<PAGE>
As filed with the Securities and Exchange Commission on April 27, 1999
File No. 333-62825
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM N-4
REGISTRATION STATEMENT UNDER SECURITIES ACT OF 1933 / /
Pre-Effective Amendment No. /_/
Post-Effective Amendment No. 1 /X/
REGISTRATION STATEMENT UNDER THE INVESTMENT
COMPANY ACT of 1940 / /
Amendment No. 26 /X/
----------------
Penn Mutual Variable Annuity Account III
(Exact Name of Registrant)
----------------
THE PENN MUTUAL LIFE INSURANCE COMPANY
(Name of Depositor)
----------------
600 Dresher Road
Horsham, Pennsylvania 19044
(Address of Principal Executive Offices of Depositor)
Depositor's Telephone Number: 215-956-8000
----------------
Richard F. Plush
Vice President, Products and Programs
The Penn Mutual Life Insurance Company
600 Dresher Road
Horsham, Pennsylvania 19044
(Name and Address of Agent for Service)
Copy to:
Angela C. Goelzer C. Ronald Rubley
Morgan, Lewis & Bockius LLP Morgan, Lewis & Bockius LLP
1800 M Street, N.W. 1701 Market Street
Washington, D.C. 20036 Philadelphia, PA 19103
----------------
It is proposed that this filing will become effective (check appropriate box):
--- immediately upon filing pursuant to paragraph (b) of Rule 485
X on May 1, 1999 pursuant to paragraph (b) of Rule 485
--- 60 days after filing pursuant to paragraph (a) of Rule 485
--- on (date) pursuant to paragraph (a) of Rule 485
<PAGE>
CROSS REFERENCE SHEET
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Location in Statement of
Form N-4 Item Number Location in Prospectuses Additional Information
- -------------------- ------------------------ ----------------------
<S> <C>
Item 1. Cover Page Cover Page N/A
Item 2. Definitions Glossary N/A
Item 3. Synopsis or Highlights Cover Page; Expenses N/A
Item 4. Condensed Financial N/A N/A
Information
Item 5. General Description The Penn Mutual Life N/A
of Registrant, Insurance Company;
Depositor and The Separate Account
Portfolio Companies
Item 6. Deductions and Expenses The Contract - What Charges N/A
Do I Pay?
Item 7. General Description of The Contract N/A
Variable Annuity Contracts
Item 8. Annuity Period Options The Contract -What Types of N/A
Annuity Payments May I Choose?
Item 9. Death Benefit On Death The Contract - What are the Death N/A
Benefits Under My Contract?
Item 10. Purchases and Contract The Contract - How Do I Purchase N/A
Value a Contract?
The Separate Account -
Accumulation Units
Item 11. Redemptions The Contract - May I Withdraw N/A
Any of My Money?
Item 12. Taxes Federal Income Tax N/A
Considerations
Item 13. Legal Proceedings N/A N/A
Item 14. Table of Contents of Statement of Additional N/A
Statement of Additional Information Contents
Information
Item 15. Cover Page N/A Cover Page
Item 16. Table of Contents N/A Cover Page
Item 17. General Information N/A N/A
and History
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CROSS REFERENCE SHEET
Location in Statement of
Form N-4 Item Number Location in Prospectuses Additional Information
- -------------------- ------------------------ ----------------------
<S> <C>
Item 18. Services N/A Administrative and
Recordkeeping
Services; Custodian;
Independent Auditors
Item 19. Purchase of Securities The Contract - How Do I Purchase Distribution of
Being Offered and Expenses a Contract? Contracts
The Contract - May I Transfer
Money Among Subaccounts and
the Fixed Interest Accounts?
The Contract - What Charges Do
I Pay?
Item 20. Underwriters N/A Distribution of
Contracts
Item 21. Calculation of Performance N/A Performance Data
Data
Item 22. Annuity Payments N/A Variable Annuity
Payments
Item 23. Financial Statements N/A Financial Statements
</TABLE>
<PAGE>
PART A
------
Information Required in a Prospectus
------------------------------------
<PAGE>
PROSPECTUS -- MAY 1, 1999
- --------------------------------------------------------------------------------
COMMANDER
Individual Variable and Fixed Annuity Contract - Flexible Purchase Payments
PENN MUTUAL VARIABLE ANNUITY ACCOUNT III
THE PENN MUTUAL LIFE INSURANCE COMPANY
PHILADELPHIA, PENNSYLVANIA 19172 O TELEPHONE (800) 523-0650
- --------------------------------------------------------------------------------
This Prospectus describes an individual variable and fixed annuity contract
("Contract") offered by the Penn Mutual Life Insurance Company ("Penn Mutual").
Please read it carefully and save it for future reference.
The Contract is an agreement between you and Penn Mutual. You agree to make one
or more payments to us and we agree to make annuity and other payments to you at
a future date. The Contract
o has a variable component, which means that your Variable Account Value and
any variable payout will be based upon investment experience.
o has a fixed component, which means that your Fixed Account Value and any
fixed payout will be based on purchase payments accumulated with interest
at a rate of not less than 3%.
o is tax-deferred, which means that you will not pay taxes until we begin to
make annuity payments to you or you take money out.
o allows you to choose to receive your annuity payments over different
periods of time.
Under the variable component of the Contract, you may direct us to invest your
payments in one or more of the following Funds through Penn Mutual Variable
Annuity Account III (the "Separate Account").
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
<S> <C>
PENN SERIES FUNDS, INC. MANAGER
Growth Equity Fund Independence Capital Management, Inc.
Value Equity Fund OpCap Advisors
Small Capitalization Fund OpCap Advisors
Emerging Growth Fund RS Investment Management, Inc.
Flexibly Managed Fund T. Rowe Price Associates, Inc.
International Equity Fund Vontobel USA, Inc.
Quality Bond Fund Independence Capital Management, Inc.
High Yield Bond Fund T. Rowe Price Associates, Inc.
Money Market Fund Independence Capital Management, Inc.
- ---------------------------------------------------------------------------------------------------
NEUBERGER BERMAN ADVISERS MANAGEMENT TRUST MANAGER
Balanced Portfolio Neuberger Berman Management Incorporated
Limited Maturity Bond Portfolio Neuberger Berman Management Incorporated
Partners Fund Portfolio Neuberger Berman Management Incorporated
- ---------------------------------------------------------------------------------------------------
FIDELITY INVESTMENTS' VARIABLE INSURANCE PRODUCTS FUND MANAGER
Equity-Income Portfolio Fidelity Management and Research Company
Growth Portfolio Fidelity Management and Research Company
- ---------------------------------------------------------------------------------------------------
FIDELITY INVESTMENTS' VARIABLE INSURANCE PRODUCTS FUND II MANAGER
Asset Manager Portfolio Fidelity Management and Research Company
Index 500 Portfolio Fidelity Management and Research Company
- ---------------------------------------------------------------------------------------------------
MORGAN STANLEY DEAN WITTER UNIVERSAL FUNDS, INC. MANAGER
Emerging Markets Equity (International) Portfolio Morgan Stanley Dean Witter Asset
Management Inc.
- ---------------------------------------------------------------------------------------------------
</TABLE>
A PROSPECTUS FOR EACH OF THESE FUNDS ACCOMPANIES THIS PROSPECTUS.
Under the fixed component of the Contract, you may direct us to allocate money
to our Fixed Interest Account.
YOU MAY PAY A DEFERRED SALES CHARGE OF 1% ON EARLY WITHDRAWALS. IF YOU WITHDRAW
MONEY BEFORE AGE 59 1/2, YOU MAY PAY A 10% ADDITIONAL INCOME TAX. THE CONTRACT
IS NOT A BANK DEPOSIT AND IS NOT FEDERALLY INSURED.
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THESE
SECURITIES OR DETERMINED WHETHER THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. IT IS
A CRIME FOR ANYONE TO TELL YOU OTHERWISE.
<PAGE>
- --------------------------------------------------------------------------------
YOU MAY RETURN YOUR CONTRACT WITHIN TEN DAYS OF RECEIPT FOR A FULL REFUND OF THE
CONTRACT VALUE (OR PURCHASE PAYMENTS, IF REQUIRED BY LAW). LONGER FREE LOOK
PERIODS APPLY IN SOME STATES.
You may obtain a Statement of Additional Information from us free of charge by
writing The Penn Mutual Life Insurance Company, Customer Service Group,
Philadelphia, PA 19172. Or, you can call us at (800) 523-0650. The Statement of
Additional Information contains more information about the Contract. It is filed
with the Securities and Exchange Commission and we incorporate it by reference
into this Prospectus. The table of contents of the Statement of Additional
Information is at the end of this Prospectus.
The Securities and Exchange Commission maintains a Web site (http://www.sec.gov)
that contains this Prospectus, the Statement of Additional Information,
material incorporated by reference, and other information regarding registrants
that file electronically with the Commission.
<PAGE>
PROSPECTUS CONTENTS
- --------------------------------------------------------------------------------
GLOSSARY .......................................................................
- --------------------------------------------------------------------------------
EXPENSES .......................................................................
- --------------------------------------------------------------------------------
EXAMPLES OF FEES AND EXPENSES ..................................................
- --------------------------------------------------------------------------------
THE PENN MUTUAL LIFE INSURANCE COMPANY .........................................
- --------------------------------------------------------------------------------
YEAR 2000 ......................................................................
- --------------------------------------------------------------------------------
THE SEPARATE ACCOUNT
Accumulation Units ..........................................................
Voting Instructions .........................................................
Investment Options in the Separate Account ..................................
Penn Series Funds, Inc. ..................................................
Neuberger Berman Advisers Management Trust ...............................
Fidelity Investments' Variable Insurance Products Fund ...................
Fidelity Investments' Variable Insurance Products Fund II ................
Morgan Stanley Dean Witter Universal Funds, Inc. .........................
- --------------------------------------------------------------------------------
THE FIXED INTEREST ACCOUNT
- --------------------------------------------------------------------------------
THE CONTRACT ...................................................................
How Do I Purchase a Contract? ...............................................
What Types of Annuity Payments May I Choose? ................................
Variable Annuity Payments ................................................
Fixed Annuity Payments ...................................................
What Are the Death Benefits Under My Contract? ..............................
Enhanced Guaranteed Minimum Death Benefit ................................
Choosing a Lump Sum or Annuity ...........................................
May I Transfer Money Among Subaccounts and the Fixed Interest Accounts? .....
Before the Annuity Date ..................................................
After the Annuity Date ...................................................
Dollar Cost Averaging ....................................................
Automatic Rebalancing ....................................................
May I Withdraw Any of My Money? .............................................
Systematic Withdrawals ...................................................
403(b) Withdrawals .......................................................
Deferment of Payments and Transfers .........................................
What Charges Do I Pay? ......................................................
Administration Charges ...................................................
Mortality and Expense Risk Charge ........................................
Contingent Deferred Sales Charge .........................................
Free Withdrawals .........................................................
Enhanced Variable Account Death Benefit ..................................
Premium Taxes ............................................................
Performance Information .....................................................
2
<PAGE>
- --------------------------------------------------------------------------------
MORE INFORMATION ABOUT THE FIXED INTEREST ACCOUNT ..............................
General Information .........................................................
Loans Under Section 403(b) Contracts ........................................
FEDERAL INCOME TAX CONSIDERATIONS ..............................................
Withdrawals and Death Benefits ..............................................
Annuity Payments ............................................................
Early Withdrawals ...........................................................
Transfers ...................................................................
Separate Account Diversification ............................................
Qualified Plans .............................................................
- --------------------------------------------------------------------------------
FINANCIAL STATEMENTS ...........................................................
- --------------------------------------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION CONTENTS ...................................
3
<PAGE>
- --------------------------------------------------------------------------------
GLOSSARY
ACCUMULATION PERIOD: A period that begins with your first purchase payment
and ends on the Annuity Date.
ACCUMULATION UNIT: A unit of measure used to compute the Variable Account
Value under the Contract prior to the Annuity Date.
ADMINISTRATIVE OFFICE: A reference to our administrative office means The
Penn Mutual Life Insurance Company, Administrative Office, 600 Dresher
Road, Horsham, Pennsylvania 19044.
ANNUITANT: The person during whose life annuity payments are made.
ANNUITY DATE: The date on which annuity payments start.
ANNUITY PAYOUT PERIOD: The period of time, starting on the Annuity Date,
during which we make annuity payments.
ANNUITY UNIT: A unit of measure used to calculate the amount of each
variable annuity payment.
BENEFICIARY: The person(s) named by the Contract Owner to receive the death
benefit payable upon the death of the Contract Owner or Annuitant.
CONTRACT: The combination variable and fixed annuity contract described in
this prospectus.
CONTRACT OWNER: The person specified in the Contract as the Contract Owner.
CONTRACT VALUE: The sum of the Variable Account Value and the Fixed
Interest Account Value.
FIXED ACCOUNT VALUE: The value of amounts held under the Contract in the
Fixed Interest Account.
SEPARATE ACCOUNT: Penn Mutual Variable Annuity Account III, a separate
account of The Penn Mutual Life Insurance Company that is registered as a
unit investment trust under the Investment Company Act of 1940.
VARIABLE ACCOUNT VALUE: The value of amounts held under the Contract in all
subaccounts of the Separate Account.
VALUATION PERIOD: The period from one valuation of Separate Account assets
to the next. Valuation is performed on each day the New York Stock Exchange
is open for trading.
WE OR US: A reference to "we" or "us" denotes The Penn Mutual Life
Insurance Company, also referred to in this Prospectus as Penn Mutual.
YOU: A reference to "you" denotes the Contract Owner or prospective
Contract Owner.
4
<PAGE>
- --------------------------------------------------------------------------------
EXPENSES
- --------------------------------------------------------------------------------
Contract Owner Transaction Expenses
Sales Load Imposed on Purchase Payments ....................................None
Maximum Contingent Deferred Sales Charge .........................1% of purchase
payments withdrawn(a)
Transfer Fee ...............................................................None
MAXIMUM ANNUAL CONTRACT ADMINISTRATION CHARGE ............................$40(b)
SEPARATE ACCOUNT ANNUAL EXPENSES (AS A PERCENTAGE OF VARIABLE ACCOUNT VALUE)
Mortality and Expense Risk Charge ......................................1.25%
Contract Administration Charge .........................................0.15%
-----
Total Separate Account Annual Expenses .................................1.40%(c)
- ------------
(a) You do not pay this charge if you wait one year before withdrawing a
purchase payment.
(b) You pay $40 or 2% of the Variable Account Value, whichever is less. You do
not pay this charge if your Variable Account Value is more than $100,000.
(c) You may purchase an Enhanced Guaranteed Minimum Death Benefit rider with
your Contract. The current annual charge for this rider is 0.20% of the
Variable Account Value, and will never be more than 0.25%. See What Charges
Do I Pay? in this Prospectus.
- --------------------------------------------------------------------------------
PENN SERIES FUNDS, INC. (A)
UNDERLYING FUND ANNUAL EXPENSES (AS A % OF PORTFOLIO AVERAGE NET ASSETS)
<TABLE>
<CAPTION>
Administrative
Management and Corporate Total
Fees Service Fees Accounting Other Fund
(after waiver) (after waiver) Fees Expenses Expenses
-------------- -------------- ---- -------- --------
<S> <C> <C> <C> <C> <C>
Growth Equity ..................................................0.45% 0.15% 0.07% 0.09% 0.76%
Value Equity ...................................................0.50% 0.15% 0.06% 0.05% 0.76%
Small Capitalization ...........................................0.50% 0.15% 0.08% 0.09% 0.82%
Emerging Growth (b) ............................................0.80% 0.15% 0.10% 0.10% 1.15%
Flexibly Managed ...............................................0.50% 0.15% 0.05% 0.06% 0.76%
International Equity ...........................................0.75% 0.15% 0.08% 0.10% 1.08%
Quality Bond ...................................................0.45% 0.15% 0.08% 0.09% 0.77%
High Yield Bond ................................................0.50% 0.15% 0.08% 0.09% 0.82%
Money Market ...................................................0.40% 0.15% 0.08% 0.09% 0.72%
- ----------
</TABLE>
(a) These expenses are for the last fiscal year.
(b) The total expenses of the Emerging Growth Fund would have been 1.21%; if
the investment adviser and administrator of that Fund had not waived part
of their fees.
- --------------------------------------------------------------------------------
NEUBERGER BERMAN ADVISERS MANAGEMENT TRUST (A)
UNDERLYING FUND ANNUAL EXPENSES (AS A % OF PORTFOLIO AVERAGE NET ASSETS)
Management
Advisory and
Administration Other Total Fund
Fees Expenses Expenses
-------------- -------- --------
Limited Maturity Bond ..........................0.65% 0.11% 0.76%
Balanced .......................................0.85% 0.18% 1.03%
Partners Fund ..................................0.80% 0.04% 0.84%
- ------------
(a) Neuberger Berman Advisers Management Trust (the "Trust") is divided into
portfolios ("Portfolios"). Each Portfolio invests in a corresponding series
("Series") of the Trust. This table shows the current expenses paid by each
Portfolio and the Portfolio's share of the current expenses of its Series.
See "Expenses" in the Trust's Prospectus.
5
<PAGE>
- --------------------------------------------------------------------------------
FIDELITY INVESTMENTS' VARIABLE INSURANCE PRODUCTS FUND (A)
UNDERLYING FUND ANNUAL EXPENSES (AS A % OF PORTFOLIO AVERAGE NET ASSETS)
Management Other Total Fund
Fees Expenses Expenses
---------- -------- ----------
Equity-Income ...................................0.50% 0.07% 0.57%
Growth ..........................................0.60% 0.06% 0.66%
- ------------
(a) These expenses are for the last fiscal year. Some of the brokerage
commissions paid by the fund reduced the expenses shown in this table.
Without this reduction, total expenses would have been 0.58% for the Equity
Income Portfolio and 0.68% for the Growth Portfolio.
FIDELITY INVESTMENTS' VARIABLE INSURANCE PRODUCTS FUND II UNDERLYING FUND ANNUAL
EXPENSES (AS A % OF PORTFOLIO AVERAGE NET ASSETS)
Management Other Total Fund
Fees After Waiver Expenses Expenses
----------------- -------- ----------
Asset Manager (a) ............................0.55% 0.08% 0.63%
Index 500 (b) ................................0.24% 0.04% 0.28%
- ------------
(a) The expenses presented are for the last fiscal year. Some of the brokerage
commissions paid by the fund reduced its expenses shown in this table.
Without this reduction, total expenses would have been 0.64% for the Asset
Manager Portfolio.
(b) The expenses presented are for the last fiscal year. If the Fund's
investment adviser had not voluntarily waived part of its fee, total
expenses would have been 0.35% for the Index 500 Portfolio.
- --------------------------------------------------------------------------------
MORGAN STANLEY DEAN WITTER UNIVERSAL FUNDS, INC. UNDERLYING FUND ANNUAL
EXPENSES (AS A % OF PORTFOLIO AVERAGE NET ASSETS)
Management Other Total Fund
Fees Expenses Expenses
---------- -------- --------
Emerging Markets Equity (International) 1.25% 0.50% 1.75%
- --------------------------------------------------------------------------------
Please review these tables carefully. They show the expenses that you pay
directly and indirectly when you purchase a Contract. Your expenses include
Contract expenses and the expenses of the Funds that you select. See the
prospectuses of Penn Series Funds, Inc., Neuberger Berman Advisers
Management Trust, Fidelity Investments' Variable Insurance Products Fund,
Fidelity Investments' Variable Insurance Products Fund II and Morgan
Stanley Dean Witter Universal Funds, Inc. for additional information on
Fund expenses.
You also may pay premium taxes. These tables and the examples that follow
do not show the effect of premium taxes. See WHAT CHARGES DO I PAY? in this
Prospectus.
- --------------------------------------------------------------------------------
6
<PAGE>
- --------------------------------------------------------------------------------
EXAMPLES OF FEES AND EXPENSES
The following examples show the total expenses that you would pay on each
$1,000 invested. You would pay the following expenses on each $1,000 invested
(assuming a 5% annual return) if you surrender your Contract after the number of
years shown:
<TABLE><CAPTION>
ONE THREE FIVE TEN
YEAR YEARS YEARS YEARS
---- ----- ----- -----
<S> <C> <C> <C> <C>
Penn Series Growth Equity Fund ...............................$33 $69 $119 $256
Penn Series Value Equity Fund ................................$33 $69 $119 $256
Penn Series Small Capitalization Fund ........................$33 $71 $122 $262
Penn Series Emerging Growth Fund .............................$37 $81 $139 $295
Penn Series Flexibly Managed Fund ............................$33 $69 $119 $256
Penn Series International Equity Fund ........................$36 $79 $135 $288
Penn Series Quality Bond Fund ................................$33 $70 $120 $257
Penn Series High Yield Bond Fund .............................$33 $71 $122 $262
Penn Series Money Market Fund ................................$32 $68 $117 $252
Neuberger Berman Limited Maturity Bond Portfolio .............$33 $69 $119 $256
Neuberger Berman Balanced Portfolio ..........................$35 $78 $133 $283
Neuberger Berman Partners Fund Portfolio .....................$34 $72 $123 $264
Fidelity's Equity Income Portfolio ...........................$31 $64 $109 $236
Fidelity's Growth Portfolio ..................................$32 $66 $114 $246
Fidelity's Asset Manager Portfolio ...........................$31 $66 $112 $242
Fidelity's Index 500 .........................................$28 $55 $94 $205
Morgan Stanley Dean Witter Emerging Markets Equity
(International) Portfolio ...................................$43 $99 $168 $352
</TABLE>
You would pay the following expenses by the end of the year shown on each
$1,000 invested (assuming a 5% annual return) if you do not surrender your
Contract or if you annuitize your Contract:
<TABLE>
<CAPTION>
ONE THREE FIVE TEN
YEAR YEARS YEARS YEARS
---- ----- ----- -----
<S> <C> <C> <C> <C>
Penn Series Growth Equity Fund ...............................$23 $69 $119 $256
Penn Series Value Equity Fund ................................$23 $69 $119 $256
Penn Series Small Capitalization Fund ........................$23 $71 $122 $262
Penn Series Emerging Growth Fund .............................$26 $81 $139 $295
Penn Series Flexibly Managed Fund ............................$23 $69 $119 $256
Penn Series International Equity Fund ........................$26 $79 $135 $288
Penn Series Quality Bond Fund ................................$23 $70 $120 $257
Penn Series High Yield Bond Fund .............................$23 $71 $122 $262
Penn Series Money Market Fund ................................$22 $68 $117 $252
Neuberger Berman Limited Maturity Bond Portfolio .............$23 $69 $119 $256
Neuberger Berman Balanced Portfolio ..........................$25 $78 $133 $283
Neuberger Berman Partners Fund Portfolio .....................$23 $72 $123 $264
Fidelity's Equity Income Portfolio ...........................$21 $64 $109 $236
Fidelity's Growth Portfolio ..................................$22 $66 $114 $246
Fidelity's Asset Manager Portfolio ...........................$21 $66 $112 $242
Fidelity's Index 500 .........................................$18 $55 $94 $205
Morgan Stanley Dean Witter Emerging Markets Equity
(International) Portfolio ...................................$32 $99 $168 $352
- ------------
</TABLE>
The examples are based upon Fund data for the fiscal year ended December
31, 1998. THESE ARE ONLY EXAMPLES. YOUR EXPENSES MAY BE MORE OR LESS THAN
WHAT IS SHOWN.
7
<PAGE>
- --------------------------------------------------------------------------------
THE PENN MUTUAL LIFE INSURANCE COMPANY
The Penn Mutual Life Insurance Company. Penn Mutual is a Pennsylvania
mutual life insurance company chartered in 1847. We are located at 600 Dresher
Road, Horsham, PA 19044. Our mailing address is Philadelphia, PA 19172. We issue
and are liable for all benefits and payments under the Contract.
- --------------------------------------------------------------------------------
YEAR 2000
The services we provide, as well as services provided by other companies,
organizations and governmental entities generally, depend on the smooth
functioning of computer systems. Many computer systems in use today cannot
recognize the Year 2000, and may return to 1900 or some other date after
December 31, 1999. If not corrected, these systems could fail or create
erroneous results. We began addressing the Year 2000 problem actively in 1996.
The effort involves assessing all of our computers, computer programs, and
related equipment, making necessary changes, and assuring that all systems
process dates correctly. We believe that we have designed and implemented an
efficient process for identifying what needs to be changed. Although we cannot
give assurance that we will have no Year 2000 problem, we expect our computer
systems to perform satisfactorily in the Year 2000.
Penn Mutual and the mutual funds that serve as investment options for the
Separate Account have relationships with investment advisers, broker-dealers,
transfer agents, custodians, and other service providers. We are contacting the
funds and their vendors and service providers to obtain reasonable assurances
that such service providers have taken appropriate measures to address the Year
2000 problem. Where practicable, we will assess and attempt to mitigate risks
that the organizations upon which we depend are not Year 2000 compliant. We
cannot, however, give assurance that failure of these firms to complete adequate
preparations in a timely manner will not have an adverse effect on the
Contracts.
The Year 2000 Information and Readiness Disclosure Act passed by Congress
in 1998 encourages businesses and other organizations to provide information
about the readiness of their computer systems. The Act also provides certain
protections to these organizations against potential liability for what they say
about their readiness. We specifically designate the information about our
readiness as readiness disclosure under the protections of the Act.
- --------------------------------------------------------------------------------
THE SEPARATE ACCOUNT
Penn Mutual established Penn Mutual Variable Annuity Account III (the
"Separate Account") on April 13, 1982. The Separate Account is registered with
the Securities and Exchange Commission as a unit investment trust and is a
"separate account" within the meaning of the federal securities laws. The
Separate Account is divided into subaccounts that invest in shares of different
mutual funds.
o The income, gains and losses of Penn Mutual do not have any effect on the
income, gains or losses of the Separate Account or any subaccount.
o The Separate Account and its subaccounts are not responsible for the
liabilities of any other business of Penn Mutual.
- --------------------------------------------------------------------------------
ACCUMULATION UNITS
Your assets in the Separate Account are held as Accumulation Units of the
subaccounts that you select. We value Accumulation Units on each day the New
York Stock Exchange is open. When you invest in or transfer money to a
subaccount, you receive the Accumulation Unit price next computed after we
receive your purchase payment or transfer request at our administrative office.
In the case of your first purchase payment, you receive the price next computed
after we accept your application to purchase a Contract.
The value of an Accumulation Unit is $10 when a subaccount begins
operation. The value of an Accumulation Unit may vary, and is determined by
multiplying its last computed value by the net investment factor for the
subaccount for the current valuation period. The net investment factor measures
(1) investment performance of Fund shares held in the subaccount, (2) any taxes
on income or gains from investments held in the subaccount and (3) the mortality
and expense risk charge at an annual rate of 1.25% and contract administration
charge at an annual rate of 0.15% assessed against the subaccount.
8
<PAGE>
- --------------------------------------------------------------------------------
VOTING INSTRUCTIONS
You have the right to tell us how to vote proxies for the Fund shares in
which your purchase payments are invested. If the law changes and permits us to
vote the Fund shares, we may do so.
If you are a Contract Owner, we determine the number of Fund shares that
you may vote by dividing your interest in a subaccount by the net asset value
per share of the Fund. If you are receiving annuity payments, we determine the
number of Fund shares that you may vote by dividing the reserve allocated to the
subaccount by the net asset value per share of the Fund. We may change these
procedures whenever we are required or permitted to do so by law.
- --------------------------------------------------------------------------------
INVESTMENT OPTIONS IN THE SEPARATE ACCOUNT
The Separate Account currently has subaccounts that invest in the following
Funds:
- --------------------------------------------------------------------------------
PENN SERIES FUNDS, INC.:
GROWTH EQUITY FUND - seeks long term growth of capital and increase of
future income by investing primarily in common stocks of well established growth
companies;
VALUE EQUITY FUND - seeks to maximize total return (capital appreciation
and income) primarily by investing in equity securities of companies believed to
be undervalued considering such factors as assets, earnings, growth potential
and cash flows;
SMALL CAPITALIZATION FUND - seeks capital appreciation through investment
in a diversified portfolio of securities consisting primarily of equity
securities of companies with market capitalizations under $1 billion;
EMERGING GROWTH FUND - seeks capital appreciation by investing primarily in
common stocks of emerging growth companies with above-average growth prospects;
FLEXIBLY MANAGED FUND - seeks to maximize total return (capital
appreciation and income) by investing in common stocks, other equity securities,
corporate debt securities, and/or short term reserves, in proportions considered
appropriate in light of the availability of attractively valued individual
securities and current and expected economic and market conditions;
INTERNATIONAL EQUITY FUND - seeks to maximize capital appreciation by
investing in a carefully selected diversified portfolio consisting primarily of
equity securities. The investments will consist principally of equity securities
of European and Pacific Basin countries;
QUALITY BOND FUND - seeks the highest income over the long term consistent
with the preservation of principal through investment primarily in marketable
investment grade debt securities;
HIGH YIELD BOND FUND - seeks high current income by investing primarily in
a diversified portfolio of long term high-yield/high-risk fixed income
securities in the medium to lower quality ranges; capital appreciation is a
secondary objective; such securities, which are commonly referred to as "junk"
bonds, generally involve greater risks of loss of income and principal than
higher rated securities (see accompanying Penn Series prospectuses);
MONEY MARKET FUND - seeks to preserve capital, maintain liquidity and
achieve the highest possible level of current income consistent with these
objectives, by investing in high quality money market instruments; an investment
in the Fund is neither insured nor guaranteed by the U.S. Government and there
can be no assurance that the fund will be able to maintain a stable net asset
value of $1.00 per share.
Independence Capital Management, Inc., Horsham, Pennsylvania is investment
adviser to each of the Funds. OpCap Advisors, New York, New York, is investment
sub-adviser to the Value Equity and Small Capitalization Funds. T. Rowe Price
Associates, Baltimore, Maryland, is investment sub-adviser to the Flexibly
Managed and High Yield Bond Funds. Vontobel USA, Inc., New York, New York, is
investment sub-adviser to the International Equity Fund. RS Investment
Management, Inc., San Francisco, California, is investment sub-adviser to the
Emerging Growth Fund.
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NEUBERGER BERMAN ADVISERS MANAGEMENT TRUST:
LIMITED MATURITY BOND PORTFOLIO - seeks highest current income consistent
with low risk to principal and liquidity, primarily by investing in a
diversified portfolio of limited maturity debt securities. A secondary objective
is capital appreciation.
BALANCED PORTFOLIO - seeks long-term capital growth and reasonable current
income without undue risk to principal through investment of a portion of its
assets in common stock and a portion in debt securities.
PARTNERS PORTFOLIO - seeks capital growth by investing primarily in common
stocks of established companies, using the value oriented investment approach.
Neuberger Berman reserves the right to make changes in the investment objective,
but will notify shareholders thirty days in advance of any proposed material
change.
Neuberger Berman Management Incorporated, New York, New York, is investment
adviser to the Limited Maturity Bond Portfolio, the Balanced Portfolio and the
Partners Portfolio.
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FIDELITY INVESTMENTS' VARIABLE INSURANCE PRODUCTS FUND:
EQUITY-INCOME PORTFOLIO - seeks reasonable income by investing primarily in
income-producing equity securities. In choosing these securities, the fund will
also consider the potential for capital appreciation. The fund's goal is to
achieve a yield which exceeds the composite yield on the securities comprising
the Standard & Poor's 500 Composite Stock Price Index.
GROWTH PORTFOLIO - seeks to achieve capital appreciation. The fund normally
purchases common stocks, although its investments are not restricted to any one
type of security. Capital appreciation may also be found in other types of
securities, including bonds and preferred stocks.
Fidelity Management & Research Company, Boston, Massachusetts, is
investment adviser to the Equity-Income Portfolio and the Growth Portfolio.
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FIDELITY INVESTMENTS' VARIABLE INSURANCE PRODUCTS FUND II:
ASSET MANAGER PORTFOLIO - seeks high total return with reduced risk over
the long-term by allocating its assets among domestic and foreign stocks, bonds
and short-term fixed income investments.
INDEX 500 PORTFOLIO - seeks to match the total return of the S&P 500 while
keeping expenses low. The S&P 500 is an index of 500 common stocks, most of
which trade on the New York Stock Exchange.
Fidelity Management & Research Company, Boston, Massachusetts, is
investment adviser to the Asset Manager Portfolio and the Index 500 Portfolio.
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MORGAN STANLEY DEAN WITTER UNIVERSAL FUNDS, INC.:
EMERGING MARKETS EQUITY (INTERNATIONAL) PORTFOLIO - seeks long term capital
appreciation by investing primarily in equity securities of emerging market
country issuers. The Portfolio will focus on economies that are developing
strongly and in which the markets are becoming more sophisticated.
Morgan Stanley Dean Witter Asset Management Inc., New York, New York, is
investment adviser to the Emerging Markets Equity (International) Portfolio.
Shares of Penn Series are sold to other variable life and variable annuity
separate accounts of Penn Mutual and its subsidiary, The Penn Insurance and
Annuity Company. Shares of Neuberger Berman Advisers Management Trust, Fidelity
Investments' Variable Insurance Products Fund and Variable Insurance Products
Fund II and Morgan Stanley Dean Witter Universal Funds, Inc. are offered not
only to variable annuity and variable life separate accounts of Penn Mutual, but
also to such accounts of other insurance companies unaffiliated with Penn Mutual
and, in the case of Neuberger Berman Advisers Management Trust and Morgan
Stanley Dean Witter Universal Funds, Inc., directly to qualified pension and
retirement plans. For more information on the possible conflicts involved when
the Separate Account invests in Funds offered to other separate amounts, see the
Fund prospectuses.
READ THE PROSPECTUSES OF THESE FUNDS BEFORE INVESTING.
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THE FIXED INTEREST ACCOUNT
Interests in the Company's general account are not registered under the
Securities Act of 1933 and the general account is not registered as an
investment company under the Investment Company Act of 1940. The general account
and any interests held in the general account are not subject to the provisions
of these Acts. This Prospectus generally discusses only the variable portion of
the Contract. The staff of the Securities and Exchange Commission has not
reviewed the disclosure in this Prospectus relating to the Fixed Interest
Account. Disclosure regarding the Fixed Interest Account, however, may be
subject to generally applicable provisions of the federal securities laws
relating to the accuracy and completeness of statements made in this Prospectus.
See MORE INFORMATION ABOUT THE FIXED INTEREST ACCOUNT.
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THE CONTRACT
An individual variable and fixed annuity contract may be an attractive
investment vehicle for many people. Our Contract allows you to invest in:
o the Separate Account, through which you may invest in one or more of the
available Funds of Penn Series Funds, Inc., Neuberger & Berman Advisers
Management Trust, Fidelity Investments' Variable Insurance Products Fund,
Fidelity Investments' Variable Insurance Products Fund II and Morgan
Stanley Dean Witter Universal Funds, Inc. See THE SEPARATE ACCOUNT in this
Prospectus.
o The Fixed Interest Account. The Fixed Interest Account is guaranteed and
funded by Penn Mutual through its general account. SEE THE FIXED INTEREST
ACCOUNT and MORE INFORMATION ABOUT THE FIXED INTEREST ACCOUNT in this
Prospectus.
You decide, within Contract limits,
o how often you make a purchase payment and how much you invest;
o the Funds and/or Fixed Interest Account in which your purchase payments are
invested;
o whether or not to transfer money among the available Funds and Fixed
Interest Accounts;
o the type of annuity that we pay and who receives it;
o the Beneficiary or Beneficiaries to whom we pay death benefits: and
o the amount and frequency of withdrawals from the Contract Value.
Your Contract has
o an Accumulation Period, during which you make one or more purchase payments
and we invest your payments as you tell us; and
o an Annuity Payout Period, during which we make annuity payments to you.
Your Payout Period begins on your Annuity Date.
We may amend your Contract at any time to comply with legal requirements.
State law may require us to obtain your approval for any Contract amendment. We
may, with approval of the Securities and Exchange Commission and the governing
state insurance department, substitute another mutual fund for any of the Funds
currently available.
The Contract is available to individuals and institutions. The Contracts
also may be issued as individual retirement annuities under Section 408(b) of
the Internal Revenue Code (the "Code") in connection with IRA rollovers and as
tax-deferred annuities under Section 403(b) of the Code (often referred to as
qualified Contracts).
You may contact us by writing The Penn Mutual Life Insurance Company,
Customer Service Group, Philadelphia, PA 19172. Or, you may call (800) 523-0650.
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HOW DO I PURCHASE A CONTRACT?
Our representative will assist you in completing an application and sending
it, together with a check for your first purchase payment, to our administrative
office. All subsequent purchase payments should be sent to our administrative
office. We usually accept an application to purchase a Contract within two
business days after we receive it. If you send us an incomplete application, we
will return your purchase payment to you within five business days unless you
ask us to keep it while you complete the application.
The minimum purchase payment that we will accept is $25,000, although we
may decide to accept lower amounts. We will accept total purchase payments under
your Contract of up to $1 million. You must obtain our prior approval to make
total purchase payments in excess of $1 million.
The principal underwriter of the Contracts is Hornor, Townsend & Kent,
Inc., 600 Dresher Road, Horsham, PA 19044, a wholly-owned subsidiary of Penn
Mutual.
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WHAT TYPES OF ANNUITY PAYMENTS MAY I CHOOSE?
You may choose: (1) an annuity for a set number of years, (2) a life
annuity, (3) a life annuity with payments guaranteed for 10 or 20 years, (4) a
joint and survivor life annuity or (5) any other form of annuity that we may
agree upon. You may choose a variable annuity (except for a set number of
years), a fixed annuity, or a combination of both. You may choose a person other
than yourself to be the Annuitant. Currently, during the Annuity Payout Period
your variable annuity may not be allocated to more than four subaccounts.
VARIABLE ANNUITY PAYMENTS. The size of your variable annuity payments will
vary depending upon the performance of the investment options that you choose
for the Annuity Payout Period. Your payments also will depend on the size of
your investment, the type of annuity you choose, the expected length of the
annuity period, and the annuity purchase rates and charges in your Contract.
When you purchase a variable annuity, you will pick an assumed interest
rate of 3% or 5%. If the annual net investment return during the annuity payout
period is greater than the rate chosen, your annuity payments will increase. If
the annual net investment return is less, your payments will decrease. Choosing
a higher assumed interest rate would mean a higher first annuity payment but
more slowly rising or more rapidly falling subsequent payments. Choosing a lower
assumed interest rate would have the opposite effect.
During the Variable Annuity Payout Period, you (or your Beneficiary in the
event of death) may transfer your Annuity Unit Values among four subaccounts of
the Separate Account that you choose on the Annuity Date. You may not select
other subaccounts after the Annuity Date.
FIXED ANNUITY PAYMENTS. The size of your fixed annuity payments will not
change. The size of these payments is determined by a number of factors,
including the size of your investment, the form of annuity chosen, the expected
length of the annuity period, and a guaranteed 3% rate of return.
OTHER INFORMATION. Unless you tell us otherwise:
o you will receive a life annuity with payments guaranteed for 10 years. Tax
deferred annuities under Section 403(b) of the Code will receive a joint
and survivor annuity.
o the annuity will be split between fixed and variable in the same
proportions as your Contract Value on the Annuity Date, except if your
Contract Value is allocated to more than four subaccounts, the variable
portion will be allocated to the Money Market Subaccount until you give us
instructions to allocate to not more than four subaccounts.
o your annuity payments will begin on the later of (1) the first day of the
next month after the Annuitant's 95th birthday or (2) 10 years after the
contract date, unless state law requires an earlier Annuity Date. The
Annuity Date under the Contract must be on the first day of a month.
You may change the Annuity Date or your annuity option by giving us written
notice at our administrative office at least 30 days prior to the current
Annuity Date. If your Contract Value is less than $5,000, we may pay you in a
lump sum. We usually make annuity payments monthly, starting with the Annuity
Date, but we will pay you quarterly, semiannually or annually, if you prefer. If
necessary, we will adjust the frequency of your payments so that payments are at
least $50 each. For information on the treatment of annuity payments, see
FEDERAL INCOME TAX CONSIDERATIONS in this Prospectus.
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WHAT ARE THE DEATH BENEFITS UNDER MY CONTRACT?
You may designate a Beneficiary in your application. If you fail to
designate a Beneficiary, your Beneficiary will be your estate. You may change
the Beneficiary at any time before your death or the death of the Annuitant,
whichever occurs first.
If you die before the Annuity Date and you are not the Annuitant, we will
pay your Beneficiary the Contract Value as of the date our administrative office
receives proof of death and other information required to process the payment.
If you are the Annuitant, we will pay your Beneficiary the death benefit
described in the next paragraph.
If the Annuitant dies before the Annuity Date, we will pay a death benefit
equal to the sum of the Variable Account death benefit and the Fixed Interest
Account death benefit as of the date we receive proof of death and other
information required to process the payment. The Variable Account death benefit
is the greater of (1) the Variable Account Value or (2) all purchase payments
allocated and transfers made to the Variable Account, less withdrawals and
amounts transferred out. The Fixed Interest Account death benefit is the Fixed
Interest Account Value.
We generally pay the death benefit within seven days after we receive proof
of death and all required information.
Enhanced Guaranteed Minimum Death Benefit. If the Annuitant is 75 years of
age or less, you may purchase an enhanced guaranteed minimum death benefit as
part of your Contract. The enhanced guaranteed minimum death benefit is paid in
place of the Variable Account death benefit, if it is greater, and if the
Annuitant dies before the Annuity Date and before age 90. We offer two different
enhanced guaranteed minimum death benefits. You may purchase either, but only at
the time you purchase your Contract.
The guaranteed minimum death benefit - step-up: This is the highest
Variable Account Value on the current or prior contract anniversary dates,
adjusted as follows. For this purpose, the Variable Account Value on an
anniversary date will be adjusted upward by the amount of any purchase payments
allocated and transfers made to the Variable Account after the anniversary date,
and before the next anniversary date, and adjusted downward by an amount that is
in the same proportion that the Variable Account Value was decreased by
transfers and withdrawals (including any deferred sales charge) after the
anniversary date and before the next anniversary date.
The guaranteed minimum death benefit - rising floor: This is the sum of all
purchase payments allocated and transfers made to the Variable Account, minus a
reduction for any withdrawals or transfers made from the Variable Account (as
described below), plus interest at 5%, calculated as follows. Interest is
reflected for the periods amounts are held in the Variable Account, but not for
any period after the Annuitant attains 80 years of age. If a withdrawal or
transfer is made from the Variable Account prior to death, the guaranteed
minimum death benefit will be reduced by an amount that is in the same
proportion that the amount withdrawn or transferred from the Variable Account
(including any contingent deferred sales charge) was to the Variable Account
Value on the date of the withdrawal or transfer.
The enhanced guaranteed minimum death benefit will terminate if you
withdraw or transfer the full Variable Account Value from your Contract. For
information on the cost of the enhanced guaranteed minimum death benefits, see
WHAT CHARGES DO I PAY? In this Prospectus.
CHOOSING A LUMP SUM OR ANNUITY. Your Beneficiary has one year from your
death to choose to receive the death benefit in a lump sum or as an annuity.
o The Beneficiary has only 60 days to make this election if the death benefit
is paid upon death of an Annuitant other than you.
o If the Beneficiary chooses a lump sum, he or she may ask us to postpone
payment of the lump sum for up to five years (until paid out, the death
benefit will be allocated to subaccounts of the Separate Account and/or
Fixed Interest Account as directed by the Beneficiary).
o If the Beneficiary chooses an annuity, we will begin annuity payments no
later than one year from the date of death. Payments will be made over the
Beneficiary's life or over a period not longer than the Beneficiary's life
expectancy.
o If an election is not made within one year of the date of death of the
Contract Owner or within 60 days of the death of an Annuitant other than
you, the death benefit will be paid to the Beneficiary in a lump sum.
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If your Beneficiary is your surviving spouse, he or she may become the Contract
Owner rather than receive the death benefit. If there is more than one surviving
Beneficiary, they must choose their portion of the death benefit in accordance
with the above options. If the Annuitant dies on or after the Annuity Date, the
death benefit payable, if any, will be paid in accordance with your choice of
annuity.
For information on the tax treatment of death benefits, see FEDERAL INCOME
TAX CONSIDERATIONS in this Prospectus.
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MAY I TRANSFER MONEY AMONG SUBACCOUNTS AND THE FIXED INTEREST ACCOUNT?
BEFORE THE ANNUITY DATE. You may transfer amounts from one subaccount of
the Separate Account to another subaccount of the Separate Account. Within
Contract limits, you also may transfer from the subaccounts of the Separate
Account to the Fixed Interest Account. You may transfer from the Fixed Interest
Account to the Variable Account only at the completion of the interest period or
within 25 days thereafter.
AFTER THE ANNUITY DATE. You may transfer amounts from one subaccount of the
Separate Account to another. Transfers are limited to the four subaccounts
selected at the time of annuitization. Upon your death or the death of the
Annuitant, a Beneficiary who is receiving annuity payments may transfer amounts
among the subaccounts of the Separate Account.
o Transfers will be based on values at the end of the valuation period in
which the transfer request is received at our administrative office.
o The minimum amount that may be transferred is $250 or, if less, the amount
held in the subaccount or Fixed Interest Account. In the case of partial
transfers, the amount remaining in the subaccount or Fixed Interest Account
must be at least $250.
o A transfer request must be received at our administrative office and all
other administrative requirements for transfer must be met to make the
transfer. Neither we nor the Separate Account will be liable for following
instructions communicated by telephone that we reasonably believe to be
genuine. We require certain personal identifying information to process a
request for transfer made over the telephone.
DOLLAR COST AVERAGING: Dollar cost averaging is a way to invest in which
securities are purchased at regular intervals in fixed dollar amounts so that
the cost of the securities gets averaged over time and possibly over market
cycles. If you have a Contract Value of at least $10,000, you can have a fixed
percentage of your purchase payments transferred monthly or quarterly from one
account to other accounts to achieve dollar cost averaging. These transfers may
be made only from one of the following accounts: Money Market Subaccount,
Limited Maturity Bond Subaccount, Quality Bond Subaccount, and the Fixed
Interest Account. You may do this for up to 60 months or until you tell us to
change or cancel the dollar cost averaging.
AUTOMATIC REBALANCING: Automatic Rebalancing is a way to transfer money
from those subaccounts that have increased in value to those subaccounts that
have decreased in value. Over time, this may help you to sell high and buy low,
although there can be no assurance of this. If you have a Contract Value of at
least $10,000 you may elect to have your investments in subaccounts of the
Separate Account automatically rebalanced. We will transfer funds under your
Contract on a quarterly (calendar) basis among the subaccounts to maintain a
specified percentage allocation among your selected variable investment options.
Dollar cost averaging and automatic rebalancing may not be in effect at the
same time.
For transfers other than dollar cost averaging and automatic rebalancing,
we reserve the right to charge a fee, although we have no present intention of
doing so.
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MAY I WITHDRAW ANY OF MY MONEY?
Before the Annuity Date and the death of the Contract Owner or Annuitant,
you may withdraw all or part of your Contract Value. We base your withdrawal on
your Contract Value next determined after we receive a proper written request
for withdrawal at our administrative office (and the Contract, in case of a full
withdrawal). We normally will pay you within seven days. You may pay tax when
you make a withdrawal, including an additional 10% tax under certain
circumstances. See FEDERAL INCOME TAX CONSIDERATIONS.
o The minimum withdrawal is $500.
o You may make a partial withdrawal only if the amount remaining in the
contract is at least $5,000 and the balance remaining in each subaccount or
the fixed interest account is at least $250.
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o If you do not tell us otherwise, the withdrawal will be taken pro rata from
the variable subaccounts; if the partial withdrawal exhausts your Variable
Account Value, then any remaining withdrawal will be taken from the fixed
interest account.
SYSTEMATIC WITHDRAWALS: If your Contract Value is at least $25,000, you can
make systematic withdrawals. These are regular payments that we make to you on a
monthly, quarterly, semiannual or annual basis. It is a convenient way for you
to withdraw a limited percentage of purchase payments without incurring a
contingent deferred sales charge. The total amount that you withdraw in a
Contract Year cannot exceed 15% of total purchase payments, and the minimum
amount of each withdrawal payment is $100. Your payments will begin on the next
withdrawal date after we receive your request. For information on the tax
treatment of withdrawals, see FEDERAL INCOME TAX CONSIDERATIONS in this
Prospectus.
403(B) WITHDRAWALS: There are restrictions on withdrawals from Contracts
qualifying under Section 403(b) of the Code. Generally, withdrawals may be made
only if the Contract Owner is over the age of 59 1/2, leaves the employment of
the employer, dies, or becomes disabled as defined in the Code. Withdrawals
(other than withdrawals attributable to income earned on purchase payments) may
also be possible in the case of hardship as defined in the Code. The
restrictions do not apply to transfers among subaccounts and may also not apply
to transfers to other investments qualifying under Section 403(b). For
information on the tax treatment of withdrawals under Section 403(b) Contracts,
see FEDERAL INCOME TAX CONSIDERATIONS in this Prospectus.
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DEFERMENT OF PAYMENTS AND TRANSFERS
We reserve the right to defer a withdrawal, a transfer of Contract Value,
or annuity payments funded by the Separate Account if: (a) the New York Stock
Exchange is closed (other than customary weekend and holiday closings); (b)
trading on the Exchange is restricted; (c) an emergency exists that makes it
impractical for us to dispose of securities held in the Separate Account or to
determine the value of its assets; or (d) the Securities and Exchange Commission
by order so permits for the protection of investors. Conditions described in (b)
and (c) will be decided by, or in accordance with rules of, the Commission.
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WHAT CHARGES DO I PAY?
The following discussion explains the Contract charges that you pay. You
also indirectly pay expenses of the Funds that you select as investment options
in the Separate Account. See the prospectuses of the Funds for information on
Fund expenses.
ADMINISTRATION CHARGES:
These charges reimburse us for administering the Contract and the Separate
Account.
o We deduct from your Variable Account Value an annual contract
administration charge that is the lesser of $40 or 2% of your Variable
Account Value. You will not pay this charge if your Variable Account Value
is more than $100,000. To pay this charge, we cancel Accumulation Units
credited to your Contract, pro rata among the subaccounts in which you
invest.
o We deduct from the net asset value of the Separate Account a daily
administration charge that will not exceed an effective annual rate of
0.15%.
For transfers among investment options other than under dollar cost
averaging and automatic rebalancing, we reserve the right to charge for making
the transfer, although we have no present intention of doing so.
MORTALITY AND EXPENSE RISK CHARGE:
We deduct from the net asset value of the Separate Account a daily
mortality and expense risk charge that will not exceed an effective annual rate
of 1.25%. This charge compensates us for the mortality-related guarantees we
make under the Contract (e.g., the death benefit and the guarantee that the
annuity factors will never be decreased even if mortality experience is
substantially different than originally assumed), and for the risk that our
administration charges will be insufficient to cover administration expenses
over the life of the Contracts. The mortality and expense risk charge is paid
during both the accumulation and variable annuity pay-out phases of the
Contract.
CONTINGENT DEFERRED SALES CHARGE:
This charge pays for our sales expenses. Sales expenses that are not
covered by the deferred sales charge are paid from the surplus of the Company,
which may include proceeds from the mortality and expense risk charge.
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You pay this charge only if you withdraw a purchase payment within one year
of the effective date of payment. If applicable, the charge is 1% of the
purchase payment withdrawn. Purchase payments will be treated as withdrawn on a
first-in, first-out basis.
The contingent deferred sales charge may be reduced on Contracts sold to a
trustee, employer or similar party pursuant to a retirement plan or to a group
of individuals, if such sales are expected to involve reduced sales expenses.
The amount of reduction will depend upon such factors as the size of the group,
any prior or existing relationship with the purchaser or group, the total amount
of purchase payments and other relevant factors that might tend to reduce
expenses incurred in connection with such sales. The reduction will not unfairly
discriminate against any Contract Owner.
FREE WITHDRAWALS:
ONE-YEAR-OLD PURCHASE PAYMENTS. You may withdraw any purchase payment that
was made more than one year before the withdrawal without incurring a contingent
deferred sales charge.
SYSTEMATIC WITHDRAWALS OF 15% OF PURCHASE PAYMENTS. Once each Contract
Year, you may request systematic withdrawals totaling 15% of purchase payments
as of the date of the request. The free systematic withdrawal amount will be
applied to purchase payments on a first-in, first-out basis. With respect to any
withdrawal in excess of the free withdrawal limit in a contract year, the
contingent deferred sales charge schedule set forth above will apply to the
remainder of the purchase payments so withdrawn on a first-in, first-out basis.
OTHER WITHDRAWALS:
There is no contingent deferred sales charge imposed upon minimum
distributions under qualified contracts that are required by the Code.
ENHANCED GUARANTEED MINIMUM DEATH BENEFIT (OPTIONAL):
If you purchase an Enhanced Guaranteed Minimum Death Benefit as part of
your Contract, we will deduct a guaranteed minimum death benefit charge from the
Variable Account Value. The charge is currently 0.20% of the average annual
Variable Account Value, but may be raised to a maximum rate of 0.25% at the
discretion of Penn Mutual. The charge will be made on each Contract anniversary
and at any time the Variable Account Value is withdrawn or transferred in full.
The charge will be deducted by canceling Accumulation Units credited to your
Contract, with the charge allocated pro rata among the subaccounts comprising
the Variable Account Value.
PREMIUM TAXES:
Some states and municipalities impose premium taxes on purchase payments
received by insurance companies. Generally, any premium taxes payable will be
deducted upon annuitization, although we reserve the right to deduct such taxes
when due in jurisdictions that impose such taxes on purchase payments.
Currently, state premium taxes on purchase payments range from 0% to 31/2%.
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PERFORMANCE INFORMATION
We may advertise total return performance and annual changes in
accumulation unit values.
Information on total return performance will include average annual rates
of total return for one, five and ten year periods, or lesser periods depending
on how long the underlying Fund has been available through a subaccount of the
Separate Account. Average annual total return figures will show the average
annual rates of increase or decrease in investments in the subaccounts, assuming
a hypothetical $1,000 investment at the beginning of the period, withdrawal of
the investment at the end of the period, and the deduction of all applicable
fund and Contract charges. We also may show average annual rates of total
return, assuming investment on the inception date of the underlying Fund, other
amounts invested at the beginning of the period, and no withdrawal at the end of
the period. Average annual total return figures which assume no withdrawals at
the end of the period will reflect all recurring charges, but will not reflect
the contingent deferred sales charge (if applicable, the contingent deferred
sales charge would reduce the amount that may be withdrawn under the Contracts).
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MORE INFORMATION ABOUT THE FIXED INTEREST ACCOUNTS
GENERAL INFORMATION
You may allocate or transfer all or part of the amount credited to your
Contract to the Fixed Interest Account. You will earn interest at a rate
declared by us in the month in which you allocate or transfer money to the Fixed
Interest Account. This rate of interest will apply for a 12-month period that
begins on the 1st day of the calendar month in which your allocation is made.
The annual interest rate will never be less than 3%.
You may transfer money in the Fixed Interest Account to subaccounts of the
Separate Account, subject to the fixed interest account provisions of your
Contract. If you do not withdraw or reallocate money in the Fixed Interest
Account within 25 days after the end of an interest period, we will treat it as
a new allocation to the Fixed Interest Account. In accordance with state law, we
may defer a withdrawal or transfer from the fixed interest accounts for up to
six months if we reasonably determine that investment conditions are such that
an orderly sale of assets in our general account is not feasible.
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LOANS UNDER SECTION 403(B) CONTRACTS
If your Contract qualifies under Section 403(b) of the Code, and if state
law permits, you may be able to borrow against money that you have invested in a
Fixed Interest Account. Review your Contract loan endorsement or consult our
representative for a complete description of the terms of the loan privilege,
including minimum and maximum loan amounts, repayment terms, and restrictions on
prepayments.
When you borrow, an amount equal to your loan will be transferred, as
collateral, from your Separate Account subaccounts to an account in our general
account called the "Restricted Account." Amounts transferred to the Restricted
Account currently earn interest at a rate of 1 1/2 percentage points less than
the rate of interest that we charge you on the loan. The lowest possible
interest that you could earn on your Restricted Account assets is 2 1/2
percentage points less than the rate charged on the loan. On your Contract
Anniversary, the accrued interest in the Restricted Account will be transferred
to your Separate Account subaccounts in accordance with your current payment
allocation instructions.
Loan repayments are due quarterly. When you repay part of your loan, we
transfer an amount equal to the principal portion of the repayment from the
Restricted Account to the Money Market subaccount. You may then transfer amounts
from the Money Market subaccount to the other investment options offered under
the Contract.
If you are in default, we will report the default to the Internal Revenue
Service as a taxable distribution and, if you are then under age 59 1/2, as a
premature distribution that may be subject to a 10% penalty. We will repay the
loan by withdrawing the amount in default, plus interest and any applicable
contingent deferred sales charge, from your Separate Account subaccounts in
accordance with your Loan Request and Agreement. If Section 403(b) prevents us
from doing this, your outstanding loan balance will continue to accrue interest
and the amount due will be withdrawn when a withdrawal becomes permissible.
While a loan balance is outstanding, any withdrawal or death benefit proceeds
must first be used to pay the loan.
Loans are subject to the terms of your Contract, your Section 403(b) plan
and the Code, and, in the case of plans subject to the Employee Retirement
Income Security Act of 1974, the ERISA regulations on plan loans, all of which
may impose restrictions. We reserve the right to suspend, modify or terminate
the availability of loans. Where there is a plan fiduciary, it is the
responsibility of the fiduciary to ensure that any Contract loans comply with
plan qualification requirements, including ERISA.
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FEDERAL INCOME TAX CONSIDERATIONS
The following is a general summary of some federal income tax
considerations. It is based on the law in effect on the date of this Prospectus,
which may change, and does not address state or local tax laws. For further
information, you should consult qualified tax counsel.
You pay no federal income tax on increases in the value of your Contract
until money is distributed to you or your beneficiary as a withdrawal, death
benefit or an annuity payment.
WITHDRAWALS AND DEATH BENEFITS: You may pay tax on a withdrawal, and your
beneficiary may pay tax on a death benefit. The taxable portion of these
payments generally will be the amount by which the payment exceeds your cost.
Thus, you or your Beneficiary generally will have taxable income to the extent
that your Contract Value exceeds your purchase payments. Ordinary income tax
rates apply. If you designate a Beneficiary who is either 37 1/2 years younger
than you or your grandchild, you may obtain Generation Skipping Transfer Tax
treatment under Section 2601 of the Code.
17
<PAGE>
- --------------------------------------------------------------------------------
In the case of a nonqualified Contract and death of an Annuitant who was
not the Contract Owner, an election to receive the death benefit in the form of
annuity payment must be made within 60 days. If such election is not made, the
gain from the Contract will generally be taxed as a lump sum payment, as
described in the preceding paragraph.
ANNUITY PAYMENTS: The taxable portion of an annuity payment generally is
determined by a formula that establishes the ratio of the cost basis of the
Contract (as adjusted for any refund feature) to the expected return under the
Contract. The taxable portion, which is the amount of the annuity payment in
excess of the cost basis, is taxed at ordinary income tax rates.
Subject to certain exceptions, a Contract must be held by or on behalf of a
natural person in order to be treated as an annuity contract under federal
income tax law and to be accorded the tax treatment described in the preceding
paragraphs. If a contract is not treated as an annuity contract for federal
income tax purposes, the income on the Contract is treated as ordinary income
received or accrued by the Contract Owner during the taxable year.
EARLY WITHDRAWALS: An additional income tax of 10% may be imposed on the
taxable portion of an early withdrawal or distribution unless one of several
exceptions apply. Generally, there will be no additional income tax on:
o early withdrawals that are part of a series of substantially equal periodic
payments (not less frequently than annually) made for life (or life
expectancy) of the taxpayer or the joint lives (or joint life expectancies)
of the taxpayer and a Beneficiary;
o withdrawals made on or after age 59 1/2;
o on distributions made after death; and
o withdrawals attributable to total and permanent disability.
TRANSFERS: You may pay tax if you transfer your Contract to someone else.
If the transfer is for less than adequate consideration, the taxable portion
would be the Contract Value at the time of transfer over the investment in the
Contract at such time. This rule does not apply to transfers between spouses or
to transfers incident to a divorce.
SEPARATE ACCOUNT DIVERSIFICATION: Section 817(h) of the Code provides that
the investments of a separate account underlying a variable annuity contract
which is not purchased under a qualified retirement plan or certain other types
of plans (or the investments of a mutual fund, the shares of which are owned by
the variable annuity separate account) must be "adequately diversified" in order
for the Contract to be treated as an annuity contract for tax purposes. The
Treasury Department has issued regulations prescribing such diversification
requirements. The Separate Account, through each of the available funds of the
Penn Series Funds, Inc., Neuberger & Berman Advisers Management Trust, Variable
Insurance Products Fund, Variable Insurance Products Fund II, and Morgan Stanley
Universal Funds, Inc. intends to comply with those requirements. The
requirements are briefly discussed in the accompanying prospectuses for the
underlying funds.
The Treasury Department has stated in published rulings that a variable
contract owner will be considered the owner of separate account assets if the
contract owner possesses incidents of ownership in those assets, such as the
ability to exercise investment control over the assets. If a variable contract
owner is treated as owner of separate account assets, income and gain from the
assets would be includable in the variable contract owner's gross income. In
1984 the Treasury Department announced that it would provide guidance, by way of
regulation or ruling, on the "extent to which Policyholders may direct their
investments to particular subaccounts without being treated as owners of
underlying assets." As of the date of this Prospectus, no ruling or regulation
has been issued.
QUALIFIED PLANS: The Contracts may be used in connection with certain
retirement plans that qualify for special tax treatment under the Code. The
plans include rollover individual retirement annuities qualified under Section
408(b) of the Code (referred to as IRAs) and certain tax deferred annuities
qualified under Section 403(b) of the Code. Qualified Contracts have special
provisions in order to be treated as qualified under the Code.
For some types of qualified retirement plans, there may be no cost basis in
the Contract. In this case, the total payments received may be taxable. Before
purchasing a contract under a qualified retirement plan, the tax law provisions
applicable to the particular plan should be considered.
Distribution must generally commence from individual retirement annuities
and from contracts qualified under Section 403(b) no later than the April 1
following the calendar year in which the Contract Owner attains age 70 1/2.
Failure to make such required minimum distributions may result in a 50% tax on
the amount of the required distribution.
18
<PAGE>
- --------------------------------------------------------------------------------
Generally, under a nonqualified annuity or rollover individual retirement
annuity qualified under Section 408(b), unless the Contract Owner elects to the
contrary, any amounts that are received under the Contract that we believe are
includable in gross income for tax purposes will be subject to mandatory
withholding to meet federal income tax obligations. The same treatment will
apply to distributions from a qualified plan or Section 403(b) annuity that are
payable as an annuity for the life or life expectancy of one or more
individuals, or for a period of at least 10 years, or are required minimum
distributions. Other distributions from a Section 403(b) annuity are subject to
mandatory withholding, unless an election is made to receive the distribution as
a direct rollover to another eligible retirement plan.
This general summary of federal income tax does not address every issue
that may affect you. You should consult qualified tax counsel.
- --------------------------------------------------------------------------------
FINANCIAL STATEMENTS
The consolidated financial statements of The Penn Mutual Life Insurance
Company and the financial statements of the Separate Account at December 31,
1998 for the year then ended appear in the Statement of Additional Information.
The consolidated financial statements of Penn Mutual should be considered only
as bearing upon Penn Mutual's ability to meet its obligations under the
Contracts.
New subaccounts of the Separate Account have been established under the
Contracts subsequent to December 31, 1998. No amounts were allocated to the
subaccounts as of December 31, 1998. There are, therefore, no unit values for
the subaccounts at December 31, 1998.
19
<PAGE>
- --------------------------------------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION CONTENTS
- --------------------------------------------------------------------------------
VARIABLE ANNUITY PAYMENTS ....................................................B-
First Variable Annuity Payments ...........................................B-
Subsequent Variable Annuity Payments ......................................B-
Annuity Units .............................................................B-
Value of Annuity Units ....................................................B-
Net Investment Factor .....................................................B-
Assumed Interest Rate .....................................................B-
Valuation Period ..........................................................B-
- --------------------------------------------------------------------------------
PERFORMANCE DATA .............................................................B-
Average Annual Total Return ...............................................B-
- --------------------------------------------------------------------------------
ADMINISTRATIVE AND RECORDKEEPING SERVICES ....................................B-
- --------------------------------------------------------------------------------
DISTRIBUTION OF CONTRACTS ....................................................B-
- --------------------------------------------------------------------------------
CUSTODIAN ....................................................................B-
- --------------------------------------------------------------------------------
INDEPENDENT AUDITORS .........................................................B-
- --------------------------------------------------------------------------------
LEGAL MATTERS ................................................................B-
- --------------------------------------------------------------------------------
FINANCIAL STATEMENTS .........................................................B-
- --------------------------------------------------------------------------------
<PAGE>
PART B
Information Required in a Statement
of Additional Information
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION -- MAY 1, 1999
LOGO
Penn Mutual Variable Account III
The Penn Mutual Life Insurance Company
Philadelphia, Pennsylvania 19172 o Telephone (800) 523-0650
This statement of additional information is not a prospectus. It should be read
in conjunction with the current Prospectus for the Commander Contract, dated
May 1, 1999. The Contract is funded through Penn Mutual Variable Account III
(referred to as the "Separate Account"). To obtain a prospectus you may write
to The Penn Mutual Life Insurance Company (the "Company"), Customer Service
Group, Philadelphia, PA 19172. Or you may call (800) 523-0650. Terms used in
this statement of additional information have the same meaning as the
Prospectus.
TABLE OF CONTENTS
<TABLE>
<S> <C>
- --------------------------------------------------------------------------------
VARIABLE ANNUITY PAYMENTS ...................................................B-2
First Variable Annuity Payments ............................................B-2
Subsequent Variable Annuity Payments .......................................B-2
Annuity Units ..............................................................B-2
Value of Annuity Units .....................................................B-2
Net Investment Factor ......................................................B-2
Assumed Interest Rate ......................................................B-2
Valuation Period ...........................................................B-2
- --------------------------------------------------------------------------------
PERFORMANCE DATA ............................................................B-2
Average Annual Total Return ................................................B-2
- --------------------------------------------------------------------------------
ADMINISTRATIVE AND RECORDKEEPING SERVICES ...................................B-7
- --------------------------------------------------------------------------------
DISTRIBUTION OF CONTRACTS ...................................................B-8
- --------------------------------------------------------------------------------
CUSTODIAN ...................................................................B-8
- --------------------------------------------------------------------------------
INDEPENDENT AUDITORS ........................................................B-8
- --------------------------------------------------------------------------------
LEGAL MATTERS ...............................................................B-8
- --------------------------------------------------------------------------------
FINANCIAL STATEMENTS ........................................................B-8
- --------------------------------------------------------------------------------
</TABLE>
B-1
<PAGE>
VARIABLE ANNUITY PAYMENTS
FIRST VARIABLE ANNUITY PAYMENT
When a variable annuity is effected, we will first deduct applicable
premium taxes, if any, from the Contract Value. The dollar amount of the first
monthly annuity payment will be determined by applying the net Contract Value
to the annuity table set forth in the contract for the annuity option chosen.
The annuity tables show the amount of the first monthly income payment under
each annuity option for each $1,000 of value applied, based on the Annuitant's
age at the Annuity Date. The annuity tables are based on the Annuity 2000 Basic
Table with interest rates at 3% or 5%.
SUBSEQUENT VARIABLE ANNUITY PAYMENTS
The dollar amount of subsequent variable annuity payments will vary in
accordance with the investment experience of the subaccount(s) of the Separate
Account applicable to the annuity. Each subsequent variable annuity payment
will equal the number of annuity units credited, multiplied by the value of the
annuity unit for the valuation period. The Company guarantees that the amount
of each subsequent annuity payment will not be affected by variations in
expense or mortality experience.
ANNUITY UNITS
For each subaccount selected, the number of annuity units is the amount of
the first annuity payment allocated to the subaccount divided by the value of
an annuity unit for the subaccount on the Annuity Date. The number of your
annuity units will not change as a result of investment experience.
VALUE OF ANNUITY UNITS
The value of an annuity unit for each subaccount was arbitrarily set at
$10 when the subaccount was established. The value may increase or decrease
from one valuation period to the next. For a valuation period, the value of an
annuity unit for a subaccount is the value of an annuity unit for the
subaccount for the last prior valuation period multiplied by the net investment
factor for the subaccount for the valuation period. The result is then
multiplied by a factor to neutralize an assumed interest rate of 3% or 5%, as
applicable, built into the annuity tables.
NET INVESTMENT FACTOR
For any subaccount, the net investment factor for a valuation period is
determined by dividing (a) by (b) and subtracting (c):
WHERE (A) IS:
The net asset value per share of the mutual fund held in the subaccount,
as of the end of the valuation period.
PLUS
The per share amount of any dividend or capital gain distributions by the
mutual fund if the "ex-dividend" date occurs in the valuation period.
PLUS OR MINUS
A per share charge or credit, as we may determine as of the end of the
valuation period, for provision for taxes (if applicable).
WHERE (B) IS:
The net asset value per share of the mutual fund held in the subaccount as
of the end of the last prior valuation period.
PLUS OR MINUS
The per share charge or credit for provision for taxes as of the end of
the last prior valuation period (if applicable).
WHERE (C) IS:
The sum of the mortality and expense risk charge and the daily
administration charge. On an annual basis, the sum of such charges equals
1.40% of the daily net asset value of the subaccount.
B-2
<PAGE>
ASSUMED INTEREST RATE
Assumed annual interest rates of 3% and 5% are included in the annuity
tables in the contracts. A higher assumption would mean a higher first annuity
payment but more slowly rising or more rapidly falling subsequent payments. A
lower assumption would have the opposite effect. If the actual net investment
on an annual basis is equal to the interest rate you have selected, annuity
payments will be level.
VALUATION PERIOD
Valuation period is the period from one valuation of underlying fund
assets to the next. Valuation is performed each day the New York Stock Exchange
is open for trading.
PERFORMANCE DATA
AVERAGE ANNUAL TOTAL RETURN
The performance data in the following tables include average annual total
return of subaccounts of the Separate Account computed in accordance with the
standard formula and limitations prescribed by the Securities and Exchange
Commission and average annual total return and cumulative total return
information based upon different hypothetical assumptions.
B-3
<PAGE>
Table 1 Average Annual Total Return On $1,000 Investment -- Computed as
Prescribed by the SEC
Table 1
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
-----------------------------------------------------------------------
FROM TEN FIVE ONE
INCEPTION YEARS YEARS YEAR
INCEPTION THROUGH ENDED ENDED ENDED
FUND (MANAGER) DATE* 12/31/98 12/31/98 12/31/98 12/31/98
- -------------- ----------- ------------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Growth Equity (a) 6/1/83 13.85% 14.91% 18.21% 39.46%
(Independence Capital)
Value Equity (a) 3/17/87 12.31% 12.98% 17.54% 7.83%
(OpCap)
Small-Cap Fund 5/1/95 10.07% n/a n/a (10.66%)
(OpCap)
Emerging Growth Fund (a) 5/1/95 44.15% n/a n/a 33.58%
(RS Investment Management)
Flexibly Managed (a) 7/31/84 13.20% 11.20% 10.94% 4.38%
(T. Rowe Price)
International Equity (a) 11/2/92 12.70% n/a 8.57% 16.96%
(Vontobel)
Quality Bond (a) 3/17/87 6.60% 7.30% 5.40% 8.40%
(Independence Capital)
High Yield Bond (a) 8/6/84 8.72% 8.15% 6.58% 3.10%
(T. Rowe Price)
Balanced Portfolio (b) 5/1/93 9.84% n/a 9.69% 10.38%
(Neuberger Berman)
Limited Maturity Bond Portfolio (b) 5/1/93 3.35% n/a 3.49% 2.70%
(Neuberger Berman)
Partners Fund Portfolio (b) 5/1/97 15.38% n/a n/a 2.53%
(Neuberger Berman)
Equity-Income Portfolio (c) 5/1/95 18.26% n/a n/a 9.84%
(Fidelity Investments)
Growth Portfolio (c) 5/1/95 25.79% n/a n/a 37.32%
(Fidelity Investments)
Asset Manager Portfolio (d) 5/1/95 15.26% n/a n/a 13.22%
(Fidelity Investments)
Index 500 (d) 5/1/97 24.20% n/a n/a 26.32%
(Fidelity Investments)
Emerging Markets Equity (International) (e) 5/1/97 (21.85%) n/a n/a (25.50%)
(Morgan Stanley Dean Witter)
</TABLE>
- -----------
* DATE THE UNDERLYING FUND WAS FIRST OFFERED THROUGH A SUBACCOUNT OF THE
SEPARATE ACCOUNT.
(A) PENN SERIES FUNDS, INC.
(B) NEUBERGER BERMAN ADVISERS MANAGEMENT TRUST
(C) VARIABLE INSURANCE PRODUCTS FUND
(D) VARIABLE INSURANCE PRODUCTS FUND II
(E) MORGAN STANLEY DEAN WITTER UNIVERSAL FUNDS, INC.
B-4
<PAGE>
Table 2 Average Annual Total Return On $1,000 Investment -- Assumes No
Contingent Deferred Sales Charge and Investment on Inception Date of the
Underlying Fund
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
-----------------------------------------------------------------------
FROM TEN FIVE ONE
INCEPTION YEARS YEARS YEAR
INCEPTION THROUGH ENDED ENDED ENDED
FUND (MANAGER) DATE* 12/31/98 12/31/98 12/31/98 12/31/98
- -------------- ----------- ------------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Growth Equity (a) 06/01/83 13.85% 14.91% 18.21% 39.46%
(Independence Capital)
Value Equity (a) 03/17/87 12.31% 12.98% 17.54% 7.83%
(OpCap)
Small-Cap Fund 03/01/95 9.57% n/a n/a (10.66%)
(OpCap)
Emerging Growth Fund (a) 05/01/97 44.15% n/a n/a 33.58%
(RS Investment Management)
Flexibly Managed (a) 07/31/84 13.20% 11.20% 10.94% 4.38%
(T. Rowe Price)
International Equity (a) 11/01/92 12.70% n/a 8.57% 16.96%
(Vontobel)
Quality Bond (a) 03/17/87 6.60% 7.30% 5.40% 8.40%
(Independence Capital)
High Yield Bond (a) 08/06/84 8.72% 8.15% 6.58% 3.10%
(T. Rowe Price)
Balanced Portfolio (b) 02/28/89 9.59% n/a 9.69% 10.38%
(Neuberger Berman)
Limited Maturity Bond Portfolio (b) 09/10/84 6.26% 5.12% 3.49% 2.70%
(Neuberger Berman)
Partners Fund Portfolio (b) 03/22/94 17.86% n/a n/a 2.53%
(Neuberger Berman)
Equity-Income Portfolio (c) 10/09/86 12.66% 13.85% 16.93% 9.84%
(Fidelity Investments)
Growth Portfolio (c) 10/09/86 15.58% 17.60% 19.84% 37.32%
(Fidelity Investments)
Asset Manager Portfolio (d) 09/06/89 11.24% n/a 10.03% 13.22%
(Fidelity Investments)
Index 500 (d) 08/27/92 19.34% n/a 21.81% 26.32%
(Fidelity Investments)
Emerging Markets Equity (International) (e) 10/01/96 (13.88%) n/a n/a (25.50%)
(Morgan Stanley Dean Witter)
</TABLE>
- -----------
* DATE THE UNDERLYING FUND WAS ESTABLISHED.
(A) PENN SERIES FUNDS, INC.
(B) NEUBERGER BERMAN ADVISERS MANAGEMENT TRUST
(C) VARIABLE INSURANCE PRODUCTS FUND
(D) VARIABLE INSURANCE PRODUCTS FUND II
(E) MORGAN STANLEY DEAN WITTER UNIVERSAL FUNDS, INC.
B-5
<PAGE>
Table 3 Average Annual Total Return On $10,000 Investment -- Assumes No
Contingent Deferred Sales Charge and Investment on the Inception Date of
Underlying Fund
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
-----------------------------------------------------------------------
FROM TEN FIVE ONE
INCEPTION YEARS YEARS YEAR
INCEPTION THROUGH ENDED ENDED ENDED
FUND (MANAGER) DATE* 12/31/98 12/31/98 12/31/98 12/31/98
- -------------- ----------- ------------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Growth Equity (a) 06/01/83 13.95% 15.05% 18.39% 39.68%
(Independence Capital)
Value Equity (a) 03/17/87 12.45% 13.13% 17.70% 8.04%
(OpCap)
Small-Cap Fund 03/01/95 9.75% n/a n/a (10.45%)
(OpCap)
Emerging Growth Fund (a) 05/01/97 44.35% n/a n/a 33.79%
(RS Investment Management)
Flexibly Managed (a) 07/31/84 13.29% 11.34% 11.11% 4.59%
(T. Rowe Price)
International Equity (a) 11/01/92 12.87% n/a 8.77% 17.17%
(Vontobel)
Quality Bond (a) 03/17/87 6.76% 7.45% 5.60% 8.61%
(Independence Capital)
High Yield Bond (a) 08/06/84 8.85% 8.31% 6.78% 3.31%
(T. Rowe Price)
Balanced Portfolio (b) 02/28/89 9.74% n/a 9.88% 10.59%
(Neuberger Berman)
Limited Maturity Bond Portfolio (b) 09/10/84 6.40% 5.28% 3.69% 2.92%
(Neuberger Berman)
Partners Fund Portfolio (b) 03/22/94 18.02% n/a n/a 2.74%
(Neuberger Berman)
Equity-Income Portfolio (c) 10/09/86 12.80% 13.99% 17.09% 10.05%
(Fidelity Investments)
Growth Portfolio (c) 10/09/86 15.71% 17.73% 20.02% 37.53%
(Fidelity Investments)
Asset Manager Portfolio (d) 09/06/89 11.39% n/a 10.22% 13.43%
(Fidelity Investments)
Index 500 (d) 08/27/92 19.51% n/a 21.97% 26.53%
(Fidelity Investments)
Emerging Markets Equity (International) (e) 10/01/96 (13.56%) n/a n/a (25.29%)
(Morgan Stanley Dean Witter)
</TABLE>
* DATE THE UNDERLYING FUND WAS ESTABLISHED.
(A) PENN SERIES FUNDS, INC.
(B) NEUBERGER BERMAN ADVISERS MANAGEMENT TRUST
(C) VARIABLE INSURANCE PRODUCTS FUND
(D) VARIABLE INSURANCE PRODUCTS FUND II
(E) MORGAN STANLEY DEAN WITTER UNIVERSAL FUNDS, INC.
B-6
<PAGE>
Average annual total returns in Table 1 are computed by finding the
average annual compounded rates of return over the periods shown that would
equate the initial amount invested to the withdrawal value, in accordance with
the following formula: P(1 + T)n = ERV. In the formula, P is a hypothetical
investment payment of $1,000; T is the average annual total return; n is the
number of years; and ERV is the withdrawal value at the end of the periods
shown. The computation assumes that the contract charge is allocated equally
across all available subaccounts by an average Contract Owner and that the
Contract Value is of average size.
Average annual rates of total return in Tables 2 and Table 3 are computed
by finding the average annual compounded rates of return over the periods shown
that would equate the initial amount invested to the Contract account value at
the end of the periods shown, in accordance with the following formula: P(1 +
T)n = FV. In the formula, P is a hypothetical investment of $1,000 in Table 2
and $10,000 in Table 3; T is the average annual total return; n is the number
of years; and FV is the Contract Value. The computations assume that no
withdrawals were made at the end of the periods, and therefore do not reflect
the contract's contingent deferred sales charge of 1% for withdrawals made
within one year of the purchase payment. The computation assumes that the
contract charge is allocated equally across all available subaccounts by an
average Contract Owner and the contract value is of average size. The returns
also show investment performance from the inception date of the Fund, which may
predate the date the Separate Account began investing in the Fund. The returns
are based upon hypothetical assumptions which are not prescribed by the SEC.
The performance information set forth above is for past performance of the
Funds, assuming the subaccounts of the Separate Account had invested in the
Funds from the date the underlying Fund was first available through a
subaccount of the Separate Account or the date the underlying Fund was
established. The performance information is not an indication or representation
of future performance.
- --------------------------------------------------------------------------------
ADMINISTRATIVE AND RECORDKEEPING SERVICES
The Company performs all data processing, recordkeeping and other related
services with respect to the Contracts and the Separate Accounts.
B-7
<PAGE>
- --------------------------------------------------------------------------------
DISTRIBUTION OF CONTRACTS
Hornor, Townsend & Kent, Inc., a wholly owned subsidiary of The Penn
Mutual Life Insurance Company ("Penn Mutual"), serves as principal underwriter
of the Contracts. The address of Hornor, Townsend & Kent, Inc. is 600 Dresher
Road, Horsham, PA 19044.
The Contracts will be distributed by Hornor, Townsend & Kent, Inc. through
broker-dealers. Total commissions on purchase payments made under the Contract
will not exceed 1% and trailer commissions based on a percentage of Contract
Value may be paid. The offering of the Contracts is continuous, and the Company
does not anticipate discontinuing the offering of the Contract, although we
reserve the right to do so.
- --------------------------------------------------------------------------------
CUSTODIAN
The Company is custodian of the assets held in the Separate Account.
- --------------------------------------------------------------------------------
INDEPENDENT AUDITORS
Ernst & Young LLP serves as independent auditors of The Penn Mutual Life
Insurance Company and Penn Mutual Variable Annuity Account III. Their offices
are located at 2001 Market Street, Suite 4000, Philadelphia, PA.
- --------------------------------------------------------------------------------
LEGAL MATTERS
Morgan, Lewis & Bockius LLP has provided advice on certain matters
relating to the federal securities laws and the offering of the Contracts.
Their offices are located at 1701 Market Street, Philadelphia, PA.
- --------------------------------------------------------------------------------
FINANCIAL STATEMENTS
The consolidated financial statements of The Penn Mutual Life Insurance
Company and the financial statements of the Separate Account at December 31,
1998 and for the year then ended appear in the Statement of Additional
Information. The consolidated financial statements of Penn Mutual should be
considered only as bearing upon Penn Mutual's ability to meet its obligations
under the Contracts.
New subaccounts of the Separate Account have been established under the
Contracts subsequent to December 31, 1998. No amounts were allocated to the
subaccounts as of December 31, 1998. There are, therefore, no unit values for
the subaccounts at December 31, 1998.
B-8
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Penn Mutual Life Insurance Company and Contract Owners of Penn Mutual
Variable Annuity Account III
We have audited the accompanying statement of assets and liabilities of Penn
Mutual Variable Annuity Account III (comprising, respectively, Money Market
Fund, Quality Bond Fund, High Yield Bond Fund, Growth Equity Fund, Value Equity
Fund, Flexibly Managed Fund, International Equity Fund, Small Capitalization
Fund, Emerging Growth Fund, Balanced Portfolio, Limited Maturity Bond
Portfolio, Partners Portfolio, Capital Appreciation Portfolio, Equity Income
Portfolio, Growth Portfolio, Asset Manager Portfolio, Index 500 Portfolio, and
Emerging Markets Equity Portfolio) as of December 31, 1998, and the related
statement of operations and statements of changes in net assets for each of
periods indicted therein. These financial statements are the responsibility of
the management of Penn Mutual Variable Annuity Account III. Our responsibility
is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. Our
procedures included confirmation of securities owned as of December 31, 1998,
by correspondence with the transfer agents. An audit also includes assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of each of the respective
portfolios constituting the Penn Mutual Variable Annuity Account III at
December 31, 1998, the results of their operations and changes in their net
assets for each of the periods indicated therein, in conformity with generally
accepted accounting principles.
Philadelphia, Pennsylvania ERNST & YOUNG LLP
April 2, 1999
B-9
<PAGE>
- --------------------------------------------------------------------------------
PENN MUTUAL VARIABLE ANNUITY ACCOUNT III
STATEMENT OF ASSETS AND LIABILITIES -- DECEMBER 31, 1998
<TABLE>
<CAPTION>
MONEY QUALITY HIGH YIELD GROWTH EQUITY
TOTAL MARKET FUND++ BOND FUND++ BOND FUND++ FUND++
----------------- --------------- ------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
Investment in Common Stock
Number of Shares .................... 29,226,007 3,531,561 4,932,997 5,192,077
Cost ................................ $ 997,139,079 $29,226,007 $36,316,362 $46,980,987 $107,364,728
Assets:
Investments at market value ......... $1,223,619,652 $29,226,007 $36,728,233 $45,334,241 $160,331,330
Dividends receivable ................ 115,690 115,690 -- -- --
Liabilities:
Due to (from) The Penn Mutual
Life Insurance Company ............ 421,701 (25,724) 11,770 15,896 66,829
-------------- ----------- ----------- ----------- ------------
Net Assets ........................... $1,223,313,641 $29,367,421 $36,716,463 $45,318,345 $160,264,501
============== =========== =========== =========== ============
</TABLE>
- --------------------------------------------------------------------------------
PENN MUTUAL VARIABLE ANNUITY ACCOUNT III
STATEMENT OF OPERATIONS -- FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
MONEY QUALITY HIGH YIELD GROWTH EQUITY
TOTAL MARKET FUND++ BOND FUND++ BOND FUND++ FUND++
-------------- --------------- ------------- --------------- ----------------
<S> <C> <C> <C> <C> <C>
Investment Income:
Dividends ............................ $ 22,196,411 $1,164,353 $ 1,661,348 $ 3,575,971 $ 107,422
Expense:
Mortality and expense risk
charges ............................ 14,451,169 300,924 420,725 560,207 1,750,208
------------ ---------- ----------- ------------ ------------
Net investment income (loss) ......... 7,745,242 863,429 1,240,623 3,015,764 (1,642,786)
------------ ---------- ----------- ------------ ------------
Realized and Unrealized Gains
(Losses) on Investments:
Realized gains (losses) from
redemption of fund shares ............ 890,703 -- 1,912 (3,290) 534,595
Capital gains distributions ........... 90,233,970 -- 1,081,936 -- 16,777,825
------------ ---------- ----------- ------------ ------------
Net realized gains (losses) from
investment transactions .............. 91,124,673 -- 1,083,848 (3,290) 17,312,420
Net change in unrealized
appreciation/depreciation of
investments .......................... 31,850,409 -- 469,323 (1,514,889) 29,742,092
------------ ---------- ----------- ------------ ------------
Net realized and unrealized gains
(losses) on investments .............. 122,975,082 -- 1,553,171 (1,518,179) 47,054,512
------------ ---------- ----------- ------------ ------------
Net increase (decrease) in
net assets resulting from
operations ........................... $130,720,324 $ 863,429 $ 2,793,794 $ 1,497,585 $ 45,411,726
============ ========== =========== ============ ============
</TABLE>
- -----------
+ INVESTMENT IN PENN SERIES FUNDS, INC.
++ INVESTMENT IN NEUBERGER BERMAN ADVISERS MANAGEMENT TRUST
+++ INVESTMENT IN AMERICAN CENTURY VARIABLE PORTFOLIOS, INC.
++++ INVESTMENT IN FIDELITY INVESTMENTS' VARIABLE INSURANCE PRODUCTS FUNDS
I AND II
+++++ INVESTMENT IN MORGAN STANLEY DEAN WITTER UNIVERSAL FUNDS, INC.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
B-10
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FLEXIBLY SMALL EMERGING
VALUE EQUITY MANAGED INTERNATIONAL CAPITALIZATION GROWTH
FUND++ FUND++ EQUITY FUND++ FUND++ FUND++
- --------------- --------------- --------------- ---------------- --------------
<S> <C> <C> <C> <C>
9,698,894 18,571,284 4,435,929 1,469,303 829,633
$ 146,389,313 $304,396,066 $60,456,004 $19,240,367 $12,098,508
$ 217,158,244 $340,040,217 $81,532,380 $18,821,773 $14,460,495
-- -- -- -- --
80,934 122,232 30,165 6,425 6,150
------------- ------------ ----------- ----------- -----------
$ 217,077,310 $339,917,985 $81,502,215 $18,815,348 $14,454,345
============= ============ =========== =========== ===========
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FLEXIBLY SMALL EMERGING
VALUE EQUITY MANAGED INTERNATIONAL CAPITALIZATION GROWTH
FUND++ FUND++ EQUITY FUND++ FUND++ FUND++
- ---------------- ---------------- --------------- ---------------- ---------------
<S> <C> <C> <C> <C>
$ 2,711,886 $ 9,667,960 $ 749,841 $ 118,336 $ --
2,747,364 4,371,907 1,002,331 232,311 115,686
------------ ------------- ------------ ----------- -----------
(35,478) 5,296,053 (252,490) (113,975) (115,686)
------------ ------------- ------------ ----------- -----------
(253,955) 470,070 572,081 (73,896) (20,414)
17,723,221 34,454,748 2,613,424 307,141 2,258
------------ ------------- ------------ ----------- -----------
17,469,266 34,924,818 3,185,505 233,245 (18,156)
(1,405,794) (24,572,191) 9,485,903 (2,387,287) 2,702,071
------------ ------------- ------------ ----------- -----------
16,063,472 10,352,627 12,671,408 (2,154,042) 2,683,915
------------ ------------- ------------ ----------- -----------
$ 16,027,994 $ 15,648,680 $ 12,418,918 ($ 2,268,017) $ 2,568,229
============ ============= ============ =========== ===========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
B-11
<PAGE>
- --------------------------------------------------------------------------------
PENN MUTUAL VARIABLE ANNUITY ACCOUNT III
STATEMENT OF ASSETS AND LIABILITIES -- DECEMBER 31, 1998 (CONT'D.)
<TABLE>
<CAPTION>
LIMITED CAPITAL
BALANCED MATURITY BOND PARTNERS APPRECIATION
PORTFOLIO++++ PORTFOLIO++++ PORTFOLIO++++ PORTFOLIO++++++
--------------- --------------- --------------- ----------------
<S> <C> <C> <C> <C>
Investment in Common Stock
Number of Shares .................... 1,569,682 453,975 1,158,926 1,568,981
Identified Cost ..................... $24,116,435 $6,481,863 $22,808,452 $14,586,463
Assets:
Investments at market value ......... $25,648,596 $6,273,938 $21,938,469 $14,152,208
Dividends receivable ................ -- -- -- --
Liabilities:
Due to (from) The Penn Mutual
Life Insurance Company ............ 9,544 2,105 7,983 5,890
----------- ---------- ----------- -----------
Net Assets ........................... $25,639,052 $6,271,833 $21,930,486 $14,146,318
=========== ========== =========== ===========
</TABLE>
- --------------------------------------------------------------------------------
PENN MUTUAL VARIABLE ANNUITY ACCOUNT III
STATEMENT OF OPERATIONS -- FOR THE YEAR ENDED DECEMBER 31, 1998 (CONT'D.)
<TABLE>
<CAPTION>
LIMITED CAPITAL
BALANCED MATURITY BOND PARTNERS APPRECIATION
PORTFOLIO++++ PORTFOLIO++++ PORTFOLIO++++ PORTFOLIO++++++
--------------- --------------- --------------- ----------------
<S> <C> <C> <C> <C>
Investment Income:
Dividends ............................ $ 535,041 $ 343,516 $ 42,364 $ --
Expense:
Mortality and expense risk
charges ............................ 300,387 76,053 202,308 200,676
------------ --------- ------------ -----------
Net investment income (loss) ......... 234,654 267,463 (159,944) (200,676)
------------ --------- ------------ -----------
Realized and Unrealized Gains
(Losses) on Investments:
Realized gains (losses) from
redemption of fund shares .......... (46,570) 4,432 (19,925) (7,274)
Capital gains distributions .......... 3,758,025 -- 1,334,479 897,971
------------ --------- ------------ -----------
Net realized gains (losses) from
investment transactions ............ 3,711,455 4,432 1,314,554 890,697
Net change in unrealized
appreciation/depreciation of
investments ........................ (1,522,453) (90,968) (1,132,139) (1,315,911)
------------ --------- ------------ -----------
Net realized and unrealized
gains (losses) on investments 2,189,002 (86,536) 182,415 (425,214)
------------ --------- ------------ -----------
Net increase (decrease) in net
assets resulting from
operations ......................... $ 2,423,656 $ 180,927 $ 22,471 ($ 625,890)
============ ========= ============ ===========
</TABLE>
- -----------
+ INVESTMENT IN PENN SERIES FUNDS, INC.
++ INVESTMENT IN NEUBERGER BERMAN ADVISERS MANAGEMENT TRUST
+++ INVESTMENT IN AMERICAN CENTURY VARIABLE PORTFOLIOS, INC.
++++ INVESTMENT IN FIDELITY INVESTMENTS' VARIABLE INSURANCE PRODUCTS FUNDS
I AND II
+++++ INVESTMENT IN MORGAN STANLEY DEAN WITTER UNIVERSAL FUNDS, INC.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
B-12
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
EMERGING
EQUITY INCOME GROWTH ASSET MANAGER INDEX 500 MARKETS EQUITY
PORTFOLIO++++++++ PORTFOLIO++++++++ PORTFOLIO++++++++ PORTFOLIO++++++++ PORTFOLIO++++++++++
- ------------------- ------------------- ------------------- ------------------- --------------------
<S> <C> <C> <C> <C>
2,821,444 1,951,799 754,546 256,571 384,256
$57,982,108 $61,686,131 $12,229,496 $30,768,653 $4,011,136
$71,721,096 $87,577,214 $13,702,561 $36,240,594 $2,732,056
-- -- -- -- --
27,927 33,764 4,917 13,879 1,015
----------- ----------- ----------- ----------- ----------
$71,693,169 $87,543,450 $13,697,644 $36,226,715 $2,731,041
=========== =========== =========== =========== ==========
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
EMERGING
EQUITY INCOME GROWTH ASSET MANAGER INDEX 500 MARKETS EQUITY
PORTFOLIO++++++++ PORTFOLIO++++++++ PORTFOLIO++++++++ PORTFOLIO++++++++ PORTFOLIO++++++++++
- ------------------- ------------------- ------------------- ------------------- --------------------
<S> <C> <C> <C> <C>
$ 818,947 $ 276,373 $ 283,624 $ 124,449 $ 14,980
838,185 875,493 139,895 286,451 30,058
----------- ------------ ----------- ----------- ----------
(19,238) (599,120) 143,729 (162,002) (15,078)
----------- ------------ ----------- ----------- ----------
(105,681) (133,956) (15,231) (6,289) (5,906)
2,914,489 7,229,334 850,874 288,245 --
----------- ------------ ----------- ----------- ----------
2,808,808 7,095,378 835,643 281,956 (5,906)
3,216,502 15,492,226 416,857 5,006,490 (739,423)
----------- ------------ ----------- ----------- ----------
6,025,310 22,587,604 1,252,500 5,288,446 (745,329)
----------- ------------ ----------- ----------- ----------
$ 6,006,072 $ 21,988,484 $ 1,396,229 $ 5,126,444 ($ 760,407)
=========== ============ =========== =========== ==========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
B-13
<PAGE>
- --------------------------------------------------------------------------------
PENN MUTUAL VARIABLE ANNUITY ACCOUNT III
STATEMENTS OF CHANGES IN NET ASSETS -- FOR THE YEARS ENDED DECEMBER 31, 1998
AND 1997
<TABLE>
<CAPTION>
TOTAL
--------------------------------------
1998 1997
------------------ ------------------
<S> <C> <C>
Operations:
Net investment income (loss) ............... $ 7,745,242 $ 10,673,323
Net realized gains (losses) from
investment transactions ................... 91,124,673 52,434,365
Net change in unrealized appreciation/
depreciation of investments ............... 31,850,409 80,424,769
-------------- --------------
Net increase (decrease) in net assets
resulting from operations .................. 130,720,324 143,532,457
-------------- --------------
Variable Annuity Activities:
Purchase payments .......................... 300,859,955 267,822,906
Surrender benefits ......................... (86,895,748) (77,835,445)
Net Transfers .............................. (144,859,060) (104,394,903)
Death Benefits ............................. (5,130,027) (5,546,379)
Contract administration charges ............ (960,359) (867,185)
Deferred sales charges ..................... (1,159,997) (941,155)
Annuity benefits ........................... (6,283,330) (4,608,091)
-------------- --------------
Net increase in net assets resulting from
variable annuity activities ................ 55,571,434 73,629,748
-------------- --------------
Total increase (decrease) in net assets .... 186,291,758 217,162,205
Net Assets:
Beginning of year .......................... 1,037,021,883 819,859,678
-------------- --------------
End of year ................................ $1,223,313,641 $1,037,021,883
============== ==============
<CAPTION>
MONEY MARKET QUALITY BOND
FUND++ FUND++
---------------------------------- --------------------------------
1998 1997 1998 1997
---------------- ---------------- --------------- ---------------
<S> <C> <C> <C> <C>
Operations:
Net investment income (loss) ............... $ 863,429 $ 868,851 $ 1,240,623 $ 1,305,261
Net realized gains (losses) from
investment transactions ................... -- -- 1,083,848 (62,983)
Net change in unrealized appreciation/
depreciation of investments ............... -- -- 469,323 690,652
-------------- -------------- ------------ ------------
Net increase (decrease) in net assets
resulting from operations .................. 863,429 868,851 2,793,794 1,932,930
-------------- -------------- ------------ ------------
Variable Annuity Activities:
Purchase payments .......................... 43,970,396 34,757,734 12,828,873 5,555,275
Surrender benefits ......................... (6,521,246) (9,401,752) (2,749,714) (3,121,924)
Net Transfers .............................. (30,458,666) (26,472,847) (5,801,159) (4,767,816)
Death Benefits ............................. (146,334) (79,929) (323,546) (447,151)
Contract administration charges ............ (15,517) (16,669) (23,415) (24,971)
Deferred sales charges ..................... (62,744) (66,903) (40,919) (26,092)
Annuity benefits ........................... (158,174) (128,331) (310,029) (364,470)
-------------- -------------- ------------ ------------
Net increase in net assets resulting from
variable annuity activities ................ 6,607,715 (1,408,697) 3,580,091 (3,197,149)
-------------- -------------- ------------ ------------
Total increase (decrease) in net assets .... 7,471,144 (539,846) 6,373,885 (1,264,219)
Net Assets:
Beginning of year .......................... 21,896,277 22,436,123 30,342,578 31,606,797
-------------- -------------- ------------ ------------
End of year ................................ $ 29,367,421 $ 21,896,277 $ 36,716,463 $ 30,342,578
============== ============== ============ ============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
HIGH YIELD
BOND FUND++
--------------------------------
1998 1997
--------------- ---------------
<S> <C> <C>
Operations:
Net investment income (loss) ................... $ 3,015,764 $ 2,776,213
Net realized gains (losses) from
investment transactions ....................... (3,290) 57,619
Net change in unrealized appreciation/
depreciation of investments ................... (1,514,889) 2,285,110
------------ ------------
Net increase (decrease) in net assets
resulting from operations ...................... 1,497,585 5,118,942
------------ ------------
Variable Annuity Activities:
Purchase payments .............................. 11,805,678 10,878,709
Surrender benefits ............................. (3,764,322) (3,014,970)
Net Transfers .................................. (5,718,830) (4,748,376)
Death Benefits ................................. (216,584) (353,295)
Contract administration charges ................ (33,874) (32,949)
Deferred sales charges ......................... (42,634) (41,927)
Annuity benefits ............................... (451,818) (263,827)
------------ ------------
Net increase (decrease) in net assets
resulting from variable annuity activities . 1,577,616 2,423,365
------------ ------------
Total increase (decrease) in net assets ........ 3,075,201 7,542,307
Net Assets:
Beginning of year .............................. 42,243,144 34,700,837
------------ ------------
End of year .................................... $ 45,318,345 $ 42,243,144
============ ============
<CAPTION>
GROWTH EQUITY FUND++ VALUE EQUITY FUND++
---------------------------------- ---------------------------------
1998 1997 1998 1997
---------------- ---------------- --------------- ----------------
<S> <C> <C> <C> <C>
Operations:
Net investment income (loss) ................... ($ 1,642,786) ($ 946,700) ($ 35,478) $ 171,478
Net realized gains (losses) from
investment transactions ....................... 17,312,420 12,252,124 17,469,266 11,178,890
Net change in unrealized appreciation/
depreciation of investments ................... 29,742,092 12,401,882 (1,405,794) 26,725,711
------------ ----------- ------------ -------------
Net increase (decrease) in net assets
resulting from operations ...................... 45,411,726 23,707,306 16,027,994 38,076,079
------------ ----------- ------------ -------------
Variable Annuity Activities:
Purchase payments .............................. 19,386,206 14,771,345 31,610,352 39,960,196
Surrender benefits ............................. (11,279,745) (9,992,279) (16,621,269) (13,261,992)
Net Transfers .................................. (8,257,183) (5,743,584) (17,458,000) (8,211,820)
Death Benefits ................................. (520,878) (432,200) (864,575) (1,000,702)
Contract administration charges ................ (117,047) (116,728) (161,845) (142,233)
Deferred sales charges ......................... (106,395) (96,532) (185,128) (141,327)
Annuity benefits ............................... (410,717) (232,640) (1,052,517) (750,028)
------------ ----------- ------------ -------------
Net increase (decrease) in net assets
resulting from variable annuity activities . (1,305,759) (1,842,618) (4,732,982) 16,452,094
------------ ----------- ------------ -------------
Total increase (decrease) in net assets ........ 44,105,967 21,864,688 11,295,012 54,528,173
Net Assets:
Beginning of year .............................. 116,158,534 94,293,846 205,782,298 151,254,125
------------ ----------- ------------ -------------
End of year .................................... $160,264,501 $116,158,534 $217,077,310 $ 205,782,298
============ ============ ============ =============
</TABLE>
<PAGE>
- -----------
* FOR THE PERIOD FROM MAY 1, 1997 (DATE FUND BECAME AVAILABLE FOR
INVESTMENT TO CONTRACT OWNERS) TO DECEMBER 31, 1997.
++ INVESTMENT IN PENN SERIES FUNDS, INC.
++++ INVESTMENT IN NEUBERGER BERMAN ADVISERS MANAGEMENT TRUST
++++++ INVESTMENTS IN AMERICAN CENTURY VARIABLE PORTFOLIOS, INC. (TCI
PORTFOLIOS, INC.'S NAME CHANGED TO AMERICAN CENTURY VARIABLE
PORTFOLIOS, INC.AS OF MAY 1, 1997)
++++++++ INVESTMENT IN FIDELITY INVESTMENTS' VARIABLE INSURANCE PRODUCTS FUNDS
I AND II
++++++++++ INVESTMENT IN MORGAN STANLEY DEAN WITTER UNIVERSAL FUNDS, INC.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
B-14
<PAGE>
- --------------------------------------------------------------------------------
PENN MUTUAL VARIABLE ANNUITY ACCOUNT III
STATEMENTS OF CHANGES IN NET ASSETS -- FOR THE YEARS ENDED DECEMBER 31, 1998
AND 1997 (CONT'D.)
<TABLE>
<CAPTION>
FLEXIBLY
MANAGED FUND++
----------------------------------
1998 1997
---------------- ----------------
<S> <C> <C>
Operations:
Net investment income (loss) ................... $ 5,296,053 $ 5,425,606
Net realized gains (losses) from
investment transactions ....................... 34,924,818 19,611,037
Net change in unrealized appreciation/
depreciation of investments ................... (24,572,191) 16,726,884
------------- -------------
Net increase (decrease) in net assets
resulting from operations ...................... 15,648,680 41,763,527
------------- -------------
Variable Annuity Activities:
Purchase payments .............................. 51,119,838 58,888,377
Surrender benefits ............................. (24,701,353) (21,762,080)
Net Transfers .................................. (33,470,654) (19,473,960)
Death Benefits ................................. (1,865,231) (2,171,468)
Contract administration charges ................ (297,618) (287,496)
Deferred sales charges ......................... (314,220) (275,949)
Annuity benefits ............................... (2,389,329) (1,873,395)
------------- -------------
Net increase (decrease) in net assets result-
ing from variable annuity activities ........... (11,918,567) 13,044,029
------------- -------------
Total increase (decrease) in net assets ........ 3,730,113 54,807,556
Net Assets:
Beginning of year .............................. 336,187,872 281,380,316
------------- -------------
End of year .................................... $ 339,917,985 $ 336,187,872
============= =============
<CAPTION>
INTERNATIONAL SMALL CAPITALIZATION
EQUITY FUND++ FUND++
--------------------------------- -------------------------------
1998 1997 1998 1997
---------------- --------------- -------------- ---------------
<S> <C> <C> <C> <C>
Operations:
Net investment income (loss) ................... ($ 252,490) $ 1,386,098 ($ 113,975) ($ 84,438)
Net realized gains (losses) from
investment transactions ....................... 3,185,505 2,495,757 233,245 1,049,563
Net change in unrealized appreciation/
depreciation of investments ................... 9,485,903 2,281,822 (2,387,287) 1,463,910
------------- ------------ ----------- -----------
Net increase (decrease) in net assets
resulting from operations ...................... 12,418,918 6,163,677 (2,268,017) 2,429,035
------------- ------------ ----------- -----------
Variable Annuity Activities:
Purchase payments .............................. 10,523,913 15,267,035 7,163,274 9,987,455
Surrender benefits ............................. (5,911,352) (5,349,569) (1,305,281) (929,941)
Net Transfers .................................. (10,270,675) (6,781,095) (2,355,711) (1,369,531)
Death Benefits ................................. (272,835) (237,872) (46,045) (106,697)
Contract administration charges ................ (73,241) (73,305) (17,860) (11,878)
Deferred sales charges ......................... (92,237) (72,607) (24,968) (9,920)
Annuity benefits ............................... (309,264) (274,746) (51,104) (27,558)
------------- ------------ ----------- -----------
Net increase (decrease) in net assets result-
ing from variable annuity activities ........... (6,405,691) 2,477,841 3,362,305 7,531,930
------------- ------------ ----------- -----------
Total increase (decrease) in net assets ........ 6,013,227 8,641,518 1,094,288 9,960,965
Net Assets:
Beginning of year .............................. 75,488,988 66,847,470 17,721,060 7,760,095
------------- ------------ ----------- -----------
End of year .................................... $ 81,502,215 $ 75,488,988 $18,815,348 $17,721,060
============= ============ =========== ===========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EMERGING
GROWTH FUND++
-----------------------------
1998 1997*
-------------- -------------
<S> <C> <C>
Operations:
Net investment income (loss) ................... ($ 115,686) ($ 15,096)
Net realized gains (losses) from
investment transactions ....................... (18,156) 321,999
Net change in unrealized appreciation/
depreciation of investments ................... 2,702,071 (340,083)
----------- ---------
Net increase (decrease) in net assets
resulting from operations ...................... 2,568,229 (33,180)
----------- ---------
Variable Annuity Activities:
Purchase payments .............................. 9,803,496 4,773,188
Surrender benefits ............................. (303,992) (62,413)
Net Transfers .................................. (1,828,444) (414,030)
Death Benefits ................................. (8,772) --
Contract administration charges ................ (7,172) (624)
Deferred sales charges ......................... (6,090) (787)
Annuity benefits ............................... (17,597) (7,467)
----------- ---------
Net increase (decrease) in net assets result-
ing from variable annuity activities ........... 7,631,429 4,287,867
----------- ---------
Total increase (decrease) in net assets ........ 10,199,658 4,254,687
Net Assets:
Beginning of year .............................. 4,254,687 --
----------- ---------
End of year .................................... $14,454,345 $4,254,687
=========== ==========
<CAPTION>
BALANCED LIMITED MATURITY
PORTFOLIO++++ BOND PORTFOLIO++++
-------------------------------- ------------------------------
1998 1997 1998 1997
--------------- --------------- --------------- -------------
<S> <C> <C> <C> <C>
Operations:
Net investment income (loss) ................... $ 234,654 $ 100,421 $ 267,463 $ 237,192
Net realized gains (losses) from
investment transactions ....................... 3,711,455 1,039,436 $ 4,432 10,303
Net change in unrealized appreciation/
depreciation of investments ................... (1,522,453) 2,360,126 (90,968) 26,677
------------ ------------ ------------- ----------
Net increase (decrease) in net assets
resulting from operations ...................... 2,423,656 3,499,983 180,927 274,172
------------ ------------ ------------- ----------
Variable Annuity Activities:
Purchase payments .............................. 4,708,127 3,659,563 2,811,758 1,780,086
Surrender benefits ............................. (1,459,064) (1,445,846) (579,485) (685,437)
Net Transfers .................................. (2,543,550) (2,735,929) (1,594,229) (891,379)
Death Benefits ................................. (90,973) (234,335) (37,669) (73,242)
Contract administration charges ................ (20,547) (20,492) (4,237) (4,089)
Deferred sales charges ......................... (33,142) (31,195) (8,272) (4,872)
Annuity benefits ............................... (145,035) (132,766) (58,661) (36,318)
------------ ------------ ------------- ----------
Net increase (decrease) in net assets result-
ing from variable annuity activities ........... 415,816 (941,000) 529,205 84,749
------------ ------------ ------------- ----------
Total increase (decrease) in net assets ........ 2,839,472 2,558,983 710,132 358,921
Net Assets:
Beginning of year .............................. 22,799,580 20,240,597 5,561,701 5,202,780
------------ ------------ ------------- ----------
End of year .................................... $ 25,639,052 $ 22,799,580 $ 6,271,833 $5,561,701
============ ============ ============= ==========
</TABLE>
<PAGE>
- -----------
* FOR THE PERIOD FROM MAY 1, 1997 (DATE FUND BECAME AVAILABLE FOR INVESTMENT
TO CONTRACT OWNERS) TO DECEMBER 31, 1997.
+ INVESTMENT IN PENN SERIES FUNDS, INC.
++ INVESTMENT IN NEUBERGER BERMAN ADVISERS MANAGEMENT TRUST
+++ INVESTMENTS IN AMERICAN CENTURY VARIABLE PORTFOLIOS, INC. (TCI PORTFOLIOS,
INC.'S NAME CHANGED TO AMERICAN CENTURY VARIABLE PORTFOLIOS, INC. AS OF
MAY 1, 1997)
++++ INVESTMENT IN FIDELITY INVESTMENTS' VARIABLE INSURANCE PRODUCTS FUNDS
I AND II
+++++ INVESTMENT IN MORGAN STANLEY DEAN WITTER UNIVERSAL FUNDS, INC.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
B-15
<PAGE>
PENN MUTUAL VARIABLE ANNUITY ACCOUNT III
STATEMENTS OF CHANGES IN NET ASSETS -- FOR THE YEARS ENDED DECEMBER 31, 1998
AND 1997 (CONT'D.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PARTNERS CAPITAL APPRECIATION
PORTFOLIO++++ PORTFOLIO++++++
----------------------------- --------------------------------
1998 1997* 1998 1997
-------------- ------------- -------------- ----------------
<S> <C> <C> <C> <C>
Operations:
Net investment income (loss) ................... ($ 159,944) ($ 28,275) ($ 200,676) ($ 281,031)
Net realized gains (losses) from
investment transactions ....................... 1,314,554 1,377 890,697 (242,067)
Net change in unrealized appreciation/
depreciation of investments ................... (1,132,139) 262,156 (1,315,911) (562,269)
----------- --------- ----------- -------------
Net increase (decrease) in net assets
resulting from operations ...................... 22,471 235,258 (625,890) (1,085,367)
----------- --------- ----------- -------------
Variable Annuity Activities:
Purchase payments .............................. 16,825,601 8,417,570 1,967,452 4,600,249
Surrender benefits ............................. (636,970) (127,161) (1,284,123) (2,129,250)
Net Transfers .................................. (2,421,858) (244,197) (5,680,990) (10,307,667)
Death Benefits ................................. (37,624) -- (24,305) (42,762)
Contract administration charges ................ (10,943) (950) (20,497) (29,637)
Deferred sales charges ......................... (10,334) (1,745) (31,644) (45,296)
Annuity benefits ............................... (58,006) (20,626) (41,725) (72,368)
----------- --------- ----------- -------------
Net increase (decrease) in net assets result-
ing from variable annuity activities ........... 13,649,866 8,022,891 (5,115,832) (8,026,731)
----------- --------- ----------- -------------
Total increase (decrease) in net assets ........ 13,672,337 8,258,149 (5,741,722) (9,112,098)
Net Assets:
Beginning of year .............................. 8,258,149 -- 19,888,040 29,000,138
----------- --------- ----------- -------------
End of year .................................... $21,930,486 $8,258,149 $14,146,318 $ 19,888,040
=========== ========== =========== =============
<CAPTION>
EQUITY INCOME
PORTFOLIO++++++++
---------------------------------
1998 1997
---------------- ---------------
<S> <C> <C>
Operations:
Net investment income (loss) ................... ($ 19,238) $ 16,502
Net realized gains (losses) from
investment transactions ....................... 2,808,808 2,991,946
Net change in unrealized appreciation/
depreciation of investments ................... 3,216,502 7,434,103
----------- ------------
Net increase (decrease) in net assets
resulting from operations ...................... 6,006,072 10,442,551
----------- ------------
Variable Annuity Activities:
Purchase payments .............................. 19,104,376 20,275,870
Surrender benefits ............................. (4,228,476) (2,822,385)
Net Transfers .................................. (5,399,857) (3,908,648)
Death Benefits ................................. (297,915) (200,039)
Contract administration charges ................ (55,951) (40,423)
Deferred sales charges ......................... (72,716) (39,449)
Annuity benefits ............................... (427,304) (253,800)
----------- ------------
Net increase (decrease) in net assets result-
ing from variable annuity activities ........... 8,622,157 13,011,126
----------- ------------
Total increase (decrease) in net assets ........ 14,628,229 23,453,677
Net Assets:
Beginning of year .............................. 57,064,940 33,611,263
----------- ------------
End of year .................................... $ 71,693,169 $ 57,064,940
============ ============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
GROWTH
PORTFOLIO++++++++
--------------------------------
1998 1997
--------------- ---------------
<S> <C> <C>
Operations:
Net investment income (loss) ................... ($ 599,120) ($ 326,222)
Net realized gains (losses) from
investment transactions ....................... 7,095,378 1,202,712
Net change in unrealized appreciation/
depreciation of investments ................... 15,492,226 8,116,417
----------- -----------
Net increase (decrease) in net assets
resulting from operations ...................... 21,988,484 8,992,907
----------- -----------
Variable Annuity Activities:
Purchase payments .............................. 23,254,838 18,702,331
Surrender benefits ............................. (4,004,288) (3,085,102)
Net Transfers .................................. (6,920,426) (6,992,841)
Death Benefits ................................. (261,573) (147,166)
Contract administration charges ................ (71,268) (55,184)
Deferred sales charges ......................... (99,279) (74,954)
Annuity benefits ............................... (245,272) (125,244)
----------- -----------
Net increase (decrease) in net assets result-
ing from variable annuity activities ........... 11,652,732 8,221,840
----------- -----------
Total increase (decrease) in net assets ........ 33,641,216 17,214,747
Net Assets:
Beginning of year .............................. 53,902,234 36,687,487
----------- -----------
End of year .................................... $ 87,543,450 $ 53,902,234
============ ============
<CAPTION>
ASSET MANAGER INDEX 500
PORTFOLIO++++++++ PORTFOLIO ++++++++
--------------------------------- -------------------------------
1998 1997 1998 1997*
---------------- --------------- --------------- --------------
<S> <C> <C> <C> <C>
Operations:
Net investment income (loss) ................... $ 143,729 $ 97,473 ($ 162,002) ($ 34,323)
Net realized gains (losses) from
investment transactions ....................... 835,643 459,956 281,956 1,410
Net change in unrealized appreciation/
depreciation of investments ................... 416,857 625,879 5,006,490 465,450
------------ ----------- ----------- ----------
Net increase (decrease) in net assets
resulting from operations ...................... 1,396,229 1,183,308 5,126,444 432,537
------------ ----------- ----------- ----------
Variable Annuity Activities:
Purchase payments .............................. 5,224,201 3,737,528 26,942,238 8,905,076
Surrender benefits ............................. (557,255) (467,149) (918,820) (159,993)
Net Transfers .................................. (891,784) (528,705) (3,321,795) (611,399)
Death Benefits ................................. (46,723) (19,521) (68,425) --
Contract administration charges ................ (10,316) (7,431) (16,392) (1,585)
Deferred sales charges ......................... (13,295) (10,039) (14,007) (1,208)
Annuity benefits ............................... (92,217) (36,991) (59,823) (6,133)
------------ ----------- ----------- ----------
Net increase (decrease) in net assets result-
ing from variable annuity activities ........... 3,612,611 2,667,692 22,542,976 8,124,758
------------ ----------- ----------- ----------
Total increase (decrease) in net assets ........ 5,008,840 3,851,000 27,669,420 8,557,295
Net Assets:
Beginning of year .............................. 8,688,804 4,837,804 8,557,295 --
------------ ----------- ----------- ----------
End of year .................................... $ 13,697,644 $ 8,688,804 $ 36,226,715 $ 8,557,295
============ =========== ============ ===========
</TABLE>
<PAGE>
- -----------
* FOR THE PERIOD FROM MAY 1, 1997 (DATE FUND BECAME AVAILABLE FOR INVESTMENT
TO CONTRACT OWNERS) TO DECEMBER 31, 1997.
+ INVESTMENT IN PENN SERIES FUNDS, INC.
++ INVESTMENT IN NEUBERGER BERMAN ADVISERS MANAGEMENT TRUST
+++ INVESTMENTS IN AMERICAN CENTURY VARIABLE PORTFOLIOS, INC. (TCI PORTFOLIOS,
INC.'S NAME CHANGED TO AMERICAN CENTURY VARIABLE PORTFOLIOS, INC. AS OF
MAY 1, 1997)
++++ INVESTMENT IN FIDELITY INVESTMENTS' VARIABLE INSURANCE PRODUCTS FUNDS
I AND II
+++++ INVESTMENT IN MORGAN STANLEY DEAN WITTER UNIVERSAL FUNDS, INC.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
B-16
<PAGE>
PENN MUTUAL VARIABLE ANNUITY ACCOUNT III
STATEMENTS OF CHANGES IN NET ASSETS -- FOR THE YEARS ENDED DECEMBER 31, 1998
AND 1997 (CONT'D.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
EMERGING MARKETS
PORTFOLIO++++++++++
--------------------------------
1998 1997*
-------------- ---------------
<S> <C> <C>
Operations:
Net investment income (loss) ................... ($ 15,078) $ 4,313
Net realized gains (losses) from
investment transactions ....................... (5,906) 65,286
Net change in unrealized appreciation/
depreciation of investments ................... (739,423) (539,658)
---------- -----------
Net increase (decrease) in net assets
resulting from operations ...................... (760,407) (470,059)
---------- -----------
Variable Annuity Activities:
Purchase payments .............................. 1,809,338 2,905,319
Surrender benefits ............................. (68,993) (16,202)
Net Transfers .................................. (465,249) (191,079)
Death Benefits ................................. (20) --
Contract administration charges ................ (2,619) (541)
Deferred sales charges ......................... (1,973) (353)
Annuity benefits ............................... (4,738) (1,383)
---------- -----------
Net increase (decrease) in net assets result-
ing from variable annuity activities ........... 1,265,746 2,695,761
---------- -----------
Total increase (decrease) in net assets ........ 505,339 2,225,702
Net Assets:
Beginning of year .............................. 2,225,702 --
---------- -----------
End of year .................................... $ 2,731,041 $ 2,225,702
=========== ===========
</TABLE>
- -----------
* FOR THE PERIOD FROM MAY 1, 1997 (DATE FUND BECAME AVAILABLE FOR INVESTMENT
TO CONTRACT OWNERS) TO DECEMBER 31, 1997.
+ INVESTMENT IN PENN SERIES FUNDS, INC.
++ INVESTMENT IN NEUBERGER BERMAN ADVISERS MANAGEMENT TRUST
+++ INVESTMENTS IN AMERICAN CENTURY VARIABLE PORTFOLIOS, INC. (TCI PORTFOLIOS,
INC.'S NAME CHANGED TO AMERICAN CENTURY VARIABLE PORTFOLIOS, INC. AS OF
MAY 1, 1997)
++++ INVESTMENT IN FIDELITY INVESTMENTS' VARIABLE INSURANCE PRODUCTS FUNDS
I AND II
+++++ INVESTMENT IN MORGAN STANLEY DEAN WITTER UNIVERSAL FUNDS, INC.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
B-17
<PAGE>
PENN MUTUAL VARIABLE ANNUITY ACCOUNT III
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES
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.
Account III is registered under the Investment Company Act of 1940, as amended,
as a unit investment trust. Account III offers units to variable annuity
contract owners to provide for the accumulation of value and for the payment of
annuities. The preparation of the accompanying financial statements requires
management to make estimates and assumptions that affect the reported values of
assets and liabilities as of December 31, 1998 and the reported amounts from
operations and annuity activities during 1998 and 1997. Actual results could
differ from those estimates. Certain 1997 amounts have been reclassified to
conform with 1998 presentation. As of January 1, 1999, Commander and Pennant
Select variable annuity contracts became available. These additions represent
no risk to the accompanying financial statements.
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, Small
Capitalization and Emerging Growth Funds; Neuberger Berman Advisers Management
Trust (AMT): Limited Maturity Bond, Balanced and Partners Portfolios; American
Century Variable Portfolios, Inc. (ACI): Capital Appreciation Portfolio;
Fidelity Investments' Variable Insurance Products (Fidelity): Equity Income,
Growth, Asset Manager and Index 500 Portfolios; and Morgan Stanley Dean Witter
Universal Funds, Inc. (Morgan Stanley): Emerging Markets Equity Portfolio. Penn
Series, AMT, ACI, Fidelity and Morgan Stanley are open-end diversified
management investment companies. The investment in shares of these funds or
portfolios 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 -- Penn Mutual is taxed under federal law as a life
insurance company. Account III is part of Penn Mutual's total operations and is
not taxed separately. Under existing federal law, no taxes are payable on
investment income and realized gains of Account III.
DIVERSIFICATION REQUIREMENTS -- Under the provisions of Section 817(h) of
the Internal Revenue Code, a variable annuity contract other than a contract
issued in connection with certain types of employee benefit plans will not be
treated as an annuity contract for federal tax purposes for any period for
which the investments of the segregated asset account on which the contract is
based are not adequately diversified. The Code provides that the "adequately
diversified" requirement may be met if the underlying investments satisfy
either a statutory safe harbor test or diversification requirements set forth
in regulations issued by the Secretary of Treasury. The Internal Revenue
Service has issued regulations under 817(h) of the Code. Penn Mutual believes
that Account III satisfies the current requirements of the regulations, and it
intends that Account III will continue to meet such requirements.
B-18
<PAGE>
NOTE 2. PURCHASES AND SALES OF INVESTMENTS
The following table shows aggregate cost of shares purchased and proceeds
from sales of each fund or portfolio for the year ended December 31, 1998:
Purchases Sales
-------------- --------------
Money Market Fund .......................... $ 30,432,569 $ 23,045,084
Quality Bond Fund .......................... 10,882,705 5,085,192
High Yield Bond Fund ....................... 11,023,018 6,468,898
Growth Equity Fund ......................... 27,266,027 13,409,715
Value Equity Fund .......................... 32,277,856 18,324,692
Flexibly Managed Fund ...................... 60,707,211 32,903,505
International Equity Fund .................. 6,429,367 10,517,433
Small Capitalization Fund .................. 5,352,813 1,798,157
Emerging Growth Fund ....................... 8,570,511 1,047,959
Limited Maturity Bond Portfolio ............ 2,621,373 1,824,894
Balanced Portfolio ......................... 7,473,949 3,064,907
Partners Portfolio ......................... 16,217,272 1,388,054
Capital Appreciation Portfolio ............. 1,398,973 5,819,404
Equity Income Portfolio .................... 16,047,593 4,523,656
Growth Portfolio ........................... 23,369,223 5,071,622
Asset Manager Portfolio .................... 5,401,429 792,639
Index 500 Portfolio ........................ 23,991,511 1,311,578
Emerging Markets Equity Portfolio .......... 1,579,778 328,561
------------ ------------
Total ...................................... $291,043,178 $136,725,950
============ ============
NOTE 3. CONTRACT CHARGES
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
Account III. As reimbursement for expenses incurred in administering the
contract, Penn Mutual receives $30 per year from each annuity contract prior to
the contract's date of maturity. The $30 charge is waived on certain contracts.
If a policy is surrendered within the first 11 years, a contingent
deferred sales charge may be assessed. This charge will be deducted before any
surrender proceeds are paid. See original contract documents for special
charges assessed.
B-19
<PAGE>
Note 4. Unit Values
As of December 31, 1998, the accumulation units and accumulation unit
values are as follows:
Accumulation Accumulation
Units Unit Value
-------------- -------------
Diversifier II Variable Annuity Contract
Money Market Fund ........................... 1,449,199 $ 20.27
Quality Bond Fund ........................... 1,665,664 $ 22.04
High Yield Bond Fund ........................ 1,308,094 $ 34.64
Growth Equity Fund -- Qualified ............. 1,752,036 $ 67.51
Growth Equity Fund -- Non-Qualified ......... 626,895 $ 66.96
Value Equity Fund ........................... 5,273,048 $ 41.17
Flexibly Managed Fund ....................... 5,766,014 $ 58.95
International Equity Fund ................... 3,822,847 $ 21.32
Small Capitalization Fund ................... 1,306,650 $ 14.40
Emerging Growth Fund ........................ 781,196 $ 18.50
Limited Maturity Bond Portfolio ............. 509,381 $ 12.31
Balanced Portfolio .......................... 1,488,257 $ 17.23
Partners Portfolio .......................... 1,716,964 $ 12.77
Capital Appreciation Portfolio .............. 1,153,673 $ 12.26
Equity Income Portfolio ..................... 3,820,796 $ 18.76
Growth Portfolio ............................ 3,722,268 $ 23.52
Asset Manager Portfolio ..................... 801,557 $ 17.09
Index 500 Portfolio ......................... 2,350,293 $ 15.41
Emerging Markets Equity Portfolio ........... 406,394 $ 6.72
B-20
<PAGE>
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT AUDITORS
THE BOARD OF TRUSTEES
THE PENN MUTUAL LIFE INSURANCE COMPANY
PHILADELPHIA, PENNSYLVANIA
We have audited the accompanying consolidated balance sheets of The Penn Mutual
Life Insurance Company and subsidiaries as of December 31, 1998 and 1997, and
the related consolidated income statements, statements of changes in equity,
and statements of cash flows for the years then ended. These consolidated
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. The financial statements of the Company for the year ended December
31, 1996 were audited by other auditors whose report dated January 31, 1997
expressed an unqualified opinion on those statements.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of The
Penn Mutual Life Insurance Company and subsidiaries as of December 31, 1998 and
1997, and the results of their operations and their cash flows for the years
then ended, in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Philadelphia, Pennsylvania
January 29, 1999
B-21
<PAGE>
- --------------------------------------------------------------------------------
THE PENN MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1998 1997
- -------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C>
ASSETS
Debt securities, at fair value .................................... $ 5,500,924 $5,427,652
Equity securities, at fair value .................................. 4,161 12,502
Mortgage loans on real estate ..................................... 38,828 52,996
Real estate, net of accumulated depreciation ...................... 15,791 22,358
Policy loans ...................................................... 638,376 642,989
Short-term investments ............................................ 1,024 43,470
Other invested assets ............................................. 98,571 88,928
----------- ----------
TOTAL INVESTMENTS ................................................ 6,297,675 6,290,895
Cash and cash equivalents ......................................... 24,468 37,064
Investment income due and accrued ................................. 104,208 103,072
Deferred acquisition costs ........................................ 399,742 384,542
Amounts recoverable from reinsurers ............................... 69,583 63,211
Broker/dealer receivables ......................................... 793,522 526,797
Other assets ...................................................... 94,179 92,203
Separate account assets ........................................... 2,302,937 1,869,094
----------- ----------
TOTAL ASSETS ..................................................... $10,086,314 $9,366,878
=========== ==========
LIABILITIES
Reserves for payment of future policy benefits .................... $ 2,761,319 $2,770,015
Other policyholder funds .......................................... 2,835,081 2,973,434
Policyholders' dividends payable .................................. 30,532 35,273
Broker/dealer payables ............................................ 488,783 333,104
Accrued income tax payable: .......................................
Current .......................................................... 34,853 17,476
Deferred ......................................................... 107,781 75,096
Other liabilities ................................................. 383,744 283,666
Separate account liabilities ...................................... 2,302,937 1,869,094
----------- ----------
TOTAL LIABILITIES ................................................ 8,945,030 8,357,158
----------- ----------
EQUITY
Retained earnings ................................................. 944,145 857,711
Accumulated other comprehensive income - unrealized gains ......... 197,139 152,009
----------- ----------
TOTAL EQUITY ..................................................... 1,141,284 1,009,720
----------- ----------
TOTAL LIABILITIES AND EQUITY .................................... $10,086,314 $9,366,878
=========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
B-22
<PAGE>
- --------------------------------------------------------------------------------
THE PENN MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENTS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
REVENUES
Premium and annuity considerations .................................. $ 171,354 $ 195,220 $ 199,821
Policy fee income ................................................... 114,681 102,398 89,349
Net investment income ............................................... 444,697 460,206 475,315
Net realized capital gains/(losses) ................................. 3,912 9,655 (10,078)
Broker/dealer fees and commissions .................................. 331,285 290,005 241,068
Other income ........................................................ 16,491 11,851 11,544
---------- ---------- ----------
TOTAL REVENUE ...................................................... 1,082,420 1,069,335 1,007,019
---------- ---------- ----------
BENEFITS AND EXPENSES
Benefits paid to policyholders and beneficiaries .................... 455,036 480,234 462,412
Policyholder dividends .............................................. 61,369 67,412 67,596
Increase/(decrease) in liability for future policy benefits ......... (12,356) (11,972) 42,652
General expenses .................................................... 211,770 202,731 178,554
Broker/dealer sales expense ......................................... 180,255 160,730 132,724
Amortization of deferred acquisition costs .......................... 42,223 43,223 46,137
---------- ---------- ----------
TOTAL BENEFITS AND EXPENSES ........................................ 938,297 942,358 930,075
---------- ---------- ----------
Income Before Income Taxes .......................................... 144,123 126,977 76,944
---------- ---------- ----------
Income taxes:
Current ............................................................ 49,509 50,061 37,944
Deferred ........................................................... 8,180 3,851 (9,919)
---------- ---------- ----------
NET INCOME ........................................................ $ 86,434 $ 73,065 $ 48,919
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
B-23
<PAGE>
- --------------------------------------------------------------------------------
THE PENN MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
<TABLE>
<CAPTION>
OTHER
COMPREHENSIVE RETAINED TOTAL
FOR THE YEARS ENDED DECEMBER 31, INCOME EARNINGS EQUITY
- ------------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
BALANCE AT JANUARY 1, 1996 .................................... $ 158,941 $735,727 $ 894,668
Comprehensive Income
Net income for 1996 .......................................... -- 48,919 48,919
Other comprehensive loss, net of tax .........................
Unrealized depreciation of securities, net of reclassification
adjustment ................................................. (73,211) -- (73,211)
-------- ---------- -----------
Comprehensive Loss ............................................ (24,292)
-------- ---------- ----------
BALANCE AT DECEMBER 31, 1996 .................................. 85,730 784,646 870,376
Comprehensive Income
Net income for 1997 .......................................... -- 73,065 73,065
Other comprehensive income, net of tax .......................
Unrealized appreciation of securities, net of reclassification
adjustment ................................................. 66,279 -- 66,279
-------- ---------- ----------
Comprehensive Income .......................................... 139,344
-------- ---------- ----------
BALANCE AT DECEMBER 31, 1997 .................................. 152,009 857,711 1,009,720
Comprehensive Income
Net income for 1998 .......................................... -- 86,434 86,434
Other comprehensive income, net of tax .......................
Unrealized appreciation of securities, net of reclassification
adjustment ................................................. 45,130 -- 45,130
----------
Comprehensive Income .......................................... 131,564
--------- -------- ----------
BALANCE AT DECEMBER 31, 1998 .................................. $ 197,139 $944,145 $1,141,284
========= ======== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
B-24
<PAGE>
- --------------------------------------------------------------------------------
THE PENN MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, 1998 1997 1996
- -------------------------------------------------------------------------- --------------- --------------- ---------------
(in thousands)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income ............................................................... $ 86,434 $ 73,065 $ 48,919
Adjustments to reconcile net income to net cash provided by operations:
Capitalization of policy acquisition costs ............................ (72,356) (64,427) (60,234)
Amortization of deferred acquisition costs ............................ 42,223 43,223 46,137
Policy fees on universal life and investment contracts ................ (120,315) (104,342) (89,349)
Interest credited on universal life and investment contracts .......... 146,081 160,417 171,051
Depreciation and amortization ......................................... 4,750 18,682 11,613
Premiums due and other receivables .................................... (1,293) (7,291) (105)
Realized capital (gains)/losses ....................................... (3,912) (9,655) 10,078
(Increase)/decrease in accrued investment income ...................... (1,136) 60 6,474
(Increase)/decrease in amounts due from reinsurers .................... (6,372) (4,329) (14,200)
Increase/(decrease) in future policy benefit reserves ................. (8,696) (13,358) 58,697
Increase/(decrease) in income tax payable ............................. 25,622 (4,526) 7,798
Other, net ............................................................ 3,805 (6,693) 39,625
------------ ------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES ........................... 94,835 80,826 236,504
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Sale of investments:
Debt securities available for sale .................................... 1,837,209 1,235,274 927,905
Equity securities ..................................................... 35,496 20,374 25,413
Real estate ........................................................... 9,937 87,875 40,209
Other ................................................................. 18,074 14,355 15,284
Maturity and other principal repayments:
Debt securities available for sale .................................... 496,283 472,474 278,290
Mortgage loans ........................................................ 2,357 61,813 156,643
Cost of investments acquired:
Debt securities available for sale .................................... (2,315,067) (1,772,007) (1,427,048)
Equity securities ..................................................... (26,390) (15,268) (11,752)
Mortgage loans ........................................................ -- -- (36,155)
Real estate ........................................................... (293) (15,600) (8,542)
Other ................................................................. (17,917) (15,503) (8,789)
Change in policy loans, net .............................................. 4,613 13,084 1,234
(Increase)/decrease in short-term investments, net ....................... 42,446 (5,955) 51,290
Purchases of furniture and equipment, net ................................ (9,446) (4,116) (6,449)
------------ ------------ ------------
NET CASH (USED)/PROVIDED BY INVESTING
ACTIVITIES ......................................................... 77,302 76,800 (2,467)
------------ ------------ ------------
</TABLE>
-continued-
The accompanying notes are an integral part of the consolidated
financial statements.
B-25
<PAGE>
- --------------------------------------------------------------------------------
THE PENN MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Deposits for universal life and investment contracts ............. $ 589,070 $ 653,233 $ 625,816
Withdrawals from universal life and investment contracts ......... (605,821) (552,311) (567,697)
Transfers to separate accounts ................................... (147,708) (236,008) (269,735)
Issuance/(repayment) of debt ..................................... 90,772 24,842 (18,424)
(Increase)/decrease in net broker dealer receivables ............. (111,046) (47,632) 296
---------- ---------- ----------
NET CASH USED BY FINANCING ACTIVITIES ........................ (184,733) (157,876) (229,744)
---------- ---------- ----------
NET DECREASE IN CASH AND CASH EQUIVALENTS .................... (12,596) (250) 4,293
CASH AND CASH EQUIVALENTS ........................................
Beginning of the year ......................................... 37,064 37,314 33,021
---------- ---------- ----------
End of the year ............................................... $ 24,468 $ 37,064 $ 37,314
========== ========== ==========
</TABLE>
The accompanying notes are an intergal part of the consolidated
financial statements.
B-26
<PAGE>
- --------------------------------------------------------------------------------
THE PENN MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(IN THOUSANDS OF DOLLARS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
ORGANIZATION AND BASIS OF PRESENTATION
The Penn Mutual Life Insurance Company was founded and commenced business
in 1847 as a mutual life insurance company. The Company concentrates primarily
on the sale of individual life insurance and annuity products. The primary
products that the Company currently markets are traditional whole life, term
life, universal life, variable life, immediate annuities and deferred
annuities, both fixed and variable. The Company markets its products through a
network of career agents, independent agents, and independent marketing
organizations. The Company is also involved in the broker-dealer business which
offers a variety of investment products and services and is conducted through
the Company's non-insurance subsidiaries. The Company sells its products in all
fifty states and the District of Columbia. The Company is pursuing the sale of
its disability income line of business. This business had total assets of
$226,672 as of December 31, 1998 and premium and annuity considerations of
$16,739 for the year then ended.
The accompanying consolidated financial statements have been prepared in
conformity with generally accepted accounting principles and include the
accounts of The Penn Mutual Life Insurance Company, its wholly owned life
insurance subsidiary, The Penn Insurance and Annuity Company ("PIA"), and
non-insurance subsidiaries (principally broker/dealer and investment advisory
subsidiaries) (the "Company"). All significant intercompany accounts and
transactions have been eliminated in consolidation. The preparation of
financial statements requires management to make estimates and assumptions that
affect the amounts reported in the consolidated financial statements and notes
to the consolidated financial statements.
NEW ACCOUNTING PRONOUNCEMENTS
As of January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. (SFAS) 130, "Reporting Comprehensive Income." SFAS No.
130 establishes standards for the reporting and display of comprehensive income
and its components in the financial statements. The initial application of SFAS
No. 130, required the reclassification of prior-year financial statements to
reflect the components of comprehensive income.
During 1998, the Company adopted SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits," which revised disclosures
about pension and other postretirement benefit plans. As SFAS No. 132 does not
change the measurement or recognition of these plans, its adoption had no
impact on the Company's financial condition or results of operations.
In June 1998, The FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 requires all derivatives to
be recognized in the statement of financial position as either assets or
liabilities and measured at fair value. The corresponding derivative gains and
losses should be reported based on hedge relationships that exist. Changes in
the fair value of derivatives that are not designated as hedges or that do not
meet the hedge accounting criteria in SFAS No. 133, are required to be reported
in earning. SFAS No. 133 is effective for fiscal years beginning after June 15,
1999. Adoption of SFAS No. 133 is not expected to have a material effect on the
Company's financial condition or results of operations.
INVESTMENTS
Debt securities (bonds, notes, redeemable preferred stocks and
mortgage-backed securities) which might be sold prior to maturity are
classified as available for sale. These securities are carried at fair value,
with the change in unrealized gains and losses reported in other comprehensive
income. Interest on debt securities is credited to income as it is earned. Debt
securities are amortized using the scientific method. These assumptions are
consistent with the current interest rate and economic environments. The
retrospective adjustment method is used to value all securities.
Equity securities are classified as available for sale and carried at fair
value. Dividends on equity securities are credited to income on their
ex-dividend dates.
The Company regularly evaluates the carrying value of debt and equity
securities based on current economic conditions, past credit loss experience
and other circumstances of the investee. A decline in a security's fair value
that is deemed to be other than temporary is treated as a realized loss and a
reduction in the cost basis of the security.
B-27
<PAGE>
- --------------------------------------------------------------------------------
THE PENN MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS OF DOLLARS)
Mortgage loans on real estate are stated at unpaid principal balances, net
of unamortized discounts and valuation allowances. Valuation allowances on
impaired loans are based on the present value of expected future cash flows
discounted at the loan's original effective interest rate or the collateral
value if the loan is collateral dependent. However, if foreclosure is or
becomes probable, the measurement method used is collateral value.
Investment real estate, which the Company has the intent to hold, is
carried at cost less accumulated depreciation and valuation reserves. The
Company establishes valuation reserves for investment real estate when declines
in value are deemed to be other then temporary based on an analysis of
discounted future cash flows. Properties held for sale are carried at the lower
of depreciated cost or fair value less selling costs. Valuation reserves are
established for properties held for sale when the fair value less estimated
selling costs is below depreciated cost. Real estate acquired through
foreclosure is recorded at the lower of cost or fair value less estimated
selling costs at the time of foreclosure. Depreciation is calculated using the
straight-line method over the estimated useful lives of the real estate.
Policy loans are carried at the unpaid principal balances.
Short-term investments include securities purchased with a maturity date
of 90 days to less than one year. Short-term investments are valued at cost.
Other invested assets primarily include venture capital limited
partnerships which are carried at fair value.
Realized gains and losses are determined by specific identification and
are included in income on the trade date, net of amortization of deferred
acquisition costs. Unrealized gains and losses, net of appropriate taxes and
amortization of deferred acquisition costs, are accounted for as a separate
component of other comprehensive income.
The Company utilizes various financial instruments, such as interest rate
swaps, financial futures and structured notes, to hedge against interest rate
fluctuation. Most of these investments are recorded as accounting hedges using
a valuation method consistent with the valuation method of the assets hedged.
Gains and losses on these instruments are deferred and recognized in the
Consolidated Income Statements over the remaining life of the hedged security.
Changes in the fair value of these instruments are reported as unrealized gains
or losses. Realized gains or losses are recognized when the hedged securities
are sold.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on hand, money market instruments
and other debt securities with a maturity of 90 days or less when purchased.
OTHER ASSETS
Property and equipment and leasehold improvements are stated at cost, less
accumulated depreciation and amortization. Depreciation is calculated using the
straight-line method over the estimated useful lives of the related assets.
Amortization of leasehold improvements is calculated using the straight-line
method over the lesser of the term of the leases or the estimated useful life
of the improvements. Accumulated depreciation and amortization on property and
equipment and leasehold improvements was $49,816 and $44,329 at December 31,
1998 and 1997, respectively. Related depreciation and amortization expense was
$8,586, $8,183 and $7,510 for the years ended December 31, 1998, 1997 and 1996,
respectively.
Goodwill represents the excess of the cost of the businesses acquired over
the fair value of their net assets. These costs are amortized on a
straight-line basis over not more than 40 years and are included in other
assets in the Consolidated Balance Sheets. Unamortized goodwill amounted to
$16,126 and $16,932 at December 31, 1998 and 1997, respectively. Goodwill
amortization was $806, $808 and $909 for 1998, 1997 and 1996, respectively.
DEFERRED ACQUISITION COSTS
Costs of acquiring new insurance and annuity contracts, which vary with
and are primarily related to the production of new business, have been deferred
to the extent that such costs are deemed recoverable from future gross profits.
Such costs include commissions, certain costs of policy issuance and
underwriting, and certain variable agency expenses.
B-28
<PAGE>
- --------------------------------------------------------------------------------
THE PENN MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS OF DOLLARS)
Deferred acquisition costs related to participating traditional and
universal life insurance policies and annuity products without mortality risk
that include significant surrender charges are being amortized over the lesser
of the estimated or actual contract life in proportion to estimated gross
profits arising principally from interest, mortality and expense margins and
surrender charges. The effects on amortization of deferred acquisition costs of
revisions to estimated gross profits are reflected in earnings in the period
such estimated gross profits are revised. Deferred acquisition costs are
reviewed to determine that the unamortized portion of such costs is recoverable
from future estimated gross profits. Certain costs and expenses reported in the
consolidated income statements are net of amounts deferred.
SEPARATE ACCOUNTS
Separate Account assets and liabilities represent segregated funds
administered and invested by the Company primarily for the benefit of variable
life insurance policyholders and annuity and pension contractholders, including
certain of the Company's benefit plans. The value of the assets in the Separate
Accounts reflects the actual investment performance of the respective accounts
and is not guaranteed by the Company. The carrying value for Separate Account
assets and liabilities approximates the estimated fair value of the underlying
assets.
INSURANCE LIABILITIES AND REVENUE RECOGNITION
PARTICIPATING TRADITIONAL LIFE AND LIFE CONTINGENT ANNUITY PRODUCTS
Future policy benefits include reserves for participating traditional life
insurance and life contingent annuity products and are established in amounts
adequate to meet the estimated future obligations of the policies in force.
Liabilities for participating traditional life products are computed using the
net level premium method, using assumptions for investment yields, mortality,
morbidity and withdrawals, which are consistent with the dividend fund interest
rate and mortality rates used in calculating cash surrender values. Interest
rate assumptions used in the calculation of the liabilities for participating
traditional life products ranged from 2.25% to 4.5%. Premiums are recognized as
income when due. Death and surrender benefits are reported in expense as
incurred.
Liabilities for life contingent annuity products are computed by
estimating future benefits and expenses. Assumptions are based on Company
experience projected at the time of policy issue, with provision for adverse
deviations. Interest rate assumptions range from 2.25% to 13.25%. Premiums are
recognized as income as they are received. Death and surrender benefits are
reported in expense as incurred.
UNIVERSAL LIFE PRODUCTS AND OTHER ANNUITY PRODUCTS
Other policyholder funds represent liabilities for universal life and
investment-type annuity products. The liabilities for these products are based
on the contract account value which consists of deposits received from
customers and investment earnings on the account value, less administrative and
expense charges. The liability for universal life products is also reduced by
mortality charges. Liabilities for the non-life contingent annuity products are
computed by estimating future benefits and expenses. Assumptions are based on
Company experience projected at the time of policy issue. Interest rate
assumptions range from 2.0% to 11.25%.
Contract charges assessed against account value for universal life and
investment-type annuities are reflected as policy fee income in revenue.
Interest credited to account values and universal life benefit claims in excess
of fund values are reflected as benefit expense.
POLICYHOLDERS' DIVIDENDS
The majority of the Company's insurance products have been issued on a
participating basis. As of December 31, 1998, participating insurance expressed
as a percentage of insurance in force is 92%, and as a percentage of premium
income is 89%. The amount of policyholders' dividends to be paid is approved
annually by the Board of Trustees. The aggregate amount of policyholders'
dividends is calculated based on actual interest, mortality, morbidity and
expense experience for the year and on management's judgment as to the
appropriate level of equity to be retained by the Company. The carrying value
of this liability approximates the earned amount and fair value at December 31,
1998.
B-29
<PAGE>
- --------------------------------------------------------------------------------
THE PENN MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS OF DOLLARS)
BROKER/DEALER REVENUE RECOGNITION
Broker-dealer transactions in securities and listed options, including
related commission revenue and expense, are recorded on a settlement-date
basis. There would be no material effect on the financial statements if such
transactions were recorded on a trade-date basis.
FEDERAL INCOME TAXES
The Company files a consolidated federal income tax return with its life
and non-life insurance subsidiaries. Federal income taxes are charged or
credited to operations based upon amounts estimated to be payable or
recoverable as a result of taxable operations for the current year. Deferred
income tax assets and liabilities are established to reflect the impact of
temporary differences between the amount of assets and liabilities recognized
for financial reporting purposes and such amounts recognized for tax purposes.
These deferred tax assets or liabilities are measured by using the enacted tax
rates expected to apply to taxable income in the period in which the deferred
tax liabilities or assets are expected to be settled or realized.
REINSURANCE
In the normal course of business, the Company seeks to limit its exposure
to loss on any single insured and to recover a portion of benefits paid by
ceding reinsurance to other insurance enterprises or reinsurers under excess
coverage and coinsurance contracts. The Company has set its retention limit for
acceptance of risk on life insurance policies at various levels up to $1,250.
Insurance liabilities are reported before the effects of reinsurance.
Reinsurance receivables (including amounts related to insurance liabilities)
are reported as assets. Estimated reinsurance receivables are recognized in a
manner consistent with the liabilities related to the underlying reinsured
contracts.
2. INVESTMENTS:
DEBT SECURITIES
The following tables summarize the Company's investment in debt
securities, including redeemable preferred stocks. All debt securities are
classified as available for sale and are carried at estimated fair value.
Amortized cost is net of cumulative writedowns for other than temporary
declines in value of $3,056 and $1,208 as of December 31, 1998 and 1997,
respectively.
<TABLE>
<CAPTION>
December 31, 1998
-------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------------- ------------ ------------ --------------
<S> <C> <C> <C> <C>
U.S. Treasury securities and U.S. Government and agency
securities ........................................... $ 13,109 $ 1,271 $ -- $ 14,380
States and political subdivisions ..................... 12,094 2,216 -- 14,310
Foreign governments ................................... 24,920 3,323 -- 28,243
Corporate securities .................................. 3,058,066 299,489 4,956 3,352,599
Mortgage and other asset-backed securities ............ 2,006,891 86,271 4,399 2,088,763
----------- --------- ------- -----------
Total bonds ........................................... 5,115,080 392,570 9,355 5,498,295
Redeemable preferred stocks ........................... 2,696 -- 67 2,629
----------- --------- ------- -----------
TOTAL .............................................. $ 5,117,776 $ 392,570 $ 9,422 $ 5,500,924
=========== ========= ======= ===========
</TABLE>
B-30
<PAGE>
- --------------------------------------------------------------------------------
THE PENN MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
December 31, 1997
-------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------------- ------------ ------------ --------------
<S> <C> <C> <C> <C>
U.S. Treasury securities and U.S. Government and agency
securities ........................................... $ 107,539 $ 6,302 $ -- $ 113,841
States and political subdivisions ..................... 12,085 569 -- 12,654
Foreign governments ................................... 20,397 3,049 -- 23,446
Corporate securities .................................. 2,854,234 218,145 6,748 3,065,631
Mortgage and other asset-backed securities ............ 2,133,758 76,160 757 2,209,161
----------- --------- ------- -----------
Total bonds ........................................... 5,128,013 304,225 7,505 5,424,733
Redeemable preferred stocks ........................... 3,085 -- 166 2,919
----------- --------- ------- -----------
TOTAL .............................................. $ 5,131,098 $ 304,225 $ 7,671 $ 5,427,652
=========== ========= ======= ===========
</TABLE>
The following tables summarize the amortized cost and estimated fair value
of debt securities, including redeemable preferred stocks, as of December 31,
1998 by contractual maturity.
<TABLE>
<CAPTION>
Amortized Estimated
Cost Fair Value
-------------- --------------
<S> <C> <C>
Years to Maturity:
One or less ........................................ $ 279,580 $ 294,068
After one through five ............................. 357,684 369,099
After five through ten ............................. 566,864 631,968
After ten .......................................... 1,904,061 2,114,397
Mortgage and other asset-backed securities ......... 2,006,891 2,088,763
----------- -----------
Total bonds ...................................... 5,115,080 5,498,295
Redeemable preferred stocks ........................ 2,696 2,629
----------- -----------
TOTAL ............................................ $ 5,117,776 $ 5,500,924
=========== ===========
</TABLE>
<PAGE>
Expected maturities may differ from contractual maturities because certain
borrowers have the right to call or prepay obligations with or without call or
prepayment penalties. Mortgage and other asset-backed securities are presented
separately in the maturity schedule due to the potential for prepayment. The
weighted average life of these securities is 7.1 years.
At December 31, 1998, the Company held $2,088,763 in mortgage and other
asset-backed securities. The structured securities portfolio consists of
commercial and residential mortgage pass-through holdings totaling $1,865,556
and securities backed by credit card receivables, auto loans, home equity and
manufactured housing loans totaling $223,207. These securities follow a
structured principal repayment schedule and are of high credit quality.
Securities totaling $1,512,963 are rated AAA and include $20,394 of
interest-only tranches that were retained from the securitization of the
Company's mortgage loan portfolio.
At December 31, 1998, the largest industry concentration of the Company's
portfolio was investments in the finance industry of $624,768 representing 11%
of the total debt portfolio.
Proceeds during 1998, 1997 and 1996 from sales of available-for-sale
securities were $1,931,269, $1,353,112 and $927,905, respectively. Gross gains
and gross losses realized on those sales were $37,324 and $35,257,
respectively, during 1998, $21,799 and $8,990, respectively, during 1997 and
$15,932 and $6,899, respectively, during 1996.
The Company's investment portfolio of debt securities is predominantly
comprised of investment grade securities. At December 31, 1998 and 1997, debt
securities with amortized cost totaling $192,724 and $198,943, respectively,
were less than investment grade. At December 31, 1998 the Company held
securities with a carrying value of $9,170 which are to be restructured
pursuant to commenced negotiations. At December 31 1997, the Company did not
hold any securities which were either in default as to principal and/or
interest payments, were to be restructured pursuant to commenced negotiations
or were in situations where the borrowers went into bankruptcy subsequent to
acquisition. The Company did not hold any debt securities which were non-income
producing for the preceding twelve months as of December 31, 1998 and 1997.
B-31
<PAGE>
- --------------------------------------------------------------------------------
THE PENN MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS OF DOLLARS)
EQUITY SECURITIES
During 1998, 1997 and 1996, the proceeds from sales of equity securities
amounted to $18,487, $20,374 and $25,413, respectively. The gross gains and
gross losses realized on those sales were $3,095 and $239, $975 and $239 and
$1,369 and $247 for 1998, 1997 and 1996, respectively.
MORTGAGE LOANS
On August 29, 1996, the Company securitized the majority of its mortgage
loan portfolio by transferring the loans to a trust which qualifies as a REMIC
(Real Estate Mortgage Investment Conduit) under the Internal Revenue Code.
Prior to transferring the loans with a principal value of $781,564 and a book
value of $780,942, the loans were written down to a fair market value of
$755,559, and the related reserve of $25,285 was released. The trust issued
sixteen classes of Commercial Mortgage Pass-Through Certificates with a total
par value of $781,564. The certificates evidence the entire beneficial
ownership interest in the trust. The cash flow from the mortgages will be used
to repay the certificates over an average life of 4.28 years. The actual date
on which the principal amount of the notes may be paid in full could be
substantially earlier or later based on performance of the mortgages. The cash
flows of the assets of the trust will be the sole source of payments on the
notes. The Company has not guaranteed these certificates or the mortgage loans
held by the trust. As a result of this transaction, the Company recognized a
loss of $98 upon the transfer of the mortgages to the trust, representing the
difference between the fair market value of the certificates and the book value
of the mortgage loans transferred to the trust.
The Company retained the highest quality classes of certificates with a
par value of $715,126 and a fair market value of $734,326 at the time of the
securitization. As of December 31, 1998, the par value and fair value of these
securities were $460,753 and $475,699, respectively. As of December 31, 1997,
the par value and fair value of these securities were $570,130 and $597,248,
respectively. The Company sold the lowest rated classes of certificates with a
par value of $66,438 and a fair market value of $24,838.
The mortgage loans which were not included in the securitization and were
retained by the Company had a book value of $171,555 with a related reserve of
$21,907 and an estimated fair value of $153,405 on the date of the
securitization. Loans which the Company intended to dispose of within a period
of 6 to 24 months were written down to their estimated net realizable value.
These loans had a book value of $99,817 and an estimated net realizable value
of $81,310 at the time of the securitization. The writedown of $18,507 was
fully offset by a release in mortgage loss reserve. As of December 31, 1998 and
1997, the Company held $0 and $12,368 of these loans, respectively. The Company
intended to hold mortgage loans with a book value of $71,738 on the date of the
securitization through their remaining terms. As of December 31, 1998 and 1997,
the Company continued to hold $42,628 and $44,428 of these mortgages,
respectively. The Company discontinued the origination of commercial mortgage
loans in 1996.
The following tables summarize the carrying value of mortgage loans, by
property type and geographic concentration, at December 31.
1998 1997
------------ -----------
Property Type
Office buildings ............ $ 9,204 $ 20,012
Retail ...................... 5,553 7,862
Dwellings ................... 24,741 25,237
Other ....................... 3,130 3,685
Valuation allowance ......... (3,800) (3,800)
-------- --------
TOTAL ..................... $ 38,828 $ 52,996
======== ========
B-32
<PAGE>
- --------------------------------------------------------------------------------
THE PENN MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS OF DOLLARS)
1998 1997
---------- ----------
Geographic Concentration
Northeast ................... $ 10,273 $ 23,313
Midwest ..................... 5,728 5,922
South ....................... 12,075 12,502
West ........................ 14,552 15,059
Valuation allowance ......... (3,800) (3,800)
-------- --------
TOTAL ..................... $ 38,828 $ 52,996
======== ========
The following table presents changes in the mortgage loan valuation
allowance for the years presented:
1998 1997
---------- ----------
Balance at January 1 .............. $ 3,800 $ 3,400
Provision ......................... -- 400
Charge-offs ....................... -- --
------- -------
BALANCE AT DECEMBER 31 .......... $ 3,800 $ 3,800
======= =======
As of December 31, 1998 and 1997, the Company's mortgage loan portfolio
contained no loans delinquent over 60 days or in foreclosure and there were no
non-income producing mortgage loans for the preceding twelve months.
During 1998 and 1997, the Company did not restructure the terms of any
outstanding mortgages. As of December 31, 1998 and 1997, the mortgage loan
portfolio included $2,555 and $2,834, respectively, of restructured mortgage
loans. Restructured mortgage loans include commercial loans for which the basic
terms, such as interest rate, maturity date, collateral or guaranty have been
changed as a result of actual or anticipated delinquency. Restructures do not
include mortgages refinanced upon maturity at or above current market rates.
Gross interest income on restructured mortgage loans on real estate that would
have been recorded in accordance with the original terms of such loans amounted
to $258 and $298 in 1998 and 1997, respectively. Gross interest income from
these loans included in net investment income totaled $236 and $262 in 1998 and
1997, respectively.
At December 31, 1998, no loans were considered to be impaired. At December
31, 1997, the recorded investment in loans that were considered to be impaired
was $12,368 that, as a result of writedowns, did not have a valuation
allowance. The average recorded investment in impaired loans during the year
ended December 31, 1998 and 1997 was approximately $6,184 and $38,096,
respectively. During 1998 and 1997, $163 and $1,454 was received, respectively,
on these impaired loans which was applied to the outstanding principal balance
or will be applied to principal at the date of foreclosure.
REAL ESTATE
The following table summarizes the carrying value of the Company's real
estate holdings at December 31.
1998 1997
----------- -----------
Investment ......................... $ 19,111 $ 19,999
Properties held for sale ........... 1,914 7,828
Less: Valuation allowance .......... (5,234) (5,469)
-------- --------
TOTAL ............................ $ 15,791 $ 22,358
======== ========
At December 31, 1998 and 1997, accumulated depreciation on real estate
amounted to $6,218 and $6,498, respectively. Depreciation expense on real
estate totaled $1,071, $5,709 and $6,488 for the years ended December 31, 1998,
1997 and 1996, respectively. During 1997, the Company sold its largest real
estate investment for $65,007 cash to an unrelated buyer. At the date of the
sale, this property had a carrying value of $61,914, net of related reserves,
resulting in a gain of $3,093. During 1996, the Company wrote down the
statement value of this property by $16,000 to its estimated fair value, based
on changes in future valuation assumptions.
B-33
<PAGE>
- --------------------------------------------------------------------------------
THE PENN MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS OF DOLLARS)
OTHER
Investments on deposit with regulatory authorities as required by law were
$7,104 and $7,106 at December 31, 1998 and 1997, respectively.
As of December 31, 1998 and 1997, the Company's investments included
$475,699 and $597,248, respectively, of the tranches retained from the 1996
securitization of the Company's commercial mortgage loan portfolio. These
investments represented 42% and 59% of equity at December 31, 1998 and 1997,
respectively.
3. INVESTMENT INCOME AND CAPITAL GAINS:
The following table summarizes the sources of investment income, excluding
investment gains/(losses), for the year ended December 31.
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Debt securities ..................... $ 395,628 $ 390,852 $ 356,669
Equity securities ................... 206 1,371 1,313
Mortgages ........................... 4,268 12,098 62,454
Real estate ......................... 2,903 17,519 24,143
Policy loans ........................ 39,760 40,921 40,580
Short-term investments .............. 2,029 2,426 6,052
Other invested assets ............... 11,330 21,268 14,665
Cash and cash equivalents ........... 3 2 44
--------- --------- ---------
Gross investment income ............. 456,127 486,457 505,920
Less: Investment expenses .......... 11,430 26,251 30,605
--------- --------- ---------
Investment income, net .............. $ 444,697 $ 460,206 $ 475,315
========= ========= =========
</TABLE>
The following table summarizes net realized capital gains/(losses) on
investments for the year ended December 31. Net realized capital gains/(losses)
include decreases in valuation allowances of $235, $3,154 and $44,164 in 1998,
1997 and 1996, respectively.
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- --------------
<S> <C> <C> <C>
Debt securities ..................................... $ 110 $ 12,991 $ 10,412
Equity securities ................................... 2,856 417 1,122
Mortgage loans ...................................... 210 280 (2,821)
Real estate ......................................... 4,148 (684) (22,356)
Other ............................................... (2,109) (811) 3,565
Amortization of deferred acquisition costs .......... (1,303) (2,538) --
-------- -------- ----------
Realized gains/(losses) ............................. $ 3,912 $ 9,655 $ (10,078)
======== ======== ==========
</TABLE>
B-34
<PAGE>
- --------------------------------------------------------------------------------
THE PENN MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS OF DOLLARS)
The following table summarizes the change in unrealized gains and losses
for investments carried at fair value which are reflected in other
comprehensive income for the year ended December 31.
<TABLE>
<CAPTION>
1998 1997 1996
----------- ------------ ---------------
<S> <C> <C> <C>
Unrealized gains/(losses):
Debt securities ................................ $ 86,594 $ 160,850 $ (149,259)
Equity securities .............................. (2,092) 408 (582)
Other .......................................... (2,091) (14,581) (1,545)
--------- --------- -----------
82,411 146,677 (151,386)
--------- --------- -----------
Less:
Deferred policy acquisition costs .............. (12,841) (45,043) 38,324
Deferred income taxes .......................... (24,440) (35,355) 39,851
--------- --------- -----------
Net change in unrealized gains/(losses) ......... $ 45,130 $ 66,279 $ (73,211)
========= ========= ===========
</TABLE>
The following table sets forth the reclassification adjustment required to
avoid double-counting in comprehensive income items that are included as part
of net income for a period that also had been part of other comprehensive
income in earlier periods:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- --------------
<S> <C> <C> <C>
Reclassification Adjustments
Unrealized holding gains/(losses) arising during period .............. $ 53,576 $ 71,797 $ (57,160)
Reclassification adjustment for gains included in net income ......... 8,446 5,518 16,051
-------- -------- ----------
Unrealized gains/(losses) on investments, net of
reclassification adjustment ......................................... $ 45,130 $ 66,279 $ (73,211)
======== ======== ==========
</TABLE>
Reclassification adjustments reported in the above table for the years
ended December 31, 1998, 1997 and 1996 are net of income tax expense of $7,679,
$4,519 and $13,350, respectively, and $5,815, $2,875 and $8,740, respectively,
relating to the effects of such amounts on deferred acquisition costs.
B-35
<PAGE>
- --------------------------------------------------------------------------------
THE PENN MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS OF DOLLARS)
4. FAIR VALUE INFORMATION:
The following table summarizes the carrying value and estimated fair value
of the Company's financial instruments as of December 31, 1998 and 1997.
<TABLE>
<CAPTION>
1998 1997
------------------------------- -------------------------------
Carrying Fair Carrying Fair
Value Value Value Value
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
FINANCIAL ASSETS:
Debt securities
Available for sale ...................... $ 5,500,924 $ 5,500,924 $ 5,427,652 $ 5,427,652
Equity securities
Common stock ............................ 158 158 3,051 3,051
Non-redeemable preferred stocks ........... 4,003 4,003 9,451 9,451
Mortgage loans ............................ 38,828 42,678 52,996 57,224
Policy loans .............................. 638,376 605,144 642,989 606,681
Cash and cash equivalents ................. 24,468 24,468 37,064 37,064
Short-term investments .................... 1,024 1,024 43,470 43,470
Separate account assets ................... 2,302,937 2,302,937 1,869,094 1,869,094
Other invested assets ..................... 98,571 98,571 88,928 88,928
FINANCIAL LIABILITIES:
Investment-type contracts
Individual annuities .................... $ 1,108,274 $ 1,143,373 $ 1,225,192 $ 1,260,639
Guaranteed investment contracts ......... 39,571 40,556 59,809 61,456
Other group annuities ................... 113,974 115,422 147,061 148,257
Other policyholder funds ................ 1,573,262 1,573,262 1,541,372 1,541,372
----------- ----------- ----------- -----------
Total policyholder funds .................. 2,835,081 2,866,627 2,973,434 3,011,724
Policyholders' dividends payable .......... 30,532 30,532 35,273 35,273
Separate account liabilities .............. 2,302,937 2,302,937 1,869,094 1,869,094
</TABLE>
The estimated fair values for the Company's investments in debt and equity
securities are based on quoted market prices, where available. In situations
where market prices are not readily available, primarily private placements,
fair values are estimated using a formula pricing method based on fair values
of securities with similar characteristics. The estimated fair value of
currently performing mortgage loans is estimated by discounting the cash flows
associated with the investment, using an interest rate currently offered for
similar loans to borrowers with similar credit ratings. Loans with similar
credit quality, characteristics and time to maturity are aggregated for
purposes of discounted cash flow analysis. Assumptions regarding credit risk,
cash flows and discount rates are determined using the available market and
borrower-specific information. The estimated fair value for non-performing
loans is based on the estimated fair value of the underlying real estate, which
is based on recent appraisals or other estimation techniques. The estimated
fair value of policy loans is calculated by discounting estimated future cash
flows using interest rates currently being offered for similar loans. Loans
with similar characteristics are aggregated for purposes of the calculations.
The carrying values of cash, cash equivalents, short-term investments and
separate account assets approximate their fair values. The estimated fair
values for the venture capital limited partnerships are based on values
determined by the partnerships' managing general partners. The resulting
estimated fair values may not be indicative of the value which could be
negotiated in an actual sale.
The fair values of the Company's liabilities for individual annuities,
guaranteed investment contracts and certain group annuities are estimated by
discounting the cash flows associated with the contracts, using an interest
rate currently offered for similar contracts with maturities similar to those
remaining for the contracts being valued. The statement value for certain of
the other group annuities approximates their fair value due to the nature of
the contracts. The statement values of other policyholder funds, policyholders'
dividends payable and separate account liabilities approximate their fair
values.
B-36
<PAGE>
- --------------------------------------------------------------------------------
THE PENN MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS OF DOLLARS)
Currently, disclosure of estimated fair values is not required for all the
Company's assets and liabilities. Therefore, presentation of the estimated fair
value of a significant portion of assets without a corresponding valuation of
liabilities associated with insurance contracts can be misinterpreted. The
estimated fair values of liabilities under all of the Company's contracts are
considered in the overall management of interest rate risk. The continuing
management of the relationship between the maturities of the Company's
investments and the amounts due under insurance contracts reduces the Company's
exposure to changing interest rates.
The Company is exposed to interest rate risk on its interest-sensitive
products. The Company's investment strategy is designed to minimize interest
risk by managing the durations and anticipated cash flows of the Company's
assets and liabilities.
To minimize exposure and reduce risk from exchange and interest rate
fluctuations in the normal course of business, the Company enters into interest
rate swap programs for purposes other than trading. As of December 31, 1998 and
1997, the Company had interest rate swaps with aggregate notional amounts equal
to $95,000 and $105,000, respectively, with average unexpired terms of 8 and 19
months, respectively. Interest rate swap agreements involve the exchange of
fixed and floating rate interest payment obligations without an exchange of the
underlying notional principal amounts. During the term of the swap, the net
settlement amount is accrued as an adjustment to interest income. Gross
unrealized gains and losses, which represent fair value based on dealer-quoted
prices, were $2,248 and $0, respectively, at December 31, 1998 and $5,164 and
$0, respectively, at December 31, 1997. These fair values represent the amount
at risk if the counterparties default and the amount that the Company would
receive to terminate the contracts, taking into account current interest rates
and, where appropriate, the current creditworthiness of the counterparties.
In the normal course of business, the Company loans securities under
arrangements in which collateral is obtained in amounts greater than the
current market value of loaned securities. This collateral is held in the form
of cash, cash equivalents or securities issued or guaranteed by the United
States Government. The Company is at risk to the extent the value of loaned
securities exceeds the value of the collateral obtained. The Company controls
this risk by requiring collateral of the highest quality and requiring that
additional collateral be deposited when the market value of loaned securities
increases in relation to the collateral held or the value of the collateral
held decreases in relation to the value of the loaned securities. The Company
had loaned securities outstanding of $38,144 and $155,356 as of December 31,
1998 and 1997, respectively.
5. INCOME TAXES:
The Company follows the asset and liability method of accounting for
income taxes whereby current and deferred tax assets and liabilities are
recognized utilizing currently enacted tax laws and rates. Deferred taxes are
adjusted to reflect tax rates at which future tax liabilities or assets are
expected to be settled or realized.
B-37
<PAGE>
- --------------------------------------------------------------------------------
THE PENN MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS OF DOLLARS)
Deferred income taxes reflect the impact for financial statement reporting
purposes of temporary differences between the financial statement carrying
amounts and tax bases of assets and liabilities. The significant temporary
differences that give rise to the deferred tax assets and liabilities at
December 31 relate to the following:
1998 1997
----------- -----------
DEFERRED TAX ASSETS
Future policy benefits ................... $ 92,909 $ 88,172
Dividend award ........................... 10,255 11,970
Allowances for investment losses ......... 4,232 3,667
Employee benefit liabilities ............. 29,762 27,979
Other .................................... 18,677 24,728
--------- --------
Total deferred tax asset ............... 155,835 156,516
--------- --------
DEFERRED TAX LIABILITIES
Deferred acquisition costs ............... 135,248 127,495
Unrealized investment gains .............. 105,993 81,553
Other .................................... 22,375 22,564
--------- --------
Total deferred tax liability ........... 263,616 231,612
--------- --------
NET DEFERRED TAX LIABILITY ................ $ 107,781 $ 75,096
========= ========
The federal income taxes attributable to consolidated net income are
different from the amounts determined by multiplying consolidated net income
before federal income taxes by the expected federal income tax rate. The
difference between the amount of tax at the U.S. federal income tax rate of 35%
and the consolidated tax provision is summarized as follows:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Tax expense at 35% ................................ $ 50,443 $ 44,442 $ 26,930
Increase/(decrease) in income taxes resulting from:
Differential earnings amount ..................... 2,681 6,942 500
Other ............................................ 4,565 2,528 595
-------- -------- --------
Federal income tax expense/(benefit) .............. $ 57,689 $ 53,912 $ 28,025
======== ======== ========
</TABLE>
As a mutual life insurance company, the Company is subject to Internal
Revenue Code provisions which require mutual, but not stock, life insurance
companies to include the Differential Earnings Amount (DEA) in each year's
taxable income. This amount is computed by multiplying the Company's average
taxable equity base by a prescribed rate, which is intended to reflect the
difference between stock and mutual companies' earnings rates.
The Internal Revenue Service has examined the Company's income tax returns
through the year 1994. Management believes that an adequate provision has been
made for potential assessments.
B-38
<PAGE>
- --------------------------------------------------------------------------------
THE PENN MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS OF DOLLARS)
6. BENEFIT PLANS:
The following table summarizes the funded status and accrued benefit cost
for the Company's defined benefit plans and other postretirement benefit plans:
As of December 31,
<TABLE>
<CAPTION>
PENSION BENEFITS OTHER BENEFITS
------------------------------- -------------------------------
1998 1997 1998 1997
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Benefit obligation ................................ $ (90,428) $ (84,051) $ (26,439) $ (31,413)
Fair value of plan assets ......................... 53,349 42,783 -- --
---------- ---------- ---------- ----------
Funded Status ..................................... $ (37,079) $ (41,268) $ (26,439) $ (31,413)
========== ========== ========== ==========
Accrued benefit cost recognized in the consolidated
balance sheet .................................... $ (22,530) $ (23,527) $ (44,558) $ (45,143)
</TABLE>
The weighted-average assumptions used to measure the actuarial present
value of the projected benefit obligation were:
<TABLE>
<CAPTION>
PENSION BENEFITS OTHER BENEFITS
----------------------- -----------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Discount rate .......................... 6.75% 7.00% 6.75% 7.00%
Expected return on plan assets ......... 8.00% 8.00% -- --
Rate of compensation increase .......... 5.50% 5.50% 5.00% 5.50%
</TABLE>
At December 31, 1998, the assumed health care cost trend rate used in
measuring the accumulated postretirement benefit obligation was 8% in 1999,
grading to 5% in the year 2004. At December 31, 1997, the assumed health care
cost trend rate used in measuring the accumulated postretirement benefit
obligation was 8.5% in 1998, grading to 5.0% in the year 2004. The assumed
health care cost trend rate used at December 31, 1996 in measuring the
accumulated postretirement benefit obligation was 8.5% in 1997, grading to 5.0%
in the year 2004. Assumed health care cost trend rates have a significant
effect on the amounts reported for the health care plans.
The contributions made and the benefits paid from the plan were:
<TABLE>
<CAPTION>
PENSION BENEFITS OTHER BENEFITS
----------------------- ---------------------
1998 1997 1998 1997
---------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Benefit cost recognized in consolidated income
statement ................................... $ 5,692 $ 5,917 $ 831 $ 1,515
Employer contribution ........................ 6,687 3,006 1,415 2,191
Plan participants' contribution .............. -- -- -- --
Benefits paid ................................ 3,229 3,085 1,415 2,191
</TABLE>
The Company maintains four defined contribution pension plans for
substantially all of its employees and full-time agents. For two plans,
designated contributions of up to 6% or 8% of annual compensation are eligible
to be matched by the Company. Contributions for the third plan are based on
tiered earnings of full-time agents. The last plan, which covers employees of a
subsidiary, are determined on a discretionary basis by the Board of Directors
of that subsidiary. For the years ended December 31, 1998, 1997 and 1996, the
expense recognized for these plans was $9,526, $8,345 and $6,092, respectively.
The estimated fair value of the defined contribution plans' assets at December
31, 1998 and 1997 was $260,706 and $229,378, respectively.
B-39
<PAGE>
- --------------------------------------------------------------------------------
THE PENN MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS OF DOLLARS)
7. REINSURANCE:
The Company has assumed and ceded reinsurance on certain life and annuity
contracts under various agreements. Reinsurance permits recovery of a portion
of losses from reinsurers, although the Company remains primarily liable as the
direct insurer on all risks reinsured. The Company evaluates the financial
strength of potential reinsurers and continually monitors the financial
condition of present reinsurers to ensure that amounts due from reinsurers are
collectible. The table below highlights the amounts shown in the accompanying
financial statements.
<TABLE>
<CAPTION>
Assumed Ceded to
Gross from Other Other Net
Amount Companies Companies Amount
-------------- ------------ ------------- --------------
<S> <C> <C> <C> <C>
DECEMBER 31, 1998:
Life Insurance in Force ......... $32,066,821 $5,115,520 $5,954,701 $31,227,640
Premiums ........................ 166,708 10,586 5,940 171,354
Benefits ........................ 457,239 15,710 17,913 455,036
Reserves ........................ 5,594,712 1,688 62,198 5,534,202
DECEMBER 31, 1997:
Life Insurance in Force ......... $31,027,764 $5,217,856 $4,620,599 $31,625,021
Premiums ........................ 190,754 11,189 6,723 195,220
Benefits ........................ 492,857 14,293 26,916 480,234
Reserves ........................ 5,741,456 1,993 59,322 5,684,127
</TABLE>
During 1996, the Company had gross premiums of $196,897, assumed premiums
of $12,745 and ceded premiums of $9,821 and gross benefits of $293,270, assumed
benefits of $16,466 and ceded benefits of $16,808. Reinsurance receivables with
a carrying value of $55,119 and $50,617 were associated with a single reinsurer
at December 31, 1998 and 1997, respectively.
8. COMMITMENTS AND CONTINGENCIES:
The Company and its subsidiaries are respondents in a number of
proceedings, some of which involve extra-contractual damage in addition to
other damages. In addition, 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 are not likely to have a material adverse effect on
the financial position of the Company.
The Company, in the ordinary course of business, extends commitments
relating to its investment activities. As of December 31, 1998, the Company had
outstanding commitments totaling $19,413 relating to these investment
activities. The fair value of these commitments approximates the face amount.
9. STATUTORY INFORMATION:
State insurance regulatory authorities prescribe or permit statutory
accounting practices for calculating net income and capital and surplus which
differ in certain respects from generally accepted accounting principles
(GAAP). The significant differences relate to deferred acquisition costs, which
are charged to expenses as incurred; federal income taxes, which reflect
amounts that are currently taxable; and benefit reserves, which are determined
using prescribed mortality, morbidity and interest assumptions, and which, when
considered in light of the assets supporting these reserves, adequately provide
for obligations under policies and contracts. In addition, the recording of
impairments in the value of investments generally lags recognition under GAAP.
The combined insurance companies' statutory capital and surplus at
December 31, 1998 and 1997 was $495,212 and $435,861, respectively. The
combined insurance companies' net income, determined in accordance with
statutory accounting practices, for the years ended December 31, 1998, 1997 and
1996, was $83,676 $63,613 and $25,905, respectively.
B-40
<PAGE>
- --------------------------------------------------------------------------------
THE PENN MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS OF DOLLARS)
10. YEAR 2000 (Unaudited):
The services provided by the Company depend on the smooth functioning of
computer systems. Many computer systems in use today cannot recognize the Year
2000, but revert to 1900 or some other date, due to the manner in which dates
were encoded and calculated earlier in this century. If not corrected, many
computer applications could fail or create erroneous results by or at the Year
2000. Failure of computer systems could affect pricing, account services, and
the handling of investment transactions, among other things. The Company began
preparing for the Year 2000 actively in 1996. The effort involves assessing all
computers, computer programs and related equipment, making necessary changes
and ensuring that all systems process dates correctly. The Company believes
that it has designed and implemented an efficient process for identifying what
needs to be changed and is working to correct and test systems that research
shows will be affected by dates in the Year 2000 and beyond. The Company
expects its computer systems to be Year 2000 compliant.
The Company has relationships with vendors and other service providers
that are not affiliated with the Company. As part of its plan, the Company is
contacting vendors and service providers to obtain assurances that such service
providers have taken appropriate measures to address the Year 2000 issue. The
Company will assess and attempt to mitigate risks where outside service
providers are not Year 2000 ready. However, there is no assurance that the
failure of outside service providers to complete adequate preparations in a
timely manner, which results in systems interruptions or other consequences,
will not have an adverse effect, directly or indirectly, on the Company.
The cost of addressing the Year 2000 issue is significant but not material
to the Company's financial condition or results of operations. The Company will
continue to incur costs in addressing the Year 2000, but does not anticipate
that the costs will be material going forward.
The foregoing statements are designated Year 2000 Readiness Disclosure
within the meaning of The Year 2000 Information and Readiness Disclosure Act
(P.L. 105-271,S.2392).
B-41
<PAGE>
PART C
Other Information
<PAGE>
Item 24. Financial Statements and Exhibits
(a) Financial Statements included in Part B:
Financial Statements of Penn Mutual Variable Annuity
Account III:
Report of Independent Auditors
Statements of Assets and Liabilities - December 31, 1998
Statement of Operations - for the year ended December 31,
1998
Statements of Changes in Net Assets - for the years ended
December 31, 1998 and 1997 Notes to Financial Statements
Consolidated Financial Statements of The Penn Mutual Life
Insurance Company:
Report of Independent Auditors
Statements of Financial Condition at December 31, 1998 and
1997
Statements of Operations and Surplus for the years
ended December 31, 1998, 1997 and 1996
Statements of Cash Flows for the years ended December 31,
1998 1997 and 1996
Notes to Financial Statements
(b) Exhibits
1. (a) Resolutions of Executive Committee of
Board of Trustees of The Penn Mutual Life
Insurance Company authorizing the
establishment of the Registrant.
Incorporated herein by reference to Exhibit
1(a) to the Registration Statement on Form
N-4 of Penn Mutual Variable Annuity Account
III (File No. 333-62811 and Accession No.
0001036050-98-001504) filed on September 3,
1998.
(b) Resolution of Executive Committee of Board
of Trustees of the Penn Mutual Life
Insurance Company authorizing investments of
the Registrant. Filed herewith.
2. Not applicable
3. (a) Form of Sales Support Agreement between
The Penn Mutual Life Insurance Company and
Horner, Townsend & Kent, Inc., a
wholly-owned subsidiary of Penn Mutual.
Incorporated herein by reference to Exhibit
3(a) to Pre-Effective Amendment No. 1 to the
Registration Statement on Form N-4 of the
Penn Mutual Variable Annuity Account III
(File No. 333-62811 and Accession No.
0001036050-98-002055) filed on November 30,
1998.
C-1
<PAGE>
(b) Form of Distribution Agreement between The
Penn Mutual Life Insurance Company and
Horner, Townsend & Kent, Inc., a
wholly-owned subsidiary of Penn Mutual.
Incorporated herein by reference to Exhibit
3(a) and 3(b) to Pre-Effective Amendment No.
1 to the Registration Statement on Form N-4
of the Penn Mutual Variable Annuity Account
III (File No. 333-62811 and Accession No.
0001036050-98-002055) filed on November 30,
1998.
(c) Form of Agent's Agreement relating to
broker-dealer supervision. Incorporated
herein by reference to Exhibit 3(c) to the
Registration Statement on Form N-4 of Penn
Mutual Variable Annuity Account III (File
No. 333-62811 and Accession No.
0001036050-98-001504) filed on September 3,
1998.
(d) Form of Broker-Dealer Selling Agreement (for
broker-dealers licensed to sell variable
annuity contracts and/or variable life
insurance contracts under state insurance
laws). Incorporated herein by reference to
Exhibit 3(d) to the Pre-Effective Amendment
to the Registration Statement on Form N-4 of
Penn Mutual Variable Annuity Account III
(File No. 333-62811 and Accession No.
0001036050-98-001504) filed on November 30,
1998.
(e) Form of Broker-Dealer Selling Agreement (for
broker-dealers with affiliated corporations
licensed to sell variable annuity contracts
and/or variable life insurance contracts
under state insurance laws). Filed herewith.
(f) Form of Addendum (Form 98-1) to
Broker-Dealer Selling Agreement.
Incorporated herein by reference to Exhibit
3(f) to Pre-Effective Amendment No. 1 to the
Registration Statement on Form N-4 of Penn
Mutual Variable Annuity Account III (File
No. 333-62811 and Accession No.
0001036050-98-001504) filed
on September 3, 1998.
4. (a) Individual Variable and Fixed Annuity
Contract (Form VAB-98). Incorporated herein
by reference to Exhibit 4(a) to
Pre-Effective Amendment No. 1 to this
Registration Statement on Form N-4 of Penn
Mutual Variable Annuity Account III
(Accession No. 0001036050-98-002056) filed
on November 30, 1998.
(b) Rider -- Guaranteed Minimum Death Benefit --
Rising Floor (GDBRF-98). Incorporated herein
by reference to Exhibit 4(b) to
Pre-Effective Amendment No. 1 to this
Registration Statement on Form N-4 of Penn
Mutual Variable Annuity Account III
(Accession No. 0001036050-98-002056) filed
on November 30, 1998.
C-2
<PAGE>
(c) Rider -- Guaranteed Minimum Death Benefit --
Step Up (GDBSU-98). Incorporated herein by
reference to Exhibit 4(c) to Pre-Effective
Amendment No. 1 to this Registration
Statement on Form N-4 of Penn Mutual
Variable Annuity Account III (Accession No.
0001036050-98-002056) filed on November 30,
1998.
(d) Endorsement No. 1534-96 to Individual
Variable and Fixed Annuity Contract.
Incorporated herein by reference to Exhibit
4(d) to the Registration Statement on Form
N-4 of Penn Mutual Variable Annuity Account
III (File No. 333-62811 and Accession No.
0001036050-98-001504) filed on September 3,
1998.
(e) Endorsement No. 1542-97 to Individual
Variable and Fixed Annuity Contract.
Incorporated herein by reference to Exhibit
4(e) to the Registration Statement on Form
N-4 of Penn Mutual Variable Annuity Account
III (File No. 333-62811 and Accession No.
0001036050-98-001504) filed on September 3,
1998.
(f) Endorsement No. 1536-98 to Individual
Variable and Fixed Annuity Contract.
Incorporated herein by reference to Exhibit
4(f) to Pre-Effective Amendment No. 1 to the
Registration Statement on Form N-4 of Penn
Mutual Variable Annuity Account III (File
No. 333-62811 and Accession No.
0000950116-99-000291) filed on February 24,
1999.
5. Application (Form 5790) for Individual
Variable Annuity Contract. Incorporated
herein by reference to Exhibit 5 to this
Registration Statement on Form N-4 of Penn
Mutual Variable Annuity Account III
(Accession No. 0001036050-98-001508)
filed on September 3, 1998.
6. (a) Charter of The Penn Mutual Life Insurance
Company (May 1983). Incorporated herein by
reference to Exhibit 6(a) to the
Registration Statement on Form N-4 of Penn
Mutual Variable Annuity Account III (File
No. 333-62811 and Accession No.
0001036050-98-001504) filed on September 3,
1998.
(b) By-laws of The Penn Mutual Life Insurance
Company, as amended through February 21,
1997. Incorporated herein by reference to
Exhibit 6(b) to the Registration Statement
on Form N-4 of Penn Mutual Variable Annuity
Account III (File No. 333-62811 and
Accession No. 0001036050-98-001504) filed on
September 3, 1998.
C-3
<PAGE>
7. None
8. (a)(1) Form of Sales Agreement between The Penn
Mutual Life Insurance Company and Neuberger
& Berman Advisers Management Trust.
Incorporated herein by reference to Exhibit
8(b)(1) to the Registration Statement on
Form N-4 of Penn Mutual Variable Annuity
Account III (File No. 333-62811 and
Accession No. 0001036050-98-001504) filed on
September 3, 1998.
(a)(2) Form of Assignment and Modification
Agreement between Neuberger & Berman
Management Incorporated, Neuberger & Berman
Advisers Management Trust, Advisers Managers
Trust and The Penn Mutual Life Insurance
Company. Incorporated herein by reference to
Exhibit 8(b)(2) to the Registration
Statement on Form N-4 of Penn Mutual
Variable Annuity Account III (File No.
333-62811 and Accession No. 0001036050-
98-001504) filed on September 3, 1998.
(a)(3) Amendment to Fund Participation Agreement
between The Penn Mutual Life Insurance
Company and Neuberger & Berman Advisers
Management Trust. Incorporated herein by
reference to Exhibit 8(b)(3) to
Post-Effective Amendment No.5 to the
Registration Statement of Penn Mutual
Variable Life Account I (File No. 33-54662
and Accession No. 0000950109-97-003328)
filed on April 30, 1997.
(b) Form of Sales Agreement between The Penn
Mutual Life Insurance Company and Penn
Series Funds, Inc. Incorporated herein by
reference to Exhibit 8(c) to the
Registration Statement on Form N-4 of Penn
Mutual Variable Annuity Account III (File
No. 333-62811 and Accession No.
0001036050-98-001504) filed on September 3,
1998.
(c) Form of Participation Agreement between The
Penn Mutual Life Insurance Company, Variable
Insurance Products Fund and Fidelity
Distributors Corporation. Incorporated
herein by reference to Exhibit 8(d) to this
Registration Statement on Form N-4 of Penn
Mutual Variable Annuity Account III
(Accession No. 0001036050-98-001504) filed
on September 3, 1998.
(d) Form of Participation Agreement between The
Penn Mutual Life Insurance Company, Variable
Insurance Products Fund II and Fidelity
Distributors Corporation. Incorporated
herein by reference to Exhibit 8(e) to the
Registration Statement on Form N-1A of Penn
Mutual Variable Annuity Account III (File
No. 333-62811 and Accession No.
0001036050-98-001504) filed on September 3,
1998.
C-4
<PAGE>
(e) Participation Agreement between The Penn
Mutual Life Insurance Company, Morgan
Stanley Universal Funds, Inc., Morgan
Stanley Asset Management Inc. and Miller
Andersen & Sherrerd LLP. Incorporated herein
by reference to Exhibit 8(f) to
Post-Effective Amendment No. 2 to the
Registration Statement of PIA Variable
Annuity Account I (File No. 33-83120 and
Accession No. 0000950109-97-003327) filed on
April 30, 1998.
9. Opinion and Consent of Franklin L. Best,
Esq. Associate General Counsel of The Penn
Mutual Life Insurance Company. Incorporated
herein by reference to Pre-Effective
Amendment No. 1 to the Registration
Statement on Form N-4 of Penn Mutual
Variable Annuity Account III (File No.
333-62811 and Accession No.
0001036050-98-002055) filed on November 30,
1998.
10. (a) Consent of Ernst & Young LLP. Filed herewith
(b) Consent of Morgan, Lewis & Bockius LLP.
Filed herewith.
11. Not applicable.
12. Not applicable.
13. Schedule of Computation of Performance
Quotations set forth in this Registration
Statement. Filed herewith.
14. (a) Powers of Attorney of Trustees (except Ms.
Bloch and Messrs. Notebaert and Rock).
Incorporated herein by reference to Exhibit
14 to Post-Effective Amendment No. 22 to the
Registration Statement on Form N-4 of Penn
Mutual Variable Annuity Account III (File
No. 002-77283 and Accession No.
00001021408-97-000161) filed on April 29,
1997.
(b) Powers of Attorney of Edmond F. Notebaert
and Robert H. Rock . Incorporated herein by
reference to Exhibit 14(b) to Post Effective
Amendment No. 24 to the Registration
Statement on Form N-4 of Penn Mutual
Variable Annuity Account III (File No.
002-77283 and Accession No.
000095109-98-002717) filed on April 24,
1998.
(c) Power of Attorney of Ms. Julia Chang Bloch.
Incorporated herein by reference to Exhibit
14(c) to the Registration Statement on Form
N-4 of Penn Mutual Variable Annuity Account
III (File No. 333-62811 and Accession No.
0001036050-98-001504) filed on September 3,
1998.
C-5
<PAGE>
ITEM 25. DIRECTORS AND OFFICERS OF THE DEPOSITOR
The following table sets forth the names of the officers and
trustees of the Depositor who are engaged directly or indirectly
in activities relating to the Registrant or the variable annuity
contracts offered by the Registrant and the executive officers of
the Depositor.
ROBERT E. CHAPPELL NANCY S. BRODIE
Chairman of the Board and Chief Executive Vice President and
Executive Officer and Member of Chief Financial Officer
the Board of Trustees
DANIEL J. TORAN PETER M. SHERMAN
President and Chief Operating Senior Vice President and
Officer and Member of the Board of Chief Investment Officer
Trustees
LARRY L. MAST ANN M. STROOTMAN
Executive Vice President, Sales and Vice President and Controller
Marketing
HAROLD E. MAUDE, JR. STEVEN M. HERZBERG
Senior Vice President, Assistant Vice President
Independence Financial Network and Treasurer
RICHARD F. PLUSH JAMES MCELWAIN
Vice President, Products and Programs Assistant Vice President,
Retirement and Investment Sales
JOHN M. ALBANESE Operations
Senior Vice President, Customer Service
and Information Systems
FREDERICK M. ROCKOVAN ROBERT P. DAVIS
Vice President, Insurance Service Vice President and Chief Actuary
The business address of the director and officers is The Penn Mutual Life
Insurance Company, Philadelphia, PA 19172.
ITEM 26. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH THE DEPOSITOR
OR REGISTRANT
C-6
<PAGE>
Penn Mutual Wholly-Owned Subsidiaries
<TABLE>
<CAPTION>
CORPORATION PRINCIPAL BUSINESS STATE OF INCORPORATION
- ----------- ------------------ ----------------------
<S> <C> <C>
The Penn Insurance and Life Insurance and Annuities Delaware
Annuity Company
Independence Capital Investment Adviser Pennsylvania
Management, Inc.
Penn Janney Fund, Inc. Investments Pennsylvania
INDEPENDENCE SQUARE Holding Company Pennsylvania
PROPERTIES, INC.
The Pennsylvania Trust Trust Company Pennsylvania
Company
</TABLE>
INDEPENDENCE SQUARE PROPERTIES, INC.
WHOLLY-OWNED SUBSIDIARIES
<TABLE>
<CAPTION>
CORPORATION PRINCIPAL BUSINESS STATE OF INCORPORATION
- ----------- ------------------ ----------------------
<S> <C> <C>
Penn Glenside Corporation Real Estate Investment Pennsylvania
Penn Wayne Corporation Real Estate Investment Pennsylvania
St. James Realty Corporation Real Estate Investment Pennsylvania
Investors' Mortgage Real Estate Investment Pennsylvania
Corporation
Christie Street Properties, Real Estate Investment Pennsylvania
Inc.
INDEPRO CORPORATION Real Estate Investment Delaware
Economic Resources Real Estate Investment Delaware
Associates, Inc.
WPI Investment Company Real Estate Investment Delaware
Hornor, Townsend & Kent, Registered Broker-Dealer and Pennsylvania
Inc. Investment Adviser
Penn Tallahassee Real Estate Investment Florida
Corporation
</TABLE>
C-7
<PAGE>
<TABLE>
<CAPTION>
CORPORATION PRINCIPAL BUSINESS STATE OF INCORPORATION
- ----------- ------------------ ----------------------
<S> <C> <C>
JANNEY MONTGOMERY SCOTT Registered Broker-Dealer and Delaware
INC. Investment Adviser
</TABLE>
INDEPRO CORPORATION
WHOLLY-OWNED SUBSIDIARIES
<TABLE>
<CAPTION>
CORPORATION PRINCIPAL BUSINESS STATE OF INCORPORATION
- ----------- ------------------ ----------------------
<S> <C> <C>
Indepro Property Fund I Real Estate Investment Delaware
Corporation
Indepro Property Fund II Real Estate Investment Delaware
Corporation
Commons One Corporation Real Estate Investment Delaware
West Hazleton, Inc. Real Estate Investment Delaware
</TABLE>
JANNEY MONTGOMERY SCOTT, INC.
WHOLLY-OWNED SUBSIDIARIES
<TABLE>
<CAPTION>
CORPORATION PRINCIPAL BUSINESS STATE OF INCORPORATION
- ----------- ------------------ ----------------------
<S> <C> <C>
Addison Capital Investment Adviser Pennsylvania
Management, Inc.
JMS Resources, Inc. Oil and Gas Development Pennsylvania
JMS Investor Services, Inc. Insurance Sales Delaware
</TABLE>
ITEM 27. NUMBER OF CONTRACT OWNERS
As of March 31, 1999, there were 13 contracts being registered
under this Registration Statement outstanding.
ITEM 28. INDEMNIFICATION
Section 6.2 of the By-laws of The Penn Mutual Life Insurance
Company provides that, in accordance with the provisions of the
Section, the Company shall indemnify trustees and officers
against expenses (including attorneys' fees), judgments, fines,
excise taxes and amounts paid in settlement actually and
reasonably incurred in connection with actions, suits and
proceedings, to the extent such indemnification is not prohibited
by law, and may provide other indemnification to the extent not
prohibited by law. The By-laws are filed as Exhibit 6(b) to
Post-Effective
C-8
<PAGE>
Amendment No. 12 to this Registration Statement and are
incorporated in this Post-Effective Amendment by reference.
Pennsylvania law (15 Pa. C.S.A. ss.ss. 1741-1750) authorizes
Pennsylvania corporations to provide indemnification to
directors, officers and other persons.
Penn Mutual owns a directors and officers liability insurance
policy covering liabilities directors and officers of Penn Mutual
and its subsidiaries may incur in acting as directors and
officers.
Selling Agreements entered into by The Penn Mutual Life Insurance
Company ("Penn Mutual") and its subsidiary, Hornor, Townsend &
Kent, Inc. ("HTK") with securities brokers and insurance agents
generally provide for indemnification of Penn Mutual and HTK and
their directors and officers in the event of liability resulting
from unauthorized acts of the brokers and insurance agents.
Insofar as indemnification for liability arising under the
Securities Act of 1933 may be permitted to directors, officers
and controlling persons of the registrant pursuant to the
foregoing provisions, or otherwise, the registrant has been
advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities
(other than the payment by the registrant of expenses incurred or
paid by a director, officer or controlling person of the
registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in
the Act and will be governed by the final adjudication of such
issue.
ITEM 29. PRINCIPAL UNDERWRITERS
Hornor Townsend & Kent, Inc. serves as principal underwriters of
the securities of the Registrant.
Hornor Townsend & Kent, Inc. serves as principal underwriter for
Addison Capital Shares, Inc., a registered investment company.
HORNOR, TOWNSEND & KENT, INC. - DIRECTORS AND OFFICERS
John J. Gray, Director and Chairman of the Board
Harold E. Maude, Jr., Director
Nina M. Mulrooney, Director
Norman T. Wilde, Jr., Director
Daniel J. Toran, Director
Ronald C. Zimmerman, President and Chief Executive Officer
Michael D. Sweeney, Assistant Vice President, Director of
Compliance and Secretary
Edward G. Pecelli - Assistant Vice President, Director of Sales
and Marketing
C-9
<PAGE>
Laura M. Ritzko, Assistant Secretary
Henry S. Buck, Assistant Vice President and Assistant Treasurer
Barbara S. Wood, Senior Vice President, Finance and Treasurer
Bruce Ohrenich, Vice President, Sales
Joseph R. Englert, Assistant Vice President, Director of
Operations
Franklin L. Best, Jr., Counsel
Constance Flaville, Assistant Secretary
The principal business address of Messrs. Gray and Wilde is
Janney, Montgomery, Scott Inc., 1801 Market Street, Philadelphia,
Pennsylvania. The principal business address of Mses. Mulrooney
and Ritzko and Messrs. Maude, Toran and Best is The Penn Mutual
Life Insurance Company, Philadelphia, Pennsylvania, 19172. The
principal business address of the other directors and officers is
Hornor, Townsend & Kent, Inc., 600 Dresher Road, Horsham,
Pennsylvania.
As of December 31, 1998, no commissions or other compensation was
paid to a principal underwriter in respect to contracts issued in
this registration statement.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
The name and address of the person who maintains physical
possession of each account, book or other documents required by
Section 31(a) of the Investment Company Act of 1940 is as
follows:
The Penn Mutual Life Insurance Company
600 Dresher Road
Horsham, Pennsylvania 19044
ITEM 31. MANAGEMENT SERVICES
See "Administrative and Recordkeeping Services" in Part B of this
Registration Statement.
ITEM 32. UNDERTAKINGS
The Penn Mutual Life Insurance Company hereby undertakes:
(a) to file a post-effective amendment to this Registration
Statement as frequently as is necessary to ensure that
the audited financial statements in the Registration
Statement are never more than 16 months old for so long
as payments under the variable annuity contracts may be
accepted;
(b) to include either (1) as part of any application to
purchase a contract or account offered by the prospectus,
a space that an applicant can check to request a
statement of additional information, or (2) a post card
or similar written communication affixed to or included
in the prospectus that the applicant can remove to send
for a statement of additional information;
C-10
<PAGE>
(c) to deliver any statement of additional information and
any financial statements required to be made available
under Form N-4 promptly upon written or oral request.
Restrictions on withdrawals under Section 403(b) Contracts are
imposed in reliance upon, and in compliance with, a no-action
letter issued by the Chief of the Office of Insurance Products
and Legal Compliance of the Securities and Exchange Commission to
the American Council of Life Insurance on November 28, 1988.
The Penn Mutual Life Insurance Company represents that the fees
and charges deducted under the Individual Variable and Fixed
Annuity Contract, in the aggregate, are reasonable in relation to
the services rendered, the expenses expected to be incurred, and
the risks assumed by the Registrant.
C-11
<PAGE>
SIGNATURES
As required by the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant certifies that it meets the requirements of
Securities Act Rule 485(b) for effectiveness of this Post-Effective Amendment
No.1 of this Registration Statement and has caused this Post-Effective Amendment
to the Registration Statement to be signed on its behalf, by the undesigned,
thereunto duly authorized, in the Township of Horsham and Commonwealth of
Pennsylvania on this 23rd day of April, 1999.
PENN MUTUAL VARIABLE ANNUITY ACCOUNT III
(Registrant)
By: THE PENN MUTUAL LIFE INSURANCE COMPANY
(Depositor)
By: /s/ Robert E. Chappell
----------------------------------------
Robert E. Chappell
Chairman of the Board of Trustees
and Chief Executive Officer
As required by the Securities Act of 1933, this Post-Effective
Amendment No. 1 to the Registration Statement has been signed by the following
persons, in the capacities indicated, on the 23rd day of April, 1999.
Signature Title
- --------- -----
/s/ Robert E. Chappell Chairman of the Board of Trustees
- --------------------------- and Chief Executive Officer
Robert E. Chappell
/s/ Nancy S. Brodie Executive Vice President and
- --------------------------- Chief Financial Officer
Nancy S. Brodie
*JULIA CHANG BLOCH Trustee
*JAMES A. HAGEN Trustee
*PHILLIP E. LIPPINCOTT Trustee
*JOHN F. MCCAUGHAN Trustee
*ALAN B. MILLER Trustee
*EDMOND F. NOTEBAERT Trustee
*ROBERT H. ROCK Trustee
*DANIEL J. TORAN Trustee
*NORMAN T. WILDE, JR. Trustee
*WESLEY S. WILLIAMS, JR. Trustee
*By: /s/ Robert E. Chappell
----------------------
Robert E. Chappell, attorney-in-fact
C-12
<PAGE>
EXHIBIT INDEX
EX.99 B1 (b) Resolutions of Executive Committee Board of
Trustees of the Penn Mutual Life Insurance
Company.
EX.99 B3 (e) Form of Broker-Dealer Selling Agreement.
EX.99 B10 (a) Consent of Ernst & Young LLP.
EX.99 B10 (b) Consent of Morgan, Lewis & Bockius LLP.
EX.99 B13 Schedule of Computation of Performance
Quotations.
C-13
<PAGE>
THE PENN MUTUAL LIFE INSURANCE COMPANY
Executive Committee Resolutions
April 25, 1995
Investments Held in Penn Mutual Variable Annuity Account III
for
Individual Variable Annuity Contracts
WHEREAS, the Company's individual variable annuity contracts (the
"Contracts") currently provide for investments in shares of Penn Series Funds,
Inc., TCI Portfolios, Inc. and Neuberger & Berman Advisers Management Trust and
provide that such investments shall be segregated in Penn Mutual Variable
Annuity Account III, a separate account established pursuant to Section 406.2 of
the Insurance Company Act of 1921, as amended (the "Separate Account");
WHEREAS, the Company proposes to offer investments in shares of
Fidelity Investments' Variable Insurance Products Fund and Variable Insurance
Product Fund II as additional investment choices under the Contracts and
proposes to segregate such investments in the Separate Account;
WHEREAS, it is in order to authorize investments in shares of
portfolios of Fidelity Investments' Variable Insurance Products Fund and
Variable Insurance Products Fund II through the Separate Account, it is:
RESOLVED, that the Company is authorized to invest amounts held in the
Separate Account in shares of the following funds or portfolios of the following
registered investment companies, in accordance with instructions from owners of
and payees under the Contracts:
Penn Series Funds, Inc.: Growth Equity Fund
Value Equity Fund
Flexibly Managed Fund
Small Capitalization Fund
International Equity Fund
Quality Bond Fund
High Yield Bond Fund
Money Market Fund
Neuberger & Berman: Limited Maturity Bond Portfolio
Advisers Management Trust Balance Portfolio
TCI Portfolios, Inc.: TCI Growth Portfolio
Variable Insurance: Equity-Income Portfolio
Product Fund Growth Portfolio
Variable Insurance: Asset Manager Portfolio
Product Fund II
<PAGE>
The Penn Mutual Life Insurance Company
Penn Independence Square, Philadelphia, PA 19172
Mutual
- --------------------------------------------------------------------------------
National Accounts - Broker-Dealers Licensed
to Sell Variable Annuities and/or Variable
Life Insurance under Federal Securities Laws
(Companion Agreement - Form A-2)
BROKER-DEALER SELLING AGREEMENT
THE PENN MUTUAL LIFE INSURANCE COMPANY (hereinafter called "Penn
Mutual") and Hornor, Townsend & Kent, Inc. (hereinafter called
"Distributor") enter into this Agreement with
____________________________________________________ (hereinafter
called "Broker-Dealer") on this date _________________, 19___
agree as follows:
WITNESSETH:
WHEREAS, Penn Mutual is in the business of issuing annuity and
life insurance contracts to the public;
WHEREAS, Distributor is a wholly owned subsidiary of Penn Mutual,
is registered as a broker-dealer under the Securities Exchange
Act of 1934, is a member of the National Association of
Securities Dealers, Inc., and is assisting Penn Mutual in the
distribution of such contracts;
WHEREAS, Broker-Dealer is registered as a Broker-Dealer under the
Securities Exchange Act of 1934 and is a member of the National
Association of Securities Dealers, Inc.;
WHEREAS, Broker-Dealer is affiliated with
__________________________________, (hereinafter referred to as
"Corporate Insurance Agent") a corporation which is properly
licensed under the insurance laws of the state(s) in which
Broker-Dealer will act under this agreement;
WHEREAS, the parties desire to enter into an arrangement under
which Broker-Dealer and Corporate Insurance Agent agree to sell
certain variable annuity and variable life insurance contracts
issued by Penn Mutual;
NOW THEREFORE, in consideration of these premises and mutual
covenants herein contained, the parties agree as follows:
- --------------------------------------------------------------------------------
1. Appointment 1.1 Subject to the terms and conditions of this agreement,
of Broker-Dealer Penn Mutual and Distributor authorizes Broker-Dealer
as a non-exclusive agent for the solicitation of
applications for, and the servicing of, variable
annuity and/or variable life insurance contracts
identified in the schedule(s) attached hereto, and
Broker-Dealer accepts such authorization. The variable
annuity and/or variable life insurance contracts
identified in the schedule(s) are referred to herein
as "Contracts".
1.2 Broker-Dealer and its representatives shall be
independent contractors as to Penn Mutual and
Distributor and, subject to the terms and conditions
of this agreement, free to exercise their own judgment
as to the time, place and means of performing all acts
hereunder. Nothing in this agreement is intended to
create a relationship of employer and employee as
between Penn Mutual or Distributor, on the one hand,
and representatives of Broker-Dealer on the other.
- --------------------------------------------------------------------------------
2. Security 2.1 The sale of variable annuity and variable life
Regulations insurance contracts identified in the schedule(s)
and Insurance attached hereto is subject to and regulated under
Coordination of state insurance laws and regulations, in addition to
Agreements. federal securities laws and regulations, and in some
cases, state securities laws. It is understood and
agreed that registered representatives of
Broker-Dealer shall also be representative of
Corporate Insurance Agent and that Corporate Insurance
Agent shall contemporaneously enter into a Corporate
Insurance Agent Selling Agreement with Penn Mutual and
Distributor covering the sale of such contracts. This
agreement and the Corporate Insurance Agent Selling
Agreement shall govern the sales of such contracts.
- --------------------------------------------------------------------------------
3. Sale of 3.1 Broker-Dealer shall use its best efforts to solicit
Contracts. applications for Contracts from persons for whom the
Contracts are suitable, in accordance with the terms
and conditions of this agreement.
<PAGE>
3.2 All applications for Contracts shall be made on
applications forms authorized by Penn Mutual.
Broker-Dealer shall diligently review all such
applications for accuracy and completeness and shall
take all reasonable and appropriate measures to assure
that applications submitted to Penn Mutual are
accurate and complete.
3.3 All purchase payments collected by Broker-Dealer for
Penn Mutual shall be received in trust and shall be
remitted immediately, together with the application
and any other required documentation, to Penn Mutual
at the address indicated on the application or to such
other address as Penn Mutual may specify in writing.
All checks or money orders for payments under
Contracts shall be drawn to the order of Penn Mutual,
except as may be provided in the Corporate Insurance
Agent Selling Agreement (referred to in Section 2.1 of
this agreement).
3.4 All applications are subject to acceptance or
rejection by Penn Mutual in its sole discretion. Penn
Mutual may at any time in its sole discretion
discontinue issuing the Contracts or change the form
and content of new Contracts to be issued.
3.5 In soliciting applications for Contracts,
Broker-Dealer may not accept risk of any kind for or
on behalf of Penn Mutual and may not bind Penn Mutual
by promise or agreement or alter any Contract in any
way.
- --------------------------------------------------------------------------------
4. Compensation. 4.1 In consideration of and as full compensation for the
services performed in accordance with this agreement,
Corporate lnsurance Agent will receive compensation
from Penn Mutual as set forth in the schedule(s)
attached to the Corporate Insurance Agent Selling
Agreement referred to in Section 2.1 of this
agreement.
4.2 Should Penn Mutual for any reason return to the payor
any payment made under a Contract Broker-Dealer shall
cause Corporate Insurance Agent to repay Penn Mutual
the total amount of any compensation which Penn Mutual
may have paid Corporate Insurance Agent with respect
to such payment.
4.3 Penn Mutual may, in its sole discretion, change the
amount, terms and conditions of compensation with
respect to payment received by Penn Mutual under
Contracts.
4.4 Penn Mutual shall not be obligated to pay any
compensation which would be in violation of applicable
laws of any jurisdiction, anything in this agreement
to the contrary notwithstanding.
4.5 With respect to compensation paid to Corporate
Insurance Agent in connection with the sale of
variable annuity and/or variable life insurance
contracts, Broker-Dealer shall cause Corporate
Insurance Agent to maintain, on behalf of
Broker-Dealer, such books and records as are necessary
for Broker-Dealer to comply with applicable
recordkeeping requirements under federal and state
securities laws and under the rules of the National
Association of Securities Dealers, Inc.
<PAGE>
- --------------------------------------------------------------------------------
5. Compliance With 5.1 Broker-Dealer shall not solicit applications for
Securities Laws. Contracts unless Penn Mutual or Distributor has
notified Broker-Dealer that a registration statement
required under the Securities Act of 1933 is effective
as to such contracts and unless Broker-Dealer is duly
registered as a broker-dealer under the Securities
Exchange Act of 1934, is a member in good standing of
the National Association of Securities Dealers, Inc.,
and is duly licensed under any applicable securities
laws of the state or jurisdiction in which
Broker-Dealer engages in such activity.
5.2 Penn Mutual or Distributor shall furnish Broker-Dealer
with copies of the current prospectuses (and current
supplements thereto) required to be used in soliciting
applications for variable annuity and/or variable life
insurance contracts.
5.3 Broker-Dealer and its representatives shall comply
with all applicable securities laws and regulations
and with the rules of the National Association of
Securities Dealers, Inc. in soliciting applications
for and servicing Contracts. Broker-Dealer shall be
fully responsible for all acts of its representatives
in soliciting applications for and servicing
Contracts.
- --------------------------------------------------------------------------------
6. Advertisements, 6.1 Broker-Dealer shall not print, publish, distribute or
Sales Literature use any advertisements, sales literature or other
and Other writing relating to the Contracts unless such
Communications. advertisements, sales literature or other writing
shall have first been approved in writing by Penn
Mutual and Distributor.
6.2 Broker-Dealer shall exercise care not to misrepresent
the Contracts or Penn Mutual and shall make no oral or
written representation which is inconsistent with the
terms of the Contracts or with the information in any
prospectus or sales literature furnished by Penn
Mutual or it misleading in any way.
- --------------------------------------------------------------------------------
<PAGE>
7. Indemnification. 7.1 Broker-Dealer shall indemnify or hold harmless Penn
Mutual and Distributor and each director and officer
of Penn Mutual and Distributor against any losses,
claims, damages or liabilities, including but not
limited to reasonable attorneys' fees and court cost
to which Penn Mutual or Distributor and any such
director or officer may become subject, under the
Securities Act of 1933 or otherwise, insofar as such
losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon any
unauthorized use of sales materials or any verbal or
written misrepresentations or any unlawful sales
practices, or the failure of Broker-Dealer, its
officers, employees or representatives to comply with
the provisions of this agreement or the willful
misfeasance, bad faith, negligence or misconduct of
Broker-Dealer, its officers, employees, or
representatives in the solicitation of applications
for and the servicing of Contracts.
7.2 Penn Mutual and Distributor shall indemnify and hold
harmless Broker-Dealer and each officer or director of
Broker-Dealer against any losses, claims, damages or
liabilities, joint or several, including but not
limited to reasonable attorneys' fees and court cost,
to which Broker-Dealer or such officer or director
becomes subject, under the Securities Act of 1933 or
otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out
of or are based upon any untrue statement or alleged
untrue statement of a material fact, required to be
stated therein or necessary to make the statements
therein not misleading, contained in any registration
statement or any post-effective amendment or
supplement to the prospectus, or in any sales material
written by Penn Mutual or Distributor.
7.3 In the event Penn Mutual suffers a loss resulting from
Broker-Dealer activities, Broker-Dealer hereby assigns
any proceeds received under its fidelity bond to Penn
Mutual to the extent of such losses. If there is any
deficiency amount, whether due to a deductible or
otherwise, Broker-Dealer shall promptly pay Penn
Mutual such amount on demand and Broker-Dealer shall
indemnify and hold harmless Penn Mutual from any such
deficiency and from the costs of collection thereof
(including reasonable attorneys' fees).
- --------------------------------------------------------------------------------
8. Complaints, 8.1 Broker-Dealer shall promptly notify Penn Mutual and
Investigations Distributor of any allegation that Broker-Dealer or
& Proceedings. any of its representatives violated any law,
regulation or rule in soliciting applications for or
servicing Contracts, and shall provide Penn Mutual
with full details, including copies of all legal
documents pertaining thereto.
8.2 Broker-Dealer shall cooperate fully with Penn Mutual
and Distributor in any regulatory investigation or
proceeding or judicial proceeding involving the
solicitation of application for and servicing
Contracts by Broker-Dealer or any of its
representatives.
<PAGE>
- --------------------------------------------------------------------------------
9. Nonwaiver. 9.1 Forbearance by Penn Mutual or Distributor to enforce
any rights under this agreement shall not be construed
as a waiver of any of the terms and conditions of this
agreement and the same shall remain in full force and
effect. No waiver of any provision of this agreement
shall be deemed to be a waiver of any other provision,
whether or not similar, nor shall any waiver of a
provision of this agreement be deemed to constitute a
continuing waiver.
- --------------------------------------------------------------------------------
10. Amendment. 10.1 Penn Mutual reserves the right to amend this Agreement
at any time. Broker-Dealer's submission of an
application for a Contract after notice of any such
amendment shall constitute agreement of Broker-Dealer
to such amendment.
- --------------------------------------------------------------------------------
11. Termination and 11.1 This agreement may be terminated by any party, with or
Assignment. without cause, upon giving written notices to the
other parties. This agreement shall automatically
terminate if Broker-Dealer is adjudicated as bankrupt
or avails itself of any insolvency act or if a
permanent receiver or trustee in bankruptcy is
appointed for the property of Broker-Dealer. Upon
termination of this agreement, with or without cause,
all authorizations, rights and obligations shall
cease, except the rights and obligations set forth in
sections 7 and 8 of this agreement and the obligations
to settle account hereunder, including the immediate
forwarding of all payments received by Broker-Dealer
under Contract to Penn Mutual, and except as may be
expressly stated otherwise in this agreement.
11.2 This agreement may not be assigned without the written
consent of all parties.
- --------------------------------------------------------------------------------
12. Governing Law. 12.1 This agreement shall be construed in accordance with
and governed by the laws of the Commonwealth of
Pennsylvania.
- --------------------------------------------------------------------------------
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
by their officers designated below on the day and year first written.
____________________________________________
Name of Broker-Dealer
By:_________________________________________
Signature
_________________________________________
Name
_________________________________________
Title
THE PENN MUTUAL LIFE INSURANCE COMPANY
By:_________________________________________
Signature
_________________________________________
Name
_________________________________________
Title
HORNOR, TOWNSEND & KENT, INC.
By:_________________________________________
Signature
_________________________________________
Name
_________________________________________
Title
<PAGE>
The Penn Mutual Life Insurance Company
Penn Independence Square, Philadelphia, PA 19172
Mutual
- --------------------------------------------------------------------------------
SCHEDULE 1 TO BROKER-DEALER SELLING AGREEMENT
Individual Variable and Fixed Annuity Contracts -
Diversifier II
Individual Fixed - Only Annuity Contracts - Diversifier II
Date of Broker-Dealer Selling Agreement to which this
schedule is attached:____________
- --------------------------------------------------------------------------------
1. Authorization Subject to the conditions and limitations of the
To Sell. Broker-Dealer Selling Agreement, Broker-Dealer is
authorized to solicit applications for Diversifier II
Individual Variable and Fixed Annuity Contracts and
Diversifier II Individual Fixed-Only Annuity Contracts issued
by Penn Mutual (hereinafter referred to as "Contracts").
This Schedule 1 replaces and supersedes any and all prior Schedule 1's attached
to the Broker-Dealer Selling Agreement.
Agreed:
Date:___________________________ ____________________________________________
Name of Broker-Dealer
By:_________________________________________
Signature
_________________________________________
Name
_________________________________________
Title
THE PENN MUTUAL LIFE INSURANCE COMPANY
By:_________________________________________
Signature
_________________________________________
Name
_________________________________________
Title
HORNOR, TOWNSEND & KENT, INC.
By:_________________________________________
Signature
_________________________________________
Name
_________________________________________
Title
<PAGE>
The Penn Mutual Life Insurance Company
Penn Independence Square, Philadelphia, PA 19172
Mutual
- --------------------------------------------------------------------------------
SCHEDULE 3 TO BROKER-DEALER SELLING AGREEMENT
Variable Universal Life Insurance Contracts -
Penn Mutual Cornerstone VUL II
Date of Broker-Dealer Selling Agreement to which this
schedule is attached:____________
- --------------------------------------------------------------------------------
1. Authorization Subject to and in accordance with the provisions of the
To Sell. Broker-Dealer Selling Agreement, Broker-Dealer is authorized
to solicit applications for Form VU-94(s) and Form VU-94(u)
Flexible Premium Adjustable Variable Universal Life Insurance
Policies and such variations of such form of contracts as may
be designated by Penn Mutual and approved under applicable
state insurance laws ("Cornerstone VUL II Policies").
This Schedule 3 replaces and supersedes any and all prior Schedule 3's attached
to the Broker-Dealer Selling Agreement.
Agreed:
Date:___________________________ ____________________________________________
Name of Broker-Dealer
By:_________________________________________
Signature
_________________________________________
Name
_________________________________________
Title
THE PENN MUTUAL LIFE INSURANCE COMPANY
By:_________________________________________
Signature
_________________________________________
Name
_________________________________________
Title
HORNOR, TOWNSEND & KENT, INC.
By:_________________________________________
Signature
_________________________________________
Name
_________________________________________
Title
<PAGE>
The Penn Mutual Life Insurance Company
Penn Independence Square, Philadelphia, PA 19172
Mutual
- --------------------------------------------------------------------------------
SCHEDULE 4 TO BROKER-DEALER SELLING AGREEMENT
Variable Universal Life Insurance Contracts-Penn Mutual
Variable EstateMax
Date of Broker-Dealer Selling Agreement to which this
schedule is attached:____________
- --------------------------------------------------------------------------------
1. Authorization Subject to and in accordance with the provision of the
To Sell. Broker-Dealer Selling Agreement, Broker-Dealer is authorized
to solicit applications for Form VALJ-94(s) and Form
VALJ-94(u) Last Survivor Adjustable Variable Life Insurance
Policies and such variations of such form of contract as may
be designated by Penn Mutual and approved under applicable
state insurance laws ("Variable EstateMax Policies").
This Schedule 4 replaces and supersedes any and all prior Schedule 4's attached
to the Broker-Dealer Selling Agreement.
Agreed:
Date:___________________________ ____________________________________________
Name of Broker-Dealer
By:_________________________________________
Signature
_________________________________________
Name
_________________________________________
Title
THE PENN MUTUAL LIFE INSURANCE COMPANY
By:_________________________________________
Signature
_________________________________________
Name
_________________________________________
Title
HORNOR, TOWNSEND & KENT, INC.
By:_________________________________________
Signature
_________________________________________
Name
_________________________________________
Title
<PAGE>
Penn The Penn Mutual Life Insurance Company
Mutual Independence Square, Philadelphia, PA 19172
- --------------------------------------------------------------------------------
National Accounts - Corporate Insurance Agents
Licensed to Sell Variable Annuities and/or Variable
Life Insurance under State Insurance Laws
(Companion Agreement - Form A-1)
CORPORATE INSURANCE AGENT SELLING AGREEMENT
THE PENN MUTUAL LIFE INSURANCE COMPANY (hereinafter called
"Penn Mutual"), and Horner Townsend & Kent, Inc.
(hereinafter called "Distributor") enter into this
Agreement with __________________________________
(hereinafter called "Corporate Insurance Agent") on this
date ______________, 19____ agrees as follows:
WITNESSETH:
WHEREAS, Penn Mutual is in the business of issuing annuity
and life insurance contracts to the public;
WHEREAS, Distributor is a wholly owned subsidiary of Penn
Mutual, is registered as a broker-dealer under the
Securities Exchange Act of 1934, is a member of the
National Association of Securities Dealers, Inc., and is
assisting Penn Mutual in the distribution of such
contracts;
WHEREAS, Corporate Insurance Agent is properly licensed
under the insurance laws of the state(s) in which it will
act under this agreement;
WHEREAS, Corporate Insurance Agent is affiliated with
______________________________ a corporation which is
registered as a broker-dealer under the Securities Exchange
Act of 1934 and is a member of the National Association of
Securities Dealers, Inc. (hereinafter referred to as
"Broker-Dealer");
WHEREAS, the parties desire to enter into an arrangement
under which Corporate Insurance Agent and Broker-Dealer
agree to sell certain annuity and life insurance contracts
issued by Penn Mutual;
NOW THEREFORE, in consideration of these premises and
mutual covenants herein contained, the parties agree as
follows:
- --------------------------------------------------------------------------------
1. Appointment 1.1 Subject to the terms and conditions of this agreement,
of Corporate Penn Mutual and Distributor appoint Corporate
Insurance Insurance Agent as a non-exclusive agent for the
Agent. solicitation of applications for, and the servicing
of, annuity Insurance Agent and/or variable life
insurance contracts identified in the schedule(s)
attached hereto, and Corporate Insurance Agent accepts
such appointment. The annuity and/or variable life
insurance contracts identified in the schedules(s) are
referred to herein as "Contracts".
<PAGE>
1.2 Corporate Insurance Agent and its representatives
shall be independent contractors as to Penn Mutual and
Distributor and, subject to the terms and conditions
of this agreement, free to exercise their own judgment
as to the time, place and means of performing all acts
hereunder. Nothing in this agreement is intended to
create a relationship of employer and employee as
between Penn Mutual or Distributor, on the one hand,
and representatives of Corporate Insurance Agent on
the other.
- --------------------------------------------------------------------------------
2. Insurance and 2.1 The sale of variable annuity and variable life
Securities insurance contracts identified in the schedule(s)
Regulations - attached hereto is subject to and regulated under
Coordination federal securities laws (and may also be subject to
of Agreements. and regulated under certain state securities laws), in
addition to state insurance laws. It is understood and
agreed that representatives of Corporate Insurance
Agent shall be registered representative of
Broker-Dealer and that Broker-Dealer shall
contemporaneously enter into a Broker-Dealer Selling
Agreement with Penn Mutual and Distributor covering
the sale of such contracts. This agreement and the
Broker-Dealer Selling Agreement shall govern the sales
of such contracts.
- --------------------------------------------------------------------------------
3. Sale of 3.1 Corporate insurance Agent shall use its best efforts
Contracts. to solicit applications for Contracts from persons for
whom the Contracts are suitable, in accordance with
the terms and conditions of this agreement.
3.2 All applications for Contracts shall be made on
applications forms authorized by Penn Mutual.
Corporate Insurance Agent shall diligently review all
such applications for accuracy and completeness and
shall take all reasonable and appropriate measures to
assure that applications submitted to Penn Mutual are
accurate and complete.
3.3 All purchase payments collected by Corporate Insurance
Agent for Penn Mutual shall be received in trust and
shall be remitted immediately together with the
application and any other required documentation, to
Penn Mutual at the address indicated on the
application or to such other address as Penn Mutual
may specify in writing. All checks or money orders for
payments under Contracts shall be drawn to the order
of Penn Mutual.
3.4 All applications are subject to acceptance or
rejection by Penn Mutual in its sole discretion. Penn
Mutual may at any time in its sole discretion
discontinue issuing the Contracts or change the form
and content of new Contracts to be issued.
3.5 In soliciting applications for Contracts, Corporate
Insurance Agent may not accept risk of any kind for or
on behalf of Penn Mutual and may not bind Penn Mutual
by promise or agreement or alter any Contract in any
way.
- --------------------------------------------------------------------------------
4. Compensation. 4.1 In consideration of and as full compensation for the
services performed in accordance with this agreement,
Corporate Insurance Agent will receive compensation
from Penn Mutual as set forth in the schedule(s)
attached to this agreement. The schedule(s) shall be
signed and dated by the parties.
- --------------------------------------------------------------------------------
<PAGE>
4.2 Should Penn Mutual for any reason return any payment
made under a Contract to the payor, Corporate
Insurance Agent shall repay Penn Mutual the total
amount of any compensation which Penn Mutual may have
paid with respect to such payment.
4.3 Corporate Insurance Agent may not withhold or deduct
any part of any premium or other payment due Penn
Mutual for payment of compensation under this
agreement or for any other purpose. The right of
Corporate Insurance Agent to receive any compensation
under this agreement shall at all times be subordinate
to the right of Penn Mutual or Distributor to offset
or apply such compensation against any indebtedness of
Corporate Insurance Agent to Penn Mutual or
Distributor.
4.4 Penn Mutual may, in its sole discretion, change the
amount, terms and conditions, of compensation set
forth in the schedule(s) attached to this agreement,
with respect to payment received by Penn Mutual under
Contracts.
4.5 Penn Mutual shall not be obligated to pay any
compensation which would be in violation of applicable
laws of any jurisdiction, anything in this agreement
to the contrary notwithstanding.
4.6 With respect to compensation paid in connection with
the sale of variable annuity and/or variable life
insurance contracts, Corporate Insurance Agent shall,
on behalf of Broker-Dealer, maintain such books and
records as are necessary for Broker-Dealer to comply
with applicable record keeping requirements under
federal and state securities laws and under the rules
of the National Association of Securities Dealer, Inc.
Such records shall be maintained and preserved in
conformity with the requirements of Rules 17a-3 and
17a-4 under the Securities Exchange Act of 1934, to
the extent that such requirements are applicable to
the variable annuity and/or variable life contracts.
Further, with respect to such records, Corporate
Insurance Agent shall be subject to examination by the
Securities and Exchange Commission in accordance with
Section 17(a) of the Securities Exchange Act of 1934.
- --------------------------------------------------------------------------------
5. Compliance 5.1 Corporate Insurance Agent and its representative shall
with Insurance not solicit applications for Contracts in any state or
Laws and jurisdiction unless they are duly licensed and
Regulations. qualified to do so under the insurance laws and
regulations of the state or jurisdiction and unless
Penn Mutual has notified Corporate Insurance Agent
that the Contracts have been approved for sale in the
state or jurisdiction.
5.2 Penn Mutual may at any time in its sole discretion
withhold or withdraw authority of any representative
of Corporate Insurance Agent to solicit applications
for the Contracts. Upon Penn Mutual giving written
notice to Corporate Insurance Agent of its withdrawal
of authority of a representative to solicit
applications, Corporate Insurance Agent shall
immediately cause any such representative to cease all
such solicitations.
- --------------------------------------------------------------------------------
<PAGE>
5.3 Corporate Insurance Agent shall notify Penn Mutual in
writing immediately of the termination of the
employment or affiliation of an employee or
representative who is an appointed agent of Penn
Mutual pursuant to this agreement.
5.4 Corporate Insurance Agent shall keep accurate and
complete books and records of all transactions
relating to the solicitation of applications and for
servicing Contracts. The books and records shall be
made available to Penn Mutual for inspection upon
reasonable request.
5.5 If Corporate Insurance Agent solicits applications for
or servicing variable life insurance contracts under
this agreement, Corporate Insurance Agent and its
representative shall observe the Standards of
Suitability for the Sale of Variable Life Insurance
set forth on the reverse side of the schedule attached
hereto identifying such contacts.
5.6 Corporate Insurance Agent and its representatives
shall comply with all applicable insurance laws and
regulations in soliciting applications for and
servicing Contracts. Corporate Insurance Agent shall
be fully responsible for all acts of its
representatives in soliciting applications for and
servicing Contracts.
- --------------------------------------------------------------------------------
6. Advertisements, 6.1 Corporate Insurance Agent shall not print, publish,
Sales distribute or use any advertisements, sales literature
Literature and or other writing relating to the Contracts unless such
Other advertisements, sales literature or other writing
Communications. shall have first been approved in writing by Penn
Mutual and Distributor.
6.2 Corporate Insurance Agent shall exercise care not to
misrepresent the Contracts or Penn Mutual and shall
make no oral or written representation which is
inconsistent with the terms of the Contracts or with
the information in any prospectus or sales literature
furnished by Penn Mutual or it misleading in any way.
- --------------------------------------------------------------------------------
7. Indemnification. 7.1 Corporate Insurance Agent shall indemnify or hold
harmless Penn Mutual and Distributor and each director
and officer of Penn Mutual and Distributor against any
losses, claims, damages or liabilities, including but
not limited to reasonable attorneys' fees and court
cost to which Penn Mutual or Distributor and any such
director or officer may become subject, under the
Securities Act of 1933 or otherwise, insofar as such
losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon any
unauthorized use of sales materials or any verbal or
written misrepresentations or any unlawful sales
practices, or the failure of Corporate Insurance
Agent, its officers, employees or representative to
comply with the provisions of this agreement or the
willful misfeasance, bad faith, negligence or
misconduct of Corporate Insurance Agent, its officers,
employees, or representatives in the solicitation of
applications for and the servicing of Contracts.
- --------------------------------------------------------------------------------
<PAGE>
7.2 Penn Mutual and Distributor shall indemnify and hold
harmless Corporate Insurance Agent and each officer or
director of Corporate Insurance Agent against any
losses, claims, damages or liabilities, joint or
several, including but not limited to reasonable
attorneys' fees and court cost, to which Corporate
Insurance Agent or such officer or director becomes
subject, under the Securities Act of 1933 or
otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out
of or are based upon any untrue statement or alleged
untrue statement of a material fact, required to be
stated therein or necessary to make the statements
therein not misleading, contained in any registration
statement or any post-effective amendment or
supplement to the prospectus, or in any sales material
written by Penn Mutual or Distributor.
7.3 In the event Penn Mutual suffers a loss resulting from
Corporate Insurance Agent activities, Corporate
Insurance Agent hereby assigns any proceeds received
under its fidelity bond to Penn Mutual to the extent
of such losses. If there is any deficiency amount,
whether due to a deductible or otherwise, Corporate
Insurance Agent shall promptly pay Penn Mutual such
amount on demand and Corporate Insurance Agent shall
indemnify and hold harmless Penn Mutual from any such
deficiency and from the costs of collection thereof
(including reasonable attorneys' fees).
- --------------------------------------------------------------------------------
8. Complaints, 8.1 Corporate Insurance Agent shall promptly notify Penn
Investigations Mutual and Distributor of any allegation that
& Proceedings. Corporate Insurance Agent or any of its
representatives violated any law, regulation or rule
in soliciting applications for or servicing Contracts,
and shall provide Penn Mutual with full details,
including copies of all legal documents pertaining
thereto.
8.2 Corporate Insurance Agent shall cooperate fully with
Penn Mutual and Distributor in any regulatory
investigation or proceeding or judicial proceeding
involving the solicitation of application for and
servicing Contracts by Corporate Insurance Agent or
any of its representatives.
- --------------------------------------------------------------------------------
9. Nonwaiver. 9.1 Forbearance by Penn Mutual or Distributor to enforce
any rights under this agreement shall not be construed
as a waiver of any of the terms and conditions of this
agreement and the same shall remain in full force and
effect. No waiver of any provision of this agreement
shall be deemed to be a waiver of any other provision,
whether or not similar, nor shall any waiver of a
provision of this agreement be deemed to constitute a
continuing waiver.
- --------------------------------------------------------------------------------
10. Amendment. 10.1 Penn Mutual reserves the right to amend this Agreement
at any time. Corporate Insurance Agent's submission of
an application for a Contract after notice of any such
amendment shall constitute agreement of Corporate
Insurance Agent to such amendment.
- --------------------------------------------------------------------------------
11. Termination 11.1 This agreement may be terminated by any party, with or
and without cause, upon giving written notices to the
Assignment. other parties. This agreement shall automatically
terminate if Corporate Insurance Agent is adjudicated
as bankrupt or avails itself of any insolvency act or
if a permanent receiver or trustee in bankruptcy is
appointed for the property of Corporate Insurance
Agent. Upon termination of this agreement, with or
without cause, all authorizations, rights and
obligations shall cease, except the rights and
obligations set forth in sections 7 and 8 of this
agreement and the obligations to settle account
hereunder, including the immediate forwarding of all
payments received by Corporate Insurance Agent under
Contract to Penn Mutual, and except as may be
expressly stated otherwise in this agreement.
11.2 This agreement may not be assigned without the written
consent of all parties.
- --------------------------------------------------------------------------------
12. Governing Law. 12.1 This agreement shall be construed in accordance with
and governed by the laws of Law. the Commonwealth of
Pennsylvania.
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
by their officers designated below on the day and year first written.
____________________________________________________
Name of Corporate Insurance Agent
By:_________________________________________________
Signature
____________________________________________________
Name
____________________________________________________
Title
THE PENN MUTUAL LIFE INSURANCE COMPANY
By:_________________________________________________
Signature
____________________________________________________
Name
____________________________________________________
Title
HORNOR, TOWNSEND & KENT, INC.
By:_________________________________________________
Signature
____________________________________________________
Name
____________________________________________________
Title
<PAGE>
Penn The Penn Mutual Life Insurance Company
Mutual Independence Square, Philadelphia, PA 19172
- --------------------------------------------------------------------------------
SCHEDULE 1 TO CORPORATE INSURANCE AGENT SELLING AGREEMENT
Individual Variable and Fixed Annuity Contracts -
Diversifier II
Individual Fixed - Only Annuity Contracts - Diversifier II
Date of Corporate Insurance Agent Selling Agreement to
which this schedule is attached:
- --------------------------------------------------------------------------------
1. Authorization Subject to the conditions and limitations of the Corporate
to Sell. Insurance Agent Selling Agreement, Corporate Insurance
Agent is authorized to solicit applications for Diversifier
II Individual Variable and Fixed Annuity Contracts and
Diversifier II Individual Fixed-Only Annuity Contracts
issued by Penn Mutual (hereinafter referred to as
"Contracts").
- --------------------------------------------------------------------------------
2. Compensation. Subject to the conditions and limitations of the Corporate
Insurance Agent Selling Agreements and this Schedule,
Corporate Insurance Agent shall be paid a fee for placing
or servicing a Diversifier II Individual Variable and Fixed
Annuity Contract equal to _____% of any purchase payment
made under such Contract and a fee for placing and
servicing a Diversifier II Fixed-Only Annuity Contract
equal to _____% of any purchase payment made under such
Contract. No fee shall be paid with respect to a purchase
payment made under a contract after the Corporate Insurance
Agent Selling Agreement has been terminated. If the
Annuitant or Contractowner (other than a trustee of a
Qualified Plan) is over age 81 on the date the Diversifier
II Contract is issued, the fee shall be limited as follows:
80% of such fee if the Annuitant or Contractowner is age
82; 60% of such fee if the Annuitant or Contractowner is
age 83; 40% of such fee if the Annuitant or Contractowner
is age 84; and 20% of such fee if the Annuitant of
Contractowner is age 85. Amounts transferred among
Contracts are not purchase payments with the meaning of the
Corporate Insurance Agent Selling Agreement of this
Schedule.
This Schedule 1 replaces and supersedes any and all prior
Schedule 1's attached to the Corporate Insurance Agent
Selling Agreement.
Agreed:
Date:___________________________ ____________________________________________
Name of Corporate Insurance Agent
By:_________________________________________
Signature
_________________________________________
Name
_________________________________________
Title
THE PENN MUTUAL LIFE INSURANCE COMPANY
By:_________________________________________
Signature
_________________________________________
Name
_________________________________________
Title
HORNOR, TOWNSEND & KENT, INC.
By:_________________________________________
Signature
_________________________________________
Name
_________________________________________
Title
<PAGE>
Penn The Penn Mutual Life Insurance Company
Mutual Independence Square, Philadelphia, PA 19172
- --------------------------------------------------------------------------------
SCHEDULE 3 TO CORPORATE INSURANCE AGENT SELLING AGREEMENT
Variable Universal Life Insurance Contracts - Penn Mutual
Cornerstone VUL II Date of Corporate Insurance Agent
Selling Agreement to which this schedule is attached:
- --------------------------------------------------------------------------------
1. Authorization. Subject to and in accordance with the provision of the
to Sell. Corporate Insurance Agent Selling Agreement, Corporate
Insurance Agent is authorized to solicit applications for
Form VU- 94(s) and Form VU-94(u) Flexible Premium
Adjustable Variable Universal Life Insurance Policies and
such variations of such form of contract as may be
designated by Penn Mutual and approved under applicable
state insurance laws ("Cornerstone VUL II Policies").
- --------------------------------------------------------------------------------
2. Compensation. During the period the Corporate Insurance Agent Selling
Agreement and this schedule is n. in effect, and subject to
and in accordance with the provisions thereof, Corporate
Insurance Agent shall be compensated as follows:
2.1 Basic First Year Compensation
A fee for the first policy year of 50% of an amount
equal to the first T of premium paid for the first
policy year and 3.3% of an amount equal to the premium
paid for the first policy year in excess of T. However,
if the insured is over attained age 75 on the date the
policy is issued, the fee for the first policy year
will be limited to 35% of an amount equal to the first
T of premium paid for the first policy year and 3.3% of
an amount equal to premium paid for the first policy
year in excess of T. T is equal to the amount set forth
in Table 1 below for each $1,000 or fraction thereof
the initial Specified Amount of insurance as set forth
in the policy in question. In calculating compensation
payable pursuant to this subsection, it will be deemed
that any increase in Specified Amount of the policy in
question that is effective during the first six policy
months of such policy took place prior to the issuance
of such policy, and the calculations pursuant to this
subsection shall be based upon an initial Specified
Amount as so adjusted.
2.2 Renewal Compensation
A fee for the second through fifteen policy years of
3.00% of an amount equal to premium paid for the policy
year in question, and a fee for the sixteenth and later
policy years equal to 1.20% of premium paid for the
policy year in question.
2.3 Basic Compensation on Increases
In the case of an increase in the Specified Amount of
insurance, a fee of 47% (32% where the insured has an
attained age greater than 75) of an amount equal to the
smaller of (1) the first T of premium paid for the
twelve months following the effective date of any
increase in Specified Amount of the policy in question
and (2) total increase in scheduled annual basis
premium. Such fee shall be paid only once for each such
increase. T is defined in subsection 2.1 above.
-------------------------------------------------------
<PAGE>
2.4 Expense Allowance
For each calendar month while Corporate Insurance Agent
Selling Agreement is in effect and before its
termination, Corporate Insurance Agent shall be
entitled to the expense from Penn Mutual described
below, provided that the amount payable as an expense
allowance shall be limited to the total of reasonable
business expenses incurred by Corporate Insurance Agent
that are directly related to the sale or service of
Penn Mutual policies, and provided further that no such
allowance shall be payable to Corporate Insurance Agent
that would cause the total of such allowances to exceed
the limits of Section 4228 of the Insurance Law of the
State of New York. No payment pursuant to this
agreement will be used by Corporate Insurance Agent to
effect compensation for the sale of insurance in excess
of the limits of said Section 4228. Such allowance
shall be 60% of an amount equal to the Basic First Year
Compensation and Basic Compensation on Regular
increases for the Cornerstone, VUL Policies during the
calendar month for which this allowance is being
calculated.
2.5 Compensation Chargebacks
A percentage of total compensation (including expense
allowance) will be charged back for lapses/surrenders
during the first policy year and during the 12 policy
months following an increase. The percentage is shown
below and is dependent on the policy month of
lapse/surrender.
Policy Month of Chargeback
Lapse/Surrender Percentage
---------------- ----------
1-3 100%
4-6 75%
7-9 50%
10-12 25%
13+ 0%
2.6 Replacement of Penn Mutual Policies
It is agreed that the compensation otherwise payable to
Corporate Insurance Agent for any policy shall be
reduced in accordance with the replacement control
program of Penn Mutual in effect at the time such
policy is placed in force. It is anticipated that such
replacement control program may be changed from time to
time as to policies in force after such change.
<PAGE>
2.7 Policy Delivery Receipt
it is agreed that the Corporate Insurance Agent shall
be responsible for obtaining a signed policy delivery
receipt. No compensation otherwise payable to the
Corporate Insurance Agent for any policy shall be paid
until Penn Mutual is in possession of a signed policy
delivery receipt (or facsimile copy thereof) for said
policy.
This Schedule 3 replaces and supersedes any and all
prior Schedule 3's attached to the Corporate
Insurance Agent Selling Agreement.
Agreed:
Date:___________________________ ____________________________________________
Name of Corporate Insurance Agent
By:_________________________________________
Signature
_________________________________________
Name
_________________________________________
Title
THE PENN MUTUAL LIFE INSURANCE COMPANY
By:_________________________________________
Signature
_________________________________________
Name
_________________________________________
Title
HORNOR, TOWNSEND & KENT, INC.
By:_________________________________________
Signature
_________________________________________
Name
_________________________________________
Title
<PAGE>
Table 1
Variable Universal Life
Target Premiums
<TABLE>
<CAPTION>
Male Female Unisex Male Female Unisex
---- ------ ------ ---- ------ ------
Age NS SM NS SM NS SM Age NS SM NS SM NS SM
- --- -- -- -- -- -- -- --- -- -- -- -- -- --
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
0 N/A 2.82 N/A 2.44 N/A 2.77 41 11.35 13.61 9.72 11.40 11.01
1 N/A 2.81 N/A 2.45 N/A 2.77 42 11.88 14.27 10.15 11.91 11.53
2 N/A 2.91 N/A 2.53 N/A 2.86 43 12.45 14.96 10.60 12.43 12.07
3 N/A 3.00 N/A 2.61 N/A 2.96 44 13.04 15.68 11.08 12.98 12.64
4 N/A 3.11 N/A 2.70 N/A 3.06 45 13.67 16.45 11.58 13.56 13.24
5 N/A 3.22 N/A 2.79 N/A 3.17 46 14.34 17.26 12.11 14.16 13.88
6 N/A 3.33 N/A 2.89 N/A 3.28 47 15.05 18.11 12.67 14.80 14.56
7 N/A 3.46 N/A 2.99 N/A 3.40 48 15.80 19.02 13.26 15.47 15.27
8 N/A 3.59 N/A 3.10 N/A 3.53 49 16.60 19.97 13.89 16.17 16.03
9 N/A 3.73 N/A 3.21 N/A 3.67 50 17.45 20.98 14.55 16.91 16.84
10 N/A 3.87 N/A 3.33 N/A 3.81 51 18.35 22.05 15.24 17.69 17.70
11 N/A 4.03 N/A 3.45 N/A 3.96 52 19.31 23.19 15.98 18.51 18.61
12 N/A 4.19 N/A 3.59 N/A 4.12 53 20.33 24.39 16.77 19.38 19.58
13 N/A 4.36 N/A 3.72 N/A 4.28 54 21.42 25.65 17.59 20.29 20.60
14 N/A 4.53 N/A 3.86 N/A 4.45 55 22.57 26.99 18.47 21.26 21.70
15 N/A 4.70 N/A 4.01 N/A 4.62 56 23.80 28.40 19.40 22.28 22.86
16 N/A 4.88 N/A 4.16 N/A 4.79 57 25.10 29.88 20.40 23.36 24.09
17 N/A 5.06 N/A 4.32 N/A 4.96 58 26.50 31.46 21.46 24.51 25.40
18 N/A 5.25 N/A 4.48 N/A 5.13 59 27.98 33.13 22.59 25.74 26.81
19 N/A 5.44 N/A 4.65 N/A 5.31 60 29.57 34.91 23.82 27.07 28.31
20 4.83 5.65 4.17 4.82 4.70 5.50 61 31.27 36.80 25.13 28.50 29.92
21 5.00 5.84 4.32 5.01 4.86 5.69 62 33.09 38.80 26.54 30.03 31.63
22 5.17 6.05 4.49 5.20 5.04 5.90 63 35.03 40.93 28.06 31.68 33.47
23 5.36 6.27 4.66 5.41 5.22 6.12 64 37.11 43.18 29.69 33.43 35.43
24 5.56 6.51 4.84 5.62 5.41 6.35 65 39.33 45.54 31.43 35.29 37.53
25 5.76 6.76 5.02 5.83 5.62 6.59 66 41.69 48.04 33.29 37.27 39.76
26 5.99 7.03 5.22 6.08 5.83 6.85 67 44.22 50.00 35.28 39.38 42.15
27 6.22 7.31 5.43 6.32 6.06 7.13 68 46.93 50.00 37.44 41.65 44.71
28 6.47 7.62 5.65 6.58 6.31 7.43 69 49.85 50.00 39.78 44.12 47.46
29 6.74 7.94 5.87 6.85 6.57 7.74 70 50.00 50.00 42.33 46.80 50.00
30 7.02 8.28 6.11 7.14 6.84 8.07 71 50.00 50.00 45.12 49.74 50.00
31 7.31 8.64 6.37 7.44 7.12 8.42 72 50.00 50.00 48.16 50.00 50.00
32 7.63 9.03 6.63 7.75 7.43 8.79 73 50.00 50.00 50.00 50.00 50.00
33 7.96 9.43 6.91 8.08 7.75 9.18 74 50.00 50.00 50.00 50.00 50.00
34 8.31 9.86 7.20 8.43 8.08 9.59 75 50.00 50.00 50.00 50.00 50.00
35 8.67 10.31 7.51 8.80 8.44 10.03 76 50.00 50.00 50.00 50.00 50.00
36 9.06 10.79 7.84 9.19 8.81 10.49 77 50.00 50.00 50.00 50.00 50.00
37 9.47 11.30 8.18 9.59 9.21 10.97 78 50.00 50.00 50.00 50.00 50.00
38 9.90 11.83 8.53 10.01 9.62 11.48 79 50.00 50.00 50.00 50.00 50.00
39 10.36 12.39 8.91 10.46 10.06 12.02 80 50.00 50.00 50.00 50.00 50.00
40 10.84 12.99 9.30 10.92 10.52 12.58
</TABLE>
NS is to be used for both Nonsmoker Standard and Preferred.
<PAGE>
THE PENN MUTUAL LIFE INSURANCE COMPANY
Standards of Suitability for Sale
of Variable Life Insurance
The Standards of suitability for the sale of Variable Life Insurance Policies
are as follows:
(1) The applicant is furnished with a prospectus effective under the Securities
Act of 1933 which accurately and adequately inform the applicant of all
relevant particulars of the Variable Life Insurance Policy, including the
investment risks assumed under the Policy.
(2) The purchase of the Variable Life Insurance Policy by the applicant is
reasonably consistent with the insurance needs and financial objectives
expressed by the applicant; and
(3) The purchase of the Variable Life Insurance Policy by the applicant is
reasonably consistent with the insurance needs and financial objectives of
the applicant, as determined objectively by the Company's sales agent after
reasonable inquiry into the relevant financial and family situation of the
applicant.
No recommendation shall be made to an applicant to purchase a Variable Life
Insurance Policy in the absence of reasonable grounds to believe that the Policy
is not unsuitable for the applicant. Reasonable grounds for believing that the
Policy is not unsuitable shall be based upon information furnished after
reasonable inquiry of the applicant concerning the applicant's insurance and
investment objectives, financial situation and needs and any other information
known to the Company or the sales agent making the recommendation.
<PAGE>
Penn The Penn Mutual Life Insurance Company
Mutual Independence Square, Philadelphia, PA 19172
- --------------------------------------------------------------------------------
SCHEDULE 4 TO CORPORATE INSURANCE AGENT SELLING AGREEMENT
Variable Universal Life Insurance Contracts - Penn Mutual
Variable EstateMax Date of Corporate
Insurance Agent Selling Agreement to which this schedule is
attached:
- --------------------------------------------------------------------------------
1. Authorization. Subject to and in accordance with the provision of the
to Sell. Corporate Insurance Agent Selling Agreement, Corporate
Insurance Agent is authorized to solicit applications for
Form VALJ- 94(u) and Form VALJ-94(u) Last Survivor Flexible
Premium Adjustable Variable Life Insurance Policy and such
variations of such form of contract as may be designated by
Penn Mutual and approved under applicable state insurance
laws ("Variable EstateMax").
- --------------------------------------------------------------------------------
2. Compensation. During the period the Corporate Insurance Agent Selling
Agreement and this schedule is in n. effect, and subject to
and in accordance with the provisions thereof, Corporate
Insurance Agent shall be compensated as follows:
2.1 Basic First Year Compensation
A fee for the first policy year of 50% of an amount
equal to the first R of premium paid for the first
policy year and 2.00% of an amount equal to the premium
paid for the first policy year in excess of R. R is
equal to seventyfive percent (75%) of an Adjusted
Guideline Annual Premium for each $1,000 or fraction
thereof of the initial Specified Amount of insurance as
set forth in the Variable EstateMax Policy in question.
The Adjusted Guideline Annual Premium is the Guideline
Annual Premium as defined in Section 7702 of the
Internal Revenue Service Code of 1986, as amended, or
as set forth in any applicable successor provision
thereto, adjusted to reflect four percent (4%) interest
from the date of issue through the policy maturity
date, and excluding the effect of any per policy
expense loads and substandard ratings. The policy
maturity date is the date that the younger insured
would reach attained age 100.
2.2 Renewal Compensation
A fee for the second through fifteen policy years of
2.0% of an amount equal to premium paid for the policy
year in question, and a fee for the sixteenth and later
policy years equal to 1.2% of premium paid for the
policy year in question.
- --------------------------------------------------------------------------------
<PAGE>
2.3 Expense Allowance
For each calendar month while Corporate Insurance Agent
Selling Agreement is in effect and before its
termination, Corporate Insurance Agent shall be
entitled to the expense from Penn Mutual described
below, provided that the amount payable as an expense
allowance shall be limited to the total of reasonable
business expenses incurred by Corporate Insurance Agent
that are directly related to the sale or service of
Penn Mutual policies, and provided further that no such
allowance shall be payable to Corporate Insurance Agent
that would cause the total of such allowances to exceed
the limits of Section 4228 of the Insurance Law of the
State of New York. No payment pursuant to this
agreement will be used by Corporate Insurance Agent to
effect compensation for the sale of insurance in excess
of the limits of said Section 4228. Such allowance
shall be 60% of an amount equal to the Basic First Year
Compensation and Basic Compensation on Regular
increases for the Variable EstateMax during the
calendar month for which this allowance is being
calculated.
2.4 Compensation Chargebacks
A percentage of total compensation (including expense
allowance) will be charged back for lapses/surrenders
during the first policy year and during the 12 policy
months following an increase. The percentage is shown
below and is dependent on the policy month of
lapse/surrender.
Policy Month of Chargeback
Lapse/Surrender Percentage
---------------- ----------
1-3 100%
4-6 100%
7-9 50%
10-12 50%
13+ 0%
2.5 Replacement of Penn Mutual Policies
It is agreed that the compensation otherwise payable to
Corporate Insurance Agent for any policy shall be
reduced in accordance with the replacement control
program of Penn Mutual in effect at the time such
policy is placed in force. It is anticipated that such
replacement control program may be changed from time to
time as to policies in force after such change.
2.6 Policy Delivery Receipt
it is agreed that the Corporate Insurance Agent shall
be responsible for obtaining a signed policy delivery
receipt. No compensation otherwise payable to the
Corporate Insurance Agent for any policy shall be paid
until Penn Mutual is in possession of a signed policy
delivery receipt (or facsimile copy thereof) for said
policy.
This Schedule 4 replaces and supersedes any and all
prior Schedule 4's attached to the Corporate
Insurance Agent Selling Agreement.
<PAGE>
Agreed:
Date:___________________________ ____________________________________________
Name of Corporate Insurance Agent
By:_________________________________________
Signature
_________________________________________
Name
_________________________________________
Title
THE PENN MUTUAL LIFE INSURANCE COMPANY
By:_________________________________________
Signature
_________________________________________
Name
_________________________________________
Title
HORNOR, TOWNSEND & KENT, INC.
By:_________________________________________
Signature
_________________________________________
Name
_________________________________________
Title
<PAGE>
THE PENN MUTUAL LIFE INSURANCE COMPANY
Standards of Suitability for Sale
of Variable Life Insurance
The Standards of suitability for the sale of Variable Life Insurance Policies
are as follows:
(1) The applicant is furnished with a prospectus effective under the Securities
Act of 1933 which accurately and adequately inform the applicant of all
relevant particulars of the Variable Life Insurance Policy, including the
investment risks assumed under the Policy.
(2) The purchase of the Variable Life Insurance Policy by the applicant is
reasonably consistent with the insurance needs and financial objectives
expressed by the applicant; and
(3) The purchase of the Variable Life Insurance Policy by the applicant is
reasonably consistent with the insurance needs and financial objectives of
the applicant, as determined objectively by the Company"s sales agent after
reasonable inquiry into the relevant financial and family situation of the
applicant.
No recommendation shall be made to an applicant to purchase a Variable Life
Insurance Policy in the absence of reasonable grounds to believe that the Policy
is not unsuitable for the applicant. Reasonable grounds for believing that the
Policy is not unsuitable shall be based upon information furnished after
reasonable inquiry of the applicant concerning the applicant's insurance and
investment objectives, financial situation and needs and any other information
known to the Company or the sales agent making the recommendation.
<PAGE>
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Independent Auditors"
in the Statement of Additional Information, and to the use of our report dated
January 29, 1999 accompanying the financial statements of The Penn Mutual Life
Insurance Company for the year ended December 31, 1998, and to the use of our
report dated April 2, 1999 accompanying the financial statements of Penn Mutual
Variable Annuity Account III in the Post-Effective Amendment No. 1 to
Registration Statement No. 333-62825 on Form N-4 and the related Statement of
Additional Information of Penn Mutual Variable Annuity Account III.
/s/ Ernst & Young LLP
Philadelphia, Pennsylvania
April 20, 1999
<PAGE>
April 20, 1999
Board of Trustees
The Penn Mutual Life Insurance Company
Philadelphia, PA 19172
Re: Penn Mutual Variable Annuity Account III (the "Separate Account")
SEC Registration Statement on Form N-4 (File No. 333-62825)
------------------------------------------------ ----------
Dear Ladies and Gentleman:
We hereby consent to the reference of our name under the caption "Legal Matters"
in the Statement of Additional Information filed as part of Post-Effective
Amendment No. 1 to the above referred Registration Statement on Form N-4 under
the Securities Act of 1933 on behalf of the Separate Account and as Amendment
No. 26 to the Separate Account's Registration Statement under the Investment
Company Act of 1940. In giving this consent, we do not admit that we are in the
category of persons whose consent is required under Section 7 of the Securities
Act of 1933.
Very truly yours,
/s/ Morgan, Lewis & Bockius LLP
Morgan, Lewis & Bockius LLP
<PAGE>
<TABLE>
<CAPTION>
Commander Table 1 - 1 Year Calculations
- ---------------------------------------------------------------------------------------------------------------------------
Beginning Beginning Ending Ending Ending
Fund Name Begin Date Unit Value Value Date Unit Value Value Charges Return
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Emerging Growth Fund 12/31/97 $ 7.54 $1,000.00 12/31/98 $10.09 $1,335.81 $2.35 33.58%
- ---------------------------------------------------------------------------------------------------------------------------
Fidelity Asset Manager 12/31/97 $ 8.83 $1,000.00 12/31/98 $10.02 $1,132.17 $2.35 13.22%
- ---------------------------------------------------------------------------------------------------------------------------
Fidelity Equity Income 12/31/97 $ 9.12 $1,000.00 12/31/98 $10.04 $1,098.41 $2.35 9.84%
- ---------------------------------------------------------------------------------------------------------------------------
Fidelity Growth 12/31/97 $ 7.27 $1,000.00 12/31/98 $10.00 $1,373.17 $2.35 37.32%
- ---------------------------------------------------------------------------------------------------------------------------
Fidelity Index 500 12/31/97 $ 7.92 $1,000.00 12/31/98 $10.02 $1,263.16 $2.35 26.32%
- ---------------------------------------------------------------------------------------------------------------------------
Flexibly Managed Fund 12/31/97 $ 9.54 $1,000.00 12/31/98 $ 9.98 $1,043.82 $2.35 4.38%
- ---------------------------------------------------------------------------------------------------------------------------
Growth Equity Fund 12/31/97 $ 7.18 $1,000.00 12/31/98 $10.03 $1,394.64 $2.35 39.46%
- ---------------------------------------------------------------------------------------------------------------------------
High Yield Bond Fund 12/31/97 $ 9.66 $1,000.00 12/31/98 $ 9.98 $1,031.02 $2.35 3.10%
- ---------------------------------------------------------------------------------------------------------------------------
International Equity Fund 12/31/97 $ 8.36 $1,000.00 12/31/98 $ 9.80 $1,169.63 $2.35 16.96%
- ---------------------------------------------------------------------------------------------------------------------------
MS Emerging Markets International 12/31/97 $13.11 $1,000.00 12/31/98 $ 9.79 $ 744.96 $2.35 -25.50%
- ---------------------------------------------------------------------------------------------------------------------------
Neuberger Berman Balanced 12/31/97 $ 9.11 $1,000.00 12/31/98 $10.08 $1,103.83 $2.35 10.38%
- ---------------------------------------------------------------------------------------------------------------------------
Neuberger Berman Limited Maturity 12/31/97 $ 9.72 $1,000.00 12/31/98 $10.01 $1,027.05 $2.35 2.70%
- ---------------------------------------------------------------------------------------------------------------------------
Neuberger Berman Partners 12/31/97 $ 9.74 $1,000.00 12/31/98 $10.01 $1,025.25 $2.35 2.53%
- ---------------------------------------------------------------------------------------------------------------------------
Quality Bond Fund 12/31/97 $ 9.22 $1,000.00 12/31/98 $10.01 $1,084.01 $2.35 8.40%
- ---------------------------------------------------------------------------------------------------------------------------
Small Capitalization Fund 12/31/97 $11.18 $1,000.00 12/31/98 $10.02 $ 893.41 $2.35 -10.66%
- ---------------------------------------------------------------------------------------------------------------------------
Value Equity Fund 12/31/97 $ 9.29 $1,000.00 12/31/98 $10.04 $1,078.29 $2.35 7.83%
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Commander Table 2 - 1 Year Calculations
- ---------------------------------------------------------------------------------------------------------------------------
Beginning Beginning Ending Ending Ending
Fund Name Begin Date Unit Value Value Date Unit Value Value Charges Return
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Emerging Growth Fund 12/31/97 $ 7.54 $1,000.00 12/31/98 $10.09 $1,335.81 $2.35 33.58%
- ---------------------------------------------------------------------------------------------------------------------------
Fidelity Asset Manager 12/31/97 $ 8.83 $1,000.00 12/31/98 $10.02 $1,132.17 $2.35 13.22%
- ---------------------------------------------------------------------------------------------------------------------------
Fidelity Equity Income 12/31/97 $ 9.12 $1,000.00 12/31/98 $10.04 $1,098.41 $2.35 9.84%
- ---------------------------------------------------------------------------------------------------------------------------
Fidelity Growth 12/31/97 $ 7.27 $1,000.00 12/31/98 $10.00 $1,373.17 $2.35 37.32%
- ---------------------------------------------------------------------------------------------------------------------------
Fidelity Index 500 12/31/97 $ 7.92 $1,000.00 12/31/98 $10.02 $1,263.16 $2.35 26.32%
- ---------------------------------------------------------------------------------------------------------------------------
Flexibly Managed Fund 12/31/97 $ 9.54 $1,000.00 12/31/98 $ 9.98 $1,043.82 $2.35 4.38%
- ---------------------------------------------------------------------------------------------------------------------------
Growth Equity Fund 12/31/97 $ 7.18 $1,000.00 12/31/98 $10.03 $1,394.64 $2.35 39.46%
- ---------------------------------------------------------------------------------------------------------------------------
High Yield Bond Fund 12/31/97 $ 9.66 $1,000.00 12/31/98 $ 9.98 $1,031.02 $2.35 3.10%
- ---------------------------------------------------------------------------------------------------------------------------
International Equity Fund 12/31/97 $ 8.36 $1,000.00 12/31/98 $ 9.80 $1,169.63 $2.35 16.96%
- ---------------------------------------------------------------------------------------------------------------------------
MS Emerging Markets International 12/31/97 $13.11 $1,000.00 12/31/98 $ 9.79 $ 744.96 $2.35 -25.50%
- ---------------------------------------------------------------------------------------------------------------------------
Neuberger Berman Balanced 12/31/97 $ 9.11 $1,000.00 12/31/98 $10.08 $1,103.83 $2.35 10.38%
- ---------------------------------------------------------------------------------------------------------------------------
Neuberger Berman Limited Maturity 12/31/97 $ 9.72 $1,000.00 12/31/98 $10.01 $1,027.05 $2.35 2.70%
- ---------------------------------------------------------------------------------------------------------------------------
Neuberger Berman Partners 12/31/97 $ 9.74 $1,000.00 12/31/98 $10.01 $1,025.25 $2.35 2.53%
- ---------------------------------------------------------------------------------------------------------------------------
Quality Bond Fund 12/31/97 $ 9.22 $1,000.00 12/31/98 $10.01 $1,084.01 $2.35 8.40%
- ---------------------------------------------------------------------------------------------------------------------------
Small Capitalization Fund 12/31/97 $11.18 $1,000.00 12/31/98 $10.02 $ 893.41 $2.35 -10.66%
- ---------------------------------------------------------------------------------------------------------------------------
Value Equity Fund 12/31/97 $ 9.29 $1,000.00 12/31/98 $10.04 $1,078.29 $2.35 7.83%
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Commander Table 3 - 1 Year Calculations
- ---------------------------------------------------------------------------------------------------------------------------
Beginning Beginning Ending Ending Ending
Fund Name Begin Date Unit Value Value Date Unit Value Value Charges Return
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Emerging Growth Fund 12/31/97 $ 7.54 $10,000.00 12/31/98 $10.09 $13,379.26 $2.35 33.79%
- ---------------------------------------------------------------------------------------------------------------------------
Fidelity Asset Manager 12/31/97 $ 8.83 $10,000.00 12/31/98 $10.02 $11,342.80 $2.35 13.43%
- ---------------------------------------------------------------------------------------------------------------------------
Fidelity Equity Income 12/31/97 $ 9.12 $10,000.00 12/31/98 $10.04 $11,005.22 $2.35 10.05%
- ---------------------------------------------------------------------------------------------------------------------------
Fidelity Growth 12/31/97 $ 7.27 $10,000.00 12/31/98 $10.00 $13,752.82 $2.35 37.53%
- ---------------------------------------------------------------------------------------------------------------------------
Fidelity Index 500 12/31/97 $ 7.92 $10,000.00 12/31/98 $10.02 $12,652.73 $2.35 26.53%
- ---------------------------------------------------------------------------------------------------------------------------
Flexibly Managed Fund 12/31/97 $ 9.54 $10,000.00 12/31/98 $ 9.98 $10,459.34 $2.35 4.59%
- ---------------------------------------------------------------------------------------------------------------------------
Growth Equity Fund 12/31/97 $ 7.18 $10,000.00 12/31/98 $10.03 $13,967.54 $2.35 39.68%
- ---------------------------------------------------------------------------------------------------------------------------
High Yield Bond Fund 12/31/97 $ 9.66 $10,000.00 12/31/98 $ 9.98 $10,331.31 $2.35 3.31%
- ---------------------------------------------------------------------------------------------------------------------------
International Equity Fund 12/31/97 $ 8.36 $10,000.00 12/31/98 $ 9.80 $11,717.41 $2.35 17.17%
- ---------------------------------------------------------------------------------------------------------------------------
MS Emerging Markets International 12/31/97 $13.11 $10,000.00 12/31/98 $ 9.79 $ 7,470.80 $2.35 -25.29%
- ---------------------------------------------------------------------------------------------------------------------------
Neuberger Berman Balanced 12/31/97 $ 9.11 $10,000.00 12/31/98 $10.08 $11,059.43 $2.35 10.59%
- ---------------------------------------------------------------------------------------------------------------------------
Neuberger Berman Limited Maturity 12/31/97 $ 9.72 $10,000.00 12/31/98 $10.01 $10,291.60 $2.35 2.92%
- ---------------------------------------------------------------------------------------------------------------------------
Neuberger Berman Partners 12/31/97 $ 9.74 $10,000.00 12/31/98 $10.01 $10,273.65 $2.35 2.74%
- ---------------------------------------------------------------------------------------------------------------------------
Quality Bond Fund 12/31/97 $ 9.22 $10,000.00 12/31/98 $10.01 $10,861.28 $2.35 8.61%
- ---------------------------------------------------------------------------------------------------------------------------
Small Capitalization Fund 12/31/97 $11.18 $10,000.00 12/31/98 $10.02 $ 8,955.28 $2.35 -10.45%
- ---------------------------------------------------------------------------------------------------------------------------
Value Equity Fund 12/31/97 $ 9.29 $10,000.00 12/31/98 $10.04 $10,804.05 $2.35 8.04%
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Commander Table 1 - 5 Year Calculations
- ---------------------------------------------------------------------------------------------------------------------------
Beginning Beginning Ending Ending Ending
Fund Name Begin Date Unit Value Value Date Unit Value Value Charges Return
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Flexibly Managed Fund 12/31/93 $5.89 $1,000.00 12/31/98 $ 9.98 $1,680.91 $11.75 10.94%
- ---------------------------------------------------------------------------------------------------------------------------
Growth Equity Fund 12/31/93 $4.30 $1,000.00 12/31/98 $10.03 $2,308.80 $11.75 18.21%
- ---------------------------------------------------------------------------------------------------------------------------
High Yield Bond Fund 12/31/93 $7.18 $1,000.00 12/31/98 $ 9.98 $1,375.51 $11.75 6.58%
- ---------------------------------------------------------------------------------------------------------------------------
International Equity Fund 12/31/93 $6.43 $1,000.00 12/31/98 $ 9.80 $1,509.03 $11.75 8.57%
- ---------------------------------------------------------------------------------------------------------------------------
Neuberger Berman Balanced 12/31/93 $6.29 $1,000.00 12/31/98 $10.08 $1,588.15 $11.75 9.69%
- ---------------------------------------------------------------------------------------------------------------------------
Neuberger Berman Limited Maturity 12/31/93 $8.34 $1,000.00 12/31/98 $10.01 $1,187.49 $11.75 3.49%
- ---------------------------------------------------------------------------------------------------------------------------
Quality Bond Fund 12/31/93 $7.61 $1,000.00 12/31/98 $10.01 $1,301.20 $11.75 5.40%
- ---------------------------------------------------------------------------------------------------------------------------
Value Equity Fund 12/31/93 $4.44 $1,000.00 12/31/98 $10.04 $2,244.40 $11.75 17.54%
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Commander Table 2 - 5 Year Calculations
- ---------------------------------------------------------------------------------------------------------------------------
Beginning Beginning Ending Ending Ending
Fund Name Begin Date Unit Value Value Date Unit Value Value Charges Return
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fidelity Asset Manager 12/31/93 $6.15 $1,000.00 12/31/98 $10.02 $1,613.16 $11.75 10.03%
- ---------------------------------------------------------------------------------------------------------------------------
Fidelity Equity Income 12/31/93 $4.56 $1,000.00 12/31/98 $10.04 $2,187.17 $11.75 16.93%
- ---------------------------------------------------------------------------------------------------------------------------
Fidelity Growth 12/31/93 $4.01 $1,000.00 12/31/98 $10.00 $2,473.21 $11.75 19.84%
- ---------------------------------------------------------------------------------------------------------------------------
Fidelity Index 500 12/31/93 $3.71 $1,000.00 12/31/98 $10.02 $2,683.02 $11.75 21.81%
- ---------------------------------------------------------------------------------------------------------------------------
Flexibly Managed Fund 12/31/93 $5.89 $1,000.00 12/31/98 $ 9.98 $1,680.91 $11.75 10.94%
- ---------------------------------------------------------------------------------------------------------------------------
Growth Equity Fund 12/31/93 $4.30 $1,000.00 12/31/98 $10.03 $2,308.80 $11.75 18.21%
- ---------------------------------------------------------------------------------------------------------------------------
High Yield Bond Fund 12/31/93 $7.18 $1,000.00 12/31/98 $ 9.98 $1,375.51 $11.75 6.58%
- ---------------------------------------------------------------------------------------------------------------------------
International Equity Fund 12/31/93 $6.43 $1,000.00 12/31/98 $ 9.80 $1,509.03 $11.75 8.57%
- ---------------------------------------------------------------------------------------------------------------------------
Neuberger Berman Balanced 12/31/93 $6.29 $1,000.00 12/31/98 $10.08 $1,588.15 $11.75 9.69%
- ---------------------------------------------------------------------------------------------------------------------------
Neuberger Berman Limited Maturity 12/31/93 $8.34 $1,000.00 12/31/98 $10.01 $1,187.49 $11.75 3.49%
- ---------------------------------------------------------------------------------------------------------------------------
Quality Bond Fund 12/31/93 $7.61 $1,000.00 12/31/98 $10.01 $1,301.20 $11.75 5.40%
- ---------------------------------------------------------------------------------------------------------------------------
Value Equity Fund 12/31/93 $4.44 $1,000.00 12/31/98 $10.04 $2,244.40 $11.75 17.54%
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Commander Table 3 - 5 Year Calculations
- ---------------------------------------------------------------------------------------------------------------------------
Beginning Beginning Ending Ending Ending
Fund Name Begin Date Unit Value Value Date Unit Value Value Charges Return
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fidelity Asset Manager 12/31/93 $6.15 $10,000.00 12/31/98 $10.02 $16,274.79 $11.75 10.22%
- ---------------------------------------------------------------------------------------------------------------------------
Fidelity Equity Income 12/31/93 $4.56 $10,000.00 12/31/98 $10.04 $22,022.82 $11.75 17.09%
- ---------------------------------------------------------------------------------------------------------------------------
Fidelity Growth 12/31/93 $4.01 $10,000.00 12/31/98 $10.00 $24,911.35 $11.75 20.02%
- ---------------------------------------------------------------------------------------------------------------------------
Fidelity Index 500 12/31/93 $3.71 $10,000.00 12/31/98 $10.02 $27,012.97 $11.75 21.97%
- ---------------------------------------------------------------------------------------------------------------------------
Flexibly Managed Fund 12/31/93 $5.89 $10,000.00 12/31/98 $ 9.98 $16,941.53 $11.75 11.11%
- ---------------------------------------------------------------------------------------------------------------------------
Growth Equity Fund 12/31/93 $4.30 $10,000.00 12/31/98 $10.03 $23,273.68 $11.75 18.39%
- ---------------------------------------------------------------------------------------------------------------------------
High Yield Bond Fund 12/31/93 $7.18 $10,000.00 12/31/98 $ 9.98 $13,883.27 $11.75 6.78%
- ---------------------------------------------------------------------------------------------------------------------------
International Equity Fund 12/31/93 $6.43 $10,000.00 12/31/98 $ 9.80 $15,229.26 $11.75 8.77%
- ---------------------------------------------------------------------------------------------------------------------------
Neuberger Berman Balanced 12/31/93 $6.29 $10,000.00 12/31/98 $10.08 $16,018.14 $11.75 9.88%
- ---------------------------------------------------------------------------------------------------------------------------
Neuberger Berman Limited Maturity 12/31/93 $8.34 $10,000.00 12/31/98 $10.01 $11,990.13 $11.75 3.69%
- ---------------------------------------------------------------------------------------------------------------------------
Quality Bond Fund 12/31/93 $7.61 $10,000.00 12/31/98 $10.01 $13,135.48 $11.75 5.60%
- ---------------------------------------------------------------------------------------------------------------------------
Value Equity Fund 12/31/93 $4.44 $10,000.00 12/31/98 $10.04 $22,598.03 $11.75 17.70%
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Commander Table 1 - 10 Year Calculations
- -------------------------------------------------------------------------------------------------------------
Beginning Beginning Ending Ending Ending
Fund Name Begin Date Unit Value Value Date Unit Value Value Charges Return
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Flexibly Managed Fund 12/31/88 $3.40 $1,000.00 12/31/98 $ 9.98 $2,893.57 $2.35 11.20%
- -------------------------------------------------------------------------------------------------------------
Growth Equity Fund 12/31/88 $2.46 $1,000.00 12/31/98 $10.03 $4,015.82 $2.35 14.91%
- -------------------------------------------------------------------------------------------------------------
High Yield Bond Fund 12/31/88 $4.48 $1,000.00 12/31/98 $ 9.98 $2,189.36 $2.35 8.15%
- -------------------------------------------------------------------------------------------------------------
Quality Bond Fund 12/31/88 $4.87 $1,000.00 12/31/98 $10.01 $2,023.76 $2.35 7.30%
- -------------------------------------------------------------------------------------------------------------
Value Equity Fund 12/31/88 $2.92 $1,000.00 12/31/98 $10.04 $3,390.72 $2.35 12.98%
- -------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Commander Table 2 - 10 Year Calculations
- -------------------------------------------------------------------------------------------------------------------------
Beginning Beginning Ending Ending Ending
Fund Name Begin Date Unit Value Value Date Unit Value Value Charges Return
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fidelity Equity Income 12/31/88 $2.70 $1,000.00 12/31/98 $10.04 $3,660.81 $2.35 13.85%
- -------------------------------------------------------------------------------------------------------------------------
Fidelity Growth 12/31/88 $1.95 $1,000.00 12/31/98 $10.00 $5,063.89 $2.35 17.60%
- -------------------------------------------------------------------------------------------------------------------------
Flexibly Managed Fund 12/31/88 $3.40 $1,000.00 12/31/98 $ 9.98 $2,893.57 $2.35 11.20%
- -------------------------------------------------------------------------------------------------------------------------
Growth Equity Fund 12/31/88 $2.46 $1,000.00 12/31/98 $10.03 $4,015.82 $2.35 14.91%
- -------------------------------------------------------------------------------------------------------------------------
High Yield Bond Fund 12/31/88 $4.48 $1,000.00 12/31/98 $ 9.98 $2,189.36 $2.35 8.15%
- -------------------------------------------------------------------------------------------------------------------------
Neuberger Berman Limited Maturity 12/31/88 $5.97 $1,000.00 12/31/98 $10.01 $1,648.17 $2.35 5.12%
- -------------------------------------------------------------------------------------------------------------------------
Quality Bond Fund 12/31/88 $4.87 $1,000.00 12/31/98 $10.01 $2,023.76 $2.35 7.30%
- -------------------------------------------------------------------------------------------------------------------------
Value Equity Fund 12/31/88 $2.92 $1,000.00 12/31/98 $10.04 $3,390.72 $2.35 12.98%
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Commander Table 3 - 10 Year Calculations
- ---------------------------------------------------------------------------------------------------------------------------
Beginning Beginning Ending Ending Ending
Fund Name Begin Date Unit Value Value Date Unit Value Value Charges Return
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fidelity Equity Income 12/31/88 $2.70 $10,000.00 12/31/98 $10.04 $37,071.95 $2.35 13.99%
- ---------------------------------------------------------------------------------------------------------------------------
Fidelity Growth 12/31/88 $1.95 $10,000.00 12/31/98 $10.00 $51,179.37 $2.35 17.73%
- ---------------------------------------------------------------------------------------------------------------------------
Flexibly Managed Fund 12/31/88 $3.40 $10,000.00 12/31/98 $ 9.98 $29,294.17 $2.35 11.34%
- ---------------------------------------------------------------------------------------------------------------------------
Growth Equity Fund 12/31/88 $2.46 $10,000.00 12/31/98 $10.03 $40,647.08 $2.35 15.05%
- ---------------------------------------------------------------------------------------------------------------------------
High Yield Bond Fund 12/31/88 $4.48 $10,000.00 12/31/98 $ 9.98 $22,227.09 $2.35 8.31%
- ---------------------------------------------------------------------------------------------------------------------------
Neuberger Berman Limited Maturity 12/31/88 $5.97 $10,000.00 12/31/98 $10.01 $16,739.49 $2.35 5.28%
- ---------------------------------------------------------------------------------------------------------------------------
Quality Bond Fund 12/31/88 $4.87 $10,000.00 12/31/98 $10.01 $20,527.51 $2.35 7.45%
- ---------------------------------------------------------------------------------------------------------------------------
Value Equity Fund 12/31/88 $2.92 $10,000.00 12/31/98 $10.04 $34,354.14 $2.35 13.13%
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Commander Table 1 - Since Inception Calculations
- ---------------------------------------------------------------------------------------------------------------------------
Beginning Beginning Ending Ending Ending
Fund Name Begin Date Unit Value Value Date Unit Value Value Charges Return
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Emerging Growth Fund 05/01/97 $ 5.47 $1,000.00 31-Dec-98 $10.09 $1,840.62 $2.35 44.15%
- ---------------------------------------------------------------------------------------------------------------------------
MS Emerging Markets International 05/01/97 $14.63 $1,000.00 31-Dec-98 $ 9.79 $ 662.76 $2.35 -21.85%
- ---------------------------------------------------------------------------------------------------------------------------
Fidelity Asset Manager Portfolio 05/01/95 $ 5.89 $1,000.00 31-Dec-98 $10.02 $1,684.52 $2.35 15.26%
- ---------------------------------------------------------------------------------------------------------------------------
Fidelity Equity Income Portfolio 05/01/95 $ 5.38 $1,000.00 31-Dec-98 $10.04 $1,851.00 $2.35 18.26%
- ---------------------------------------------------------------------------------------------------------------------------
Fidelity Growth Equity Portfolio 05/01/95 $ 4.28 $1,000.00 31-Dec-98 $10.00 $2,321.84 $2.35 25.79%
- ---------------------------------------------------------------------------------------------------------------------------
Fidelity Index 500 08/27/97 $ 7.46 $1,000.00 31-Dec-98 $10.02 $1,338.50 $2.35 24.20%
- ---------------------------------------------------------------------------------------------------------------------------
Flexibly Managed Fund 07/31/84 $ 1.65 $1,000.00 31-Dec-98 $ 9.98 $5,981.10 $2.35 13.20%
- ---------------------------------------------------------------------------------------------------------------------------
Growth Equity Fund - qualified 06/01/83 $ 1.31 $1,000.00 31-Dec-98 $10.03 $7,558.46 $2.35 13.85%
- ---------------------------------------------------------------------------------------------------------------------------
High Yield Bond Fund 08/06/84 $ 2.94 $1,000.00 31-Dec-98 $ 9.98 $3,335.37 $2.35 8.72%
- ---------------------------------------------------------------------------------------------------------------------------
International Equity Fund 11/01/92 $ 4.64 $1,000.00 31-Dec-98 $ 9.80 $2,090.29 $2.35 12.70%
- ---------------------------------------------------------------------------------------------------------------------------
N & B Balanced Fund 05/01/93 $ 5.86 $1,000.00 31-Dec-98 $10.08 $1,702.72 $2.35 9.84%
- ---------------------------------------------------------------------------------------------------------------------------
N & B Limited Maturity Fund 05/01/93 $ 8.18 $1,000.00 31-Dec-98 $10.01 $1,205.19 $2.35 3.35%
- ---------------------------------------------------------------------------------------------------------------------------
N & B Partners Fund 05/01/97 $ 7.86 $1,000.00 31-Dec-98 $10.01 $1,269.56 $2.35 15.38%
- ---------------------------------------------------------------------------------------------------------------------------
Quality Bond Fund 03/17/87 $ 4.62 $1,000.00 31-Dec-98 $10.01 $2,126.88 $2.35 6.60%
- ---------------------------------------------------------------------------------------------------------------------------
Small Capitalization 05/01/95 $ 6.99 $1,000.00 31-Dec-98 $10.02 $1,422.28 $2.35 10.07%
- ---------------------------------------------------------------------------------------------------------------------------
Value Equity Fund 03/17/87 $ 2.51 $1,000.00 31-Dec-98 $10.04 $3,933.84 $2.35 12.31%
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Commander Table 2 - Since Inception Calculations
- --------------------------------------------------------------------------------------------------------------------------
Beginning Beginning Ending Ending Ending
Fund Name Begin Date Unit Value Value Date Unit Value Value Charges Return
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Emerging Growth Fund 05/01/97 $ 5.47 $1,000.00 12/31/98 $10.09 $1,840.62 $2.35 44.15%
- --------------------------------------------------------------------------------------------------------------------------
Fidelity Asset Manager 09/06/89 $ 3.66 $1,000.00 12/31/98 $10.02 $2,698.93 $2.35 11.24%
- --------------------------------------------------------------------------------------------------------------------------
Fidelity Equity Income 10/09/86 $ 2.30 $1,000.00 12/31/98 $10.04 $4,300.73 $2.35 12.66%
- --------------------------------------------------------------------------------------------------------------------------
Fidelity Growth 10/09/86 $ 1.68 $1,000.00 12/31/98 $10.00 $5,879.37 $2.35 15.58%
- --------------------------------------------------------------------------------------------------------------------------
Fidelity Index 500 08/27/92 $ 3.23 $1,000.00 12/31/98 $10.02 $3,072.49 $2.35 19.34%
- --------------------------------------------------------------------------------------------------------------------------
Flexibly Managed Fund 07/31/84 $ 1.65 $1,000.00 12/31/98 $ 9.98 $5,981.10 $2.35 13.20%
- --------------------------------------------------------------------------------------------------------------------------
Growth Equity Fund 06/01/83 $ 1.31 $1,000.00 12/31/98 $10.03 $7,558.46 $2.35 13.85%
- --------------------------------------------------------------------------------------------------------------------------
High Yield Bond Fund 08/06/84 $ 2.94 $1,000.00 12/31/98 $ 9.98 $3,335.37 $2.35 8.72%
- --------------------------------------------------------------------------------------------------------------------------
International Equity Fund 11/01/92 $ 4.64 $1,000.00 12/31/98 $ 9.80 $2,090.29 $2.35 12.70%
- --------------------------------------------------------------------------------------------------------------------------
MS Emerging Markets International 10/01/96 $13.58 $1,000.00 12/31/98 $ 9.79 $ 714.58 $2.35 -13.88%
- --------------------------------------------------------------------------------------------------------------------------
Neuberger Berman Balanced 02/28/89 $ 4.03 $1,000.00 12/31/98 $10.08 $2,462.66 $2.35 9.59%
- --------------------------------------------------------------------------------------------------------------------------
Neuberger Berman Limited Maturity 09/10/84 $ 4.11 $1,000.00 12/31/98 $10.01 $2,386.08 $2.35 6.26%
- --------------------------------------------------------------------------------------------------------------------------
Neuberger Berman Partners 03/22/94 $ 4.53 $1,000.00 12/31/98 $10.01 $2,193.70 $2.35 17.86%
- --------------------------------------------------------------------------------------------------------------------------
Quality Bond Fund 03/17/87 $ 4.62 $1,000.00 12/31/98 $10.01 $2,126.88 $2.35 6.60%
- --------------------------------------------------------------------------------------------------------------------------
Small Capitalization Fund 03/01/95 $ 7.00 $1,000.00 12/31/98 $10.02 $1,420.37 $2.35 9.57%
- --------------------------------------------------------------------------------------------------------------------------
Value Equity Fund 03/17/87 $ 2.51 $1,000.00 12/31/98 $10.04 $3,933.84 $2.35 12.31%
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Commander Table 3 - Since Inception Calculations
- ----------------------------------------------------------------------------------------------------------------------------
Beginning Beginning Ending Ending Ending
Fund Name Begin Date Unit Value Value Date Unit Value Value Charges Return
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Emerging Growth Fund 05/01/97 $ 5.47 $10,000.00 12/31/98 $10.09 $18,449.12 $2.35 44.35%
- ----------------------------------------------------------------------------------------------------------------------------
Fidelity Asset Manager 09/06/89 $ 3.66 $10,000.00 12/31/98 $10.02 $27,344.18 $2.35 11.39%
- ----------------------------------------------------------------------------------------------------------------------------
Fidelity Equity Income 10/09/86 $ 2.30 $10,000.00 12/31/98 $10.04 $43,668.01 $2.35 12.80%
- ----------------------------------------------------------------------------------------------------------------------------
Fidelity Growth 10/09/86 $ 1.68 $10,000.00 12/31/98 $10.00 $59,596.07 $2.35 15.71%
- ----------------------------------------------------------------------------------------------------------------------------
Fidelity Index 500 08/27/92 $ 3.23 $10,000.00 12/31/98 $10.02 $30,999.29 $2.35 19.51%
- ----------------------------------------------------------------------------------------------------------------------------
Flexibly Managed Fund 07/31/84 $ 1.65 $10,000.00 12/31/98 $ 9.98 $60,543.38 $2.35 13.29%
- ----------------------------------------------------------------------------------------------------------------------------
Growth Equity Fund 06/01/83 $ 1.31 $10,000.00 12/31/98 $10.03 $76,667.35 $2.35 13.95%
- ----------------------------------------------------------------------------------------------------------------------------
High Yield Bond Fund 08/06/84 $ 2.94 $10,000.00 12/31/98 $ 9.98 $33,925.87 $2.35 8.85%
- ----------------------------------------------------------------------------------------------------------------------------
International Equity Fund 11/01/92 $ 4.64 $10,000.00 12/31/98 $ 9.80 $21,100.73 $2.35 12.87%
- ----------------------------------------------------------------------------------------------------------------------------
MS Emerging Markets International 10/01/96 $13.58 $10,000.00 12/31/98 $ 9.79 $ 7,204.84 $2.35 -13.56%
- ----------------------------------------------------------------------------------------------------------------------------
Neuberger Berman Balanced 02/28/89 $ 4.03 $10,000.00 12/31/98 $10.08 $24,955.84 $2.35 9.74%
- ----------------------------------------------------------------------------------------------------------------------------
Neuberger Berman Limited Maturity 09/10/84 $ 4.11 $10,000.00 12/31/98 $10.01 $24,300.47 $2.35 6.40%
- ----------------------------------------------------------------------------------------------------------------------------
Neuberger Berman Partners 03/22/94 $ 4.53 $10,000.00 12/31/98 $10.01 $22,083.50 $2.35 18.02%
- ----------------------------------------------------------------------------------------------------------------------------
Quality Bond Fund 03/17/87 $ 4.62 $10,000.00 12/31/98 $10.01 $21,645.59 $2.35 6.76%
- ----------------------------------------------------------------------------------------------------------------------------
Small Capitalization Fund 03/01/95 $ 7.00 $10,000.00 12/31/98 $10.02 $14,291.70 $2.35 9.75%
- ----------------------------------------------------------------------------------------------------------------------------
Value Equity Fund 03/17/87 $ 2.51 $10,000.00 12/31/98 $10.04 $39,915.21 $2.35 12.45%
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
