<PAGE>
As filed with the Securities and Exchange Commission on April 28, 1999
File No. 2-77283
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM N-4
REGISTRATION STATEMENT UNDER SECURITIES ACT OF 1933 /X/
Pre-Effective Amendment No. ___ / /
Post-Effective Amendment No. 25 /X/
REGISTRATION STATEMENT UNDER THE INVESTMENT
COMPANY ACT of 1940 /X/
Amendment No. 28 /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 Cover Page; Expenses N/A
or Highlights
Item 4. Condensed Financial Condensed Financial N/A
Information Information
Item 5. General Description The Penn Mutual Life N/A
of Registrant, Depositor Insurance Company;
and Portfolio Companies The Separate Account
Item 6. Deductions The Contract - What Charges N/A
and Expenses Do I Pay?
Item 7. General Description of The Contract N/A
of Variable Annuity
Contracts
Item 8. Annuity Period Options The Contract - What Types of N/A
Payments May I Choose?
Item 9. Death Benefit On Death The Contract - What are the N/A
the Death Benefits Under My
Contract?
Item 10. Purchases and The Contract - How Do I Purchase N/A
Contract Value a Contract?
The Separate Account
- Accumulation Unit Value
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
</TABLE>
<PAGE>
CROSS REFERENCE SHEET
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Location in Statement of
Form N-4 Item Number Location in Prospectuses Additional Information
- -------------------- ------------------------ ----------------------
<S> <C>
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
Item 18. Services N/A Administrative and
Recordkeeping Services;
Custodian;Auditors
Item 19. Purchase of Securities The Contract - How Do I Purchase Distribution of
Being Offered and Expenses A Contract? The Contract - May I Contracts and
Transfer Money Among Subaccounts Certificates
and Fixed Interest Accounts? The
Contract - What Charges Do I Pay?
Item 20. Underwriters N/A Distribution of Contracts
and Certificates
Item 21. Calculation of N/A Performance Data
Performance 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
Penn Mutual Variable Annuity Account III
May 1, 1999
- ----------------
Diversifier II
- ----------------
A Flexible Premium Variable and
Fixed Annuity
Penn Series Funds, Inc.
May 1, 1999
Investment Advisers:
T. Rowe Price Associates, Inc.
OpCap Advisors
Independence Capital Management, Inc.
Vontobel USA, Inc.
RS Investment Management, Inc.
American Century Variable Portfolios, Inc.
May 1, 1999
Investment Adviser:
American Century Investment Management, Inc.
Neuberger Berman
Advisers Management Trust
May 1, 1999
Investment Adviser:
Neuberger Berman Management Incorporated
Fidelity Investments'
Variable Insurance Products Fund
Variable Insurance Products Fund II
April 30, 1999
Investment Adviser:
Fidelity Management & Research Company
Morgan Stanley Dean Witter Universal Funds
May 1, 1999
Investment Adviser:
Morgan Stanley Dean Witter Investment Management
<PAGE>
- --------------------------------------------------------------------------------
PROSPECTUS -- MAY 1, 1999
Individual Annuity Contracts With Variable Benefit Provisions --
Flexible Purchase Payments
- --------------------------------------------------------------------------------
DIVERSIFIER II
PENN MUTUAL VARIABLE ANNUITY ACCOUNT III
THE PENN MUTUAL LIFE INSURANCE COMPANY
Philadelphia, Pennsylvania 19172 o Telephone (800) 523-0650
- --------------------------------------------------------------------------------
This Prospectus describes two annuity contracts ("Contracts") offered by the
Penn Mutual Life Insurance Company ("Penn Mutual"). Please read it carefully and
save it for future reference.
Each Contract is an agreement between you and Penn Mutual. One Contract is an
individual fixed and variable annuity contract. The other is a variable annuity
contract that is available only if you own a companion fixed annuity contract
issued by us.
Under either Contract, you agree to make one or more payments to us and we agree
to pay annuity and other benefits 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 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 either Contract, you 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.
AMERICAN CENTURY VARIABLE PORTFOLIOS, INC. MANAGER
Capital Appreciation Portfolio American Century Investment 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 Investment Management Inc.
</TABLE>
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>
A Prospectus for each of these Funds accompanies this Prospectus.
The combination variable and fixed annuity contract has a fixed component that
allows you to allocate purchase payments and to transfer money to one or more of
our Fixed Interest Accounts. Your Fixed Account Value and any fixed payout will
be based on purchase payments accumulated with interest at a rate of not less
than 4%. The variable contract allows you to transfer money to your companion
fixed annuity contract.
The Contracts are not suitable for short-term investment. You may pay a deferred
sales charge on early withdrawals. If you withdraw money before age 59 1/2, you
may pay a 10% additional income tax. Your Contract is not a bank deposit and is
not federally insured.
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 toll-free at 1-800-523-0650. 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 ..................................................................... 3
- --------------------------------------------------------------------------------
EXPENSES ..................................................................... 4
- --------------------------------------------------------------------------------
EXAMPLES OF FEES AND EXPENSES ................................................ 6
- --------------------------------------------------------------------------------
CONDENSED FINANCIAL INFORMATION .............................................. 8
- --------------------------------------------------------------------------------
THE PENN MUTUAL LIFE INSURANCE COMPANY .......................................14
- --------------------------------------------------------------------------------
YEAR 2000 ....................................................................14
- --------------------------------------------------------------------------------
THE SEPARATE ACCOUNT .........................................................14
Accumulation Units.......................................................14
Voting Instructions......................................................15
Investment Options in the Separate Account...............................15
Penn Series Funds, Inc. .............................................16
American Century Variable Portfolios, Inc............................16
Neuberger Berman Advisers Management Trust...........................16
Fidelity Investments' Variable Insurance Products Fund...............16
Fidelity Investments' Variable Insurance Products Fund II............16
Morgan Stanley Dean Witter Universal Funds, Inc. ....................16
- --------------------------------------------------------------------------------
THE FIXED INTEREST ACCOUNTS ..................................................17
- --------------------------------------------------------------------------------
THE CONTRACT .................................................................17
How Do I Purchase a Contract?............................................18
What Types of Annuity Payments May I Choose?.............................18
Variable Annuity Payments ...........................................18
Fixed Annuity Payments Under a Variable/Fixed Contract ..............18
Other Information....................................................18
What Are the Death Benefits Under My Contract?...........................19
Contracts Sold in Texas..............................................19
May I Transfer Money Among Subaccounts and the Fixed Interest Accounts?..20
Variable/Fixed Contracts ............................................20
Variable Contract ..................................................20
Dollar Cost Averaging................................................20
Automatic Rebalancing................................................20
Additional Information...............................................20
May I Withdraw Any of My Money?..........................................21
403(b) Withdrawals ..................................................21
Deferment of Payments and Transfers......................................21
What Charges Do I Pay?...................................................21
Administration Charges...............................................21
Mortality and Expense Risk Charge....................................22
Contingent Deferred Sales Charge.....................................22
Variable/Fixed Contract..............................................22
Variable Contract....................................................23
Other Information....................................................24
Premium Taxes........................................................24
Performance Information..................................................24
- --------------------------------------------------------------------------------
MORE INFORMATION ABOUT THE FIXED INTEREST ACCOUNTS ...........................24
General Information......................................................24
Loans Under Section 403(b) Contracts.....................................25
- --------------------------------------------------------------------------------
FEDERAL INCOME TAX CONSIDERATIONS ............................................25
Withdrawals and Death Benefits...........................................25
Annuity Payments.........................................................26
Early Withdrawals........................................................26
Transfers................................................................26
Separate Account Diversification.........................................26
Qualified Plans..........................................................26
- --------------------------------------------------------------------------------
FINANCIAL STATEMENTS .........................................................27
- --------------------------------------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION CONTENTS .................................27
- --------------------------------------------------------------------------------
2
<PAGE>
GLOSSARY
ACCUMULATION PERIOD: A period that begins with your first purchase payment and
ends on the Annuity Date.
ACCUMULATION UNIT: If you own a Variable/Fixed Contract, this is a unit of
measure used to compute the Variable Account Value under the Contract prior to
the Annuity Date. If you own a Variable Contract, this is a unit of measure used
to compute Contract Value 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 or the variable
annuity contract described in this Prospectus.
CONTRACT OWNER: The person named in the Contract as the Contract Owner.
CONTRACT VALUE: If you own a Variable/Fixed Contract, this is the sum of the
Variable Account Value and the Fixed Interest Account Value. If you own a
Variable Contract, this is the Variable Account Value.
FIXED INTEREST ACCOUNT VALUE: The value of amounts held under the Variable/Fixed
Contract in all Fixed Interest Accounts.
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.
VARIABLE CONTRACT: The variable annuity contract described in this Prospectus.
VARIABLE/FIXED CONTRACT: The combination variable and fixed annuity contract
described in this Prospectus.
WE OR US: "we" or "us" means The Penn Mutual Life Insurance Company, also
referred to in this Prospectus as Penn Mutual.
YOU: "you" means the Contract Owner or prospective Contract Owner.
3
<PAGE>
- --------------------------------------------------------------------------------
EXPENSES
<TABLE>
<CAPTION>
<S> <C>
Contract Owner Transaction Expenses
Sales Load Imposed on Purchase Payments ........................................... None
Maximum Contingent Deferred Sales Charge
Variable/Fixed Contract ...................................................... 7%*
Variable Contract ............................................................ 5%**
Transfer Fee ...................................................................... None
Maximum Annual Contract Administration Charge ..................................... $30
Separate Account Annual Expenses (as a percentage of Variable Account Value)
Mortality and Expense Risk Charge ................................................. 1.25%
Account Fees and Expenses ......................................................... None
Total Separate Account Annual Expenses ............................................ 1.25%
</TABLE>
- ----------------
* You pay this charge as a percentage of the amount that you withdraw. This
charge will never be more than 8 1/2% of purchase payments that you allocate
to the Separate Account. After your first Contract year, you will not pay
this charge on your first withdrawal in a Contract year unless it exceeds 10%
of your Contract Value. See WHAT CHARGES DO I PAY? in this Prospectus.
** You pay this charge as a percentage of the amount that you withdraw, or as a
percentage of the total purchase payments that you made within seven years of
the withdrawal, whichever is less. You will not pay this charge on that
portion of the first withdrawal that you make in a Contract year that does
not exceed 10% of the purchase payments that you made one year or more prior
to the withdrawal. 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>
MANAGEMENT ADMINISTRATIVE TOTAL
FEES AND CORPORATE ACCOUNTING OTHER FUND
(AFTER WAIVER) SERVICE FEES 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 (a) ........................ 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. 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.
<PAGE>
- --------------------------------------------------------------------------------
AMERICAN CENTURY VARIABLE PORTFOLIOS, INC.
UNDERLYING FUND ANNUAL EXPENSES (AS A % OF PORTFOLIO AVERAGE NET ASSETS)
MANAGEMENT OTHER TOTAL FUND
FEES 12B-1 FEES EXPENSES EXPENSES
---------- ---------- -------- ----------
Capital Appreciation ... 1.00% None None 1.00%
- --------------------------------------------------------------------------------
NEUBERGER BERMAN ADVISERS MANAGEMENT TRUST (A)
UNDERLYING FUND ANNUAL EXPENSES (AS A % OF PORTFOLIO AVERAGE NET ASSETS)
<TABLE>
<CAPTION>
MANAGEMENT,
ADVISORY AND
ADMINISTRATION OTHER TOTAL FUND
FEES EXPENSES EXPENSES
-------------- -------- ----------
<S> <C> <C> <C>
Limited Maturity Bond ...................... 0.65% 0.11% 0.76%
Balanced ................................... 0.85% 0.18% 1.03%
Partners Fund .............................. 0.80% 0.04% 0.84%
</TABLE>
- --------------------
(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.
4
<PAGE>
- --------------------------------------------------------------------------------
FIDELITY INVESTMENTS' VARIABLE INSURANCE PRODUCTS FUND (A)
UNDERLYING FUND ANNUAL EXPENSES (AS A % OF PORTFOLIO AVERAGE NET ASSETS)
MANAGEMENT OTHER TOTAL FUND
FEE 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)
<TABLE>
<CAPTION>
MANAGEMENT FEE OTHER TOTAL FUND
(AFTER WAIVER) EXPENSES EXPENSES
-------------- -------- ----------
<S> <C> <C> <C>
Asset Manager (a) ................... 0.55% 0.08% 0.63%
Index 500 (b) ....................... 0.24% 0.04% 0.28%
</TABLE>
(a) THE EXPENSES PRESENTED 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 0.64% FOR THE ASSET
MANAGER PORTFOLIO.
(b) THESE EXPENSES 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)
<TABLE>
<CAPTION>
MANAGEMENT OTHER TOTAL FUND
FEE EXPENSES EXPENSES
---------- -------- ----------
<S> <C> <C> <C>
Emerging Markets Equity (International) .. 1.25% 0.50% 1.75%
</TABLE>
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., American Century Variable Portfolios,
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.
5
<PAGE>
- --------------------------------------------------------------------------------
EXAMPLES OF FEES AND EXPENSES
The following examples show the total expenses that you would pay on each
$1,000 invested.
If you own a Variable/Fixed Contract and make purchase payments only
during the first Contract year, 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 .................................................... $86 $114 $143 $240
Penn Series Value Equity Fund ..................................................... $86 $114 $143 $240
Penn Series Small Capitalization Fund ............................................. $86 $116 $146 $247
Penn Series Emerging Growth Fund .................................................. $90 $125 $162 $280
Penn Series Flexibly Managed Fund ................................................. $86 $114 $143 $240
Penn Series International Equity Fund ............................................. $89 $123 $158 $273
Penn Series Quality Bond Fund ..................................................... $86 $114 $143 $242
Penn Series High Yield Bond Fund .................................................. $86 $116 $146 $247
Penn Series Money Market Fund ..................................................... $86 $113 $141 $236
American Century Capital Appreciation Portfolio ................................... $86 $114 $143 $240
Neuberger Berman Limited Maturity Bond Portfolio .................................. $88 $122 $156 $268
Neuberger Berman Balanced Portfolio ............................................... $85 $111 $138 $230
Neuberger Berman Partners Fund Portfolio .......................................... $87 $116 $147 $249
Fidelity's Equity Income Portfolio ................................................ $84 $108 $133 $220
Fidelity's Growth Portfolio ....................................................... $85 $111 $138 $230
Fidelity's Asset Manager Portfolio ................................................ $85 $110 $136 $227
Fidelity's Index 500 .............................................................. $81 $100 $118 $189
Morgan Stanley Dean Witter Emerging Markets Equity (International) Portfolio ...... $95 $142 $190 $338
</TABLE>
<PAGE>
EXAMPLE
If you own a Variable/Fixed Contract and make purchase payments after the
first Contract year, 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 .................................................... $86 $114 $148 $252
Penn Series Value Equity Fund ..................................................... $86 $114 $148 $252
Penn Series Small Capitalization Fund ............................................. $86 $116 $151 $259
Penn Series Emerging Growth Fund .................................................. $90 $125 $167 $292
Penn Series Flexibly Managed Fund ................................................. $86 $114 $148 $252
Penn Series International Equity Fund ............................................. $89 $123 $164 $285
Penn Series Quality Bond Fund ..................................................... $86 $114 $148 $254
Penn Series High Yield Bond Fund .................................................. $86 $116 $151 $259
Penn Series Money Market Fund ..................................................... $86 $113 $146 $248
American Century Capital Appreciation Portfolio ................................... $86 $114 $148 $252
Neuberger Berman Limited Maturity Bond Portfolio .................................. $88 $122 $161 $280
Neuberger Berman Balanced Portfolio ............................................... $85 $111 $143 $242
Neuberger Berman Partners Fund Portfolio .......................................... $87 $116 $152 $261
Fidelity's Equity Income Portfolio ................................................ $84 $108 $138 $233
Fidelity's Growth Portfolio ....................................................... $85 $110 $141 $239
Fidelity's Asset Manager Portfolio ................................................ $85 $110 $141 $239
Fidelity's Index 500 .............................................................. $81 $100 $124 $201
Morgan Stanley Dean Witter Emerging Markets Equity (International) Portfolio ...... $95 $142 $195 $349
</TABLE>
6
<PAGE>
- --------------------------------------------------------------------------------
EXAMPLE
If you own a Variable Contract and surrender your contract after the
number of years shown, you would pay the following expenses on each $1,000
invested, assuming a 5% annual return on assets:
<TABLE>
<CAPTION>
ONE THREE FIVE TEN
YEAR YEARS YEARS YEARS
---- ----- ----- -----
<S> <C> <C> <C> <C>
Penn Series Growth Equity Fund .................................................... $67 $114 $161 $240
Penn Series Value Equity Fund ..................................................... $67 $114 $161 $240
Penn Series Small Capitalization Fund ............................................. $68 $116 $164 $247
Penn Series Emerging Growth Fund .................................................. $71 $126 $181 $280
Penn Series Flexibly Managed Fund ................................................. $67 $114 $161 $240
Penn Series International Equity Fund ............................................. $71 $124 $178 $273
Penn Series Quality Bond Fund ..................................................... $68 $115 $162 $242
Penn Series High Yield Bond Fund .................................................. $68 $116 $164 $247
Penn Series Money Market Fund ..................................................... $67 $113 $159 $236
American Century Capital Appreciation Portfolio ................................... $70 $121 $174 $265
Neuberger Berman Limited Maturity Bond Portfolio .................................. $67 $114 $161 $240
Neuberger Berman Balanced Portfolio ............................................... $70 $122 $175 $268
Neuberger Berman Partners Fund Portfolio .......................................... $68 $117 $166 $249
Fidelity's Equity Income Portfolio ................................................ $66 $109 $152 $220
Fidelity's Growth Portfolio ....................................................... $67 $112 $156 $230
Fidelity's Asset Manager Portfolio ................................................ $66 $111 $155 $227
Fidelity's Index 500 .............................................................. $63 $100 $136 $189
Morgan Stanley Dean Witter Emerging Markets Equity (International) Portfolio ...... $77 $143 $211 $338
</TABLE>
<PAGE>
EXAMPLE
If you own either a Variable/Fixed Contract or a Variable Contract and do
not surrender your Contract, or if you annuitize your Contract after the number
of years shown, you would pay the following expenses on each $1,000 invested,
assuming a 5% annual return on assets:
<TABLE>
<CAPTION>
ONE THREE FIVE TEN
YEAR YEARS YEARS YEARS
---- ----- ----- -----
<S> <C> <C> <C> <C>
Penn Series Growth Equity Fund .................................................... $21 $65 $111 $240
Penn Series Value Equity Fund ..................................................... $21 $65 $111 $240
Penn Series Small Capitalization Fund ............................................. $22 $67 $114 $247
Penn Series Emerging Growth Fund .................................................. $25 $77 $131 $280
Penn Series Flexibly Managed Fund ................................................. $21 $65 $111 $240
Penn Series International Equity Fund ............................................. $24 $75 $128 $273
Penn Series Quality Bond Fund ..................................................... $21 $65 $112 $242
Penn Series High Yield Bond Fund .................................................. $22 $67 $114 $247
Penn Series Money Market Fund ..................................................... $21 $64 $109 $236
American Century Capital Appreciation Portfolio ................................... $21 $65 $111 $240
Neuberger Berman Limited Maturity Bond Portfolio .................................. $24 $73 $125 $268
Neuberger Berman Balanced Portfolio ............................................... $20 $62 $106 $230
Neuberger Berman Partners Fund Portfolio .......................................... $22 $67 $116 $249
Fidelity's Equity Income Portfolio ................................................ $19 $59 $102 $220
Fidelity's Growth Portfolio ....................................................... $20 $61 $105 $227
Fidelity's Asset Manager Portfolio ................................................ $20 $61 $105 $227
Fidelity's Index 500 .............................................................. $16 $50 $86 $189
Morgan Stanley Dean Witter Emerging Markets Equity (International) Portfolio ...... $31 $95 $161 $338
</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>
- --------------------------------------------------------------------------------
CONDENSED FINANCIAL INFORMATION
The following tables show Accumulation Unit values and the number of
Accumulation Units outstanding for each of the subaccounts
of the Separate Account for the specified periods. Please read these tables
together with the financial statements and the related notes included in the
Statement of Additional Information.
- --------------------------------------------------------------------------------
PENN SERIES GROWTH EQUITY FUND SUBACCOUNT (A)
VALUES OF AN ACCUMULATION UNIT OUTSTANDING THROUGHOUT EACH PERIOD FOR QUALIFIED
AND NONQUALIFIED RETIREMENT PLANS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------------------------------
1998 1997 1996 1995
---------------------------------------------------------------------------------------------------
NON- NON- NON- NON-
QUAL QUAL QUAL QUAL QUAL QUAL QUAL QUAL
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Accumulation Unit Value,
beginning of period ........ $48.256 $47.859 $38.550 $38.235 $32.596 $32.327 $26.102 $25.887
Accumulation Unit Value,
end of period .............. $67.515 $66.959 $48.256 $47.859 $38.550 $38.235 $32.596 $32.327
Number of Accumulation
Units outstanding,
end of period .............. 1,752,036 626,895 1,794,481 617,717 1,830,081 620,903 1,991,646 674,290
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------------------------------
1994 1993 1992 1991
---------------------------------------------------------------------------------------------------
NON- NON- NON- NON-
QUAL QUAL QUAL QUAL QUAL QUAL QUAL QUAL
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Accumulation Unit Value,
beginning of period ........ $28.766 $28.528 $25.906 $25.692 $24.756 $24.552 $18.605 $18.451
Accumulation Unit Value,
end of period .............. $26.102 $25.887 $28.766 $28.528 $25.906 $25.692 $24.756 $24.552
Number of Accumulation
Units outstanding,
end of period .............. 2,119,836 717,328 2,042,023 685,110 2,004,015 669,679 1,680,322 518,717
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------
1990 1989 1988
--------------------------------------------------------------------------
NON- NON- NON-
QUAL QUAL QUAL QUAL QUAL QUAL
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Accumulation Unit Value,
beginning of period ........ $21.204 $21.029 $16.356 $16.221 $14.702 $14.581
Accumulation Unit Value,
end of period .............. $18.605 $18.451 $21.204 $21.029 $16.356 $16.221
Number of Accumulation
Units outstanding,
end of period .............. 1,470,210 439,287 1,284,583 333,486 1,309,408 360,185
</TABLE>
- -------------------
(a) Growth Stock Fund Subaccount prior to November 1, 1992.
8
<PAGE>
- --------------------------------------------------------------------------------
Penn Series Value Equity Fund Subaccount (a)
Values of an Accumulation Unit Outstanding Throughout Each Period
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994 1993 1992 1991 1990 1989
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Accumulation Unit Value,
beginning of period ... $38.038 $30.819 $24.928 $18.361 $18.062 $17.080 $15.058 $11.939 $13.157 $11.802
Accumulation Unit
Value, end of period .. $41.167 $38.038 $30.819 $24.928 $18.361 $18.062 $17.080 $15.058 $11.939 $13.157
Number of Accumulation
Units outstanding,
end of period ......... 5,273,048 5,409,879 4,907,784 4,235,839 3,886,404 3,693,652 2,865,294 2,207,661 1,883,581 1,802,897
</TABLE>
- -------------------
(a) EQUITY INCOME FUND SUBACCOUNT PRIOR TO NOVEMBER 1, 1992.
- --------------------------------------------------------------------------------
PENN SERIES SMALL CAPITALIZATION FUND SUBACCOUNT
VALUES OF AN ACCUMULATION UNIT OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------
1998 1997 1996 1995(A)
---------------------------------------------
<S> <C> <C> <C> <C>
Accumulation Unit Value, beginning of period ........................ $16.051 $13.211 $11.171 $10.000
Accumulation Unit Value, end of period .............................. $14.400 $16.051 $13.211 $11.171
Number of Accumulation Units outstanding, end of period ............. $1,306,650 1,104,032 587,385 137,653
</TABLE>
- -------------------
(a) FOR THE PERIOD MAY 1, 1995 (DATE SUBACCOUNT WAS ESTABLISHED) THROUGH
DECEMBER 31, 1995.
<PAGE>
- --------------------------------------------------------------------------------
Penn Series Emerging Growth Fund Subaccount
Values of an Accumulation Unit Outstanding Throughout Each Period
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1998 1997(a)
------- -------
<S> <C> <C>
Accumulation Unit Value, beginning of period ...................... $13.806 $10.000
Accumulation Unit Value, end of period ............................ $18.503 $13.806
Number of Accumulation Units outstanding, end of period ........... 781,196 308,169
</TABLE>
- -------------------
(a) FOR THE PERIOD MAY 1, 1997 (DATE SUBACCOUNT WAS ESTABLISHED) THROUGH
DECEMBER 31, 1997.
- --------------------------------------------------------------------------------
PENN SERIES FLEXIBLY MANAGED FUND SUBACCOUNT (A)
VALUES OF AN ACCUMULATION UNIT OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994 1993 1992 1991 1990 1989
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Accumulation Unit Value,
beginning of period .... $56.265 $49.262 $42.865 $35.496 $34.514 $30.179 $27.893 $23.215 $23.712 $19.832
Accumulation Unit Value,
end of period .......... $58.951 $56.265 $49.262 $42.865 $35.496 $34.514 $30.179 $27.893 $23.215 $23.712
Number of Accumulation
Units outstanding,
end of period .......... 5,766,014 5,974,993 5,711,843 4,946,240 4,198,305 3,143,601 2,327,829 1,664,751 1,237,347 1,129,858
</TABLE>
- -------------------
(a) CAPITAL APPRECIATION FUND SUBACCOUNT PRIOR TO NOVEMBER 1, 1992.
9
<PAGE>
- --------------------------------------------------------------------------------
PENN SERIES INTERNATIONAL EQUITY FUND SUBACCOUNT
VALUES OF AN ACCUMULATION UNIT OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------------
1998 1997 1996 1995 1994 1993 1992(a)
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Accumulation Unit Value,
beginning of period .............. $18.164 $16.659 $14.434 $12.843 $13.880 $10.175 $10.000
Accumulation Unit Value,
end of period .................... $21.320 $18.164 $16.659 $14.434 $12.843 $13.880 $10.175
Number of Accumulation Units
outstanding, end of period ....... 3,822,847 4,155,960 4,012,762 3,388,479 3,556,098 1,847,892 92,386
</TABLE>
(a) FOR THE PERIOD NOVEMBER 2, 1992 (DATE SUBACCOUNT WAS ESTABLISHED) THROUGH
DECEMBER 31, 1992.
- --------------------------------------------------------------------------------
PENN SERIES QUALITY BOND FUND SUBACCOUNT (A)
VALUES OF AN ACCUMULATION UNIT OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994 1993 1992 1991 1990 1989
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Accumulation Unit Value,
beginning of period ... $20.260 $18.990 $18.465 $15.562 $16.639 $15.088 $14.336 $12.558 $11.776 $10.580
Accumulation Unit Value,
end of period ......... $22.043 $20.260 $18.990 $18.465 $15.562 $16.639 $15.088 $14.336 $12.558 $11.776
Number of Accumulation
Units outstanding,
end of period ......... 1,665,664 1,497,635 1,664,378 1,869,975 1,890,869 1,953,188 1,337,087 1,229,163 1,075,187 769,467
</TABLE>
- -------------------
(a) FIXED INCOME FUND SUBACCOUNT PRIOR TO NOVEMBER 1, 1992.
<PAGE>
- --------------------------------------------------------------------------------
PENN SERIES HIGH YIELD BOND FUND SUBACCOUNT
VALUES OF AN ACCUMULATION UNIT OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994 1993 1992 1991 1990 1989
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Accumulation Unit Value,
beginning of period ... $33.476 $29.276 $26.033 $22.644 $24.742 $20.918 $18.291 $13.534 $15.035 $15.325
Accumulation Unit Value,
end of period ......... $34.645 $33.476 $29.276 $26.033 $22.644 $24.742 $20.918 $18.291 $13.534 $15.035
Number of Accumulation
Units outstanding,
end of period ......... 1,308,094 1,261,904 1,185,318 1,194,944 1,264,890 1,257,271 705,414 594,530 613,408 817,147
</TABLE>
- --------------------------------------------------------------------------------
PENN SERIES MONEY MARKET FUND SUBACCOUNT
VALUES OF AN ACCUMULATION UNIT OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994 1993 1992 1991 1990 1989
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Accumulation Unit Value,
beginning of period ... $19.541 $18.817 $18.148 $17.416 $17.003 $16.791 $16.491 $15.732 $14.893 $13.844
Accumulation Unit Value,
end of period ......... $20.268 $19.541 $18.817 $18.148 $17.416 $17.003 $16.791 $16.491 $15.732 $14.893
Number of Accumulation
Units outstanding,
end of period ......... 1,449,199 1,120,603 1,192,388 1,062,385 825,274 658,620 698,584 769,958 965,117 753,052
</TABLE>
10
<PAGE>
- --------------------------------------------------------------------------------
AMERICAN CENTURY CAPITAL APPRECIATION PORTFOLIO SUBACCOUNT (A)
VALUES OF AN ACCUMULATION UNIT OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------
1998 1997 1996 1995 1994 1993(b)
--------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Accumulation Unit Value,
beginning of period ......................... $12.690 $13.282 $14.057 $10.857 $11.124 $10.000
Accumulation Unit Value,
end of period ............................... $12.262 $12.690 $13.282 $14.057 $10.857 $11.124
Number of Accumulation Units outstanding,
end of period ............................... 1,153,673 1,567,237 2,183,381 2,157,888 1,791,799 716,404
</TABLE>
- -------------------
(a) TCI GROWTH PORTFOLIO SUBACCOUNT PRIOR TO MAY 1, 1997.
(b) FOR THE PERIOD MAY 1, 1993 (DATE SUBACCOUNT WAS ESTABLISHED) THROUGH
DECEMBER 31, 1993.
- --------------------------------------------------------------------------------
NEUBERGER BERMAN LIMITED MATURITY BOND PORTFOLIO SUBACCOUNT
VALUES OF AN ACCUMULATION UNIT OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------
1998 1997 1996 1995 1994 1993(b)
--------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Accumulation Unit Value,
beginning of period ......................... $11.943 $11.330 $ 10.999 $ 10.039 $10.181 $ 10.000
Accumulation Unit Value,
end of period ............................... $12.313 $11.943 $ 11.330 $ 10.999 $10.039 $ 10.181
Number of Accumulation Units outstanding,
end of period ............................... 509,381 465,682 459,223 444,986 448,825 311,665
</TABLE>
- -------------------
(a) FOR THE PERIOD MAY 1, 1993 (DATE SUBACCOUNT WAS ESTABLISHED) THROUGH
DECEMBER 31, 1993.
<PAGE>
- --------------------------------------------------------------------------------
NEUBERGER BERMAN BALANCED PORTFOLIO SUBACCOUNT
VALUES OF AN ACCUMULATION UNIT OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------
1998 1997 1996 1995 1994 1993(b)
--------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Accumulation Unit Value,
beginning of period ......................... $15.551 $13.182 $12.488 $10.218 $10.706 $10.000
Accumulation Unit Value,
end of period ............................... $17.228 $15.551 $13.182 $12.488 $10.218 $10.706
Number of Accumulation Units outstanding,
end of period ............................... 1,488,257 1,466,154 1,535,496 1,468,254 1,223,496 621,326
</TABLE>
- -------------------
(a) FOR THE PERIOD MAY 1, 1993 (DATE SUBACCOUNT WAS ESTABLISHED) THROUGH
DECEMBER 31, 1993.
- --------------------------------------------------------------------------------
NEUBERGER BERMAN PARTNERS' FUND PORTFOLIO SUBACCOUNT
VALUES OF AN ACCUMULATION UNIT OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1998 1997(a)
-------- --------
<S> <C> <C>
Accumulation Unit Value, beginning of period .............................. $12.411 $10.000
Accumulation Unit Value, end of period .................................... $12.773 $12.411
Number of Accumulation Units outstanding, end of period ................... 1,716,964 665,382
</TABLE>
- -------------------
(a) FOR THE PERIOD MAY 1, 1997 (DATE SUBACCOUNT WAS ESTABLISHED) THROUGH
DECEMBER 31, 1997.
11
<PAGE>
- --------------------------------------------------------------------------------
FIDELITY INVESTMENTS' EQUITY INCOME FUND SUBACCOUNT
VALUES OF AN ACCUMULATION UNIT OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1998 1997 1996 1995(a)
----------------------------------------------------
<S> <C> <C> <C> <C>
Accumulation Unit Value, beginning of period .......................... $17.021 $13.453 $11.920 $10.000
Accumulation Unit Value, end of period ................................ $18.764 $17.021 $13.453 $11.920
Number of Accumulation Units outstanding, end of period ............... 3,820,796 3,352,648 2,498,343 581,691
</TABLE>
- -------------------
(a) FOR THE PERIOD MAY 1, 1995 (DATE SUBACCOUNT WAS ESTABLISHED) THROUGH
DECEMBER 31, 1995.
- --------------------------------------------------------------------------------
FIDELITY INVESTMENTS' GROWTH FUND SUBACCOUNT
VALUES OF AN ACCUMULATION UNIT OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1998 1997 1996 1995(a)
----------------------------------------------------
<S> <C> <C> <C> <C>
Accumulation Unit Value, beginning of period .......................... $17.073 $14.000 $12.359 $10.000
Accumulation Unit Value, end of period ................................ $23.519 $17.073 $14.000 $12.359
Number of Accumulation Units outstanding, end of period ............... 3,722,268 3,157,234 2,620,543 690,602
</TABLE>
- -------------------
(a) FOR THE PERIOD MAY 1, 1995 (DATE SUBACCOUNT WAS ESTABLISHED) THROUGH
DECEMBER 31, 1995.
<PAGE>
- --------------------------------------------------------------------------------
FIDELITY INVESTMENTS' ASSET MANAGER FUND SUBACCOUNT
VALUES OF AN ACCUMULATION UNIT OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1998 1997 1996 1995(a)
----------------------------------------------------
<S> <C> <C> <C> <C>
Accumulation Unit Value, beginning of period .......................... $15.040 $12.623 $11.153 $10.000
Accumulation Unit Value, end of period ................................ $17.809 $15.040 $12.623 $11.153
Number of Accumulation Units outstanding, end of period ............... 801,557 577.711 383,267 117,290
</TABLE>
- -------------------
(a) FOR THE PERIOD MAY 1, 1995 (DATE SUBACCOUNT WAS ESTABLISHED) THROUGH
DECEMBER 31, 1995.
- --------------------------------------------------------------------------------
FIDELITY INVESTMENTS' INDEX 500 FUND SUBACCOUNT
VALUES OF AN ACCUMULATION UNIT OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1998 1997(a)
------- -------
<S> <C> <C>
Accumulation Unit Value, beginning of period ................................ $12.162 $10.000
Accumulation Unit Value, end of period ...................................... $15.414 $12.162
Number of Accumulation Units outstanding, end of period ..................... 2,350,293 703,585
</TABLE>
- -------------------
(a) FOR THE PERIOD MAY 1, 1997 (DATE SUBACCOUNT WAS ESTABLISHED) THROUGH
DECEMBER 31, 1997.
- --------------------------------------------------------------------------------
MORGAN STANLEY DEAN WITTER EMERGING MARKETS EQUITY (INTERNATIONAL)
FUND SUBACCOUNT
VALUES OF AN ACCUMULATION UNIT OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1998 1997(a)
------- -------
<S> <C> <C>
Accumulation Unit Value, beginning of period ................................ $8.975 $10.000
Accumulation Unit Value, end of period ...................................... $6.720 $8.975
Number of Accumulation Units outstanding, end of period ..................... 406,393 248.001
</TABLE>
- -------------------
(a) FOR THE PERIOD MAY 1, 1997 (DATE SUBACCOUNT WAS ESTABLISHED) THROUGH
DECEMBER 31, 1997.
12
<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 Contracts.
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.
<PAGE>
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.
The financial statements of the Separate Account for the year ended
December 31, 1998 are included in the statement of additional information
referred to on the cover page of this prospectus.
- --------------------------------------------------------------------------------
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 the 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%.
13
<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 change these
procedures whenever we are required 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.
14
<PAGE>
- --------------------------------------------------------------------------------
American Century Variable Portfolios, Inc.:
Capital Appreciation Portfolio -- seeks capital growth by investing
primarily in common stocks believed to have better-than-average prospects for
appreciation. American Century Investment Management, Inc., Kansas City,
Missouri, is investment adviser to the Capital Appreciation Portfolio.
- --------------------------------------------------------------------------------
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 FUND 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.
- --------------------------------------------------------------------------------
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 Investment 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 American Century Variable Portfolios, Inc., 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.
Read the Prospectuses of these Funds before investing.
15
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THE FIXED INTEREST ACCOUNTS
The Fixed Interest Accounts are part of the Company's general investment
account. Interests in the Fixed Interest Accounts 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. 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 Accounts. Disclosure regarding the
Fixed Interest Accounts, 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 ACCOUNTS.
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THE CONTRACTS
The Contracts may be an attractive long-term investment vehicle for many
people. They allow you to allocate your purchase payment(s) and transfer amounts
to the Separate Account, and direct investment in one or more of the available
Funds of Penn Series Funds, Inc., American Century Variable Portfolios, 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.
In addition, the Variable/Fixed Contract allows you to allocate your
purchase payment(s) and transfer amounts to one or more Fixed Interest Accounts.
The Variable Contract allows you transfer amounts from your Contract to one or
more Fixed Interest Accounts in a separate fixed annuity contract issued by Penn
Mutual. The Fixed Interest Accounts are funded and guaranteed by Penn Mutual
through its general account. See THE FIXED INTEREST ACCOUNTS and MORE
INFORMATION ABOUT THE FIXED INTEREST ACCOUNTS 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 Accounts 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.
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 the
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.
For Variable/Fixed Contracts issued in connection with qualified
retirement plans, the minimum first purchase payment is $250 and the minimum for
each subsequent purchase payment is $50. The minimum first purchase payment for
Variable/Fixed Contracts which are not issued in connection with qualified
retirement plans is $2,500 and the minimum for each subsequent purchase payment
is $300. The total purchase payments that you make on a Variable/Fixed Contract
may not exceed $1,000,000 in any calendar year without our consent.
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For Variable Contracts issued in connection with retirement plans
qualifying for special tax treatment under the Internal Revenue Code, the
minimum first purchase payment is $250 and the minimum for each subsequent
purchase payment is $40. The minimum first purchase payment for Variable
Contracts that are not issued in connection with qualified retirement plans is
$1,500 and the minimum for each subsequent purchase payment is $300.
We may, in our discretion, reduce the minimum requirements for initial and
subsequent purchase payments under the Contracts.
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 (5 to 25 years
for a Variable/Fixed Contract, 5 to 30 years for a Variable Contract); (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 person other than yourself to be the Annuitant.
Your annuity payments will not start until you choose an annuity option.
You will pay a mortality and expense risk charge during both the
Accumulation Period and Annuity Payout Period under your Contract. We charge
this fee while you receive a variable annuity even though we may no longer bear
a mortality risk.
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 factors such as
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.
The variable annuity purchase rate assumes an annual net investment return
of 4%. If the annual net investment return during the annuity payout period is
greater than 4%, the amount of your payments will increase. If the annual net
investment return is less, the amount of your payments will decrease.
FIXED ANNUITY PAYMENTS UNDER A VARIABLE/FIXED CONTRACT. 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.
OTHER INFORMATION. Unless you tell us otherwise, your annuity payments
will begin on the later of (1) the first day of the next month after the
Annuitant's 85th birthday for contracts that are not issued under qualified
retirement plans and the first day of April following the year in which the
Annuitant turns 70 1/2 for Contracts that are issued under qualified retirement
plans.
You or your surviving Beneficiary 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. The
Annuity Date under a Variable/Fixed Contract may not be earlier than the first
Contract anniversary.
If the Contract Value of a Variable/Fixed Contract is less than $5,000, or
if the Contract Value of a Variable Contract is less than $2,000, we may pay you
in a lump sum. We usually make annuity payments on the first day of each month,
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
your Beneficiary at any time before the death of the Annuitant.
Variable/Fixed Contracts sold in most states provide that if the Annuitant
dies (or in some cases, you die and you are not the Annuitant) prior to the
Annuity Date, we will pay your Beneficiary the greatest of.
o the sum of all purchase payments, adjusted for withdrawals and contract
transfers;
o the Contract Value for the valuation period in which proof of death and
any other required information needed to make payment is received in our
administrative office; or
o the Variable Account Value, as of the contract date or, if later, as of
the end of the most recent seven-year contract period occurring prior to
the Contract Owner's 81st birthday, adjusted for subsequent purchase
payments and adjusted for withdrawals and contract transfers, plus the
value of any Fixed Interest Accounts under your Contract.
Similarly, Variable Contracts sold in most states provide that if the
Annuitant dies (or, in some cases, if you die) prior to the Annuity Date, we
will pay your Beneficiary the greatest of:
o the sum of all purchase payments, adjusted for withdrawals and contract
transfers;
o the Contract Value for the valuation period in which proof of death and
any other required information needed to make payment is received in our
administrative office; or
o the Contract Value, as of the contract date or, if later, as of the end
of the most recent seven-year contract period occurring prior to the
Contract Owner's 81st birthday, adjusted for subsequent purchase
payments and adjusted for withdrawals and contract transfers.
Contracts Sold in Texas. If the Annuitant dies (or, in some cases, if you
die) prior to the Annuity Date, we will pay the greater of:
o the sum of all purchase payments, adjusted for withdrawals and contract
transfers; or
o the Contract Value for the valuation period in which proof of death and
any other required information needed to make payment is received at
Penn Mutual's service office. "Proof of death" in the foregoing means a
death certificate or other official document establishing death.
The death benefit may be paid in lump sum or in the form of annuity
payments. We normally will pay the death benefit in a lump sum within seven days
after we receive proof of the date of death and all required information. We
will delay payment of the lump sum upon request, but not for longer than five
years.
If the Beneficiary is not the spouse of the decedent, he or she may choose
an annuity option rather than a lump sum payment. If he or she selects an
annuity option, payments must begin within one year of the decedent's death.
Payments may not be made over a period longer than the Beneficiary's life or
life expectancy (whichever is longer).
If the Beneficiary is the spouse of the decedent, he or she may select any
annuity option that was available to the decedent or apply to become the
Contract Owner.
If the Annuitant dies on or after the Annuity Date and the annuity is for
a specified number of years or for life with payments guaranteed for 10 or 20
years, the Beneficiary may elect to have the payments continue for the specified
or guaranteed period or to receive in lump sum the present value of the
remaining payments.
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 Accounts?
Variable/Fixed Contracts. 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 Accounts. You may transfer from a Fixed Interest
Account to subaccounts of the Separate Account or to another Fixed Interest
Account. You may make no more than two transfers per calendar month and no more
than twelve per calendar year. The minimum amount that you may transfer is $250
or the total amount held in the investment account, if less.
If you own a Variable/Fixed Contract as trustee under a qualified
retirement plan, you may transfer all or part of the Contract Value to another
annuity contract issued by us that you own under the same plan.
VARIABLE CONTRACT. You may transfer amounts from one subaccount of the
Separate Account to another, up to six times in a calendar year. The minimum
transfer for a Contract issued under a tax-qualified retirement plan is $250.
The minimum for all other Contracts is $1,000. If a partial transfer is made to
another Contract, the remaining Contract Value must be $250.
You may transfer all or part of your Contract Value to another contract
issued by us containing a reciprocal transfer provision, subject to the
following conditions. The owner, annuitant and beneficiary must be the same
under both contracts. No more than six such transfers may be made in a calendar
year and no transfer may be made after the thirtieth day before the Annuity
Date.
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 your Contract value is 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 ($50 minimum per
account.) These transfers may be made only from one of the following accounts:
Money Market Subaccount, Limited Maturity Bond Subaccount, Quality Bond
Subaccount, or the Fixed Holding Account. You may do this for 12 to 60 months,
or until you change your allocations or tell us to stop 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. 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.
ADDITIONAL INFORMATION. Transfers will be based on values at the end of
the valuation period in which the transfer request is received at our
administrative office. You may transfer amounts to a Contract from another
contract issued by us to the extent permitted by the other contract. If you make
a withdrawal from a Contract that relates to money transferred from another
contract with a front-end sales load, we will not charge you a deferred sales
charge on the withdrawal.
A transfer request must be received at our administrative office and all
other administrative requirements for transfer must be met to make the transfer.
We reserve the right to lower the minimum transfer amount. 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.
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May I Withdraw Any of My Money?
Prior to the earlier of the Annuity Date or the death of the Contract
Owner or Annuitant, you may withdraw all or part of your Contract Value. We base
your withdrawal request on your Contract Value next determined after we receive
a proper written request for withdrawal (and the Contract, in case of a full
withdrawal) at our administrative office. 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 in this
Prospectus.
o A partial withdrawal must be at least $250 and the remaining Contract
Value must be at least $250.
o After the Annuity Date, you choose an annuity for a set number of years,
you may withdraw the present value of your annuity.
o If you do not tell us otherwise, the withdrawal will be taken pro rata
from the variable subaccounts if you own a variable contract. If you own
a Variable/Fixed Contract, if you do not tell us otherwise, the
withdrawal will be taken first from the Fixed Holding Account. If the
withdrawal exhausts your Fixed Holding Account value, any remaining
withdrawal will be taken pro rata from the Variable Subaccounts. If the
withdrawal exhausts your Variable Account Value, then any remaining
withdrawal will be taken from a fixed interest account beginning with
the fixed interest account with the shortest interest period.
403(B) WITHDRAWALS. There are restrictions on withdrawals from Contracts
qualifying under Section 403(b) of the Code. Generally, withdrawals attributable
to purchase payments made after December 31, 1988 pursuant to a salary reduction
plan 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 pay expenses indirectly to 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 Contracts and the
Separate Account
o We deduct from your Variable Account Value an annual contract
administration charge that is the lesser of $30 or 2% of your Variable
Account Value. We deduct this charge each year on the date specified in
the Contract (and on the date the Variable Account Value or Contract
Value is withdrawn in full if other than the date specified). To pay
this charge, we cancel Accumulation Units credited to your Contract, pro
rata among the subaccounts in which you invest.
Mortality and Expense Risk Charges
o We deduct from the net asset value of the Separate Account a daily
administration charge a daily expense risk charge equal to an annual
rate of 0.5% of the daily net asset value of the Separate Account. You
pay this charge to compensate us for the risk of guaranteeing not to
increase the annual contract administration charge to more than $30
regardless of actual administrative costs.
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o We deduct a daily mortality risk charge equal to an annual rate of 0.75%
of the daily net asset value of the Separate Account (prior to September
1, 1990 the charge was 0.80%). This charge is to compensate us for the
mortality-related guarantees (e.g. guarantees that the annuity factors
will never be decreased even if mortality experience is substantially
different than originally assumed) we make under your Contract.
You pay the mortality and expense risk charges during both the
accumulation and variable annuity payout phases of your 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 our surplus, which may
include proceeds from the expense and mortality risk charges. You may pay this
charge if you make a full or partial withdrawal of the Contract Value or if you
withdraw the present value of your annuity payments. Purchase payments will be
treated as withdrawn on a first-in, first-out basis.
Variable/Fixed Contract
The following tables shows the schedule of the contingent deferred sales
charge that will apply to the withdrawal of a purchase payment, after allowing
for the free withdrawals described below.
First, if no purchase payments have been made after the first contract
year, the deferred sales charge will equal:
Withdrawal During Deferred Sales Charge as a
Contract Year Percentage of Amount Withdrawn
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1 7.0%
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2 6.0%
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3 5.0%
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4 4.0%
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5 3.0%
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6 2.0%
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7 1.0%
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8 and later No Charge
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Second, if purchase payments have been made in any contract year after the
first, the deferred sales charge will equal:
Withdrawal During Deferred Sales Charge as a
Contract Year Percentage of Amount Withdrawn
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1 7.0%
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2 6.0%
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3 5.0%
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4 4.0%
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5 3.5%
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6 3.0%
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7 2.5%
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8 2.0%
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9 1.5%
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10 1.0%
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11 and later No Charge
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Once in each contract year on or after the last day of the first contract
year, you may withdraw 10% of the Contract Value (determined as of the date of
withdrawal) free of the contingent deferred sales charge. The 10% free
withdrawal may be taken either in one sum or, subject to meeting certain minimum
amounts, in a series of scheduled amounts during the contract year. The total
sum of the contingent deferred sales charges deducted from amounts withdrawn
from the Separate Account will never exceed 8 1/2% of the total of all purchase
payments credited to the Separate Account.
Variable Contract
If the contingent deferred sales charge applies, it will equal the lesser
of (a) 5% of the sum of purchase payments made within seven years prior to the
date of withdrawal or (b) 5% of the amount withdrawn. Under no circumstances
will the charge ever exceed 5% of total purchase payments.
You will not pay a charge on that portion of the first withdrawal in a
contract year that does not exceed 10% of total purchase payments made one year
or more prior to the withdrawal. This 10% free withdrawal may be taken in either
one sum or, subject to certain minimum amounts, in a series of scheduled amounts
during the contract year. Further, no charge will be made under the Variable
Contract on that portion of the first withdrawal in the eighth, ninth and tenth
contract years that does not exceed the following percentages of the Contract
Value:
Contract Year Percentage
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Eighth 25%
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Ninth 50%
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Tenth 75%
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No charge will be made on the first withdrawal in any contract year after
the tenth contract year.
Other Information
You may at any time withdraw all or any part of the Contract Value free
from the contingent deferred sales charge if (i) you (or Annuitant under a
qualified retirement plan) are disabled as defined in Section 72 (m) (7) of the
Internal Revenue Code and as applied under the Social Security Act, (ii) the
disability began after the Contract Date and (iii) the disability has continued
without interruption for four months.
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 be
unfairly discriminatory to any Contract Owners.
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 3.5%.
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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 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 at the inception date of the underlying Funds, other amounts
invested at the beginning of the period and no withdrawal at the end of the
period. Average annual total return figures that 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
If you own a Variable/Fixed Contract you may allocate or transfer all or
part of the amount credited to your Contract to one or more of the following
fixed interest options in the Fixed Interest Account: (1) the Fixed Holding
Account; (2) the One Year Guaranteed Account; (3) the Three Year Guaranteed
Account; (4) the Five Year Guaranteed Account; and (5) the Seven Year Guaranteed
Account. The minimum amount for an allocation to the Fixed Holding Account is
$50; the minimum amount for an allocation to the One Year Guaranteed Account or
the Three Year Guaranteed Account is $250; and the minimum amount for an
allocation to the Five Year Guaranteed Account or the Seven Year Guaranteed
Account is $5,000. We periodically declare an effective annual interest rate
applicable to allocations to the various fixed interest options. For each amount
allocated to the Fixed Holding Account, interest will be credited at an
effective annual interest rate declared by us on the first day of each calendar
year. The declared rate of interest will apply through the end of the calendar
year in which an allocation is made to the Fixed Holding Account, at which time
a new rate will be declared by Penn Mutual. For each amount allocated to the One
Year Guaranteed Account, the Three Year Guaranteed Account, the Five Year
Guaranteed Account or the Seven Year Guaranteed Account, interest will be
credited at an annual effective interest rate declared by us each month. The
declared rate of interest will apply through the end of the twelve month,
thirty-six month, sixty month or eighty-four month period, as applicable, which
begins on the first day of the calendar month in which the allocation is made.
We guarantee an effective annual rate of interest on allocations to all fixed
interest options of not less than 4%. In addition, rates declared during the
first seven contract years for the One Year Guaranteed Account will not be less
than the 52 week Treasury Bill discount rate obtained from the most recent
regularly scheduled auction.
If you own a Variable/Fixed Contract you may transfer Fixed Account funds
to subaccounts of the Separate Account or to another fixed interest option
within the Fixed Account, subject to the conditions and limitations in the fixed
account provisions of the Contract. A premature withdrawal charge may be
deducted from the interest earned on any amount that is withdrawn from the Three
Year Guaranteed Account, the Five Year Guaranteed Account or the Seven Year
Guaranteed Account during the period for which an interest rate is guaranteed.
In no event will the premature withdrawal charge invade the Contract Owner's
principal investment in the applicable fixed interest option. In accordance with
state law, we may defer a withdrawal or transfer from the Fixed Account 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 2 1/2 percentage points less than
the rate of interest that we charge you 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.
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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 Fixed Holding Account subaccount. You may then
transfer amounts from the Fixed Holding Account subaccount to the other
investment options offered under the Contract.
If you are in default, we must 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.
- --------------------------------------------------------------------------------
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.
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;
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.
24
<PAGE>
- --------------------------------------------------------------------------------
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., American Century Variable Portfolios, Inc., Neuberger
Berman Advisers Management Trust, Fidelity Investments' Variable Insurance
Products Fund, Variable Insurance Products Fund II, and Morgan Stanley Dean
Witter 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 indicated that in regulations or revenue
rulings under Section 817(d) (relating to the definition of a variable
contract), it will provide guidance on the extent to which Contract Owners may
direct their investments to particular subaccounts without being treated as
owners of the underlying shares. It is possible that when such regulations or
rulings are issued, the Contracts may need to be modified to comply with them.
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 individual retirement annuities qualified under Section 408(b) of
the Code (referred to as IRAs), simplified employee pension plans qualified
under Section 408(k) of the Code, tax deferred annuities qualified under Section
403(b) of the Code, state and local government deferred compensation plans
qualified under Section 457 of the Code, pension or profit sharing plans for
self-employed individuals qualified under Section 401 of the Code (referred to
as H.R. 10 or Keogh plans) and corporate pension or profit sharing plans
qualified under Section 401 of the Code or annuity plans qualified under Section
403(a) of the Code. Special provisions are required in some Contracts for
qualification 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.
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 the Company
believes 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 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 qualified plan or 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. Distributions from a
Section 457 deferred compensation plan are wages subject to general income tax
withholding requirements.
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 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.
25
<PAGE>
- --------------------------------------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION CONTENTS
- --------------------------------------------------------------------------------
VARIABLE ANNUITY PAYMENTS
First Variable Annuity Payments.......................................
Subsequent Variable Annuity Payments................................
Annuity Units.......................................................
Value of Annuity Units..............................................
Net Investment Factor...............................................
Assumed Interest Rate...............................................
Valuation Period....................................................
- --------------------------------------------------------------------------------
PERFORMANCE DATA...........................................................
Average Annual Total Return.........................................
Annual Changes in Accumulation Unit Values..........................
- --------------------------------------------------------------------------------
DISTRIBUTION OF CONTRACTS AND CERTIFICATES.................................
- --------------------------------------------------------------------------------
CUSTODIAN..................................................................
- --------------------------------------------------------------------------------
INDEPENDENT AUDITORS.......................................................
- --------------------------------------------------------------------------------
LEGAL MATTERS..............................................................
- --------------------------------------------------------------------------------
FINANCIAL STATEMENTS.......................................................
26
<PAGE>
Penn
Mutual
A better way of life
The Penn Mutual
Life Insurance Company
Philadelphia, PA 19172
EB1474 5/99
<PAGE>
- --------------------------------------------------------------------------------
PROSPECTUS -- May 1, 1999
Certificates Issued Under Group Variable and Fixed Annuity Contracts --
Flexible Purchase Payments
- --------------------------------------------------------------------------------
OPTIMIZER
PENN MUTUAL VARIABLE ANNUITY ACCOUNT III
THE PENN MUTUAL LIFE INSURANCE COMPANY
Philadelphia, PA 19172 o Telephone (800) 523-0650
- --------------------------------------------------------------------------------
This Prospectus describes a group variable and fixed annuity contract ("Penn
Mutual") 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 the Contractholder and Penn Mutual. You, as
a participant in the Contract, 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 the Participant's Variable Account
Value and future payouts we make to you will vary based upon investment
experience;
o has a fixed component, which means that the Participant's Fixed Account Value
and future payouts we make to you will be fixed based on your purchase
payments plus interest credited at not less than 4%;
o is tax-deferred, which means that you will not pay federal income taxes until
we begin to make annuity payments to you or until you take money out, and
o allows you to receive annuity payments over different periods of time.
Under the variable component, you direct us to invest your payments in one or
more of the following Funds through Penn Mutual Variable Annuity Account III
(the "Separate Account").
- --------------------------------------------------------------------------------
Penn Series Funds, Inc. Manager
- --------------------------------------------------------------------------------
Growth Equity Fund Independence Capital Management, Inc.
Value Equity Fund OpCap Advisors
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.
- --------------------------------------------------------------------------------
A Prospectus for the Penn Series Fund, Inc. accompanies this prospectus.
You also may direct us to invest in one or more of our Fixed Interest Accounts.
The Contract is not suitable for short-term investment. You may pay a deferred
sales charge of 5% on early withdrawals. If you withdraw money before age 59?,
you may pay a 10% additional income tax. The Contract is not a bank deposit and
is not federally insured.
You may return your Contract Certificate issued 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.
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>
- ---------------------------------------------------------------------------
PROSPECTUS CONTENTS
- ---------------------------------------------------------------------------
SPECIAL TERMS............................................................ 3
- ---------------------------------------------------------------------------
EXPENSES ................................................................ 4
EXAMPLES OF FEES AND EXPENSES ........................................... 5
ACCUMULATION UNIT VALUES ................................................ 6
THE PENN MUTUAL LIFE INSURANCE COMPANY .................................. 9
YEAR 2000 ............................................................... 9
THE SEPARATE ACCOUNT .................................................... 9
Accumulation Units.................................................. 9
Voting Instructions.................................................10
Investment Options in the Separate Account......................... 10
Growth Equity Fund..............................................10
Value Equity Fund...............................................10
Flexibly Managed Fund...........................................10
International Equity Fund.......................................10
Quality Bond Fund...............................................10
High Yield Bond Fund............................................10
Money Market Fund...............................................10
- ---------------------------------------------------------------------------
THE FIXED INTEREST ACCOUNTS .............................................11
- ---------------------------------------------------------------------------
THE CONTRACT ............................................................11
How Do I Participate in a Contract?.................................12
What Type of Annuity Payments May I Choose?.........................12
Variable Annuity Payments.......................................12
Fixed Annuity Payments..........................................12
Other Information...............................................12
What Are the Death Benefits Under My Certificate?...................13
May I Transfer Money Among Subaccounts and the Fixed
Interest Accounts?.............................................13
May I Withdraw Any of My Money?.....................................13
403(b) Withdrawals..............................................14
Deferment of Payments and Transfers.................................14
What Charges Do I Pay?..............................................14
Administration Charges...................................................14
Mortality and Expense Risk Charges..............................14
Contingent Deferred Sales Charge................................14
- ---------------------------------------------------------------------------
PERFORMANCE INFORMATION .................................................15
- ---------------------------------------------------------------------------
MORE INFORMATION ABOUT THE FIXED INTEREST ACCOUNT .......................15
General Information.................................................15
Loans Under Section 403(b) Contracts................................16
- ---------------------------------------------------------------------------
FEDERAL INCOME TAX CONSIDERATIONS .......................................16
Withdrawals and Death Benefits......................................16
Annuity Payments....................................................17
Early Withdrawals...................................................17
Transfers...........................................................17
Separate Account Diversification....................................17
Qualified Plans.....................................................17
- ---------------------------------------------------------------------------
FINANCIAL STATEMENTS ....................................................18
STATEMENT OF ADDITIONAL INFORMATION CONTENTS ............................18
<PAGE>
- ---------------------------------------------------------------------------
SPECIAL TERMS
- ---------------------------------------------------------------------------
As used in this prospectus, the following terms have the indicated meaning:
Accumulation Unit: A unit of measure used to compute a Participant's
Variable Account Value 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.
Annuity Date: The date on which annuity payments start.
Annuity Unit: A unit of measure used to compute a Participant's
variable annuity payment.
Certificate: A certificate issued under the Contract which sets the
Participant's interest in the Contract.
Contract: The group combination variable and fixed annuity contract
described in this prospectus.
Participant: A person on whose behalf purchase payments are made under
the Contract.
Participant's Fixed Account: An account established and maintained by
The Penn Mutual Life Insurance Company under the fixed account
provisions of the Contract.
Participant's Fixed Account Value: The sum of all amounts credited to a
Participant's Fixed Account, increased by interest credited and reduced
by amounts withdrawn from the Participant's Fixed Account.
Participant's Variable Account: An account established and maintained
under the Contract for a Participant.
Participant's Variable Account Value: The value of all Accumulation
Units credited to the Participant's Variable Account.
We: The Penn Mutual Life Insurance company.
You: The Participant
- --------------------------------------------------------------------------------
EXPENSES
- --------------------------------------------------------------------------------
Contract Owner Transaction Expenses
Sales Load Imposed on Purchase Payments None
Deferred Sales Load, as percentage of the amount withdrawn 5%*
Exchange Fee None
Annual Contract Administration Charge $30
Separate Account Annual Expenses (as a percentage of Average
Variable Account Value)
Mortality and Expense Risk Charge 1.25%
Account Fees and Expenses None
Total Separate Account Annual Expenses 1.25%
* The deferred sales charge will not be made on that portion of the first
withdrawal in an enrollment year that does not exceed specified percentages
of the sum of the Participant's Variable Account Value and the
Participant's Fixed Account Value.
See WHAT CHARGES DO I PAY? in this prospectus.
<PAGE>
- --------------------------------------------------------------------------------
Penn Series Funds, Inc.**
Underlying Fund Annual Expenses (as a % of portfolio avg. net assets)
<TABLE>
<CAPTION>
Administrative
Management and Corporate Total
Fees Services 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%
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>
** These expenses are for the last fiscal year.
- --------------------------------------------------------------------------------
The purpose of this foregoing table is to assist Contract Owners in
understanding the various costs and expenses that a Contract Owner will bear
directly and indirectly. The table shows Contract expenses and underlying Fund
expenses. See the accompanying prospectus of Penn Series Funds, Inc. for
information on expenses.
Premium taxes may be applicable. See WHAT CHARGES DO I PAY? in this
prospectus.
<PAGE>
- --------------------------------------------------------------------------------
EXAMPLES OF FEES AND EXPENSES
EXAMPLE
If you own certificates and surrender your certificates at the end of the
applicable period, you would pay the following expenses on each $1,000 invested,
assuming 5% annual return on assets:
One Three Five Ten
Year Years Years Years
Penn Series Growth Equity Fund $67 $114 $163 $257
Penn Series Value Equity Fund $67 $114 $163 $257
Penn Series Flexibly Managed Fund $67 $114 $163 $257
Penn Series International Equity Fund $70 $123 $179 $289
Penn Series Quality Bond Fund $67 $114 $164 $258
Penn Series High Yield Bond Fund $68 $116 $166 $263
Penn Series Money Market Fund $67 $113 $162 $253
- --------------------------------------------------------------------------------
EXAMPLE
If you own certificates and do not surrender your certificates, or you
elect an annuity option at the end of the applicable time period, you would pay
the following expense on each $1,000 invested, assuming 5% annual return on
assets:
One Three Five Ten
Year Years Years Years
Penn Series Growth Equity Fund $21 $65 $111 $240
Penn Series Value Equity Fund $21 $65 $111 $240
Penn Series Flexibly Managed Fund $21 $65 $111 $240
Penn Series International Equity Fund $24 $75 $128 $273
Penn Series Quality Bond Fund $21 $65 $112 $242
Penn Series High Yield Bond Fund $22 $67 $114 $247
Penn Series Money Market Fund $21 $64 $109 $236
The examples are based upon data for the fiscal year ended December 31,
1998. Your expenses may be more or less than what is shown.
<PAGE>
- --------------------------------------------------------------------------------
ACCUMULATION UNIT VALUES
The following tables show Accumulation Unit values and the number of
Accumulation Units outstanding for each of the subaccounts of the Separate
Account for the specified periods. The financial data included in these tables
should be read in conjunction with the financial statements and the related
notes included in the Statement of Additional Information.
- --------------------------------------------------------------------------------
PENN SERIES GROWTH EQUITY FUND SUBACCOUNT (a)
Values of an Accumulation Unit Outstanding Throughout Each Period for Qualified
and Nonqualified Retirement Plans
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------------------------------------
1998 1997 1996 1995
---------------------------------------------------------------------------------------
Non- Non- Non- Non-
Qual Qual Qual Qual Qual Qual Qual Qual
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Accumulation Unit Value,
beginning of period $48.256 $47.859 $38.550 $38.235 $32.596 $32.327 $26.102 $25.887
Accumulation Unit Value,
end of period $67.515 $66.959 $48.256 $47.859 $38.550 $38.235 $32.596 $32.327
Number of Accumulation
Units outstanding,
end of period 1,752,036 626,895 1,794,481 617,717 1,830,081 620,903 1,991,646 674,290
<CAPTION>
Year Ended December 31,
---------------------------------------------------------------------------------------
1994 1993 1992 1991
---------------------------------------------------------------------------------------
Non- Non- Non- Non-
Qual Qual Qual Qual Qual Qual Qual Qual
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Accumulation Unit Value,
beginning of period $28.766 $28.528 $25.906 $25.692 $24.756 $24.552 $18.605 $18.451
Accumulation Unit Value,
end of period $26.102 $25.887 $28.766 $28.528 $25.906 $25.692 $24.756 $24.552
Number of Accumulation
Units outstanding,
end of period 2,119,836 717,328 2,042,023 685,110 2,004,015 669,679 1,680,322 518,717
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------------
1990 1989 1988
-----------------------------------------------------------------
Non- Non- Non-
Qual Qual Qual Qual Qual Qual
-----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Accumulation Unit Value,
beginning of period $21.204 $21.029 $16.356 $16.221 $14.702 $14.581
Accumulation Unit Value,
end of period $18.605 $18.451 $21.204 $21.029 $16.356 $16.221
Number of Accumulation
Units outstanding,
end of period 1,470,210 439,287 1,284,583 333,486 1,309,408 360,185
</TABLE>
(a) Growth Stock Fund Subaccount prior to November 1, 1992.
<PAGE>
- --------------------------------------------------------------------------------
Penn Series Value Equity Fund Subaccount (a)
Values of an Accumulation Unit Outstanding Throughout Each Period
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994 1993 1992 1991 1990 1989
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Accumulation Unit Value,
beginning of period.. $38.038 $30.819 $24.928 $18.361 $18.062 $17.080 $15.058 $11.939 $13.157 $11.802
Accumulation Unit Value,
end of period........ $41.167 $38.038 $30.819 $24.928 $18.361 $18.062 $17.080 $15.058 $11.939 $13.157
Number of Accumulation
Units outstanding,
end of period........ 5,273,048 5,409,879 4,907,784 4,235,839 3,886,404 3,693,652 2,865,294 2,207,661 1,883,581 1,802,897
</TABLE>
(a) Equity Income Fund Subaccount prior to November 1, 1992.
- --------------------------------------------------------------------------------
Penn Series Flexibly Managed Fund Subaccount (a)
Values of an Accumulation Unit Outstanding Throughout Each Period
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994 1993 1992 1991 1990 1989
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Accumulation Unit Value,
beginning of period... $56.265 $49.262 $42.865 $35.496 $34.514 $30.179 $27.893 $23.215 $23.712 $19.832
Accumulation Unit Value,
end of period ........ $58.951 $56.265 $49.262 $42.865 $35.496 $34.514 $30.179 $27.893 $23.215 $23.712
Number of Accumulation
Units outstanding,
end of period......... 5,766,01 5,974,993 5,711,843 4,946,240 4,198,305 3,143,601 2,327,829 1,664,751 1,237,347 1,129,858
</TABLE>
(a) Capital Appreciation Fund Subaccount prior to November 1, 1992.
- --------------------------------------------------------------------------------
Penn Series International Equity Fund Subaccount
Values of an Accumulation Unit Outstanding Throughout Each Period
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------------------------------
1998 1997 1996 1995 1994 1993 1992(a)
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Accumulation Unit Value,
beginning of period $18.164 $16.659 $14.434 $12.843 $13.880 $10.175 $10.000
Accumulation Unit Value,
end of period $21.320 $18.164 $16.659 $14.434 $12.843 $13.880 $10.175
Number of Accumulation Units
outstanding, end of period 3,822,847 4,155,960 4,012,762 3,388,479 3,556,098 1,847,892 92,386
</TABLE>
(a) For the period November 2, 1992 (date subaccount was established) through
December 31, 1992.
<PAGE>
- --------------------------------------------------------------------------------
Penn Series Quality Bond Fund Subaccount (a)
Values of an Accumulation Unit Outstanding Throughout Each Period
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994 1993 1992 1991 1990 1989
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Accumulation Unit Value,
beginning of period..... $20.260 $18.990 $18.465 $15.562 $16.639 $15.088 $14.336 $12.558 $11.776 $10.580
Accumulation Unit Value,
end of period .......... $22.043 $20.260 $18.990 $18.465 $15.562 $16.639 $15.088 $14.336 $12.558 $11.776
Number of Accumulation
Units outstanding,
end of period........... 1,665,664 1,497,635 1,664,378 1,869,975 1,890,869 1,953,188 1,337,087 1,229,163 1,075,187 769,467
</TABLE>
(a) Fixed Income Fund Subaccount prior to November 1, 1992.
- --------------------------------------------------------------------------------
Penn Series High Yield Bond Fund Subaccount
Values of an Accumulation Unit Outstanding Throughout Each Period
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994 1993 1992 1991 1990 1989
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Accumulation Unit Value,
beginning of period.. $33.476 $29.276 $26.033 $22.644 $24.742 $20.918 $18.291 $13.534 $15.035 $15.325
Accumulation Unit Value,
end of period ....... $34.645 $33.476 $29.276 $26.033 $22.644 $24.742 $20.918 $18.291 $13.534 $15.035
Number of Accumulation
Units outstanding,
end of period........ 1,308,094 1,261,904 1,185,318 1,194,944 1,264,890 1,257,271 705,414 594,530 613,408 817,147
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Penn Series Money Market Fund Subaccount
Values of an Accumulation Unit Outstanding Throughout Each Period
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994 1993 1992 1991 1990 1989
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Accumulation Unit Value,
beginning of period.. $19.541 $18.817 $18.148 $17.416 $17.003 $16.791 $16.491 $15.732 $14.893 $13.844
Accumulation Unit Value,
end of period ....... $20.268 $19.541 $18.817 $18.148 $17.416 $17.003 $16.791 $16.491 $15.732 $14.893
Number of Accumulation
Units outstanding,
end of period........ 1,449,199 1,120,603 1,192,388 1,062,385 825,274 658,620 698,584 769,958 965,117 753,052
</TABLE>
- --------------------------------------------------------------------------------
The financial statements of the Separate Account for the year ended
December 31, 1998 are included in the statement of additional information
referred to on the cover page of this prospectus.
<PAGE>
- --------------------------------------------------------------------------------
THE PENN MUTUAL LIFE INSURANCE COMPANY
- --------------------------------------------------------------------------------
The Penn Mutual Life Insurance Company ("Penn Mutual") is a Pennsylvania
mutual life insurance company. We were chartered in 1847 and have been
continuously engaged in the life insurance business since that date. Our home
office is located at The Penn Mutual Life Insurance Company, Philadelphia, PA
19172.
- --------------------------------------------------------------------------------
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.
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THE SEPARATE ACCOUNT
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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.
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Accumulation Units
- --------------------------------------------------------------------------------
Money allocated to the Separate Account is invested in Accumulation Units
of the subaccounts of the Separate Account 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 the your first purchase payment,
you receive the price next computed after we accept your application to
participate in the 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%.
<PAGE>
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Voting Instructions
- --------------------------------------------------------------------------------
You have the right to tell us how to vote proxies for the Fund shares in
which your purchase payments are invested through a subaccount of the Separate
Account. If the law changes and permits us to vote the Fund shares, we may do
so.
If you are a Participant, 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 change these
procedures whenever we are required to do so by law.
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Investment Options in the Separate Account
- --------------------------------------------------------------------------------
Assets held in the Separate Account under a Contract are invested, at the
direction of the Owner, in one or more of the following Funds of 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;
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 by investing 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 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 risk of loss of income and principal than higher rated
securities (see accompanying Penn Series prospectus);
MONEY MARKET FUND -- seeks to preserve capital, maintain liquidity and
achieve the highest possible level of current income consistent therewith, 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 Fund. T. Rowe Price Associates, Inc.,
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.
Shares of Penn Series are also sold other variable annuity and variable
life separate accounts of Penn Mutual and its subsidiary, The Penn Insurance and
Annuity Company.
READ THE PROSPECTUS OF THE PENN SERIES FUNDS, INC. CAREFULLY BEFORE INVESTING.
<PAGE>
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THE FIXED INTEREST ACCOUNTS
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The Fixed Interest Accounts are part of the Company's general investment
account. Interests in the Fixed Interest Accounts 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. 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 Accounts. Disclosure regarding the
Fixed Interest Accounts, 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 Accounts.
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THE CONTRACT
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Participation in the Contract may be an attractive long-term investment
vehicle for many people. The Contract allows you to allocate your purchase
payments(s) and transfer amounts to the Separate Account, and direct investment
in one or more of the Growth Equity, Value Equity, Flexibly Managed,
International Equity, Quality Bond, High Yield Bond and Money Market Funds of
Penn Series Funds, Inc.
In addition, the Contract allows you to allocate your purchase payment(s)
and transfer amounts to one or more Fixed Interest Accounts. The Fixed Interest
Accounts are funded and guaranteed by Penn Mutual through our general account.
See THE FIXED INTEREST ACCOUNTS and MORE INFORMATION ABOUT THE FIXED INTEREST
ACCOUNTS 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 Accounts 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.
The 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.
The Contract is available to groups of individuals, either as part of a
tax-qualified retirement plan or apart from such a plan.
We may amend the 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.
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.
<PAGE>
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How Do I Participate in 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 payment should be sent to our
administrative office. We usually accept an application 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 $5,000, although we
may decide to accept lower amounts. We will accept total purchase payments under
a Contract of up to $1 million. You must obtain our prior approval to make total
purchase payments in excess of $1 million.
The distributor 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 Type of Annuity Payments May I Choose?
- --------------------------------------------------------------------------------
You may choose: (1) an annuity for a specified number of years (not less
than 5 or more than 30); (2) a life annuity; (3) a life annuity with payments
guaranteed for 10 or 20 years; (4) a joint and survivor annuity; or (5) such
other form of annuity as we may agree upon. Your annuity payments will not start
until you choose an annuity option.
You will pay a mortality and expense risk charge during both the
Accumulation Period and Annuity Payout Period under the Contract. We charge this
fee while you receive a variable annuity even though we may no longer bear a
mortality risk.
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 factors such as
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.
The variable annuity purchase rate assumes an annual net investment return
of 4%. If the annual net investment return during the annuity payout period is
greater than 4%, the amount of your payments will increase. If the annual net
investment return is less, the amount of your payments will decrease.
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.
Other Information. You or your surviving Beneficiary 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. The
Annuity Date that you select may not be later than the first day of the next
month after the Annuitant's 85th birthday.
If your Participant's Variable Account Value is less than $2,000, we may
pay you in a lump sum in place of a variable annuity. Similarly, if your
Participant's Fixed Account Value is less than $2,000, we may pay you in a lump
sum in place of a fixed annuity. We usually make annuity payments on the first
day of each month, 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.
<PAGE>
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What Are the Death Benefits Under My Certificate?
- --------------------------------------------------------------------------------
You may designate a Beneficiary in your application. If you fail to
designate a Beneficiary, your Beneficiary will be your estate. You may change
your Beneficiary at any time before the death of the Participant.
If you die prior to the Annuity Date, we will pay your Beneficiary the
greater of:
o the sum of all purchase payments, adjusted for withdrawals and contract
transfers; or
o the sum of the Participant's Variable Account Value and the Participant's
Fixed Account Value for the value period in which proof of death and any
other required information is received at our service office.
The death benefit may be paid in lump sum or in the form of annuity
payments. We normally will pay the death benefit in a lump sum within seven days
after we receive proof of the date of death and all required information. We
will delay payment of the lump sum upon request, but not for longer than five
years.
If the Beneficiary is not the spouse of the decedent, he or she may choose
an annuity option rather than a lump sum payment. If he or she selects an
annuity option, payments must begin within one year of the decedent's death.
Payments may not be made over a period longer than the Beneficiary's life or
life expectancy (whichever is longer).
If the Beneficiary is the spouse of the decedent, he or she may select any
annuity option that was available to the decedent or apply to become the
Contract Owner.
If the Annuitant dies on or after the Annuity Date and the annuity is for
a specified number of years or for life with payments guaranteed for 10 or 20
years, the Beneficiary may elect to have the payments continue for the specified
or guaranteed period or to receive in lump sum the present value of the
remaining payments.
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 ACCOUNTS?
- --------------------------------------------------------------------------------
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
Accounts. Transfers will be based on values at the end of the valuation period
in which the transfer request is received at our administrative office. You may
transfer from a Fixed Interest Account to subaccounts of the Separate Account or
to another Fixed Interest Account. You may make no more than four transfers in a
calendar year. No transfers may be made within 30 days of the Annuity Date. A
transfer will not be made unless the transfer request is received and any other
applicable requirements are made before the death of the Participant.
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MAY I WITHDRAW ANY OF MY MONEY?
- --------------------------------------------------------------------------------
Prior to the earlier of the Annuity Date, you may withdraw all or part of
your Participant's Variable Account Value and Participant's Fixed Account Value.
A partial withdrawal must be at least $250. 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 in
this Prospectus.
After the Annuity Date and election to receive annuity payments for a
specified number of years under Option 1, you may withdraw the present value of
your annuity.
If you do not tell us otherwise, the withdrawal will be taken first from
Fixed Interest Account Option B, next from Fixed Interest Account Option A, then
pro rata from your interests in the Separate Account, and finally from Fixed
Interest Account Option C.
<PAGE>
403(b) Withdrawals. There are restrictions on withdrawals from Contracts
qualifying under Section 403(b) of the Code. Generally, withdrawals attributable
to purchase payments made after December 31, 1988 pursuant to a salary reduction
plan may be made only if the Participant is over the age of 59?, 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 values or
annuity payments 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 such that it is not reasonably practical 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. Note
that you also indirectly pay the expenses of the Funds in which your interests
in the Separate Account are invested.
Administration Charges
These charges reimburse us for administering the Contracts and the
Separate Account
o We deduct from your Participant's Variable Account Value an annual contract
administration charge of $30. We deduct this charge each year on the date
specified in the Contract (and on the date the Participant's Variable Account
Value is withdrawn in full if other than the date specified). To pay this
charge, we cancel Accumulation Units credited to your Participant's Variable
Account, pro rata among the subaccounts in which you invested.
Mortality and Expense Risk Charges
o We deduct from the net asset value of the Separate Account a daily expense
risk charge equal to an annual rate of 0.5% of the daily net asset value of
the Separate Account. You pay this charge to compensate us for the risk of
guaranteeing not to increase the annual contract administration charge to
more than $30 regardless of actual administrative costs.
o We deduct a daily mortality risk charge equal to an annual rate of 0.75% of
the daily net asset value of the Separate Account. This charge is to
compensate us for the mortality-related guarantees (e.g. guarantees that the
annuity factors will never be decreased even if mortality experience is
substantially different than originally assumed) we make under your Contract.
You pay the mortality and expense risk charges during both the
accumulation and variable annuity pay-out phases of your Contract.
CONTINGENT DEFERRED SALES CHARGE
You may pay this charge if you make a full or partial withdrawal of your
Participant's Variable Account Value or Participant's Fixed Account Value, or if
you withdraw the present value of your annuity payments. Purchase payments will
be treated as withdrawn on a first-in, first-out basis. This charge pays for our
sales expenses. Sales expenses that are not covered by the deferred sales charge
are paid from our surplus, which may include proceeds from the expense and
mortality risk charges.
<PAGE>
If the contingent deferred sales charge applies, it will be 5% of the
amount withdrawn and will be made by canceling Accumulation Units credited to
the Participant's Variable Account. No charge will be made on a withdrawal if
the Participant has provided due proof of disability. Further, no charge will be
made on that portion of the first withdrawal made during an enrollment year that
does not exceed the following percentages of the sum of the Participant's
Variable Account Value and the Participant's Fixed Account Value set forth in
the following table.
Participant's Enrollment Year Percentage
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Second through Seventh 10%
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Eighth 25%
Ninth 50%
Tenth 75%
No charge will be made on any withdrawal after the Participant has been
enrolled for ten years.
Some states and municipalities impose premium taxes on purchase payments
received by insurance companies. Any premium taxes payable will be deducted at
the Annuity Date. Currently, they range from 0% to 3.5%.
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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 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 at the inception date of the underlying Funds, other amounts
invested at the beginning of the period and no withdrawal at the end of the
period. Average annual total return figures that 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 OPTIONS
General Information
You may allocate or transfer all or part of your Participant's Variable
Account to one or more of the following Fixed Interest Accounts:
(1) (Option A) the One Year Guaranteed Account; and
(2) (Option B) the Fixed Holding Account;
(3) the Three Year Guaranteed Account.
The minimum amount for an allocation to the Fixed Holding Account is $50;
the minimum for an allocation to the One Year Guaranteed Account or the Three
Year Guaranteed Account is $250.
We periodically declare an effective annual interest rate applicable to
allocations to the Fixed Interest Accounts.
For each amount allocated to the Fixed Holding Account, interest will be
credited at an effective annual interest rate declared by us on the first day of
each calendar year. The declared rate of interest will apply through the end of
the calendar year in which an allocation is made to the Fixed Holding Account at
which time a new rate will be declared by Penn Mutual.
<PAGE>
For each amount allocated to the One Year Guaranteed Account and the Three
Year Guaranteed Account, interest will be credited at an annual effective
interest rate declared by us each month. The declared rate of interest will
apply through the end of the twelve month and thirty-six month periods, as
applicable, which begin on the first day of the calendar month in which the
allocation is made.
We guarantee an effective annual rate of interest on allocations to all
fixed interest options of not less than 4%. In addition, rates declared during
the first seven contract years for the One Year Guaranteed Account will not be
less than the 52 week Treasury Bill discount rate obtained from the most recent
regularly scheduled auction.
You may transfer money from a Fixed Account to subaccounts of the Separate
Account or to another Fixed Interest Account, in accordance with the terms of
the Contract. A premature withdrawal charge may be deducted from the interest
earned on any amount that is withdrawn from the Three Year Guaranteed Account.
We may defer a withdrawal or transfer from the Fixed Account for up to six
months if we reasonably determine that investment conditions are such that an
orderly sale of assets in Penn Mutual's general account is not feasible.
LOANS UNDER SECTION 403(B) CONTRACTS
If the 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 Certificate 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 interests in 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 3 percentage points less
than the rate of interest that we charge you on the loan. On the anniversary of
your becoming a Participant, your interest earned in the Restricted Account will
be transferred to your Participant's Variable Account 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 account. You may then transfer amounts
from the Money Market account to the other investment options offered under the
Contract.
If you are in default, we must report the default to the Internal Revenue
Service as a taxable distribution and, if you are then under age 59?, 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 Participant's Variable Account in
accordance with your Loan Request and Agreement. If Section 403(b) prevents us
from doing this, your outstanding loan balance will continue to be charged
interest. The amount due on the loan 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.
Your right to borrow money under the Contract is limited by the terms of
the Contract, the Code and the Employee Retirement Income Security Act of 1974
("ERISA"). We reserve the right to suspend, modify or terminate the availability
of loans. Where there is a plan fiduciary, the fiduciary must 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, particularly as it may affect you, 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 Participant's Variable Account Value and Participant's Fixed Account
Value exceeds your purchase payments. Ordinary income tax rates apply. If you
designate a Beneficiary who is either 37 ? years younger than you or your
grandchild, you may obtain generation skipping transfer tax treatment under
Section 2601 of the Code.
<PAGE>
Annuity Payments. The taxable portion of an annuity payment generally is
determined by a formula that establishes the ratio of your cost basis (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?; o on distributions made after death; 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 your Participant's Variable Contract Value and Participant's Fixed
Contract Value at the time of transfer over your investment in the Contract at
the 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. Treasury
Department regulations further prescribe diversification requirements. The
Separate Account, through each of the available funds of the Penn Series Funds,
Inc., intends to comply with those requirements. The requirements are briefly
discussed in the accompanying prospectuses for the underlying funds.
The IRS has stated in published rulings that a variable contract owner
will be considered the owner of separate account assets if the contract owner
possesses incidents of ownership in those assets, such as the ability to
exercise investment control over the assets. In circumstances where the variable
contract owner is considered the owner of separate account assets, income and
gain from the assets would be includable in the variable contract owner's gross
income. In connection with the issuance of regulations on the phrase "adequate
diversification," the Treasury Department announced in 1984 that guidance would
be given, 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 retirement
plans that qualify for special tax treatment under the Code. The plans include
individual retirement annuities qualified under Section 408(b) of the Code
(referred to as IRAs), simplified employee pension plans qualified under Section
408(k) of the Code, tax deferred annuities qualified under Section 403(b) of the
Code, state and local government deferred compensation plans qualified under
Section 457 of the Code, pension or profit sharing plans for self-employed
individuals qualified under Section 401 of the Code (referred to as H.R. 10 or
Keogh plans) and corporate pension or profit sharing plans qualified under
Section 401 of the Code, or annuity plans qualified under Section 403(a) of the
Code. Special provisions are required in some Contracts for qualification under
the Code.
<PAGE>
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 participating in a Contract under a qualified retirement plan, the tax
law provisions applicable to the particular plan should be considered.
Generally, under a nonqualified annuity or individual retirement annuity
qualified under Section 408(b), unless the Participant elects to the contrary,
any amounts that are received under the Contract that Penn Mutual believes are
includable in gross income for tax purposes will be subject to 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 qualified plan or a Section 403(b) annuity are subject to
federal income tax withholding, unless an election is made to make a direct
transfer to another eligible retirement plan. (Depending upon applicable State
law, however, mandatory withholding may not apply to distributions from a
Section 403(b) annuity plan maintained by a State or local government until
1994.) Distributions from a Section 457 deferred compensation plan are wages
subject to general income tax withholding requirements.
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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.
- --------------------------------------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION CONTENTS
- --------------------------------------------------------------------------------
VARIABLE ANNUITY PAYMENTS
First Variable Annuity Payments
Subsequent Variable Annuity Payments
Annuity Units
Value of Annuity Units
Net Investment Factor
Assumed Interest Rate
Valuation Period
- --------------------------------------------------------------------------------
PERFORMANCE DATA
Average Annual Total Return
Annual Changes in Accumulation Unit Values
- --------------------------------------------------------------------------------
DISTRIBUTION OF CONTRACTS AND CERTIFICATES
CUSTODIAN
INDEPENDENT AUDITORS
LEGAL MATTERS
- --------------------------------------------------------------------------------
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
<PAGE>
PART B
Information Required in a Statement
of Additional Information
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION -- MAY 1, 1999
PENN MUTUAL VARIABLE ANNUITY 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 Penn Mutual Diversifier II
Variable/Fixed Contracts and Penn Mutual Diversifier II Variable Contracts or
the current prospectus for Penn Mutual Optimizer Group Variable and Fixed
Annuity Contracts, both dated May 1, 1999. The Contracts are funded through Penn
Mutual Variable Annuity Account III (referred to herein 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, toll free, 1-800-523-0650.
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
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-3
Valuation Period .......................................................... B-3
- --------------------------------------------------------------------------------
PERFORMANCE DATA ........................................................... B-3
Average Annual Total Return ............................................... B-3
Annual Changes in Accumulation Unit Values ................................B-12
- --------------------------------------------------------------------------------
ADMINISTRATIVE AND RECORDKEEPING SERVICES ..................................B-14
- --------------------------------------------------------------------------------
DISTRIBUTION OF CONTRACTS AND CERTIFICATES .................................B-14
- --------------------------------------------------------------------------------
CUSTODIAN ..................................................................B-14
- --------------------------------------------------------------------------------
INDEPENDENT AUDITORS .......................................................B-14
- --------------------------------------------------------------------------------
LEGAL MATTERS ..............................................................B-14
- --------------------------------------------------------------------------------
FINANCIAL STATEMENTS .......................................................B-14
- --------------------------------------------------------------------------------
B-1
<PAGE>
VARIABLE ANNUITY PAYMENTS
First Variable Annuity Payment
The dollar amount of the first monthly annuity payment will be determined
by applying the net contract or variable account 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. The annuity tables for the Diversifier II
Variable/Fixed Contracts are based on the 1983 Individual Annuity Mortality
Tables and the annuity tables for the Diversifier II Variable Contracts and the
Penn Mutual Optimizer Group Variable and Fixed Annuity Contracts are based on
the 1971 Individual Annuity Mortality Tables. The tables assume a rate of
interest of 4%. The amount of the first monthly income for each $1,000 of value
is shown at various ages.
The United States Supreme Court has ruled that life annuity payments under
an employer's retirement plan may not be based upon sex-distinct mortality
tables. Where this decision applies or where otherwise required by law, Penn
Mutual will provide annuity payments based upon unisex tables.
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. Penn Mutual 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 will not change
as a result of investment experience.
VALUE OF ANNUITY UNITS
For each subaccount selected, the value of an annuity unit 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 the assumed interest rate of 4%
included in 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 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
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 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 daily expense risk charge and the daily mortality risk charge.
On an annual basis, the sum of such charges equals 1.25% of the daily net
asset value of the Separate Account.
B-2
<PAGE>
ASSUMED INTEREST RATE
A 4% assumed annual interest rate is included in the annuity tables in the
contracts. A higher assumption would mean a higher first annuity payment but
more slowly rising and more rapidly falling subsequent payments. A lower
assumption would have the opposite effect. If the actual net investment rate is
4% on an annual basis, annuity payments will be level.
VALUATION PERIOD
Valuation period is the period from one valuation 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 1A Diversifier II Variable/Fixed Annuity Contract
Average Annual Total Return On $1,000 Investment -- Computed as
Prescribed by the SEC and Assumes No Purchase Payments After the
First Contract Year
<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)
Non-Qualified 6/1/83 12.80% 15.02% 17.68% 30.79%
Qualified 8/11/83 13.03% 15.02% 17.68% 30.79%
(Independence Capital)
Value Equity (a) 3/17/87 12.33% 13.00% 16.93% 0.98%
(OpCap)
Small-Cap Fund 5/1/95 9.21% n/a n/a (16.10%)
(OpCap)
Emerging Growth Fund (a) 5/1/97 39.79% n/a n/a 25.49%
(RS Investment Management)
Flexibly Managed (a) 7/31/84 12.81% 11.12% 10.21% (2.41%)
(T. Rowe Price)
International Equity (a) 11/2/92 12.65% n/a 8.07% 9.67%
(Vontobel)
Quality Bond (a) 3/17/87 6.82% 7.52% 5.09% 1.82%
(Independence Capital)
High Yield Bond (a) 8/6/84 8.91% 8.37% 6.22% (3.19%)
(T. Rowe Price)
Capital Appreciation (b) 5/1/93 3.63% n/a 1.39% (9.48%)
(American Century Investment Management)
Balanced Portfolio (c) 5/1/93 9.98% n/a 9.29% 3.71%
(Neuberger Berman)
Limited Maturity Bond Portfolio (c) 5/1/93 3.48% n/a 3.10% (3.62%)
(Neuberger Berman)
Partners Fund Portfolio (c) 5/1/97 13.72% n/a n/a (3.75%)
(Neuberger Berman)
Equity-Income Portfolio (d) 5/1/95 18.62% n/a n/a 3.22%
(Fidelity Investments)
Growth Portfolio (d) 5/1/95 26.19% n/a n/a 29.04%
(Fidelity Investments)
Asset Manager Portfolio (e) 5/1/95 15.66% n/a n/a 6.42%
(Fidelity Investments)
Index 500 (e) 5/1/97 28.80% n/a n/a 18.69%
(Fidelity Investments)
Emerging Markets Equity (International) (f) 5/1/97 (23.39%) n/a n/a (29.86%)
(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) AMERICAN CENTURY INVESTMENT MANAGEMENT
(c) NEUBERGER BERMAN ADVISERS MANAGEMENT TRUST
(d) VARIABLE INSURANCE PRODUCTS FUND
(e) VARIABLE INSURANCE PRODUCTS FUND II
(f) MORGAN STANLEY DEAN WITTER UNIVERSAL FUNDS, INC.
B-4
<PAGE>
Table 1B Diversifier II Variable/Fixed Annuity Contract
Average Annual Total Return On $1,000 Investment -- Computed as
Prescribed by the SEC and Assumes Purchase Payments After the First
Contract Year
<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)
Non-Qualified 6/1/83 12.80% 14.92% 17.57% 30.79%
Qualified 8/11/83 13.03% 14.92% 17.57% 30.79%
(Independence Capital)
Value Equity (a) 3/17/87 12.33% 12.90% 16.83% 0.98%
(OpCap)
Small-Cap Fund 5/1/95 9.21% n/a n/a (16.10%)
(OpCap)
Emerging Growth Fund (a) 5/1/97 39.79% n/a n/a 25.49%
(RS Investment Management)
Flexibly Managed (a) 7/31/84 12.81% 11.02% 10.10% (2.41%)
(T. Rowe Price)
International Equity (a) 11/2/92 12.40% n/a 7.97% 9.67%
(Vontobel)
Quality Bond (a) 3/17/87 6.82% 7.43% 4.99% 1.82%
(Independence Capital)
High Yield Bond (a) 8/6/84 8.91% 8.27% 6.12% (3.19%)
(T. Rowe Price)
Capital Appreciation (b) 5/1/93 3.63% n/a 1.29% (9.48%)
(American Century Investment Management)
Balanced Portfolio (c) 5/1/93 9.81% n/a 9.19% 3.71%
(Neuberger Berman)
Limited Maturity Bond Portfolio (c) 5/1/93 3.48% n/a 3.00% (3.62%)
(Neuberger Berman)
Partners Fund Portfolio (c) 5/1/97 13.41% n/a n/a (3.75%)
(Neuberger Berman)
Equity-Income Portfolio (d) 5/1/95 18.62% n/a n/a 3.22%
(Fidelity Investments)
Growth Portfolio (d) 5/1/95 26.19% n/a n/a 29.04%
(Fidelity Investments)
Asset Manager Portfolio (e) 5/1/95 15.38% n/a n/a 6.42%
(Fidelity Investments)
Index 500 (e) 5/1/97 27.75% n/a n/a 18.69%
(Fidelity Investments)
Emerging Markets Equity (International) (f) 5/1/97 (23.39%) n/a n/a (29.86%)
(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) AMERICAN CENTURY INVESTMENT MANAGEMENT
(c) NEUBERGER BERMAN ADVISERS MANAGEMENT TRUST
(d) VARIABLE INSURANCE PRODUCTS FUND
(e) VARIABLE INSURANCE PRODUCTS FUND II
(f) MORGAN STANLEY DEAN WITTER UNIVERSAL FUNDS, INC.
B-5
<PAGE>
Table 1C Diversifier II Variable Annuity Contract
Average Annual Total Return On $1,000 Investment -- Computed as
Prescribed by the SEC
<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)
Non-Qualified 6/1/83 12.80% 14.88% 17.81% 34.60%
Qualified 8/11/83 13.03% 14.88% 17.81% 34.60%
(Independence Capital)
Value Equity (a) 3/17/87 12.33% 12.83% 17.05% 2.89%
(OpCap)
Small-Cap Fund (a) 5/1/95 9.24% n/a n/a (14.43%)
(OpCap)
Emerging Growth Fund (a) 5/1/97 42.16% n/a n/a 28.93%
(RS Investment Management)
Flexibly Managed (a) 7/31/84 12.81% 10.93% 10.14% (0.55%)
(T. Rowe Price)
International Equity (a) 11/2/92 12.37% n/a 7.94% 12.07%
(Vontobel)
Quality Bond (a) 3/17/87 6.82% 7.26% 4.85% 3.73%
(Independence Capital)
High Yield Bond (a) 8/6/84 8.91% 8.12% 6.03% (1.35%)
(T. Rowe Price)
Capital Appreciation (b) 5/1/93 3.63% n/a 1.00% (7.73%)
(American Century Investment Management)
Balanced Portfolio (c) 5/1/93 9.41% n/a 9.20% 5.69%
(Neuberger Berman)
Limited Maturity Bond Portfolio (c) 5/1/93 3.48% n/a 2.78% (1.78%)
(Neuberger Berman)
Partners Fund Portfolio (c) 5/1/97 12.86% n/a n/a (1.92%)
(Neuberger Berman)
Equity-Income Portfolio (d) 5/1/95 18.62% n/a n/a 5.17%
(Fidelity Investments)
Growth Portfolio (d) 5/1/95 26.19% n/a n/a 32.72%
(Fidelity Investments)
Asset Manager Portfolio (e) 5/1/95 14.73% n/a n/a 8.58%
(Fidelity Investments)
Index 500 (e) 5/1/97 26.97% n/a n/a 21.68%
(Fidelity Investments)
Emerging Markets Equity (International) (f) 5/1/97 (23.27%) n/a n/a (28.39%)
(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) AMERICAN CENTURY INVESTMENT MANAGEMENT
(c) NEUBERGER BERMAN ADVISERS MANAGEMENT TRUST
(d) VARIABLE INSURANCE PRODUCTS FUND
(e) VARIABLE INSURANCE PRODUCTS FUND II
(f) MORGAN STANLEY DEAN WITTER UNIVERSAL FUNDS, INC.
B-6
<PAGE>
Table 1D Penn Mutual Optimizer Group Variable and Fixed Annuity Contract
Average Annual Total Return On $1,000 Investment -- Computed as
Prescribed by the SEC
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
---------------------------------------------------------
FROM
INCEPTION TEN YEARS FIVE YEARS ONE YEAR
INCEPTION DATE 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
Nonqualified Plans (a) 6/1/83 12.80% 14.88% 17.24% 33.31%
Quality Plans (a) 8/11/83 13.03% 14.88% 17.24% 33.31%
(Independence Capital Management)
Value Equity (a) 3/17/87 12.33% 12.86% 16.50% 2.93%
(OpCap Advisors)
Flexibly Managed (a) 7/31/84 12.81% 10.98% 9.79% (0.53%)
(T. Rowe Price Associates)
Quality Bond (a) 3/17/87 6.82% 7.39% 4.70% 3.78%
(Independence Capital Management)
High Yield Bond (a) 8/6/84 8.91% 8.23% 5.83% (1.33%)
(T. Rowe Price Associates)
International Equity (a) 11/2/92 11.97% n/a 7.67% 11.78%
(Vontobel USA)
</TABLE>
- -----------
* DATE THE UNDERLYING FUND WAS FIRST OFFERED THROUGH A SUBACCOUNT OF THE
SEPARATE ACCOUNT.
(a) PENN SERIES FUNDS, INC.
B-7
<PAGE>
Table 2A Diversifier II Variable/Fixed Annuity Contract and Diversifier II
Variable Annuity Contract Average Annual Total Return On $1,000
Investment -- Assumes No Contingent Deferred Sales Charge, Investment
on Inception Date of the Underlying Fund, and No Purchase Payments
Made After the First Contract Year Under the Variable/Fixed Contract
<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)
Non-Qualified 06/01/83 12.80% 15.02% 18.32% 39.60%
Qualified 08/11/83 13.03% 15.02% 18.32% 39.60%
(Independence Capital)
Value Equity (a) 03/17/87 12.33% 13.00% 17.58% 7.80%
(OpCap)
Small-Cap Fund 03/01/95 9.81% n/a n/a (10.44%)
(OpCap)
Emerging Growth Fund (a) 05/01/97 44.52% n/a n/a 33.93%
(RS Investment Management)
Flexibly Managed (a) 07/31/84 12.81% 11.12% 10.81% 4.19%
(T. Rowe Price)
International Equity (a) 11/01/92 12.81% n/a 8.67% 17.07%
(Vontobel)
Quality Bond (a) 03/17/87 6.82% 7.52% 5.67% 8.67%
(Independence Capital)
High Yield Bond (a) 08/06/84 8.91% 8.37% 6.81% 3.33%
(T. Rowe Price)
Capital Appreciation (b) 11/20/87 6.80% 7.24% 1.94% (3.40%)
(American Century Investment Management)
Balanced Portfolio (c) 02/28/89 9.85% n/a 9.89% 10.69%
(Neuberger Berman)
Limited Maturity Bond Portfolio (c) 09/10/84 6.43% 5.29% 3.66% 2.87%
(Neuberger Berman)
Partners Fund Portfolio (c) 03/22/94 18.37% n/a n/a 2.73%
(Neuberger Berman)
Equity-Income Portfolio (d) 10/09/86 12.88% 14.06% 17.08% 10.17%
(Fidelity Investments)
Growth Portfolio (d) 10/09/86 15.87% 17.89% 20.18% 37.72%
(Fidelity Investments)
Asset Manager Portfolio (e) 09/06/89 11.55% n/a 10.37% 13.58%
(Fidelity Investments)
Index 500 (e) 08/27/92 19.95% n/a 22.44% 26.68%
(Fidelity Investments)
Emerging Markets Equity (International) (f) 10/01/96 (13.39%) n/a n/a (25.14%)
(Morgan Stanley Dean Witter)
</TABLE>
- -----------
* DATE THE UNDERLYING FUND WAS ESTABLISHED.
(a) PENN SERIES FUNDS, INC.
(b) AMERICAN CENTURY VARIABLE PORTFOLIOS, INC.
(c) NEUBERGER BERMAN ADVISERS MANAGEMENT TRUST
(d) VARIABLE INSURANCE PRODUCTS FUND
(e) VARIABLE INSURANCE PRODUCTS FUND II
(f) MORGAN STANLEY DEAN WITTER UNIVERSAL FUNDS, INC.
B-8
<PAGE>
Table 2B Penn Mutual Optimizer Group Variable and Fixed Annuity Contract
Average Annual Total Return On $1,000 Investment -- Assumes No
Contingent Deferred Sales Charge and Investment on 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
Nonqualified Plans (a) 06/01/83 12.80% 15.02% 18.32% 39.60%
Qualified Plans (a) 08/11/83 13.03% 15.02% 18.32% 39.60%
(Independence Capital Management)
Value Equity (a) 03/17/87 12.33% 13.00% 17.58% 7.80%
(OpCap Advisors)
Flexibly Managed (a) 07/31/84 12.81% 11.12% 10.81% 4.19%
(T. Rowe Price Associates)
Quality Bond (a) 03/17/87 6.82% 7.52% 5.67% 8.67%
(Independence Capital Management)
High Yield Bond (a) 08/06/84 8.91% 8.37% 6.81% 3.33%
(T. Rowe Price Associates)
International Equity (a) 11/01/92 12.81% n/a 8.67% 17.07%
(Vontobel USA)
</TABLE>
- -----------
* DATE THE UNDERLYING FUND WAS ESTABLISHED.
(a) PENN SERIES FUNDS, INC.
B-9
<PAGE>
Table 3A Diversifier II Variable/Fixed Annuity Contract and Diversifier II
Variable Contract Average Annual Total Return On $10,000 Investment --
Assumes No Contingent Deferred Sales Charge and Investment on the
Inception Date of Underlying Fund, and No Purchase Payment After the
First Contract Year Under the Variable Fixed Contract
<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)
Non-Qualified 06/01/83 12.95% 15.20% 18.57% 39.88%
Qualified 08/11/83 13.19% 15.20% 18.57% 39.88%
(Independence Capital)
Value Equity (a) 03/17/87 12.59% 13.27% 17.87% 8.18%
(OpCap)
Small-Cap Fund 03/01/95 9.92% n/a n/a (10.30%)
(OpCap)
Emerging Growth Fund (a) 05/01/97 44.59% n/a n/a 34.01%
(RS Investment Management)
Flexibly Managed (a) 07/31/84 13.06% 11.47% 11.25% 4.72%
(T. Rowe Price)
International Equity (a) 11/01/92 13.04% n/a 8.93% 17.34%
(Vontobel)
Quality Bond (a) 03/17/87 6.91% 7.60% 5.77% 8.79%
(Independence Capital)
High Yield Bond (a) 08/06/84 9.00% 8.48% 6.95% 3.48%
(T. Rowe Price)
Capital Appreciation (b) 11/20/87 6.82% 7.26% 1.96% ( 3.37%)
(American Century Investment Management)
Balanced Portfolio (c) 02/28/89 9.91% n/a 9.97% 10.77%
(Neuberger Berman)
Limited Maturity Bond Portfolio (c) 09/10/84 6.56% 5.44% 3.85% 3.07%
(Neuberger Berman)
Partners Fund Portfolio (c) 03/22/94 18.50% n/a n/a 2.90%
(Neuberger Berman)
Equity-Income Portfolio (d) 10/09/86 12.92% 14.10% 17.13% 10.23%
(Fidelity Investments)
Growth Portfolio (d) 10/09/86 15.89% 17.91% 20.21% 37.75%
(Fidelity Investments)
Asset Manager Portfolio (e) 09/06/89 11.57% n/a 10.41% 13.62%
Fidelity Investments)
Index 500 (e) 08/27/92 19.99% n/a 22.48% 26.73%
(Fidelity Investments)
Emerging Markets Equity (International) (f) 10/01/96 (13.35%) n/a n/a (25.12%)
(Morgan Stanley Dean Witter)
</TABLE>
- -----------
* DATE THE UNDERLYING FUND WAS ESTABLISHED.
(a) PENN SERIES FUNDS, INC.
(b) AMERICAN CENTURY VARIABLE PORTFOLIOS, INC.
(c) NEUBERGER BERMAN ADVISERS MANAGEMENT TRUST
(d) VARIABLE INSURANCE PRODUCTS FUND
(e) VARIABLE INSURANCE PRODUCTS FUND II
(f) MORGAN STANLEY DEAN WITTER UNIVERSAL FUNDS, INC.
B-10
<PAGE>
Table 3B Penn Mutual Optimizer Group Variable and Fixed Annuity Contract
Average Annual Total Return On $10,000 Investment -- Assumes No
Contingent Deferred Sales Charge and Investment on Inception Date of
Underlying Fund
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
--------------------------------------------------------------------
FROM
INCEPTION
DATE TEN YEARS FIVE YEARS ONE 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
Quality Plans (a) 06/01/83 12.95% 15.20% 18.57% 39.88%
Nonqualified Plans (a) 08/11/83 13.19% 15.20% 18.57% 39.88%
(Independence Capital Management)
Value Equity (a) 03/17/87 12.59% 13.27% 17.87% 8.18%
(OpCap Advisors)
Flexibly Managed (a) 07/31/84 13.06% 11.47% 11.25% 4.72%
(T. Rowe Price Associates)
Quality Bond (a) 03/17/87 6.91% 7.60% 5.77% 8.79%
(Independence Capital Management)
High Yield Bond (a) 08/06/84 9.00% 8.48% 6.95% 3.48%
(T. Rowe Price Associates)
International Equity (a) 11/01/92 13.04% N/A 8.93% 17.34%
(Vontobel USA)
</TABLE>
- -----------
* DATE THE UNDERLYING FUND WAS ESTABLISHED.
(a) PENN SERIES FUNDS, INC.
Average annual total returns in Tables 1A, 1B, 1C and 1D 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 or account adminstration charge
is allocated equally across all available subaccounts by an average Contract
Owner or Participant and that the Contract Value or Participant's Variable
Account Value is of average size. The returns are computed according to the
formula assumptions prescribed by the SEC.
Average annual rates of total return in Tables 2A, 2B, 3A and 3B 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 Tables 2A
and 2B and $10,000 in Tables 3A and 3B; 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. 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.
B-11
<PAGE>
Annual Rate of Change in Accumulation Unit Values
Table 4A Diversifier II -- Variable/Fixed Annuity Contract and Variable Annuity
Contract Annual Rate of Change in Accumulation Unit Values
Annual Rate of Changes in Accumulation Unit Values for each of the
subaccounts of the Separate Account investing in each of the Funds are shown in
the Table. The returns show investment performance from the inception date of
the Fund, which may predate the date the Separate Account began investing in the
Fund.
<TABLE>
<CAPTION>
ANNUAL RATE OF CHANGE IN ACCUMULATION UNIT VALUES
--------------------------------------------------------------------
FUND (MANAGER) 1998 1997 1996 1995 1994
- --------------------------------------------- ------------- ------------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Growth Equity (a)
Qualified Plans 39.91% 25.17% 18.27% 24.88% 9.26%
Nonqualified Plans 39.91% 25.17% 18.27% 24.88% 9.26%
(Independence Capital Management)
Value Equity (a) 8.23% 23.42% 23.63% 35.77% 1.65%
(OpCap Advisors)
Small Capitalization (a) (10.29%) 21.50% 18.26% 11.71% N/A
(OpCap Advisors)
Emerging Growth Fund (a) 34.02% 38.06% N/A N/A N/A
(RS Investment Management)
Flexibly Managed (a) 4.77% 14.22% 14.92% 20.76% 2.85%
(T. Rowe Price Associates)
International Equity (a) 17.37% 9.03% 15.41% 13.39% 7.47%
(Vontobel USA)
Quality Bond (a) 8.80% 6.69% 2.84% 18.65% 6.47%
(Independence Capital Management)
High Yield Bond (a) 3.49% 14.35% 12.46% 14.97% 8.48%
(T. Rowe Price Associates)
Money Market (a) 3.72% 3.85% 3.69% 4.21% 2.43%
(Independence Capital Management)
Capital Appreciation (b) (3.37%) (4.46%) 5.51% 29.47% (2.40%)
(American Century Investment
Management)
Balanced Portfolio (c) 10.78% 17.97% 5.56% 22.22% (4.56%)
(Neuberger Berman)
Limited Maturity Bond (c) 3.09% 5.41% 3.01% 9.56% (1.39%)
(Neuberger Berman)
Partners Fund Portfolio (c) 2.91% 24.11% N/A N/A N/A
(Neuberger Berman)
Equity Income (d) 10.24% 26.52% 12.86% 19.20% N/A
(Fidelity Investors Research)
Growth (d) 37.76% 21.95% 13.28% 23.59% N/A
(Fidelity Investors Research)
Asset Manager (e) 13.62% 19.15% 13.18% 11.53% N/A
(Fidelity Investors Research)
Index 500 (e) 26.73% 21.62% N/A N/A N/A
Fidelity Investors Research)
Emerging Markets Equity (International) (f) (25.12%) (10.25%) N/A N/A N/A
(Morgan Stanley Dean Witter)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Annual Rate of Change in Accumulation Unit Values
----------------------------------------------------------------------
Fund (Manager) 1993 1992 1991 1990 1989
- --------------------------------------------- ------------- ---------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Growth Equity (a)
Qualified Plans (11.00%) 4.60% (33.10%) 12.30% 29.60%
Nonqualified Plans (11.00%) 4.60% (33.10%) 12.30% 29.60%
(Independence Capital Management)
Value Equity (a) 5.70% 13.40% 26.10% 9.30% (11.50%)
(OpCap Advisors)
Small Capitalization (a) N/A N/A N/A N/A N/A
(OpCap Advisors)
Emerging Growth Fund (a) N/A N/A N/A N/A N/A
(RS Investment Management)
Flexibly Managed (a) 14.40% 8.20% 20.10% 2.10% (19.60%)
(T. Rowe Price Associates)
International Equity (a) (36.40%) N/A N/A N/A N/A
(Vontobel USA)
Quality Bond (a) (10.30%) 5.20% 14.20% 6.60% 11.30%
(Independence Capital Management)
High Yield Bond (a) (18.30%) 14.40% 35.20% (10.00%) 1.90%
(T. Rowe Price Associates)
Money Market (a) 1.30% 1.80% 4.60% 5.60% 7.60%
(Independence Capital Management)
Capital Appreciation (b) N/A N/A N/A N/A N/A
(American Century Investment
Management)
Balanced Portfolio (c) N/A N/A N/A N/A N/A
(Neuberger Berman)
Limited Maturity Bond (c) N/A N/A N/A N/A N/A
(Neuberger Berman)
Partners Fund Portfolio (c) N/A N/A N/A N/A N/A
(Neuberger Berman)
Equity Income (d) N/A N/A N/A N/A N/A
(Fidelity Investors Research)
Growth (d) N/A N/A N/A N/A N/A
(Fidelity Investors Research)
Asset Manager (e) N/A N/A N/A N/A N/A
(Fidelity Investors Research)
Index 500 (e) N/A N/A N/A N/A N/A
Fidelity Investors Research)
Emerging Markets Equity (International) (f) N/A N/A N/A N/A N/A
(Morgan Stanley Dean Witter)
</TABLE>
- -----------
(a) PENN SERIES FUNDS, INC.
(b) AMERICAN CENTURY VARIABLE PORTFOLIOS, INC.
(c) NEUBERGER BERMAN ADVISERS MANAGEMENT TRUST.
(d) FIDELITY INVESTMENTS' VARIABLE INSURANCE PRODUCTS FUND.
(e) FIDELITY INVESTMENTS' VARIABLE INSURANCE PRODUCTS FUND II.
(f) MORGAN STANLEY DEAN WITTER UNIVERSAL FUNDS, INC.
B-12
<PAGE>
Table 4B Penn Mutual Optimizer Group Variable and Fixed Annuity Contract Annual
Rate of Change in Accumulation Unit Values
<TABLE>
<CAPTION>
ANNUAL RATE OF CHANGE IN ACCUMULATION UNIT VALUES
--------------------------------------------------------------
FUND (MANAGER) 1998 1997 1996 1995 1994
- -------------------------- ----------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Growth Equity (a)
Quality 39.91% 25.17% 18.27% 24.88% 9.26%
Nonqualified 39.91% 25.17% 18.27% 24.88% 9.26%
(Independence
Capital
Management)
Value Equity (a) 8.23% 23.42% 23.63% 35.77% 1.65%
(OpCap Advisors)
Flexibly Managed (a) 4.77% 14.22% 14.92% 20.76% 2.85%
(T. Rowe Price
Associates)
Quality Bond (a) 8.80% 6.69% 2.84% 18.65% 6.47%
(Independence
Capital
Management)
High Yield Bond (a) 3.49% 14.35% 12.46% 14.97% 8.48%
(T. Rowe Price
Associates)
International Equity (a) 17.37% 9.03% 15.41% 13.39% 7.47%
(Vontobel USA)
Money Market (a) 3.72% 3.85% 3.69% 4.21% 2.43%
(Independence
Capital
Management)
<CAPTION>
ANNUAL RATE OF CHANGE IN ACCUMULATION UNIT VALUES
----------------------------------------------------------------------
FUND (MANAGER) 1993 1992 1991 1990 1989
- -------------------------- ------------- ---------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Growth Equity (a)
Quality (11.00%) 4.60% (33.10%) 12.30% 29.60%
Nonqualified (11.00%) 4.60% (33.10%) 12.30% 29.60%
(Independence
Capital
Management)
Value Equity (a) 5.70% 13.40% 26.10% 9.30% (11.50%)
(OpCap Advisors)
Flexibly Managed (a) 14.40% 8.20% 20.10% 2.10% (19.60%)
(T. Rowe Price
Associates)
Quality Bond (a) (10.30%) 5.20% 14.20% 6.60% 11.30%
(Independence
Capital
Management)
High Yield Bond (a) (18.30%) 14.40% 35.20% (10.00%) 1.90%
(T. Rowe Price
Associates)
International Equity (a) (36.40%) N/A N/A N/A N/A
(Vontobel USA)
Money Market (a) 1.30% 1.80% 4.60% 5.60% 7.60%
(Independence
Capital
Management)
</TABLE>
- -----------
* DATE THE UNDERLYING FUND WAS ESTABLISHED.
(a) PENN SERIES FUNDS, INC.
- --------------------------------------------------------------------------------
The performance information set forth above is for past performance and is
not an indication or representation of future performance.
- --------------------------------------------------------------------------------
B-13
<PAGE>
ADMINISTRATIVE AND RECORDKEEPING SERVICES
- --------------------------------------------------------------------------------
The Company performs all data processing, recordkeeping and other related
services with respect to the Contracts and the Separate Accounts.
- --------------------------------------------------------------------------------
DISTRIBUTIONS OF CONTRACTS AND CERTIFICATES
Hornor, Townsend & Kent, Inc. is a wholly owned subsidiary of Penn Mutual,
serves as principal underwriter of the combination variable and fixed annuity
contracts and the variable annuity contracts. The address of Hornor, Townsend &
Kent, Inc. is 600 Dresher Road, Horsham, PA 19044. For 1998, 1997, and 1996
Penn Mutual paid Hornor, Townsend & Kent, Inc. underwriting commissions of
$450,661, $436,619 and $403,603, respectively.
- --------------------------------------------------------------------------------
CUSTODIAN
Penn Mutual is custodian of the assets held in the Separate Account.
- --------------------------------------------------------------------------------
INDEPENDENT AUDITORS
Ernst & Young LLP serve as independent auditors of the Separate Account
and the Company. Their offices are located at 2001 Market Street, Suite 4000,
Philadelphia, PA 19103.
- --------------------------------------------------------------------------------
LEGAL MATTERS
Morgan, Lewis & Bockius LLP of Philadelphia, Pennsylvania, has provided
advice on certain matters relating to the federal securities laws and the
offering of the Contracts and Certificates.
- --------------------------------------------------------------------------------
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-14
<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-15
<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-16
<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-17
<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-18
<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-19
<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>
- -----------
* 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-20
<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 $5,561,701
============ ============ ============= ==========
</TABLE>
- -----------
* FOR THE PERIOD FROM MAY 1, 1997 (DATE FUND BECAME AVAILABLE FOR INVESTMENT
TO CONTRACT OWNERS) TO DECEMBER 31, 1997.
+ INVESTMENT IN PENN SERIES FUNDS, INC.
++ INVESTMENT IN NEUBERGER BERMAN ADVISERS MANAGEMENT TRUST
+++ INVESTMENTS IN AMERICAN CENTURY VARIABLE PORTFOLIOS, INC. (TCI
PORTFOLIOS, INC.'S NAME CHANGED TO AMERICAN CENTURY VARIABLE PORTFOLIOS,
INC. AS OF MAY 1, 1997)
++++ INVESTMENT IN FIDELITY INVESTMENTS' VARIABLE INSURANCE PRODUCTS FUNDS
I AND II
+++++ INVESTMENT IN MORGAN STANLEY DEAN WITTER UNIVERSAL FUNDS, INC.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
B-21
<PAGE>
PENN MUTUAL VARIABLE ANNUITY ACCOUNT III
STATEMENTS OF CHANGES IN NET ASSETS -- FOR THE YEARS ENDED DECEMBER 31, 1998 AND
1997 (CONT'D.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Partners Capital Appreciation
Portfolio++ Portfolio+++
----------------------------- --------------------------------
1998 1997* 1998 1997
-------------- ------------- -------------- ----------------
<S> <C> <C> <C> <C>
Operations:
Net investment income (loss) ................... ($ 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>
- -----------
* 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-22
<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-23
<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-24
<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-25
<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-26
<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-27
<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-28
<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-29
<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-30
<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-31
<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-32
<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-33
<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-34
<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-35
<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-36
<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>
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-37
<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-38
<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-39
<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-40
<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-41
<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-42
<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-43
<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-44
<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-45
<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-46
<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-47
<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
Statement of Assets and Liabilities - December 31, 1998 and
1997 Statement of Operations - For the years ended
December 31, 1998, 1997 and 1996 Statements of
Changes in Net Assets - For the years ended
December 31, 1998, 1997 and 1996
Notes to Financial Statements
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 filed on
September 3, 1998 (File No. 333-62811 and
Accession No. 0001036050-98-001504).
(b) Resolutions of Executive Committee of Board
of Trustees of The Penn Mutual Life
Insurance Company authorizing investments of
the Registrant. Incorporated herein by
reference to Exhibit 1(b) to Post-Effective
Amendment No. 1 to the Registration
Statement filed on April 27, 1999
(File No. 333-62825 and Accession No.
0000950116-99-000834).
2. Not applicable.
3. (a) 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 filed on November 30,
1998 (File No. 333-62811 and Accession No.
0001036050-98-002055).
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) to Pre-Effective Amendment No. 1 to
this Registration Statement filed on
November 30, 1998 (File No. 333-62811 and
Accession No. 0001036050-98-002055).
(c) Form of Agent's Agreement relating to
broker-dealer supervision. Incorporated
herein by reference to Exhibit 3(c) to the
Registration Statement filed on September 3,
1998 (File No. 333-62811 Accession No.
0001036050-98-002055).
(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 Pre-Effective Amendment No.
1 to the Registration Statement on Form N-4
filed on November 30, 1998 (File No.
333-62811 Accession No.
0001036050-98-002055).
(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. Incorporated
herein by reference to Exhibit 3(e) to
Pre-Effective Amendment No. 1 to the
Registration Statement on Form N-4 filed on
April 27, 1999 (File No. 333-62825 Accession
No. 0000950116-99-000834).
4. (a) Group Variable and Fixed Annuity Contract
(primarily for Section 403(b) retirement
plans) (Form GDI-385) and Certificate issued
under the Contract (Form EB 1611). Filed
herewith.
(b) Individual Variable Annuity Contract (Form
DI-1182-V). Filed herewith.
C-2
<PAGE>
(c) Endorsement No. 1309-82 to Individual
Variable Annuity Contract. Filed herewith.
(d) Individual Variable and Fixed Annuity
Contract - Flexible Purchase Payments (Form
DV-790). Filed herewith.
(e) Endorsement No. 1536-90 to Individual
Variable and Fixed Annuity Contract. Filed
herewith.
(f) Endorsement No. 1534-96 to Individual
Variable and Fixed Annuity Contract. Filed
herewith.
(g) Endorsement No. 1542-97 to Individual
Variable and Fixed Annuity Contract. Filed
herewith.
(h) Endorsement No. 1504-94 to 403(b) Policy
Loan. Filed herewith.
5. (a) Application (Form EB 1610) for participation
in Group Variable and Fixed Annuity
Contract. Filed herewith.
C-3
<PAGE>
(b) Application (Form PM3502 11/94) for
Individual Variable and Fixed Annuity
Contract. Filed herewith.
6. (a) Charter of The Penn Mutual Life Insurance
Company (May 1983). Incorporated herein by
reference to Exhibit 6(a) to this
Registration Statement on Form N-4 filed on
September 3, 1998 (File No. 333-62811 and
Accession No. 0001036050-98-001504).
(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
filed on September 3, 1998 (File No.
333-62811 and Accession No.
0001036050-98-001504).
7. None.
8. (a)(1) Form of Sales Agreement between The Penn
Mutual Life Insurance Company and Neuberger
& Berman Advisers Management Trust.
Previously filed as Exhibit 8(b)(1) to this
Registration Statement on September 3, 1998
(Accession No. 0001036050-98-001504) and
incorporated herein by reference.
(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. Previously filed as Exhibit 8(b)(2)
to this Registration Statement on September
3, 1998 (Accession No. 0001036050-98-001504)
and incorporated herein by reference.
(a)(3) Amendment to Fund Participation Agreement
between The Penn Mutual Life Insurance
Company and Neuberger & Berman Advisers
Management Trust. Previously filed as
Exhibit 8(b)(3) to Post-Effective Amendment
No.5 to the Registration Statement of Penn
Mutual Variable Life Account I on April 30,
1997 (File No. 33-54662 and Accession No.
0000950109-97-003328) and incorporated
herein by reference.
C-4
<PAGE>
(b) Form of Sales Agreement between The Penn
Mutual Life Insurance Company and Penn
Series Funds, Inc. Previously filed as
Exhibit 8(c) to this Registration Statement
on September 3, 1998 (Accession No.
0001036050-98-001504) and incorporated
herein by reference.
(c) Form of Participation Agreement between The
Penn Mutual Life Insurance Company, Variable
Insurance Products Fund and Fidelity
Distributors Corporation. Previously filed
as Exhibit 8(d) to this Registration
Statement on September 3, 1998 (Accession
No. 0001036050-98-001504) and incorporated
herein by reference.
(d) Form of Participation Agreement between The
Penn Mutual Life Insurance Company, Variable
Insurance Products Fund II and Fidelity
Distributors Corporation. Previously filed
as Exhibit 8(e) to this Registration
Statement on September 3, 1998 (Accession
No. 0001036050-98-001504) and incorporated
herein by reference.
(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. Previously filed as
Exhibit 8(f) to Post-Effective Amendment No.
2 to the Registration Statement of PIA
Variable Annuity Account I on April 30, 1998
(File No. 33-83120 and Accession No.
0000950109-97-003327) and incorporated
herein by reference.
9. Opinion and Consent of C. Ronald Rubley, Esq.,
Associate General Counsel of The Penn Mutual Life
Insurance Company. Incorporated herein by reference
to Exhibit 9 to Post-Effective Amendment No. 1 to
this Registration Statement filed on April 26, 1999
(File No. 333-62825 and Accession No. ).
10. (a) Consent of Ernst & Young LLP, Independent
Auditors. Filed herewith.
(b) Consent of Morgan, Lewis & Bockius LLP. Filed
herewith.
11. None.
12. None.
13. Schedule for Computation of Performance Quotations.
Filed herewith.
14. (a) Powers of Attorney of Trustees (except Ms. Bloch
and Messrs. Notebaert and Rock). Incorporated
herein by reference to Exhibit 14(a) to Post-
Effective Amendment No. 22 to this Registration
Statement filed on April 29, 1997.
C-5
<PAGE>
(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 this Registration
Statement on Form N-4 filed on April 24,
1998 (Accession No. 0001036050-98-001504).
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
Marketing Controller
HAROLD E. MAUDE, JR. STEVEN M. HERZBERG
Senior Vice President, Assistant Vice President
Independence Financial Network and Treasurer
RICHARD F. PLUSH
Vice President, Products and Programs
JOHN M. ALBANESE JAMES MCELWAIN
Senior Vice President, Customer Service Assistant Vice President,
and Information Systems Retirement and Investment
Sales Operations
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.
C-6
<PAGE>
Item 26. Persons Controlled By or Under Common Control with the Depositor
or Registrant
PENN MUTUAL WHOLLY-OWNED SUBSIDIARIES
<TABLE>
<CAPTION>
CORPORATION PRINCIPAL BUSINESS STATE OF INCORPORATION
- ----------- ------------------ ----------------------
<S> <C> <C> <C> <C> <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>
C-7
<PAGE>
INDEPENDENCE SQUARE PROPERTIES, INC.
WHOLLY-OWNED SUBSIDIARIES
<TABLE>
<CAPTION>
CORPORATION PRINCIPAL BUSINESS STATE OF INCORPORATION
- ----------- ------------------ ----------------------
<S> <C> <C> <C> <C> <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
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> <C> <C> <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>
C-8
<PAGE>
JANNEY MONTGOMERY SCOTT, INC.
WHOLLY-OWNED SUBSIDIARIES
<TABLE>
<CAPTION>
CORPORATION PRINCIPAL BUSINESS STATE OF INCORPORATION
- ----------- ------------------ ----------------------
<S> <C> <C> <C> <C> <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:
28,910 owners of qualified individual variable annuity contracts;
23,083 owners of qualified group variable annuity contracts; 521
owners of certificates issued under qualified group variable
annuity contracts; and 7,892 owners of nonqualified individual
variable annuity contracts.
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 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.
C-9
<PAGE>
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
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 Best, 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.
C-10
<PAGE>
COMMISSIONS AND OTHER COMPENSATION RECEIVED BY EACH PRINCIPAL
UNDERWRITER DURING LAST FISCAL YEAR
<TABLE>
<CAPTION>
NET UNDERWRITING
NAME OF PRINCIPAL DISCOUNTS AND COMPENSATION BROKERAGE OTHER
UNDERWRITER COMMISSIONS ON REDEMPTION COMMISSIONS COMPENSATION
- ---------------------- -------------------- ----------------- ---------------- ------------------
<S> <C> <C> <C> <C>
Hornor, Townsend $ 450,661 0 0 0
& Kent, Inc.
</TABLE>
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) 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
Combination Variable and Fixed Annuity Contract and the Variable
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.25 of this
Registration Statement and has caused this Post-Effective Amendment to the
Registration Statement to be signed on its behalf, by the undersigned, thereunto
duly authorized, in the Township of Horsham and Commonwealth of Pennsylvania on
this 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 #25 to the Registration Statement has been signed by the following
persons, in the capacities indicated, on the 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.B4(a) Group Variable and Fixed Annuity Contract (Form GDI-385).
EX-99.B4(b) Individual Variable Annuity Contract (Form DI-1182-V).
EX-99.B4(c) Endorsement No. 1309-82 to Individual Variable Annuity Contract.
EX-99.B4(d) Individual Variable and Fixed Annuity Contract-Flexible Purchase
Payments (Form DV-790).
EX-99.B4(e) Endorsement No. 1536-90 to Individual Variable and Fixed Annuity
Contract.
EX-99.B4(f) Endorsement No. 1534-96 to Individual Variable and Fixed Annuity
Contract.
EX-99.B4(g) Endorsement No. 1542-97 to Individual Variable and Fixed Annuity
Contract.
EX-99.B4(l) Endorsement No. 1504-94 to 403(b) Policy Loan.
EX-99.B5(a) Application for participation in Group Variable and Fixed
Annuity Contract (Form EB 1610).
EX-99.B5(b) Application for Individual Variable and Fixed Annuity Contract
(Form PM3502 11/94).
EX-99.B 10(a) Consent of Ernst & Young LLP
EX-99.B 10(b) Consent of Morgan, Lewis & Bockius LLP
EX-99.B 13 Schedule for Computation of Performance Quotations
C-13
<PAGE>
The Penn Mutual Life Insurance Company
Founded 1847
Participant Annuity Date
Participant's
Certificate Number Enrollment Date
Group Variable and Fixed Annuity Contract Number --
Contractholder
The Penn Mutual Life Insurance Company certifies that the above named person is
a Participant under the Group Annuity Contract.
This certificate is evidence of your interest in the Group Annuity Contract. All
matters pertaining to such interest are subject to the provisions of the Group
Annuity Contract. Relevant provisions of the Group Annuity Contract are
described in the following pages.
This certificate replaces any certificate previously issued to you by Penn
Mutual with respect to the Group Annuity Contract.
VALUES AND PAYMENTS TO YOU UNDER THE GROUP ANNUITY CONTRACT, WHEN BASED UPON THE
INVESTMENT EXPERIENCE OF A SEPARATE ACCOUNT, ARE VARIABLE AND ARE NOT GUARANTEED
AS TO FIXED DOLLAR AMOUNT.
/s/ /s/
------------------------------- ------------------------------------
Secretary Chairman and
Chief Executive Officer
TEN DAY RIGHT TO REVIEW CONTRACT: You may cancel this contract within ten days
after its receipt. Simply return or mail it to us or our agent. We will be
refund your Participant's Variable and Fixed Account Values.
Group Variable and Fixed
Annuity Certificate --
Flexible Purchase Payments
The Penn Mutual Life Insurance Company, Independence Square, Philadelphia,
Pennsylvania 19172
EB1611 3/85
<PAGE>
TABLE OF CONTENTS
Page
Section 1 -- Specifications 3
Section 2 -- Definitions 4
Section 3 -- Purchase Payments 4
Section 4 -- Variable Account Provisions 5
Section 5 -- Fixed Account Provisions 11
Section 6 -- Payment on Death 15
Section 7 -- Transfer From Variable to Fixed Account 15
Section 8 -- Transfer From Fixed to Variable Account 15
Section 9 -- Transfer From Another Annuity Contract 16
Section 10 -- Withdrawal 16
Section 11 -- Miscellaneous 17
Table of Guaranteed Benefits 20
<PAGE>
Section 2 - Definitions
Participant: An employee who has made application through Contractholder to
make Purchase Payments on behalf of the Participant under the Group Annuity
Contract. In this certificate you are the Participant.
Participant's Enrollment Year: The twelve month period commencing on the
Participant's Enrollment Date, or any anniversary of the Participant's
Enrollment Date.
Accumulation Unit: An index used to compute a Participant's Variable
Account Value prior to the Variable Annuity Date.
Annuity Unit: An index used to compute a Participant's Variable Annuity
Payment.
Participant's Variable Account: An account established and maintained by
Penn Mutual for each Participant and to which Purchase Payments are
allocated under Section 4.
Participant's Variable Account Value: The value of all Accumulation Units
credited to a Participant's Variable Account.
Participant's Fixed Account: An account established and maintained by Penn
Mutual or each Participant and to which Purchase Payments are allocated
under Section 5.
Participant's Fixed Account Value: The sum of all amounts credited to a
Participant's Fixed Account, increased by interest credited and reduced by
amounts withdrawn or transferred from a Participant's Fixed Account.
Annuity Date: The date on which annuity payments to a Participant are to
start.
Purchase Payments: Amounts paid to Penn Mutual on behalf of Participants
under the Group Annuity Contract.
Section 3 - Purchase Payments
Purchase Payments may be made on behalf of each Participant subject to the
following provisions:
(a) The minimum Purchase Payment for any one Participant is $25.00 or
such lower minimum as we may establish.
(b) The Participant will direct the allocation of Purchase Payments to
the Participant's Variable Account or the Participant's Fixed
Account, subject to the provisions of Sections 4 and 5.
(c) Total Purchase Payments in a calendar year for a Participant are
limited as provided by Section 403(b) of the Internal Revenue
Code.
(d) Total Purchase Payment in a calendar year for a Participant may
not exceed $1,000,000 without Penn Mutual's consent.
(e) Purchase Payments for a Participant may be made only through the
Contractholder.
<PAGE>
(f) Purchase Payments will be credited to Participant's Variable
Accounts and Participant's Fixed Accounts in accordance with
information provided by Participant.
Section 4 - Variable Account Provisions
A. The Separate Account
The Separate Account. The name of the Separate Account is specified in
Section 1. We established the Separate account for the Group Annuity
Contract and other contracts we may issue. Amounts credited to the
Participant's Variable Account will be allocated to the Separate
Account.
Investment of Separate Account Assets. Assets held in the Separate
Account will be invested in one or more eligible mutual funds. Current
eligible mutual funds are specified in Section 1.
For the Group Annuity Contract and other contracts the Separate
Account is divided into investment accounts. There is an investment
account for each eligible mutual fund. For each investment account,
there is a subaccount for Qualified Plans and a subaccount for
Nonqualified Plans.
Each Participant may choose the investment account to which amounts
credited to the Participant's Variable Account are to be allocated.
We own the assets held in the Separate Account. However, the portion
of such assets equal to the reserves and other contract liabilities
with respect to each subaccount of each investment account of the
Separate Account are not chargeable with liabilities arising out of
any other business we may conduct.
Upon notice to us, a Participant may transfer part or all the value of
the Accumulation Units or Annuity Units credited to the Participant's
Variable Account from one investment account to another. No more than
four such transfers may be made in a calendar year. Such investment
account transfers, as well as all other investments, are subject to
the limits and rules applicable to each mutual fund.
Substitution of Investment. If investment in a mutual fund should no
longer be possible or in our judgment becomes inappropriate to the
purposes of the contract, we may substitute another mutual fund.
Substitutions may be made with respect to existing investments and the
investment of future Purchase Payments. Substitution will be subject
to the approval of the Insurance Department of the jurisdiction in
which this contract is delivered.
B. Charges and Deductions
Variable Account Administration Charge. With respect to each
Participant's Variable Account, a charge of $30 will be deducted each
year on the date specified in Section 1. It will also be deducted when
the Participant's Variable Account Value is withdrawn in full if
withdrawal is not on the date specified in Section 1. The charge will
never increase. The charge will not be deducted on or after the
Annuity Date.
Expense Risk Charge. This charge is made to compensate us for
guaranteeing that the Variable account administration charge will
never increase. On an annual basis it equals 0.5% of the daily net
asset value of the Separate Account. This charge is reflected in the
Net Investment Factor set forth in Subsection C of this Section 4.
Mortality Risk Charge. This charge is made to compensate us for the
mortality guarantees we make under this contract. On an annual basis
it equals 0.8% of the daily net asset value of the Separate Account.
This charge is reflected in the Net Investment Factor set forth in
Subsection C of this Section 4.
<PAGE>
Contingent Deferred Sales Charge. This charge may be deducted upon
withdrawal, in whole or in part, of the Participant's Variable Account
Value or the present value of remaining annuity payments (if
applicable). The Contingent Deferred Sales Charge is set forth in
Section 10.
Deductions. The expense risk and mortality risk charge will be
computed and deducted from each subaccount of each investment account
of the Separate Account for each day the Group Annuity Contract is in
force. Other charges will be deducted by canceling Accumulation Units
or Annuity Units (if applicable) of a value equal to the deduction.
Cancellation of Accumulation Units will be in the ratio of the
Participant's interest in each subaccount to the Participant's
Variable Account Value.
C. Variable Accumulation Values
Number of Participant's Accumulation Units. For each subaccount of
each investment account of the Separate Account, the number of a
Participant's Accumulation Units is the sum of
Amounts allocated to the subaccount for the Participant
divided by
The value of an Accumulation Unit for that subaccount for the
valuation period in which we received the amount allocated.
The number will be adjusted for transfers, withdrawals and charges.
Adjustments will be made as of the valuation period in which we
receive all requirements for the transaction, as appropriate.
Value of Each Accumulation Unit. For each subaccount of each
investment account of the Separate Account, the value was arbitrarily
set at $10 when the subaccount was established. The value may increase
or decrease from one valuation period to the next. For any valuation
period the value is
The value of an Accumulation Unit for the prior valuation period
multiplied by
The net investment factor for that subaccount for the valuation
period.
Net Investment Factor. Net Investment Factor is an index used to
measure the investment performance of a subaccount from one valuation
period to the next. For any subaccount, the net investment factor for
a valuation period is found 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 "exdividend" date
occurs in the valuation period
plus or minus
<PAGE>
A per-share charge or credit as we may determine, as of the
end of the valuation period, for tax reserves;
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 tax reserves as of the
end of the last prior valuation period;
Where (c) is
The sum of the daily expense risk charge and the daily
mortality risk charge. On an annual basis, the sum of such
charges equals 1.30% of the daily net asset value of the
Separate Account.
Valuation Period. Valuation period is the interval from one valuation
time to the next valuation time. Valuation time is the time as of
which each mutual fund determines the net asset value of its shares.
D. Variable Annuity Payments
Annuity Date. The Annuity Date must be on the first day of a month. It
may not be later than the first day of the next month after the
Annuitant's 85th birthday. You chose the Annuity Date in the
application. You may change the Annuity Date up to 30 days prior to
the current Annuity Date.
Variable Annuity Options. You or your surviving beneficiary may choose
a variable annuity option up to 30 days prior to the Annuity Date. An
option not set forth in the contract may be chosen if acceptable to
us.
First Variable Annuity Payment. Any premium taxes will be deducted
from the Participant's Variable Account Value. The net Participant's
Variable Account Value as of the Annuity Date will be applied to the
annuity table for the option chosen. The variable annuity tables show
the amount of the first payment for each $1,000 so applied, according
to the age at the Annuity Date. The tables are based on the 1971
Individual Annuity Mortality Table with interest at 4%. Adjusted ages
are used in entering those tables.
Subsequent Variable Annuity Payments. Payments after the first will
vary in amount according to the investment performance of the
subaccount or subaccounts chosen. The amount may change from month to
month. The amount of each subsequent payment is the sum of the
following amounts attributable to each applicable subaccount
The number of Annuity Units for the subaccount
multiplied by
The value of an Annuity Unit for that subaccount for the
valuation period in which payment is due.
We guarantee that the amount of each annuity payment after the first
will not be affected by variations in expense or mortality experience.
<PAGE>
Minimum Annuity Payments. If the net Participant's Variable Account to
be applied at the Annuity Date is less than $2,000, we may pay such
amount in a lump sum. Annuity payments will be made monthly; but if
any payment would be less than $50, we may change the frequency so
payments are at least $50 each.
Number of Participant's Annuity Units. The number of units for the
subaccount of each investment account chosen by the Participant is
The amount of the first variable annuity payment attributable to
that subaccount
divided by
The value of Annuity Unit for the subaccount as of the Annuity
Date.
The number is fixed except for adjustments for subaccount transfers.
Adjustments will be made as of the valuation period in which we
receive all requirements for the transfer, as appropriate.
Value of Each Annuity Unit. For each subaccount of each investment
account of the Separate Account the value was arbitrarily set at $10
when the subaccount was established. The value may increase or
decrease from one valuation period to the next. For any valuation
period the value is
The value of an Annuity Unit for the last prior valuation period
multiplied by
The net investment factor for that subaccount for the valuation
period
multiplied by
An interest factor to neutralize the assumed investment rate of 4%
built into the annuity tables.
E. Variable Annuity Options
Option 1 - Variable Annuity for Specified Number of Years. Payments
will be made for a specified number of years, which may not be less
than 5 nor more than 30 years.
Option 2 - Variable Life Annuity. Payments will be made for the life
of the Annuitant. Payments will cease with the last payment due prior
to the Annuitant's death.
Option 3 - Variable Life Annuity With Payments Guaranteed for 10 Or 20
Years. Payments will be made for the life of the Annuitant. A
guaranteed payment period of either 10 or 20 years may be chosen.
Option 4 - Variable Joint and Survivor Life Annuity. Payments will be
made during the lifetimes of the Annuitant and a designated second
Annuitant. Payments will continue as long as either is living. The
amount of such payment will not change by reason of the death of the
first Annuitant to die.
If the Annuitant dies prior to the end of the specified period under
Option 1 or the guaranteed period under Option 3, the beneficiary may
choose either
(1) To have the payments continue for the specified or guaranteed
period, or
<PAGE>
(2) To receive at any time in lump sum the present value of the
remaining payments to be made over the specified or guaranteed
period.
If a beneficiary dies while receiving annuity payments under this
Option 4, the present value will be paid in a lump sum to the
beneficiary's estate. The present value will be (a) computed as of the
valuation period in which due proof of death is received at our
designated service office, and (b) commuted at the assumed investment
rate of the annuity tables.
Payments. Payments will be made on the first day of each month
starting with the Annuity Date. Except under Option 4, payments will
be made to the Participant. Under Option 4, payments will be jointly
payable while both Annuitants are alive.
<PAGE>
F. Variable Annuity Option Table
The following tables show the amount of the first monthly income
payment for each $1,000 of value applied under a variable settlement
option. "Age" as used in the tables means an adjusted age determined
in the following manner from the actual age of the Annuitant on the
birthday nearest the date of the first payment.
Calendar Year of Birth Adjusted Age
---------------------- ------------
Before 1900 Actual Age increased by 1
1900-1919 Actual Age
1920-1939 Actual Age decreased by 1
1940-1959 Actual Age decreased by 2
1960 and later Actual Age decreased by 3
-------------- -------------------------
Option 1 -- Variable Annuity for Specified Number of Years
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
Number of Monthly Number of Monthly Number of Monthly
Years Income Years Income Years Income
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
11 9.31 21 5.81
12 8.69 22 5.64
13 8.17 23 5.49
14 7.72 24 5.35
5 18.32 15 7.34 25 5.22
6 15.56 16 7.00 26 5.10
7 13.59 17 6.71 27 5.00
8 12.12 18 6.44 28 4.90
9 10.97 19 6.21 29 4.80
10 10.06 20 6.00 30 4.72
- ------------------------------------------------------------------------------------------------------
</TABLE>
Option 2 -- Variable Life Annuity and
Option 3 -- Variable Life Annuity with
Payments Gauranteed for 10 or 20 Years
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
Life 10 Years 20 Years Life 10 Years 20 Years
Age Annuity Guaranteed Guaranteed Age Annuity Guaranteed Guaranteed
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
50 $4.59 $4.56 $4.47 70 7.08 6.71 5.71
51 4.65 4.62 4.52 71 7.33 6.89 5.76
52 4.72 4.69 4.57 72 7.60 7.08 5.81
53 4.80 4.76 4.63 73 7.90 7.28 5.84
54 4.87 4.83 4.69 74 8.22 7.48 5.88
55 4.96 4.91 4.75 75 8.57 7.68 5.90
56 5.05 4.99 4.81 76 8.95 7.89 5.92
57 5.14 5.07 4.87 77 9.37 8.10 5.94
58 5.24 5.16 4.93 78 9.82 8.30 5.96
59 5.34 5.25 5.00 79 10.32 8.50 5.97
60 5.45 5.35 5.07 80 10.86 8.69 5.98
61 5.56 5.45 5.14 81 11.46 8.88 5.98
62 5.69 5.56 5.20 82 12.11 9.04 5.99
63 5.82 5.68 5.27 83 12.82 9.20 5.99
64 5.96 5.80 5.34 84 13.59 9.33 6.00
65 6.11 5.93 5.41 85 14.43 9.45 6.00
66 6.27 6.07 5.48
67 6.45 6.22 5.54
68 6.64 6.37 5.60
69 6.85 6.54 5.66
- -------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Option 4 -- Variable Joint and Survivor Life Annuity
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
Age 55 60 65 70 75 80 85 Age
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
50 $4.25 $4.34 $4.41 $4.46 $4.51 $4.54 $4.56 50
55 4.40 4.53 4.64 4.74 4.81 4.87 4.90 55
60 4.53 4.72 4.90 5.05 5.18 5.28 5.35 60
65 4.64 4.90 5.16 5.40 5.62 5.79 5.91 65
70 4.74 5.05 5.40 5.77 6.11 6.39 6.59 70
75 4.81 5.18 5.62 6.11 6.65 7.12 7.48 75
80 4.87 5.28 5.79 6.39 7.12 7.94 8.59 80
85 4.90 5.35 5.91 6.59 7.48 8.59 9.88 85
- ---------------------------------------------------------------------------------------
</TABLE>
Section 5 - Fixed Account Provisions
A. Interest Options
Interest will be earned on each Participant's Fixed Account Value from
the date amounts are credited to the Participant's Fixed Account to
the date amounts are applied to an annuity option, paid upon the death
of the annuitant, transferred or withdrawn.
Each amount credited to a Participant's Fixed Account will be credited
with interest under Interest Option A, Interest Option B, Interest
Option C. You choose the interest options. The minimum initial amount
for which an Interest Option may be elected is $25.00 or such lower
minimum as we may establish.
Interest Option A
With respect to each amount for which Interest Option A is elected,
interest will be credited at an effective annual rate declared by us.
The effective annual rate will be declared as of the first day of each
calendar quarter. The declared rate will apply, for Interest Option A
elections made in that calendar quarter, through the end of the same
calendar quarter in the next calendar year. Thereafter, interest will
be credited at the declared effective annual rate then applicable to
new Interest Option A elections, for successive twelve month periods.
We will declare an effective annual interest rate under Interest
Option A which is not less than the published 52 week United States
Treasury Bill discount rate from the most recent regularly scheduled
auction held before the beginning of the calendar quarter. If the
auction program is discontinued, we will substitute an index which in
our opinion is comparable and which is approved by the Insurance
Department of the jurisdiction in which this contract is delivered.
The declared effective annual interest rate under Interest Option A
will never be less than 4%.
Interest Option B
With respect to each amount for which Interest Option B is elected,
interest will be credited at an effective annual rate declared by us.
The declared rate will apply through the end of the calendar month in
which the election is made. Thereafter, interest will be credited on
such amount for successive calendar month periods at the declared
effective annual rate then applicable to new Interest Option B
elections made as of the beginning of each such calendar month.
The declared effective annual interest rate under Interest Option B
will never be less than 4%.
Interest Option C
With respect to each amount for which Interest Option C is elected,
interest will be credited at an effective annual rate declared by us.
The effective annual rate will be declared as of the first day of each
calendar quarter. The declared rate will apply, for Interest Option C
elections made in that calendar quarter, through the end of the same
calendar quarter in the third following calendar year. Thereafter,
interest will be credited at the declared effective annual rate then
applicable to new Interest Option C elections, for successive
thirty-six month periods.
<PAGE>
You may change the interest option election or withdraw or transfer
any portion of an amount for which Interest Option C is elected before
the end of a period for which a declared effective annual rate of
interest is guaranteed for such amount. However, in such event, the
amount withdrawn or transferred or the amount for which the interest
option election is changed will be reduced by a premature transaction
charge equal to 2 1/2% of such amount.
The declared effective annual interest rate under Interest Option C
will never be less than 4%.
Change of Interest Option
You may change the interest option election applicable to all or part
of your Participant's Fixed Account Value, subject to the provisions
set forth below.
You may change the election for an amount held under Interest Option A
only at the end of the period for which a declared effective annual
interest rate is guaranteed for such amount.
You may change the election for an amount held under Interest Option B
only at the end of a calendar month.
You may change the election for all or any part of an amount held
under Interest Option C before the end of the period for which a
declared effective annual interest rate is guaranteed for such amount,
subject to the premature transaction charge set forth in Interest
Option C.
The minimum amount for which an interest option may be changed is
$250.
B. Fixed Annuity Payments
Annuity Date. The Annuity Date must be on the first day of a month. It
may not be later than the first day of the next month after the
Annuitant's 85th birthday. You chose the Annuity Date in the
application. You may change the Annuity Date up to 30 days prior to
the current Annuity Date.
Fixed Annuity Options. You or your surviving beneficiary may choose a
fixed annuity option up to 30 days prior to the Annuity Date. An
option not set forth in the contract may be chosen if acceptable to
us.
Amount of Fixed Annuity Payments. Any premium taxes will be deducted
from the Participant's Fixed Account Value The net Participant's Fixed
Account Value as of the Annuity Date will be applied to the fixed
annuity option chosen. If fixed annuity payments begin within 5 years
after the Participant's Enrollment Date, the monthly income under
Options 1, 2, 3 and 4 will equal the monthly income under a comparable
single premium nonparticipating annuity available from us at the time
fixed annuity payments are to begin.
If fixed annuity payments begin more than 5 years after the
Participant's Enrollment Date, the monthly income under Options 1, 2,
3 and 4 will equal 104% of the monthly income under a comparable
single premium nonparticipating annuity available from us at the time
fixed annuity payments are to begin. In no event will the monthly
income be less than shown in the Fixed Annuity Option Tables.
<PAGE>
The guaranteed monthly income under Options 1 and 3 will be based on
interest at a rate of 3% per year compounded annually. The guaranteed
monthly income under Option 2 and 4 will be based on interest at a
rate of 2 3/4 % per year compounded annually. Fixed Annuity Options 1,
2, 3 and 4 will not participate in divisible surplus.
Minimum Annuity Payments. If the net Participant's Fixed Account Value
to be applied at the Annuity Date is less than $2,000, we may pay such
amount in a lump sum. Fixed Annuity payments will be made monthly. But
if any payment would be less than $50, we may change the frequency so
payments are at least $50 each.
C. Fixed Annuity Options
Option 1 - Fixed Annuity for Specified Number of Years. Payments will
be made for a specified number of years, which may not be less than 5
years nor more than 30 years.
Option 2 - Fixed Life Annuity. Payments will be made for the life of
the Annuitant. Payments will cease with the last payment due prior to
the Annuitant's death.
Option 3 - Fixed Life Annuity With Payments Guaranteed for 10 Or 20
Years. Payments will be made for the life of the Annuitant. A
guaranteed payment period of either 10 or 20 years may be chosen.
Option 4 - Fixed Joint and Survivor Life Annuity. Payments will be
made during the lifetimes of the Annuitant and a designated second
Annuitant. Payments will continue as long as either is living. The
amount of such payments will not change by reason of the death of the
first Annuitant to die.
If the Annuitant dies prior to the end of the specified period under
Option 1 or the guaranteed period under Option 3, the beneficiary may
choose either:
(1) to have the payments continue for the specified or guaranteed
period, or
(2) to receive at any time in lump sum the present value of the
remaining payments to be made over the specified or guaranteed
period.
If a beneficiary dies while receiving annuity payments under this
option, the present value will be paid in a lump sum to the
beneficiary's estate.
The present value of payments under Option 1 will be based on interest
at a rate of 3% per year compounded annually. The present value of the
remaining payments during the guaranteed period under Option 3 will be
based on interest at a rate set by us at the time payments are to
begin.
Payment. Payments will be made on the first day of each month starting
with the Annuity Date. Payments under all options will be made to the
Participant, except under Option 4. Under Option 4, payments will be
jointly payable while both Annuitants are alive.
<PAGE>
D. Fixed Annuity Option Tables
Amount of monthly income provided by each $1,000 applied under an
income option.
Option 1 --Fixed Income for Specified Number of Years
----------------------------------------------------------
Monthly Monthly Monthly
Years Income Years Income Years Income
----------------------------------------------------------
11 8.86 21 5.32
12 8.24 22 5.15
13 7.71 23 4.99
14 7.26 24 4.84
5 17.91 15 6.87 25 4.71
6 15.14 16 6.53 26 4.59
7 13.16 17 6.23 27 4.47
8 11.68 18 5.96 28 4.37
9 10.53 19 5.73 29 4.27
10 9.61 20 5.51 30 4.18
----------------------------------------------------------
Option 2 -- Fixed Life Annuity and
Option 3 -- Fixed Life Annuity with
Payments Guaranteed for 10 or 20 Years
The amount of monthly income will be based on the age of the option annuitant on
the birthday nearest the date of the first payment.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
2 3 2 3
-------------------------------- ---------------------------------
Age of Life 20 Year 10 Year Age of Life 20 Year 10 Year
Option Income Guaranteed Guaranteed Option Income Guaranteed Guaranteed
Annuitant Period Period Annuitant Period Period
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
15 and
under $2.90 $2.87 $2.88 50 $4.03 $3.93 $4.01
16 2.91 2.88 2.89 51 4.11 3.99 4.08
17 2.92 2.89 2.90 52 4.19 4.05 4.15
18 2.94 2.91 2.92 53 4.27 4.11 4.22
19 2.96 2.93 2.94 54 4.35 4.17 4.30
20 2.97 2.94 2.95 55 4.44 4.23 4.38
21 2.99 2.96 2.97 56 4.53 4.30 4.47
22 3.01 2.98 2.99 57 4.63 4.36 4.56
23 3.03 3.00 3.01 58 4.74 4.43 4.66
24 3.05 3.02 3.03 59 4.86 4.50 4.76
25 3.07 3.04 3.05 60 4.98 4.57 4.87
26 3.09 3.06 3.07 61 5.11 4.64 4.98
27 3.11 3.08 3.09 62 5.25 4.72 5.10
28 3.14 3.11 3.12 63 5.39 4.79 5.23
29 3.16 3.13 3.14 64 5.55 4.86 5.36
30 3.18 3.15 3.16 65 5.71 4.92 5.50
31 3.21 3.18 3.19 66 5.89 4.99 5.65
32 3.24 3.21 3.22 67 6.08 5.05 5.80
33 3.27 3.24 3.25 68 6.27 5.11 5.96
34 3.30 3.27 3.28 69 6.49 5.17 6.13
35 3.33 3.30 3.31 70 6.71 5.22 6.30
36 3.36 3.33 3.34 71 6.95 5.25 6.48
37 3.40 3.36 3.38 72 7.20 5.25 6.66
38 3.43 3.40 3.41 73 7.47 5.25 6.85
39 3.47 3.43 3.45 74 7.76 5.25 7.05
40 3.51 3.47 3.49 75 8.06 5.25 7.25
41 3.55 3.51 3.53 76 8.43 5.25 7.44
42 3.59 3.55 3.57 77 8.84 5.25 7.64
43 3.64 3.59 3.62 78 9.28 5.25 7.84
44 3.69 3.63 3.67 79 9.75 5.25 8.04
45 3.74 3.68 3.72 80 and 10.27 5.25 8.23
46 3.79 3.72 3.77 over
47 3.85 3.77 3.83
48 3.91 3.82 3.88
49 3.97 3.88 3.94
----------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Option 4 - Fixed Joint and Survivor Life Annuity
The amount of monthly income will be based on the ages of the option annuitants
on their respective birthdays nearest the date of the first payment. The table
shows income for certain ages for two option annuitants. The amount is shown
under the age of the first annuitant and opposite the age of the second
annuitant. Amounts of income for other combinations of ages will be furnished
upon request.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
Age of Second Age of First Option Annuitant
Option Annuitant 50 55 60 65 70 75 80 85
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
45 $3.40 $3.48 $3.54 $3.60 $3.64 $3.67 $3.70 $3.71
50 3.52 3.64 3.74 3.82 3.89 3.94 3.97 3.99
55 3.65 3.80 3.95 4.08 4.19 4.27 4.33 4.38
60 3.76 3.96 4.17 4.37 4.54 4.68 4.79 4.86
62 3.80 4.02 4.26 4.49 4.69 4.86 5.00 5.09
65 3.85 4.11 4.38 4.67 4.93 5.15 5.34 5.48
70 3.93 4.22 4.57 4.95 5.32 5.68 6.00 6.25
75 3.99 4.31 4.72 5.19 5.70 6.21 6.74 7.18
80 4.03 4.38 4.84 5.39 6.03 6.75 7.55 8.32
- ----------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Section 6 - Payment on Death
Death Before The Annuity Date. Upon receipt of due proof of the death
of the Participant prior to the Annuity Date, we will pay to the
beneficiary the greater of:
(1) The sum of all Purchase Payments, adjusted for withdrawals
and transfers, or
(2) The sum of the Participant's Variable Account Value and the
Participant's Fixed Account Value for the valuation period in
which we receive such proof at our designated service office.
If the beneficiary is not the decedent's spouse, the beneficiary can
choose an Annuity Option for death payments. The Option must provide
for payments over the beneficiary's life or over a period not longer
than the beneficiary's life expectancy. Payments shall begin within
one year after the date of death. If payment is made in a lump sum,
such payment shall be made within five years after the death.
If the beneficiary is the decedent's surviving spouse, the spouse
shall be treated as the decedent for purposes of contract death
benefits.
Death After the Annuity Date. If the Participant dies after the
Annuity Date, the amount payable, if any, will be according to the
Annuity Option or Annuity Options in force.
Section 7 - Transfer From Variable to Fixed Account
You may transfer all or part of your Participant's Variable Account
Value to your Participant's Fixed Account, subject to the following
provisions:
The minimum transfer amount is $250.
No more than four such transfers may be made by a Participant in a
calendar year.
No transfer may be made after the thirtieth day before the Annuity
Date.
Request for transfer must be received by us and any other applicable
requirements must be met before the death of the Participant.
Section 8 - Transfer From Fixed to Variable Account
You may transfer all or part of your Participant's Fixed Account Value
to your Participant's Variable Account, subject to the following
provisions:
The minimum transfer amount is $250.
An amount held under Interest Option A may be transferred only at the
end of the period for which a declared effective annual interest rate
is guaranteed for such amount.
An amount held under Interest Option B may be transferred only at the
end of a calendar month.
All or any part of an amount held under Interest Option C may be
transferred before the end of the period for which a declared
effective annual interest rate is guaranteed for such amount, subject
to the premature transaction charge set forth in Interest Option C.
No transfer may be made after the thirtieth day before the Annuity
Date.
Request for transfer must be received by us and any other applicable
requirements must be met before the death of the Participant.
<PAGE>
Section 9 - Transfer From Another Annuity Contract
A Participant may, through the Contractholder, transfer to your
Participant's Variable or Fixed Accounts under this contract, amounts
held under another annuity contract purchased for the Participant
under the provisions of Section 403(b) of the Internal Revenue Code.
Section 10 - Withdrawal
A. Withdrawal. Prior to the earlier of the Annuity Date or the death
of the Participant, the Participant may withdraw all or part of the
Participant's Variable Account Value and the Participant's Fixed
Account Value.
After the Annuity Date and the election of Variable Annuity Option 1,
the payee may withdraw the present value of the variable annuity
payments remaining to be made. The present value will be (a) computed
as of valuation period in which notice of the withdrawal is received
at our designated service office and (b) commuted at the assumed
investment rate of the Variable Annuity tables.
After the Annuity Date and the election of Fixed Annuity Option 1, the
payee may withdraw the present value of the fixed annuity payments
remaining to be made.
For full withdrawal of all the Participant's Variable and Fixed
Account Values, the Participant's Certificate must be surrendered to
our designated service office.
For partial withdrawals, the withdrawal must be at least $250.
Withdrawal of all or any part of the Participant's Fixed Account Value
held under Interest Option C before the end of the period for which a
declared effective annual interest rate is guaranteed for such amount
will be subject to the premature transaction charge set forth in
Interest Option C. The total of the premature transaction charge and
the Contingent Deferred Sales Charge set forth below will never be
more than 7% of the amount withdrawn.
B. Contingent Deferred Sales Charges. A charge equal to 5% of the
amount withdrawn will be made at the time of withdrawal, subject to
the following provisions:
(1) If the Participant makes a total withdrawal of the
Participant's Fixed Account Value as a result of termination
of participation in the Group Annuity contract, the amount
received will never be less than the total of all amounts
allocated to the Participant's Fixed Account, less prior
transfers and withdrawals from the Participant's Fixed
Account.
(2) No charge will be made for withdrawal if the Participant has
provided due proof of disability. Disability shall mean the
inability, by reason of medically determinable physical or
mental impairment which can be expected to result in death or
be of long-continued and indefinite duration, to engage in
the Participant's usual and customary occupation or in any
other substantial gainful activity for which the Participant
is reasonable suited by education, training or experience.
(3) No charge will be made for a withdrawal after the death of
the Participant.
<PAGE>
(4) No charge will be made for that portion of the first
withdrawal made in a Participant's Enrollment Year after the
first Participant's Enrollment Year which does not exceed 10%
of the sum of the Participant's Variable Account and Fixed
Account Values.
(5) No charge will be made for that portion of the first
withdrawal, made in the Participant's Eighth Enrollment Year,
which does not exceed 25% of the sum of the Participant's
Variable Account and Fixed Account Value(s).
(6) No charge will be made for that portion of the first
withdrawal, made in the Participant's Ninth Enrollment year,
which does not exceed 50% of the sum of the Participant's
Variable Account and Fixed Account Values.
(7) No charge will be made for that portion of the first
withdrawal, made in the Participant's Tenth Enrollment Year,
which does not exceed 75% of the Participant's Variable
Account and Fixed Account Values.
(8) No charge will be made for any withdrawal made after the
Participant has been enrolled for ten years.
C. Payment of Withdrawals. Unless you direct otherwise, partial
withdrawals prior to the Annuity date, and related charges, will be
deducted from your Participant's Fixed and Variable Accounts in the
following order
first from Interest Option B;
next from Interest Option A;
then from each subaccount of each investment account of the
Separate Account in the ratio of your interest in each subaccount
to your Participant's Variable Account Value; and
finally from Interest Option C.
Partial withdrawal of amounts held under Interest Option A or Interest
Option C will be made form amounts most recently placed under that
option.
Section 11 - Miscellaneous
Beneficiary. The Beneficiary is the person chosen by the Participant
in the application, who is to receive:
(1) Payment on death of the Participant prior to the Annuity Date
or
(2) Guaranteed annuity payments, if any, on death of the
Annuitant on or after the Annuity Date.
The Participant may change the beneficiary while the Participant is
alive.
<PAGE>
The estate or heirs of a beneficiary who dies before the Participant
have no rights under this contract. If no beneficiary survives the
Participant, payment will be made to the Participant's estate.
Misstatement of Age. If the age of the Annuitant or a joint payee is
misstated, any amount payable under the Group Annuity Contract will be
that amount which the Purchase Payments paid would have purchased on
the basis of the correct age.
If the annuity payments have been overpaid because the age of the
Annuitant or joint payee has been misstated, the amount overpaid, with
interest at the rate of 6% per year compounded annually, will be
charged against the payments still to be made under this contract.
If the annuity payments have been underpaid because the age of the
Annuitant or joint payee has been misstated, the amount underpaid,
with interest at the rate of 6% per year compounded annually, will be
paid in full with the next payment due under this contract.
Proof of Age and Survival. We may require satisfactory proof of
correct age at any time. If any payment under the Group Annuity
Contract depends on the payee being alive, we may require satisfactory
proof of survival.
Deferment of Transfer and Payments. Transfers and payments of
withdrawals from the Participant's Variable Account will be made
within seven days. However, we may defer a transfer, a withdrawal, the
Annuity Date or annuity payments, under the Variable Account
Provisions of Section 4 if:
(1) The New York Stock Exchange is closed (other than customary
weekend and holiday closings);
(2) Trading on the New York Stock Exchange is restricted;
(3) An emergency exists such that it is not reasonably practical
to dispose of securities held in the Separate Account or to
determine the value of its assets; or
(4) The Securities and Exchange Commission by order so permits
for the protection of security holders.
Conditions in (2) and (3) will be decided by, or in accordance with
rules of, the Securities and Exchange Commission.
We may defer a transfer or withdrawal from the Participant's Fixed
Account for such period not exceeding six months, as we reasonable
determine that investment conditions are such that an orderly sale of
assets held as part of our general assets is not possible.
Participating Contract. The Group Annuity Contract may participate in
our divisible surplus. Divisible surplus, if any, to be apportioned to
the contract shall be apportioned annually and will be allocated by us
equitably among all Participants. Divisible surplus so allocated will
be credited as Purchase Payments to the Participants' Variable and
Fixed Accounts, unless the Participant elects to have it paid in cash.
No divisible surplus is expected to be apportioned to the contract in
the foreseeable future.
Assignment and Ownership. Accounts established and maintained for a
Participant are owned by the Participant for his or her lifetime. The
entire interest in a Participant's Variable or Fixed Account is for
the exclusive benefit of the Participant. A Participant's Variable or
Fixed Account is nontransferable and the entire interest of the
Participant is nonforfeitable in accordance with applicable provisions
of the Internal Revenue Code.
<PAGE>
Failure to Enforce Not Waiver. A waiver by a Participant or Penn
Mutual of the right to enforce any rights arising from a breach of the
Group Annuity Contract will not constitute a waiver of any right
arising from a subsequent breach. The forbearance by a Participant or
Penn Mutual to enforce any right hereunder will not be considered a
waiver of such right.
Amendment. To the extent necessary to comply with applicable law and
regulations, Penn Mutual reserves the right to change any or all of
the Group Annuity Contract provisions at any time, including
retroactive changes, without the consent of Participants.
Changes in the Internal Revenue Code or in regulations or revenue
rulings thereunder may require amendments to the Group Annuity
Contract. In accordance with the preceding paragraph, Penn Mutual may
make such amendments without the consent of Participants.
Participants will be informed of amendments when they are made.
Discontinuance of Contract. Upon giving Penn Mutual 90 days prior
written notice, the Contractholder may discontinue the contract with
respect to new Purchase Payments, provided, however, that the contract
shall continue in full force and effect in accordance with its terms
with respect to Purchase Payments made prior to discontinuance.
Notices, Changes and Choices. To be effective, all notices, changes
and choices the Participant may make under the Group Annuity Contract
must be in writing, signed and received by us at our designated
service office. If acceptable to us, notices, changes and choices
relating to beneficiaries and ownership will take effect as of the
date signed unless we have already acted in reliance on the prior
status. We are not responsible for their validity.
Contract Payments. All sums payable to or by us are payable at our
designated service office. We may require return of the contract prior
to making payment.
Protection of Proceeds. Payments under this contract may not be
assigned by the payee prior to their due dates. To the extent allowed
by law, payments are not subject to legal process for debts of a
payee.
Compliance with Minimum Value Requirements. Annuity, death and
withdrawal benefits are not less than the minimum benefits required
under applicable laws and regulations of the jurisdiction in which
this certificate is delivered.
The benefits provided under the Group Annuity Contract from the
Participant's Fixed Account are increased by interest credited in
excess of the guaranteed minimums, if any.
Periodic Reports. At least once a year we will furnish each
Participant a report. It will set forth the current number of
Accumulation Units or Annuity Units, the value per Accumulation or
Annuity Unit, the Participant's Variable Account Value and the
Participant's Fixed Account Value. Each person with voting rights in
the Separate Account will be furnished reports required by the
Investment Company Act of 1940.
<PAGE>
VALUES AND PAYMENTS TO YOU UNDER THE GROUP ANNUITY CONTRACT, WHEN BASED UPON THE
INVESTMENT EXPERIENCE OF A SEPARATE ACCOUNT AND ARE NOT GUARANTEED AS TO FIXED
DOLLAR AMOUNT.
Group Variable and Fixed
Annuity Certificate --
Flexible Purchase Payments
The Penn Mutual Life Insurance Company, Independence Square, Philadelphia,
Pennsylvania 19172
EB1611 3/85
<PAGE>
The Penn Mutual Life Insurance Company
Founded 1847
Annuitant Annuity Date
Contract Number Contract Date
The Penn Mutual Life Insurance Company will make monthly annuity payments and
other payments as set forth in this contract.
This is a legal contract between you and us. Please read the contract carefully.
VALUES AND PAYMENTS TO YOU UNDER THIS CONTRACT VARY ACCORDING TO THE INVESTMENT
EXPERIENCE OF A SEPARATE ACCOUNT AND ARE NOT GUARANTEED AS TO FIXED DOLLAR
AMOUNT.
TEN DAY RIGHT TO REVIEW CONTRACT: You may cancel this contract within ten days
after its receipt. Simply return or mail it to us or our agent. We will be
refund the contract value.
/s/ /s/
------------------------------ -----------------------------------
Secretary Chairman and
Chief Executive Officer
Individual Variable
Annuity Contract
Flexible Purchase Payments
o Annuity Payments payable on Annuity Date
o Flexible Purchase Payments payable until
Annuity Date
o Participating
The Penn Mutual Life Insurance Company, Independence Square, Philadelphia,
Pennsylvania 19172
DI-1182-V
<PAGE>
Table of Contents
Page
Section 1 - Contract Specifications 3
Section 2 - Endorsements 4
Section 3 - Definitions 5
Section 4 - Purchase Payments 5
Section 5 - Charges and Deductions 5
Section 6 - The Separate Account 6
Section 7 - Accumulation Values 7
Section 8 - Annuity Payments 8
Section 9 - Annuity Options 9
Section 10 - Annuity Options Tables 10
Section 11 - Payment on Death 11
Section 12 - Transfer To Or From Another Contract 11
Section 13 - Withdrawal 11
Section 14 - Miscellaneous 12
<PAGE>
Section 2 - Endorsements
This contract is amended as follows:
1. The following endorsement which has or may have been added to this contract
is rescinded and replaced in its entirety by this endorsement:
Endorsement No. 1447-805.
2. The following provision is added to Section 4 -- Purchase Payments:
Total purchase payments in any calendar year may not exceed $1,000,000
without our consent.
3. The first three paragraphs in Section 5--Charges and Deductions are changed
to read as follows:
Contract Administration Charge. This charge is the lesser of 2% of the
Contract Value at the end of the contract year or $30. It will be deducted each
year on the date specified n Section 1. It will also be deducted when the
Contract Value is withdrawn in full if withdrawal is not on t he date specified.
The charge will never exceed $30. The charge will not be on or after the Annuity
Date.
Expense Risk Charge. This charge is made to compensate us for guaranteeing
that the contract administration charge will never exceed $30. On an annual
basis it equals 0.5% of the daily net asset value of the e Separate Account.
Mortality Risk Charge. This charge is made to compensate us for the
mortality guarantees we make under this contract. On an annual basis it equals
0.75% if the daily net asset value of the Separate Account.
4. Section 11 -- Payment on Death is amended in its entirety to read as
follows:
Section 11 -- Payment on Death
Death payments described in this Section shall be payable upon the earlier
of:
(1) the death of the Annuitant, or
(2) the death of the Owner (other than the trustee of a Qualified Plan).
Death Before The Annuity Date. Upon receipt of due proof of death prior to
the Annuity Date, Penn Mutual will pay to the beneficiary the greater of:
(1) The sum of all Purchase Payments, adjusted for withdrawals and contract
transfers.
(2) The Contract Value on the date of receipt of such proof of death, or
(3) The Contract Value as of the Contract Date or, of later, the most
recent seven year anniversary of the contract occurring before the
Owner's 81st birthday, increased by subsequent Purchase Payments and
transfers to the contract and reduced by subsequent withdrawals and
transfers from the contract.
If the beneficiary is not the decedent's spouse, the beneficiary can choose
an Annuity Option for death payments. The Option must provide for payments over
the beneficiary's life or over a period not longer than the beneficiary's life
expectancy. Payments shall begin within one year after the date of death. If
payment is made in a lump sum, such payment shall be made within five years
after the date of death.
If the beneficiary is the decedent's surviving spouse, the surviving spouse
shall become the owner of this contract.
Death After The Annuity Date. If death occurs after the Annuity Date, the
amount payable, if any, will be according to the annuity option in force.
5. The first paragraph in Section 8 -- Annuity Payments is changed to read as
follows:
Annuity Date. Unless another Annuity Date was chosen in the application or
later written notification, the Annuity Date for Nonqualified Plans will be the
first day of the next month after the Annuitant's 85th birthday and for
Qualified Plans, the first day of April in the calendar year following the year
in which the Annuitant attained age 70 1/2.
<PAGE>
Endorsement No. 1499-91
The Annuity Date must be on the first day of a month. You may change
the Annuity Date up to 30 days before the current Annuity Date.
6. Section 13 -- Withdrawal is amended in its entirety to read as follows:
Section 13 -- Withdrawal
Withdrawal. Prior to the earlier of the Annuity Date or the first death to
occur of the Owner or the Annuitant, the Owner may withdraw all or part of the
Contract Value. After the Annuity Date if Option 1 in Section 9 is in force, the
payee may withdraw the present value of the annuity payments remaining to be
made.
For full withdrawal, this contract must be surrendered to Penn Mutual. For
partial withdrawals of the Contract Value, the withdrawal must be at least $250.
The amount remaining under the contract must be at least $250.
Contingent Deferred Sales Charge. This charge will be make at withdrawal.
It will be the lesser of:
(1) 5% of the sum of the Purchase Payments made within 7 years prior to the
date of the withdrawal, or
(2) 5% of the amount withdrawn in excess of the free withdrawal amount.
The cumulative sum of such charges made within 7 years prior to the date of
withdrawal will never be more than 5% of the sum of all Purchase Payments
made during the same period.
Free Withdrawal. The Owner may at any time withdrawal all or any part of
the Contract Value free from Contingent Deferred Sales Charge if (i) the Owner
in a Nonqualified Plan, or the Annuitant in a Qualified Plan, is then disabled
as defined in Section 72(m)(7) of the Internal Revenue Code and as applied under
the Social Security Act, (ii) the disability began after the Contract Date, and
(iii) the disability had continued without interruption for four months has
continued without interruption for four months.
No charge will be made for that portion of the first withdrawal make in a
contract year which does not exceed 10% of the sum of all Purchase Payments
which were made one year or more prior to the date of withdrawal.
No charge will be made on the portion of the first withdrawal made in the
contract years set forth below which does not exceed the following percentages
of the Contract Value:
Contract Year Percentage
------------- ----------
Eighth 25%
Ninth 50%
Tenth 75%
No contingent deferred sales charge will be applicable after this contract
has been in force for ten years.
For purpose of this Section, if there has been a transfer from another
contract, the most recent Purchase Payments under that contract shall be deemed
to have been made under this contract to the extent of the amount transferred.
Payment of Withdrawals. Unless you notify us otherwise, partial withdrawals
prior to the Annuity Date and related charges, will be deducted from each
subaccounts of each investment account in the ratio of your interest in each
subaccount to your Contract Value. Withdrawals will be based on values for the
valuation period in which the notice, and contract if required, are received at
our designated service office.
7. Effective Date
The effective date of this endorsement is the Contract Date unless a later
date is shown below.
Philadelphia, Pennsylvania The Penn Mutual Life Insurance Company
/s/
-----------------------------------
Actuarys
<PAGE>
Section 3 - Definitions
Owner: The person entitled to exercise all rights under the contract. In
this contract, the word "you" means Owner.
Purchase Payments: The money you pay us for this contract.
Annuitant: The person during whose life annuity payments are made.
Annuity Date: The date on which annuity payments are to start.
Accumulation Unit: An index used to compute the contract value prior to the
annuity date.
Annuity Unit: An index used to compute annuity payments.
Contract Value: The value of all accumulation units credited to the
contract.
Qualified Plan: A retirement plan that receives special tax treatment under
Sections 401, 403, 404, 408, 457 or any similar provisions of the Internal
Revenue Code.
Nonqualified Plan: A retirement plan other than a Qualified Plan.
Section 4 - Purchase Payments
First Purchase Payment. The first Purchase Payment must be made prior to
issue of the contract. The minimum first Purchase Payment is $250 for
Qualified Plans and $1,500 for Nonqualified Plans, or such lower minimum as
we may establish.
Subsequent Purchase Payment. Subsequent Purchase Payment may be made at any
time without prior notice to us. The minimum subsequent Purchase Payment is
$40 for Qualified Plans and $300 for Nonqualified Plans, or such lower
minimum as we may establish. Subsequent Purchase Payments are not required
to keep this contract in force.
Section 5 - Charges and Deductions
Contract Administration Charge. This charge of $30 will be deducted each
year on the date specified in Section 1. It will also be deducted when the
Contract Value is withdrawn in full if withdrawal is not on the date
specified. The charge will never increase. The charge will not be deducted
on or after the Annuity Date.
Expense Risk Charge. This charge is made to compensate us for guaranteeing
that the contract administration charge will never increase. On an annual
basis it equals 0.5% of the daily net asset value of the Separate Account.
Mortality Risk Charge. This charge is made to compensate us for the
mortality guarantees we make under this contract. On an annual basis it
equals 0.8% of the daily net asset value of the Separate Account.
Contingent Deferred Sales Charge. This charge may be deducted upon
withdrawal, in whole or in part, of the Contract Value or the present value
of remaining annuity payments (if applicable). See Section 13.
<PAGE>
Premium Taxes. Any premium taxes imposed by a state or other government
will be deducted when due.
Deductions. The expense risk and mortality risk charge will be computed and
deducted from each subaccount of each investment account established under
the contract for each day the contract is in force. Other charges will be
deducted by canceling accumulation units or annuity units (if applicable)
of a value equal to the deduction. Unless you notify us otherwise,
cancellation of accumulation units will be in the ratio of your interest in
each subaccount to your Contract Value.
Section 6 - The Separate Account
The Separate Account: The name of the Separate Account is specified in
Section 1. It is a separate account of The Penn Mutual Life Insurance
Company. It is for this and other contracts. Your Purchase Payments will be
allocated to the Separate Account.
Investment of Separate Account Assets. Assets held in the Separate Account
will be invested in one or more eligible mutual funds. Current eligible
mutual funds are specified in Section 1.
For this and other contracts the Separate Account is divided into
investment accounts. There is an investment account for each eligible
mutual fund. For each investment account, there is a subaccount for
Qualified Plans and a subaccount for Nonqualified Plans.
You choose the investment account to which you want your Purchase Payments
allocated.
We own the assets held in the Separate Account. However, the portion of
such assets equal to the reserves and other contract liabilities with
respect to each subaccount of each investment account of the Separate
Account are not chargeable with liabilities arising out of any other
business we may conduct.
Upon notice to us, you may transfer part or all the value of the
Accumulation Units or Annuity Units credited under this contract from one
investment account to another. No more than two such transfers may be made
in a calendar year. Such investment account transfers, as well as all other
investments, are subject to the limits and rules applicable to each mutual
fund.
Substitution of Investment. If investment in a mutual fund should no longer
be possible or in our judgment becomes inappropriate to the purposes of the
contract, we may substitute another mutual fund. Substitution may be made
with respect to existing investments and the investment of future Purchase
Payments.
<PAGE>
Section 7 - Accumulation Values
Number of Accumulation Units. For each subaccount of each investment
account of the Separate Account, the number of your Accumulation Units is
the sum of
Each Purchase Payment allocated to the subaccount
divided by
The value of an Accumulation Unit for that subaccount for the
valuation period in which we received the Purchase Payment.
The number will be adjusted for transfers, withdrawals and charges.
Adjustments will be made as of the valuation period in which we receive all
requirements for the transaction, as appropriate.
Value of Each Accumulation Unit. For each subaccount of each investment
account of the Separate Account, the value was arbitrarily set at $10 when
the subaccount was established. The value may increase or decrease from one
valuation period to the next. For any valuation period the value is
The value of an Accumulation Unit for the prior valuation period
multiplied by
The net investment factor for that subaccount for the valuation
period.
Net Investment Factor. As used in this contract, is an index used to
measure the investment performance of a subaccount from one valuation
period to the next. For any subaccount, the net investment factor for a
valuation period is found 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 "exdividend" 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 tax reserves.
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 tax reserves as of the end of
the last prior valuation period.
<PAGE>
Where (c) is
The sum of the daily expense risk charge and the daily mortality
risk charge. See Section 5. On an annual basis, the sum of such
charges equals 1.30% of the daily net asset value of the Separate
Account.
Valuation Period. As used in this contract, this is the interval from one
valuation time to the next valuation time. Valuation time is the time as of
which each mutual fund determines the net asset value of its shares.
Section 8 - Annuity Payments
Annuity Date. The Annuity Date must be on the first day of a month. It may
not be later than the first day of the next month after the Annuitant's
85th birthday. You chose the Annuity Date in the application. You may
change the Annuity Date up to 30 days prior to the current Annuity Date.
Annuity Options. You or your surviving beneficiary may choose an annuity
option up to 30 days prior to the Annuity Date. An option not set forth in
the contract may be chosen if acceptable to us.
First Variable Annuity Payment. Any premium taxes will be deducted. The net
Contract Value as of the Annuity Date will be applied to the annuity table
for the option chose. The annuity tables show the amount of the first
payment for each $1,000 so applied, according to the age and sex at the
Annuity Date. The tables are based on the 1971 Individual Annuity Mortality
Table (set back one year) with interest at 4%. Adjusted ages are used in
entering those tables.
Subsequent Variable Annuity Payments. Payments after the first will vary in
amount according to the investment performance of the subaccount or
subaccounts you have chosen. The amount may change from month to month. The
amount of each subsequent payment is the sum of the following amounts
attributable to each applicable subaccount
The number of Annuity Units for the subaccount
multiplied by
The value of an Annuity Unit for that subaccount for the valuation
period in which payment is due.
We guarantee that the amount of each annuity payment after the first will
not be affected by variations in expense or mortality experience.
Minimum Annuity Payments. If the net Contract Value to be applied at the
Annuity Date is less than $5,000, we may pay such amount in a lump sum.
Annuity payments will be made monthly; but if any payment would be less
than $50, we may change the frequency so payments are at least $50 each.
Number of Annuity Units. The number of units for the subaccount of each
investment account you have chosen is
The amount of the first variable annuity payment attributable to that
subaccount
divided by
The value of Annuity Unit for the subaccount as of the Annuity Date.
The number is fixed except for adjustments for subaccount transfers.
Adjustments will be made as of the valuation period in which we receive all
requirements for the transfer, as appropriate.
<PAGE>
Value of Each Annuity Unit. For each subaccount of each investment account,
the value was arbitrarily set at $10 when the subaccount was established.
The value may increase or decrease from one valuation period to the next.
For any valuation period the value is
The value of an Annuity Unit for the last prior valuation period
multiplied by
The net investment factor for that subaccount for the valuation period
multiplied by
An interest factor to neutralize the assumed investment rate of 4%
built into the annuity tables.
Section 9 - Annuity Options
Option 1 - Annuity for Specified Number of Years. Payments will be made for
a specified number of years, which may not be less than 5 or more than 30.
Option 2 - Life Annuity. Payments will be made for the life of the
Annuitant. Payments will cease with the last payment due prior to the
Annuitant's death.
Option 3 - Life Annuity With Payments Guaranteed for 10 Or 20 Years.
Payments will be made for the life of the Annuitant. A guaranteed payment
period of either 10 or 20 years may be chosen.
Option 4 - Joint and Survivor Life Annuity. Payments will be made during
the lifetimes of the Annuitant and a designated second Annuitant. Payments
will continue as long as either is living. The amount of such payments will
not change by reason of the death of the first Annuitant to die.
If the Annuitant dies prior to the end of the specified period under Option
1 or the guaranteed period under Option 3, the beneficiary may choose
either:
(1) To have the payments continue for the specified or guaranteed period,
or
(2) To receive at any time in lump sum the present value of the remaining
payments to be made over the specified or guaranteed period.
If a beneficiary dies while receiving annuity payments under this option,
the present value will be paid in a lump sum to the beneficiary's estate.
The present value will be (a) computed as of the valuation period in which
due proof of death is received at our designated service office, and (b)
commuted at the assumed investment rate of the annuity tables.
Payments. Payments will be made on the first day of each month starting
with the Annuity Date. Payments under all options will be made to the Owner
or to such person(s), designated by the Owner, except under Option 4. Under
Option 4, payments will be jointly payable while both Annuitants are alive.
<PAGE>
Section 10 - Annuity Option Tables
The following tables show the amount of the first monthly income payment for
each $1,000 of value applied under a variable settlement option. "Age" as used
in the tables means an adjusted age determined in the following manner from the
actual age of the Annuitant on the birthday nearest the date of the first
payment.
Calendar Year of Birth Adjusted Age
Before 1900 Actual Age increased by 1
1900-1919 Actual Age
1920-1939 Actual Age decreased by 1
1940-1959 Actual Age decreased by 2
1960 and later Actual Age decreased by 3
Option 1 --Annuity for Specified Number of Years
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Number of Years 5 6 7 8 9 10 11 12 13 14 15
Monthly Income 18.32 15.56 13.59 12.12 10.97 10.06 9.31 8.69 8.17 7.72 7.34
- ---------------------------------------------------------------------------------------------------------------------
Number of Years 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30
Monthly Income $7.00 6.71 6.44 6.21 6.00 5.81 5.64 5.49 5.35 5.22 5.10 5.00 4.90 4.80 4.72
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
Option 2 -- Life Annuity and Option 3 -- Life Annuity with Payments
Guaranteed for 10 or 20 Years
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
Male Life 10 Years 20 Years Female Life 10 Years 20 Years
Age Annuity Guaranteed Guaranteed Age Annuity Guaranteed Guaranteed
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
50 5.00 4.93 4.73 50 4.59 4.56 4.47
51 5.09 5.01 4.78 51 4.65 4.62 4.52
52 5.17 5.08 4.84 52 4.72 4.69 4.57
53 5.27 5.17 4.89 53 4.80 4.76 4.63
54 5.36 5.25 4.95 54 4.87 4.83 4.69
55 5.47 5.34 5.01 55 4.96 4.91 4.75
56 5.57 5.43 5.06 56 5.05 4.99 4.81
57 5.68 5.53 5.12 57 5.14 5.07 4.87
58 5.80 5.63 5.18 58 5.24 5.16 4.93
59 5.93 5.73 5.24 59 5.34 5.25 5.00
60 6.06 5.84 5.30 60 5.45 5.35 5.07
61 6.20 5.96 5.36 61 5.56 5.45 5.14
62 6.35 6.08 5.42 62 5.69 5.56 5.20
63 6.51 6.21 5.48 63 5.82 5.68 5.27
64 6.69 6.34 5.53 64 5.96 5.80 5.34
65 6.87 6.48 5.59 65 6.11 5.93 5.41
66 7.07 6.62 5.64 66 6.27 6.07 5.48
67 7.28 6.77 5.69 67 6.45 6.22 5.54
68 7.51 6.93 5.73 68 6.64 6.37 5.60
69 7.75 7.09 5.78 69 6.85 6.54 5.66
70 8.01 7.26 5.81 70 7.08 6.71 5.71
71 8.30 7.43 5.85 71 7.33 6.89 5.76
72 8.50 7.60 5.88 72 7.60 7.08 5.81
73 8.93 7.78 5.91 73 7.90 7.28 5.84
74 9.28 7.96 5.93 74 8.22 7.48 5.88
75 9.67 8.14 5.95 75 8.57 7.68 5.90
76 10.08 8.32 5.97 76 8.95 7.89 5.92
77 10.53 8.50 5.98 77 9.37 8.10 5.94
78 11.02 8.67 5.99 78 9.82 8.30 5.96
79 11.54 8.84 5.99 79 10.32 8.50 5.97
80 12.12 9.01 6.00 80 10.86 8.69 5.98
81 12.74 9.16 6.00 81 11.46 8.88 5.98
82 13.41 9.31 6.00 82 12.11 9.04 5.99
83 14.14 9.44 6.00 83 12.82 9.20 5.99
84 14.95 9.57 6.00 84 13.59 9.33 6.00
85 15.84 9.67 6.00 85 14.43 9.45 6.00
- -----------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Option 4 -- Joint and Survivor Life Annuity
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
Female Male Age Female
----------------------------------------------------------------------------------------
Age 50 55 60 65 70 75 80 85 Age
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
50 4.25 4.34 $4.41 $4.46 $4.51 $4.54 $4.56 $4.57 50
55 4.40 4.53 4.64 4.74 4.81 4.87 4.90 4.93 55
60 4.53 4.72 4.90 5.05 5.18 5.28 5.35 5.39 60
65 4.66 4.90 5.16 5.40 5.62 5.80 5.92 6.01 65
70 4.76 5.07 5.40 5.77 6.12 6.44 6.69 6.87 70
75 4.85 5.20 5.62 6.11 6.65 7.19 7.68 8.05 75
80 4.91 5.31 5.79 6.39 7.12 7.94 8.79 9.56 80
85 4.95 5.38 5.91 6.59 7.48 8.59 9.88 11.25 85
- --------------------------------------------------------------------------------------------------------------
</TABLE>
Section 11 - Payment on Death
Death Before The Annuity Date. Upon receipt of due proof of the death of
the Annuitant prior to the Annuity Date, we will pay to the beneficiary the
greater of:
(1) The sum of all Purchase Payments, adjusted for withdrawals and contract
transfers, or
(2) The Contract Value for the valuation period in which we receive such
proof at our designated service office.
Payment will be in a lump sum or the beneficiary may choose an Annuity
Option under this contract. If we are issuing new contracts on this form at
the time of payment, the beneficiary may elect to apply for a new contract
and apply the payment as a transfer to the new contract.
Death After the Annuity Date. If the Annuitant dies after the Annuity Date,
the amount payable, if any, will be according to the Annuity Option in
force. See Section 9.
Section 12 - Transfer to or From Another Contract
Transfer to Another Annuity Contract You may transfer all or part of your
Contract Value to another annuity contract issued to you by us which
contains a reciprocal transfer provision. The Owner, contingent owner,
Annuitant and beneficiaries of the other annuity contract must be the same
as under this contract.
Transfer to a new contract for a Nonqualified Plan must be at least $1,000
or such lower minimum as we may establish. Other contract transfers must be
at least $250. For partial transfers the remaining Contract Value for this
contract must be at least $250. For full transfers this contract must be
surrendered to our designated service office. A request to transfer must be
received by us and any other applicable requirement must be met prior to
the death of the Annuitant. No more than two transfers may be made to
another annuity contract in a calendar year. No transfer may be made after
the thirtieth day before the Annuity Date.
Transfers From Another Annuity Contract You may make transfers to this
contract from another annuity contract issued by us which provides for such
transfers, subject to the limits set forth in that contract.
Section 13 - Withdrawal
Withdrawal. Prior to the earlier of the Annuity Date or the death of the
Annuitant, you may withdraw all or part of the Contract Value. After the
Annuity Date and the election of Option 1 in Section 9, the payee may
withdraw the present value of the annuity payments remaining to be made.
The present value will be (a) computed as of valuation period in which
notice of the withdrawal is received at our designated service office and
(b) commuted at the assumed investment rate of the annuity tables.
For full withdrawal, this contract must be surrendered to our designated
service office. For partial withdrawals of the Contract Value, the
withdrawal must be at least $250. The amount remaining under the contract
must be at least $250.
<PAGE>
Contingent Deferred Sales Charges. This charge will be made at withdrawal.
It will be the lesser of:
(1) 5% of the sum of the Purchase Payments made within 7 years prior to the
date of the withdrawal, or
(2) 5% of the amount withdrawn.
The cumulative sum of such charges made within 7 years prior to the day of
withdrawal will never be more than 5% of the sum of all Purchase Payments
made during the same period.
No charge will be made for that portion of the first withdrawal made in a
contract year that does not exceed 10% of the sum of all Purchase Payments
which were made more than one year prior to the date of withdrawal.
For purposes of this Section, if there has been a transfer from another
contract, the most recent Purchase Payments under that contract shall be
deemed to have been made under this contract to the extent of the amount
transferred.
Payment of Withdrawals. Unless you notify us otherwise, partial withdrawals
prior to the Annuity Date and related charges will be deducted from each
subaccount of each investment account in the ratio of your interest in each
subaccount to your Contract Value. Withdrawals will be based on values for
the valuation period in which the notice, and contract if required, are
received at our designated service office.
Section 14 - Miscellaneous
Beneficiary. The Beneficiary is the person who is to receive:
(1) Payment on death of the Annuitant prior to the Annuity Date or
(2) Guaranteed annuity payments, if any, on death of the Annuitant on or
after the Annuity Date.
You choose the beneficiary in the application. You may change the
beneficiary while the Annuitant is alive.
The estate or heirs of a beneficiary who dies before the Annuitant have no
rights under this contract. If no beneficiary survives the Annuitant,
payment will be made to you or your estate.
Ownership of Contract. The Annuitant is the owner unless another owner is
named in the application or an endorsement.
Only an Owner may name or change a contingent owner.
Upon notice to us you may assign the contract to a new Owner. The
assignment cancels a designation of contingent owner.
<PAGE>
Deferment of Transfer and Payments. Transfers and payments of withdrawals
will be made within seven days. However, we may defer a transfer, a withdrawal,
the Annuity Date or annuity payments if:
(1) The New York Stock Exchange is closed (other than customary weekend and
holiday closings);
(2) Trading on the New York Stock Exchange is restricted;
(3) An emergency exists such that it is not reasonably practical to dispose
of securities held in the Separate Account or to determine the value
of its assets; or
(4) The Securities and Exchange Commission by order so permits for the
protection of security holders.
Conditions in (2) and (3) will be decided by, or in accordance with rules
of, the Securities and Exchange Commission.
Collateral Assignment. Upon notice to us you may make a collateral
assignment. It does not change contract ownership.
Restrictions of Qualified Plans. If the contract is issued pursuant to a
Qualified Plan, it may not be assigned, pledged or transferred unless permitted
by law.
Misstatement of Age or Sex. If the age or sex of the Annuitant or a joint
payee is misstated, annuity payments will be adjusted to reflect the correct age
and sex. If we have overpaid as a result of such misstatement, the amount will
be deducted from the next payments due under this contract. If we have
underpaid, the amount will be paid in full with the next payment due under this
contract.
Proof of Age Sex, or Survival. We may require satisfactory proof of correct
age or sex at any time. If any payment under this contract depends on the payee
being alive, we may require satisfactory proof of survival.
Incontestability. No statement made by the applicant will void the contract
unless it is contained in the written application attached to the contract. The
contract will be incontestable after it has been in force for 2 years from the
Contract Date.
The Contract. The contract, any endorsements, and its attached application
are the entire contract. It is issued in consideration of the application and
your Purchase Payments.
Only our President, a Vice President, Pension Actuary or Secretary may
change the contract. Any change must be in writing.
At any time we may make such changes in this contract as are required to
make it conform with any law or regulation issued by any government agency to
which it is subject.
Participating Contract. The contract may participate in our divisible
surplus. Divisible surplus, if any, to be apportioned to the contract shall be
apportioned annually and shall be paid in cash or credited to your Contract
Value at the end of the contract year. No divisible surplus is expected to be
apportioned to this contract in the foreseeable future.
Dates. Contract years and anniversaries are measured from the Contract
Date.
<PAGE>
Notices, Changes and Choices. To be effective, all notices, changes and
choices you may make under the contract must be in writing, signed and received
by us at our designated service office. If acceptable to us, notices, changes
and choices relating to beneficiaries and ownership will take effect as of the
date signed unless we have already acted in reliance on the prior status. We are
not responsible for their validity.
Contract Payments. All sums payable to or by us are payable at our
designated service office. We may require return of the contract prior to making
payment.
Protection of Proceeds. Payments under this contract may not be assigned by
the payee prior to their due dates. To the extent allowed by law, payments are
not subject to legal process for debts of a payee.
Periodic Reports. At least once a year prior to the Annuity Date, we will
furnish you a report. It will set forth the current number of Accumulation
Units, the value per Accumulation Unit and the total Contract Value. Each person
with voting rights in the Separate Account will be furnished reports required by
the Investment Company Act of 1940.
<PAGE>
This contract provides valuable benefits. Please contact Penn Mutual or its
agent if you have questions about this contract.
Please notify Penn Mutual promptly of any change in address.
Annual Election - Penn Mutual is a mutual life insurance company. It has no
stockholders. The Owner of this contract is a member of Penn Mutual while this
contract is in force during the life of the Annuitant before the Annuity Date
and before total withdrawal of the contract value. Members have the right to
vote in person or by proxy at the annual election of Trustees held at the Home
Office, Independence Square, Philadelphia, Pennsylvania, on the first Tuesday of
March. If more information is desired, it may be obtained from the Secretary.
VALUES AND PAYMENTS TO YOU UNDER THIS CONTRACT VARY ACCORDING TO THE INVESTMENT
EXPERIENCE OF A SEPARATE ACCOUNT AND ARE NOT GUARANTEED AS TO FIXED DOLLAR
AMOUNT.
Individual Variable
Annuity Contract --
Flexible Purchase Payments
o Annuity Payments payable on Annuity Date
o Flexible Purchase Payments payable until
Annuity Date
o Participating
The Penn Mutual Life Insurance Company, Independence Square, Philadelphia,
Pennsylvania 19172
DI-1182-V
<PAGE>
Section 2 - Endorsements
A002893E
Endorsement- Policy or Contract Not Transferable; Annuity Payment
Commencement Date; Form of Benefit; Notice and Election
The following provisions are added to the policy or contract:
1. Non-transferable
This policy or contract is non-transferable in accordance
with Section 401(g) of the Internal Revenue Code. It may not
be sold. assigned. discounted or pledged as collateral for a
loan or as security for the performance of an obligation or
for any other purpose, to any person other than Penn Mutual.
2. Benefit Commencement Date
On the Annuity Date or, if earlier. within 90 days following
receipt of the Owner's written notice of Intent to commence
annuity benefit payments, but in no event later than the
last day of the calendar year in which the Owner attains age
701/2, annuity benefit payments will commence. The form of
such benefit payments will be determined in accordance with
the provisions of the following paragraphs.
3. Form of Benefit-Married Owner
The term Married Owner shall mean an Owner who has been
married to the same spouse for at least the twelve
consecutive calendar months immediately preceding the
Benefit Commencement Date. The form of benefit for a Married
Owner shall be a Qualified Joint and 50% Survivor Annuity
which is the actuarial equivalent of a life annuity.
Election of an optional form of benefit may be made subject
to the conditions set forth in Paragraph 6 below.
4. Form of Benefit-Unmarried Owner
The form of benefit for an Owner who is not a Married Owner
shall be a life annuity unless the Owner elects an optional
form of benefit.
5. Payment of Death Benefit
If the Married Owner dies before the Benefit Commencement
Date, the Death Benefit will be payable to the Married
Owner's surviving spouse unless the spouse has consented to
the waiver of such Death Benefit in a written, notarized
statement of consent.
6. Notice and Election
A. Notice
At least 90 days before the earlier of (i) the Annuity
Date or (ii) the last day of the calendar year in which
the owner attains age 701/2 or immediately upon receipt
of the Owner's written notice of intent to commence
annuity benefit payments, Penn Mutual will give the
Owner Written Notice. Such Notice will:
1. Set forth the optional forms of benefit available to
the Owner who is not a Married Owner,and the procedure
for electing an optional form of benefit.
2. Provide, for the Married Owner, an explanation of the
Qualified Joint and Survivor Annuity and of the
optional forms of benefit available, the Married
Owner's right to elect an optional form of benefit,
the spouse's right to waive the Qualified Joint and
Survivor Annuity, and the Owner's rights during the
election period.
B. Election
Unless the Owner notifies Penn Mutual in writing of
election of an optional form of benefit by the day before
the Benefit Commencement Date, annuity benefit payments
shall be in the form of benefit set forth in Paragraphs 3
and 4 above.
Election by a Married Owner of a form of benefit other
than Qualified Joint and Survivor Annuity will be valid
only if accompanied by the written, notarized consent to
waiver of the Qualified Joint and Survivor Annuity by the
Married Owner's spouse.
Endorsement No. 1309-82
<PAGE>
7. Optional Forms of Benefit
Subject to the conditions and limitations in Paragraph 6
above, an Owner may elect any annuity payment option set
forth in the Annuity Options section or Income Payments
Options section of the policy or contract. The form of
benefit may not be changed after the Benefit Commencement
Date.
Philadelphia, Pennsylvania
(Included at Issue) The Penn Mutual Life Insurance Company
[GRAPHIC OMITTED]
Vice President and Senior Actuary
Endorsement No. 1309-82
<PAGE>
The Penn Mutual Life Insurance Company
A002430C
Founded 1847
Annuitant Annuity Date
Contract Number Contract Date
The Penn Mutual Life Insurance Company will make monthly annuity payments and
other payments as set forth in this contract.
This is a legal contract between the Owner and Penn Mutual. Please read the
contract carefully.
VALUES AND PAYMENTS UNDER THIS CONTRACT, WHEN BASED UPON THE INVESTMENT
EXPERIENCE OF A SEPARATE ACCOUNT, ARE VARIABLE. THEY MAY DECREASE OR INCREASE
AND ARE NOT GUARANTEED AS TO FIXED DOLLAR AMOUNT.
TEN DAY RIGHT TO REVIEW CONTRACT: The Owner may cancel this contract within ten
days after its receipt. Simply return or mail it to Penn Mutual or the
representative through whom it was purchased. The Variable Account Value and
Purchase Payments credited to the Fixed Account will be refunded.
/s/ /s/
---------------------------- ------------------------------------
Secretary Chairman
Chief Executive Officer
Individual Variable and Fixed
Annuity Contract
Flexible Purchase Payments
o Annuity Payments payable on Annuity Date
o Flexible Purchase Payments payable until
Annuity Date
o Participating
The Penn Mutual Life Insurance Company, Independence Square, Philadelphia,
Pennsylvania 19172
DV-790
Guide to Contract Sections
<PAGE>
A002883I
Section 1 - Specifications
Section 2 - Endorsements
Section 3 - Definitions
Section 4 - Purchase Payments
Section 5 - Variable Account Provisions
Section 6 - Fixed Account Provisions
Section 7 - Payment on Death
Section 8 - Transfer To Another Contract
Section 9 - Withdrawal
Section 10 - Miscellaneous
<PAGE>
SECTION I - CONTRACT SPECIFICATIONS
A002890P
- --------------------------------------------------------------------------------
ANNUITANT ANNUITY DATE
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
CONTRACT CONTRACT DATE
- --------------------------------------------------------------------------------
FIRST PURCHASE PAYMENT TO SEPARATE ACCOUNT AGE OF ANNUITANT
DATE CONTRACT ADMINISTRATION
THE SEPARATE ACCOUNT CHARGE IS DEDUCTED EACH YEAR
PENN MUTUAL VARIABLE ANNUITY ACCOUNT III
- --------------------------------------------------------------------------------
MORTALITY AND EXPENSE RISK CHARGES ARE MADE DAILY AGAINST THE ASSETS OF THE
SEPARATE ACCOUNT. ON AN ANNUAL BASIS THEY EQUAL 1.25% OF THE DAILY NET ASSET
VALUE OF THE SEPARATE ACCOUNT.
- --------------------------------------------------------------------------------
THE ASSETS OF THE SEPARATE ACCOUNT MUST EARN AN INVESTMENT RETURN OF AT LEAST
4.00% SO THAT THE DOLLAR AMOUNT OF VARIABLE ANNUITY PAYMENTS WILL NOT DECREASE.
- --------------------------------------------------------------------------------
ELIGIBLE FUNDS
Fidelity Management Quest for Value Advisors
Equity Income (a subsidiary of Oppenhiemer Capital)
Growth Value Equity
Asset Manager Small Capitalization
Independence Capital (ICMI) T. Rowe Price
Money Market High Yield Bond
Quality Bond Flexibly Managed
Growth Equity
Twentieth Century
Vontobel USA (Investors Research)
International Equity TCI Growth
Neuberger & Berman
Limited Maturity Bond Portfolio
Balanced
EXCEPT WITH THE CONSENT OF PENN MUTUAL, THERE CAN BE NO ALLOCATION OF PURCHASE
PAYMENTS AND TRANSFERS TO MORE THAN 17 OF THE FUNDS AND THE FIXED INTEREST
ACCOUNTS OVER THE DURATION OF THE CONTRACT.
DIVISIBLE SURPLUS APPORTIONED TO THIS CONTRACT, IF ANY, WILL BE APPLIED TO
PROVIDE ADDITIONAL ACCUMULATION UNITS OR ANNUITY UNITS UNLESS YOU ELECT TO HAVE
IT PAID IN CASH. CONTRACT ADMINISTRATION CHARGE IS EQUAL TO THE LESSER OF $30,
OR 2% OF THE VARIABLE ACCOUNT VALUE EACHYEAR IN WHICH FUNDS ARE HELD IN ONE OR
MORE VARIABLE ACCOUNTS.
DV-790 PAGE 3A
<PAGE>
SCHEDULE OF PURCHASE PAYMENTS TO THE FIXED ACCOUNTS
A002692P
<TABLE>
<CAPTION>
<S> <C> <C> <C>
DATE OF PAYMENT HOLDING ACCOUNT 1 YR GUARANTEE 3 YR GUARANTEE
5 YR GUARANTEE 7 YR GUARANTEE TOTAL PAYMENT
AFTER: HOLDING ACCOUNT 1 YR GUARANTEE 3 YR GUARANTEE
BUT BEFORE: 5 YR GUARANTEE 7 YR GUARANTEE TOTAL PAYMENT
BEGINNING: HOLDING ACCOUNT 1 YR GUARANTEE 3 YR GUARANTEE
UNTIL: 5 YR GUARANTEE 7 YR GUARANTEE TOTAL PAYMENT
</TABLE>
THE AMOUNT OF PURCHASE PAYMENTS AND THE INTERVAL OF SUBSEQUENT PURCHASE PAYMENTS
MAY BE CHANGED BY THE OWNER SUBJECT TO THE PROVISIONS OF THIS CONTRACT. ANY
CHANGE WILL AFFECT THE AMOUNT OF THE ANNUITY BENEFIT.
GUARANTEED EFFECTIVE ANNUAL RATES OF INTEREST
DV-790
PAGE 3B
<PAGE>
SCHEDULE OF BENEFITS - FIXED ACCOUNT
A002693P
THIS IS BASED ON THE ELECTION OF INTEREST OPTIONS AND PURCHASE PAYMENTS MADE IN
THE AMOUNTS AND AT THE INTERVALS STATED IN THE SCHEDULE OF PURCHASE PAYMENTS
SPECIFIED ON PAGE 3B. ACCUMULATIONS BEYOND THE INITIAL GUARANTEE PERIOD AND
PAYOUT OF BENEFITS ARE BASED ON THE MINIMUM CONTRACTUAL GUARANTEES.
THE AMOUNT OF MONTHLY ANNUITY BENEFIT ON THE ANNUITY DATE DEPENDS ON: (1) THE
AMOUNT AND FREQUENCY OF PURCHASE PAYMENTS MADE (2) THE INTEREST OPTION(S)
ELECTED (3) THE ACTUAL RATES CREDITED (4) THE ANNUITY OPTION CHOSEN.
FOR A WITHDRAWAL MADE DURING THE FIRST CONTRACT YEAR, THE WITHDRAWAL CHARGE
WOULD BE 7% OF THE AMOUNT WITHDRAWN. FOR OTHER CHARGES SEE SECTIONS 5-B, 6-C AND
9.
DV-790
PAGE 3C
<PAGE>
Section 2 - Endorsements
A002884E
Endorsement-Individual Retirement Annuity
The contract is amended as follows:
1. The definition of Owner in the Definitions Section is amended by the addition
of the following provision:
The entire interest in this contract will be for the exclusive benefit of
the Annuitant who will be the Owner for his or her lifetime.
2. The following provision is added to the Purchase Payments Section:
There are no fixed Purchase Payments under this contract.
No Purchase Payments under this contract may be made unless this contract is
an Individual Retirement Annuity which meets the requirements of Section
408(b) of the Internal Revenue Code (Code) for the taxable year of the Owner
for or during which the Purchase Payment is made. Purchase Payments must be
paid in cash and either:
(a) must meet the requirements for deduction under Section 219 of the code
and must not exceed the lesser of $2,000 or 100% of compensation per year
except, in the case of a simplified employee pension as defined in
Section 408(k) of the Code, the maximum Purchase Payment per year shall
be 15% of compensation up to a maximum of $200,000 of compensation
(adjusted pursuant to Section 415 of the code) may be contributed by the
employer, or
(b) must be paid with funds which qualify as a rollover contribution under
Sections 402(a)(5), 402(a)(7), 408(b)(8), 408(d)(3), 409(b)(3)(c) of the
Internal Revenue Code.
3. The Participating Contract paragraph in the Miscellaneous Section is amended
to read as follows:
Participating Contract. The contract may participate in our divisible
surplus. Divisible surplus, if any. to be apportioned to the contract shall
be apportioned annually and shall be credited to your Contract Value at the
end of the contract year. Dividends will not be paid in cash.
No divisible surplus is expected to be apportioned to this contract in the
foreseeable future.
Any refund of Purchase Payments (other than those attributable to excess
contributions) will be applied before the close of the calendar year
following the year of the refund toward payment of future premiums or the
purchase of additional benefits.
4. Any benefits payable under the Annuity Payments Section, or Withdrawal
Section are subject to the following added provisions:
Article I-Notwithstanding any provision of this contract to the contrary, the
distribution of an individual's interest shall be made in accordance with the
minimum distribution requirements of section 408(a)(6) or section 408(b)(3)
of the Code and the regulations thereunder, including the incidental death
benefit provisions of section 1.401(a)(9)-2 of the proposed regulations, all
of which are herein incorporated by reference.
Article II-The owner's entire interest in the contract must be distributed,
or begin to be distributed, by the owner's required beginning date, which is
the April 1 following the calendar year in which the owner reaches age 70
1/2. For each succeeding year, a distribution must be made on or before
December 31. By the required beginning date the owner may elect to have the
balance in the contract distributed in one of the following forms:
a. a single sum payment;
b. equal or substantially equal payments over the life of the owner;
c. equal or substantially equal payments over the lives of the owner and his
or her designated beneficiary;
d. equal or substantially equal payments over a specified period that may
not be longer than the owner's life expectancy;
Endorsement No. 1534-90
<PAGE>
Endorsement-Individual Retirement Annuity (continued)
A002885E
e. equal or substantially equal payments over a specified period that may not
be longer than the joint life and last survivor expectancy of the owner
and his or her designated beneficiary.
Article III-If the owner dies before his or her entire interest is
distributed, the entire remaining interest will be distributed as follows:
a. If the owner dies on or after distributions have begun under Article II,
the entire remaining interest must be distributed at least as rapidly as
provided under Article II.
b. If the owner dies before distributions have begun under Article II, the
entire remaining interest must be distributed as elected by the owner or,
if the owner has not so elected, as elected by the beneficiary or
beneficiaries, as follows:
1) by December 31 st of the year containing the fifth anniversary of the
owner's death; or
2) in equal or substantially equal payments over the life or life
expectancy of the designated beneficiary or beneficiaries starting by
December 31st of the year following the year of the owner's death. If,
however, the beneficiary is the owner's surviving spouse, then this
distribution is not required to begin before December 31st of the year
in which the owner would have turned 70 1/2.
Article IV-Unless otherwise elected by the owner prior to the commencement of
distributions under Article II or, if applicable, by the surviving spouse
where the owner dies before distributions have commenced, life expectancies
of an owner or spouse beneficiary shall be recalculated annually for purposes
of distributions under Article II and Article III. An election not to
recalculate shall be irrevocable and shall apply to all subsequent years. The
life expectancy of a non-spouse beneficiary shall not be recalculated.
Article V-An individual may satisfy the minimum distribution requirements
under sections 408(a)(6) and 408(b)(3) of the Code by receiving a
distribution from one IRA that is equal to the amount required to satisfy the
minimum distribution requirements for two or more IRAs. For this purpose, the
owner of two or more IRAs may use the alternative method described in Notice
88-38,1988-1 C.B. 524, to satisfy the minimum distribution requirements
described above.
5. In the Annuity Payments Section the Provision entitled Annuity Date is
changed to read as follows, subject to the minimum distribution requirements
of Section 4 above being satisfied by such alternative methods as may from
time to time be approved by the Commissioner of Internal Revenue: Annuity
Date. The Annuity Date must be on the first of the month. It may not be later
than the first day of the next month after the Annuitant 's 90th birthday.
You choose the Annuity Date in the application. You may change the Annuity
Date up to 30 days prior to the current Annuity Date.
6. In the Miscellaneous Section, the provision entitled Ownership of Contract is
changed to read as follows: Ownership-Transferability and Forfeitability
Restriction. The Annuitant is the Owner. This contract is nontransferable by
the Owner and the entire interest of the Owner is nonforfeitable in
accordance with applicable provisions of the Internal Revenue Code.
7. The following provision is added to the Miscellaneous Section: Amendment of
Policy. To the extent necessary to comply with applicable laws and
regulations, including the Internal Revenue Code and rules and regulations
thereunder, Penn Mutual reserves the right to amend this contract without the
consent of the Owner. Such amendment may, to the extent necessary, have
retroactive effect. The Owner will be given a copy of any such' amendments
when they are made.
8. The terms of this endorsement shall override any inconsistent or conflicting
provisions in the contract. The Effective Date of this endorsement is the
later of January 1,1989, or the Contract Date.
Philadelphia, Pennsylvania
(Included at Issue) The Penn Mutual Life Insurance Company
[GRAPHIC OMITTED]
Endorsement No. 1534-90
<PAGE>
Section 2 - Endorsements
A002888E
Endorsement-Tax Deferred Annuity
The following provisions are added to the contract:
1. Non-transferable
This policy or contract is non-transferable in accordance with Section 401(g)
of the Internal Revenue Code. It may not be sold, assigned, discounted or
pledged as collateral for a loan or as security for the performance of an
obligation or for any other purpose, to any person other than Penn Mutual.
2. Benefit Commencement Date
On the Annuity Date or, if earlier, within 90 days following receipt of the
Owner's written notice of intent to commence annuity benefit payments, but in
no event later than the last day of the calendar year in which the Owner
attains age 701/2, annuity benefit payments will commence. The form of such
benefit payments will be determined in accordance with the provisions of the
following paragraphs.
3. Form of Benefit-Married Owner
The term married owner shall mean an Owner who has been married to the same
spouse for at least the twelve consecutive calendar months immediately
preceding the Benefit Commencement Date. The form of benefit for a Married
Owner shall be a Qualified Joint and 50% Survivor Annuity which is the
actuarial equivalent of a life annuity. Election of an optional form of
benefit may be made subject to the conditions set forth in Paragraph 6 below.
4. Form of Benefit-Unmarried Owner
The form of benefit for an Owner who is not a Married Owner shall be a life
annuity unless the Owner elects an optional form of benefit.
5. Payment of Death Benefit
If the married Owner dies before the Benefit Commencement Date, the Death
Benefit will be payable to the Married Owner's surviving spouse unless the
spouse has consented to the waiver of such Death Benefit in a written,
notarized statement of consent.
6. Notice and Election
A. Notice
At least 90 days before the earlier of (i) the Annuity Date or (ii) the
last day of the calendar year in which the owner attains age 701/2, or
immediately upon receipt of the Owner's written notice of intent to
commence annuity benefit payments, Penn Mutual will give the Owner written
Notice. Such Notice will:
1. Set forth the optional forms of benefit available to the Owner who is
not a Married Owner, and the procedure for electing an optional form of
benefit.
2. Provide, for the Married owner, an explanation of the Qualified Joint
and Survivor Annuity and of the optional forms of benefit available,
the Married Owner's right to elect an optional form of benefit, the
spouse's right to waive the Qualified Joint and Survivor Annuity, and
the Owner's rights during the election period.
B. Election Unless the owner notifies Penn Mutual in writing of election of
an optional form of benefit by the day before the Benefit Commencement
Date, annuity benefit payments shall be in the form of benefit set forth
in Paragraphs 3 and 4 above.
Election by a Married Owner of a form of benefit other than Qualified Joint
and Survivor Annuity will be valid only if accompanied by the written,
notarized consent to waiver of the Qualified Joint and Survivor Annuity by
the Married Owner's spouse.
Endorsement No. 1495-90
<PAGE>
A002889E
7. Optional Forms of Benefit
Subject to the conditions and limitations in Paragraph 6 above, an owner may
elect any annuity payment option set forth in the Annuity Options section or
Income Payments Options section of the policy or contract. The form of
benefit may not be changed after the Benefit Commencement Date.
8. Benefit Restrictions
Any benefits payable under the Annuity Payments Section, or the Withdrawal
Section are subject to the following added provisions:
A. Effective with respect to contributions made after December 31, 1988,
withdrawals attributable to contributions made pursuant to a salary
reduction agreement may be made only when the Owner is over age 591/2,
leaves the employment of the employer who purchased the contract, dies,
becomes disabled as defined in Section 72(m)(7) of the Code, or
establishes hardship as defined in the Code. In the case of hardship
withdrawal, no income attributable to such contributions may be withdrawn.
B. Any withdrawal or annuity benefits under this contract will be paid
either:
(i) in one sum to the Owner not later than April 1 of the calendar year
following the year In which the Owner attains age 70 1/2; or
(ii) in equal or substantially equal monthly, quarterly, semiannual or
annual payments beginning no later than April 1 of the calendar year
following the year in which the Owner attains age 70 1/2.
The periodic payments must extend over either:
(i) the life of the Owner or the joint life of the Owner and designated
beneficiary; or (ii) a fixed period not to exceed the life expectancy
of the Owner or the joint life expectancy of the Owner and designated
beneficiary.
The periodic payments will be provided by an annuity option.
9. Effective Date
The Effective Date of this endorsement is the later of January 1, 1989 or the
Contract Date.
Philadelphia, Pennsylvania
(Included at Issue) The Penn Mutual Life Insurance Company
[GRAPHIC OMITTED]
Endorsement No. 1495-90
<PAGE>
Section 2 - Endorsements
A002886E
Endorsement - 403(b) Contract Loans
The Individual Variable and Fixed Annuity Contract is amended as follows:
1. The following is added to Subsection A. Interest Options;
Section 6 - Fixed Account Provisions:
Restricted Account. Amounts will be transferred to and from the Restricted
Account in accordance with the provisions of Section 11 - Loans and the terms
of a Loan Request and Agreement as provided therein. For each amount
transferred to the Restricted Account, interest will be credited at an
effective annual rate declared by Penn Mutual. Such rate will be 2 1/2% less
than the interest rate charged by Penn Mutual on the loan with respect to
which the transfer to the Restricted Account was made. Interest will be
credited at the same rate for the entire period that all or any part of the
amount is held in the Restricted Account. The declared effective annual
interest rate under the Restricted Account will never be less than 4%. On
each contract anniversary, interest credited to the Restricted Account will
be transferred to the investment accounts in accordance with the Owner's then
current purchase payment allocation instructions.
2. Section 7 - Payment on Death is amended by the addition of the following: Any
outstanding loan balance will be repaid before any death benefit proceeds are
payable.
3. Section 9 - Withdrawal is amended by the addition of the following:
The proceeds of any full or partial withdrawal must first be applied to the
repayment of any outstanding loan balance. 4. The following provision is
added to Section 10 - Miscellaneous:
Any outstanding loan balance must be repaid before Account Values can be
applied to provide annuity payments and before the contract, or any part
thereof or right therein, is assigned, transferred or exchanged.
While a loan is outstanding, the net amount of any withdrawal, after
deduction of all applicable charges, must be at least equal to the scheduled
loan payment.
5. The following Section 11 is added to the contract:
Section 11 - Loans
Contract Loans. At any time following one month after the Contract Date, the
Owner may borrow funds from the general account of Penn Mutual if this
contract was issued as part of an arrangement under the provisions of Section
403(b) of the Internal Revenue Code.
Loan Request and Agreement. To make a loan under this contract, the Owner
must submit a completed Loan Request and Agreement on a form provided by Penn
Mutual.
Loan Amount. The maximum loan amount is one-half of the Contract Value but
not more than $50,000. The minimum loan amount is $2,000. No loan may be made
if the Contract Value is less than $4,000. No new loan may be made if any
part of a prior loan remains unpaid.
Restricted Account. When a loan is made, an amount equal to the amount of the
loan will be transferred to the Restricted Account from investment accounts
of the Variable Account and the Fixed Account in accordance with direction
provided by the Owner in the Loan Request and Agreement. When a loan payment
is received by Penn Mutual, an amount equal to the portion which is repayment
of principal will be transferred from the Restricted Account to the Fixed
Holding Account. Transfers from the Restricted Account will be made as of the
date a loan payment is received or, if earlier, the due date of a payment
received during the grace period.
Loan Interest. The loan will bear interest at a rate declared by Penn Mutual
for the entire term of the loan. Such rate will be based on the Monthly
Average of the Composite Yield on Seasoned Corporate Bonds as published by
Moody's Investor Service, Inc. for the calendar month ending two months
before the effective date of the loan. If the Monthly Average of the
Composite Yield on Seasoned Corporate Bonds is no longer published, the rate
used in its place will be as established by law or by regulation of the
insurance supervisory official of the jurisdiction in which this policy is
Endorsement No. 1536-90
<PAGE>
delivered. Interest will accrue on the outstanding loan balance until the
entire loan is repaid; provided, however, that in the event of prepayment of
the entire loan in the first loan year, the amount of interest payable as
part of the scheduled payments during the first loan year must still be paid.
If interest is not paid when due, it will be added to the outstanding loan
balance and will then bear interest at the same rate.
A002887E
Term of Loan. A loan made for the purchase of a primary residence may be made
for 10 years. All other loans will be for a term of 5 years.
Repayment. Each loan, together with all accrued interest, must be fully
repaid in equal quarterly payments over its term. Payments will be due three
months from the effective date of the loan and every three months thereafter.
Payments must be made to Penn Mutual at its Home Office or its designated
service office.
Grace Period. Each scheduled loan payment shall have a grace period of 30
days from its due date during which a loan payment will not be deemed in
default. Any scheduled loan payment which is not made within the grace period
will be in default. A payment made after the grace period but before the next
scheduled bill date will be deemed an unscheduled prepayment of principal.
Payment In Default. If a payment is in default, an amount equal to the
defaulted payment including interest accrued plus any applicable contract
charges will be withdrawn from the contract in accordance with the Owner's
direction in the Loan Request and Agreement but subject to the timing
restrictions of Section 403(b)(11) of the Internal Revenue Code. The amount
withdrawn will be applied to the payment in default.
Such withdrawal will not be subject to minimum withdrawal amount or remaining
account balance.
Loan In Default. If at any time during the term of the loan four scheduled
payments are not made within the applicable grace periods, the entire loan
will be in default and immediately due and payable. An amount equal to the
outstanding loan balance, including all accrued interest plus any applicable
contract charges, will be withdrawn from the contract in accordance with the
Owner's direction in the Loan Request and Agreement but subject to the timing
restrictions of Section 403(b)(11) of the Internal Revenue Code. The amount
withdrawn will be applied to repay the loan in default.
Such withdrawal will not be subject to minimum withdrawal amount or remaining
account balance.
Death of Annuitant. In the event of the death of the Annuitant, any
outstanding loan shall be considered immediately due and payable in full from
proceeds payable under the Payment on Death provisions of the contract.
6. The effective date of this endorsement is the Contract Date unless a later
date is shown below.
Philadelphia. Pennsylvania
(Included at Issue) The Penn Mutual Life Insurance Company
[GRAPHIC OMITTED]
Endorsement No. 1536-90
<PAGE>
Section 3 - Definitions
A002754P
Owner: The person or entity entitled to exercise all rights under the
contract.
Annuitant: The person during whose life annuity payments are made.
Purchase Payments: The money paid to Penn Mutual under this contract.
Variable Account: The account established for the Owner under Section 5 of
this contract to which Purchase Payments are credited.
Accumulation Unit: A measuring unit used to compute the Variable Account
Value prior to the Annuity Date.
Annuity Unit: A measuring unit used to compute Variable Annuity Payments.
Variable Account Value: The value of all Accumulation Units credited to the
Variable Account.
Fixed Account: The account established for the Owner under Section 6 of this
contract to which Purchase Payments are credited.
Fixed Account Value: The sum of all Purchase Payments and transfers allocated
to the Fixed Account, increased by interest credited to and reduced by
withdrawals and amounts transferred from the Fixed Account.
Contract Value: The sum of the Variable Account Value and the Fixed Account
Value.
Nonforfeiture Date: The later of (i) the date which is the tenth anniversary
of the contract date, or (ii) the Annuitant 's 70th birthday, but in no event
later than the Annuity Date.
Qualified Plan: A retirement plan which receives special tax treatment under
Sections 401, 403, 404, 408, 457 or any similar provisions of the Internal
Revenue Code.
Nonqualified Plan: Any arrangement other than a Qualified Plan.
<PAGE>
Section 4 - Purchase Payments
Purchase Payments will be credited to the Variable Account or the Fixed
Account in accordance with instructions provided by the Owner.
First Purchase Payment: The first Purchase Payment must be made before issue
of the contract. The minimum first Purchase Payment is $250 for Qualified
Plans and $2,500 for Nonqualified Plans, or such lower minimums as Penn
Mutual may establish.
Subsequent Purchase Payments: Purchase Payments, after the first, may be made
at any time without prior notice to Penn Mutual. The minimum subsequent
Purchase Payment is $50 for Qualified Plans and $300 for Nonqualified Plans.
Total Purchase payments in any calendar year may not exceed $1,000,000
without the consent of Penn Mutual.
<PAGE>
A002755P
Section 5 - Variable Account Provisions
<PAGE>
A. The Separate Account. The name of the Separate Account is specified in
Section 1. It is a separate account of The Penn Mutual Life Insurance
Company. It is for this and other contracts. Amounts credited to the
Variable Account will be allocated to the Separate Account.
Investment of Separate Account Assets. Assets held in the Separate Account
will be invested in one or more eligible mutual funds. Current eligible
mutual funds are specified in Section 1.
For this and other contracts the Separate Account is divided into
investment accounts. There is an investment account for each eligible
mutual fund. For each investment account, there is a subaccount for
Qualified Plans and a subaccount for Nonqualified Plans.
The Owner must choose the investment account(s) to which Purchase Payments
credited to the Variable Account are to be allocated.
Penn Mutual owns the assets held in the Separate Account. However, the
portion of such assets equal to the reserves and other contract
liabilities with respect to each subaccount of each investment account of
the Separate Account are not chargeable with liabilities arising out of
any other business Penn Mutual may conduct.
Upon notice to Penn Mutual the Owner may transfer part or all the value of
the Accumulation Units or Annuity Units credited under this contract from
one investment account to another. Upon notice to Penn Mutual, the Owner
may transfer part or all the value of the Accumulation Units to the Fixed
Account. No more than two such transfers may be made in a calendar month
and no more than 12 such transfers may be made in a calendar year. Penn
Mutual reserves the right to charge a fee for transfers in excess of six
in a calendar year. Such fee for excess transfers will not exceed $10 per
transfer. The minimum transfer amount is $250, or, if less, the amount
held in the investment account.
Such investment account transfers, as well as all other investments, are
subject to the limits and rules applicable to each mutual fund.
Substitution of Investment. If investment in a mutual fund should no
longer be possible or in our judgment becomes inappropriate to the
purposes of the contract, we may substitute another mutual fund.
Substitution may be made with respect to existing investments and the
investment of future Purchase Payments.
Substitution will be subject to the approval of the Insurance Department
of the jurisdiction in which this contract is delivered.
B. Charges and Deductions
Contract Administration Charge. This charge is the lesser of 2% of the
Variable Account Value at the end of the contract year or $30. It will be
deducted each year in which funds are held in the Variable Account. It
will be deducted on the date specified in Section 1. It will also be
deducted when the Variable Account Value is withdrawn in full if
withdrawal is not on the date specified. The charge will never exceed $30.
The charge will not be deducted on or after the Annuity Date.
Expense Risk Charge. This charge is made to compensate Penn Mutual for
guaranteeing that the contract administration charge will never exceed
$30. On an annual basis it equals 0.5% of the daily net asset value of the
Separate Account.
Mortality Risk Charge. This charge is made to compensate Penn Mutual for
the mortality guarantees made under this contract. On an annual basis it
equals 0.75% of the daily net asset value of the Separate Account.
Contingent Deferred Sales Charge. This charge, if applicable, will be
deducted upon withdrawal, in whole or in part, of the Contract Value. See
Section 9. This charge will not apply to any 10% Free Withdrawal, any
disability Free Withdrawal, any payment on Death or any Variable or Fixed
Annuity Payments.
<PAGE>
A002756P
Premium Taxes. Premium taxes, if any, imposed by a state or other
government will be deducted when due.
Deductions. The expense risk charge and mortality risk charge will be
computed and deducted from each subaccount of each investment account of
the Separate Account established under the contract for each day the
contract is in force. Other charges, to the extent applicable to the
Variable Account, will be deducted by canceling accumulation units or
annuity units of a value equal to the deduction. Cancellation of
accumulation units will be in the ratio of the Owner's interest in each
subaccount to the Variable Account Value.
C. Variable Accumulation Values
Valuation Period. As used in this contract, this is the interval from one
valuation time to the next valuation time. Valuation time is the time as
of which each mutual fund determines the net asset value of its shares.
Number of Accumulation Units. For each subaccount of each investment
account of the Separate Account, the number of Accumulation Units is the
sum of
Each Purchase Payment allocated to the subaccount
divided by
The value of an Accumulation Unit for that subaccount for the valuation
period in which the Purchase Payment was received.
The number of Accumulation Units will be adjusted for transfers,
withdrawals and charges. Adjustments will be made as of the valuation
period in which all requirements for the transaction are received.
Value of Each Accumulation Unit. For each subaccount of each investment
account of the Separate Account, the value was arbitrarily set at $10 when
the subaccount was established. The value may increase or decrease from
one valuation period to the next. For any valuation period the value is
The value of an Accumulation Unit for the prior valuation period.
multiplied by
The net investment factor for that subaccount for the current valuation
period.
Net Investment Factor. As used in this contract, Net Investment Factor is
an index used to measure the investment performance of a subaccount from
one valuation period to the next. For any subaccount, the net investment
factor for a valuation period is found 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
<PAGE>
A002757P
plus or minus
A per-share charge or credit as Penn Mutual may determine, as of the end
of the valuation period, for tax reserves.
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 (if any) for tax reserves as of the end of
the last prior valuation period.
Where (c) is
The sum of the daily Expense Risk Charge and the daily Mortality Risk
Charge. On an annual basis, the sum of such charges equals 1.25% of the
daily net asset value of the Separate Account.
D. Variable Annuity Payments
Annuity Date. Unless another Annuity Date was chosen in the application or
later written notification, the Annuity Date for Nonqualified Plans will
be the first day of the next month after the Annuitant's 85th birthday
and, for Qualified Plans, the first day of April in the calendar year
following the year in which the Annuitant attained age 70 1/2.
The Annuity Date may not be earlier than the first contract anniversary
and must be on the first day of a month. The Owner may change the Annuity
Date up to 30 days before the current Annuity Date.
Variable Annuity Options. The Owner or the Owner's surviving beneficiary
may choose a variable annuity option up to 30 days prior to the Annuity
Date.
First Variable Annuity Payment. Premium taxes, if any, will be deducted
from the Variable Account Value. The net Variable Account Value as of the
Annuity Date will be applied to the annuity table for the option chosen.
The annuity tables show the amount of the first payment for each $1,000 so
applied, according to the age at the Annuity Date. The tables are based on
the 1983 Individual Annuity Mortality Table with interest at 4%. Adjusted
ages are used in applying those tables.
Subsequent Variable Annuity Payments. Payments after the first will vary
in amount according to the investment performance of the subaccount or
subaccounts chosen. The payment amount may change from month to month. The
amount of each subsequent payment is the sum of the following amounts
attributable to each applicable subaccount.
The number of Annuity Units for the subaccount
multiplied by
The value of an Annuity Unit for that subaccount for the valuation period
in which payment is due.
The amount of each annuity payment after the first will not be affected by
variations in expense or mortality experience.
Minimum Annuity Payments. If the net Contract Value to be applied at the
Annuity Date is less than $5,000, Penn Mutual may pay such amount in a
lump sum. Annuity payments will be made monthly, quarterly, semi-annually
or annually at the Owner's request. If any payment would be less than $50,
Penn Mutual may change the frequency so that payments are at least $50
each.
<PAGE>
A002758P
Number of Annuity Units. The number of units for the subaccount of each
investment account chosen is
The amount of the first variable annuity payment attributable to that
subaccount
divided by
The value of an Annuity Unit for the subaccount as of the Annuity Date.
The number of Annuity Units is fixed except for adjustments for subaccount
transfers. Adjustments will be made as of the valuation period in which
all requirements for the transfer are received.
Value of Each Annuity Unit. For each subaccount of each investment
account, the value of an Annuity unit was arbitrarily set at $10 when the
subaccount was established. The value may increase or decrease from one
valuation period to the next. For any valuation period the value is
The value of an Annuity Unit for the last prior valuation period
multiplied by
The net investment factor for that subaccount for the valuation period
multiplied by
An interest factor to neutralize the assumed investment rate of 4% built
into the annuity tables.
E. Variable Annuity Options
Option 1 - Variable Annuity for Specified Number of Years. Payments will
be made for a specified number of years, which may not be less than 5 nor
more than 25.
Option 2 - Variable Life Annuity. Payments will be made for the life of
the Annuitant. Payments will cease with the last payment due prior to the
Annuitant's death.
Option 3 - Variable Life Annuity with Payments Guaranteed for 10 or 20
Years. Payments will be made for the life of the Annuitant. A guaranteed
payment period of either 10 or 20 years may be chosen.
Option 4 - Variable Joint and Survivor Life Annuity. Payments will be made
during the lifetimes of the Annuitant and a designated second Annuitant.
Payments will continue as long as either is living. The amount of such
payments will not change by reason of the death of the first Annuitant to
die.
If the Annuitant dies prior to the end of the specified period under
Option 1 or the guaranteed period under Option 3, the beneficiary may
choose either:
(1) To have the payments continue for the specified or guaranteed period,
or
(2) To receive at any time in one sum the present value of the remaining
payments to be made over the specified or guaranteed period.
If the beneficiary dies while receiving annuity payments under Option 1 or
Option 3, the present value of remaining payments will be paid in one sum
to the beneficiary's estate. The present value will be (a) computed as of
the valuation period in which due proof of death is received at our
designated service office, and (b) commuted at the rate of 4% per annum.
Payments. Payments will be made on the first day of the month starting
with the Annuity Date. Payments under all options will be made to or at
the direction of the Owner.
<PAGE>
A002759P
F. Variable Annuity Option Tables
The following tables show the amount of the first monthly income payment for
each $1,000 of value applied under a variable annuity option. "Age" as used in
the tables for Options 2, 3, and 4 means an adjusted age determined in the
following manner from the actual age of the Annuitant on the birthday nearest
the date of the first payment:
Date of First Payment Adjusted Age
Before calendar year 2000 Actual age
2000 - 2009 Actual age decreased by 1
2010 - 2019 Actual age decreased by 2
2020 and later Actual age decreased by 3
<TABLE>
<CAPTION>
Option 1 - Annuity for Specified Number of Years
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Number of Years 5 6 7 8 9 10 11 12 13 14
Monthly Income 18.32 15.56 13.59 12.12 10.97 10.06 9.31 8.69 8.17 7.72
- ------------------------------------------------------------------------------------------------------------------------------------
Number of Years 15 16 17 18 19 20 21 22 23 24 25
Monthly Income 7.34 7.00 6.71 6.44 6.21 6.00 5.81 5.65 5.49 5.35 5.22
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Option 2 - Variable Life Annuity and Option 3 - Variable Life Annuity with
Payments Guaranteed for 10 or 20 Years
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Life 10 Years 20 Years
Age Annuity Guaranteed Guaranteed
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
50 4.68 4.64 4.53
51 4.75 4.71 4.58
52 4.82 4.78 4.64
53 4.90 4.85 4.69
54 4.98 4.92 4.75
55 5.06 5.00 4.81
56 5.15 5.08 4.87
57 5.25 5.17 4.93
58 5.35 5.27 4.99
59 5.46 5.36 5.06
60 5.58 5.47 5.12
61 5.71 5.58 5.19
62 5.84 5.69 5.25
63 5.98 5.81 5.31
64 6.14 5.94 5.38
65 6.30 6.07 5.44
66 6.48 6.21 5.50
67 6.66 6.36 5.56
68 6.86 6.51 5.61
69 7.08 6.67 5.66
70 7.31 6.83 5.71
71 7.56 7.00 5.75
72 7.83 7.17 5.79
73 8.12 7.35 5.83
74 8.43 7.53 5.86
75 8.77 7.72 5.89
76 9.13 7.90 5.91
77 9.52 8.08 5.93
78 9.94 8.26 5.95
79 10.40 8.44 5.96
80 10.88 8.61 5.97
81 11.41 8.77 5.98
82 11.98 8.93 5.99
83 12.58 9.07 5.99
84 13.23 9.20 5.99
85 13.92 9.33 6.00
</TABLE>
<PAGE>
<PAGE>
Option 4 - Variable Joint and Survivor Life Annuity
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Age 50 55 60 65 70 75 80 85 Age
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
50 4.21 4.31 4.41 4.49 4.55 4.60 4.63 4.65 50
55 4.31 4.47 4.61 4.74 4.84 4.92 4.98 5.01 55
60 4.41 4.61 4.82 5.02 5.19 5.32 5.42 5.49 60
65 4.49 4.74 5.02 5.30 5.58 5.81 5.99 6.12 65
70 4.55 4.84 5.19 5.58 5.98 6.37 6.69 6.93 70
75 4.60 4.92 5.32 5.81 6.37 6.95 7.50 7.95 75
80 4.63 4.98 5.42 5.99 6.69 7.50 8.36 9.14 80
85 4.65 5.01 5.49 6.12 6.93 7.95 9.14 10.37 85
</TABLE>
<PAGE>
s
Section 6 - Fixed Account Provisions
A002760P
A. Interest Options
Interest will be earned on the Fixed Account value from the date amounts
are credited to the Fixed Account to the date amounts are applied to an
annuity option, paid upon the death of the Owner or Annuitant, transferred
or withdrawn.
Each amount credited to the Fixed Account will be credited with interest
under the Fixed Holding Account, the One Year Guaranteed Account, the
Three Year Guaranteed Account, the Five Year Guaranteed Account or the
Seven Year Guaranteed Account. The Owner chooses the account(s) to which
Purchase Payments and transfers credited to the Fixed Account are to be
allocated.
The minimum amount for an allocation to the Fixed Holding Account is $50.
The minimum amount for an allocation to the One Year Guaranteed Account or
the Three Year Guaranteed Account is $250. The minimum amount for an
allocation to the Five Year Guaranteed Account or the Seven Year
Guaranteed Account is $5,000.
Fixed Holding Account. For each amount allocated to the Fixed Holding
Account, interest will be credited at an effective annual rate declared by
Penn Mutual on the first day of each calendar year. The declared rate will
apply through the end of the calendar year. Thereafter, interest will be
credited on such amount for successive calendar years at the declared
effective rate then applicable to new allocations to the account.
The declared effective annual interest rate under the Fixed Holding
Account will never be less than 4%.
One Year Guaranteed Account. For each amount allocated to the One Year
Guaranteed Account, interest will be credited at an effective annual rate
declared by Penn Mutual. The declared rate will apply through the end of
the twelve month period which begins on the first day of the calendar
month in which the allocation is made. Thereafter, interest will be
credited on such amount for successive twelve month periods at the
declared effective annual rate then applicable to new allocations to the
account made as of the beginning of each such period.
For the first seven contract years Penn Mutual will declare an effective
annual interest rate under the One Year Guaranteed Account which is not
less than the published 52 Week United States Treasury Bill discount rate
from the most recent regularly scheduled auction held before the beginning
of the calendar month. If the auction program is discontinued, Penn Mutual
will substitute an index which in its option is comparable and which is
approved by the jurisdiction in which this contract is delivered.
The declared effective annual interest rate under the One Year Guaranteed
Account will never be less than 4%.
Three Year Guaranteed Account, Five Year Guaranteed Account and Seven Year
Guaranteed Account. For each amount allocated to the Three Year Guaranteed
Account, the Five Year Guaranteed Account or the Seven Year Guaranteed
Account, interest will be credited at an effective annual rate declared by
Penn Mutual for such account. The declared rate will apply through the end
of the thirty-six month period, sixty month period or eighty-four month
period, as applicable, which begins on the first day of the calendar month
in which the allocation is made.
Thereafter, interest will be credited on such amount for successive
thirty-six, sixty or eighty-four month periods at the declared effective
annual rate then applicable to new allocations as of the beginning of each
such period.
The declared interest rate under the Three Year, Five Year and Seven Year
Guaranteed Accounts will never be less than 4%. Page 11
<PAGE>
A002761P
B. Change of Interest Election
The Owner may transfer an amount from the Fixed Holding Account to another
account within the Fixed or Variable Account at any time.
The Owner may transfer an amount from the One Year, Three Year, Five Year
or Seven Year Guaranteed Account to another account within the Fixed or
Variable Account only during the 25 day period immediately following the
end of the period for which an interest rate is guaranteed on such amount.
No more than two transfers from one account to another may be made in any
calendar month and no more than 12 such transfers may be made in any
calendar year. Penn Mutual reserves the right to charge a fee for
transfers in excess of six in a calendar year. Such fee for excess
transfers will not exceed $10 per transfer.
The minimum amount of transfer from one account to another is $250 or, if
less, the amount held in the account. In the event of a partial transfer
to another account, at least $50 must be left in the Fixed Holding
Account; at least $250 must be left in the One Year Guaranteed Account; at
least $5,000 must be left in the Five Year Guaranteed Account or the Seven
Year Guaranteed Account.
C. Charges
Group Maintenance Charge. This charge of $15 will be deducted on a
contract anniversary if (i) this contract was issued as part of a
Qualified plan as defined in Section 401, 403(b) or 457 of the Internal
Revenue Code, (ii) the Contract Value is less than $2,500 on the contract
anniversary and (iii) at no time during the preceding contract year were
any funds held in the Variable Account. No charge will be deducted if no
Purchase Payments were made in the preceding contract year. The charge
will be deducted from the amount most recently allocated to the account
with the shortest interest rate guarantee duration.
Contingent Deferred Sales Charge. This charge, if applicable, will be
deducted upon withdrawal, in whole or part, of the Contract Value. See
Section 9. This charge will not apply to any 10% Free Withdrawal, any
disability Free Withdrawal, any Payment on Death or any Variable or Fixed
Annuity Payments.
Premature Withdrawal Charge. This charge will be deducted from any amount
withdrawn from the Three Year Guaranteed Account, The Five Year Guaranteed
Account or the Seven Year Guaranteed Account before the end of the period
for which a declared effective annual interest rate is guaranteed on such
amount.
The amount subject to the Premature Withdrawal Charge will be:
1. for the first withdrawal from this contract in any Contract Year after
the first Contract Year, the total amount withdrawn from the Three
Year, Five Year or Seven Year Guaranteed Account minus the greater of
(i) any amount for which the declared effective annual interest rate
guarantee has expired within the immediately preceding 25 days, or (ii)
an amount equal to 10% of the Value, as of the date of the withdrawal,
of the Three Year, Five Year or Seven Year Guaranteed Account from
which the withdrawal is made; or
2. for any other withdrawal, the total amount withdrawn from the Three
Year, Five Year or Seven Year Guaranteed Account minus any amount for
which the declared effective annual interest rate guarantee has expired
within the immediately preceding 25 days.
Provided however, that the Premature Withdrawal Charge shall not apply to
any disability Free Withdrawal set forth in Section 9, any Payment on
Death or any Variable or Fixed Annuity Payments.
For premature withdrawal from the Three Year Guaranteed Account the
Premature Withdrawal Charge will be a percentage of the amount subject to
the charge equal to one-fourth of the most recent effective annual
interest rate then applicable to the amount subject to the charge.
<PAGE>
A002762P
For premature withdrawals from the Five Year Guaranteed Account or the
Seven Year Guaranteed Account the Premature Withdrawal Charge will be a
percentage of the amount subject to the charge equal to one-half of the
most recent effective annual interest rate then applicable to the amount
subject to the change.
Maximum Charge. In no event will the sum of the Premature Withdrawal
Charge and the Contingent Deferred Sales Charge set forth in Section 9
exceed 10% of the amount withdrawn or such lesser percentage as may be the
maximum in the jurisdiction in which this contract is issued.
On the Nonforfeiture Date, the Premature Withdrawal Charge will be equal
to two percent of the entire amount withdrawn from the Three Year, Five
Year or Seven Year Guaranteed Account.
Before or after the Nonforfeiture Date, the Premature Withdrawal Charge
will not exceed two percent of the entire amount withdrawn from the Three
Year, Five Year or Seven Year Guaranteed Account.
The total of all Premature Withdrawal Charges deducted will never exceed
the total amount of all interest which has been credited to the Fixed
Account.
D. Fixed Annuity Payments
Annuity Date. Unless another Annuity Date was chosen in the application or
later written notification, the Annuity Date for Nonqualified Plans will
be the first day of the next month after the Annuitant's 85th birthday
and, for Qualified Plans, the first day of April in the calendar year
following the year in which the Annuitant attained age 70 1/2.
The Annuity Date may not be earlier than the first contract anniversary
and must be on the first day of a month. The Owner may change the Annuity
Date up to 30 days before the current Annuity Date.
Fixed Annuity Options. The Owner or the Owner's surviving beneficiary may
choose a fixed annuity option up to 30 days prior to the Annuity Date.
Amount of Fixed Annuity Payments. Premium taxes, if any, will be deducted
from the Fixed Account Value. The Fixed Account Value, net of any premium
taxes, as of the Annuity Date will be applied to the fixed annuity option
chosen. The monthly income under Options 1, 2, 3 and 4 will equal the
monthly income under a comparable single premium nonparticipating annuity
available from Penn Mutual at the time fixed annuity payments are to
begin.
The guaranteed monthly income under Option 1, Option 2, Option 3 and
Option 4 will be based on interest at a rate of 4% per year compounded
annually. Fixed Annuity Options 1, 2, 3 and 4 will not participate in
divisible surplus.
Minimum Annuity Payments. If the net Contract Value to be applied at the
Annuity Date is less than $5,000, Penn Mutual may pay such amount in a
lump sum. Fixed Annuity payments will be made monthly, quarterly,
semi-annually or annually at the Owner's request.
If any payment would be less than $50, Penn Mutual may change the
frequency of payment so that payments are at least $50 each.
E. Fixed Annuity Options
Option 1 - Fixed Annuity for Specified Number of Years. Payments will be
made for a specified number of years, which will be not less than 5 years
nor more than 25 years.
Option 2 - Fixed Life Annuity. Payments will be made for the life of the
Annuitant. Payments will cease with the last payment due prior to the
Annuitant's death.
<PAGE>
A002763P
Option 3 - Fixed Life Annuity with Payments Guaranteed for 10 or 20 Years.
Payments will be made for the life of the Annuitant. A guaranteed payment
period of either 10 or 20 years may be chosen.
Option 4 - Fixed Joint and Survivor Life Annuity. Payments will be made
during the lifetimes of the Annuitant and a designated second Annuitant.
If the Annuitant dies prior to the end of the specified period under
Option 1 or the guaranteed period under Option 3, the beneficiary may
choose either:
(1) to have the payments continue for the specified or guaranteed period,
or
(2) to receive at any time in one sum the present value of the remaining
payments to be made over the specified or guaranteed period.
If the beneficiary dies while receiving annuity payments under Option 1 or
Option 3 the present value of remaining payments will be paid in one sum
to the beneficiary's estate. The present value will be based on interest
at a rate set by Penn Mutual at the time payments are to begin.
Payment. Payments will be made on the first day of the month starting with
the Annuity Date. Payments under all options will be made to or at the
direction of the Owner.
<PAGE>
F. Fixed Annuity Option Tables
<PAGE>
A002764P
The following tables show the amount of the monthly income payment for each
$1,000 of value applied under a fixed annuity option. "Age" as used in the
tables for Options 2, 3, and 4 means an adjusted age determined in the following
manner from the actual age of the Annuitant on the birthday nearest the date of
the first payment:
Date of First Payment Adjusted Age
Before calendar year 2000 Actual age
2000 - 2009 Actual age decreased by 1
2010 - 2019 Actual age decreased by 2
2020 and later Actual age decreased by 3
Option 1 - Fixed Annuity for Specified Number of Years
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Number of Years 5 6 7 8 9 10 11 12 13 14
Monthly Income 18.32 15.56 13.59 12.12 10.97 10.06 9.31 8.69 8.17 7.72
- ------------------------------------------------------------------------------------------------------------------------------------
Number of Years 15 16 17 18 19 20 21 22 23 24 25
Monthly Income 7.34 7.00 6.71 6.44 6.21 6.00 5.81 5.65 5.49 5.35 5.22
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Option 2 - Fixed Life Annuity and Option 3 - Fixed Life Annuity with Payments
Guaranteed for 10 or 20 Years
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Life 10 Years 20 Years
Age Annuity Guaranteed Guaranteed
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
50 4.68 4.64 4.53
51 4.75 4.71 4.58
52 4.82 4.78 4.64
53 4.90 4.85 4.69
54 4.98 4.92 4.75
55 5.06 5.00 4.81
56 5.15 5.08 4.87
57 5.25 5.17 4.93
58 5.35 5.27 4.99
59 5.46 5.36 5.06
60 5.58 5.47 5.12
61 5.71 5.58 5.19
62 5.84 5.69 5.25
63 5.98 5.81 5.31
64 6.14 5.94 5.38
65 6.30 6.07 5.44
66 6.48 6.21 5.50
67 6.66 6.36 5.56
68 6.86 6.51 5.61
69 7.08 6.67 5.66
70 7.31 6.83 5.71
71 7.56 7.00 5.75
72 7.83 7.17 5.79
73 8.12 7.35 5.83
74 8.43 7.53 5.86
75 8.77 7.72 5.89
76 9.13 7.90 5.91
77 9.52 8.08 5.93
78 9.94 8.26 5.95
79 10.40 8.44 5.96
80 10.88 8.61 5.97
81 11.41 8.77 5.98
82 11.98 8.93 5.99
83 12.58 9.07 5.99
84 13.23 9.20 5.99
85 13.92 9.33 6.00
</TABLE>
Option 4 - Fixed Joint and Survivor Life Annuity
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Age 50 55 60 65 70 75 80 85 Age
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
50 4.21 4.31 4.41 4.49 4.55 4.60 4.63 4.65 50
55 4.31 4.47 4.61 4.74 4.84 4.92 4.98 5.01 55
60 4.41 4.61 4.82 5.02 5.19 5.32 5.42 5.49 60
65 4.49 4.74 5.02 5.30 5.58 5.81 5.99 6.12 65
70 4.55 4.84 5.19 5.58 5.98 6.37 6.69 6.93 70
75 4.60 4.92 5.32 5.81 6.37 6.95 7.50 7.95 75
80 4.63 4.98 5.42 5.99 6.69 7.50 8.36 9.14 80
85 4.65 5.01 5.49 6.12 6.93 7.95 9.14 10.37 85
</TABLE>
<PAGE>
Section 7 - Payment on Death
A002765P
Death payments described in this Section shall be payable upon the earlier
of:
(1) the death of the Annuitant, or
(2) the death of the Owner (other than the trustee of a Qualified Plan).
Death Before The Annuity Date. Upon receipt of due proof of death prior to
the Annuity Date, Penn Mutual will pay to the beneficiary the greatest of:
(1) The sum of all Purchase Payments adjusted for withdrawals and contract
transfers,
(2) The Contract Value on the date of receipt of such proof of death, or
(3) The sum of (i) the Fixed Account Value on the date of death and (ii)
the Variable Account Value as of the Contract Date, or, if later, the
most recent seven year anniversary of the contract occurring before
the Owner's 81st birthday, increased by subsequent Purchase Payments
and transfers to the contract and reduced by subsequent withdrawals
and transfers from the contract.
If the beneficiary is not the decedent's spouse, the beneficiary can
choose an Annuity Option for death payments. The Option must provide for
payments over the beneficiary's life or over a period not longer than the
beneficiary's life expectancy. Payments shall begin within one year after
the date of death. If payment is made in a lump sum, such payment shall be
made within five years after the date of death.
If the beneficiary is the decedent's surviving spouse the surviving spouse
shall become the owner of this contract.
Death After The Annuity Date. If death occurs after the Annuity Date, the
amount payable, if any, will be according to the annuity option in force.
The premature withdrawal Charge set forth in Section 6 and the Contingent
Deferred Sales Charge set forth in Section 9 shall not apply to any
Payment on Death.
Section 8 - Transfer to or from Another Contract
Transfer to Another Annuity Contract. All or part of the Contract Value
may be transferred to another annuity contract issued by Penn Mutual,
provided that the Owner of both contracts is the same trustee(s) of the
same Qualified Plan. The amount of such transfer may not exceed the amount
of forfeiture upon termination of the annuitant's participation in the
plan.
Transfer from Another Annuity Contract. The Owner may make transfers to
this contract from another annuity contract issued by Penn Mutual which
provides for such transfers, subject to the limits set forth in that
contract.
Section 9 - Withdrawal
Withdrawal. Prior to the earlier of the Annuity Date or the first death to
occur of the Owner or the Annuitant, the Owner may withdraw all or part of
the Contract Value. After the Annuity Date if Option 1 in Section 5 or
Section 6 is in force, the payee may withdraw the present value of the
annuity payments remaining to be made.
For full withdrawal, this contract must be surrendered to Penn Mutual. For
partial withdrawals of the Contract Value, the withdrawal must be at least
$250. The amount remaining under the contract must be at least $250.
Free Withdrawal. Once in any Contract Year on or after the last day of the
first Contract Year and before the Annuity Date the Owner may withdraw
from the contract an amount equal to 10% of the Contract Value as of the
date of withdrawal free from Contingent Deferred Sales Charge.
<PAGE>
A002766P
The Owner may at any time withdraw all or any part of the Contract Value
free from Contingent Deferred Sales Charge if (i) the Owner in a
Nonqualified Plan, or the Annuitant in a Qualified Plan, is then disabled
as defined in Section 72(m)(7) of the Internal Revenue Code and as applied
under the Social Security Act, (ii) the disability began after the
Contract Date and (iii) the disability has continued without interruption
for four months.
Contingent Deferred Sales Charge. This charge, if applicable, will be
deducted from amounts withdrawn from the contract. The charge will be a
percentage of any amount withdrawn in excess of a 10% Free Withdrawal in
accordance with the applicable table below. This charge will not apply to
any disability Free Withdrawal, any Payment on Death or any Variable or
Fixed Annuity Payments.
If no Purchase Payments have been made after the first contract year:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Contract Years: 1 2 3 4 5 6 7 8+
Charge: 7% 6% 5% 4% 3% 2% 1% 0
</TABLE>
If Purchase Payments have been made in any contract year after the first:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Contract Years: 1 2 3 4 5 6 7 8 9 10 11+
Charge: 7% 6% 5% 4% 3.5% 3% 2.5% 2% 1.5% 1% 0
</TABLE>
The sum of the Contingent Deferred Sales Charge and the Premature
Withdrawal Charge deducted from an amount withdrawn from the Fixed Account
will never exceed 10% (or such lesser percentage as may be the maximum in
the jurisdiction in which this contract is issued) of the amount withdrawn
from the Fixed Account.
The cumulative sum of Contingent Deferred Sales Charges deducted from
amounts withdrawn from the Variable Account will never exceed 8 1/2% of
the total of all Purchase Payments credited to or transferred to the
Variable Account.
Payment of Withdrawals. Unless the Owner directs otherwise, partial
withdrawals prior to the Annuity Date, and applicable charges, will be
deducted from accounts within the Fixed and Variable Accounts in the
following order:
first from the Fixed Holding Account;
next from each subaccount of each investment account of the Separate
Account in the ratio of the Owner's interest in each subaccount to the
Variable Account Value;
next from the One Year Guaranteed Account;
next from the Three Year Guaranteed Account;
next from the Five Year Guaranteed Account; and
finally from the Seven Year Guaranteed Account.
Partial withdrawal of amounts held under the One Year, Three Year, Five
Year and Seven Year Guaranteed Accounts will be made from amounts most
recently allocated to the account.
<PAGE>
Page 18
A002767P
Section 10 - Miscellaneous
Beneficiary. The beneficiary is the person who is to receive:
(1) Payment on death of the Owner or the Annuitant prior to the Annuity
Date, or
(2) Remaining payments under specified or guaranteed annuity periods, if
any, on death of the payee on or after the Annuity Date.
The Owner shall choose the beneficiary in the application. The Owner may
change the beneficiary at any time before the death of the Owner or the
Annuitant, whichever occurs first.
If no beneficiary survives the first to die of the Owner or the Annuitant,
payment will be made to the Owner or the Owner's estate. The estate of a
beneficiary who dies before the first to die of the Owner or the Annuitant
shall have no rights under this contract.
Ownership of Contract. The Owner must be named in the application.
Upon notice to Penn Mutual the Owner may assign the contract to a new
Owner.
Deferment of Transfers and Payments. Transfers and payments of withdrawals
from the Variable Account will be made within seven days after receipt by
Penn Mutual of all documents required for such transfer or payment.
However, Penn Mutual may defer a transfer, a withdrawal, the Annuity Date
or annuity payments under the Variable Account Provisions of Section 5,
if:
(1) The New York Stock Exchange is closed (other than customary weekend
and holiday closings);
(2) Trading on the New York Stock Exchange is restricted;
(3) An emergency exists such that it is not reasonably practical to
dispose of securities held in the Separate Account or to fairly
determine the value of its assets; or
(4) The Securities and Exchange Commission by order so permits for the
protection of security holders.
Conditions in (2) and (3) will be decided by, or in accordance with rules
of, the Securities and Exchange Commission.
Penn Mutual may defer a transfer or withdrawal from the Fixed Account for
a period not exceeding six months, if it reasonably determines that
investment conditions are such that an orderly sale of assets held as part
of general assets is not possible.
Incontestability. No material misstatement made by the applicant will void
the contract unless it is contained in the written application attached to
the contract. The contract will be incontestable after it has been in
force for 2 years from the Contract Date.
Misstatement of Age. If the age of the Annuitant or a joint payee is
misstated, any amount payable under this contract will be that amount
which the Purchase Payments paid would have purchased on the basis of the
correct age.
If the annuity payments have been overpaid because the age of the
Annuitant or joint payee has been misstated, the amount overpaid, with
interest at the rate of 6% per year compounded annually, will be charged
against the payments still to be made under this contract.
If the annuity payments have been underpaid because the age of the
Annuitant or joint payee has been misstated, the amount underpaid, with
interest at the rate of 6% per year compounded annually, will be paid in
full with the next payment due under this contract.
Proof of Age and Survival. Penn Mutual may require satisfactory proof of
correct age at any time. If any payment under this contract depends on the
payee being alive, Penn Mutual may require satisfactory proof of survival.
<PAGE>
A002768P
The Contract. The contract, any endorsements, and its attached application
are the entire contract. It is issued in consideration of the application
and Purchase Payments.
Only the President, a Vice President, Pension Actuary or Secretary of Penn
Mutual may change the contract. Any change must be in writing.
At any time, Penn Mutual may make such changes in this contract as are
required to make it conform with any law or regulation issued by any
government agency to which it is subject.
Participating Contract. The contract may participate in divisible surplus
of Penn Mutual. Divisible surplus, if any, to be apportioned to the
contract shall be apportioned annually and shall be paid in cash or
credited to the Contract Value at the end of the contract year. No
divisible surplus is expected to be apportioned to this contract in the
foreseeable future.
Dates. Contract years and anniversaries are measured from the Contract
Date.
Notices Changes and Choices. To be effective, all notices, changes and
choices which the Owner may make under the contract must be in writing, on
a form provided or approved by Penn Mutual, signed and received by Penn
Mutual at its Home Office or designated service office. If acceptable to
Penn Mutual, notices, changes and choices relating to beneficiaries and
ownership will take effect as of the date signed unless Penn Mutual has
already acted in reliance on the prior status. Penn Mutual is not
responsible for their validity.
Contract Payments. All sums payable to or by Penn Mutual are payable at
its designated service office.
Protection of Proceeds. Payments under this contract may not be assigned
by the payee prior to their due dates. To the extent allowed by law,
payments are not subject to legal process for debts of a payee.
Compliance with Minimum Value Requirements. Annuity, death and withdrawal
benefits are not less than the minimum benefits required under applicable
laws and regulations of the jurisdiction in which this contract is
delivered.
The benefits provided under this contract are increased by interest
credited in excess of the guaranteed minimums, if any.
Periodic Reports. As required by federal and state law and at least once
each year Penn Mutual will furnish the Owner a periodic report on the
Separate Account, the Variable Account Value, the number of Accumulation
Units, the value per Accumulation Unit and the Fixed Account Value.
<PAGE>
<PAGE>
TABLE OF GUARANTEED CONTRACT VALUES
A002694P
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
GUARANTEED GUARANTEED GUARANTEED GUARANTEED
GUARANTEED CONTRACT CONTRACT CONTRACT CONTRACT
CONTRACT VALUE VALUE VALUE VALUE TOTAL
VALUE 1 YEAR 3 YEAR 5 YEAR 7 YEAR GUARANTEE
FIXED HOLDING GUARANTEE GUARANTEE GUARANTEE GUARANTEE CONTRACT
ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT VALUE
</TABLE>
<PAGE>
TABLE OF GUARANTEED CONTRACT VALUES
A002695P
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
GUARANTEED GUARANTEED GUARANTEED GUARANTEED
GUARANTEED CONTRACT CONTRACT CONTRACT CONTRACT
CONTRACT VALUE VALUE VALUE VALUE TOTAL
VALUE 1 YEAR 3 YEAR 5 YEAR 7 YEAR GUARANTEE
FIXED HOLDING GUARANTEE GUARANTEE GUARANTEE GUARANTEE CONTRACT
ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT VALUE
</TABLE>
<PAGE>
CALCULATION OF GUARANTEED WITHDRAWAL VALUES
A002777P
I. SUPPOSE YOU PLACE $1,000.00 ANNUALLY INTO THE 3 YEAR GUARANTEED ACCOUNT. THE
GUARANTEED INTEREST RATE ON THE FIRST DEPOSIT IS 8.00% FOR THE FIRST THREE
YEARS. FOLLOWING ISSUE, DEPOSITS AND FUNDS MATURING EARN 4.00% (THE MINIMUM
CONTRACT GUARANTEE) FOR THREE YEARS FROM DEPOSIT OR MATURITY, RESPECTIVELY.
AT THE END OF YEAR ONE THE FOLLOWING VALUES WOULD APPLY:
<TABLE>
<CAPTION>
<S> <C>
GUARANTEED CONTRACT VALUE: $1080.00
FREE WITHDRAWAL: 1080.00*(0.10)= $108.00
CONTINGENT DEFERRED SALES CHARGE: (1080.00-108.00)*(0.07) = $68.04
PREMATURE WITHDRAWAL CHARGE:
AMOUNT MATURING: $0.00
AMOUNT TO WHICH CHARGE APPLIES: (1080.00-(GREATER OF (108.00 OR 000))) = $972.00
APPLICABLE INTEREST RATE: 8.00% (1)
CALCULATED CHARGE: (1080.00-108.00)*(0.08)*(0.25) = $19.44
2% OF GUARANTEED CONTRACT VALUE: 1080.00*(0.02) = $21.60
ACTUAL CHARGE: LESSER OF (19.44 OR 21.60) = $19.44 (2)
GUARANTEED WITHDRAWAL VALUE: 1080.00-68.04-19.44 = $992.52
</TABLE>
(1) MOST RECENT INTEREST GUARANTEE ON AN AMOUNT TO WHICH THE CHARGE APPLIES.
(2) EXCEPT ON NONFORFEITURE DATE WHERE THE CHARGE IS EXACTLY 2.00% OF
THE GUARANTEED CONTRACT VALUE.
- --------------------------------------------------------------------------------
II. SUPPOSE YOU PLACE $1,000.00 ANNUALLY INTO THE 5 YEAR GUARANTEED ACCOUNT. THE
GUARANTEED INTEREST RATE ON THE FIRST DEPOSIT IS 9.00% FOR THE FIRST FIVE
YEARS. FOLLOWING ISSUE, DEPOSITS AND FUNDS MATURING EARN 4.00% (THE MINIMUM
CONTRACT GUARANTEE) FOR FIVE YEARS FROM DEPOSIT OR MATURITY, RESPECTIVELY.
AT THE END OF YEAR FIFTEEN THE FOLLOWING VALUES WOULD APPLY:
<TABLE>
<CAPTION>
<S> <C>
GUARANTEED CONTRACT VALUE: $21301.13
FREE WITHDRAWAL: 21301.13*(0.10)= $2130.11
CONTINGENT DEFERRED SALES CHARGE: (21301.13-2130.11)*(0.00) = $0.00
PREMATURE WITHDRAWAL CHARGE:
AMOUNT MATURING: 1000*((1.09)^5*(1.04)^10+(1.04)^10+(1.04^5)=$4974.44
AMOUNT TO WHICH CHARGE APPLIES: (21301.13-(GREATER OF (2130.11 OR 4974.44))) =
$16326.69
APPLICABLE INTEREST RATE: 4.00% (1)
CALCULATED CHARGE: 16326.69*(0.04)*(0.50) = $326.53
2% OF GUARANTEED CONTRACT VALUE: 21301.13*(0.02) = $426.02
ACTUAL CHARGE: LESSER OF (326.53 OR 426.02) = $326.53 (2)
GUARANTEED WITHDRAWAL VALUE: 21301.13-0.00-326.53 = $20974.60
</TABLE>
(1) MOST RECENT INTEREST GUARANTEE ON AN AMOUNT TO WHICH THE CHARGE APPLIES.
(2) EXCEPT ON NONFORFEITURE DATE WHERE THE CHARGE IS EXACTLY 2.00% OF
THE GUARANTEED CONTRACT VALUE.
<PAGE>
DV-790
CALCULATION OF GUARANTEED WITHDRAWAL VALUES
A002778P
III. SUPPOSE YOU PLACE A SINGLE DEPOSIT OF $100,000.00 INTO THE 7 YEAR
GUARANTEED ACCOUNT. THE GUARANTEED INTEREST RATE ON THE FIRST DEPOSIT IS
10.00% FOR THE FIRST SEVEN YEARS. MATURING FUNDS EARN 4.00% (THE MINIMUM
CONTRACT GUARANTEE) FOR SEVEN YEARS FROM MATURITY.
AT THE END OF YEAR SIX THE FOLLOWING VALUES WOULD APPLY:
<TABLE>
<CAPTION>
<S> <C>
GUARANTEED CONTRACT VALUE: $177156.10
FREE WITHDRAWAL: 177156.10*(0.10)= $17715.61
CONTINGENT DEFERRED SALES CHARGE: (177156.10-17715.61)*(0.02) = $3188.81
PREMATURE WITHDRAWAL CHARGE:
AMOUNT MATURING: $0.00
AMOUNT TO WHICH CHARGE APPLIES: (177156.10-(GREATER OF (17715.61 OR 0.00))) = $3188.81
APPLICABLE INTEREST RATE: 10.00% (1)
CALCULATED CHARGE: 159440.49*(0.10)*(0.50) = $7972.02
2% OF GUARANTEED CONTRACT VALUE: 177156.10*(0.02) = $3543.12
ACTUAL CHARGE: LESSER OF (7972.02 OR 3543.21) = $3543.12 (2)
GUARANTEED WITHDRAWAL VALUE: 177156.10-3188.81-3543.12 = $170424.17
</TABLE>
(1) MOST RECENT INTEREST GUARANTEE ON AN AMOUNT TO WHICH THE CHARGE APPLIES.
(2) EXCEPT ON NONFORFEITURE DATE WHERE THE CHARGE IS EXACTLY 2.00% OF
THE GUARANTEED CONTRACT VALUE.
- --------------------------------------------------------------------------------
<PAGE>
A002779B
Please notify Penn Mutual promptly of any change in address.
Annual Election - Penn Mutual is a mutual life insurance company. It has no
stockholders. The Owner of this contract is a member of Penn Mutual while this
contract is in force during the life of the Annuitant before the Annuity Date
and before total withdrawal of the Contract Value. Members have the right to
vote in person or by proxy at the annual election of Trustees held at the Home
Office, Independence Square, Philadelphia, Pennsylvania, on the first Tuesday of
March. If more information is desired, it may be obtained from the Secretary.
VALUES AND PAYMENTS UNDER THIS CONTRACT, WHEN BASED UPON THE INVESTMENT
EXPERIENCE OF A SEPARATE ACCOUNT, ARE VARIABLE AND ARE NOT GUARANTEED AS TO
FIXED DOLLAR AMOUNT.
Individual Variable and Fixed
Annuity Contract
Flexible Purchase Payments
o Annuity Payments payable on Annuity Date
o Flexible Purchase Payments payable until
Annuity Date
o Participating
The Penn Mutual Life Insurance Company, Independence Square, Philadelphia,
Pennsylvania 19172
DV-790
<PAGE>
Section 2 - Endorsements
A002886E
Endorsement - 403(b) Contract Loans
The Individual Variable and Fixed Annuity Contract is amended as follows:
1. The following is added to Subsection A. Interest Options; Section 6 - Fixed
Account Provisions:
Restricted Account. Amounts will be transferred to and from the Restricted
Account in accordance with the provisions of Section 11 - Loans and the
terms of a Loan Request and Agreement as provided therein. For each amount
transferred to the Restricted Account, interest will be credited at an
effective annual rate declared by Penn Mutual. Such rate will be 2 1/2%
less than the interest rate charged by Penn Mutual on the loan with respect
to which the transfer to the Restricted Account was made. Interest will be
credited at the same rate for the entire period that all or any part of the
amount is held in the Restricted Account. The declared effective annual
interest rate under the Restricted Account will never be less than 4%. On
each contract anniversary, interest credited to the Restricted Account will
be transferred to the investment accounts in accordance with the Owner's
then current purchase payment allocation instructions.
2. Section 7 - Payment on Death is amended by the addition of the following:
Any outstanding loan balance will be repaid before any death benefit
proceeds are payable.
3. Section 9 - Withdrawal is amended by the addition of the following:
The proceeds of any full or partial withdrawal must first be applied to the
repayment of any outstanding loan balance.
4. The following provision is added to Section 10 - Miscellaneous:
Any outstanding loan balance must be repaid before Account Values can be
applied to provide annuity payments and before the contract, or any part
thereof or right therein, is assigned, transferred or exchanged.
While a loan is outstanding, the net amount of any withdrawal, after
deduction of all applicable charges, must be at least equal to the
scheduled loan payment.
5. The following Section 11 is added to the contract:
Section 11 - Loans
Contract Loans. At any time following one month after the Contract Date, the
Owner may borrow funds from the general account of Penn Mutual if this
contract was issued as part of an arrangement under the provisions of
Section 403(b) of the Internal Revenue Code.
Loan Request and Agreement. To make a loan under this contract, the Owner must
submit a completed Loan Request and Agreement on a form provided by Penn
Mutual.
Loan Amount. The maximum loan amount is one-half of the Contract Value but not
more than $50,000. The minimum loan amount is $2,000. No loan may be made
if the Contract Value is less than $4,000. No new loan may be made if any
part of a prior loan remains unpaid.
Restricted Account. When a loan is made, an amount equal to the amount of the
loan will be transferred to the Restricted Account from investment accounts
of the Variable Account and the Fixed Account in accordance with direction
provided by the Owner in the Loan Request and Agreement. When a loan
payment is received by Penn Mutual, an amount equal to the portion which is
repayment of principal will be transferred from the Restricted Account to
the Fixed Holding Account. Transfers from the Restricted Account will be
made as of the date a loan payment is received or, if earlier, the due date
of a payment received during the grace period.
Loan Interest. The loan will bear interest at a rate declared by Penn Mutual for
the entire term of the loan. Such rate will be based on the Monthly Average
of the Composite Yield on Seasoned Corporate Bonds as published by Moody's
Investor Service, Inc. for the calendar month ending two months before the
effective date of the loan. If the Monthly Average of the Composite Yield
on Seasoned Corporate Bonds is no longer published, the rate used in its
place will be as established by law or by regulation of the insurance
supervisory official of the jurisdiction in which this policy is
Endorsement No. 1536-90
<PAGE>
A002887E
delivered. Interest will accrue on the outstanding loan balance until the
entire loan is repaid; provided, however, that in the event of prepayment
of the entire loan in the first loan year, the amount of interest payable
as part of the scheduled payments during the first loan year must still be
paid. If interest is not paid when due, it will be added to the outstanding
loan balance and will then bear interest at the same rate.
Term of Loan. A loan made for the purchase of a primary residence may be made
for 10 years. All other loans will be for a term of 5 years.
Repayment. Each loan, together with all accrued interest, must be fully repaid
in equal quarterly payments over its term. Payments will be due three
months from the effective date of the loan and every three months
thereafter. Payments must be made to Penn Mutual at its Home Office or its
designated service office.
Grace Period. Each scheduled loan payment shall have a grace period of 30 days
from its due date during which a loan payment will not be deemed in
default. Any scheduled loan payment which is not made within the grace
period will be in default. A payment made after the grace period but before
the next scheduled bill date will be deemed an unscheduled prepayment of
principal.
Payment In Default. If a payment is in default, an amount equal to the defaulted
payment including interest accrued plus any applicable contract charges
will be withdrawn from the contract in accordance with the Owner's
direction in the Loan Request and Agreement but subject to the timing
restrictions of Section 403(b)(11) of the Internal Revenue Code. The amount
withdrawn will be applied to the payment in default.
Such withdrawal will not be subject to minimum withdrawal amount or remaining
account balance.
Loan In Default. If at any time during the term of the loan four scheduled
payments are not made within the applicable grace periods, the entire loan
will be in default and immediately due and payable. An amount equal to the
outstanding loan balance, including all accrued interest plus any
applicable contract charges, will be withdrawn from the contract in
accordance with the Owner's direction in the Loan Request and Agreement but
subject to the timing restrictions of Section 403(b)(11) of the Internal
Revenue Code. The amount withdrawn will be applied to repay the loan in
default.
Such withdrawal will not be subject to minimum withdrawal amount or remaining
account balance.
Death of Annuitant. In the event of the death of the Annuitant, any outstanding
loan shall be considered immediately due and payable in full from proceeds
payable under the Payment on Death provisions of the contract.
6.The effective date of this endorsement is the Contract Date unless a later
date is shown below.
Philadelphia. Pennsylvania
(Included at Issue) The Penn Mutual Life Insurance Company
[GRAPHIC OMITTED]
Vice President and Senior Actuary
Endorsement No. 1536-90
<PAGE>
2. Endorsements
A003935E
Endorsement - Individual Retirement Annuity
The contract is amended as follows:
1. Contract Owner
The definition of Contract Owner is amended by the addition of the
following provision: The contract is established for the exclusive benefit
of the individual or his or her beneficiaries.
2. Purchase Payments
The following provision is added to the Purchase Payments Section: There
are no fixed Purchase Payments under this contract.
No Purchase Payments under this contract may be made unless this contract
is an Individual Retirement Annuity which meets the requirements of section
408(b) of the Internal Revenue Code ("Code") for the taxable year of the
Contract Owner for or during which the Purchase Payment is made.
Consequently, no Purchase Payments will be accepted under a SIMPLE IRA plan
established by any employer pursuant to Code section 408(p). No transfer or
rollover of funds attributable to contributions made by a particular
employer under its SIMPLE IRA plan will be accepted from a SIMPLE IRA, that
is, an IRA used in conjunction with a SIMPLE IRA plan, prior to the
expiration of the 2-year period beginning on the date the individual first
participated in that employer's SIMPLE IRA plan. Purchase Payments must be
paid in cash and either:
(a) must meet the requirements for deduction under Section 219 of the code
and must not exceed the lesser of $2,000 for the Contract Owner or
100% of the Contract Owner's compensation per year except,
(i) in the case of an Individual Retirement Annuity established by
the Contract Owner for the Contract Owner's spouse, effective
January 1, 1997, the maximum Purchase Payment per year for the
Contract Owner's spouse shall not exceed $2,000, provided that
the combined contributions of the Contract Owner and the Contract
Owner's spouse do not exceed the combined compensation of the
Contract Owner and the Contract Owner's spouse, and the Contract
Owner and the Contract Owner's spouse file a joint tax return;
(ii) in the case of an Individual Retirement Annuity that is a
simplified employee pension plan as defined in section 408(k) of
the Code, the maximum Purchase Payment per year shall be equal to
the lesser of
(A) 15% of compensation not in excess of the first $150,000
($200,000 for benefits accruing in plan years beginning
before 1994), adjusted pursuant to Section 415 of the code,
or
(B) $30,000 (as adjusted under the Code for inflation); and
(b) must be paid with funds which qualify as a rollover contribution under
section 402(c), 403(a)(4), 403(b)(8), or 408(d)(3) of the Internal
Revenue Code.
3. Required Minimum Distributions
Any benefits payable under the Annuity Payments Section, or Withdrawal
Section are subject to the following provision:
Notwithstanding any provisions of this contract to the contrary, the
distribution of an individual's interest shall be made in accordance with
the minimum distribution requirements of section 401(a)(9) of the Code and
the regulations thereunder, including the incidental death benefit
requirements of section 401(a)(9)(G) of the Code and the regulations
thereunder, and the minimum distribution incidental benefit requirement of
section 1.401(a)(9)-2 of the Proposed Income Tax Regulations, all of which
are herein incorporated by reference.
Distributions before death
The entire interest of the individual for whose benefit the contract is
maintained
(a) will be distributed, no later than the first day of April
following the calendar year in which such individual attains age
70 1/2 (required beginning date), or
Endorsement No. 1534-96 Page 4
<PAGE>
Page 4 (con'd)
A003936E
Endorsement - Individual Retirement Annuity (continued)
(b) will begin to be distributed not later than the required beginning
date over the life of such individual, the lives of such individual
and his or her designated beneficiary, a period not extending beyond
the life expectancy of such individual, or the period not extending
beyond joint and last survivor expectancy of such individual and his
or her designated beneficiary. Distributions made under paragraph (b)
must be made in periodic payments at intervals of no longer than one
year and distributions made in years after the required beginning date
must be made on or before December 31. In addition, distributions made
under paragraph (b) must be either non-increasing or they may increase
only as provided in Q&A F-3 of section 1.401(a)(9)-1 of the Proposed
Income Tax Regulations.
For purposes of calculating the maximum period over which distributions can
be made under paragraph (b) above, life expectancy is computed by use of
the expected return multiples in Table V and VI of section 1.72-9 of the
Income Tax Regulations. Unless otherwise elected by the individual by the
time distributions are required to begin, life expectancies shall be
recalculated annually. Any affirmative election made by the individual
shall be irrevocable and shall apply to all subsequent years. The life
expectancy of a non-spouse beneficiary may not be recalculated. Instead,
life expectancy will be calculated using the attained age of such
beneficiary during the calendar year in which the individual attains ages
70 1/2, and payments for subsequent years shall be calculated based on such
life expectancy reduced by one for each calendar year which has elapsed
since the calendar year life expectancy was first calculated.
A Contract Owner who maintains more than one IRA may satisfy the minimum
distribution requirements under section 401(a)(9) of the Code by receiving
a distribution from any one or more of his or her IRAs in an amount equal
to the total amount of the required minimum distributions of all his or her
IRAs. For this purpose, the Contract Owner of two or more IRAs may use the
'alternative method' described in Notice 88-38, 1988-1 C.B. 524, to satisfy
the minimum distribution requirements described in this provision.
Distribution upon death
Distributions beginning before death. If the individual dies after
distribution of his or her interest has begun, the remaining portion of
such interest will continue to be distributed at least as rapidly as under
the method of distribution being used prior to the individual's death.
Distributions beginning after death. If the individual dies before
distribution of his or her interest begins, distribution of the
individual's entire interest shall be completed by December 31 of the
calendar year containing the fifth anniversary of the individual's death
except to the extent that an election is made to receive distribution in
accordance with (1) or (2) below:
(1) If the individual's interest is payable to a designated beneficiary,
then the entire interest of the individual may be distributed over the
life or over a period certain not greater than the life expectancy of
the designated beneficiary commencing on or before December 31 of the
calendar year immediately following the calendar year in which the
individual died.
(2) If the designated beneficiary is the individual's surviving spouse,
the date distributions are required to begin in accordance with (1)
above shall not be earlier than the later of (A) December 31 of the
calendar year immediately following the calendar year in which the
individual died or (B) December 31 of the calendar year in which the
individual would have attained age 70 1/2.
(3) If the designated beneficiary is the individual's surviving spouse,
the spouse may treat the contract as his or her own IRA and, in such
event, shall be treated as the Contract Owner thereafter.. This
election will be deemed to have been made if such surviving spouse
makes a regular IRA contribution to the contract, makes a rollover to
or from such contract, or fails to elect to receive a distribution
within the otherwise applicable time period described above.
Life expectancy is computed by use of the expected return multiples in
Tables V and VI of section 1.72-9 of the Income Tax Regulations. For
purposes of distributions beginning after the individual's death, unless
otherwise elected by the surviving spouse by the time distributions are
required to begin, life expectancies shall be recalculated annually. Such
election shall be irrevocable by the surviving spouse and shall apply to
all
<PAGE>
Endorsement No. 1534-96
Endorsement - Individual Retirement Annuity (continued)
subsequent years. In the case of any other designated beneficiary, life
expectancies shall be calculated using the attained age of such beneficiary
during the calendar year in which distributions are required to begin
pursuant to this section, and payments for any subsequent calendar year
shall be calculated based on such life expectancy reduced by one for each
calendar year which has elapsed since the calendar year life expectancy was
first calculated.
Distributions under this section are considered to have begun if
distributions are made on account of the individual reaching his or her
required beginning date, or if prior to the required beginning date,
distributions irrevocably commence to an individual over a period permitted
and in an annuity form acceptable under section 1.401(a)(9)-2 of the
Proposed Income Tax Regulations.
4. Annuity Payments
In the Annuity Payments Section, the provision entitled "Annuity Date" is
changed to read as follows, subject to the minimum distribution
requirements of Paragraph 3 above being satisfied by such alternative
methods as may from time to time be approved by the Commissioner of
Internal Revenue.
Annuity Date. The Annuity Date shall be the first day of the month selected
by the Annuitant in the application. The Annuity Date shall not be later
than the first day of the next month after the Annuitant's 90th birthday.
The Annuitant may change the Annuity Date up to 30 days prior to the
current Annuity Date.
5. Ownership
Transferability and Forfeitability Restriction. The Annuitant is the
Contract Owner. This contract is nontransferable by the Contract Owner and
the entire interest of the Contract Owner is nonforfeitable in accordance
with section 408(b)(1) and (4) of the Code.
6. Refund of Purchase Payments
Any refund of purchase payments (other than those attributable to excess
contributions) will be applied, before the close of the calendar year
following the close of the year of the refund, toward the payment of future
Purchase Payments or the purchase of additional benefits.
7. Amendment of Contract.
To the extent necessary to comply with applicable laws and regulations,
including the Internal Revenue Code and rules and regulations thereunder,
the Company reserves the right to amend this contract without the consent
of the Contract Owner. Such amendment may, to the extent necessary, have
retroactive effect. The Contract Owner will be given a copy of any such
amendments when they are made.
8. Periodic Reports.
As required by federal and state law and at least once each year Penn
Mutual will furnish the Owner with a periodic report on the Separate
Account, the Variable Account Value, the number of Accumulation Units, the
value per Accumulation Unit and the Fixed Account Value as they apply to
the contract.
9. The terms of this endorsement shall override any inconsistent or
conflicting provisions in the contract. The Effective Date of this
endorsement is the Contract Date.
Philadelphia, Pennsylvania The Penn Mutual Life Insurance Company
/s/ [GRAPHIC OMITTED]
---------------------
Actuary
Endorsement No. 1534-96
A003937E
Page 4 (con'd)
<PAGE>
2. Endorsement
A004077E
Endorsement - Tax Deferred Annuity - 403(b)
The following provisions are added to the contract:
1. Non-transferable
This contract is non-transferable in accordance with section 401(g) of the
Internal Revenue Code. It may not be sold, assigned, discounted or pledged
as collateral for a loan or as security for the performance of an
obligation or for any other purpose, to any person other than the Company.
2. Benefit Commencement Date
On the Annuity Date or, if earlier, within 90 days following receipt of the
Contract Owner's written notice of intent to commence annuity benefit
payments, annuity benefit payments will commence. The form of such benefit
payments will be determined in accordance with the provisions of the
following paragraphs.
3. Compensation
For purposes of determing the maximum annual contribution that can be made
under section 415 of the Internal Revenue Code, effective for contributions
made after December 31, 1997, the Contract Owner's compensation from the
employer for the year includes any elective deferrals made under a 401(k)
plan, 403(b) plan, employer contributions made to a SEP (simplified
employer pension), and any amount which is contributed or deferred by the
employer at the election of the Contract Owner under a plan described in
section 125 of the Internal Revenue Code (a "cafeteria plan") or section
457 of the Internal Revenue Code.
4. Limits on Contributions
Contributions made in any calendar year cannot exceed the annual limit on
elective deferrals under section 402(g) of the Internal Revenue Code, i.e.
$9,500 as adjusted for inflation.
Solely for a Contract Owner who has completed 15 years of service with a
single qualified employer, this limit will be increased by the lesser of:
(A) $3,000,
(B) $15,000 reduced by amounts not included in gross income for prior
taxable years by reason of this rule, or
(C) the excess of $5,000 multiplied by the Contract Owner's number of
years of service with the qualified employer, over all prior elective
deferrals made on behalf of the Contract Owner by the qualified
employer in prior taxable years.
For this purpose, a qualified employer means any educational organization,
hospital, home health service agency, health and welfare service agency,
church, or convention or association of churches, including an exempt
organization controlled by or associated with a church.
5. Multiple Salary Deferrals
As permitted by the employer, a Contract Owner may enter into more than one
salary reduction agreement in any calendar year to defer compensation that
has not yet been paid or made available.
6. Form of Benefit - Married Owner
The term married owner shall mean a Contract Owner who has been married to
the same spouse for at least the twelve consecutive calendar months
immediately preceding the Benefit Commencement Date. Notwithstanding what
is stated in the Annuity Payments Section of the contract to the contrary,
the form of benefit for a Married Owner shall be a Qualified Joint and 50%
Survivor Annuity which is the actuarial equivalent of a single life
annuity, unless the Contract Owner elects an optional form of benefit in
accordance with Paragraph 9 below.
7. Form of Benefit - Unmarried Owner
Notwithstanding what is stated in the Annuity Payments Section of the
contract to the contrary, the form of benefit for a Contract Owner who is
not a Married Owner shall be a single life annuity unless the Contract
Owner elects an optional form of benefit.
Endorsement No. 1542-97 Page 4
<PAGE>
Page 4 (con'd)
A004078E
Endorsement - Tax Deferred Annuity (continued)
8. Payment of Death Benefit
If a married Contract Owner dies before the date benefits begin, the death
benefit will be paid to the Contract Owner's surviving spouse in the form
of a single life annuity, unless the Contract Owner has designated another
form of payment available under the contract, or the surviving spouse
elects to receive a lump sum payment or another form of payment available
under the contract.
9. Notice and Election
A. Notice
The Company must provide a Contract Owner written notice within the 30
to 90 day period before the date benefits are to begin. Such written
notice shall explain:
1. The terms and conditions of the automatic forms of benefits, the
alternative forms of benefits that the Contract Owner can choose,
and information about the relative values of each form of
benefits;
2. The Contract Owner's right to waive the automatic form of benefit
and the effect of such waiver;
3. The rights of the Contract Owner's spouse regarding a waiver; and
4. The Contract Owner's right to revoke such waiver and the effect
of such revocation.
B. Election
A Contract Owner may elect a form of benefit other than the automatic
form in writing at any time during the 90 day period which ends on the
date on which payments are to begin; provided, however, that no
election can be made earlier than the date the Contract Owner receives
the notice described in Subsection A above.
If the married Contract Owner, after receiving the notice described
above in Subsection A, elects one of the available forms of
distribution and the Contract Owner's spouse consents to the form of
distribution (if necessary), payments may begin before the end of the
30 day period after the notice was given to the Contract Owner, as
long as
(A) the Contract Owner has been advised of his right to a 30 day
period to consider whether to waive the automatic form of benefit
and consent to a form of distribution other than the automatic
form of benefit;
(B) payments do not begin to be paid to the Contract Owner until
after the Contract Owner receives the notice;
(C) payments do not begin before 7 days have elapsed after the notice
is provided to the Contract Owner; and
(D) the Contract Owner may revoke the election of a form of payment
until the end of the 7 day period described in (C) or the date
payments begin, if later.
Spousal Consent Requirement
A Contract Owner will automatically receive a Qualified Joint and 50%
Survivor Annuity unless the Company is satisfied that he or she is not
married on the date benefit payments are to begin. The Contract Owner
may elect an alternate form of benefit only if:
(A) the Contract Owner's spouse (or the spouse's legal guardian)
consents in writing that he or she consents to the Contract Owner's
election to waive the Qualified Joint and 50% Survivor Annuity; to the
specific alternative form elected by the Contract Owner, or to the
Contract Owner's right to choose any alternative form without any
further consent by the spouse. If a beneficiary other than the spouse
is selected, the spouse must also consent in writing to either the
specific Beneficiary or Beneficiaries designated by the Contract Owner
or to the Contract Owner's right to designate any Beneficiary or
Beneficiaries without any further consent by the spouse. The written
consent also must acknowledge the effect of the election and be
witnessed by a notary public; or
Endorsement No. 1542-97
<PAGE>
Endorsement - Tax Deferred Annuity (continued)
A004079E
(B) the Contract Owner satisfies the Company that his or her spouse
cannot be located, or furnishes a court order establishing that
the Contract Owner is legally separated or has been abandoned
(within the meaning of local law), unless a qualified domestic
relations order pertaining to the Contract Owner provides that
the spouse's consent must be obtained.
Spousal consent shall not be effective with respect to any other
spouses of the Contract Owner, and shall become void if the
circumstances causing the consent of the spouse not to be required
cease to exist prior to the date that the Contract Owner's payments
commence.
Revocation of Election
A Contract Owner may revoke an election to waive the automatic form of
payment at any time during the election period. revocation shall not
void any prospectively effective consent given by his or her spouse in
connection with the revoked election.
10. Optional Forms of Benefit
Subject to the conditions and limitations in Paragraph 9 above, a Contract
Owner may elect any annuity payment option set forth in the Annuity Options
Section or Annuity Payments Section of the contract. The form of benefit
may not be changed after the Benefit Commencement Date.
11. Benefit Restrictions
Any benefits payable under the Annuity Payments Section, or the Withdrawal
Section are subject to the following added provisions:
A. Effective after December 31, 1988, withdrawals attributable to
contributions made pursuant to a salary reduction agreement may be
made only when the Contract Owner is over age 59 1/2, leaves the
employment of the employer who purchased the contract, dies, becomes
disabled as defined in section 72(m)(7) of the Code, or establishes
hardship as defined in the Code. In the case of hardship withdrawal,
no income attributable to such contributions may be withdrawn.
B. Notwithstanding any provisions of this contract to the contrary, the
distribution of an individual's interest shall be made in accordance
with the requirements of section 401(a)(31) of the Code and the
minimum distribution requirements of section 403(b)(10) of the Code
and the regulations thereunder, including the incidental death benefit
provisions of section 1.401(a)(9)-2 of the proposed regulations, all
of which are herein incorporated by reference.
C. The Contract Owner's entire interest in the contract must be
distributed, or begin to be distributed, by the Contract Owner's
required beginning date, which effective January 1, 1997, is the April
1 of the calendar year following the later of (i) the calendar year in
which the Contract Owner reaches age 70 1/2, or (ii) the calendar year
in which the Contract Owner retires. For a Contract Owner who is a 5%
owner of the employer in the plan year ending in the calendar year in
which the Contract Owner reaches age 70 1/2, such Contract Owner's
required beginning date is the April 1 following the calendar year in
which that Contract Owner reaches 70 1/2.
For each succeeding year, a distribution must be made on or before
December 31. By the required beginning date the Contract Owner may
elect to have the balance in the contract distributed in one of the
following forms:
a. a single sum payment;
b. equal or substantially equal periodic payments over the life of
the Contract Owner;
c. equal or substantially equal periodic payments over the lives of
the Contract Owner and his or her designated beneficiary;
d. equal or substantially equal periodic payments over a specified
period that may not be longer than the Contract Owner's life
expectancy ;
e. equal or substantially equal periodic payments over a specified
period that may not be longer than the joint life and last
survivor expectancy of the Contract Owner and his or her
designated beneficiary.
Endorsement No. 1542-97 Page 4 (con'd)
<PAGE>
Page 4 (con'd)
A004080E
Endorsement - Tax Deferred Annuity (continued)
D. If the Contract Owner dies before his or her entire interest is
distributed, the entire remaining interest will be distributed as
follows:
a. If the Contract Owner dies when or after distributions have begun
under Paragraph 11.C of this endorsement, the entire remaining
interest must be distributed at least as rapidly as provided
under Paragraph 11.C.
b. If the Contract Owner dies before distributions have begun under
Paragraph 11.C, the entire remaining interest must be distributed
as elected by the Contract Owner or, if the Contract Owner has
not so elected, as elected by the beneficiary or beneficiaries,
as follows:
1) by December 31st of the year containing the fifth anniversary
of the Contract Owner's death; or 2) in equal or substantially
equal periodic payments over the life or life expectancy of the
designated beneficiary or beneficiaries starting by December 31st
of the year following the year of the Contract Owner's death. If,
however, the beneficiary is the Contract Owner's surviving
spouse, then this distribution is not required to begin before
December 31st of the year in which the Contract Owner would have
turned 70 1/2.
Unless otherwise elected by the Contract Owner prior to the
commencement of distributions under Paragraph 11.B or, if
applicable, by the surviving spouse where the Contract Owner dies
before distributions have commenced, life expectancies of a
Contract Owner or spouse beneficiary shall be recalculated
annually for purposes of distributions under Paragraphs 11.B and
11.C. An election not to recalculate shall be irrevocable and
shall apply to all subsequent years. The life expectancy of a
non-spouse beneficiary shall not be recalculated.
An individual may satisfy the minimum distribution requirements under
sections 403(b)(10) of the Code by receiving a distribution from one TDA
that is equal to the amount required to satisfy the minimum distribution
requirements for two or more TDAs. For this purpose, the Contract Owner of
two or more TDAs may use the 'alternative method' described in Notice
88-39, 1988-1 C.B. 525, to satisfy the minimum distribution requirements
described above.
12. Effective Date
The Effective Date of this endorsement is the Contract Date unless another
Effective Date is shown below.
Philadelphia, Pennsylvania The Penn Mutual Life Insurance Company
/s/ [GRAPHIC OMITTED]
---------------------------
Actuary
Endorsement No. 1542-97
<PAGE>
ENDORSEMENT -- 403(b) POLICY LOAN
A. The following provisions are added to the Certificate:
1. Policy Loan. Anytime following the later of one year after the
Participant's Enrollment Date or October 1, 1991 the
Participant may borrow funds from Penn Mutual under the Group
Variable and Fixed Annuity Contract form GDI-385 issued to the
Participant's employer, provided that the employer certifies
that the Section 403(b) arrangement under which the contract
is purchased is not an employee benefit plan subject to the
Employee Retirement Income Security Act of 1974 (ERISA). Penn
Mutual shall rely exclusively on the employer's certification
that the 403(b) arrangement is not an employee benefit plan
under ERISA for purposes of applying the provisions of this
Endorsement.
2. Loan Application and Agreement. To borrow funds under the
Contract, a completed 403(b) Loan Application and Agreement
must be submitted to Penn Mutual. The Loan shall be made
available from the general account of Penn Mutual. By applying
for this Loan, the Participant hereby consents to provide that
the Participant's entire Account Values are security for the
Loan.
3. Amount of Loan. The Participant may borrow up to one half of
the Participant's Fixed and Variable Account Values but not
more than $50,000. The minimum loan amount is $2,000. No
additional Loan will be made while the Participant has an
outstanding Loan and no Loan will be approved if the Account
Values are less than $4,000.
4. Loan Interest. The Loan will bear simple interest at the
annual rate of seven percent (7%) from the effective date of
the Loan. Interest will continue to accrue on the outstanding
Loan balance until the entire Loan is repaid.
5. Term of Loan. All Loans will be for a term of 5 years.
6. Repayment. The Loan must be repaid in equal quarterly payments
(interest plus an amortized portion of loan principal) over
its term, beginning on the same day of the month three (3)
months after the effective date of the Loan and every three
(3) months thereafter through the term of the Loan. Loan
payments must be received at the Home Office as directed by
Penn Mutual.
7. Grace Period. A Loan Payment will not be considered in default
if it is received within the Grace Period which is within
thirty (30) days of its due date.
8. Default Payment Penalty. If a payment is not received within
the Grace Period, a penalty charge of five percent (5%) of the
overdue payment will be added to the loan payment due and in
default.
9. Default-Individual Payments. If a Loan Payment is not received
within the Grace Period, it will be considered in default.
Penn Mutual has the right to obtain repayment on or after the
last day of the Grace Period by withdrawing funds from the
Participant's Investment Accounts under the Contract, subject
only to the timing restrictions of section 403(b)(11) of the
Internal Revenue Code. The amount of the withdrawal will equal
the outstanding Loan Payment due and in default. Default
Payment Penalty and any other Contract charge(s) applicable to
a withdrawal from the Contract.
The amount will be withdrawn from Participant's Investment
Account(s) in the following order:
(a) Interest Option B (One Month Guaranteed Account)
(b) Interest Option A (One Year Guaranteed Account)
(c) Variable Sub-accounts (pro rata)
(d) Interest Option C (Three Year Guaranteed Account)
Endorsement 1504-94
<PAGE>
These withdrawals will not be subject to Contract rules
concerning withdrawal amount(s) and remaining account balance
minimum(s).
If the Payment(s) is (are) received from the Participant after
the Grace Period, it will not be considered a repayment of a
defaulted individual payment or the payment of the next
quarterly payment, but will be deemed to be a prepayment of
principal only.
10. Default of Entire Loan. If during the term of the Loan, four
(4) payments are not paid within the Grace Period and have
been in default, the entire Loan will be considered in
default. Penn Mutual has the right to obtain repayment by
withdrawing Funds from the amount of the Participant's
Investment Accounts on or after the same day the fourth
payment is defaulted, subject only to the timing restriction
of section 403(b)(11) of the Internal Revenue Code. The
withdrawal will equal the outstanding Loan balance, including
a Default Payment Penalty and any other Contract charges
applicable to a withdrawal from the Contract. The Default
Payment Penalty shall be applied against the entire
outstanding Loan balance.
The amount will be withdrawn from Participant's Investment
Account(s) in the following order:
(a) Interest Option B (One Month Guaranteed Account)
(b) Interest Option A (One Year Guaranteed Account)
(c) Variable Sub-accounts (pro rata)
(d) Interest Option C (Three Year Guaranteed Account)
This withdrawal will not be subject to Contract rules
concerning withdrawal amount(s) and remaining account balance
minimum(s).
11. Restricted Account. When a Loan is made, Penn Mutual shall
transfer an amount equal to the amount of the Loan from the
investment accounts as instructed in the 403(b) Loan
Application and Agreement to the Restricted Account. This
transfer, if from the Interest Option C (Three Year Guaranteed
Account), may be subject to the premature transaction charge
specified under the Contract. When a loan payment is received,
the portion of the payment which is a repayment of loan
principal shall be transferred from the Restricted Account to
the Interest Option B (One Month Guaranteed Account) under the
Contract. The transfer shall be made the earlier of the date
of the Loan payment is received by Penn Mutual or the due
date.
The Restricted Account shall earn interest at an effective
annual rate of four percent (4%). As of each Enrollment
anniversary date, interest shall be credited and transferred
to the investment accounts pursuant to the then current
payment allocation for purchase payments made by the Contract
Holder for the benefit of the Participant.
12. Prepayment. During the first year of the Loan, any prepayment
will not reduce the remaining interest charge for that period.
After the first year, the Loan may be repaid in its entirety
at any time.
13. Death of Participant. In the event of the death of the
Participant, the Loan shall be considered immediately due and
payable in its entirety.
14. Tax Reporting. Penn Mutual shall report to the Internal
Revenue Service any Loan Payment or Loan Balance in default as
a taxable designated distribution.
15. Loan Document. In order to obtain the Loan, the Participant
must sign a 403(b) Loan Application and Agreement evidencing
the Loan prior to receiving the Loan from the General Account
of Penn Mutual.
<PAGE>
16. Restrictions. No partial withdrawals, except as required to
obtain repayment of a loan payment or entire loan balance in
default, will be permitted while there is an outstanding loan
balance. The loan must be repaid prior to surrender, exchange,
annualization or assignment of the Contract or Certificate or
any part thereof or any right in the same.
B. The effective date of this Endorsement is the Participant's Enrollment Date
unless a later date is shown below.
Philadelphia, Pennsylvania The Penn Mutual Life Insurance Company
/s/ Richard Plush
Endorsement No. 1504-94 Assistant Vice President and Senior Actuary
<PAGE>
The Penn Mutual Life Insurance Company
Philadelphia, PA 19172
APPLICATION FOR PARTICIPATION IN GROUP ANNUITY CONTRACT (TDA)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
1. PARTICIPANT
<S> <C>
Full Name:______________________________________ Social Security No. | | | | | | | | | |
Address:________________________________________ Birthdate (Mo. Day Yr.)____/____/____
City:____________________State______Zip Code______ Sex [ ] M [ ] F
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
2. FIRST PURCHASE PAYMENT ALLOCATION: Amount of First Purchase Payment $________
ALLOCATION: (Indicate % of first payment to be allocated to each option/fund.)
Interest Option B (one month) _____%
Interest Option A (one year) _____%
Interest Option C (three year) _____%
Money Market Fund _____%
Value Equity Fund _____%
High Yield Bond Fund _____%
Equity Income Fund _____%
Growth Stock Fund _____%
Flexible Managed Fund _____%
Total Must Equal 100 %
-----
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
<S> <C>
3. ANNUITY DATE: Note: Payment of benefits under certain tax favored retirement
---------------------- plans must begin not later than April 1 of the year after
First Day of | | | the calender year in which the participant attains age 70 1/2.
| | |
----------------------
Month Year
- ------------------------------------------------------------------------------------------------------------------------
4. BENEFICIARY
Include Primary______________________________________ Relationship__________________
Relationship
To Participant. Secondary ___________________________________ Relationship__________________
If no Beneficiary is designated above or if no designated
Beneficiary survives the participant, the Beneficiary will
be the participant's executor or administrator.
- ------------------------------------------------------------------------------------------------------------------------
5. SUITABILITY INFORMATION (COMPLETE EITHER A OR B):
A. Number of Total Family Family Net Clients Earned
Dependents ______ Ages _____ _____ _____ _____; Income $ __________ Worth $ __________ Income $ __________
B. [ ] I understand that the sales representative is required to do the
above inquires for purposes of determining suitability of this sale.
However, I do not wish to answer these inquiries.
- ------------------------------------------------------------------------------------------------------------------------
6. REPLACEMENT: Is annuity applied for intended to replace or change any
existing life insurance or annuity now in force with any insurance company?
[ ] Yes (Give details under "Remarks".) [ ] No
- ------------------------------------------------------------------------------------------------------------------------
7. REMARKS:
- ------------------------------------------------------------------------------------------------------------------------
<PAGE>
I have read the above statements and represent that they are written as made by me and that they are complete and true
to the best of my knowledge and belief. I agree that I will be bound by the above statements, that Penn Mutual,
believing them to be true, will rely and act upon them and that this Application will be a part of any annuity issued by
Penn Mutual.
If this application is for a variable annuity, I understand that values and annuity payments will be based upon the
Investment experience of a separate account; that they are variable and not guaranteed as to amount. I acknowledge
receipt of current prospectuses for the variable annuity contract and for the funds selected in question 2.
Signed at (City and State) _____________________________________
Name of
Date _______________ Employer __________________________________________
Signature of Signature of
Proposed Participant_________________________________ Employer __________________________________________
REPRESENTATIVE: Do you have reason to believe the contract applied for is to replace existing insurance
or annuities? [ ] Yes [ ] No
Does the contract applied for come under the category of personal business? [ ] Yes [ ] No
Signature of
Representative ________________________/ ______________ __________________________________________/ ______________
Agent Code No. Signature of General Agent Agency Code No.
or Other Authorized Individual
</TABLE>
<PAGE>
THE AGENCY IS TO COMPLETE THE FOLLOWING:
(Please print.)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Servicing Agent/Broker Agent/Broker Percent Agency Code Five Digit General Agent
Code Number Ident. Code Number
1.
--------------------------- ------------ ---------- -------- ------------- ---------------------------
2.
--------------------------- ------------ ---------- -------- ------------- ---------------------------
3.
--------------------------- ------------ ---------- -------- ------------- ---------------------------
Show County Name and Code if sold in Louisiana, South Carolina, or Pennsylvania.
- ---------------------------------- ------------
Name Code
- ------------------------------------------------------------------------------------------------------------------------
PURCHASE PAYMENT INFORMATION:
[ ] Please do not send bills
[ ] Subsequent Purchase Payment Amount $________________
[ ] Monthly (all 12 months) [ ] Send bills for the
[ ] Annually (check 1 below) months checked below
[ ] Semi-Annual (check 2 below)
[ ] Quarterly (check 4 below)
[ ] January [ ] February [ ] March [ ] April [ ] May [ ] June
[ ] July [ ] August [ ] September [ ] October [ ] November [ ] December
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
MAIL APPLICATION TO:
The Penn Mutual Life Insurance Company
600 Dresher Road - C2L
Horsham, PA 19044
<PAGE>
The Penn Mutual Philadelphia, Pa. 19172
A Better way of Life
<TABLE>
<CAPTION>
<S> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
Name (First, Middle, Last) (Please Print) Social Security No./Tax ID
________________________________________________ ________________________________________________
Address Daytime Telephone Number
Contract ________________________________________________ ________________________________________________
Owner City State Zip Code Employer Name
Information ________________________________________________ ________________________________________________
Date of Birth Sex City State
________________________________________________ ________________________________________________
- ------------------------------------------------------------------------------------------------------------------------------------
Name (First, Middle, Last) Social Security No./Tax ID
Annuitant ________________________________________________ ________________________________________________
(If different Address
from Contract ________________________________________________ Date of Birth Sex
Owner) City State Zip Code ________________________________________________
________________________________________________
- ------------------------------------------------------------------------------------------------------------------------------------
Primary Beneficiary: Contingent Beneficiary:
Beneficiary ________________________________________________ ________________________________________________
Designation Social Security No. Social Security No.
________________________________________________ ________________________________________________
Relationship to Contract Owner Relationship to Contract Owner
________________________________________________ ________________________________________________
If the Contract is issued to a qualified plan, the Beneficiary is the Plan Trustee, notwithstanding any other
designation to the contrary.
- ------------------------------------------------------------------------------------------------------------------------------------
| Market Type: (check one and indicate type, if applicable)
Purchase Purchase | [ ] Non-Qualified
Payment Payment $_____________ | [ ] IRA-408 (type: [ ] Rollover, [ ] Transfer, [ ] Custodial,
| [ ] Regular payment-tax year ___)
($2,500 min. Make check payable to: | [ ] SEP-408(k) (type: [ ] Rollover, [ ] Custodial,
for Non- | [ ] Regular payment-tax year ___)
Qualified) The Penn Mutual Life | [ ] 457 (type: [ ] PEDC, [ ] Other tax-exempt organization)
Insurance Company | not available in NY
| [ ] 401(a) (type: [ ] Corporate, [ ] HR10, [ ] Custodial)
Select Annuity Date: | [ ] 401(k) (type: [ ] Custodial, [ ] HR10)
| Mo.| Day | Yr. | [ ] TDA-403(b)
($250 min. | | 01 | | -----------------------------------------------------------------------------------
for Qualified) | Is this Annuity intended to replace or change existing life insurance or annuities?
If no date is selected, |
the Annuity Date will be | [ ] Yes [ ] No If yes, list insurance company and policy number in the Remarks
the later of the first | Section. If this is an exchange under IRC Section 1035, attach necessary 1035
day of the month | Exchange Forms.
following the Annuitant's |
85th birthday or 10 years |
after the issue date. |
- ------------------------------------------------------------------------------------------------------------------------------------
Allocate payment to the Variable Investment Options and/or Fixed Interest Options using whole percentages.
Fidelity Investments Neuberger & Berman American Century
Purchase _____ % VIP Equity Income _____ % AMT Limited Maturity Bond _____ % VP Capital Appreciation
Payment _____ % VIP Growth _____ % AMT Balanced Morgan Stanley
Allocation _____ % VIP II Asset Manager _____ % AMT Partners _____ % Emerging Markets Equity (Int'l)
_____ % VIP II Index 500 OpCap Advisors The Penn Mututal Life
(Total Independence Capital (ICMI) _____ % Value Equity Insurance Company
Allocations _____ % Money Market _____ % Small Capitalization Fixed Interest Options
must equal _____ % Quality Bond T. Rowe Price _____ % Fixed Holding Account
100%) _____ % Growth Equity _____ % High Yield Bond _____ % 1 Year Fixed Interest
ICMI / Robertson Stephens _____ % Flexibly Managed _____ % 3 Year Fixed Interest
_____ % Emerging Growth _____ % 5 Year Fixed Interest
Vontobel USA ($5,000 minimum)
_____ % International Equity _____ % 7 Year Fixed Interest
($5,000 minimum)
VALUES AND PAYMENTS UNDER THIS CONTRACT, WHEN BASED UPON THE INVESTMENT EXPERIENCE OF A SEPARATE ACCOUNT, ARE
VARIABLE. THEY MAY DECREASE OR INCREASE AND ARE NOT GUARANTEED AS TO FIXED DOLLAR AMOUNT.
- ------------------------------------------------------------------------------------------------------------------------------------
[ ] Yes [ ] No If answered Yes, the Contract Owner authorizes and directs PML to accept telephone
Request for instructions to transfer contract values among the variable subaccounts and fixed interest options and/or
Telephone change the allocation of future purchase payments. This authorization is subject to the terms and conditions
Transfer in the contract. PML will not be held liable for any loss, liability, cost, or expense for acting in good
Privileges faith on the telephone instructions. This authorization shall continue in force until and unless the earlier
of (a) written revocation is received by PML or (b) PML discontinues this privilege.
- ------------------------------------------------------------------------------------------------------------------------------------
Remarks: | Home Office
| Use Only
|
|
|
- ------------------------------------------------------------------------------------------------------------------------------------
PM 3502 Version 5/97 Page 1 of 2
</TABLE>
<PAGE>
Dollar Cost Averaging ($10,000 Contract Minimum)
Sufficient funds must be allocated to the source account indicated below.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Transfer $______ monthly (minimum $100) over a ______ month period (12 months minimum, 60 months maximum).
Transfer from the following source account (check one only): [ ] Money Market [ ] Quality Bond
[ ] AMT Limited Maturity Bond [ ] Fixed Holding Account
Into the following account(s) based on the dollar amounts indicated below ($50 per account minimum):
$_____VIP Equity Income $_____Quality Bond $_____AMT Balanced $_____Flexibly Managed
$_____VIP Growth $_____Growth Equity $_____AMT Partners $_____VP Capital Appreciation
$_____VIP II Asset Manager $_____Emerging Growth $_____Value Equity $_____Emerging Markets
$_____VIP II Index 500 $_____International Equity $_____Small Capitalization Equity (Int'l)
$_____Money Market $_____AMT Limited Maturity Bond $_____High Yield Bond
The first monthly transfer will take place on the 15th of the month following the date of issue and each month
thereafter for the period indicated above. The Dollar Cost Averaging Program will terminate on the earlier of
the end of the period indicated above, or after exhausting all amounts from the source account indicated above.
- ------------------------------------------------------------------------------------------------------------------------------------
Acknowledgement:
By signing below, the Contract Owner understands that:
a) The contract value and annuity payments, when based on investment experience of a separate account, are
variable and are not guaranteed as to a fixed dollar amount;
b) This annuity is a long term commitment to meet insurance needs and financial goals; and I acknowledge receipt
of the most recent prospectus; and
c) The annuity applied for is suitable for my investment objectives and my financial situation and needs.
- ------------------------------------------------------------------------------------------------------------------------------------
Signatures:
Signed at:_______________________ _________________________________ _________________________________
City State Date Signed
_______________________________ _________________________________________________________
Signature of Contract Owner Signature of Annuitant (if different from Contract Owner)
- ------------------------------------------------------------------------------------------------------------------------------------
Notice:
I hereby represent that my answers to the above sections are correct and true to the best of my knowledge and
belief and I agree that this application shall be part of any annuity contract issued by the Company. Under
penalty of perjury, I certify that (1) I am exempt from backup withholding, (2) I have indicated my correct
taxpayer identification number, (3) I am not subject to backup withholding either because I have not been
notified by the IRS that I am subject to backup withholding as result of failure to report all interest or
dividends, or the IRS has notified me that I am no longer subject to backup withholding, and (4) I have received
the W-9 Backup Withholding Instructions Form.
[ ] Check this box if you are subject to backup withholding under the provisions of Section 3406 (a) (1) (c) of the
Internal Revenue Code.
Contract No. Date of Issue
Does the proposed Contract Owner already own a PML Annuity contract? [ ] No [ ] Yes _______________ _______________
______________________________________________________________________ _______________________________
Signature of Contract Owner Date Signed
- ------------------------------------------------------------------------------------------------------------------------------------
Registered Representative:
Do you have any reason to believe the contract applied for is to replace existing insurance or annuities [ ] Yes [ ] No
__________________________________________________ ___________________________________________________ ______________________
Signature of Registered Representative Printed Name of Registered Representative State License Number
(Resident agent if required by law)
__________________________________________________ _____________________________________________________________________________
Telephone No. Office Code (3 digit) Representative Code (5 digit)
__________________________________________________ ____________________________________________________________________________
Office/Firm Name Broker/Dealer Name
Commission Information Office 5-Digit
Representative Code Number Representative Code Percent (%)
_________________________________________________________________________________________________________________________________
__________________________________________________________________________________________________________________________________
__________________________________________________________________________________________________________________________________
Send Application, Check & Other Required Forms to:
The Penn Mutual Life Insurance Company
600 Dresher Road - C2L
Horsham, PA 19044
page 2 of 2
</TABLE>
<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 for the year ended December 31, 1998 in the
Post-Effective Amendment Number 26 to Registration Statement Number 2-77283 on
Form N-4 and the related Statement of Additional Information of Penn Mutual
Variable Annuity Account III.
ERNST & YOUNG LLP
Philadelphia, Pennsylvania
April 22, 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. 2-77283)
----------------------------------------------------------
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. 25 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. 28 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>
Diversifier II Table 1a - 1 Year Calculations
<TABLE>
<CAPTION>
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>
ACI Capital Appreciation 12/31/97 $12.69 $1,000.00 12/31/98 $12.26 $ 905.16 $61.13 -9.48%
Emerging Growth Fund 12/31/97 $13.81 $1,000.00 12/31/98 $18.50 $1,254.89 $85.28 25.49%
Fidelity Asset Manager 12/31/97 $15.04 $1,000.00 12/31/98 $17.09 $1,064.20 $72.02 6.42%
Fidelity Equity Income 12/31/97 $17.02 $1,000.00 12/31/98 $18.76 $1,032.23 $70.18 3.22%
Fidelity Growth 12/31/97 $17.07 $1,000.00 12/31/98 $23.52 $1,290.38 $87.20 29.04%
Fidelity Index 500 12/31/97 $12.16 $1,000.00 12/31/98 $15.41 $1,186.91 $80.41 18.69%
Flexibly Managed Fund 12/31/97 $56.27 $1,000.00 12/31/98 $58.95 $ 975.88 $71.86 -2.41%
Growth Equity Fund - non qual 12/31/97 $47.86 $1,000.00 12/31/98 $66.96 $1,307.90 $91.18 30.79%
Growth Equity Fund - qualified 12/31/97 $48.26 $1,000.00 12/31/98 $67.51 $1,307.90 $91.18 30.79%
High Yield Bond Fund 12/31/97 $33.48 $1,000.00 12/31/98 $34.64 $ 968.07 $66.85 -3.19%
International Equity Fund 12/31/97 $18.16 $1,000.00 12/31/98 $21.32 $1,096.72 $77.02 9.67%
MS Emerging Markets International 12/31/97 $ 8.97 $1,000.00 12/31/98 $ 6.72 $ 701.38 $47.42 -29.86%
Neuberger Berman Balanced 12/31/97 $15.55 $1,000.00 12/31/98 $17.23 $1,037.11 $70.73 3.71%
Neuberger Berman Limited Maturity 12/31/97 $11.94 $1,000.00 12/31/98 $12.31 $ 963.78 $67.16 -3.62%
Neuberger Berman Partners 12/31/97 $12.41 $1,000.00 12/31/98 $12.77 $ 962.47 $66.68 -3.75%
Quality Bond Fund 12/31/97 $20.26 $1,000.00 12/31/98 $22.04 $1,018.20 $69.79 1.82%
Small Capitalization Fund 12/31/97 $16.05 $1,000.00 12/31/98 $14.40 $ 839.04 $58.07 -16.10%
Value Equity Fund 12/31/97 $38.04 $1,000.00 12/31/98 $41.17 $1,009.82 $72.44 0.98%
</TABLE>
<PAGE>
Diversifier II Table 1b - One Year Calculations
<TABLE>
<CAPTION>
Beginning Beginning Beginning Ending Ending Ending
Fund Name Date Unit Value Value Date Unit Value Value Charges Return
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ACI Capital Appreciation 12/31/97 $12.69 $1,000.00 12/31/98 $12.26 $ 905.16 $61.13 -9.48%
Emerging Growth Fund 12/31/97 $13.81 $1,000.00 12/31/98 $18.50 $1,254.89 $85.28 25.49%
Fidelity Asset Manager 12/31/97 $15.04 $1,000.00 12/31/98 $17.09 $1,064.20 $72.02 6.42%
Fidelity Equity Income 12/31/97 $17.02 $1,000.00 12/31/98 $18.76 $1,032.23 $70.18 3.22%
Fidelity Growth 12/31/97 $17.07 $1,000.00 12/31/98 $23.52 $1,290.38 $87.20 29.04%
Fidelity Index 500 12/31/97 $12.16 $1,000.00 12/31/98 $15.41 $1,186.91 $80.41 18.69%
Flexibly Managed Fund 12/31/97 $56.27 $1,000.00 12/31/98 $58.95 $ 975.88 $71.86 -2.41%
Growth Equity Fund - non qual 12/31/97 $47.86 $1,000.00 12/31/98 $66.96 $1,307.90 $91.18 30.79%
Growth Equity Fund - qualified 12/31/97 $48.26 $1,000.00 12/31/98 $67.51 $1,307.90 $91.18 30.79%
High Yield Bond Fund 12/31/97 $33.48 $1,000.00 12/31/98 $34.64 $ 968.07 $66.85 -3.19%
International Equity Fund 12/31/97 $18.16 $1,000.00 12/31/98 $21.32 $1,096.72 $77.02 9.67%
MS Emerging Markets International 12/31/97 $ 8.97 $1,000.00 12/31/98 $ 6.72 $ 701.38 $47.42 -29.86%
Neuberger Berman Balanced 12/31/97 $15.55 $1,000.00 12/31/98 $17.23 $1,037.11 $70.73 3.71%
Neuberger Berman Limited Maturity 12/31/97 $11.94 $1,000.00 12/31/98 $12.31 $ 963.78 $67.16 -3.62%
Neuberger Berman Partners 12/31/97 $12.41 $1,000.00 12/31/98 $12.77 $ 962.47 $66.68 -3.75%
Quality Bond Fund 12/31/97 $20.26 $1,000.00 12/31/98 $22.04 $1,018.20 $69.79 1.82%
Small Capitalization Fund 12/31/97 $16.05 $1,000.00 12/31/98 $14.40 $ 839.04 $58.07 -16.10%
Value Equity Fund 12/31/97 $38.04 $1,000.00 12/31/98 $41.17 $1,009.82 $72.44 0.98%
</TABLE>
<PAGE>
Diversifier II Table 1c - One Year Calculations
<TABLE>
<CAPTION>
Beginning Beginning Beginning Ending Ending Ending
Fund Name Date Unit Value Value Date Unit Value Value Charges Return
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ACI Capital Appreciation 12/31/97 $12.69 $1,000.00 12/31/98 $12.26 $ 922.72 $43.56 -7.73%
Emerging Growth Fund 12/31/97 $13.81 $1,000.00 12/31/98 $18.50 $1,289.32 $50.85 28.93%
Fidelity Asset Manager 12/31/97 $15.04 $1,000.00 12/31/98 $17.09 $1,085.78 $50.44 8.58%
Fidelity Equity Income 12/31/97 $17.02 $1,000.00 12/31/98 $18.76 $1,051.68 $50.73 5.17%
Fidelity Growth 12/31/97 $17.07 $1,000.00 12/31/98 $23.52 $1,327.17 $50.41 32.72%
Fidelity Index 500 12/31/97 $12.16 $1,000.00 12/31/98 $15.41 $1,216.75 $50.57 21.68%
Flexibly Managed Fund 12/31/97 $56.27 $1,000.00 12/31/98 $58.95 $ 994.50 $53.24 -0.55%
Growth Equity Fund - non qual 12/31/97 $47.86 $1,000.00 12/31/98 $66.96 $1,346.04 $53.04 34.60%
Growth Equity Fund - qualified 12/31/97 $48.26 $1,000.00 12/31/98 $67.51 $1,346.04 $53.04 34.60%
High Yield Bond Fund 12/31/97 $33.48 $1,000.00 12/31/98 $34.64 $ 986.52 $48.40 -1.35%
International Equity Fund 12/31/97 $18.16 $1,000.00 12/31/98 $21.32 $1,120.67 $53.07 12.07%
MS Emerging Markets International 12/31/97 $ 8.97 $1,000.00 12/31/98 $ 6.72 $ 716.11 $32.69 -28.39%
Neuberger Berman Balanced 12/31/97 $15.55 $1,000.00 12/31/98 $17.23 $1,056.90 $50.94 5.69%
Neuberger Berman Limited Maturity 12/31/97 $11.94 $1,000.00 12/31/98 $12.31 $ 982.18 $48.76 -1.78%
Neuberger Berman Partners 12/31/97 $12.41 $1,000.00 12/31/98 $12.77 $ 980.85 $48.30 -1.92%
Quality Bond Fund 12/31/97 $20.26 $1,000.00 12/31/98 $22.04 $1,037.35 $50.65 3.73%
Small Capitalization Fund 12/31/97 $16.05 $1,000.00 12/31/98 $14.40 $ 855.70 $41.41 -14.43%
Value Equity Fund 12/31/97 $38.04 $1,000.00 12/31/98 $41.17 $1,028.89 $53.37 2.89%
</TABLE>
<PAGE>
Diversifier II Table 1d - One Year Calculations
<TABLE>
<CAPTION>
Beginning Beginning Beginning Ending Ending Ending
Fund Name Date Unit Value Value Date Unit Value Value Charges Return
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Flexibly Managed Fund 12/31/97 $56.27 $1,000.00 12/31/98 $58.95 $ 994.74 $53.00 -0.53%
Growth Equity Fund - non qual 12/31/97 $47.86 $1,000.00 12/31/98 $66.96 $1,333.09 $66.00 33.31%
Growth Equity Fund - qualified 12/31/97 $48.26 $1,000.00 12/31/98 $67.51 $1,333.09 $66.00 33.31%
High Yield Bond Fund 12/31/97 $33.48 $1,000.00 12/31/98 $34.64 $ 986.69 $48.22 -1.33%
International Equity Fund 12/31/97 $18.16 $1,000.00 12/31/98 $21.32 $1,117.85 $55.89 11.78%
Quality Bond Fund 12/31/97 $20.26 $1,000.00 12/31/98 $22.04 $1,037.79 $50.21 3.78%
Value Equity Fund 12/31/97 $38.04 $1,000.00 12/31/98 $41.17 $1,029.30 $52.96 2.93%
</TABLE>
<PAGE>
Diversifier II Table 2a - One Year Calculations
<TABLE>
<CAPTION>
Beginning Beginning Beginning Ending Ending Ending
Fund Name Date Unit Value Value Date Unit Value Value Charges Return
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ACI Capital Appreciation 12/31/97 $12.69 $1,000.00 12/31/98 $12.26 $ 966.03 $0.25 -3.40%
Emerging Growth Fund 12/31/97 $13.81 $1,000.00 12/31/98 $18.50 $1,339.32 $0.85 33.93%
Fidelity Asset Manager 12/31/97 $15.04 $1,000.00 12/31/98 $17.09 $1,135.78 $0.44 13.58%
Fidelity Equity Income 12/31/97 $17.02 $1,000.00 12/31/98 $18.76 $1,101.68 $0.73 10.17%
Fidelity Growth 12/31/97 $17.07 $1,000.00 12/31/98 $23.52 $1,377.17 $0.41 37.72%
Fidelity Index 500 12/31/97 $12.16 $1,000.00 12/31/98 $15.41 $1,266.75 $0.57 26.68%
Flexibly Managed Fund 12/31/97 $56.27 $1,000.00 12/31/98 $58.95 $1,041.89 $5.85 4.19%
Growth Equity Fund - non qual 12/31/97 $47.86 $1,000.00 12/31/98 $66.96 $1,396.04 $3.04 39.60%
Growth Equity Fund - qualified 12/31/97 $48.26 $1,000.00 12/31/98 $67.51 $1,396.04 $3.04 39.60%
High Yield Bond Fund 12/31/97 $33.48 $1,000.00 12/31/98 $34.64 $1,033.27 $1.65 3.33%
International Equity Fund 12/31/97 $18.16 $1,000.00 12/31/98 $21.32 $1,170.67 $3.07 17.07%
MS Emerging Markets International 12/31/97 $ 8.97 $1,000.00 12/31/98 $ 6.72 $ 748.55 $0.25 -25.14%
Neuberger Berman Balanced 12/31/97 $15.55 $1,000.00 12/31/98 $17.23 $1,106.90 $0.94 10.69%
Neuberger Berman Limited Maturity 12/31/97 $11.94 $1,000.00 12/31/98 $12.31 $1,028.73 $2.21 2.87%
Neuberger Berman Partners 12/31/97 $12.41 $1,000.00 12/31/98 $12.77 $1,027.30 $1.84 2.73%
Quality Bond Fund 12/31/97 $20.26 $1,000.00 12/31/98 $22.04 $1,086.75 $1.25 8.67%
Small Capitalization Fund 12/31/97 $16.05 $1,000.00 12/31/98 $14.40 $ 895.56 $1.55 -10.44%
Value Equity Fund 12/31/97 $38.04 $1,000.00 12/31/98 $41.17 $1,078.00 $4.26 7.80%
</TABLE>
<PAGE>
Diversifier II Table 2b - One Year Calculations
<TABLE>
<CAPTION>
Beginning Beginning Beginning Ending Ending Ending
Fund Name Date Unit Value Value Date Unit Value Value Charges Return
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Flexibly Managed Fund 12/31/97 $56.27 $1,000.00 12/31/98 $58.95 $1,041.89 $5.85 4.19%
Growth Equity Fund - non qual 12/31/97 $47.86 $1,000.00 12/31/98 $66.96 $1,396.04 $3.04 39.60%
Growth Equity Fund - qualified 12/31/97 $48.26 $1,000.00 12/31/98 $67.51 $1,396.04 $3.04 39.60%
High Yield Bond Fund 12/31/97 $33.48 $1,000.00 12/31/98 $34.64 $1,033.27 $1.65 3.33%
International Equity Fund 12/31/97 $18.16 $1,000.00 12/31/98 $21.32 $1,170.67 $3.07 17.07%
Quality Bond Fund 12/31/97 $20.26 $1,000.00 12/31/98 $22.04 $1,086.75 $1.25 8.67%
Value Equity Fund 12/31/97 $38.04 $1,000.00 12/31/98 $41.17 $1,078.00 $4.26 7.80%
</TABLE>
<PAGE>
Diversifier II Table 3a - One Year Calculations
<TABLE>
<CAPTION>
Beginning Beginning Beginning Ending Ending Ending
Fund Name Date Unit Value Value Date Unit Value Value Charges Return
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ACI Capital Appreciation 12/31/97 $12.69 $10,000.00 12/31/98 $12.26 $ 9,662.56 $0.25 -3.37%
Emerging Growth Fund 12/31/97 $13.81 $10,000.00 12/31/98 $18.50 $13,400.83 $0.85 34.01%
Fidelity Asset Manager 12/31/97 $15.04 $10,000.00 12/31/98 $17.09 $11,361.74 $0.44 13.62%
Fidelity Equity Income 12/31/97 $17.02 $10,000.00 12/31/98 $18.76 $11,023.35 $0.73 10.23%
Fidelity Growth 12/31/97 $17.07 $10,000.00 12/31/98 $23.52 $13,775.36 $0.41 37.75%
Fidelity Index 500 12/31/97 $12.16 $10,000.00 12/31/98 $15.41 $12,672.65 $0.57 26.73%
Flexibly Managed Fund 12/31/97 $56.27 $10,000.00 12/31/98 $58.95 $10,471.55 $5.85 4.72%
Growth Equity Fund - non qual 12/31/97 $47.86 $10,000.00 12/31/98 $66.96 $13,987.80 $3.04 39.88%
Growth Equity Fund - qualified 12/31/97 $48.26 $10,000.00 12/31/98 $67.51 $13,987.80 $3.04 39.88%
High Yield Bond Fund 12/31/97 $33.48 $10,000.00 12/31/98 $34.64 $10,347.51 $1.65 3.48%
International Equity Fund 12/31/97 $18.16 $10,000.00 12/31/98 $21.32 $11,734.28 $3.07 17.34%
MS Emerging Markets International 12/31/97 $ 8.97 $10,000.00 12/31/98 $ 6.72 $ 7,487.80 $0.25 -25.12%
Neuberger Berman Balanced 12/31/97 $15.55 $10,000.00 12/31/98 $17.23 $11,077.45 $0.94 10.77%
Neuberger Berman Limited Maturity 12/31/97 $11.94 $10,000.00 12/31/98 $12.31 $10,307.20 $2.21 3.07%
Neuberger Berman Partners 12/31/97 $12.41 $10,000.00 12/31/98 $12.77 $10,289.59 $1.84 2.90%
Quality Bond Fund 12/31/97 $20.26 $10,000.00 12/31/98 $22.04 $10,878.70 $1.25 8.79%
Small Capitalization Fund 12/31/97 $16.05 $10,000.00 12/31/98 $14.40 $ 8,969.54 $1.55 -10.30%
Value Equity Fund 12/31/97 $38.04 $10,000.00 12/31/98 $41.17 $10,818.36 $4.26 8.18%
</TABLE>
<PAGE>
Diversifier II Table 3b - One Year Calculations
<TABLE>
<CAPTION>
Beginning Beginning Beginning Ending Ending Ending
Fund Name Date Unit Value Value Date Unit Value Value Charges Return
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Flexibly Managed Fund 12/31/97 $56.27 $10,000.00 12/31/98 $58.95 $10,471.55 $5.85 4.72%
Growth Equity Fund - non qual 12/31/97 $47.86 $10,000.00 12/31/98 $66.96 $13,987.80 $3.04 39.88%
Growth Equity Fund - qualified 12/31/97 $48.26 $10,000.00 12/31/98 $67.51 $13,987.80 $3.04 39.88%
High Yield Bond Fund 12/31/97 $33.48 $10,000.00 12/31/98 $34.64 $10,347.51 $1.65 3.48%
International Equity Fund 12/31/97 $18.16 $10,000.00 12/31/98 $21.32 $11,734.28 $3.07 17.34%
Quality Bond Fund 12/31/97 $20.26 $10,000.00 12/31/98 $22.04 $10,878.70 $1.25 8.79%
Value Equity Fund 12/31/97 $38.04 $10,000.00 12/31/98 $41.17 $10,818.36 $4.26 8.18%
</TABLE>
<PAGE>
Diversifier II Table 1a - Five Year Calculations
<TABLE>
<CAPTION>
Beginning Beginning Beginning Ending Ending Ending
Fund Name Date Unit Value Value Date Unit Value Value Charges Return
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ACI Capital Appreciation 12/31/93 $11.12 $1,000.00 12/31/98 $12.26 $1,071.32 $30.99 1.39%
Fidelity Asset Manager 12/31/93 $10.41 $1,000.00 12/31/98 $17.09 $1,594.15 $46.45 9.77%
Fidelity Equity Income 12/31/93 $ 8.50 $1,000.00 12/31/98 $18.76 $2,141.85 $63.11 16.45%
Fidelity Growth 12/31/93 $ 9.36 $1,000.00 12/31/98 $23.52 $2,440.82 $69.79 19.53%
Fidelity Index 500 12/31/93 $ 5.59 $1,000.00 12/31/98 $15.41 $2,679.37 $77.22 21.78%
Flexibly Managed Fund 12/31/93 $34.51 $1,000.00 12/31/98 $58.95 $1,626.07 $74.53 10.21%
Growth Equity Fund - non qual 12/31/93 $28.53 $1,000.00 12/31/98 $66.96 $2,257.57 $77.93 17.68%
Growth Equity Fund - qualified 12/31/93 $28.77 $1,000.00 12/31/98 $67.51 $2,257.57 $77.93 17.68%
High Yield Bond Fund 12/31/93 $24.74 $1,000.00 12/31/98 $34.64 $1,352.61 $45.83 6.22%
International Equity Fund 12/31/93 $13.88 $1,000.00 12/31/98 $21.32 $1,474.71 $56.36 8.07%
Neuberger Berman Balanced 12/31/93 $10.71 $1,000.00 12/31/98 $17.23 $1,559.80 $48.01 9.29%
Neuberger Berman Limited Maturity 12/31/93 $10.18 $1,000.00 12/31/98 $12.31 $1,164.87 $43.44 3.10%
Quality Bond Fund 12/31/93 $16.64 $1,000.00 12/31/98 $22.04 $1,281.90 $41.86 5.09%
Value Equity Fund 12/31/93 $18.06 $1,000.00 12/31/98 $41.17 $2,187.23 $82.11 16.93%
</TABLE>
<PAGE>
Diversifier II Table 1b - Five Year Calculations
<TABLE>
<CAPTION>
Beginning Beginning Beginning Ending Ending Ending
Fund Name Date Unit Value Value Date Unit Value Value Charges Return
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ACI Capital Appreciation 12/31/93 $11.12 $1,000.00 12/31/98 $12.26 $1,066.37 $35.94 1.29%
Fidelity Asset Manager 12/31/93 $10.41 $1,000.00 12/31/98 $17.09 $1,586.77 $53.82 9.67%
Fidelity Equity Income 12/31/93 $ 8.50 $1,000.00 12/31/98 $18.76 $2,131.94 $73.01 16.34%
Fidelity Growth 12/31/93 $ 9.36 $1,000.00 12/31/98 $23.52 $2,429.53 $81.08 19.42%
Fidelity Index 500 12/31/93 $ 5.59 $1,000.00 12/31/98 $15.41 $2,666.98 $89.61 21.66%
Flexibly Managed Fund 12/31/93 $34.51 $1,000.00 12/31/98 $58.95 $1,618.52 $82.08 10.10%
Growth Equity Fund 12/31/93 $28.53 $1,000.00 12/31/98 $66.96 $2,247.12 $88.39 17.57%
Growth Equity Fund 12/31/93 $28.77 $1,000.00 12/31/98 $67.51 $2,247.12 $88.39 17.57%
High Yield Bond Fund 12/31/93 $24.74 $1,000.00 12/31/98 $34.64 $1,346.35 $52.09 6.12%
International Equity Fund 12/31/93 $13.88 $1,000.00 12/31/98 $21.32 $1,467.88 $63.19 7.97%
Neuberger Berman Balanced 12/31/93 $10.71 $1,000.00 12/31/98 $17.23 $1,552.58 $55.23 9.19%
Neuberger Berman Limited Maturity 12/31/93 $10.18 $1,000.00 12/31/98 $12.31 $1,159.47 $48.83 3.00%
Quality Bond Fund 12/31/93 $16.64 $1,000.00 12/31/98 $22.04 $1,275.96 $47.79 4.99%
Value Equity Fund 12/31/93 $18.06 $1,000.00 12/31/98 $41.17 $2,177.10 $92.25 16.83%
</TABLE>
<PAGE>
Diversifier II Table 1c - Five Year Calculations
<TABLE>
<CAPTION>
Beginning Beginning Beginning Ending Ending Ending
Fund Name Date Unit Value Value Date Unit Value Value Charges Return
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ACI Capital Appreciation 12/31/93 $11.12 $1,000.00 12/31/98 $12.26 $1,051.06 $51.25 1.00%
Fidelity Asset Manager 12/31/93 $10.41 $1,000.00 12/31/98 $17.09 $1,588.39 $52.20 9.69%
Fidelity Equity Income 12/31/93 $ 8.50 $1,000.00 12/31/98 $18.76 $2,151.31 $53.65 16.55%
Fidelity Growth 12/31/93 $ 9.36 $1,000.00 12/31/98 $23.52 $2,458.56 $52.05 19.70%
Fidelity Index 500 12/31/93 $ 5.59 $1,000.00 12/31/98 $15.41 $2,703.74 $52.85 22.00%
Flexibly Managed Fund 12/31/93 $34.51 $1,000.00 12/31/98 $58.95 $1,621.35 $79.25 10.14%
Growth Equity Fund 12/31/93 $28.53 $1,000.00 12/31/98 $66.96 $2,270.30 $65.20 17.81%
Growth Equity Fund 12/31/93 $28.77 $1,000.00 12/31/98 $67.51 $2,270.30 $65.20 17.81%
High Yield Bond Fund 12/31/93 $24.74 $1,000.00 12/31/98 $34.64 $1,340.19 $58.25 6.03%
International Equity Fund 12/31/93 $13.88 $1,000.00 12/31/98 $21.32 $1,465.72 $65.35 7.94%
Neuberger Berman Balanced 12/31/93 $10.71 $1,000.00 12/31/98 $17.23 $1,553.11 $54.70 9.20%
Neuberger Berman Limited Maturity 12/31/93 $10.18 $1,000.00 12/31/98 $12.31 $1,147.26 $61.05 2.78%
Quality Bond Fund 12/31/93 $16.64 $1,000.00 12/31/98 $22.04 $1,267.50 $56.25 4.85%
Value Equity Fund 12/31/93 $18.06 $1,000.00 12/31/98 $41.17 $2,198.05 $71.30 17.05%
</TABLE>
<PAGE>
Diversifier II Table 1d - Five Year Calculations
<TABLE>
<CAPTION>
Beginning Beginning Beginning Ending Ending Ending
Fund Name 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 $34.51 $1,000.00 12/31/98 $58.95 $1,595.88 $104.72 9.79%
Growth Equity Fund - non qual 12/31/93 $28.53 $1,000.00 12/31/98 $66.96 $2,215.75 $119.75 17.24%
Growth Equity Fund - qualified 12/31/93 $28.77 $1,000.00 12/31/98 $67.51 $2,215.75 $119.75 17.24%
High Yield Bond Fund 12/31/93 $24.74 $1,000.00 12/31/98 $34.64 $1,327.56 $ 70.88 5.83%
International Equity Fund 12/31/93 $13.88 $1,000.00 12/31/98 $21.32 $1,447.38 $ 83.70 7.67%
Quality Bond Fund 12/31/93 $16.64 $1,000.00 12/31/98 $22.04 $1,258.16 $ 65.59 4.70%
Value Equity Fund 12/31/93 $18.06 $1,000.00 12/31/98 $41.17 $2,146.69 $122.65 16.50%
</TABLE>
<PAGE>
Diversifier II Table 2a - Five Year Calculations
<TABLE>
<CAPTION>
Beginning Beginning Beginning Ending Ending Ending
Fund Name Date Unit Value Value Date Unit Value Value Charges Return
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ACI Capital Appreciation 12/31/93 $11.12 $1,000.00 12/31/98 $12.26 $1,101.06 $ 1.25 1.94%
Fidelity Asset Manager 12/31/93 $10.41 $1,000.00 12/31/98 $17.09 $1,638.39 $ 2.20 10.37%
Fidelity Equity Income 12/31/93 $ 8.50 $1,000.00 12/31/98 $18.76 $2,201.31 $ 3.65 17.08%
Fidelity Growth 12/31/93 $ 9.36 $1,000.00 12/31/98 $23.52 $2,508.56 $ 2.05 20.18%
Fidelity Index 500 12/31/93 $ 5.59 $1,000.00 12/31/98 $15.41 $2,753.74 $ 2.85 22.44%
Flexibly Managed Fund 12/31/93 $34.51 $1,000.00 12/31/98 $58.95 $1,671.35 $29.25 10.81%
Growth Equity Fund - non qual 12/31/93 $28.53 $1,000.00 12/31/98 $66.96 $2,320.30 $15.20 18.32%
Growth Equity Fund - qualified 12/31/93 $28.77 $1,000.00 12/31/98 $67.51 $2,320.30 $15.20 18.32%
High Yield Bond Fund 12/31/93 $24.74 $1,000.00 12/31/98 $34.64 $1,390.19 $ 8.25 6.81%
International Equity Fund 12/31/93 $13.88 $1,000.00 12/31/98 $21.32 $1,515.72 $15.35 8.67%
Neuberger Berman Balanced 12/31/93 $10.71 $1,000.00 12/31/98 $17.23 $1,603.11 $ 4.70 9.89%
Neuberger Berman Limited Maturity 12/31/93 $10.18 $1,000.00 12/31/98 $12.31 $1,197.26 $11.05 3.66%
Quality Bond Fund 12/31/93 $16.64 $1,000.00 12/31/98 $22.04 $1,317.50 $ 6.25 5.67%
Value Equity Fund 12/31/93 $18.06 $1,000.00 12/31/98 $41.17 $2,248.05 $21.30 17.58%
</TABLE>
<PAGE>
Diversifier II Table 2b - Five Year Calculations
<TABLE>
<CAPTION>
Beginning Beginning Beginning Ending Ending Ending
Fund Name 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 $34.51 $1,000.00 12/31/98 $58.95 $1,671.35 $29.25 10.81%
Growth Equity Fund - non qual 12/31/93 $28.53 $1,000.00 12/31/98 $66.96 $2,320.30 $15.20 18.32%
Growth Equity Fund - qualified 12/31/93 $28.77 $1,000.00 12/31/98 $67.51 $2,320.30 $15.20 18.32%
High Yield Bond Fund 12/31/93 $24.74 $1,000.00 12/31/98 $34.64 $1,390.19 $ 8.25 6.81%
International Equity Fund 12/31/93 $13.88 $1,000.00 12/31/98 $21.32 $1,515.72 $15.35 8.67%
Quality Bond Fund 12/31/93 $16.64 $1,000.00 12/31/98 $22.04 $1,317.50 $ 6.25 5.67%
Value Equity Fund 12/31/93 $18.06 $1,000.00 12/31/98 $41.17 $2,248.05 $21.30 17.58%
</TABLE>
<PAGE>
Diversifier II Table 3a - Five Year Calculations
<TABLE>
<CAPTION>
Beginning Beginning Beginning Ending Ending Ending
Fund Name Date Unit Value Value Date Unit Value Value Charges Return
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ACI Capital Appreciation 12/31/93 $11.12 $10,000.00 12/31/98 $12.26 $11,021.59 $ 1.25 1.96%
Fidelity Asset Manager 12/31/93 $10.41 $10,000.00 12/31/98 $17.09 $16,410.85 $ 2.20 10.41%
Fidelity Equity Income 12/31/93 $ 8.50 $10,000.00 12/31/98 $18.76 $22,060.10 $ 3.65 17.13%
Fidelity Growth 12/31/93 $ 9.36 $10,000.00 12/31/98 $23.52 $25,117.01 $ 2.05 20.21%
Fidelity Index 500 12/31/93 $ 5.59 $10,000.00 12/31/98 $15.41 $27,582.04 $ 2.85 22.48%
Flexibly Managed Fund 12/31/93 $34.51 $10,000.00 12/31/98 $58.95 $17,044.17 $29.25 11.25%
Growth Equity Fund - non qual 12/31/93 $28.53 $10,000.00 12/31/98 $66.96 $23,444.00 $15.20 18.57%
Growth Equity Fund - qualified 12/31/93 $28.77 $10,000.00 12/31/98 $67.51 $23,443.99 $15.20 18.57%
High Yield Bond Fund 12/31/93 $24.74 $10,000.00 12/31/98 $34.64 $13,992.16 $ 8.25 6.95%
International Equity Fund 12/31/93 $13.88 $10,000.00 12/31/98 $21.32 $15,339.31 $15.35 8.93%
Neuberger Berman Balanced 12/31/93 $10.71 $10,000.00 12/31/98 $17.23 $16,085.90 $ 4.70 9.97%
Neuberger Berman Limited Maturity 12/31/93 $10.18 $10,000.00 12/31/98 $12.31 $12,081.23 $11.05 3.85%
Quality Bond Fund 12/31/93 $16.64 $10,000.00 12/31/98 $22.04 $13,240.95 $ 6.25 5.77%
Value Equity Fund 12/31/93 $18.06 $10,000.00 12/31/98 $41.17 $22,760.79 $21.30 17.87%
</TABLE>
<PAGE>
Diversifier II Table 3b - Five Year Calculations
<TABLE>
<CAPTION>
Beginning Beginning Beginning Ending Ending Ending
Fund Name 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 $34.51 $10,000.00 12/31/98 $58.95 $17,044.17 $29.25 11.25%
Growth Equity Fund - non qual 12/31/93 $28.53 $10,000.00 12/31/98 $66.96 $23,444.00 $15.20 18.57%
Growth Equity Fund - qualified 12/31/93 $28.77 $10,000.00 12/31/98 $67.51 $23,443.99 $15.20 18.57%
High Yield Bond Fund 12/31/93 $24.74 $10,000.00 12/31/98 $34.64 $13,992.16 $ 8.25 6.95%
International Equity Fund 12/31/93 $13.88 $10,000.00 12/31/98 $21.32 $15,339.31 $15.35 8.93%
Quality Bond Fund 12/31/93 $16.64 $10,000.00 12/31/98 $22.04 $13,240.95 $ 6.25 5.77%
Value Equity Fund 12/31/93 $18.06 $10,000.00 12/31/98 $41.17 $22,760.79 $21.30 17.87%
</TABLE>
<PAGE>
Diversifier II Table 1a - 10 Year Calculations
<TABLE>
<CAPTION>
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 12/31/88 $19.83 $1,000.00 12/31/98 $58.95 $2,872.63 $5.85 11.12%
Growth Equity Fund - non qual 12/31/88 $16.22 $1,000.00 12/31/98 $66.96 $4,057.11 $3.04 15.02%
Growth Equity Fund - qualified 12/31/88 $16.36 $1,000.00 12/31/98 $67.51 $4,057.11 $3.04 15.02%
High Yield Bond Fund 12/31/88 $15.33 $1,000.00 12/31/98 $34.64 $2,234.38 $1.65 8.37%
Quality Bond Fund 12/31/88 $10.58 $1,000.00 12/31/98 $22.04 $2,066.14 $1.25 7.52%
Value Equity Fund 12/31/88 $11.80 $1,000.00 12/31/98 $41.17 $3,397.49 $4.26 13.00%
</TABLE>
<PAGE>
Diversifier II Table 1b - 10 Year Calculations
<TABLE>
<CAPTION>
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 12/31/88 $19.83 $1,000.00 12/31/98 $58.95 $2,846.72 $31.76 11.02%
Growth Equity Fund - non qual 12/31/88 $16.22 $1,000.00 12/31/98 $66.96 $4,020.57 $39.58 14.92%
Growth Equity Fund - qualified 12/31/88 $16.36 $1,000.00 12/31/98 $67.51 $4,020.57 $39.58 14.92%
High Yield Bond Fund 12/31/88 $15.33 $1,000.00 12/31/98 $34.64 $2,214.25 $21.77 8.27%
Quality Bond Fund 12/31/88 $10.58 $1,000.00 12/31/98 $22.04 $2,047.53 $19.86 7.43%
Value Equity Fund 12/31/88 $11.80 $1,000.00 12/31/98 $41.17 $3,366.87 $34.88 12.90%
</TABLE>
<PAGE>
Diversifier II Table 1c - 10 Year Calculations
<TABLE>
<CAPTION>
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 12/31/88 $19.83 $1,000.00 12/31/98 $58.95 $2,822.63 $55.85 10.93%
Growth Equity Fund - non qual 12/31/88 $16.22 $1,000.00 12/31/98 $66.96 $4,007.11 $53.04 14.88%
Growth Equity Fund - qualified 12/31/88 $16.36 $1,000.00 12/31/98 $67.51 $4,007.11 $53.04 14.88%
High Yield Bond Fund 12/31/88 $15.33 $1,000.00 12/31/98 $34.64 $2,184.38 $51.65 8.12%
Quality Bond Fund 12/31/88 $10.58 $1,000.00 12/31/98 $22.04 $2,016.14 $51.25 7.26%
Value Equity Fund 12/31/88 $11.80 $1,000.00 12/31/98 $41.17 $3,347.49 $54.26 12.83%
</TABLE>
<PAGE>
Diversifier II Table 1d - 10 Year Calculations
<TABLE>
<CAPTION>
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 12/31/88 $19.83 $1,000.00 12/31/98 $58.95 $2,836.65 $41.83 10.98%
Growth Equity Fund - non qual 12/31/88 $16.22 $1,000.00 12/31/98 $66.96 $4,006.36 $53.79 14.88%
Growth Equity Fund - qualified 12/31/88 $16.36 $1,000.00 12/31/98 $67.51 $4,006.36 $53.79 14.88%
High Yield Bond Fund 12/31/88 $15.33 $1,000.00 12/31/98 $34.64 $2,206.43 $29.60 8.23%
Quality Bond Fund 12/31/88 $10.58 $1,000.00 12/31/98 $22.04 $2,040.30 $27.09 7.39%
Value Equity Fund 12/31/88 $11.80 $1,000.00 12/31/98 $41.17 $3,354.97 $46.78 12.86%
</TABLE>
<PAGE>
Diversifier II Table 2a - 10 Year Calculations
<TABLE>
<CAPTION>
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>
ACI Capital Appreciation 12/31/88 $ 6.08 $1,000.00 12/31/98 $12.26 $2,013.22 $0.25 7.24%
Fidelity Equity Income 12/31/88 $ 5.01 $1,000.00 12/31/98 $18.76 $3,728.58 $0.73 14.06%
Fidelity Growth 12/31/88 $ 4.52 $1,000.00 12/31/98 $23.52 $5,191.12 $0.41 17.89%
Flexibly Managed Fund 12/31/88 $19.83 $1,000.00 12/31/98 $58.95 $2,872.63 $5.85 11.12%
Growth Equity Fund - non qual 12/31/88 $16.22 $1,000.00 12/31/98 $66.96 $4,057.11 $3.04 15.02%
Growth Equity Fund - qualified 12/31/88 $16.36 $1,000.00 12/31/98 $67.51 $4,057.11 $3.04 15.02%
High Yield Bond Fund 12/31/88 $15.33 $1,000.00 12/31/98 $34.64 $2,234.38 $1.65 8.37%
Neuberger Berman Limited Maturity 12/31/88 $ 7.23 $1,000.00 12/31/98 $12.31 $1,675.03 $2.21 5.29%
Quality Bond Fund 12/31/88 $10.58 $1,000.00 12/31/98 $22.04 $2,066.14 $1.25 7.52%
Value Equity Fund 12/31/88 $11.80 $1,000.00 12/31/98 $41.17 $3,397.49 $4.26 13.00%
</TABLE>
<PAGE>
Diversifier II Table 2b - 10 Year Calculations
<TABLE>
<CAPTION>
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 12/31/88 $19.83 $1,000.00 12/31/98 $58.95 $2,872.63 $5.85 11.12%
Growth Equity Fund - non qual 12/31/88 $16.22 $1,000.00 12/31/98 $66.96 $4,057.11 $3.04 15.02%
Growth Equity Fund - qualified 12/31/88 $16.36 $1,000.00 12/31/98 $67.51 $4,057.11 $3.04 15.02%
High Yield Bond Fund 12/31/88 $15.33 $1,000.00 12/31/98 $34.64 $2,234.38 $1.65 8.37%
Quality Bond Fund 12/31/88 $10.58 $1,000.00 12/31/98 $22.04 $2,066.14 $1.25 7.52%
Value Equity Fund 12/31/88 $11.80 $1,000.00 12/31/98 $41.17 $3,397.49 $4.26 13.00%
</TABLE>
<PAGE>
Diversifier II Table 3a - 10 Year Calculations
<TABLE>
<CAPTION>
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>
ACI Capital Appreciation 12/31/88 $ 6.08 $10,000.00 12/31/98 $12.26 $20,158.24 $0.25 7.26%
Fidelity Equity Income 12/31/88 $ 5.01 $10,000.00 12/31/98 $18.76 $37,430.46 $0.73 14.10%
Fidelity Growth 12/31/88 $ 4.52 $10,000.00 12/31/98 $23.52 $52,006.33 $0.41 17.91%
Flexibly Managed Fund 12/31/88 $19.83 $10,000.00 12/31/98 $58.95 $29,625.58 $5.85 11.47%
Growth Equity Fund - non qual 12/31/88 $16.22 $10,000.00 12/31/98 $66.96 $41,208.66 $3.04 15.20%
Growth Equity Fund - qualified 12/31/88 $16.36 $10,000.00 12/31/98 $67.51 $41,208.66 $3.04 15.20%
High Yield Bond Fund 12/31/88 $15.33 $10,000.00 12/31/98 $34.64 $22,579.79 $1.65 8.48%
Neuberger Berman Limited Maturity 12/31/88 $ 7.23 $10,000.00 12/31/98 $12.31 $16,994.56 $2.21 5.44%
Quality Bond Fund 12/31/88 $10.58 $10,000.00 12/31/98 $22.04 $20,816.76 $1.25 7.60%
Value Equity Fund 12/31/88 $11.80 $10,000.00 12/31/98 $41.17 $34,791.97 $4.26 13.27%
</TABLE>
<PAGE>
Diversifier II Table 3b - 10 Year Calculations
<TABLE>
<CAPTION>
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 12/31/88 $19.83 $10,000.00 12/31/98 $58.95 $29,625.58 $5.85 11.47%
Growth Equity Fund - non qual 12/31/88 $16.22 $10,000.00 12/31/98 $66.96 $41,208.66 $3.04 15.20%
Growth Equity Fund - qualified 12/31/88 $16.36 $10,000.00 12/31/98 $67.51 $41,208.66 $3.04 15.20%
High Yield Bond Fund 12/31/88 $15.33 $10,000.00 12/31/98 $34.64 $22,579.79 $1.65 8.48%
Quality Bond Fund 12/31/88 $10.58 $10,000.00 12/31/98 $22.04 $20,816.76 $1.25 7.60%
Value Equity Fund 12/31/88 $11.80 $10,000.00 12/31/98 $41.17 $34,791.97 $4.26 13.27%
</TABLE>
<PAGE>
Diversifier II Table 1a - Since Inception Year Calculations
<TABLE>
<CAPTION>
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>
Capital Appreciation Portfolio 05/01/93 $10.00 $1,000.00 12/31/98 $12.26 $1,224.43 $ 0.25 3.63%
Emerging Growth Fund 05/01/97 $10.00 $1,000.00 12/31/98 $18.50 $1,748.69 $100.72 39.79%
MS Emerging Markets International 05/01/97 $10.00 $1,000.00 12/31/98 $ 6.72 $ 641.10 $ 30.47 -23.39%
Fidelity Asset Manager Portfolio 05/01/95 $10.00 $1,000.00 12/31/98 $17.09 $1,706.07 $ 0.44 15.66%
Fidelity Equity Income Portfolio 05/01/95 $10.00 $1,000.00 12/31/98 $18.76 $1,871.69 $ 0.73 18.62%
Fidelity Growth Equity Portfolio 05/01/95 $10.00 $1,000.00 12/31/98 $23.52 $2,348.89 $ 0.41 26.19%
Fidelity Index 500 05/01/97 $10.00 $1,000.00 12/31/98 $15.41 $1,525.50 $ 14.43 28.80%
Flexibly Managed Fund 07/31/84 $10.00 $1,000.00 12/31/98 $58.95 $5,693.76 $ 5.85 12.81%
Growth Equity - non-qualified 06/01/83 $10.00 $1,000.00 12/31/98 $66.96 $6,543.13 $ 3.04 12.80%
Growth Equity Fund - qualified 08/11/83 $10.00 $1,000.00 12/31/98 $67.51 $6,597.39 $ 3.04 13.03%
High Yield Bond Fund 08/06/84 $10.00 $1,000.00 12/31/98 $34.64 $3,419.32 $ 1.65 8.91%
International Equity Fund 11/01/92 $10.00 $1,000.00 12/31/98 $21.32 $2,084.19 $ 22.03 12.65%
Neuberger Berman Balanced Fund 05/01/93 $10.00 $1,000.00 12/31/98 $16.47 $1,638.67 $ 0.94 9.98%
Neuberger Berman Limited Maturity Fund 05/01/93 $10.00 $1,000.00 12/31/98 $12.31 $1,214.15 $ 2.21 3.48%
Neuberger Berman Partners Fund 05/01/97 $10.00 $1,000.00 12/31/98 $13.14 $1,273.08 $ 1.84 13.72%
Quality Bond Fund 03/17/87 $10.01 $1,000.00 12/31/98 $21.92 $2,165.45 $ 1.25 6.82%
Small Capitalization 05/01/95 $10.00 $1,000.00 12/31/98 $13.01 $1,247.19 $ 1.55 9.21%
Value Equity Fund 03/17/87 $10.13 $1,000.00 12/31/98 $40.68 $3,893.34 $ 4.26 12.33%
</TABLE>
<PAGE>
Diversifier II Table 1b - Since Inception Year Calculations
<TABLE>
<CAPTION>
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>
Capital Appreciation Portfolio 05/01/93 $10.00 $1,000.00 12/31/98 $12.26 $1,224.43 $ 0.25 3.63%
Emerging Growth Fund 05/01/97 $10.00 $1,000.00 12/31/98 $18.50 $1,748.69 $100.72 39.79%
MS Emerging Markets International 05/01/97 $10.00 $1,000.00 12/31/98 $ 6.72 $ 641.10 $ 30.47 -23.39%
Fidelity Asset Manager Portfolio 05/01/95 $10.00 $1,000.00 12/31/98 $17.09 $1,690.71 $ 15.80 15.38%
Fidelity Equity Income Portfolio 05/01/95 $10.00 $1,000.00 12/31/98 $18.76 $1,871.69 $ 0.73 18.62%
Fidelity Growth Equity Portfolio 05/01/95 $10.00 $1,000.00 12/31/98 $23.52 $2,348.89 $ 0.41 26.19%
Fidelity Index 500 05/01/97 $10.00 $1,000.00 12/31/98 $15.41 $1,504.71 $ 35.22 27.75%
Flexibly Managed Fund 07/31/84 $10.00 $1,000.00 12/31/98 $58.95 $5,693.76 $ 5.85 12.81%
Growth Equity - non-qualified 06/01/83 $10.00 $1,000.00 12/31/98 $66.96 $6,543.13 $ 3.04 12.80%
Growth Equity Fund - qualified 08/11/83 $10.00 $1,000.00 12/31/98 $67.51 $6,597.39 $ 3.04 13.03%
High Yield Bond Fund 08/06/84 $10.00 $1,000.00 12/31/98 $34.64 $3,419.32 $ 1.65 8.91%
International Equity Fund 11/01/92 $10.00 $1,000.00 12/31/98 $21.32 $2,055.76 $ 50.46 12.40%
Neuberger Berman Balanced Fund 05/01/93 $10.00 $1,000.00 12/31/98 $16.47 $1,623.90 $ 0.94 9.81%
Neuberger Berman Limited Maturity Fund 05/01/93 $10.00 $1,000.00 12/31/98 $12.31 $1,214.15 $ 2.21 3.48%
Neuberger Berman Partners Fund 05/01/97 $10.00 $1,000.00 12/31/98 $13.14 $1,267.18 $ 1.84 13.41%
Quality Bond Fund 03/17/87 $10.01 $1,000.00 12/31/98 $21.92 $2,165.45 $ 1.25 6.82%
Small Capitalization 05/01/95 $10.00 $1,000.00 12/31/98 $13.01 $1,247.19 $ 1.55 9.21%
Value Equity Fund 03/17/87 $10.13 $1,000.00 12/31/98 $40.68 $3,893.34 $ 4.26 12.33%
</TABLE>
<PAGE>
Diversifier II Table 1c - Since Inception Year Calculations
<TABLE>
<CAPTION>
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>
Capital Appreciation Portfolio 05/01/93 $10.00 $1,000.00 12/31/98 $12.26 $1,224.43 $ 0.25 3.63%
Emerging Growth Fund 05/01/97 $10.00 $1,000.00 12/31/98 $18.50 $1,798.56 $50.85 42.16%
MS Emerging Markets International 05/01/97 $10.00 $1,000.00 12/31/98 $ 6.72 $ 642.74 $28.83 -23.27%
Fidelity Asset Manager Portfolio 05/01/95 $10.00 $1,000.00 12/31/98 $17.09 $1,656.07 $50.44 14.73%
Fidelity Equity Income Portfolio 05/01/95 $10.00 $1,000.00 12/31/98 $18.76 $1,871.69 $ 0.73 18.62%
Fidelity Growth Equity Portfolio 05/01/95 $10.00 $1,000.00 12/31/98 $23.52 $2,348.89 $ 0.41 26.19%
Fidelity Index 500 05/01/97 $10.00 $1,000.00 12/31/98 $15.41 $1,489.36 $50.57 26.97%
Flexibly Managed Fund 07/31/84 $10.00 $1,000.00 12/31/98 $58.95 $5,693.76 $ 5.85 12.81%
Growth Equity - non-qualified 06/01/83 $10.00 $1,000.00 12/31/98 $66.96 $6,543.13 $ 3.04 12.80%
Growth Equity Fund - qualified 08/11/83 $10.00 $1,000.00 12/31/98 $67.51 $6,597.39 $ 3.04 13.03%
High Yield Bond Fund 08/06/84 $10.00 $1,000.00 12/31/98 $34.64 $3,419.32 $ 1.65 8.91%
International Equity Fund 11/01/92 $10.00 $1,000.00 12/31/98 $21.32 $2,053.15 $53.07 12.37%
Neuberger Berman Balanced Fund 05/01/93 $10.00 $1,000.00 12/31/98 $16.47 $1,590.87 $ 0.94 9.41%
Neuberger Berman Limited Maturity Fund 05/01/93 $10.00 $1,000.00 12/31/98 $12.31 $1,214.15 $ 2.21 3.48%
Neuberger Berman Partners Fund 05/01/97 $10.00 $1,000.00 12/31/98 $13.14 $1,257.07 $ 1.84 12.86%
Quality Bond Fund 03/17/87 $10.01 $1,000.00 12/31/98 $21.92 $2,165.45 $ 1.25 6.82%
Small Capitalization 05/01/95 $10.00 $1,000.00 12/31/98 $13.01 $1,248.69 $ 1.55 9.24%
Value Equity Fund 03/17/87 $10.13 $1,000.00 12/31/98 $40.68 $3,893.34 $ 4.26 12.33%
</TABLE>
<PAGE>
Diversifier II Table 1d - Since Inception Year Calculations
<TABLE>
<CAPTION>
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 07/31/84 $10.00 $1,000.00 12/31/98 $58.95 $5,693.76 $ 5.85 12.81%
Growth Equity - non-qualified 06/01/83 $10.00 $1,000.00 12/31/98 $66.96 $6,543.13 $ 3.04 12.80%
Growth Equity Fund - qualified 08/11/83 $10.00 $1,000.00 12/31/98 $67.51 $6,597.39 $ 3.04 13.03%
High Yield Bond Fund 08/06/84 $10.00 $1,000.00 12/31/98 $34.64 $3,419.32 $ 1.65 8.91%
International Equity Fund 11/01/92 $10.00 $1,000.00 12/31/98 $21.32 $2,008.37 $97.85 11.97%
Quality Bond Fund 03/17/87 $10.01 $1,000.00 12/31/98 $21.92 $2,165.45 $ 1.25 6.82%
Value Equity Fund 03/17/87 $10.13 $1,000.00 12/31/98 $40.68 $3,893.34 $ 4.26 12.33%
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