<PAGE>
As filed with the Securities and Exchange Commission on April 26, 2000
File No. 2-77283
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------
FORM N-4
REGISTRATION STATEMENT UNDER SECURITIES ACT OF 1933
Pre-Effective Amendment No. ___ / /
/X/
Post-Effective Amendment No. 27
REGISTRATION STATEMENT UNDER THE INVESTMENT
COMPANY ACT of 1940 /X/
Amendment No. 30 /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:
C. Ronald Rubley
Morgan, Lewis & Bockius LLP
1701 Market Street
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, 2000 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>
<TABLE>
<CAPTION>
CROSS REFERENCE SHEET
- -------------------------------------------------------------------------------------------------------------------
Location in Statement of
Form N-4 Item Number Location in Prospectuses Additional Information
- -------------------- ------------------------ ----------------------
<S> <C> <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>
<TABLE>
<CAPTION>
CROSS REFERENCE SHEET
Location in Statement of
Form N-4 Item Number Location in Prospectuses Additional Information
- -------------------- ------------------------ ----------------------
<S> <C> <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? Contracts and
The Contract - May I Transfer Certificates
Money Among Investment Options?
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 -- MAY 1, 2000
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
Money Market Fund Independence Capital Management, Inc.
Limited Maturity Bond Fund Independence Capital Management, Inc.
Quality Bond Fund Independence Capital Management, Inc.
High Yield Bond Fund T. Rowe Price Associates, Inc.
Flexibly Managed Fund T. Rowe Price Associates, Inc.
Growth Equity Fund Independence Capital Management, Inc.
Large Cap Value Fund Putnam Investment Management, Inc.
Index 500 Fund Wells Capital Management Incorporated
Mid Cap Growth Fund Turner Investment Partners, Inc.
Mid Cap Value Fund Neuberger Berman Management Inc.
Emerging Growth Fund RS Investment Management, Inc.
Small Cap Value Fund Royce & Associates, Inc.
International Equity Fund Vontobel USA, Inc.
- --------------------------------------------------------------------------------------------------------------------
Neuberger Berman Advisors Management Trust Manager
Balanced Portfolio Neuberger Berman Management Inc.
- --------------------------------------------------------------------------------------------------------------------
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
- --------------------------------------------------------------------------------------------------------------------
Morgan Stanley's The Universal Institutional Funds, Inc. Manager
Emerging Markets Equity (International) Portfolio Morgan Stanley Asset Management
- --------------------------------------------------------------------------------------------------------------------
A Prospectus for each of these Funds accompanies this Prospectus.
</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>
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 to 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>
<TABLE>
<CAPTION>
<S> <C>
- -------------------------------------------------------------------------------------------------------------------
PROSPECTUS CONTENTS
- -------------------------------------------------------------------------------------------------------------------
GLOSSARY........................................................................................................2
- -------------------------------------------------------------------------------------------------------------------
EXPENSES........................................................................................................3
- -------------------------------------------------------------------------------------------------------------------
EXAMPLES OF FEES AND EXPENSES...................................................................................5
- -------------------------------------------------------------------------------------------------------------------
CONDENSED FINANCIAL INFORMATION.................................................................................7
- -------------------------------------------------------------------------------------------------------------------
THE PENN MUTUAL LIFE INSURANCE COMPANY.........................................................................15
- -------------------------------------------------------------------------------------------------------------------
THE SEPARATE ACCOUNT...........................................................................................15
Accumulation Units.....................................................................................16
Voting Instructions....................................................................................16
Investment Options in the Separate Account.............................................................16
Penn Series Funds, Inc. .....................................................................16
Neuberger Berman Advisers Management Trust...................................................17
Fidelity Investments' Variable Insurance Products Fund.......................................18
Fidelity Investments' Variable Insurance Products Fund II....................................18
Morgan Stanley's The Universal Institutional Funds, Inc. ....................................18
- -------------------------------------------------------------------------------------------------------------------
THE FIXED INTEREST ACCOUNTS................................................................................... 18
- -------------------------------------------------------------------------------------------------------------------
THE CONTRACTS..................................................................................................19
How Do I Purchase a Contract?..........................................................................19
What Types of Annuity Payments May I Choose?...........................................................20
Variable Annuity Payments ...................................................................20
Fixed Annuity Payments Under a Variable/Fixed Contract ......................................20
Other information............................................................................20
What Are the Death Benefits Under My Contract?.........................................................21
Contracts Sold in Texas......................................................................21
May I Transfer Money Among Investment Options..........................................................22
Variable/Fixed Contracts ....................................................................22
Variable Contract ..........................................................................22
Dollar Cost Averaging........................................................................22
Automatic Rebalancing........................................................................22
Additional Information.......................................................................23
May I Withdraw Any of My Money?........................................................................23
403(b) Withdrawals ..........................................................................23
Deferment of Payments and Transfers....................................................................24
What Charges Do I Pay?.................................................................................24
Administration Charges.......................................................................24
Mortality and Expense Risk Charge............................................................24
Contingent Deferred Sales Charge.............................................................24
Variable/Fixed Contract......................................................................25
Variable Contract............................................................................25
Other Information............................................................................26
Premium Taxes................................................................................26
- -------------------------------------------------------------------------------------------------------------------
PERFORMANCE INFORMATION........................................................................................26
- -------------------------------------------------------------------------------------------------------------------
MORE INFORMATION ABOUT THE FIXED INTEREST ACCOUNTS.............................................................27
General Information....................................................................................27
Loans Under Section 403(b) Contracts...................................................................27
- ------------------------------------------------------------------------------------------------------------------
FEDERAL INCOME TAX CONSIDERATIONS..............................................................................28
Withdrawals and Death Benefits.........................................................................28
Annuity Payments.......................................................................................28
Early Withdrawals......................................................................................28
Transfers..............................................................................................29
Separate Account Diversification.......................................................................29
Qualified Plans........................................................................................29
- -------------------------------------------------------------------------------------------------------------------
FINANCIAL STATEMENTS...........................................................................................30
- -------------------------------------------------------------------------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION CONTENTS...................................................................31
</TABLE>
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.
3
<PAGE>
You: "you" means the Contract Owner or prospective Contract Owner.
- --------------------------------------------------------------------------------
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.
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> <C>
Money Market (1). . . . . . . 0.20% 0.15% 0.08% 0.08% 0.51%
Limited Maturity Bond(1). 0.30% 0.15% 0.08% 0.03% 0.56%
Quality Bond(1). . . . . . . . . 0.35% 0.15% 0.08% 0.10% 0.68%
High Yield Bond(2). . . . . . 0.50% 0.15% 0.08% 0.09% 0.82%
Flexibly Managed(1). . . . . 0.60% 0.15% 0.05% 0.06% 0.86%
Growth Equity(1). . . . . . . 0.65% 0.15% 0.06% 0.05% 0.91%
Large Cap Value(1). . . . . . 0.60% 0.15% 0.06% 0.05% 0.86%
Index 500 Fund(1). . . . . . 0.07% 0.09% 0.06% 0.03% 0.25%(3)
Mid Cap Growth Fund(1). 0.70% 0.15% 0.08% 0.07% 1.00%
Mid Cap Value Fund(1). . 0.55% 0.15% 0.08% 0.08% 0.86%
Emerging Growth(2). . . . . 0.73% 0.15% 0.07% 0.09% 1.04%
Small Cap Value (1). . . . . . 0.85% 0.15% 0.08% 0.09% 1.17%
International Equity(1). . . 0.85% 0.15% 0.08% 0.10% 1.18%
</TABLE>
- ----------------------
(1) The expenses are estimates provided by the Funds' investment adviser.
(2) The expenses are for the last fiscal year.
(3) The total expenses for the Index 500 Fund are estimated to be 0.31% if
the Fund's administrator does not waive part of its Administrative and
Corporate Service Fee.
4
<PAGE>
- --------------------------------------------------------------------------------
Neuberger Berman Advisers Management Trust (a)
Underlying Fund Annual Expenses (as a % of portfolio average net assets)
Management,
Advisory and
Administration Other Total Fund
Fees Expenses Expenses
---- -------- --------
Balanced......................... 0.85% 0.18% 1.03%
- ----------------------
(a) Neuberger Berman Advisers Management Trust (the "Trust") is divided into
portfolios (each a "Portfolio"). Each Portfolio invests in a
corresponding series ("Series") of the Trust. This table shows the
current expenses paid by the Balanced Portfolio and the Portfolio's
share of the current expenses of its Series. See "Expenses" in the
Trust's Prospectus.
- --------------------------------------------------------------------------------
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.................... 0.49% 0.07% 0.56%
Growth........................... 0.59% 0.06% 0.65%
- ----------------------
(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 0.57% for the
Equity Income Portfolio and 0.66% for the Growth Portfolio.
- --------------------------------------------------------------------------------
Fidelity Investments' Variable Insurance Products Fund II
Underlying Fund Annual Expenses (as a % of portfolio average net assets)
Management Fee Other Total Fund
(After Waiver) Expenses Expenses
-------------- -------- --------
Asset Manager (a)................ 0.54% 0.08% 0.62%
- ----------------------
(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 0.63%
for the Asset Manager Portfolio.
- --------------------------------------------------------------------------------
Morgan Stanley's The Universal Institutional Funds, Inc.
Underlying Fund Annual Expenses (as a % of portfolio average net assets)
Management Other Total Fund
Fee Expenses Expenses
--- -------- --------
Emerging Markets Equity (International)...... 1.25% 0.50% 1.75%
- --------------------------------------------------------------------------------
Please review these tables carefully. They show the expenses that you
pay directly and indirectly when you purchase a Contract. Your expenses include
Contract expenses and the expenses of the Funds that you select. See the
prospectuses of Penn Series Funds, Inc., Neuberger Berman Advisers Management
Trust, Fidelity Investments' Variable Insurance Products Fund, Fidelity
Investments' Variable Insurance Products Fund II and Morgan Stanley's The
Universal Institutional Funds, Inc. for additional information on Fund expenses.
5
<PAGE>
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.
- --------------------------------------------------------------------------------
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 Money Market Fund*....................................... $84 $107 $130 $214
Penn Series Limited Maturity Bond Fund*.............................. $88 $122 $156 $268
Penn Series Quality Bond Fund*....................................... $85 $112 $139 $232
Penn Series High Yield Bond Fund**................................... $86 $116 $146 $247
Penn Series Flexibly Managed Fund*................................... $87 $117 $148 $251
Penn Series Growth Equity Fund*...................................... $87 $118 $150 $256
Penn Series Large Cap Value Fund*.................................... $87 $117 $148 $251
Penn Series Index 500 Fund*.......................................... $81 $99 $117 $185
Penn Series Mid Cap Growth Fund*..................................... $84 $108 $133 $219
Penn Series Mid Cap Value Fund*...................................... $87 $117 $148 $251
Penn Series Emerging Growth Fund**................................... $89 $122 $156 $269
Penn Series Small Cap Value Fund*.................................... $90 $126 $163 $282
Penn Series International Equity Fund*............................... $90 $126 $163 $283
Neuberger Berman Balanced Portfolio**................................ $85 $111 $138 $230
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
Morgan Stanley Emerging Markets Equity (International) Portfolio**... $95 $142 $190 $338
</TABLE>
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 Money Market Fund*....................................... $84 $107 $135 $226
Penn Series Limited Maturity Bond Fund*.............................. $88 $122 $161 $280
Penn Series Quality Bond Fund*....................................... $85 $112 $144 $244
Penn Series High Yield Bond Fund**................................... $86 $116 $151 $259
Penn Series Flexibly Managed Fund*................................... $87 $117 $153 $263
Penn Series Growth Equity Fund*...................................... $87 $118 $155 $268
Penn Series Large Cap Value Fund*.................................... $87 $117 $153 $263
Penn Series Index 500 Fund*.......................................... $81 $99 $122 $198
Penn Series Mid Cap Growth Fund*..................................... $84 $108 $138 $231
Penn Series Mid Cap Value Fund*...................................... $87 $117 $153 $263
Penn Series Emerging Growth Fund**................................... $89 $122 $162 $281
Penn Series Small Cap Value Fund*.................................... $90 $126 $168 $294
Penn Series International Equity Fund*............................... $90 $126 $168 $295
Neuberger Berman Balanced Portfolio**................................ $85 $111 $143 $242
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
Morgan Stanley Emerging Markets Equity (International) Portfolio**... $95 $142 $195 $349
</TABLE>
6
<PAGE>
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 Money Market Fund*....................................... $65 $107 $149 $214
Penn Series Limited Maturity Bond Fund*.............................. $66 $109 $151 $219
Penn Series Quality Bond Fund*....................................... $67 $112 $157 $232
Penn Series High Yield Bond Fund**................................... $68 $116 $164 $247
Penn Series Flexibly Managed Fund*................................... $68 $117 $167 $251
Penn Series Growth Equity Fund*...................................... $69 $119 $169 $256
Penn Series Large Cap Value Fund*.................................... $68 $117 $167 $251
Penn Series Index 500 Fund*.......................................... $63 $99 $135 $185
Penn Series Mid Cap Growth Fund*..................................... $70 $121 $174 $265
Penn Series Mid Cap Value Fund*...................................... $68 $117 $167 $251
Penn Series Emerging Growth Fund**................................... $70 $123 $176 $269
Penn Series Small Cap Value Fund*.................................... $71 $126 $182 $282
Penn Series International Equity Fund*............................... $71 $127 $183 $283
Neuberger Berman Balanced Portfolio**................................ $70 $122 $175 $268
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
Morgan Stanley Emerging Markets Equity (International) Portfolio**... $77 $143 $211 $338
</TABLE>
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 Money Market Fund*....................................... $18 $57 $99 $214
Penn Series Limited Maturity Bond Fund*.............................. $24 $73 $125 $268
Penn Series Quality Bond Fund*....................................... $20 $63 $107 $232
Penn Series High Yield Bond Fund**................................... $22 $67 $114 $247
Penn Series Flexibly Managed Fund*................................... $22 $68 $117 $251
Penn Series Growth Equity Fund*...................................... $23 $69 $119 $256
Penn Series Large Cap Value Fund*.................................... $22 $68 $117 $251
Penn Series Index 500 Fund*.......................................... $16 $49 $85 $185
Penn Series Mid Cap Growth Fund*..................................... $19 $59 $101 $219
Penn Series Mid Cap Value Fund*...................................... $22 $68 $117 $251
Penn Series Emerging Growth Fund**................................... $24 $73 $126 $269
Penn Series Small Cap Value Fund*.................................... $25 $77 $132 $282
Penn Series International Equity Fund*............................... $25 $78 $133 $283
Neuberger Berman Balanced Portfolio**................................ $20 $62 $106 $230
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
Morgan Stanley Emerging Markets Equity (International) Portfolio**... $31 $95 $161 $338
</TABLE>
- ----------------------
* These examples are based upon estimates of Fund expenses provided by the
Funds' investment adviser.
** These examples are based upon Fund data for the fiscal year ended
December 31, 1999.
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 MONEY MARKET FUND SUBACCOUNT
Values of an Accumulation Unit Outstanding Throughout Each Period
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------------------------
1999 1998 1997 1996 1995 1994
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Accumulation Unit Value,
beginning of period ............. $20.268 $19.541 $18.817 $18.148 $17.416 $17.003
Accumulation Unit Value,
end of period .................. $20.953 $20.268 $19.541 $18.817 $18.148 $17.416
Number of Accumulation 1,669,670 1,449,199 1,120,603 1,192,388 1,062,385 825,274
Units outstanding, end of period.
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------
1993 1992 1991 1990
------------------------------------------------
<S> <C> <C> <C> <C>
Accumulation Unit Value,
beginning of period ................. $16.791 $16.491 $15.732 $14.893
Accumulation Unit Value,
end of period ....................... $17.003 $16.791 $16.491 $15.732
Number of Accumulation
Units outstanding, end of period..... 658,620 698,584 769,958 965,117
</TABLE>
8
<PAGE>
- --------------------------------------------------------------------------------
PENN SERIES QUALITY BOND FUND SUBACCOUNT (a)
Values of an Accumulation Unit Outstanding Throughout Each Period
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------------------------
1999 1998 1997 1996 1995 1994
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Accumulation Unit Value,
beginning of period................ $22.043 $20.260 $18.990 $18.465 $15.562 $16.639
Accumulation Unit Value,
end of period...................... $21.769 $22.043 $20.260 $18.990 $18.465 $15.562
Number of Accumulation
Units outstanding, end of period....1,612,651 1,665,664 1,497,635 1,664,378 1,869,975 1,890,869
Year Ended December 31,
-----------------------------------------------------
1993 1992 1991 1990
-----------------------------------------------------
Accumulation Unit Value,
beginning of period.................. $15.088 $14.336 $12.558 $11.776
Accumulation Unit Value,
end of period....................... $16.639 $15.088 $14.336 $12.558
Number of Accumulation
Units outstanding, end of period..... 1,953,188 1,337,087 1,229,163 1,075,187
</TABLE>
- ----------------------
(a) Fixed Income Fund Subaccount prior to November 1, 1992.
- -------------------------------------------------------------------------------
PENN SERIES LIMITED MATURITY BOND FUND SUBACCOUNT (a)
Values of an Accumulation Unit Outstanding Throughout Each Period
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------------------------
1999 1998 1997 1996 1995 1994
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Accumulation Unit Value,
beginning of period ................. $12.313 $11.943 $11.330 $10.999 $10.039 $10.181
Accumulation Unit Value,
end of period ....................... $12.339 $12.313 $11.943 $11.330 $10.999 $10.039
Number of Accumulation
Units outstanding, end of period..... 473,183 509,381 465,682 459,223 444,986 448,825
Year Ended December 31,
1993 (b)
-------------
Accumulation Unit Value,
beginning of period .............................. $10.000
Accumulation Unit Value,
end of period .................................... $10.181
Number of Accumulation
Units outstanding, end of period ................. 311,665
</TABLE>
- ----------------------
(a) Neuberger Berman Limited Maturity Bond Fund Subaccount prior to
May 1, 2000.
(b) For the period May 1, 1993 (date subaccount was established) through
December 31, 1993.
9
<PAGE>
- ------------------------------------------------------------------------------
PENN SERIES HIGH YIELD BOND FUND SUBACCOUNT
Values of an Accumulation Unit Outstanding Throughout Each Period
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------------------------
1999 1998 1997 1996 1995 1994
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Accumulation Unit Value,
beginning of period.................. $34.645 $33.476 $29.276 $26.033 $22.644 $24.742
Accumulation Unit Value,
end of period....................... $35.666 $34.645 $33.476 $29.276 $26.033 $22.644
Number of Accumulation
Units outstanding, end of period..... 1,176,269 1,308,094 1,261,904 1,185,318 1,194,944 1,264,890
Year Ended December 31,
--------------------------------------------------
1993 1992 1991 1990
--------------------------------------------------
Accumulation Unit Value,
beginning of period................. $20.918 $18.291 $13.534 $15.035
Accumulation Unit Value,
end of period....................... $24.742 $20.918 $18.291 $13.534
Number of Accumulation 1,257,271 705,414 594,530 613,408
Units outstanding, end of period.....
</TABLE>
- ------------------------------------------------------------------------------
PENN SERIES FLEXIBLY MANAGED FUND SUBACCOUNT (a)
Values of an Accumulation Unit Outstanding Throughout Each Period
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------------------------
1999 1998 1997 1996 1995 1994
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Accumulation Unit Value,
beginning of period................. $58.951 $56.265 $49.262 $42.865 $35.496 $34.514
Accumulation Unit Value,
end of period ....................... $62.396 $58.951 $56.265 $49.262 $42.865 $35.496
Number of Accumulation
Units outstanding, end of period..... 4,634,490 5,766,014 5,974,993 5,711,843 4,946,240 4,198,305
Year Ended December 31,
------------------------------------------------------
1993 1992 1991 1990
------------------------------------------------------
Accumulation Unit Value,
beginning of period................... $30.179 $27.893 $23.215 $23.712
Accumulation Unit Value,
end of period ......................... $34.514 $30.179 $27.893 $23.215
Number of Accumulation
Units outstanding, end of period....... 3,143,601 2,327,829 1,664,751 1,237,347
</TABLE>
- ----------------------
(a) Capital Appreciation Fund Subaccount prior to November 1, 1992.
10
<PAGE>
- ------------------------------------------------------------------------------
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,
---------------------------------------------------------------------------------------
1999 1998 1997 1996
---------------------------------------------------------------------------------------
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................... $67.515 $66.959 $48.256 $47.859 $38.550 $38.235 $32.596 $32.327
Accumulation Unit
Value, end of period..... $89.413 $88.677 $67.515 $66.959 $48.256 $47.859 $38.550 $38.235
Number of
Accumulation Units
outstanding, end of
period................... 1,772,202 665,530 1,752,036 626,895 1,794,481 617,717 1,830,081 620,903
Year Ended December 31,
-----------------------------------------------------------------------
1995 1994 1993
-----------------------------------------------------------------------
Non- Non- Non-
Qual Qual Qual Qual Qual Qual
-----------------------------------------------------------------------
Accumulation Unit Value,
beginning of period................. $26.102 $25.887 $28.766 $28.528 $25.906 $25.692
Accumulation Unit Value,
end of period....................... $32.596 $32.327 $26.102 $25.887 $28.766 $28.528
Number of Accumulation
Units outstanding, end of period.... 1,991,646 674,290 2,119,836 717,328 2,042,023 685,110
Year Ended December 31,
-----------------------------------------------------------------------
1992 1991 1990
-----------------------------------------------------------------------
Non- Non- Non-
Qual Qual Qual Qual Qual Qual
-----------------------------------------------------------------------
Accumulation Unit Value,
beginning of period........... $24.756 $24.552 $18.605 $18.451 $21.204 $21.029
Accumulation Unit Value,
end of period................. $25.906 $25.692 $24.756 $24.552 $18.605 $18.451
Number of Accumulation
Units outstanding, end
of period..................... 2,004,015 669,679 1,680,322 518,717 1,470,210 439,287
</TABLE>
- ----------------------
(a) Growth Stock Fund Subaccount prior to November 1, 1992.
11
<PAGE>
- ------------------------------------------------------------------------------
PENN SERIES LARGE CAP VALUE FUND SUBACCOUNT (a)
Values of an Accumulation Unit Outstanding Throughout Each Period
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------------------------------
1999 1998 1997 1996 1995 1994
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Accumulation
Unit Value, beginning of period..... $41.167 $38.038 $30.819 $24.928 $18.361 $18.062
Accumulation Unit Value,
end of period....................... $40.329 $41.167 $38.038 $30.819 $24.928 $18.361
Number of Accumulation
Units outstanding, end of period.... 4,407,110 5,273,048 5,409,879 4,907,784 4,235,839 3,886,404
Year Ended December 31,
------------------------------------------------
1993 1992 1991 1990
------------------------------------------------
Accumulation Unit Value,
beginning of period................. $17.080 $15.058 $11.939 $13.157
Accumulation Unit Value,
end of period...................... $18.062 $17.080 $15.058 $11.939
Number of Accumulation
Units outstanding, end of period.... 3,693,652 2,865,294 2,207,661 1,883,581
</TABLE>
- ----------------------
(a) Penn Series Value Equity Fund Subaccount prior to May 1, 2000.
- ------------------------------------------------------------------------------
PENN SERIES INDEX 500 FUND SUBACCOUNT(a)
Values of an Accumulation Unit Outstanding Throughout Each Period
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------
1999 1998 1997(b)
----------------------------------------
<S> <C> <C> <C>
Accumulation Unit Value,
beginning of period .................. $15.414 $12.162 $10.000
Accumulation Unit Value,
end of period ........................ $18.344 $15.414 $12.162
Number of Accumulation
Units outstanding, end of period...... 4,389,976 2,350,293 703,585
</TABLE>
- ----------------------
(a) Fidelity Investments' Index 500 Fund Subaccount prior to May 1, 2000.
(b) For the period May 1, 1997 (date subaccount was established) through
December 31, 1997.
- ------------------------------------------------------------------------------
PENN SERIES MID CAP GROWTH FUND SUBACCOUNT(a)
Values of an Accumulation Unit Outstanding Throughout Each Period
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------------------------
1999 1998 1997 1996 1995 1994
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Accumulation Unit Value,
beginning of period ................ $12.262 $12.690 $13.282 $14.057 $10.857 $11.124
Accumulation Unit Value,
end of period ...................... $19.924 $12.262 $12.690 $13.282 $14.057 $10.857
Number of Accumulation
Units outstanding, end of period.... 916,231 1,153,673 1,567,237 2,183,381 2,157,888 1,791,799
</TABLE>
12
<PAGE>
Year Ended December 31,
--------------------------
1993(b)
--------------------------
Accumulation Unit Value,
beginning of period ............................... $10.000
Accumulation Unit Value,
end of period ..................................... $11.124
Number of Accumulation 716,404
Units outstanding, end of period ..................
- ----------------------
(a) American Century Capital Appreciation Portfolio Subaccount prior to
May 1, 2000.
(b) For the period May 1, 1993 (date subaccount was established) through
December 31, 1993.
- ------------------------------------------------------------------------------
PENN SERIES MID CAP VALUE FUND SUBACCOUNT(a)
Values of an Accumulation Unit Outstanding Throughout Each Period
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------
1999 1998 1997(a)
-------------------------------------------
<S> <C> <C> <C>
Accumulation Unit Value,
beginning of Period........................ $12.773 $12.411 $10.000
Accumulation Unit Value,
end of period.............................. $13.544 $12.773 $12.411
Number of Accumulation
Units outstanding, end of period........... 1,787,163 1,716,964 665,382
</TABLE>
- ----------------------
(a) Neuberger Berman Partners Portfolio Subaccount prior to May 1, 2000.
(b) For the period May 1, 1997 (date subaccount was established) through
December 31, 1997.
- ------------------------------------------------------------------------------
PENN SERIES EMERGING GROWTH FUND SUBACCOUNT
Values of an Accumulation Unit Outstanding Throughout Each Period
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------
1999 1998 1997(a)
------------------------------------------
<S> <C> <C> <C>
Accumulation Unit Value,
beginning of period........................ $18.503 $13.806 $10.000
Accumulation Unit Value,
end of period.............................. $52.084 $18.503 $13.806
Number of Accumulation
Units outstanding, end of period........... 1,645,175 781,196 308,169
</TABLE>
- ----------------------
(a) For the period May 1, 1997 (date subaccount was established) through
December 31, 1997.
- ------------------------------------------------------------------------------
PENN SERIES SMALL CAP VALUE FUND SUBACCOUNT (a)
Values of an Accumulation Unit Outstanding Throughout Each Period
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------------
1999 1998 1997 1996 1995(b)
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Accumulation Unit Value,
beginning of period ................. $14.400 $16.051 $13.211 $11.171 $10.000
Accumulation Unit Value,
end of period ....................... $14.032 $14.400 $16.051 $13.211 $11.171
Number of Accumulation
Units outstanding, end of period..... 1,249,298 1,306,650 1,104,032 587,385 137,653
</TABLE>
- ----------------------
(a) Penn Series Small Capitalization Fund Subaccount prior to May 1, 2000.
(b) For the period May 1, 1995 (date subaccount was established) through
December 31, 1995.
13
<PAGE>
- ------------------------------------------------------------------------------
PENN SERIES INTERNATIONAL EQUITY FUND SUBACCOUNT
Values of an Accumulation Unit Outstanding Throughout Each Period
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------------------
1999 1998 1997 1996 1995 1994
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Accumulation Unit Value,
beginning of period ................ $21.320 $18.164 $16.659 $14.434 $12.843 $13.880
Accumulation Unit Value,
end of period ...................... $30.678 $21.320 $18.164 $16.659 $14.434 $12.843
Number of Accumulation
Units outstanding, end of period.... 3,579,323 3,822,847 4,155,960 4,012,762 3,388,479 3,556,098
Year Ended December 31,
--------------------------
1993 1992(a)
--------------------------
Accumulation Unit Value,
beginning of period ....................... $10.175 $10.000
Accumulation Unit Value,
end of period ............................. $13.880 $10.175
Number of Accumulation
Units outstanding, end of period .......... 1,847,892 92,386
</TABLE>
- ----------------------
(a) For the period November 2, 1992 (date subaccount was established) through
December 31, 1992.
- ------------------------------------------------------------------------------
FIDELITY INVESTMENTS' EQUITY INCOME PORTFOLIO SUBACCOUNT
Values of an Accumulation Unit Outstanding Throughout Each Period
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------------
1999 1998 1997 1996 1995(a)
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Accumulation Unit Value,
beginning of period ................. $18.764 $17.021 $13.453 $11.920 $10.000
Accumulation Unit Value,
end of period ....................... $19.704 $18.764 $17.021 $13.453 $11.920
Number of Accumulation
Units outstanding, end of period..... 3,820,785 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.
14
<PAGE>
- ------------------------------------------------------------------------------
FIDELITY INVESTMENTS' GROWTH PORTFOLIO SUBACCOUNT
Values of an Accumulation Unit Outstanding Throughout Each Period
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------
1999 1998 1997 1996 1995(a)
-------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Accumulation Unit Value,
beginning of period.................. $23.519 $17.073 $14.000 $12.359 $10.000
Accumulation Unit Value,
end of period........................ $31.922 $23.519 $17.073 $14.000 $12.359
Number of Accumulation
Units outstanding, end of period..... 4,955,849 3,722,268 3,157,234 2,620,543 690,602
- ----------------------
(a) For the period May 1, 1995 (date subaccount was established) through
December 31, 1995.
- ------------------------------------------------------------------------------
FIDELITY INVESTMENTS' ASSET MANAGER PORTFOLIO SUBACCOUNT
Values of an Accumulation Unit Outstanding Throughout Each Period
Year Ended December 31,
-----------------------------------------------------------------
1999 1998 1997 1996 1995(a)
-----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Accumulation Unit Value,
beginning of period................... $17.809 $15.040 $12.623 $11.153 $10.000
Accumulation Unit Value,
end of period......................... $18.748 $17.809 $15.040 $12.623 $11.153
Number of Accumulation
Units outstanding, end of period...... 1,290,362 801,557 577,711 383,267 117,290
</TABLE>
- ----------------------
(a) For the period May 1, 1995 (date subaccount was established) through
December 31, 1995.
- ------------------------------------------------------------------------------
MORGAN STANLEY'S EMERGING MARKETS EQUITY (INTERNATIONAL) FUND SUBACCOUNT
Values of an Accumulation Unit Outstanding Throughout Each Period
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------
1999 1998 1997(a)
-----------------------------------------------
<S> <C> <C> <C>
Accumulation Unit Value,
beginning of period..................... $6.720 $8.975 $10.000
Accumulation Unit Value,
end of period........................... $12.995 $6.720 $8.975
Number of Accumulation
Units outstanding, end of period........ 649,652 406,393 248,001
</TABLE>
- ----------------------
(a) For the period May 1, 1997 (date subaccount was established) through
December 31, 1997.
- ------------------------------------------------------------------------------
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.
15
<PAGE>
- ------------------------------------------------------------------------------
THE SEPARATE ACCOUNT
Penn Mutual established Penn Mutual Variable Annuity Account III (the
"Separate Account") on April 13, 1982. The Separate Account is registered with
the Securities and Exchange Commission as a unit investment trust and is a
"separate account" within the meaning of the federal securities laws. The
Separate Account is divided into subaccounts that invest in shares of different
mutual funds.
o The income, gains and losses of Penn Mutual do not have any
effect on the income, gains or losses of the Separate Account
or any subaccount.
o The Separate Account and its subaccounts are not responsible
for the liabilities of any other business of Penn Mutual.
The financial statements of the subaccounts of the Separate Account for
the year ended December 31, 1999 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 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%.
- ------------------------------------------------------------------------------
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.:
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.
Limited Maturity Bond Fund -- seeks highest available current income
consistent with liquidity and low risk to principal through investment primarily
in marketable investment grade debt securities; total return is secondary.
16
<PAGE>
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.
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.
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.
Large Cap Value Fund (formerly, Value Equity Fund)-- seeks to maximize
total return (capital appreciation and income) primarily by investing in equity
securities of companies believed to be undervalued.
Index 500 Fund -- 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.
Mid Cap Growth Fund -- seeks to maximize capital appreciation by
investing primarily in common stocks of U.S. companies with medium market
capitalizations (i.e., between $1 billion and $8 billion) that have strong
earnings growth potential.
Mid Cap Value -- seeks to achieve growth of capital by investing
primarily in U.S. companies with market medium capitalizations that are
undervalued.
Emerging Growth Fund -- seeks capital appreciation by investing
primarily in common stocks of emerging growth companies with above-average
growth prospects.
Small Cap Value Fund (formerly, 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 $1.5 billion.
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.
Independence Capital Management, Inc., Horsham, Pennsylvania is
investment adviser to each of the Funds. Putnam Investment Management, Inc.,
Boston, Massachusetts, is investment sub-adviser to the Large Cap Value Fund. T.
Rowe Price Associates, Baltimore, Maryland, is investment sub-adviser to the
Flexibly Managed and High Yield Bond Funds. Wells Capital Management
Incorporated, San Francisco, California, is investment sub-adviser to the Index
500 Fund. Turner Investment Partners, Inc., Berwyn, Pennsylvania is sub-adviser
to the Mid Cap Growth Fund. Neuberger Berman Management Inc., New York, New
York, is investment sub-adviser to the Mid Cap Value Fund. Royce & Associates,
Inc., New York, New York, is investment sub-adviser to the Small Cap Value Fund.
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.
17
<PAGE>
Neuberger Berman Advisers Management Trust:
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.
Neuberger Berman Management Inc., New York, New York, is investment
adviser to the Balanced 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.
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.
Fidelity Management & Research Company, Boston, Massachusetts, is
investment adviser to the Asset Manager Portfolio.
Morgan Stanley's The Universal Institutional 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 Asset Management, New York, New York, is investment
adviser to the Emerging Markets Equity (International) Portfolio.
Shares of Penn Series are sold to other variable life and variable
annuity separate accounts of Penn Mutual and its subsidiary, The Penn Insurance
and Annuity Company. Shares of Neuberger Berman Advisers Management Trust,
Fidelity Investments' Variable Insurance Products Fund and Variable Insurance
Products Fund II and Morgan Stanley's The Universal Institutional 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's The Universal Institutional Funds, Inc., directly to
qualified pension and retirement plans. For more information on the possible
conflicts involved when the Separate Account invests in Funds offered to other
separate accounts, see the Fund prospectuses.
Read the Prospectuses of these Funds before investing.
- --------------------------------------------------------------------------------
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
18
<PAGE>
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.
- -------------------------------------------------------------------------------
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., Neuberger Berman Advisers Management Trust,
Fidelity Investments' Variable Insurance Products Fund, Fidelity Investments'
Variable Insurance Products Fund II and Morgan Stanley's The Universal
Institutional 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 to 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.
19
<PAGE>
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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.
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 the 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, and 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 (2) 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.
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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 a 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.
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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 a 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 Investment Options
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.
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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, and 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, and 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 which is 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 (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 show 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:
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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 either in
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:
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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 the 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 the 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
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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.
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.
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
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amount due will be withdrawn when a withdrawal becomes permissible. While a loan
balance is outstanding, any withdrawal or death benefit proceeds must first be
used to pay the loan.
Loans are subject to the terms of your Contract, your Section 403(b)
plan and the Code, and, in the case of plans subject to the Employee Retirement
Income Security Act of 1974, the ERISA regulations on plan loans, all of which
may impose restrictions. We reserve the right to suspend, modify or terminate
the availability of loans. Where there is a plan fiduciary, it is the
responsibility of the fiduciary to ensure that any Contract loans comply with
plan qualification requirements, including ERISA.
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FEDERAL INCOME TAX CONSIDERATIONS
The following is a general summary of some federal income tax
considerations. It is based on the law in effect on the date of this Prospectus,
which may change, and does not address state or local tax laws. For further
information, you should consult qualified tax counsel.
You pay no federal income tax on increases in the value of your Contract
until money is distributed to you or your beneficiary as a withdrawal, death
benefit or an annuity payment.
Withdrawals and Death Benefits. You may pay tax on a withdrawal, and
your beneficiary may pay tax on a death benefit. The taxable portion of these
payments generally will be the amount by which the payment exceeds your cost.
Thus, you or your Beneficiary generally will have taxable income to the extent
that your Contract Value exceeds your purchase payments. Ordinary income tax
rates apply. If you designate a Beneficiary who is either 37 1/2 years younger
than you or your grandchild, you may obtain Generation Skipping Transfer Tax
treatment under Section 2601 of the Code.
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 distributions made after death; and
o withdrawals attributable to total and permanent disability.
Transfers. You may pay tax if you transfer your Contract to someone
else. If the transfer is for less than adequate consideration, the taxable
portion would be the Contract Value at the time of transfer over the
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investment in the Contract at such time. This rule does not apply to transfers
between spouses or to transfers incident to a divorce.
Separate Account Diversification. Section 817(h) of the Code provides
that the investments of a separate account underlying a variable annuity
contract which is not purchased under a qualified retirement plan or certain
other types of plans (or the investments of a mutual fund, the shares of which
are owned by the variable annuity separate account) must be "adequately
diversified" in order for the Contract to be treated as an annuity contract for
tax purposes. The Treasury Department has issued regulations prescribing such
diversification requirements. The Separate Account, through each of the
available funds of the Penn Series Funds, Inc., Neuberger Berman Advisers
Management Trust, Fidelity Investments' Variable Insurance Products Fund,
Variable Insurance Products Fund II, and Morgan Stanley's The Universal
Institutional 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 considerations 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,
1999 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.
29
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION CONTENTS
- --------------------------------------------------------------------------------
<S> <C>
VARIABLE ANNUITY PAYMENTS..............................................................................B-2
First Variable Annuity Payments .....................................................B-2
Subsequent Variable Annuity Payments ................................................B-2
Annuity Units .......................................................................B-2
Value of Annuity Units ..............................................................B-2
Net Investment Factor ...............................................................B-3
Assumed Interest Rate ...............................................................B-3
Valuation Period ....................................................................B-4
- ----------------------------------------------------------------------------------------------------------
PERFORMANCE DATA ......................................................................................B-4
Average Annual Total Return .........................................................B-4
Annual Changes in Accumulation Unit Values .........................................B-14
- ----------------------------------------------------------------------------------------------------------
ADMINISTRATIVE AND RECORDKEEPING SERVICES.............................................................B-17
- ----------------------------------------------------------------------------------------------------------
DISTRIBUTION OF CONTRACTS AND CERTIFICATES............................................................B-17
- ----------------------------------------------------------------------------------------------------------
CUSTODIAN ............................................................................................B-17
- ----------------------------------------------------------------------------------------------------------
INDEPENDENT AUDITORS .................................................................................B-17
- ----------------------------------------------------------------------------------------------------------
LEGAL MATTERS ........................................................................................B-17
- ----------------------------------------------------------------------------------------------------------
FINANCIAL STATEMENTS .................................................................................B-17
</TABLE>
30
<PAGE>
PROSPECTUS -- MAY 1, 2000
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 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 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
Money Market Fund Independence Capital Management, inc.
Quality Bond Fund Independence Capital Management, Inc.
High Yield Bond Fund T. Rowe Price Associates, Inc.
Flexibly Managed Fund T. Rowe Price Associates, Inc.
Growth Equity Fund Independence Capital Management, Inc.
Large Cap Value Fund Putnam Investment Management, Inc.
International Equity Fund Vontobel USA, 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 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.
1
<PAGE>
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
1/2, 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.
2
<PAGE>
<TABLE>
<CAPTION>
PROSPECTUS CONTENTS
- -------------------------------------------------------------------------------------------------------------------
<S> <C>
SPECIAL TERMS...................................................................................................2
- -------------------------------------------------------------------------------------------------------------------
EXPENSES........................................................................................................2
- -------------------------------------------------------------------------------------------------------------------
EXAMPLES OF FEES AND EXPENSES...................................................................................3
- -------------------------------------------------------------------------------------------------------------------
ACCUMULATION UNIT VALUES........................................................................................4
- -------------------------------------------------------------------------------------------------------------------
THE PENN MUTUAL LIFE INSURANCE COMPANY..........................................................................8
- -------------------------------------------------------------------------------------------------------------------
THE SEPARATE ACCOUNT............................................................................................8
Accumulation Units......................................................................................8
Voting Instructions.....................................................................................9
Investment Options in the Separate Account..............................................................9
Money Market Fund.............................................................................9
Quality Bond Fund.............................................................................9
High Yield Bond Fund..........................................................................9
Flexibly Managed Fund.........................................................................9
Growth Equity Fund............................................................................9
Large Cap Value Fund..........................................................................9
International Equity Fund....................................................................10
- -------------------------------------------------------------------------------------------------------------------
THE FIXED INTEREST ACCOUNTS....................................................................................10
- -------------------------------------------------------------------------------------------------------------------
THE CONTRACT...................................................................................................10
How Do I Participate in a Contract?....................................................................11
What Type of Annuity Payments May I Choose?............................................................11
What Are the Death Benefits Under My Certificate?......................................................12
May I Transfer Money Among Investment Options..........................................................13
May I Withdraw Any of My Money?........................................................................13
Deferment of Payments and Transfers....................................................................13
What Charges Do I Pay?.................................................................................13
Administration Charges.................................................................................13
Mortality and Expense Risk Charges.....................................................................14
Contingent Deferred Sales Charge.......................................................................14
- -------------------------------------------------------------------------------------------------------------------
PERFORMANCE INFORMATION........................................................................................15
- -------------------------------------------------------------------------------------------------------------------
MORE INFORMATION ABOUT THE FIXED INTEREST OPTIONS..............................................................15
General Information....................................................................................15
Loans Under Section 403(b) Contracts...................................................................16
- -------------------------------------------------------------------------------------------------------------------
FEDERAL INCOME TAX CONSIDERATIONS..............................................................................16
Withdrawals and Death Benefits.........................................................................16
Annuity Payments.......................................................................................16
Early Withdrawals......................................................................................17
Transfers..............................................................................................17
Separate Account Diversification.......................................................................17
Qualified Plans........................................................................................17
- -------------------------------------------------------------------------------------------------------------------
FINANCIAL STATEMENTS...........................................................................................18
- -------------------------------------------------------------------------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION CONTENTS...................................................................19
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
- --------------------------------------------------------------------------------
SPECIAL TERMS
As used in this prospectus, the following terms have the indicated meaning:
<TABLE>
<CAPTION>
<S> <C>
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
</TABLE>
- --------------------------------------------------------------------------------
EXPENSES
<TABLE>
<CAPTION>
<S> <C>
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%
</TABLE>
- ---------------------------------
* 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.
2
<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> <C>
Money Market(1)................ 0.20% 0.15% 0.08% 0.08% 0.51%
Quality Bond(1)................ 0.35% 0.15% 0.08% 0.10% 0.68%
High Yield Bond(2)............. 0.50% 0.15% 0.08% 0.09% 0.82%
Flexibly Managed(1)............ 0.60% 0.15% 0.05% 0.06% 0.86%
Growth Equity(1)............... 0.65% 0.15% 0.06% 0.05% 0.91%
Large Cap Value(1)............. 0.60% 0.15% 0.06% 0.05% 0.86%
International Equity(1)........ 0.85% 0.15% 0.08% 0.10% 1.18%
</TABLE>
- -------------------------
(1) These expenses are estimates provided by the Fund's investment adviser.
(2) 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.
- --------------------------------------------------------------------------------
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:
<TABLE>
<CAPTION>
One Year Three Years Five Years Ten Years
-------- ----------- ---------- ---------
<S> <C> <C> <C> <C>
Penn Series Money Market Fund* $65 $107 $149 $215
Penn Series Quality Bond Fund* $67 $112 $158 $233
Penn Series High Yield Bond Fund** $68 $116 $165 $248
Penn Series Flexibly Managed Fund* $69 $118 $167 $252
Penn Series Growth Equity Fund* $69 $119 $170 $257
Penn Series Large Cap Value Fund*(a) $69 $118 $167 $252
Penn Series International Equity Fund* $72 $127 $183 $284
</TABLE>
- --------------------------------------------------------------------------------
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:
3
<PAGE>
<TABLE>
<CAPTION>
One Year Three Years Five Years Ten Years
-------- ----------- ---------- ---------
<S> <C> <C> <C> <C>
Penn Series Money Market Fund* $19 $58 $99 $215
Penn Series Quality Bond Fund* $20 $63 $108 $233
Penn Series High Yield Bond Fund** $22 $67 $115 $248
Penn Series Flexibly Managed Fund* $22 $68 $117 $252
Penn Series Growth Equity Fund* $23 $70 $120 $257
Penn Series Large Cap Value Fund*(a) $22 $68 $117 $252
Penn Series International Equity Fund* $25 $78 $133 $284
</TABLE>
* These examples are based on estimates provided by the Funds' investment
advisers.
** These examples are based upon data for the fiscal year ended
December 31, 1999.
(a) Penn Series Value Equity Fund Prior to May 1, 2000.
Your expenses may be more or less than what is shown.
- --------------------------------------------------------------------------------
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 MONEY MARKET FUND SUBACCOUNT
Values of an Accumulation Unit Outstanding Throughout Each Period
<TABLE>
<CAPTION>
Year Ended December 31,
1999 1998 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Accumulation Unit Value,
beginning of period............... $20.268 $19.541 $18.817 $18.148 $17.416
Accumulation Unit Value,
end of period..................... $20.953 $20.268 $19.541 $18.817 $18.148
Number of Accumulation Units
outstanding, end of period......... 1,669,670 1,449,199 1,120,603 1,192,388 1,062,385
Year Ended December 31,
1994 1993 1992 1991 1990
- ----------------------------------------------------------------------------------------------------------------------
Accumulation Unit Value,
beginning of period............... $17.003 $16.791 $16.491 $15.732 $14.893
Accumulation Unit Value, end
of period.......................... $17.416 $17.003 $16.791 $16.491 $15.732
Number of Accumulation Units
outstanding, end of period......... 825,274 658,620 698,584 769,958 965,117
</TABLE>
4
<PAGE>
- -------------------------------------------------------------------------------
PENN SERIES QUALITY BOND FUND SUBACCOUNT (a)
Values of an Accumulation Unit Outstanding Throughout Each Period
<TABLE>
<CAPTION>
Year Ended December 31,
1999 1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Accumulation Unit Value,
beginning of period............... $22.043 $20.260 $18.990 $18.465 $15.562 $16.639
Accumulation Unit Value,
end of period...................... $21.769 $22.043 $20.260 $18.990 $18.465 $15.562
Number of Accumulation Units
outstanding, end of period......... 1,612,651 1,665,664 1,497,635 1,664,378 1,869,975 1,890,869
- ----------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
1993 1992 1991 1990
- ----------------------------------------------------------------------------------------------------------------------
Accumulation Unit Value,
beginning of period............... $15.088 $14.336 $12.558 $11.776
Accumulation Unit Value,
end of period...................... $16.639 $15.088 $14.336 $12.558
Number of Accumulation Units
outstanding, end of period......... 1,953,188 1,337,087 1,229,163 1,075,187
- ----------------------------------------------------------------------------------------------------------------------
</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,
1999 1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Accumulation Unit Value,
beginning of period............... $34.645 $33.476 $29.276 $26.033 $22.644 $24.742
Accumulation Unit Value,
end of period...................... $35.666 $34.645 $33.476 $29.276 $26.033 $22.644
Number of Accumulation Units
outstanding, end of period......... 1,176,269 1,308,094 1,261,904 1,185,318 1,194,944 1,264,890
- --------------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
1993 1992 1991 1990
- --------------------------------------------------------------------------------------------------------------------------
Accumulation Unit Value,
beginning of period............... $20.918 $18.291 $13.534 $15.035
Accumulation Unit Value,
end of period..................... $24.742 $20.918 $18.291 $13.534
Number of Accumulation Units
outstanding, end of period......... 1,257,271 705,414 594,530 613,408
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------------------
PENN SERIES FLEXIBLY MANAGED FUND SUBACCOUNT (a)
Values of an Accumulation Unit Outstanding Throughout Each Period
<TABLE>
<CAPTION>
Year Ended December 31,
1999 1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------------------
Accumulation Unit Value,
<S> <C> <C> <C> <C> <C> <C>
beginning of period............... $58.951 $56.265 $49.262 $42.865 $35.496 $34.514
Accumulation Unit Value, end of
period............................. $62.396 $58.951 $56.265 $49.262 $42.865 $35.496
Number of Accumulation Units
outstanding, end of period......... 4,634,490 5,766,014 5,974,993 5,711,843 4,946,240 4,198,305
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
1993 1992 1991 1990
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Accumulation Unit Value,
beginning of period............... $30.179 $27.893 $23.215 $23.712
Accumulation Unit Value, end of
period............................. $34.514 $30.179 $27.893 $23.215
Number of Accumulation Units
outstanding, end of period......... 3,143,601 2,327,829 1,664,751 1,237,347
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Capital Appreciation Fund Subaccount prior to November 1, 1992.
- -------------------------------------------------------------------------------
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,
1999 1998 1997
Non-Qual Qual Non-Qual Non Non-Qual Qual
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Accumulation Unit Value,
beginning of period............... $67.515 $66.959 $48.256 $47.859 $38.550 $38.235
Accumulation Unit Value,
end of period...................... $89.413 $88.677 $67.515 $66.959 $48.256 $47.859
Number of Accumulation Units
outstanding, end of period........ 1,772,202 665,530 1,752,036 626,895 1,794,481 617,717
- --------------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
1996 1995 1994
Non-Qual Qual Non-Qual Qual Non-Qual Qual
- --------------------------------------------------------------------------------------------------------------------------
Accumulation Unit Value,
beginning of period............... $32.596 $32.327 $26.102 $25.887 $28.766 $28.528
Accumulation Unit Value,
end of period...................... $38.550 $38.235 $32.596 $32.327 $26.102 $25.887
Number of Accumulation Units
outstanding, end of period........ 1,830,081 620,903 1,991,646 674,290 2,119,836 717,328
- --------------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
1993 1992 1991
Non-Qual Qual Non-Qual Qual Non-Qual Qual
- --------------------------------------------------------------------------------------------------------------------------
Accumulation Unit Value,
beginning of period............... $25.906 $25.692 $24.756 $24.552 $18.605 $18.451
Accumulation Unit Value,
end of period...................... $28.766 $28.528 $25.906 $25.692 $24.756 $24.552
Number of Accumulation Units
outstanding, end of period........ 2,042,023 685,110 2,004,015 669,679 1,680,322 518,717
- --------------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
1990
Non-Qual Qual
- --------------------------------------------------------------------------------------------------------------------------
Accumulation Unit Value,
beginning of period............... $21.204 $21.029
Accumulation Unit Value,
end of period...................... $18.605 $18.451
Number of Accumulation Units
outstanding, end of period........ 1,470,210 439,287
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Growth Stock Fund Subaccount prior to November 1, 1992.
6
<PAGE>
- -------------------------------------------------------------------------------
PENN SERIES LARGE CAP VALUE FUND SUBACCOUNT (a)
Values of an Accumulation Unit Outstanding Throughout Each Period
<TABLE>
<CAPTION>
Year Ended December 31,
1999 1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Accumulation Unit Value,
beginning of period............... $41.167 $38.038 $30.819 $24.928 $18.361 $18.062
Accumulation Unit Value,
end of period...................... $40.329 $41.167 $38.038 $30.819 $24.928 $18.361
Number of Accumulation Units
outstanding, end of period......... 4,407,110 5,273,048 5,409,879 4,907,784 4,235,839 3,886,404
- --------------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
1993 1992 1991 1990
- --------------------------------------------------------------------------------------------------------------------------
Accumulation Unit Value,
beginning of period............... $17.080 $15.058 $11.939 $13.157
Accumulation Unit Value, end
of period.......................... $18.062 $17.080 $15.058 $11.939
Number of Accumulation Units
outstanding, end of period......... 3,693,652 2,865,294 2,207,661 1,883,581
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Value Equity Fund Subaccount prior to May 1, 2000.
- -------------------------------------------------------------------------------
PENN SERIES INTERNATIONAL EQUITY FUND SUBACCOUNT
Values of an Accumulation Unit Outstanding Throughout Each Period
<TABLE>
<CAPTION>
Year Ended December 31,
1999 1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Accumulation Unit Value,
beginning of period............... $21.320 $18.164 $16.659 $14.434 $12.843 $13.880
Accumulation Unit Value,
end of period...................... $30.678 $21.320 $18.164 $16.659 $14.434 $12.843
Number of Accumulation Units
outstanding, end of period......... 3,579,323 3,822,847 4,155,960 4,012,762 3,388,479 3,556,098
- --------------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
1993 1992(a)
- --------------------------------------------------------------------------------------------------------------------------
Accumulation Unit Value,
beginning of period............... $10.175 $10.000
Accumulation Unit Value,
end of period...................... $13.880 $10.175
Number of Accumulation Units 1,847,892 92,386
outstanding, end of period.........
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) For the period November 2, 1992 (date subaccount was established) through
December 31, 1992.
The financial statements of the Separate Account for the year ended
December 31, 1999 are included in the statement of additional information
referred to on the cover page of this prospectus.
7
<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.
- --------------------------------------------------------------------------------
THE SEPARATE ACCOUNT
Penn Mutual established Penn Mutual Variable Annuity Account III (the
"Separate Account") on April 13, 1982. The Separate Account is registered with
the Securities and Exchange Commission as a unit investment trust and is a
"separate account" within the meaning of the federal securities laws. The
Separate Account is divided into subaccounts that invest in shares of different
mutual funds.
o The income, gains and losses of Penn Mutual do not have any effect on
the income, gains or losses of the Separate Account or any subaccount.
o The Separate Account and its subaccounts are not responsible for the
liabilities of any other business of Penn Mutual.
- --------------------------------------------------------------------------------
Accumulation Units
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%.
- -------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
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.:
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.
8
<PAGE>
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);
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;
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;
Large Cap Value Fund (formerly, Value Equity Fund)-- seeks to maximize
total return (capital appreciation and income) primarily by investing in equity
securities of companies believed to be undervalued.
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.
Independence Capital Management, Inc., Horsham, Pennsylvania, is
investment adviser to each of the Funds. Putnam Investment Management, Inc.,
Boston, Massachusetts, is investment sub-adviser to the Large Cap Value 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 through 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.
- -------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
THE CONTRACT
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, Large Cap Value, Flexibly Managed,
International Equity, Quality Bond, High Yield Bond and Money Market Funds of
Penn Series Funds, Inc.
9
<PAGE>
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.
- --------------------------------------------------------------------------------
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.
10
<PAGE>
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
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.
11
<PAGE>
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.
- --------------------------------------------------------------------------------
May I Transfer Money Among Investment Options?
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.
- --------------------------------------------------------------------------------
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.
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 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.
- --------------------------------------------------------------------------------
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
12
<PAGE>
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.
- --------------------------------------------------------------------------------
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.
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.
13
<PAGE>
- -----------------------------------------------------------------
Participant's Enrollment Year Percentage
- -----------------------------------------------------------------
Second through Seventh 10%
- -----------------------------------------------------------------
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%.
- --------------------------------------------------------------------------------
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).
- --------------------------------------------------------------------------------
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.
14
<PAGE>
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 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 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 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.
15
<PAGE>
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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 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 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 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; on withdrawals made on or after age 59 1/2; on distributions made
after death; and on 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
16
<PAGE>
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.
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.
- --------------------------------------------------------------------------------
FINANCIAL STATEMENTS
The consolidated financial statements of The Penn Mutual Life Insurance
Company and the financial statements of the Separate Account at December 31,
1999 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.
17
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION CONTENTS
- -------------------------------------------------------------------------------------------------------------------
<S> <C>
VARIABLE ANNUITY PAYMENTS.....................................................................................B-2
First Variable Annuity Payments.......................................................................B-2
Subsequent Variable Annuity Payments..................................................................B-2
Annuity Units.........................................................................................B-2
Value of Annuity Units................................................................................B-3
Net Investment Factor.................................................................................B-3
Assumed Interest Rate.................................................................................B-4
Valuation Period......................................................................................B-4
- -------------------------------------------------------------------------------------------------------------------
PERFORMANCE DATA..............................................................................................B-5
Average Annual Total Return...........................................................................B-5
Annual Changes in Accumulation Unit Values...........................................................B-15
- -------------------------------------------------------------------------------------------------------------------
ADMINISTRATIVE AND RECORDKEEPING SERVICES....................................................................B-18
- -------------------------------------------------------------------------------------------------------------------
DISTRIBUTION OF CONTRACTS AND CERTIFICATES...................................................................B-18
- -------------------------------------------------------------------------------------------------------------------
CUSTODIAN....................................................................................................B-18
- -------------------------------------------------------------------------------------------------------------------
INDEPENDENT AUDITORS.........................................................................................B-18
- -------------------------------------------------------------------------------------------------------------------
LEGAL MATTERS................................................................................................B-18
- -------------------------------------------------------------------------------------------------------------------
FINANCIAL STATEMENTS.........................................................................................B-18
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
18
<PAGE>
PART B
Information Required in a Statement
of Additional Information
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION -- MAY 1, 2000
- --------------------------------------------------------------------------------
PENN MUTUAL VARIABLE ANNUITY ACCOUNT III
THE PENN MUTUAL LIFE INSURANCE COMPANY
Philadelphia, PA 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, 2000. 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>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
TABLE OF CONTENTS
- -------------------------------------------------------------------------------------------------------------------
<S> <C>
VARIABLE ANNUITY PAYMENTS .................................................................. B-2
FIRST VARIABLE ANNUITY PAYMENT ..................................................... B-2
SUBSEQUENT VARIABLE ANNUITY PAYMENTS ............................................... B-2
ANNUITY UNITS ...................................................................... B-2
VALUE OF ANNUITY UNITS ............................................................. B-3
NET INVESTMENT FACTOR .............................................................. B-3
ASSUMED INTEREST RATE .............................................................. B-4
VALUATION PERIOD ................................................................... B-4
- -------------------------------------------------------------------------------------------------------------------
PERFORMANCE DATA ........................................................................... B-5
AVERAGE ANNUAL TOTAL RETURN......................................................... B-5
ANNUAL RATE OF CHANGE IN ACCUMULATION UNIT VALUES................................... B-15
- -------------------------------------------------------------------------------------------------------------------
ADMINISTRATIVE AND RECORDKEEPING SERVICES ................................................. B-18
- -------------------------------------------------------------------------------------------------------------------
DISTRIBUTION OF CONTRACTS AND CERTIFICATES ................................................. B-18
- -------------------------------------------------------------------------------------------------------------------
CUSTODIAN .................................................................................. B-18
- -------------------------------------------------------------------------------------------------------------------
INDEPENDENT AUDITORS ....................................................................... B-18
- -------------------------------------------------------------------------------------------------------------------
LEGAL MATTERS .............................................................................. B-18
- -------------------------------------------------------------------------------------------------------------------
FINANCIAL STATEMENTS ....................................................................... B-18
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
<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.
B-2
<PAGE>
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
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.
B-3
<PAGE>
- --------------------------------------------------------------------------------
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.
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* 12/31/99 12/31/99 12/31/99 12/31/99
- -------------- ------ -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Quality Bond (a) 3/17/1987 6.18% 6.24% 6.25% -7.59%
(Independence Capital)
High Yield Bond (a) 8/6/1984 8.51% 8.90% 8.78% -3.70%
(T. Rowe Price)
Flexibly Managed (a) 7/31/1984 12.34% 9.74% 10.88% -1.41%
(T. Rowe Price)
Growth Equity-Non-Qualified (a) 6/1/1983 13.89% 15.24% 27.00% 23.79%
(Independence Capital)
Growth Equity-Qualified (a) 8/11/1983 14.13% 15.24% 27.00% 23.79%
(Independence Capital)
Large Cap Value (a)(f) 3/17/1987 11.25% 11.55% 16.12% -8.63%
(Putnam)
Emerging Growth Fund (a) 5/1/1997 82.36% N/A N/A 163.68%
(RS Investment Management)
Small Cap Value Fund(a)(f) 5/1/1995 6.77% N/A N/A -8.85%
(Royce)
</TABLE>
B-4
<PAGE>
<TABLE>
<CAPTION>
From Ten Five One
Inception Years Years Year
Inception Through Ended Ended Ended
Fund (Manager) Date* 12/31/99 12/31/99 12/31/99 12/31/99
- -------------- ------ -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
International Equity (a) 11/2/1992 16.69% N/A 18.11% 34.52%
(Vontobel)
Balanced Portfolio (b) 5/3/1993 12.87% N/A 16.61% 23.50%
(Neuberger Berman)
Equity-Income Portfolio (c) 5/1/1995 14.90% N/A N/A -1.68%
(Fidelity Investments)
Growth Portfolio (c) 5/1/1995 27.42% N/A N/A 27.14%
(Fidelity Investments)
Asset Manager Portfolio (d) 5/1/1995 13.70% N/A N/A 2.76%
(Fidelity Investments)
Emerging Markets Equity (International) (e) 5/1/1997 8.20% N/A N/A 80.26%
(Morgan Stanley)
</TABLE>
- ------------------
* Date the underlying fund was first offered through a subaccount of the
Separate Account. Performance information is not shown for subaccounts
which began investing in new funds on the date of this prospectus.
(a) Penn Series Funds, Inc.
(b) Neuberger Berman Advisers Management Trust
(c) Variable Insurance Products Fund
(d) Variable Insurance Products Fund II
(e) The Universal Institutional Funds, Inc.
(f) Prior to May 1, 2000, the Penn Series Large Cap Value Fund Subaccount was
the Penn Series Value Equity Fund Subaccount and the Penn Series Small Cap
Value Fund Subaccount was the Penn Series Small Capitalization Fund
Subaccount, and the Funds in which the Subaccounts invested were managed by
OpCap Advisors.
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
B-5
<PAGE>
<TABLE>
<CAPTION>
Average Annual Total Return
--------------------------------------------------------
From Ten Five One
Inception Years Years Year
Inception Through Ended Ended Ended
Fund (Manager) Date* 12/31/99 12/31/99 12/31/99 12/31/99
- ------------------ ------ -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Quality Bond (a) 3/17/1987 6.18% 6.15% 6.15% -7.59%
(Independence Capital)
High Yield Bond (a) 8/6/1984 8.51% 8.80% 8.68% -3.70%
(T. Rowe Price)
Flexibly Managed (a) 7/31/1984 12.34% 9.64% 10.78% -1.41%
(T. Rowe Price)
Growth Equity-Non-Qualified (a) 6/1/1983 13.89% 15.13% 26.88% 23.79%
(Independence Capital)
Growth Equity-Qualified (a) 8/11/1983 14.13% 15.13% 26.88% 23.79%
(Independence Capital)
Large Cap Value (a)(f) 3/17/1987 11.25% 11.45% 16.01% -8.63%
(Putnam)
Emerging Growth Fund (a) 5/1/1997 82.36% N/A N/A 163.68%
(RS Investment Management)
Small Cap Value Fund(a)(f) 5/1/1995 6.66% N/A N/A -8.85%
(Royce)
International Equity (a) 11/2/1992 16.40% N/A 18.00% 34.52%
(Vontobel)
Balanced Portfolio (b) 5/3/1993 12.64% N/A 16.50% 23.50%
(Neuberger Berman)
Equity-Income Portfolio (c) 5/1/1995 14.78% N/A N/A -1.68%
(Fidelity Investments)
Growth Portfolio (c) 5/1/1995 27.30% N/A N/A 27.14%
(Fidelity Investments)
Asset Manager Portfolio (d) 5/1/1995 13.59% N/A N/A 2.76%
(Fidelity Investments)
Emerging Markets Equity (International) (e) 5/1/1997 8.20% N/A N/A 80.26%
(Morgan Stanley)
</TABLE>
- ----------------------
* Date the underlying fund was first offered through a subaccount of the
Separate Account. Performance information is not shown for subaccounts
which began investing in new funds on the date of this prospectus.
(a) Penn Series Funds, Inc.
(b) Neuberger Berman Advisers Management Trust
(c) Variable Insurance Products Fund
(d) Variable Insurance Products Fund II
B-6
<PAGE>
(e) The Universal Institutional Funds, Inc.
(f) Prior to May 1, 2000, the Penn Series Large Cap Value Fund Subaccount was
the Penn Series Value Equity Fund Subaccount and the Penn Series Small Cap
Value Fund Subaccount was the Penn Series Small Capitalization Fund
Subaccount, and the Funds in which the Subaccounts invested were managed by
OpCap Advisors.
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* 12/31/99 12/31/99 12/31/99 12/31/99
----- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Quality Bond (a) 3/17/1987 6.18% 5.95% 6.06% -5.81%
(Independence Capital)
High Yield Bond (a) 8/6/1984 8.51% 8.67% 8.67% -1.86%
(T. Rowe Price)
Flexibly Managed (a) 7/31/1984 12.34% 9.53% 10.84% 0.47%
(T. Rowe Price)
Growth Equity-Non-Qualified (a) 6/1/1983 13.89% 15.10% 27.32% 27.13%
(Independence Capital)
Growth Equity-Qualified (a) 8/11/1983 14.13% 15.10% 27.32% 27.13%
(Independence Capital)
Large Cap Value (a)(f) 3/17/1987 11.25% 11.36% 16.22% -6.86%
(Putnam)
Emerging Growth Fund (a) 5/1/1997 84.86% N/A N/A 176.41%
(RS Investment Management)
Small Cap Value Fund(a)(f) 5/1/1995 6.56% N/A N/A -7.08%
(Royce)
International Equity (a) 11/2/1992 16.42% N/A 18.26% 38.59%
(Vontobel)
Balanced Portfolio (b) 5/3/1993 12.65% N/A 16.72% 26.81%
(Neuberger Berman)
Equity-Income Portfolio (c) 5/1/1995 14.94% N/A N/A 0.19%
(Fidelity Investments)
Growth Portfolio (c) 5/1/1995 27.74% N/A N/A 30.69%
(Fidelity Investments)
</TABLE>
B-7
<PAGE>
<TABLE>
<CAPTION>
Average Annual Total Return
--------------------------------------------------------
From Ten Five One
Inception Years Years Year
Inception Through Ended Ended Ended
Fund (Manager) Date* 12/31/99 12/31/99 12/31/99 12/31/99
----- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Asset Manager Portfolio (d) 5/1/1995 13.71% N/A N/A 4.68%
(Fidelity Investments)
Emerging Markets Equity (International) (e) 5/1/1997 8.46% N/A N/A 87.38%
(Morgan Stanley)
</TABLE>
- ---------------
* Date the underlying fund was first offered through a subaccount of the
Separate Account. Performance information is not shown for subaccounts
which began investing in new funds on the date of this prospectus.
(a) Penn Series Funds, Inc.
(b) Neuberger Berman Advisers Management Trust
(c) Variable Insurance Products Fund
(d) Variable Insurance Products Fund II
(e) The Universal Institutional Funds, Inc.
(f) Prior to May 1, 2000, the Penn Series Large Cap Value Fund Subaccount was
the Penn Series Value Equity Fund Subaccount and the Penn Series Small Cap
Value Fund Subaccount was the Penn Series Small Capitalization Fund
Subaccount, and the Funds in which the Subaccounts invested were managed by
OpCap Advisors.
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 Ten Five One
Inception Years Years Year
Inception Through Ended Ended Ended
Fund (Manager) Date* 12/31/99 12/31/99 12/31/99 12/31/99
------ -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Quality Bond (a) 3/17/1987 6.18% 6.11% 5.86% -5.81%
(Independence Capital)
High Yield Bond (a) 8/6/1984 8.51% 8.77% 8.37% -1.85%
(T. Rowe Price)
Flexibly Managed (a) 7/31/1984 12.34% 9.61% 10.47% 0.50%
(T. Rowe Price)
Growth Equity-Non-Qualified (a) 6/1/1983 13.89% 15.09% 26.52% 26.17%
(Independence Capital)
Growth Equity-Qualified (a) 8/11/1983 14.13% 15.09% 26.52% 26.17%
(Independence Capital)
</TABLE>
B-8
<PAGE>
<TABLE>
<CAPTION>
Average Annual Total Return
-------------------------------------------------------
From Ten Five One
Inception Years Years Year
Inception Through Ended Ended Ended
Fund (Manager) Date* 12/31/99 12/31/99 12/31/99 12/31/99
------ -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Large Cap Value (a)(b) 3/17/1987 11.25% 11.41% 15.69% -6.87%
(Putnam)
International Equity (a) 11/2/1992 15.95% N/A 17.67% 37.11%
(Vontobel)
</TABLE>
- -------------------
* Date the underlying fund was first offered through a subaccount of the
Separate Account. Performance information is not shown for subaccounts
which began investing in new funds on the date of this prospectus.
(a) Penn Series Funds, Inc.
(b) Prior to May 1, 2000, the Penn Series Large Cap Value Fund Subaccount was
the Penn Series Value Equity Fund Subaccount and the Fund in which the
Subaccount invested was managed by OpCap Advisors.
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 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** 12/31/99 12/31/99 12/31/99 12/31/99
- --------------- ------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Quality Bond (a) 3/17/1987 6.18% 6.24% 6.84% -1.37%
(Independence Capital)
High Yield Bond (a) 8/6/1984 8.55% 8.90% 9.38% 2.78%
(T. Rowe Price)
Flexibly Managed (a) 7/31/1984 12.48% 9.74% 11.49% 5.26%
(T. Rowe Price)
Growth Equity-Non-Qualified (a) 6/1/1983 13.99% 15.24% 27.69% 32.13%
(Independence Capital)
</TABLE>
B-9
<PAGE>
<TABLE>
<CAPTION>
Average Annual Total Return
---------------------------------------------------------
From Ten Five One
Inception Years Years Year
Inception Through Ended Ended Ended
Fund (Manager)* Date** 12/31/99 12/31/99 12/31/99 12/31/99
- --------------- ------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Growth Equity-Qualified (a) 8/11/1983 14.22% 15.24% 27.69% 32.13%
(Independence Capital)
Large Cap Value (a)(f) 3/17/1987 11.20% 11.55% 16.76% -2.46%
(Putnam)
Emerging Growth Fund (a) 5/1/1997 85.53% N/A N/A 181.41%
(RS Investment Management)
Small Cap Value Fund(a)(f) 3/1/1995 7.10% N/A N/A -2.71%
(Royce)
International Equity (a) 11/2/1992 16.69% N/A 18.76% 43.59%
(Vontobel)
Balanced Portfolio (b) 2/28/1989 11.72% 11.18% 17.25% 31.81%
(Neuberger Berman)
Equity-Income Portfolio (c) 10/9/1986 12.28% 12.94% 16.93% 4.94%
(Fidelity Investments)
Growth Portfolio (c) 10/9/1986 17.27% 18.41% 28.08% 35.69%
(Fidelity Investments)
Asset Manager Portfolio (d) 9/6/1989 11.37% 11.70% 14.15% 9.67%
(Fidelity Investments)
Emerging Markets Equity (International) (e) 10/1/1996 10.72% N/A N/A 92.38%
(Morgan Stanley)
</TABLE>
- -------------------
* Prior to May 1, 2000, the Limited Maturity Bond, Index 500, Mid Cap Growth
and Mid Cap Value Fund had no assets. Accordingly, no performance
information is presented.
** Date the underlying fund was established.
(a) Penn Series Funds, Inc.
(b) Neuberger Berman Advisers Management Trust
(c) Variable Insurance Products Fund
(d) Variable Insurance Products Fund II
(e) The Universal Institutional Funds, Inc.
(f) Prior to May 1, 2000, the Penn Series Large Cap Value Fund Subaccount was
the Penn Series Value Equity Fund Subaccount and the Penn Series Small Cap
Value Fund Subaccount was the Penn Series Small Capitalization Fund
Subaccount, and the Funds in which the Subaccounts invested were managed by
OpCap Advisors.
B-10
<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* 12/31/99 12/31/99 12/31/99 12/31/99
------ -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Quality Bond (a) 3/17/1987 6.18% 6.24% 6.84% -1.37%
(Independence Capital)
High Yield Bond (a) 8/6/1984 8.55% 8.90% 9.38% 2.78%
(T. Rowe Price)
Flexibly Managed (a) 7/31/1984 12.48% 9.74% 11.49% 5.26%
(T. Rowe Price)
Growth Equity-Non-Qualified (a) 6/1/1983 13.99% 15.24% 27.69% 32.13%
(Independence Capital)
Growth Equity-Qualified (a) 8/11/1983 14.22% 15.24% 27.69% 32.13%
(Independence Capital)
Large Cap Value (a)(b) 3/17/1987 11.20% 11.55% 16.76% -2.46%
(Putnam)
International Equity (a) 11/2/1992 16.69% N/A 18.76% 43.59%
(Vontobel)
</TABLE>
- --------------------
* Date the underlying fund was established. Performance information is not
shown for subaccounts which began investing in new funds on the date of
this prospectus.
(a) Penn Series Funds, Inc.
(b) Prior to May 1, 2000, the Penn Series Large Cap Value Fund Subaccount was
the Penn Series Value Equity Fund Subaccount and the Fund in which the
Subaccount invested was managed by OpCap Advisors.
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 Inception Date of the Underlying Fund, and No
Purchase Payments After First Contract Year Under the Variable
Fixed Contract
B-11
<PAGE>
<TABLE>
<CAPTION>
Average Annual Total Return
---------------------------------------------------------
From Ten Five One
Inception Years Years Year
Inception Through Ended Ended Ended
Fund (Manager)* Date** 12/31/99 12/31/99 12/31/99 12/31/99
- --------------- ------ -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Quality Bond (a) 3/17/1987 6.25% 6.32% 6.93% -1.25%
(Independence Capital)
High Yield Bond (a) 8/6/1984 8.60% 9.01% 9.49% 2.93%
(T. Rowe Price)
Flexibly Managed (a) 7/31/1984 12.59% 10.11% 11.89% 5.78%
(T. Rowe Price)
Growth Equity-Non-Qualified (a) 6/1/1983 14.05% 15.45% 27.88% 32.40%
(Independence Capital)
Growth Equity-Qualified (a) 8/11/1983 14.28% 15.45% 27.88% 32.40%
(Independence Capital)
Large Cap Value (a)(f) 3/17/1987 11.37% 11.82% 17.01% -2.08%
(Putnam)
Emerging Growth Fund (a) 5/1/1997 85.59% N/A N/A 181.49%
(RS Investment Management)
Small Cap Value Fund(a)(f) 3/1/1995 7.22% N/A N/A -2.57%
(Royce)
International Equity (a) 11/2/1992 16.91% N/A 18.99% 43.86%
(Vontobel)
Balanced Portfolio (b) 2/28/1989 11.78% 11.24% 17.32% 31.90%
(Neuberger Berman)
Equity-Income Portfolio (c) 10/9/1986 12.31% 12.98% 16.97% 5.00%
(Fidelity Investments)
Growth Portfolio (c) 10/9/1986 17.29% 18.43% 28.11% 35.73%
(Fidelity Investments)
Asset Manager Portfolio (d) 9/6/1989 11.39% 11.73% 14.18% 9.71%
(Fidelity Investments)
Emerging Markets Equity (International) (e) 10/1/1996 10.76% N/A N/A 92.40%
(Morgan Stanley)
</TABLE>
- ------------------------
* Prior to May 1, 2000, the Limited Maturity Bond, Index 500, Mid Cap Growth
and Mid Cap Value Fund had no assets. Accordingly, no performance
information is presented.
** Date the underlying fund was established.
(a) Penn Series Funds, Inc.
(b) Neuberger Berman Advisers Management Trust
(c) Variable Insurance Products Fund
B-12
<PAGE>
(d) Variable Insurance Products Fund II
(e) The Universal Institutional Funds, Inc.
(f) Prior to May 1, 2000, the Penn Series Large Cap Value Fund Subaccount was
the Penn Series Value Equity Fund Subaccount and the Penn Series Small Cap
Value Fund Subaccount was the Penn Series Small Capitalization Fund
Subaccount, and the Funds in which the Subaccounts invested were managed by
OpCap Advisors.
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 Ten Five One
Inception Years Years Year
Inception Through Ended Ended Ended
Fund (Manager) Date* 12/31/99 12/31/99 12/31/99 12/31/99
- ------------- ------ -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Quality Bond (a) 3/17/1987 6.25% 6.32% 6.93% -1.25%
(Independence Capital)
High Yield Bond (a) 8/6/1984 8.60% 9.01% 9.49% 2.93%
(T. Rowe Price)
Flexibly Managed (a) 7/31/1984 12.59% 10.11% 11.89% 5.78%
(T. Rowe Price)
Growth Equity-Non-Qualified (a) 6/1/1983 14.05% 15.45% 27.88% 32.40%
(Independence Capital)
Growth Equity-Qualified (a) 8/11/1983 14.28% 15.45% 27.88% 32.40%
(Independence Capital)
Large Cap Value (a)(b) 3/17/1987 11.37% 11.82% 17.01% -2.08%
(Putnam)
International Equity (a) 11/2/1992 16.91% N/A 18.99% 43.86%
(Vontobel)
</TABLE>
- -------------------
* Date the underlying fund was established. Performance information is not
shown for subaccounts which began investing in new funds on the date of
this prospectus.
(a) Penn Series Funds, Inc.
(b) Prior to May 1, 2000, the Penn Series Large Cap Value Fund Subaccount was
the Penn Series Value Equity Fund Subaccount and the Fund in which the
Subaccount invested was managed by OpCap Advisors.
B-13
<PAGE>
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
administration 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.
- --------------------------------------------------------------------------------
Annual Rate of Change in Accumulation Unit Values
Table 4A Diversifier II Variable/Fixed Contract and Diversifier II Variable
Contract
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)* 1999 1998 1997 1996 1995 1994 1993 1992 1991 1990
- -------------- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Money Market (a) 3.38% 3.72% 3.85% 3.69% 4.21% 2.43% 1.30% 1.80% 4.60% 5.60%
(Independence Capital)
Quality Bond (a) -1.24% 8.80% 6.69% 2.84% 18.65% 6.47% 10.30% 5.20% 14.20% 6.60%
(Independence Capital)
High Yield Bond (a) 2.95% 3.49% 14.35% 12.46% 14.97% 8.48% 18.30% 14.40% 35.20% 10.00%
(T. Rowe Price)
Flexibly Managed (a) 5.84% 4.77% 14.22% 14.92% 20.76% 2.85% 14.40% 8.20% 20.10% 2.10%
(T. Rowe Price)
Growth Equity (a)
Nonqualified Plans 32.44% 39.91% 25.17% 18.27% 24.88% 9.26% 11.00% 4.60% 33.10% 12.30%
Qualified Plans 32.44% 39.91% 25.17% 18.27% 24.88% 9.26% 11.00% 4.60% 33.10% 12.30%
</TABLE>
B-14
<PAGE>
<TABLE>
<CAPTION>
Annual Rate of Change in Accumulation Unit Values
------------------------------------------------------------------------------------
Fund (Manager)* 1999 1998 1997 1996 1995 1994 1993 1992 1991 1990
- -------------- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(Independence Capital)
Large Cap Value (a) (f) -2.04% 8.23% 23.42% 23.63% 35.77% 1.65% 5.70% 13.40% 26.10% 9.30%
(Putnam)
Emerging Growth Fund (a) 181.49% 34.02% 38.06% N/A N/A N/A N/A N/A N/A N/A
(RS Investment Management)
Small Cap Value Fund (a) (f) -2.55% -10.29% 21.50% 18.26% 11.71% N/A N/A N/A N/A N/A
(Royce)
International Equity (a) 43.89% 17.37% 9.03% 15.41% 13.39% 7.47% 36.40% N/A N/A N/A
(Vontobel)
Balanced Portfolio (b) 31.91% 10.78% 17.97% 5.56% 22.22% -4.56% N/A N/A N/A N/A
(Neuberger Berman)
Equity- Income Portfolio (c) 5.01% 10.24% 26.52% 12.86% 19.20% N/A N/A N/A N/A N/A
(Fidelity Investments)
Growth Portfolio (c) 35.73% 37.76% 21.95% 13.28% 23.59% N/A N/A N/A N/A N/A
(Fidelity Investments)
Asset Manager Portfolio (d) 9.71% 13.62% 19.15% 13.18% 11.53% N/A N/A N/A N/A N/A
(Fidelity Investments)
Emerging Markets Equity 93.38% -25.12% -10.25% N/A N/A N/A N/A N/A N/A N/A
(International) (e)
(Morgan Stanley)
</TABLE>
- -----------------
* Performance information is not shown for subaccounts which began investing
in new funds on the date of this prospectus.
(a) Penn Series Funds, Inc.
(b) Neuberger Berman Advisers Management Trust
(c) Variable Insurance Products Fund
d) Variable Insurance Products Fund II.
(e) The Universal Institutional Funds, Inc.
(f) Prior to May 1, 2000, the Penn Series Large Cap Value Fund Subaccount was
the Penn Series Value Equity Fund Subaccount and the Penn Series Small Cap
Value Fund Subaccount was the Penn Series Small Capitalization Fund
Subaccount, and the Funds in which the Subaccounts invested were managed by
OpCap Advisors.
B-15
<PAGE>
Table 4B Penn Mutual Optimizer Group Variable Fixed Annuity Contract Annual
Rate of Change in Accumulation Unit Values
<TABLE>
<CAPTION>
Annual Rate of Change in Accumulation Unit Values
------------------------------------------------------------------------------------
Fund (Manager) 1999 1998 1997 1996 1995 1994 1993 1992 1991 1990
- -------------- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Money Market (a) 3.38% 3.72% 3.85% 3.69% 4.21% 2.43% 1.80% 4.60% 5.60% N/A
(Independence Capital)
Quality Bond (a) -1.24% 8.80% 6.69% 2.84% 18.65% 6.47% 10.30% 5.20% 14.20% 6.60%
(Independence Capital)
High Yield Bond (a) 2.95% 3.49% 14.35% 12.46% 14.97% 8.48% 18.30% 14.40% 35.20% 10.00%
(T. Rowe Price)
Flexibly Managed (a) 5.84% 4.77% 14.22% 14.92% 20.76% 2.85% 14.40% 8.20% 20.10% 2.10%
(T. Rowe Price)
Growth Equity (a)
Non -Qualified Plans 32.44% 39.91% 25.17% 18.27% 24.88% 9.26% 11.00% 4.60% -33.10% 12.30%
Qualified Plans 32.44% 39.91% 25.17% 18.27% 24.88% 9.26% 11.00% 4.60% -33.10% 12.30%
(Independence Captial)
Large Cap Value (a) (b) -2.04% 8.23% 23.42% 23.63% 35.77% 1.65% 5.70% 13.40% 26.10% 9.30%
(Putnam)
International Equity (a) 43.89% 17.37% 9.03% 15.41% 13.39% -7.47% 26.40% N/A N/A N/A
(Vontobel)
</TABLE>
- -------------------
(a) Penn Series Funds, Inc.
(b) Prior to May 1, 2000, the Penn Series Large Cap Value Fund Subaccount was
the Penn Series Value Equity Fund Subaccount and the Fund in which the
Subaccount invested was managed by OpCap Advisors.
----------------------
The performance information set forth above is for past performance and
is not an indication or representation of future performance.
- --------------------------------------------------------------------------------
ADMINISTRATIVE AND RECORDKEEPING SERVICES
The Company performs all data processing, recordkeeping and other
related services with respect to the Contracts and the Separate Accounts.
B-16
<PAGE>
- --------------------------------------------------------------------------------
DISTRIBUTION OF CONTRACTS AND CERTIFICATES
Hornor, Townsend & Kent, Inc., a wholly owned subsidiary of the Company,
serves as principal underwriter of the combination variable and fixed annuity
contracts and the variable annuity contracts. The address of Horner, Townsend &
Kent, Inc. is 600 Dresher Road, Horsham, PA 19044. For 1999, 1998, and 1997 the
Company paid Hornor, Townsend & Kent, Inc. underwriting commissions of $338,282,
$450,661 and $436,619, respectively.
- --------------------------------------------------------------------------------
CUSTODIAN
The Company 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 Company and the financial
statements of the Separate Account at December 31, 1999 and for the year then
ended appear in the Statement of Additional Information. The consolidated
financial statements of the Company should be considered only as bearing upon
the Company's ability to meet its obligations under the Contracts.
- --------------------------------------------------------------------------------
B-17
<PAGE>
<TABLE>
<CAPTION>
PENN MUTUAL VARIABLE ANNUITY ACCOUNT III
STATEMENT OF ASSETS AND LIABILITIES - DECEMBER 31, 1999
- ----------------------------------------------------------------------------------------------------------------------------
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 ..................... 43,365,446 3,652,548 4,580,843 5,382,378
Cost ................................. $1,056,134,961 $43,365,446 $37,570,637 $43,726,462 $113,636,714
Assets:
Investments at market value .......... $1,508,564,510 $43,365,446 $37,986,495 $43,884,472 $222,884,272
Dividends receivable ................. 190,633 190,633 - - -
Liabilities:
Due to (from) the Penn Mutual
Life Insurance Company ............. 703,552 (170,319) 20,257 23,334 147,785
-------------- ----------- ----------- ----------- ------------
Net Assets ........................... $1,508,051,591 $43,726,398 $37,966,238 $43,861,138 $222,736,487
============== =========== =========== =========== ============
- ----------------------------------------------------------------------------------------------------------------------------
PENN MUTUAL VARIABLE ANNUITY ACCOUNT III
STATEMENT OF OPERATIONS - FOR THE YEAR ENDED DECEMBER 31, 1999
Money Quality High Yield Growth Equity
Total Market Fund+ Bond Fund+ Bond Fund+ Fund+
--------------- --------------- --------------- --------------- ---------------
Investment Income:
Dividends ............................ $4,845,057 $1,677,012 $ - $ - $ -
Expense:
Mortality and expense risk charges ... 16,866,329 448,166 472,167 582,283 2,379,763
-------------- ----------- ----------- ----------- ------------
Net investment income (loss) ......... (12,021,272) 1,228,846 (472,167) (582,283) (2,379,763)
-------------- ----------- ----------- ----------- ------------
Realized and Unrealized Gains
(Losses) on Investments:
Realized gains (losses) from
redemption of fund shares ....... 4,022,204 - (8,658) 124,263 530,746
Capital gains distributions .......... 14,634,220 - - - -
-------------- ----------- ----------- ----------- ------------
Net realized gains (losses)
from investment transactions .... 18,656,424 - (8,658) 124,263 530,746
Net change in unrealized
appreciation/depreciation
of investments .................. 225,948,976 - 3,987 1,804,756 56,280,956
-------------- ----------- ----------- ----------- ------------
Net realized and unrealized
gains (losses) on investments ... 244,605,400 - (4,671) 1,929,019 56,811,702
-------------- ----------- ----------- ----------- ------------
Net increase (decrease) in net
assets resulting from
operations ...................... $232,584,128 $ 1,228,846 $ (476,838) $ 1,346,736 $ 54,431,939
============== =========== =========== =========== ============
</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>
[RESTUBBED
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Flexibly Small Emerging
Value Equity Managed International Capitalization Growth
Fund+ Fund+ Equity Fund+ Fund+ Fund+
--------------- --------------- --------------- --------------- ---------------
Investment in Common Stock
<S> <C> <C> <C> <C> <C>
Number of Shares ..................... 8,163,794 15,061,156 4,215,892 1,473,494 1,889,241
Cost ................................. $112,901,895 $239,046,567 $57,138,477 $19,123,749 $41,375,702
Assets:
Investments at market value .......... $181,317,878 $295,499,892 $112,901,582 $18,624,956 $93,857,465
Dividends receivable ................. - - - - -
Liabilities:
Due to (from) the Penn Mutual
Life Insurance Company ............. 96,971 159,036 73,394 10,546 66,652
------------ ------------ ------------ ----------- -----------
Net Assets ........................... $181,220,907 $295,340,856 $112,828,188 $18,614,410 $93,790,813
============ ============ ============ =========== ===========
- --------------------------------------------------------------------------------------------------------------------------
Flexibly Small Emerging
Value Equity Managed International Capitalization Growth
Fund+ Fund+ Equity Fund+ Fund+ Fund+
-------------- --------------- --------------- --------------- ---------------
Investment Income:
Dividends $ - $ - $ - $ - $ -
Expense:
Mortality and expense risk charges ... 2,477,020 3,924,484 1,129,230 223,952 570,399
------------ ------------ ------------ ----------- -----------
Net investment income (loss) ......... (2,477,020) (3,924,484) (1,129,230) (223,952) (570,399)
------------ ------------ ------------ ----------- -----------
Realized and Unrealized Gains
(Losses) on Investments:
Realized gains (losses) from
redemption of fund shares ....... 889,798 757,206 1,418,907 (209,337) 62,845
Capital gains distributions .......... - - - - -
------------ ------------ ------------ ----------- -----------
Net realized gains (losses)
from investment transactions .... 889,798 757,206 1,418,907 (209,337) 62,845
Net change in unrealized
appreciation/depreciation
of investments .................. (2,352,948) 20,809,174 34,686,729 (80,199) 50,119,776
------------ ------------ ------------ ----------- -----------
Net realized and unrealized
gains (losses) on investments ... (1,463,150) 21,566,380 36,105,636 (289,536) 50,182,621
------------ ------------ ------------ ----------- -----------
Net increase (decrease) in net
assets resulting from
operations ...................... $(3,940,170) $ 17,641,896 $ 34,976,406 $ (513,488) $ 49,612,222
============ ============ ============ =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
B-19
<PAGE>
PENN MUTUAL VARIABLE ANNUITY ACCOUNT III
STATEMENT OF ASSETS AND LIABILITIES - DECEMBER 31, 1999 (CONT'D)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Limited
Balanced Maturity Bond Partners
Portfolio++ Portfolio++ Portfolio++
------------ ------------ ------------
<S> <C> <C> <C>
Investment in Common Stock
Number of Shares .................................. 1,523,587 491,386 1,335,442
Cost .............................................. $ 23,474,293 $ 6,965,240 $ 26,216,021
Assets:
Investments at market value ....................... $ 31,827,712 $ 6,505,950 $ 26,228,078
Dividends receivable ............................. -- -- --
Liabilities:
Due to(from) the Penn Mutual Life Insurance Company 22,432 3,587 13,410
------------ ------------ ------------
Net Assets ........................................ $ 31,805,280 $ 6,502,363 $ 26,214,668
============ ============ ============
</TABLE>
- --------------------------------------------------------------------------------
PENN MUTUAL VARIABLE ANNUITY ACCOUNT III
STATEMENT OF OPERATIONS - FOR THE YEAR ENDED DECEMBER 31, 1999 (CONT'D.)
<TABLE>
<CAPTION>
Limited
Balanced Maturity Bond Partners
Portfolio++ Portfolio++ Portfolio++
------------ ------------ ------------
<S> <C> <C> <C>
Investment Income:
Dividends ........................................ $ 429,804 $ 348,661 $ 268,107
Expense:
Mortality and expense risk charges ............... 337,705 83,191 301,943
------------ ------------ ------------
Net investment income (loss) ..................... 92,099 265,470 (33,836
------------ ------------ ------------
Realized and Unrealized Gains (Losses) on
Investments:
Realized gains (losses) from redemption of fund
shares ...................................... 243,656 4,918 (80,300
Capital gains distributions ...................... 636,748 -- 466,273
------------ ------------ ------------
Net realized gains (losses) from investment
transactions ................................ 880,404 4,918 385,973
Net change in unrealized appreciation/depreciation
of investments .............................. 6,821,258 (251,365) 882,040
------------ ------------ ------------
Net realized and unrealized gains (losses) on
investments ................................. 7,701,662 (246,447) 1,268,013
------------ ------------ ------------
Net increase (decrease) in net assets resulting
from operations ............................. $ 7,793,761 $ 19,023 $ 1,234,177
============ ============ ============
</TABLE>
<PAGE>
[RESTUBBED]
PENN MUTUAL VARIABLE ANNUITY ACCOUNT III
STATEMENT OF ASSETS AND LIABILITIES - DECEMBER 31, 1999 (CONT'D)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Capital
Appreciation Equity Income Growth
Portfolio+++ Portfolio++++ Portfolio++++
------------ ------------- -------------
<S> <C> <C> <C>
Investment in Common Stock
Number of Shares .................................. 1,230,995 3,122,147 3,059,029
Cost .............................................. $ 11,489,792 $ 65,554,119 $110,317,173
Assets:
Investments at market value ....................... $ 18,267,967 $ 80,270,405 $168,032,483
Dividends receivable ............................. -- -- --
Liabilities:
Due to(from) the Penn Mutual Life Insurance Company 13,379 42,636 104,303
------------ ------------ ------------
Net Assets ........................................ $ 18,254,588 $ 80,227,769 $167,928,180
============ ============ ============
</TABLE>
- --------------------------------------------------------------------------------
PENN MUTUAL VARIABLE ANNUITY ACCOUNT III
STATEMENT OF OPERATIONS - FOR THE YEAR ENDED DECEMBER 31, 1999 (CONT'D.)
<TABLE>
<CAPTION>
Capital
Appreciation Equity Income Growth
Portfolio+++ Portfolio++++ Portfolio++++
------------ ------------- -------------
<S> <C> <C> <C>
Investment Income:
Dividends ........................................ $ -- $ 1,074,391 $ 163,364
Expense:
Mortality and expense risk charges ............... 182,384 965,521 1,612,474
------------ ------------ ------------
Net investment income (loss) ..................... (182,384) 108,870 (1,449,110)
------------ ------------ ------------
Realized and Unrealized Gains (Losses) on
Investments:
Realized gains (losses) from redemption of fund
shares ...................................... 240,140 (44,049) 87,967
Capital gains distributions ...................... -- 2,374,969 10,271,514
------------ ------------ ------------
Net realized gains (losses) from investment
transactions ................................ 240,140 2,330,920 10,359,481
Net change in unrealized appreciation/depreciation
of investments .............................. 7,212,430 977,298 31,824,227
------------ ------------ ------------
Net realized and unrealized gains (losses) on
investments ................................. 7,452,570 3,308,218 42,183,708
------------ ------------ ------------
Net increase (decrease) in net assets resulting
from operations ............................. $ 7,270,186 $ 3,417,088 $ 40,734,598
============ ============ ============
</TABLE>
<PAGE>
[RESTUBBED]
PENN MUTUAL VARIABLE ANNUITY ACCOUNT III
STATEMENT OF ASSETS AND LIABILITIES - DECEMBER 31, 1999 (CONT'D)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Emerging
Asset Manager Index 500 Markets Equity
Portfolio++++ Portfolio++++ Portfolio+++++
------------- ------------- --------------
<S> <C> <C> <C>
Investment in Common Stock
Number of Shares .................................. 1,360,596 552,959 656,819
Cost .............................................. $ 22,601,629 $ 74,984,601 $ 6,646,444
Assets:
Investments at market value ....................... $ 25,402,339 $ 92,570,771 $ 9,136,347
Dividends receivable ............................. -- -- --
Liabilities:
Due to(from) the Penn Mutual Life Insurance Company 14,342 55,672 6,135
------------ ------------ ------------
Net Assets ........................................ $ 25,387,997 $ 92,515,099 $ 9,130,212
============ ============ ============
</TABLE>
- --------------------------------------------------------------------------------
PENN MUTUAL VARIABLE ANNUITY ACCOUNT III
STATEMENT OF OPERATIONS - FOR THE YEAR ENDED DECEMBER 31, 1999 (CONT'D.)
<TABLE>
<CAPTION>
Emerging
Asset Manager Index 500 Markets Equity
Portfolio++++ Portfolio++++ Portfolio+++++
------------- ------------- --------------
<S> <C> <C> <C>
Investment Income:
Dividends ........................................ $ 485,862 $ 396,849 $ 1,007
Expense:
Mortality and expense risk charges ............... 271,581 839,364 64,702
------------ ------------ ------------
Net investment income (loss) ..................... 214,281 (442,515) (63,695)
------------ ------------ ------------
Realized and Unrealized Gains (Losses) on
Investments:
Realized gains (losses) from redemption of fund
shares ...................................... (63,119) (42,703) 109,924
Capital gains distributions ...................... 615,425 269,291 --
------------ ------------ ------------
Net realized gains (losses) from investment
transactions ................................ 552,306 226,588 109,924
Net change in unrealized appreciation/depreciation
of investments .............................. 1,327,645 12,114,229 3,768,983
------------ ------------ ------------
Net realized and unrealized gains (losses) on
investments ................................. 1,879,951 12,340,817 3,878,907
------------ ------------ ------------
Net increase (decrease) in net assets resulting
from operations ............................. $ 2,094,232 $ 11,898,302 $ 3,815,212
============ ============ ============
</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-20
<PAGE>
<TABLE>
<CAPTION>
PENN MUTUAL VARIABLE ANNUITY ACCOUNT III
STATEMENTS OF CHANGES IN NET ASSETS - FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
Total Money Market Fund+
-------------------------------------------- ---------------------------------------
1999 1998 1999 1998
-------------------- --------------------- ------------------- ------------------
Operations:
<S> <C> <C> <C> <C>
Net investment income (loss) .......... ($12,021,272) $7,745,242 $1,228,846 $863,429
Net realized gains (losses) from
investment transactions .......... 18,656,424 91,124,673 - -
Net change in unrealized
appreciation/ depreciation
of investments ................... 225,948,976 31,850,409 - -
-------------------- --------------------- ------------------- ------------------
Net increase (decrease) in net assets
resulting from operations ........ 232,584,128 130,720,324 1,228,846 863,429
-------------------- --------------------- ------------------- ------------------
Variable Annuity Activities:
Purchase payments ..................... 574,203,492 300,859,955 121,832,838 43,970,396
Surrender benefits .................... (118,977,195) (86,895,748) (11,197,551) (6,521,246)
Net Transfers ......................... (385,402,907) (144,859,060) (96,586,146) (30,458,666)
Death Benefits ........................ (5,743,417) (5,130,027) (220,239) (146,334)
Contract administration charges ....... (1,019,724) (960,359) (18,923) (15,517)
Deferred sales charges ................ (1,712,520) (1,159,997) (185,645) (62,744)
Annuity benefits ...................... (9,193,907) (6,283,330) (494,203) (158,174)
-------------------- --------------------- ------------------- ------------------
Net increase in net assets resulting
from variable annuity activities ...... 52,153,822 55,571,434 13,130,131 6,607,715
-------------------- --------------------- ------------------- ------------------
Total increase (decrease)
in net assets .................... 284,737,950 186,291,758 14,358,977 7,471,144
Net Assets:
Beginning of year ........................ 1,223,313,641 1,037,021,883 29,367,421 21,896,277
-------------------- --------------------- ------------------- ------------------
End of year .............................. $1,508,051,591 $1,223,313,641 $43,726,398 $29,367,421
==================== ===================== =================== ==================
High Yield Bond Fund+ Growth Equity Fund+
-------------------------------------------- ---------------------------------------
1999 1998 1999 1998
-------------------- --------------------- ------------------- ------------------
Operations:
Net investment income (loss) .......... ($582,283) $3,015,764 ($2,379,763) ($1,642,786)
Net realized gains (losses) from
investment transactions .......... 124,263 (3,290) 530,746 17,312,420
Net change in unrealized
appreciation/ depreciation
of investments ................... 1,804,756 (1,514,889) 56,280,956 29,742,092
-------------------- --------------------- ------------------- ------------------
Net increase (decrease) in net assets
resulting from operations ........ 1,346,736 1,497,585 54,431,939 45,411,726
-------------------- --------------------- ------------------- ------------------
Variable Annuity Activities:
Purchase payments ..................... 12,170,588 11,805,678 45,856,043 19,386,206
Surrender benefits .................... (3,539,725) (3,764,322) (17,409,478) (11,279,745)
Net Transfers ......................... (10,743,367) (5,718,830) (19,004,434) (8,257,183)
Death Benefits ........................ (92,686) (216,584) (370,498) (520,878)
Contract administration charges ....... (31,629) (33,874) (129,646) (117,047)
Deferred sales charges ................ (45,494) (42,634) (156,475) (106,395)
Annuity benefits ...................... (521,630) (451,818) (745,465) (410,717)
-------------------- --------------------- ------------------- ------------------
Net increase in net assets resulting
from variable annuity activities ...... (2,803,943) 1,577,616 8,040,047 (1,305,759)
-------------------- --------------------- ------------------- ------------------
Total increase (decrease)
in net assets .................... (1,457,207) 3,075,201 62,471,986 44,105,967
Net Assets:
Beginning of year ........................ 45,318,345 42,243,144 160,264,501 116,158,534
-------------------- --------------------- ------------------- ------------------
End of year .............................. $43,861,138 $45,318,345 $222,736,487 $160,264,501
==================== ===================== =================== ==================
==========================================
+ 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.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
[RESTUBBED]
Quality Bond Fund+ Flexibly Managed Fund+
--------------------------------------- -----------------------------------------
1999 1998 1999 1998
------------------- ------------------ ------------------- -------------------
Operations:
<S> <C> <C> <C> <C>
Net investment income (loss) .......... ($472,167) $1,240,623 ($3,924,484) $5,296,053
Net realized gains (losses) from
investment transactions .......... (8,658) 1,083,848 757,206 34,924,818
Net change in unrealized
appreciation/ depreciation
of investments ................... 3,987 469,323 20,809,174 (24,572,191)
------------------- ------------------ ------------------- -------------------
Net increase (decrease) in net assets
resulting from operations ........ (476,838) 2,793,794 17,641,896 15,648,680
------------------- ------------------ ------------------- -------------------
Variable Annuity Activities:
Purchase payments ..................... 12,756,541 12,828,873 36,447,765 51,119,838
Surrender benefits .................... (3,355,904) (2,749,714) (28,871,142) (24,701,353)
Net Transfers ......................... (6,819,329) (5,801,159) (64,501,255) (33,470,654)
Death Benefits ........................ (320,089) (323,546) (1,848,244) (1,865,231)
Contract administration charges ....... (24,084) (23,415) (265,216) (297,618)
Deferred sales charges ................ (45,635) (40,919) (403,427) (314,220)
Annuity benefits ...................... (464,887) (310,029) (2,777,506) (2,389,329)
------------------- ------------------ ------------------- -------------------
Net increase in net assets resulting
from variable annuity activities ...... 1,726,613 3,580,091 (62,219,025) (11,918,567)
------------------- ------------------ ------------------- -------------------
Total increase (decrease)
in net assets .................... 1,249,775 6,373,885 (44,577,129) 3,730,113
Net Assets:
Beginning of year ........................ 36,716,463 30,342,578 339,917,985 336,187,872
------------------- ------------------ ------------------- -------------------
End of year .............................. $37,966,238 $36,716,463 $295,340,856 $339,917,985
=================== ================== =================== ===================
Value Equity Fund+ Emerging Growth Fund+
--------------------------------------- ------------------------------------------
1999 1998 1999 1998
------------------- ------------------ ------------------- -------------------
Operations:
Net investment income (loss) .......... ($2,477,020) ($35,478) ($570,399) ($115,686)
Net realized gains (losses) from
investment transactions .......... 889,798 17,469,266 62,845 (18,156)
Net change in unrealized
appreciation/ depreciation
of investments ................... (2,352,948) (1,405,794) 50,119,776 2,702,071
------------------- ------------------ ------------------- -------------------
Net increase (decrease) in net assets
resulting from operations ........ (3,940,170) 16,027,994 49,612,222 2,568,229
------------------- ------------------ ------------------- -------------------
Variable Annuity Activities:
Purchase payments ..................... 26,170,266 31,610,352 43,166,695 9,803,496
Surrender benefits .................... (18,289,385) (16,621,269) (2,242,458) (303,992)
Net Transfers ......................... (37,271,848) (17,458,000) (10,898,712) (1,828,444)
Death Benefits ........................ (894,529) (864,575) (107,642) (8,772)
Contract administration charges ....... (148,072) (161,845) (25,721) (7,172)
Deferred sales charges ................ (213,107) (185,128) (64,122) (6,090)
Annuity benefits ...................... (1,269,558) (1,052,517) (103,794) (17,597)
------------------- ------------------ ------------------- -------------------
Net increase in net assets resulting
from variable annuity activities ...... (31,916,233) (4,732,982) 29,724,246 7,631,429
------------------- ------------------ ------------------- -------------------
Total increase (decrease)
in net assets .................... (35,856,403) 11,295,012 79,336,468 10,199,658
Net Assets:
Beginning of year ........................ 217,077,310 205,782,298 14,454,345 4,254,687
------------------- ------------------ ------------------- -------------------
End of year .............................. $181,220,907 $217,077,310 $93,790,813 $14,454,345
=================== ================== =================== ===================
==========================================
+ 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.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
[RESTUBBED]
Small
International Equity Fund+ Capitalization Fund +
--------------------------------------- --------------------------------------
1999 1998 1999 1998
------------------- ----------------- ----------------- ------------------
Operations:
<S> <C> <C> <C> <C>
Net investment income (loss) .......... ($1,129,230) ($252,490) ($223,952) ($113,975)
Net realized gains (losses) from
investment transactions .......... 1,418,907 3,185,505 (209,337) 233,245
Net change in unrealized
appreciation/ depreciation
of investments ................... 34,686,729 9,485,903 (80,199) (2,387,287)
------------------- ----------------- ----------------- ------------------
Net increase (decrease) in net assets
resulting from operations ........ 34,976,406 12,418,918 (513,488) (2,268,017)
------------------- ----------------- ----------------- ------------------
Variable Annuity Activities:
Purchase payments ..................... 51,502,135 10,523,913 6,536,071 7,163,274
Surrender benefits .................... (6,872,196) (5,911,352) (1,191,638) (1,305,281)
Net Transfers ......................... (47,349,992) (10,270,675) (4,851,905) (2,355,711)
Death Benefits ........................ (327,860) (272,835) (49,326) (46,045)
Contract administration charges ....... (70,048) (73,241) (17,181) (17,860)
Deferred sales charges ................ (100,631) (92,237) (26,858) (24,968)
Annuity benefits ...................... (431,841) (309,264) (86,613) (51,104)
------------------- ----------------- ----------------- ------------------
Net increase in net assets resulting
from variable annuity activities ...... (3,650,433) (6,405,691) 312,550 3,362,305
------------------- ----------------- ----------------- ------------------
Total increase (decrease)
in net assets .................... 31,325,973 6,013,227 (200,938) 1,094,288
Net Assets:
Beginning of year ........................ 81,502,215 75,488,988 18,815,348 17,721,060
------------------- ----------------- ----------------- ------------------
End of year .............................. $112,828,188 $81,502,215 $18,614,410 $18,815,348
=================== ================= ================= ==================
Limited Maturity
Balanced Portfolio++ Bond Portfolio++
--------------------------------------- --------------------------------------
1999 1998 1999 1998
------------------- ----------------- ----------------- ------------------
Operations:
Net investment income (loss) .......... $92,099 $234,654 $265,470 $267,463
Net realized gains (losses) from
investment transactions .......... 880,404 3,711,455 $4,918 4,432
Net change in unrealized
appreciation/ depreciation
of investments ................... 6,821,258 (1,522,453) (251,365) (90,968)
------------------- ----------------- ----------------- ------------------
Net increase (decrease) in net assets
resulting from operations ........ 7,793,761 2,423,656 19,023 180,927
------------------- ----------------- ----------------- ------------------
Variable Annuity Activities:
Purchase payments ..................... 4,661,798 4,708,127 13,051,511 2,811,758
Surrender benefits .................... (1,972,767) (1,459,064) (1,963,467) (579,485)
Net Transfers ......................... (3,913,423) (2,543,550) (10,599,182) (1,594,229)
Death Benefits ........................ (163,231) (90,973) (153,870) (37,669)
Contract administration charges ....... (19,388) (20,547) (4,309) (4,237)
Deferred sales charges ................ (37,246) (33,142) (21,946) (8,272)
Annuity benefits ...................... (183,276) (145,035) (97,230) (58,661)
------------------- ----------------- ----------------- ------------------
Net increase in net assets resulting
from variable annuity activities ...... (1,627,533) 415,816 211,507 529,205
------------------- ----------------- ----------------- ------------------
Total increase (decrease)
in net assets .................... 6,166,228 2,839,472 230,530 710,132
Net Assets:
Beginning of year ........................ 25,639,052 22,799,580 6,271,833 5,561,701
------------------- ----------------- ----------------- ------------------
End of year .............................. $31,805,280 $25,639,052 $6,502,363 $6,271,833
=================== ================= ================= ==================
==========================================
+ 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.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
[RESTUBBED]
Partners
Portfolio++
---------------------------------------
1998 1998
------------------ ------------------
Operations:
<S> <C> <C>
Net investment income (loss) .......... ($33,836) ($159,944)
Net realized gains (losses) from
investment transactions .......... 385,973 1,314,554
Net change in unrealized
appreciation/ depreciation
of investments ................... 882,040 (1,132,139)
------------------ ------------------
Net increase (decrease) in net assets
resulting from operations ........ 1,234,177 22,471
------------------ ------------------
Variable Annuity Activities:
Purchase payments ..................... 10,660,075 16,825,601
Surrender benefits .................... (1,352,491) (636,970)
Net Transfers ......................... (6,059,956) (2,421,858)
Death Benefits ........................ (87,737) (37,624)
Contract administration charges ....... (18,477) (10,943)
Deferred sales charges ................ (28,727) (10,334)
Annuity benefits ...................... (62,682) (58,006)
------------------ ------------------
Net increase in net assets resulting
from variable annuity activities ...... 3,050,005 13,649,866
------------------ ------------------
Total increase (decrease)
in net assets .................... 4,284,182 13,672,337
Net Assets:
Beginning of year ........................ 21,930,486 8,258,149
------------------ ------------------
End of year .............................. $26,214,668 $21,930,486
================== ==================
Growth
Portfolio++++
------------------ ------------------
1998 1998
------------------ ------------------
Operations:
Net investment income (loss) .......... ($1,449,110) ($599,120)
Net realized gains (losses) from
investment transactions .......... 10,359,481 7,095,378
Net change in unrealized
appreciation/ depreciation
of investments ................... 31,824,227 15,492,226
------------------ ------------------
Net increase (decrease) in net assets
resulting from operations ........ 40,734,598 21,988,484
------------------ ------------------
Variable Annuity Activities:
Purchase payments ..................... 76,915,718 23,254,838
Surrender benefits .................... (8,149,247) (4,004,288)
Net Transfers ......................... (27,789,707) (6,920,426)
Death Benefits ........................ (444,998) (261,573)
Contract administration charges ....... (101,515) (71,268)
Deferred sales charges ................ (155,211) (99,279)
Annuity benefits ...................... (624,908) (245,272)
------------------ ------------------
Net increase in net assets resulting
from variable annuity activities ...... 39,650,132 11,652,732
------------------ ------------------
Total increase (decrease)
in net assets .................... 80,384,730 33,641,216
Net Assets:
Beginning of year ........................ 87,543,450 53,902,234
------------------ ------------------
End of year .............................. $167,928,180 $87,543,450
================== ==================
==========================================
+ Investment in Penn Series Funds, Inc.
++ Investment in Neuberger Berman Advisers Management Trust
+++ Investment in American Century Variable Portfolios, Inc.
++++ Investment in Fidelity Investments' Variable Insurance Products Funds I and II
+++++ Investment in Morgan Stanley Dean Witter Universal Funds, Inc.
</TABLE>
<PAGE>
PENN MUTUAL VARIABLE ANNUITY ACCOUNT III
STATEMENTS OF CHANGES IN NET ASSETS - FOR THE YEARS ENDED DECEMBER 31, 1999 AND
1998 (CONT'D.)
<TABLE>
<CAPTION>
Capital Appreciation Equity Income
Portfolio+++ Portfolio++++
---------------------------- ----------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Operations:
Net investment income (loss) ........... ($ 182,384) ($ 200,676) $ 108,870 ($ 19,238)
Net realized gains (losses) from
investment transactions ........... 240,140 890,697 2,330,920 2,808,808
Net change in unrealized appreciation/
depreciation of investments ....... 7,212,430 (1,315,911) 977,298 3,216,502
------------ ------------ ------------ ------------
Net increase (decrease) in net assets
resulting from operations ......... 7,270,186 (625,890) 3,417,088 6,006,072
------------ ------------ ------------ ------------
Variable Annuity Activities:
Purchase payments ...................... 2,923,082 1,967,452 22,934,408 19,104,376
Surrender benefits ..................... (1,533,308) (1,284,123) (6,015,583) (4,228,476)
Net Transfers .......................... (4,358,209) (5,680,990) (10,733,426) (5,399,857)
Death Benefits ......................... (102,465) (24,305) (270,605) (297,915)
Contract administration charges ........ (16,308) (20,497) (61,920) (55,951)
Deferred sales charges ................. (30,459) (31,644) (110,931) (72,716)
Annuity benefits ....................... (44,249) (41,725) (624,431) (427,304)
------------ ------------ ------------ ------------
Net increase in net assets resulting
from variable annuity activities ....... (3,161,916) (5,115,832) 5,117,512 8,622,157
------------ ------------ ------------ ------------
Total increase (decrease) in net assets 4,108,270 (5,741,722) 8,534,600 14,628,229
Net Assets:
Beginning of year ......................... 14,146,318 19,888,040 71,693,169 57,064,940
------------ ------------ ------------ ------------
End of year ............................... $ 18,254,588 $ 14,146,318 $ 80,227,769 $ 71,693,169
============ ============ ============ ============
</TABLE>
[TABLE RESTUBBED]
<TABLE>
<CAPTION>
Emerging Markets
Portfolio+++++
----------------------------
1999 1998
------------ ------------
<S> <C> <C>
Operations:
Net investment income (loss) ........... ($ 63,695) ($ 15,078)
Net realized gains (losses) from
investment transactions ........... 109,924 (5,906)
Net change in unrealized appreciation/
depreciation of investments ....... 3,768,983 (739,423)
------------ ------------
Net increase (decrease) in net assets
resulting from operations ......... 3,815,212 (760,407)
------------ ------------
Variable Annuity Activities:
Purchase payments ...................... 13,056,491 1,809,338
Surrender benefits ..................... (425,250) (68,993)
Net Transfers .......................... (10,018,072) (465,249)
Death Benefits ......................... (360) (20)
Contract administration charges ........ (4,512) (2,619)
Deferred sales charges ................. (8,889) (1,973)
Annuity benefits ....................... (15,449) (4,738)
------------ ------------
Net increase in net assets resulting
from variable annuity activities ....... 2,583,959 1,265,746
------------ ------------
Total increase (decrease) in net assets 6,399,171 505,339
Net Assets:
Beginning of year ......................... 2,731,041 2,225,702
------------ ------------
End of year ............................... $ 9,130,212 $ 2,731,041
============ ============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Asset Manager Index 500
Portfolio++++ Portfolio++++
---------------------------- ----------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Operations:
Net investment income (loss) ........... $ 214,281 $ 143,729 ($ 442,515) ($ 162,002)
Net realized gains (losses) from
investment transactions ........... 552,306 835,643 226,588 281,956
Net change in unrealized appreciation/
depreciation of investments ....... 1,327,645 416,857 12,114,229 5,006,490
------------ ------------ ------------ ------------
Net increase (decrease) in net assets
resulting from operations ......... 2,094,232 1,396,229 11,898,302 5,126,444
------------ ------------ ------------ ------------
Variable Annuity Activities:
Purchase payments ...................... 15,081,833 5,224,201 58,479,634 26,942,238
Surrender benefits ..................... (1,169,535) (557,255) (3,426,070) (918,820)
Net Transfers .......................... (3,970,374) (891,784) (9,933,570) (3,321,795)
Death Benefits ......................... (13,421) (46,723) (275,617) (68,425)
Contract administration charges ........ (14,367) (10,316) (48,408) (16,392)
Deferred sales charges ................. (16,481) (13,295) (61,236) (14,007)
Annuity benefits ....................... (301,534) (92,217) (344,651) (59,823)
------------ ------------ ------------ ------------
Net increase in net assets resulting
from variable annuity activities ....... 9,596,121 3,612,611 44,390,082 22,542,976
------------ ------------ ------------ ------------
Total increase (decrease) in net assets 11,690,353 5,008,840 56,288,384 27,669,420
Net Assets:
Beginning of year ......................... 13,697,644 8,688,804 36,226,715 8,557,295
------------ ------------ ------------ ------------
End of year ............................... $ 25,387,997 $ 13,697,644 $ 92,515,099 $ 36,226,715
============ ============ ============ ============
</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.
B-21
<PAGE>
PENN MUTUAL VARIABLE ANNUITY ACCOUNT III
- --------------------------------------------------------------------------------
Notes to Financial Statements
December 31, 1999
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, 1999 and the reported amounts from
operations and contract transactions during 1999 and 1998. Actual results could
differ from those estimates.
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-22
<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,
1999:
Purchases Sales
--------- -----
Money Market Fund ................................ $93,075,237 $78,935,799
Quality Bond Fund ................................ 9,065,818 7,802,883
High Yield Bond Fund ............................. 7,362,642 10,741,430
Growth Equity Fund ............................... 26,374,757 20,633,519
Value Equity Fund ................................ 6,687,202 41,064,418
Flexibly Managed Fund ............................ 9,271,795 75,378,500
Small Capitalization Fund ........................ 3,855,827 3,763,109
International Equity Fund ........................ 41,048,208 45,784,642
Emerging Growth Fund ............................. 34,912,414 5,698,064
Limited Maturity Bond Portfolio .................. 12,895,202 12,416,743
Balanced Portfolio ............................... 3,892,676 4,778,473
Partners Portfolio ............................... 7,746,775 4,258,908
Capital Appreciation Portfolio ................... 1,261,520 4,598,331
Equity Income Portfolio .......................... 16,989,451 9,373,391
Growth Portfolio ................................. 70,264,693 21,721,619
Asset Manager Portfolio .......................... 17,243,893 6,808,640
Index 500 Portfolio .............................. 48,656,560 4,397,908
Emerging Markets Equity Portfolio ................ 11,920,803 9,395,423
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 of 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-23
<PAGE>
Note 4. Unit Values
As of December 31, 1999, the accumulation units and accumulation unit
values are as follows:
Variable Annuity Contracts: Accumulation Accumulation
Units Unit Value
------------ ------------
Money Market Fund
Commander 15,304 $10.39
Diversifier II 1,669,670 $20.95
Pennant Select 826,316 $10.32
Quality Bond Fund
Commander 28,113 $9.87
Diversifier II 1,612,651 $21.77
Pennant Select 261,461 $9.88
High Yield Bond Fund
Commander 21,145 $10.26
Diversifier II 1,176,269 $35.67
Pennant Select 164,772 $10.26
Growth Equity Fund
Commander 25,504 $13.26
Diversifier II - Qualified 1,772,202 $89.41
Diversifier II - 665,530 $88.68
Pennant Select 371,063 $13.27
Value Equity Fund
Commander 22,230 $9.82
Diversifier II 4,407,110 $40.33
Pennant Select 332,695 $9.82
Flexibly Managed Fund
Commander 39,752 $10.55
Diversifier II 4,634,490 $62.40
Pennant Select 544,267 $10.55
Small Capitalization Fund
Commander 1,759 $9.75
Diversifier II 1,249,298 $14.03
Pennant Select 109,420 $9.75
International Equity Fund
Commander 45,321 $14.08
Diversifier II 3,579,323 $30.68
Emerging Growth Fund
Commander 26,453 $28.36
Diversifier II 1,645,175 $52.08
Pennant Select 259,172 $28.37
<PAGE>
Variable Annuity Contracts: Accumulation Accumulation
Units Unit Value
------------ ------------
Limited Maturity Bond Portfolio
Commander 4,391 $10.02
Diversifier II 473,183 $12.34
Pennant Select 61,833 $10.02
Balanced Portfolio
Commander 1,560 $13.28
Diversifier II 1,348,416 $22.72
Pennant Select 86,030 $13.29
Partners Portfolio
Commander 25,519 $10.60
Diversifier II 1,787,163 $13.54
Pennant Select 163,977 $10.61
Capital Appreciation Portfolio
Diversifier II 916,231 $19.92
Equity Income Portfolio
Commander 88,377 $10.53
Diversifier II 3,820,785 $19.70
Pennant Select 381,000 $10.53
Growth Portfolio
Commander 60,951 $13.55
Diversifier II 4,955,849 $31.92
Pennant Select 656,284 $13.56
Asset Manager Portfolio
Commander 14,010 $10.97
Diversifier II 1,290,362 $18.75
Pennant Select 94,897 $10.98
Index 500 Portfolio
Commander 72,842 $11.91
Diversifier II 4,389,976 $18.34
Pennant Select 933,121 $11.91
Emerging Markets Equity
Commander 572 $18.91
Diversifier II 649,652 $13.00
Pennant Select 35,779 $18.92
B-24
<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, 1999, and the related statement of
operations for the year then ended and statements of changes in net assets for
each of the two years in the period then ended. The 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 audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatements. 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, 1999, 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
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of each of the respective
portfolios constituting the Penn Mutual Variable Annuity Account III at December
31, 1999, the results of their operations for the year then ended and the
changes in their net assets for each of the two years in the period then ended,
in conformity with accounting principles generally accepted in the United
States.
/s/ Ernst & Young LLP
Philadelphia, Pennsylvania
April 4, 2000
B-25
<PAGE>
The Penn Mutual Life Insurance Company and Subsidiaries
Consolidated Balance Sheets
================================================================================
As of December 31, 1999 1998
- --------------------------------------------------------------------------------
(in thousands)
ASSETS
Debt securities, at fair value $ 4,733,261 $ 5,500,924
Equity securities, at fair value 3,949 4,161
Mortgage loans on real estate 27,115 38,828
Real estate, net of accumulated depreciation 15,461 15,791
Policy loans 642,420 638,376
Short-term investments 6,934 1,024
Other invested assets 137,766 98,571
------------ ------------
Total investments 5,566,906 6,297,675
Cash and cash equivalents 37,481 24,468
Investment income due and accrued 89,254 104,208
Deferred acquisition costs 549,573 399,742
Amounts recoverable from reinsurers 220,847 69,583
Broker/dealer receivables 1,143,702 793,522
Other assets 109,818 94,179
Separate account assets 2,865,366 2,302,937
------------ ------------
Total Assets $ 10,582,947 $10,086,314
============ ============
LIABILITIES
Reserves for payment of future policy benefits $ 2,735,609 $ 2,761,319
Other policyholder funds 2,710,589 2,835,081
Policyholders' dividends payable 28,770 30,532
Broker/dealer payables 646,479 488,783
Accrued income tax payable 31,919 142,634
Other liabilities 573,909 383,744
Separate account liabilities 2,865,366 2,302,937
------------ ------------
Total Liabilities 9,592,641 8,945,030
------------ ------------
EQUITY
Retained earnings 1,023,704 944,145
Accumulated other comprehensive income/(loss) -
unrealized gains/(losses) (33,398) 197,139
------------ ------------
Total Equity 990,306 1,141,284
------------ ------------
Total Liabilities and Equity $ 10,582,947 $ 10,086,314
============ ============
The accompanying notes are an integral part of these financial statements.
B-26
<PAGE>
The Penn Mutual Life Insurance Company and Subsidiaries
Consolidated Income Statements
<TABLE>
<CAPTION>
For the Years Ended December 31, 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
REVENUES
Premium and annuity considerations $ 130,516 $ 154,615 $ 178,338
Policy fee income 131,709 114,681 102,398
Net investment income 431,222 433,530 448,135
Net realized capital gains/(losses) 803 3,912 9,655
Broker/dealer fees and commissions 395,483 331,285 290,005
Other income 24,895 15,543 10,920
----------- ----------- -----------
Total Revenue 1,114,628 1,053,566 1,039,451
----------- ----------- -----------
BENEFITS AND EXPENSES
Benefits paid to policyholders and beneficiaries 429,791 445,148 463,444
Policyholder dividends 56,603 61,369 67,412
Decrease in liability for future policy benefits (54,080) (23,337) (10,275)
General expenses 238,603 205,698 195,336
Broker/dealer sales expense 216,712 180,255 160,730
Amortization of deferred acquisition costs 52,668 42,223 43,223
----------- ----------- -----------
Total Benefits and Expenses 940,297 911,356 919,870
----------- ----------- -----------
Income from Continuing Operations Before Income Taxes 174,331 142,210 119,581
----------- ----------- -----------
Income taxes 66,324 57,019 51,323
----------- ----------- -----------
Income from Continuing Operations 108,007 85,191 68,258
----------- ----------- -----------
DISCONTINUED OPERATIONS
Income (loss) from operations of discontinued segment
(net of income taxes of $(2,137), $670 and $2,589) (3,968) 1,243 4,807
Loss on sale of discontinued operations (less
applicable income tax benefit of $13,181) (24,480) -- --
----------- ----------- -----------
NET INCOME $ 79,559 $ 86,434 $ 73,065
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
B-27
<PAGE>
The Penn Mutual Life Insurance Company and Subsidiaries
Consolidated Statements of Changes in Equity
<TABLE>
<CAPTION>
Other
Comprehensive Retained Total
Income/(Loss) Earnings Equity
- ---------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C>
Balance at January 1, 1997 $ 85,730 $ 784,646 $ 870,376
Comprehensive Income
Net income for 1997 -- 73,065 73,065
Other comprehensive loss, 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
Comprehensive Loss
Net income for 1999 -- 79,559 79,559
Other comprehensive loss, net of tax
Unrealized depreciation of securities,
net of reclassification adjustment (230,537) -- (230,537)
-----------
Comprehensive Loss (150,978)
----------- ----------- -----------
Balance at December 31, 1999 $ (33,398) $ 1,023,704 $ 990,306
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
B-28
<PAGE>
The Penn Mutual Life Insurance Company and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
For the Years Ended December 31, 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net income $ 79,559 $ 86,434 $ 73,065
Adjustments to reconcile net income to net cash provided by operations:
Capitalization of policy acquisition costs (78,644) (72,356) (64,427)
Amortization of deferred acquisition costs 52,668 42,223 43,223
Policy fees on universal life and investment contracts (80,456) (120,315) (104,342)
Interest credited on universal life and investment contracts 132,213 146,081 160,417
Depreciation and amortization 6,294 4,750 18,682
Premiums due and other receivables (16,794) (1,293) (7,291)
Net realized capital (gains)/losses (803) (3,912) (9,655)
Net realized loss on sale of discontinued operations 37,661 -- --
(Increase)/decrease in investment income due and accrued 14,954 (1,136) 60
(Increase) in amounts recoverable from reinsurers (18,419) (6,372) (4,329)
(Decrease) in reserves for payment of future policy benefits (25,710) (8,696) (13,358)
Increase/(decrease) in accrued income tax payable 13,222 25,622 (4,526)
Other, net 12,652 3,805 (6,693)
---------- ----------- -----------
Net cash provided by operating activities 128,397 94,835 80,826
---------- ----------- -----------
Cash Flows from Investing Activities
Sale of investments:
Debt securities available for sale 1,624,576 1,837,209 1,235,274
Equity securities 12,003 35,496 20,374
Real estate 853 9,937 87,875
Other 3,884 18,074 14,355
Maturity and other principal repayments:
Debt securities available for sale 415,888 496,283 472,474
Mortgage loans 17,596 2,357 61,813
Other 3,963 -- --
Cost of investments acquired:
Debt securities available for sale (1,752,394) (2,315,067) (1,772,007)
Equity securities (12,097) (26,390) (15,268)
Real estate (1,366) (293) (15,600)
Other (39,139) (17,917) (15,503)
Change in policy loans, net (4,044) 4,613 13,084
(Increase)/decrease in short-term investments, net (5,910) 42,446 (5,955)
Purchases of furniture and equipment, net (10,900) (9,446) (4,116)
Sale of discontinued operations (160,332) -- --
---------- ----------- -----------
Net cash provided by investing activities 92,581 77,302 76,800
---------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
B-29
<PAGE>
The Penn Mutual Life Insurance Company and Subsidiaries
Consolidated Statements of Cash Flows - Continued
<TABLE>
<CAPTION>
For the Years Ended December 31, 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
Cash Flows from Financing Activities
Deposits for universal life and investment contracts $ 605,568 $ 589,070 $ 653,233
Withdrawals from universal life and investment contracts (641,296) (605,821) (552,311)
Transfers to separate accounts (146,981) (147,708) (236,008)
Issuance/(repayment) of debt 167,228 90,772 24,842
(Increase)/decrease in net broker dealer receivables (192,484) (111,046) (47,632)
---------- ---------- ----------
Net cash used by financing activities (207,965) (184,733) (157,876)
---------- ---------- ----------
Net increase/(decrease) in cash and cash equivalents 13,013 (12,596) (250)
Cash and cash equivalents
Beginning of the year 24,468 37,064 37,314
---------- ---------- ----------
End of the year $ 37,481 $ 24,468 $ 37,064
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
B-30
<PAGE>
- --------------------------------------------------------------------------------
THE PENN MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For The Years Ended December 31, 1999, 1998 and 1997
(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 accompanying consolidated financial statements have been prepared in
conformity with accounting principles generally accepted in the United States
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, 1999, the Company adopted Statement of Position (SOP) 97-3,
"Accounting by Insurance and Other Enterprises for Insurance-Related
Assessments." SOP 97-3 provides guidance for determining when and how to measure
assets and liabilities associated with guaranty fund and other insurance related
assessments. The Company also adopted SOP 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use" which gives guidance
on accounting for the costs related to developing, obtaining, modifying and/or
implementing internal use software. The adoption of SOP 97-3 and SOP 98-1 did
not have a material effect on the Company's financial condition or results of
operations.
As of January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. (SFAS) 130, "Reporting Comprehensive Income." SFAS No. 130
established 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.
In June 1998, the FASB issued Statement of Financial Accounting Standards (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 earnings. In June 1999, the FASB issued
SFAS No. 137 which defers the effective date for implementation of SFAS No. 133
to fiscal years beginning after June 15, 2000. 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. Prepayment assumptions for loan-backed
and structured securities are obtained from broker dealer survey values or
internal estimates. These assumptions are
B-31
<PAGE>
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements, continued
(In Thousands of Dollars)
- --------------------------------------------------------------------------------
consistent with the current interest rate and economic environments. The
retrospective adjustment method is used to value all such 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.
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 $50,971 and $46,292 at December 31,
1999 and 1998,
B-32
<PAGE>
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements, continued
(In Thousands of Dollars)
- --------------------------------------------------------------------------------
respectively. Related depreciation and amortization expense was $8,441, $8,586
and $8,183 for the years ended December 31, 1999, 1998 and 1997, 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 included in other assets
amounted to $17,228 and $16,126 at December 31, 1999 and 1998, respectively.
Goodwill amortization was $1,008, $806 and $808 for 1999, 1998 and 1997,
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.
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
B-33
<PAGE>
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements, continued
(In Thousands of Dollars)
- --------------------------------------------------------------------------------
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, 1999, participating insurance expressed
as a percentage of insurance in force is 91%, and as a percentage of premium
income is 83%. 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,
1999.
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.
Reclassification
Certain 1998 and 1997 amounts have been reclassified to conform with 1999
presentation.
2. DISCONTINUED OPERATIONS:
During 1999, the Company decided to exit the Disability Income (DI) line of
business and entered into an indemnity reinsurance agreement with Christian
Mutual Life Insurance Company and ACE Bermuda Ltd. to cede all of its remaining
risk associated with this line. Under the agreement, effective July 1, 1999, the
Company agreed to transfer assets with a fair market value of $167,750 to
reinsure net liabilities of $139,889. The Company recognized a pretax loss of
$37,661 on this transaction, including costs of sale. Under the agreement, 95%
of the assets and liabilities were transferred to the reinsurer effective July
1, 1999. The remaining 5% of the related assets are being held in an escrow
account under the Company's control, pending approval of the transaction by the
State of New York. Accordingly,
B-34
<PAGE>
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements, continued
(In Thousands of Dollars)
- --------------------------------------------------------------------------------
reserves for payment of future policy benefits at December 31, 1999 include
$7,458 related to the remaining 5% of the DI business.
As this is a disposal of a segment of business, the Company has modified the
presentation in the accompanying income statements to separate the results of
operations attributable to this business. Revenue from discontinued operations
for the year ended December 31, 1999, 1998 and 1997 were $16,855, $28,854 and
$29,884, respectively.
The reinsurance agreement is secured for the Company by a collateralized trust
which names the Company as the beneficiary. As of December 31, 1999, the Company
had a reinsurance recoverable from Christian Mutual of $141,707 which was
secured by investment grade securities with a market value of $155,046 held in
trust.
3. 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
$8,703 and $3,056 as of December 31, 1999 and 1998, respectively.
<TABLE>
<CAPTION>
December 31, 1999
--------------------------------------------------------------
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 $ 10,527 $ 119 $ 178 $ 10,468
States and political subdivisions 11,600 -- 58 11,542
Foreign governments 19,854 758 -- 20,612
Corporate securities 2,678,302 69,875 116,357 2,631,820
Mortgage and other asset-backed securities 2,106,506 9,975 58,011 2,058,470
---------- ---------- ---------- ----------
Total bonds 4,826,789 80,727 174,604 4,732,912
Redeemable preferred stocks 360 -- 11 349
---------- ---------- ---------- ----------
Total $4,827,149 $ 80,727 $ 174,615 $4,733,261
========== ========== ========== ==========
December 31, 1998
--------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ---------- ---------- ----------
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-35
<PAGE>
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements, continued
(In Thousands of Dollars)
- --------------------------------------------------------------------------------
The following table summarizes the amortized cost and estimated fair value of
debt securities, including redeemable preferred stocks, as of December 31, 1999
by contractual maturity.
Amortized Estimated
Years to maturity: Cost Fair Value
---------- ----------
One or less $ 226,324 $ 215,589
After one through five 247,287 248,905
After five through ten 523,294 545,057
After ten 1,723,378 1,664,891
Mortgage and other asset-backed securities 2,106,506 2,058,470
---------- ----------
Total bonds 4,826,789 4,732,912
Redeemable preferred stocks 360 349
---------- ----------
Total $4,827,149 $4,733,261
========== ==========
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 7.5 years.
At December 31, 1999, the Company held $2,058,470 in mortgage and other
asset-backed securities. The structured securities portfolio consists of
commercial and residential mortgage pass-through holdings totaling $1,675,587
and securities backed by credit card receivables, auto loans, home equity and
manufactured housing loans totaling $382,883. These securities follow a
structured principal repayment schedule and are of high credit quality.
Securities totaling $1,412,879 are rated AAA and include $16,617 of
interest-only tranches . As of December 31, 1999 and 1998, the Company's
investments included $370,541 and $475,699, respectively, of the tranches
retained from the 1996 securitization of the Company's commercial mortgage loan
portfolio. These investments represented 37% and 42% of equity at December 31,
1999 and 1998, respectively.
At December 31, 1999, the largest industry concentration of the Company's
portfolio was investments in the finance industry of $506,017 representing 11%
of the total debt portfolio.
Proceeds during 1999, 1998 and 1997 from sales of available-for-sale securities
were $1,623,191, $1,931,269 and $1,353,112, respectively. Gross gains and gross
losses realized on those sales were $18,843 and $17,702, respectively, during
1999, $37,324 and $35,257, respectively, during 1998 and $21,799 and $8,990,
respectively, during 1997.
The Company's investment portfolio of debt securities is predominantly comprised
of investment grade securities. At December 31, 1999 and 1998, debt securities
with amortized cost totaling $218,351 and $192,724, respectively, were less than
investment grade. At December 31, 1999 and 1998, the Company held securities
with a carrying value of $0 and $9,170, respectively, which were to be
restructured pursuant to commenced negotiations. The Company did not hold any
debt securities which were non-income producing for the preceding twelve months
as of December 31, 1999 and 1998.
Equity Securities
During 1999, 1998 and 1997, the proceeds from sales of equity securities
amounted to $12,003, $35,496 and $20,374, respectively. The gross gains and
gross losses realized on those sales were $89 and $352, $3,095 and $239 and $975
and $239 for 1999, 1998 and 1997, respectively
B-36
<PAGE>
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements, continued
(In Thousands of Dollars)
- --------------------------------------------------------------------------------
Mortgage Loans
The following tables summarize the carrying value of mortgage loans, by property
type and geographic concentration, at December 31.
1999 1998
-------- --------
Property Type
Office building $ 1,366 $ 9,204
Retail 8,414 5,553
Dwellings 16,062 24,741
Other 2,773 3,130
Valuation Allowance (1,500) (3,800)
-------- -------
Total $27,115 $38,828
======== =======
1999 1998
-------- --------
Geographic Concentration
Northeast $ 5,506 $10,273
Midwest 5,515 5,728
South 11,612 12,075
West 5,982 14,552
Valuation Allowance (1,500) (3,800)
-------- -------
Total $27,115 $38,828
======== =======
The following table presents changes in the mortgage loan valuation allowance
for the years presented:
1999 1998
-------- --------
Balance at January 1 $ 3,800 $ 3,800
Reduction in provision (2,300) -
Charge-offs - -
-------- -------
Balance at December 31 $ 1,500 $ 3,800
======== =======
As of December 31, 1999 and 1998, 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 1999 and 1998, the Company did not restructure the terms of any
outstanding mortgages. As of December 31, 1999 and 1998, the mortgage loan
portfolio included $2,275 and $2,555, 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
$305 and $258 in 1999 and 1998, respectively. Gross interest income from these
loans included in net investment income totaled $211 and $236 in 1999 and 1998,
respectively.
B-37
<PAGE>
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements, continued
(In Thousands of Dollars)
- --------------------------------------------------------------------------------
At December 31, 1999 and 1998, no loans were considered to be impaired. The
Company had no investments in impaired loans during the year ended December 31,
1999. The average recorded investment in impaired loans during the year ended
December 31, 1998 was approximately $6,184. During 1998, $163 was received 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.
1999 1998
-------- --------
Investment $19,461 $19,111
Properties held for sale - 1,914
Less: Valuation allowance (4,000) (5,234)
-------- --------
Total $15,461 $15,791
======== ========
At December 31, 1999 and 1998, accumulated depreciation on real estate amounted
to $7,233 and $6,218, respectively. Depreciation expense on real estate totaled
$1,015, $1,071 and $5,709 for the years ended December 31, 1999, 1998 and 1997,
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.
Other
Investments on deposit with regulatory authorities as required by law were
$6,444 and $7,104 at December 31, 1999 and 1998, respectively.
4. INVESTMENT INCOME AND CAPITAL GAINS:
The following table summarizes the sources of investment income, excluding
investment gains/(losses), for the year ended December 31.
1999 1998 1997
--------- --------- ---------
Debt securities $ 385,963 $ 395,628 $ 390,852
Equity securities 311 206 1,371
Mortgage loans 2,706 4,268 12,098
Real estate 2,209 2,903 17,519
Policy loans 39,371 39,760 40,921
Short-term investments 830 2,032 2,428
Other invested assets 17,446 11,330 21,268
--------- --------- ---------
Gross investment income 448,836 456,127 486,457
Less: Investment expense 11,104 11,430 26,251
Less: Discontinued operations 6,510 11,167 12,071
--------- --------- ---------
Investment income, net $ 431,222 $ 433,530 $ 448,135
========= ========= =========
B-38
<PAGE>
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements, continued
(In Thousands of Dollars)
- --------------------------------------------------------------------------------
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 $1,066, $235 and $3,154 in 1999,
1998 and 1997, respectively.
1999 1998 1997
--------- -------- ---------
Debt securities $ (4,506) $ 110 $ 12,991
Equity securities (263) 2,856 417
Mortgage loans 2,300 210 280
Real estate 173 4,148 (684)
Other 2,430 (2,109) (811)
Amortization of deferred
acquisition costs 669 (1,303) (2,538)
--------- -------- ---------
Net realized capital
gains/(losses) $ 803 $ 3,912 $ 9,655
========= ======== =========
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.
1999 1998 1997
----------- --------- ----------
Unrealized gains/(losses):
Debt securities $ (477,036) $ 86,594 $ 160,850
Equity securities (43) (2,092) 408
Other 5,555 (2,091) (14,581)
----------- --------- ----------
(471,524) 82,411 146,677
----------- --------- ----------
Less:
Deferred policy acquisition
costs 117,050 (12,841) (45,043)
Deferred income taxes 123,937 (24,440) (35,355)
----------- --------- ----------
Net change in unrealized
gains/(losses) $ (230,537) $ 45,130 $ 66,279
=========== ========= ==========
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:
1999 1998 1997
----------- --------- ----------
Reclassification Adjustments
Unrealized holding gains/(losses)
arising during period $ (255,859) $ 53,576 $ 71,797
Reclassification adjustment
for gains included in net income 25,322 8,446 5,518
----------- --------- ----------
Unrealized gains/(losses) on
investments, net of
reclassification adjustment $ (230,537) $ 45,130 $ 66,279
=========== ========= ==========
Reclassification adjustments reported in the above table for the years ended
December 31, 1999, 1998 and 1997 are net of income tax expense of $13,635,
$7,679 and $4,519, respectively, and $11,760, $5,815 and $2,875, respectively,
relating to the effects of such amounts on deferred acquisition costs.
B-39
<PAGE>
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements, continued
(In Thousands of Dollars)
- --------------------------------------------------------------------------------
5. FAIR VALUE INFORMATION:
The following table summarizes the carrying value and estimated fair value of
the Company's financial instruments as of December 31, 1999 and 1998.
<TABLE>
<CAPTION>
1999 1998
----------------------------- -----------------------------
Carrying Fair Carrying Fair
Value Value Value Value
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Financial Assets:
Debt securities, available for sale $ 4,733,261 $ 4,733,261 $ 5,500,924 $ 5,500,924
Equity securities
Common stock 276 276 158 158
Non-redeemable preferred stocks 3,673 3,673 4,003 4,003
Mortgage loans 27,115 28,615 38,828 42,675
Policy loans 642,420 612,501 638,376 605,144
Cash and cash equivalents 37,481 37,481 24,468 24,468
Short-term investments 6,934 6,934 1,024 1,024
Separate account assets 2,865,366 2,865,366 2,302,937 2,302,937
Other invested assets 137,766 137,766 98,571 98,571
Financial Liabilities:
Investment-type contracts
Individual annuities $ 997,686 $ 1,011,298 $ 1,108,274 $ 1,143,373
Guaranteed investment contracts 22,786 21,353 39,571 40,556
Other group annuities 85,465 85,213 113,974 115,422
Other policyholder funds 339,937 339,937 340,761 340,761
----------- ----------- ----------- -----------
Total policyholder funds 1,445,874 1,457,801 1,602,580 1,640,112
Policyholder's dividends payable 28,770 28,770 30,532 30,532
Separate account liabilities 2,865,366 2,865,366 2,302,937 2,302,937
</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.
B-40
<PAGE>
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements, continued
(In Thousands of Dollars)
- --------------------------------------------------------------------------------
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 values of policyholders'
dividends payable and separate account liabilities approximate their fair
values.
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, 1999 and
1998, the Company had interest rate swaps with aggregate notional amounts equal
to $20,000 and $95,000, respectively, with average unexpired terms of 7 months
and 8 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 $335 and $0, respectively, at December 31, 1999 and $2,248 and $0,
respectively, at December 31, 1998. 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 $34,457 and $38,144 as of December 31, 1999 and 1998,
respectively.
B-41
<PAGE>
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements, continued
(In Thousands of Dollars)
- --------------------------------------------------------------------------------
6. 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.
Deferred income taxes reflect the impact for financial statement reporting
purposes of temporary differences between the financial statement carrying
amounts and tax basis 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:
1999 1998
--------- ----------
Deferred tax assets
Future policy benefits $ 90,877 $ 92,909
Dividend award 10,010 10,255
Allowances for investment losses 6,153 4,232
Employee benefit liabilities 30,479 29,762
Unrealized investment losses 17,934 -
Other 17,256 18,677
--------- ----------
Total deferred tax asset 172,709 155,835
--------- ----------
Deferred tax liabilities
Deferred acquisition costs 145,360 135,248
Unrealized investment gains - 105,993
Other 18,484 22,375
--------- ----------
Total deferred tax liability 163,844 263,616
--------- ----------
Net deferred tax liability (8,865) 107,781
Tax currently payable 40,784 34,853
--------- ----------
Accrued income tax payable $ 31,919 $ 142,634
========= ==========
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:
1999 1998 1997
-------- -------- --------
Tax expense at 35% $ 45,697 $ 50,443 $ 44,442
Increase in income taxes resulting
from:
Differential earnings amount 3,010 2,681 6,942
Other 2,299 4,565 2,528
-------- -------- --------
Federal income tax expense $ 51,006 $ 57,689 $ 53,912
======== ======== ========
B-42
<PAGE>
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements, continued
(In Thousands of Dollars)
- --------------------------------------------------------------------------------
The make up of the tax expense/(benefit) is as follows:
1999 1998 1997
-------- -------- --------
Continuing operations $ 66,324 $ 57,019 $ 51,323
Discontinued operations:
Operations (2,137) 670 2,589
Sale (13,181) - -
-------- -------- --------
Total federal income tax expense $ 51,006 $ 57,689 $ 53,912
======== ======== ========
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 and is currently examining years 1995 through 1997.
Management believes that an adequate provision has been made for potential
assessments.
7. 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
------------------------ ------------------------
1999 1998 1999 1998
-------- -------- -------- ---------
<S> <C> <C> <C> <C>
Benefit Obligation $(90,293) $(90,428) $(27,808) $ (26,439)
Fair value of plan assets 63,616 53,349 - -
-------- -------- -------- ---------
Funded Status $(26,677) $(37,079) $(27,808) $ (26,439)
======== ======== ======== =========
Accrued benefit cost recognized in the
consolidated balance sheet $(25,861) $(22,530) $(44,205) $ (44,558)
</TABLE>
The weighted-average assumptions used to measure the actuarial present value of
the projected benefit obligation were:
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
------------------------ ------------------------
1999 1998 1999 1998
-------- -------- -------- ---------
<S> <C> <C> <C> <C>
Discount rate 6.75% 6.75% 6.75% 6.75%
Expected return on plan assets 8.00% 8.00% - -
Rate of compensation increase 5.50% 5.50% 5.00% 5.00%
</TABLE>
At December 31, 1999, the assumed health care cost trend rate used in measuring
the accumulated postretirement benefit obligation was 8% for 2000, grading to 5%
for 2004. At December 31, 1998, the assumed health care cost trend rate used in
measuring the accumulated postretirement benefit obligation was 8% for 1999,
grading to 5% for 2004. The assumed health care cost trend rate used at December
31, 1997 in measuring the accumulated postretirement benefit obligation was 8.5%
for 1998, grading to 5% for 2004. Assumed health care cost trend rates have a
significant effect on the amounts reported for the health care plans.
B-43
<PAGE>
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements, continued
(In Thousands of Dollars)
- --------------------------------------------------------------------------------
The contributions made and the benefits paid from the plans were:
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
------------------------ ------------------------
1999 1998 1999 1998
-------- -------- -------- ---------
<S> <C> <C> <C> <C>
Benefit cost recognized in $ 5,072 $ 5,692 $ 1,140 $ 831
consolidated income statement
Employer contribution 1,741 6,687 1,493 1,415
Plan participants' contribution
- - - -
Benefits paid
3,593 3,229 1,493 1,415
</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, 1999, 1998 and 1997, the
expense recognized for these plans was $11,192, $9,526 and $8,345, respectively.
The estimated fair value of the defined contribution plans' assets at December
31, 1999 and 1998 was $300,170 and $260,706, respectively.
8. 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, 1999:
Life Insurance in Force $ 33,554,483 $ 353,382 $ 8,185,527 $ 25,722,338
Premiums
149,187 6,399 16,803 138,783
Benefits
455,518 15,629 32,705 438,442
Reserves
5,446,024 175 220,656 5,225,543
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
</TABLE>
For the years ended December 31, 1999 and 1998, the above numbers include
premiums from discontinued operations of $8,267 and $16,739, respectively, and
benefits from discontinued operations of $8,651 and $9,888, respectively.
During 1997, the Company had gross premiums of $190,754, assumed premiums of
$11,189 and ceded premiums of $6,723 and gross benefits of $492,857, assumed
benefits of $14,293 and ceded benefits of $26,916. Reinsurance receivables with
a carrying value of $205,559 and $55,119 were associated with a single reinsurer
at December 31, 1999 and 1998, respectively.
B-44
<PAGE>
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements, continued
(In Thousands of Dollars)
- --------------------------------------------------------------------------------
9. 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, 1999, the Company had outstanding
commitments totaling $70,757 relating to these investment activities. The fair
value of these commitments approximates the face amount.
10. 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,
1999 and 1998 was $558,700 and $495,212, respectively. The combined insurance
companies' net income, determined in accordance with statutory accounting
practices, for the years ended December 31, 1999, 1998 and 1997, was $76,680,
$83,676 and $63,613, respectively.
The National Association of Insurance Commissioners has released a comprehensive
guide to Statutory Accounting Principles, Accounting Practices and Procedures
Manual - version effective January 1, 2001, (Codification) to provide a
consistent basis of statutory accounting effective for years ending December 31,
2001. The Company does not expect the adoption of Codification to have a
material effect on its statutory capital and surplus.
B-45
<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, 1999 and 1998, and
the related consolidated income statements, statements of changes in equity, and
statements of cash flows for each of the three years in the period ended
December 31, 1999. 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.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. 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, 1999 and
1998, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1999, in conformity with accounting
principles generally accepted in the United States.
/s/ ERNST & YOUNG LLP
Philadelphia, Pennsylvania
January 28, 2000
B-46
<PAGE>
PART C
Other Information
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
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, 1999 and 1998
Statement of Operations - For the years ended
December 31, 1999, 1998 and 1997
Statements of Changes in Net Assets - For the years ended
December 31, 1999, 1998 and 1997
Notes to Financial Statements
Financial Statements of The Penn Mutual Life Insurance Company:
Report of Independent Auditors
Statements of Financial Condition at December 31, 1999, and 1998
Statements of Operations and Surplus for the years
ended December 31, 1999, 1998, and 1997
Statements of Cash Flows for the years ended December 31, 1999, 1998
and 1997
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 of Penn
Mutual Variable Annuity Account III (Pennant Select) on Form
N-4 (File No. 333-62811), as filed with the Securities and
Exchange Commission via EDGAR (Accession No.
0001036050-98-001504) on September 3, 1998.
(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 of Penn Mutual Variable Annuity Account III
(Commander) on Form N-4 (File No. 333-62825), as filed with
The Securities and Exchange Commission via EDGAR
(Accession No. 0000950116-99-000834) on April 27, 1999.
</TABLE>
C-1
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
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 of Penn Mutual Variable Annuity
Account III (Pennant Select) on Form N-4 (File No. 333-
62811), as filed with the Securities and Exchange Commission
via EDGAR (Accession No. 0001036050-98-002055) on
November 30, 1998.
(a)(1) Schedule I dated January 1, 2000 to Sales Support Agreement.
Filed herewith.
(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 the Registration Statement of Penn Mutual Variable Annuity
Account III (Pennant Select) on Form N-4 (File No. 333-
62811), as filed with the Securities and Exchange Commission
via EDGAR (Accession No. 0001036050-98-002055) on
November 30, 1998.
(c) Form of Agent's Agreement relating to broker-dealer
supervision. Incorporated herein by reference to Exhibit 3(c) to
the Registration Statement of Penn Mutual Variable Annuity
Account III (Pennant Select) on Form N-4 (File No. 333-
62811), as filed with the Securities and Exchange Commission
via EDGAR (Accession No. 0001036050-98-002055) on
September 3, 1998 .
(d) Form of Broker-Dealer Selling Agreement (for broker-dealers
licensed to sell variable annuity contracts and/or variable life
insurance contracts under state insurance laws). Incorporated
herein by reference to Exhibit 3(d) to Pre-Effective Amendment
No. 1 to the Registration Statement of Penn Mutual Variable
</TABLE>
C-2
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Annuity Account III (Pennant Select) on Form N-4 (File No. 33-
62811), as filed with the Securities and Exchange Commission
via EDGAR (Accession No. 0001036050-98-002055) on
November 30, 1998.
(e) Form of Broker-Dealer Selling Agreement (for broker-dealers
with affiliated corporations licensed to sell variable annuity
contracts and/or variable life insurance contracts under state
insurance laws. Incorporated herein by reference to Exhibit 3(e)
to Pre-Effective Amendment No. 1 to the Registration Statement
of Penn Mutual Variable Annuity Account III (Commander) on
Form N-4 (File No. 333-62825), as filed with the Securities and
Exchange Commission via EDGAR (Accession No.
0000950116-99-000834) on April 27, 1999.
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). Incorporated herein
by reference to Exhibit 4(a) to Post Effective Amendment No.
25 to the Registrant's Registration Statement on Form N-4 (File
No. 2-77283), as filed with the Securities and Exchange
Commission via EDGAR (Accession No. 0000950116-99-
000851) on April 28, 1999.
(b) Individual Variable Annuity Contract (Form DI-1182-V).
Incorporated herein by reference to Exhibit 4(b) to Post
Effective Amendment No. 25 to the Registrant's Registration
Statement on Form N-4 (File No. 2-77283), as filed with the
Securities and Exchange Commission via EDGAR (Accession
No. 0000950116-99-000851) on April 28, 1999.
(c) Endorsement No. 1309-82 to Individual Variable Annuity
Contract. Incorporated herein by reference to Exhibit 4(c) to
Post Effective Amendment No. 25 to the Registrant's
Registration Statement on Form N-4 (File No. 2-77283), as filed
with the Securities and Exchange Commission via EDGAR
(Accession No. 0000950116-99-000851) on April 28, 1999.
(d) Individual Variable and Fixed Annuity Contract - Flexible
Purchase Payments (Form DV-790). Incorporated herein by
reference to Exhibit 4(d) to Post Effective Amendment No. 25 to
the Registrant's Registration Statement on Form N-4 (File No.
</TABLE>
C-3
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
2-77283), as filed with the Securities and Exchange Commission
via EDGAR (Accession No. 0000950116-99-000851) on April
28, 1999.
(e) Endorsement No. 1536-90 to Individual Variable and Fixed
Annuity Contract. Incorporated herein by reference to Exhibit
4(e) to Post Effective Amendment No. 25 to the Registrant's
Registration Statement on Form N-4 (File No. 2-77283), as filed
with the Securities and Exchange Commission via EDGAR
(Accession No. 0000950116-99-000851) on April 28, 1999.
(f) Endorsement No. 1534-96 to Individual Variable and Fixed
Annuity Contract. Incorporated herein by reference to Exhibit
4(f) to Post Effective Amendment No. 25 to the Registrant's
Registration Statement on Form N-4 (File No. 2-77283), as filed
with the Securities and Exchange Commission via EDGAR
(Accession No. 0000950116-99-000851) on April 28, 1999.
(g) Endorsement No. 1542-97 to Individual Variable and Fixed
Annuity Contract. Incorporated herein by reference to Exhibit
4(g) to Post Effective Amendment No. 25 to the Registrant's
Registration Statement on Form N-4 (File No. 2-77283), as filed
with the Securities and Exchange Commission via EDGAR
(Accession No. 0000950116-99-000851) on April 28, 1999.
(h) Endorsement No. 1504-94 to 403(b) Policy Loan. Incorporated
herein by reference to Exhibit 4(h) to Post Effective Amendment
No. 25 to the Registrant's Registration Statement on Form N-4
(File No. 2-77283), as filed with the Securities and Exchange
Commission via EDGAR (Accession No. 0000950116-99-
000851) on April 28, 1999.
(i) Individual Variable Annuity Contract - Flexible Purchase
Payments. Incorporated herein by reference to Exhibit 4(i) to
Post effective Amendment No. 26 to the Registrant's
Registration Statement on Form N-4 (File No. 2-77283), as filed
with the Securities and Exchange Commission via EDGAR
(Accession No. 0000950116-99-001164) on June 11, 1999.
(j) Group Variable and Fixed Annuity Contract - Flexible Purchase
Payments Participating. Incorporated herein by reference to
Exhibit 4(j) to Post effective Amendment No. 26 to the
Registrant's Registration Statement on Form N-4 (File No. 2-
77283), as filed with the Securities and Exchange Commission
</TABLE>
C-4
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
via EDGAR (Accession No. 0000950116-99-001164) on June
11, 1999.
(k) Group Variable and Fixed Annuity Certificate - Flexible
Purchase Payments. Incorporated herein by reference to Exhibit
4(k) to Post effective Amendment No. 26 to the Registrant's
Registration Statement on Form N-4 (File No. 2-77283), as filed
with the Securities and Exchange Commission via EDGAR
(Accession No. 0000950116-99-001164) on June 11, 1999.
(l) Group Variable and Fixed Annuity Contract - Flexible Purchase
Payments - Participating. Incorporated herein by reference to
Exhibit 4(l) to Post effective Amendment No. 26 to the
Registrant's Registration Statement on Form N-4 (File No. 2-
77283), as filed with the Securities and Exchange Commission
via EDGAR (Accession No. 0000950116-99-001164) on June
11, 1999.
(m) Group Variable and Fixed Annuity Certificate - Flexible
Purchase Payments. Incorporated herein by reference to Exhibit
4(m) to Post effective Amendment No. 26 to the Registrant's
Registration Statement on Form N-4 (File No. 2-77283), as filed
with the Securities and Exchange Commission via EDGAR
(Accession No. 0000950116-99-001164) on June 11, 1999.
(n) Group Variable and Fixed Annuity Certificate - Flexible
Purchase Payments. Incorporated herein by reference to Exhibit
4(n) to Post effective Amendment No. 26 to the Registrant's
Registration Statement on Form N-4 (File No. 2-77283), as filed
with the Securities and Exchange Commission via EDGAR
(Accession No. 0000950116-99-001164) on June 11, 1999.
5. (a) Application (Form EB 1610) for participation in Group Variable
and Fixed Annuity Contract. Incorporated herein by reference
to Exhibit 5(a) to the Registrant's Registration Statement on
Form N-4 (File No. 2-77283), as filed with the Securities and
Exchange Commission via EDGAR (Accession No.
0000950116-99-000851) on April 28, 1999
(b) Application (Form PM3502 11/94) for Individual Variable and
Fixed Annuity Contract. Incorporated herein by reference to
Exhibit 5(b) to Post Effective Amendment No. 2 to the
Registration Statement of Penn Mutual Variable Annuity
Account III (Pennant Select) on Form N-4 (File No. 333-
62811), as filed with the Securities and Exchange Commission
via EDGAR (Accession No. 0000950116-99-000851) on April
28, 1999.
</TABLE>
C-5
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
6. (a) Charter of The Penn Mutual Life Insurance Company (May
1983). Incorporated herein by reference to Exhibit 6(a) the
Registration Statement of Penn Mutual Variable Annuity
Account III (Pennant Select) on Form N-4 (File No. 333-
62811), as filed with the Securities and Exchange Commission
via EDGAR (Accession No. 0001036050-98-001504) on
September 3, 1998.
(b) By-laws of The Penn Mutual Life Insurance
Company, as amended through February 21,
1997. Incorporated herein by reference to
Exhibit 6(b) to the Registration Statement of
Penn Mutual variable Annuity Account III
(Pennant Select) on form N-4 (File No.
333-62811), as filed with the Securities and
Exchange Commission via EDGAR (Accession No.
0001036050-98-001504) on September 3, 1998.
7. None.
8. (a)(1) Form of Sales Agreement between The Penn Mutual Life
Insurance Company and Neuberger & Berman Advisers
Management Trust. Incorporated herein by reference to Exhibit
8(b)(1) to the Registration Statement of Penn Mutual Variable
Annuity Account III (Pennant Select) on Form N-4 (File No.
333-62811), as filed with the Securities and Exchange
Commission via EDGAR (Accession No. 0001036050-98-
001504) on September 3, 1998.
(a)(2) Form of Assignment and Modification Agreement between
Neuberger & Berman Management Incorporated, Neuberger &
Berman Advisers Management Trust, Advisers Managers Trust
and The Penn Mutual Life Insurance Company. Incorporated
herein by reference to Exhibit 8(b)(2) to the Registration
Statement of Penn Mutual Variable Annuity Account III
(Pennant Select) on Form N-4 (File No. 333-62811), as filed
with the Securities and Exchange Commission via EDGAR
(Accession No. 0001036050-98-001504) on September 3, 1998.
(a)(3) Amendment to Fund Participation Agreement between The Penn
Mutual Life Insurance Company and Neuberger & Berman
Advisers Management Trust. Incorporated herein by reference
</TABLE>
C-6
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
to Exhibit 8(b)(3) to Post Effective Amendment No. 5 to the
Registration Statement of Penn Mutual Variable Life Account I
(Cornerstone) on Form S-6 (File No. 33-54662), as filed with
the Securities and Exchange Commission via EDGAR
(Accession No. 0000950109-97-003328) on April 30, 1997.
(b) Form of Sales Agreement between The Penn Mutual Life
Insurance Company and Penn Series Funds, Inc. Incorporated
herein by reference to Exhibit 8(c) to the Registration Statement
of Penn Mutual Variable Annuity Account III (Pennant Select)
on Form N-4 (File No. 333-62811), as filed with the Securities
and Exchange Commission via EDGAR (Accession No.
0001036050-98-001504) on September 3, 1998.
(c) Form of Participation Agreement between The Penn Mutual Life
Insurance Company, Variable Insurance Products Fund and
Fidelity Distributors Corporation. Incorporated herein by
reference to Exhibit 8(d) to the Registration Statement of Penn
Mutual Variable Annuity Account III (Pennant Select) on Form
N-4 (File No. 333-62811), as filed with the Securities and
Exchange Commission via EDGAR (Accession No.
0001036050-98-001504) on September 3, 1998.
(d) Form of Participation Agreement between The Penn Mutual Life
Insurance Company, Variable Insurance Products Fund II and
Fidelity Distributors Corporation. Incorporated herein by
reference to Exhibit 8(e) to the Registration Statement of Penn
Mutual Variable Annuity Account III (Pennant Select) on Form
N-4 (File No. 333-62811), as filed with the Securities and
Exchange Commission via EDGAR (Accession No.
0001036050-98-001504) on September 3, 1998.
(e) Participation Agreement between The Penn Mutual Life
Insurance Company, Morgan Stanley Universal Funds,
Inc.(renamed The Universal Institutional Funds, Inc. Effective
May 1, 2000), Morgan Stanley Asset Management Inc. and
Miller Andersen & Sherrerd LLP. Incorporated herein by
reference to Exhibit 8(f) to Post Effective Amendment No. 2 to
the Registration Statement of PIA Variable Annuity Account I
(Pennant) on Form N-4 (File No. 33-83120), as filed with the
Securities and Exchange Commission via EDGAR (Accession
No. 0000950109-97-003327) on April 30, 1997.
</TABLE>
C-7
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
9. Opinion and Consent of Franklin L. Best, Jr., Esq., Associate General
Counsel of The Penn Mutual Life Insurance Company, as to the
legality of the variable annuity contracts being registered. Incorporated
herein by reference to Exhibit 9 to Post Effective Amendment No. 26
to Registrant's Registration Statement on Form N-4 (File No. 2-
77283), as filed with the Securities and Exchange Commission via
EDGAR (Accession No. 0000950116-99-001164) on June 11, 1999.
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 to Post Effective Amendment No. 22 to Registrant's
Registration Statement on Form N-4 (File No. 2-77283), as filed
with the Securities and Exchange Commission via EDGAR
(Accession No. 0001021408-97-000161) on April 29, 1997.
(b) Powers of Attorney of Edmond F. Notebaert and Robert H.
Rock. Incorporated herein by reference to Exhibit 14(b) to Post
Effective Amendment No. 24 to Registrant's Registration
Statement on Form N-4 (File No. 2-77283), as filed with the
Securities and Exchange Commission via EDGAR (Accession
No. 0000950109-98-002717) on April 24, 1998.
(c) Power of Attorney for Julia Chang Bloch. Incorporated herein
by reference to Exhibit 14(c) to Post Effective Amendment No.
26 to Registrant's Registration Statement on Form N-4 (File No.
2-77283), as filed with the Securities and Exchange Commission
via EDGAR (Accession No. 0000950116-99-00164) on June 11,
1999.
</TABLE>
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
C-8
<PAGE>
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 Executive Vice President and
Officer and Member of the Board of Chief Investment Officer
Trustees
Larry L. Mast Ann M. Strootman
Executive Vice President, Sales and Vice President and Controller
Marketing
Harold E. Maude, Jr. Steven M. Herzberg
Senior Vice President, Assistant Vice President
Independence Financial Network and Treasurer
Richard F. Plush James McElwain
Vice President and Senior Actuary Assistant Vice President,
Retirement and Investment Sales
John M. Albanese Operations
Senior Vice President, Customer Service
and Information Systems
Frederick M. Rackovan George W. Bentham
Vice President, Insurance Service Senior Vice President, Career
Agency System
Ralph I. Pence
Vice President and Chief Actuary
The business address of the director and officers is The Penn
Mutual Life Insurance Company, Philadelphia, PA 19172.
C-9
<PAGE>
Item 26. Persons Controlled By or Under Common Control with the Depositor or
Registrant
<TABLE>
<CAPTION>
Penn Mutual Wholly-Owned Subsidiaries
Corporation Principal Business State of Incorporation
- ----------- ------------------ ----------------------
<S> <C> <C>
The Penn Insurance and Life Insurance and Annuities Delaware
Annuity Company
Independence Capital Investment Adviser Pennsylvania
Management, Inc.
Penn Janney Fund, Inc. Investments Pennsylvania
Independence Square Holding Company Pennsylvania
Properties, Inc.
The Pennsylvania Trust Trust Company Pennsylvania
Company
Independence Square Properties, Inc.
Wholly-Owned Subsidiaries
Corporation Principal Business State of Incorporation
- ----------- ------------------ ----------------------
Indepro Corporation Real Estate Investment Delaware
WPI Investment Company Real Estate Investment Delaware
Hornor, Townsend & Kent, Registered Broker-Dealer and Pennsylvania
Inc. Investment Adviser
Janney Montgomery Scott Registered Broker-Dealer and Delaware
LLC Investment Adviser
</TABLE>
C-10
<PAGE>
Indepro Corporation
Wholly-Owned Subsidiaries
<TABLE>
<CAPTION>
Corporation Principal Business State of Incorporation
- ----------- ------------------ ----------------------
<S> <C> <C>
Indepro Property Fund I Real Estate Investment Delaware
Corporation
Indepro Property Fund II Real Estate Investment Delaware
Corporation
Commons One Corporation Real Estate Investment Delaware
West Hazleton, Inc. Real Estate Investment Delaware
Janney Montgomery Scott LLC
Wholly-Owned Subsidiaries
Corporation Principal Business State of Incorporation
- ----------- ------------------ ----------------------
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, 2000, there were:
30,102 owners of qualified individual variable annuity contracts;
0 owners of qualified group variable annuity contracts;
0 owners of certificates issued under qualified group variable
annuity contracts; and
8,483 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
C-11
<PAGE>
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.
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
Larry L. Mast, Director
C-12
<PAGE>
Nina M. Mulrooney, Director
Norman T. Wilde, Jr., Director
Daniel J. Toran, Director
Ronald C. Zimmerman, Director, President and Chief Executive Officer
Michael D. Sweeney, Vice President, Compliance and Secretary
Edward G. Pecelli, Vice President, 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
Joseph R. Englert, Vice President, Trading and Operations
Franklin L. Best, Jr., Counsel
Constance Flaville, Assistant Secretary
The principal business address of Messrs. Gray and Wilde is
Janney, Montgomery, Scott Inc., 1801 Market Street, Philadelphia,
Pennsylvania. The principal business address of Mses. Mulrooney
and Ritzko and Messrs. Mast, 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.
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 $ 338,282 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
C-13
<PAGE>
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-14
<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.27 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 26th day of April, 2000.
PENN MUTUAL VARIABLE ANNUITY ACCOUNT III
(Registrant)
By: THE PENN MUTUAL LIFE INSURANCE COMPANY
(Depositor)
By: /s/Robert E. Chappell
--------------------------------------
Robert E. Chappell
Chairman of the Board of Trustees
and Chief Executive Officer
As required by the Securities Act of 1933, this Post-Effective Amendment No. 27
to the Registration Statement has been signed by the following persons, in the
capacities indicated, on the 26th day of April, 2000.
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-15
<PAGE>
EXHIBIT INDEX
EX.99 B3(a)(1) Schedule I dated January 1, 2000 to Sales Support Agreement.
EX.99 B10(a) Consent of Ernst & Young LLP.
EX.99 B10(b) Consent of Morgan, Lewis & Bockius LLP.
EX.99 B13 Schedule for Computation of Performance Quotations.
C-16
<PAGE>
Schedule I
To
Sales Support Agreement Effective January 1, 2000
Individual Annuity Contracts:
- -----------------------------
Diversifier II Individual Variable and Fixed Annuity Contracts - Flexible
Purchase Payments. Policy forms DI-283-F, DI-883-F, DI-1182-V, DI-783-V, DV-790
and DV-790-F and variations thereof as required under state insurance laws.
Penn Mutual Optimizer Group Variable and Fixed Annuity Contract - Flexible
Purchase Payments. Policy form EB1555 and variations thereof as required under
state insurance laws.
Tradewind Individual Deferred Annuity Contract-Single Purchase Payment. Policy
SPDA-96 and variations thereof as required under state insurance laws.
Pennant Select Individual Variable and Fixed Annuity Contract - Flexible
Purchase Payments. Policy form VAA-98 and variations thereof as required under
state insurance laws.
Commander Individual Variable and Fixed Annuity Contract - Flexible Purchase
Payments. Policy form VAB-98 and variations thereof as required under state
insurance laws.
Compensation:
- -------------
With respect to Individual Annuity Contracts sold by designated Penn Mutual
agents/registered representative contracted through a Penn Mutual Career Agency
office (CAS), Penn Mutual shall compensate HTK as follows:
1. 0.24% of Diversifier II purchase payments made in the first contract year.
0.12% of Diversifier II purchase payments made in the second and subsequent
contract years. Amounts transferred from a Fixed Annuity Contract to an
Variable Contract or vice versa are not purchase payments under the contract
to which the amounts are transferred.
2. 0.24% of Penn Mutual Optimizer purchase payments made in the first contract
year. 0.12% of Penn Mutual Optimizer purchase payments made in the second
and subsequent contract years. 3. 0.07% of Tradewind purchase payments.
4. 0.24% of Pennant Select purchase payments.
5. 0.10% of Commander purchase payments
<PAGE>
With respect to Individual Annuity Contracts sold by designated Penn Mutual
agents/registered representative contracted through a Penn Mutual Regional
office (IFN) or the DiCerbo Agency, PCP (DiCerbo), Penn Mutual shall compensate
HTK as follows:
1. 0.20% of Diversifier II purchase payments made in the first contract year.
0.10% of Diversifier II purchase payments made in the second and subsequent
contract years. Amounts transferred from a Fixed Annuity Contract to an
Variable Contract or vice versa are not purchase payments under the contract
to which the amounts are transferred.
2. 0.20% of Penn Mutual Optimizer purchase payments made in the first contract
year. 0.10% of Penn Mutual Optimizer purchase payments made in the second
and subsequent contract years.
3. 0.20% of Pennant Select purchase payments.
4. 0.075% of Commander purchase payments
Agreed
Attest The Penn Mutual Life Insurance Company
By:
- ------------------------------ -------------------------------------
Richard F. Plush
Vice President Products & Programs
Date:
-------------------------
Attest Hornor, Townsend and Kent, Inc.
By:
- ------------------------------ -------------------------------------
Ronald C. Zimmerman
President and Chief Executive Officer
Date:
-------------------------
<PAGE>
EX.99 B10(a)
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 28, 2000 accompanying the consolidated financial statements of the Penn
Mutual Life Insurance Company and to the use of our report dated April 4, 2000
accompanying the financial statements of the Penn Mutual Variable Annuity
Account III for the year ended December 31, 1999 in the Post-Effective Amendment
Number 27 to Registration Statement Number 2-77283 on Form N-4 and the related
Statement of Additional Information of Penn Mutual Variable Annuity Account III.
/s/ Ernst & Young LLP
- --------------------------
Philadelphia, Pennsylvania
April 18, 2000
<PAGE>
EX.99 B10(b)
1701 Market Street Morgan, Lewis
Philadelphia, PA 19103-2921 & Bockius LLP
215-963-5000 COUNSELORS AT LAW
Fax: 215-963-5299
April 24, 2000
Board of Trustees
The Penn Mutual Life Insurance Company
Philadelphia, Pennsylvania 19172
Re: Penn Mutual Variable Annuity Account III
SEC Registration No. 2-77283
-----------------------------------------
Dear Ladies and Gentlemen:
We hereby consent to the reference of our name under the caption "Legal Matters"
in the Statement of Additional Information filed as part of this Post-Effective
Amendment No. 27. 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
<PAGE>
Penn Mutual
Diversifier II
Table 1a
1 Year Calculation
<TABLE>
<CAPTION>
begin unit beginning ending unit ending
fund name date value value date value value charges return
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Neuberger Berman Balanced 12/31/1998 17.23 $1,000.00 12/31/1999 22.72 $1,235.02 0.49 23.50%
Capital Appreciation 12/31/1998 12.26 $1,000.00 12/31/1999 19.92 $1,522.21 0.82 52.22%
Emerging Growth Fund 12/31/1998 18.50 $1,000.00 12/31/1999 52.08 $2,636.75 0.62 163.68%
MS Emerging Market International 12/31/1998 6.72 $1,000.00 12/31/1999 12.93 $1,802.56 0.25 80.26%
Fidelity Asset Manager 12/31/1998 17.09 $1,000.00 12/31/1999 18.75 $1,027.56 0.33 2.76%
Fidelity Equity Income 12/31/1998 18.76 $1,000.00 12/31/1999 19.70 $983.20 1.31 -1.68%
Fidelity Growth 12/31/1998 23.52 $1,000.00 12/31/1999 31.92 $1,271.38 1.71 27.14%
Fidelity Index 500 12/31/1998 15.41 $1,000.00 12/31/1999 18.34 $1,114.59 0.93 11.46%
Flexibly Managed Fund 12/31/1998 58.95 $1,000.00 12/31/1999 62.40 $985.90 3.46 -1.41%
Growth Equity Fund - Non-Qualified 12/31/1998 66.96 $1,000.00 12/31/1999 88.68 $1,237.88 1.87 23.79%
Growth Equity Fund - Qualified 12/31/1998 67.51 $1,000.00 12/31/1999 89.41 $1,237.88 1.87 23.79%
High Yield Bond Fund 12/31/1998 34.64 $1,000.00 12/31/1999 35.67 $962.98 1.01 -3.70%
International Equity Fund 12/31/1998 21.32 $1,000.00 12/31/1999 30.68 $1,345.21 1.85 34.52%
Neuberger Berman Limited Maturity 12/31/1998 12.31 $1,000.00 12/31/1999 12.34 $936.82 0.16 -6.32%
Neuberger Berman Partners 12/31/1998 12.77 $1,000.00 12/31/1999 13.54 $991.72 0.57 -0.83%
Quality Bond Fund 12/31/1998 22.04 $1,000.00 12/31/1999 21.77 $924.11 0.75 -7.59%
Small Capitalization Fund 12/31/1998 14.40 $1,000.00 12/31/1999 14.03 $911.53 0.69 -8.85%
Value Equity Fund 12/31/1998 41.17 $1,000.00 12/31/1999 40.33 $913.66 2.66 -8.63%
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Penn Mutual
Diversifier II
Table 1b
1 Year Calculation
<TABLE>
<CAPTION>
begin unit beginning ending unit ending
fund name date value value date value value charges return
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Neuberger Berman Balanced 12/31/1998 17.23 $1,000.00 12/31/1999 22.72 $1,235.02 0.49 23.50%
Capital Appreciation 12/31/1998 12.26 $1,000.00 12/31/1999 19.92 $1,522.21 0.82 52.22%
Emerging Growth Fund 12/31/1998 18.50 $1,000.00 12/31/1999 52.08 $2,636.75 0.62 163.68%
MS Emerging Market International 12/31/1998 6.72 $1,000.00 12/31/1999 12.93 $1,802.56 0.25 80.26%
Fidelity Asset Manager 12/31/1998 17.09 $1,000.00 12/31/1999 18.75 $1,027.56 0.33 2.76%
Fidelity Equity Income 12/31/1998 18.76 $1,000.00 12/31/1999 19.70 $983.20 1.31 -1.68%
Fidelity Growth 12/31/1998 23.52 $1,000.00 12/31/1999 31.92 $1,271.38 1.71 27.14%
Fidelity Index 500 12/31/1998 15.41 $1,000.00 12/31/1999 18.34 $1,114.59 0.93 11.46%
Flexibly Managed Fund 12/31/1998 58.95 $1,000.00 12/31/1999 62.40 $985.90 3.46 -1.41%
Growth Equity Fund - Non-Qualified 12/31/1998 66.96 $1,000.00 12/31/1999 88.68 $1,237.88 1.87 23.79%
Growth Equity Fund - Qualified 12/31/1998 67.51 $1,000.00 12/31/1999 89.41 $1,237.88 1.87 23.79%
High Yield Bond Fund 12/31/1998 34.64 $1,000.00 12/31/1999 35.67 $962.98 1.01 -3.70%
International Equity Fund 12/31/1998 21.32 $1,000.00 12/31/1999 30.68 $1,345.21 1.85 34.52%
Neuberger Berman Limited Maturity 12/31/1998 12.31 $1,000.00 12/31/1999 12.34 $936.82 0.16 -6.32%
Neuberger Berman Partners 12/31/1998 12.77 $1,000.00 12/31/1999 13.54 $991.72 0.57 -0.83%
Quality Bond Fund 12/31/1998 22.04 $1,000.00 12/31/1999 21.77 $924.11 0.75 -7.59%
Small Capitalization Fund 12/31/1998 14.40 $1,000.00 12/31/1999 14.03 $911.53 0.69 -8.85%
Value Equity Fund 12/31/1998 41.17 $1,000.00 12/31/1999 40.33 $913.66 2.66 -8.63%
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Penn Mutual
Diversifier II
Table 1c
1 Year Calculation
<TABLE>
<CAPTION>
begin unit beginning ending unit ending
fund name date value value date value value charges return
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Neuberger Berman Balanced 12/31/1998 17.23 $1,000.00 12/31/1999 22.72 $1,268.12 0.49 26.81%
Capital Appreciation 12/31/1998 12.26 $1,000.00 12/31/1999 19.92 $1,574.57 0.82 57.46%
Emerging Growth Fund 12/31/1998 18.50 $1,000.00 12/31/1999 52.08 $2,764.09 0.62 17.64%
MS Emerging Market International 12/31/1998 6.72 $1,000.00 12/31/1999 12.93 $1,873.78 0.25 87.38%
Fidelity Asset Manager 12/31/1998 17.09 $1,000.00 12/31/1999 18.75 $1,046.82 0.33 4.68%
Fidelity Equity Income 12/31/1998 18.76 $1,000.00 12/31/1999 19.70 $1,001.86 1.31 0.19%
Fidelity Growth 12/31/1998 23.52 $1,000.00 12/31/1999 31.92 $1,306.89 1.71 30.69%
Fidelity Index 500 12/31/1998 15.41 $1,000.00 12/31/1999 18.34 $1,139.56 0.93 13.96%
Flexibly Managed Fund 12/31/1998 58.95 $1,000.00 12/31/1999 62.40 $1,004.66 3.46 0.47%
Growth Equity Fund - Non-Qualified 12/31/1998 66.96 $1,000.00 12/31/1999 88.68 $1,271.31 1.87 27.13%
Growth Equity Fund - Qualified 12/31/1998 67.51 $1,000.00 12/31/1999 89.41 $1,271.31 1.87 27.13%
High Yield Bond Fund 12/31/1998 34.64 $1,000.00 12/31/1999 35.67 $981.36 1.01 -1.86%
International Equity Fund 12/31/1998 21.32 $1,000.00 12/31/1999 30.68 $1,385.87 1.85 38.59%
Neuberger Berman Limited Maturity 12/31/1998 12.31 $1,000.00 12/31/1999 12.34 $954.85 0.16 -4.51%
Neuberger Berman Partners 12/31/1998 12.77 $1,000.00 12/31/1999 13.54 $1,010.50 0.57 1.05%
Quality Bond Fund 12/31/1998 22.04 $1,000.00 12/31/1999 21.77 $941.95 0.75 -5.81%
Small Capitalization Fund 12/31/1998 14.40 $1,000.00 12/31/1999 14.03 $929.20 0.69 -7.08%
Value Equity Fund 12/31/1998 41.17 $1,000.00 12/31/1999 40.33 $931.40 2.66 -6.86%
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Penn Mutual
Diversifier II
Table 1d
1 Year Calculation
<TABLE>
<CAPTION>
begin unit beginning ending unit ending
fund name date value value date value value charges return
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Neuberger Berman Balanced 12/31/1998 17.23 $1,000.00 12/31/1999 22.72 $1,258.76 0.49 25.88%
Capital Appreciation 12/31/1998 12.26 $1,000.00 12/31/1999 19.92 $1,551.46 0.82 55.15%
Emerging Growth Fund 12/31/1998 18.50 $1,000.00 12/31/1999 52.08 $2,687.42 0.62 168.74%
MS Emerging Market International 12/31/1998 6.72 $1,000.00 12/31/1999 12.93 $1,837.20 0.25 83.72%
Fidelity Asset Manager 12/31/1998 17.09 $1,000.00 12/31/1999 18.75 $1,047.31 0.33 4.73%
Fidelity Equity Income 12/31/1998 18.76 $1,000.00 12/31/1999 19.70 $1,002.11 1.31 0.21%
Fidelity Growth 12/31/1998 23.52 $1,000.00 12/31/1999 31.92 $1,295.82 1.71 29.58%
Fidelity Index 500 12/31/1998 15.41 $1,000.00 12/31/1999 18.34 $1,136.01 0.93 13.60%
Flexibly Managed Fund 12/31/1998 58.95 $1,000.00 12/31/1999 62.40 $1,004.95 3.46 0.50%
Growth Equity Fund - Non-Qualified 12/31/1998 66.96 $1,000.00 12/31/1999 88.68 $1,261.71 1.87 26.17%
Growth Equity Fund - Qualified 12/31/1998 67.51 $1,000.00 12/31/1999 89.41 $1,261.71 1.87 26.17%
High Yield Bond Fund 12/31/1998 34.64 $1,000.00 12/31/1999 35.67 $981.51 1.01 -1.85%
International Equity Fund 12/31/1998 21.32 $1,000.00 12/31/1999 30.68 $1,371.11 1.85 37.11%
Neuberger Berman Limited Maturity 12/31/1998 12.31 $1,000.00 12/31/1999 12.34 $954.86 0.16 -4.51%
Neuberger Berman Partners 12/31/1998 12.77 $1,000.00 12/31/1999 13.54 $1,010.81 0.57 1.08%
Quality Bond Fund 12/31/1998 22.04 $1,000.00 12/31/1999 21.77 $941.89 0.75 -5.81%
Small Capitalization Fund 12/31/1998 14.40 $1,000.00 12/31/1999 14.03 $929.07 0.69 -7.09%
Value Equity Fund 12/31/1998 41.17 $1,000.00 12/31/1999 40.33 $931.29 2.66 -6.87%
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Penn Mutual
Diversifier II
Table 2a
1 Year Calculation
<TABLE>
<CAPTION>
begin unit beginning ending unit ending
fund name date value value date value value charges return
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Neuberger Berman Balanced 12/31/1998 17.23 $1,000.00 12/31/1999 22.72 $1,318.32 0.49 31.83%
Capital Appreciation 12/31/1998 12.26 $1,000.00 12/31/1999 19.92 $1,623.59 0.82 62.36%
Emerging Growth Fund 12/31/1998 18.50 $1,000.00 12/31/1999 52.08 $2,814.01 0.62 181.40%
MS Emerging Market International 12/31/1998 6.72 $1,000.00 12/31/1999 13.00 $1,933.38 0.25 93.34%
Fidelity Asset Manager 12/31/1998 17.09 $1,000.00 12/31/1999 18.75 $1,096.63 0.33 9.66%
Fidelity Equity Income 12/31/1998 18.76 $1,000.00 12/31/1999 19.70 $1,048.13 1.31 4.81%
Fidelity Growth 12/31/1998 23.52 $1,000.00 12/31/1999 31.92 $1,354.74 1.71 35.47%
Fidelity Index 500 12/31/1998 15.41 $1,000.00 12/31/1999 18.34 $1,188.74 0.93 18.87%
Flexibly Managed Fund 12/31/1998 58.95 $1,000.00 12/31/1999 62.40 $1,053.23 3.46 5.32%
Growth Equity Fund - Non-Qualified 12/31/1998 66.96 $1,000.00 12/31/1999 88.68 $1,321.55 1.87 32.16%
Growth Equity Fund - Qualified 12/31/1998 67.51 $1,000.00 12/31/1999 89.41 $1,321.55 1.87 32.16%
High Yield Bond Fund 12/31/1998 34.64 $1,000.00 12/31/1999 35.67 $1,027.98 1.01 2.80%
International Equity Fund 12/31/1998 21.32 $1,000.00 12/31/1999 30.68 $1,436.17 1.85 43.62%
Neuberger Berman Limited Maturity 12/31/1998 12.31 $1,000.00 12/31/1999 12.34 $1,001.93 0.16 0.19%
Neuberger Berman Partners 12/31/1998 12.77 $1,000.00 12/31/1999 13.54 $1,059.51 0.57 5.95%
Quality Bond Fund 12/31/1998 22.04 $1,000.00 12/31/1999 21.77 $986.46 0.75 -1.35%
Small Capitalization Fund 12/31/1998 14.40 $1,000.00 12/31/1999 14.03 $973.44 0.69 -2.66%
Value Equity Fund 12/31/1998 41.17 $1,000.00 12/31/1999 40.33 $975.65 2.66 -2.44%
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Penn Mutual
Diversifier II
Table 2b
1 Year Calculation
<TABLE>
<CAPTION>
begin unit beginning ending unit ending
fund name date value value date value value charges return
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Flexibly Managed Fund 12/31/1998 58.95 $1,000.00 12/31/1999 62.40 $1,053.23 3.46 5.32%
Growth Equity Fund - Non-Qualified 12/31/1998 66.96 $1,000.00 12/31/1999 88.68 $1,321.55 1.87 32.16%
Growth Equity Fund - Qualified 12/31/1998 67.51 $1,000.00 12/31/1999 89.41 $1,321.55 1.87 32.16%
High Yield Bond Fund 12/31/1998 34.64 $1,000.00 12/31/1999 35.67 $1,027.98 1.01 2.80%
International Equity Fund 12/31/1998 21.32 $1,000.00 12/31/1999 30.68 $1,436.17 1.85 43.62%
Quality Bond Fund 12/31/1998 22.04 $1,000.00 12/31/1999 21.77 $986.46 0.75 -1.35%
Value Equity Fund 12/31/1998 41.17 $1,000.00 12/31/1999 40.33 $975.65 2.66 -2.44%
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Penn Mutual
Diversifier II
Table 3a
1 Year Calculation
<TABLE>
<CAPTION>
begin unit beginning ending unit ending
fund name date value value date value value charges return
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Neuberger Berman Balanced 12/31/1998 17.23 $10,000.00 12/31/1999 22.72 $13,189.85 0.74 31.90%
Capital Appreciation 12/31/1998 12.26 $10,000.00 12/31/1999 19.92 $16,247.00 1.23 62.47%
Emerging Growth Fund 12/31/1998 18.50 $10,000.00 12/31/1999 52.08 $28,148.51 0.93 181.49%
MS Emerging Market International 12/31/1998 6.72 $10,000.00 12/31/1999 13.00 $19,337.21 0.38 93.37%
Fidelity Asset Manager 12/31/1998 17.09 $10,000.00 12/31/1999 18.75 $10,970.70 0.49 9.71%
Fidelity Equity Income 12/31/1998 18.76 $10,000.00 12/31/1999 19.70 $10,498.94 1.96 4.99%
Fidelity Growth 12/31/1998 23.52 $10,000.00 12/31/1999 31.92 $13,570.49 2.56 35.70%
Fidelity Index 500 12/31/1998 15.41 $10,000.00 12/31/1999 18.34 $11,899.95 1.39 19.00%
Flexibly Managed Fund 12/31/1998 58.95 $10,000.00 12/31/1999 62.40 $10,579.14 5.19 5.79%
Growth Equity Fund - Non-Qualified 12/31/1998 66.96 $10,000.00 12/31/1999 88.68 $13,240.71 2.80 32.41%
Growth Equity Fund -Qualified 12/31/1998 67.51 $10,000.00 12/31/1999 89.41 $13,240.71 2.80 32.41%
High Yield Bond Fund 12/31/1998 34.64 $10,000.00 12/31/1999 35.67 $10,293.38 1.51 2.93%
International Equity Fund 12/31/1998 21.32 $10,000.00 12/31/1999 30.68 $14,386.60 2.77 43.87%
Neuberger Berman Limited Maturity 12/31/1998 12.31 $10,000.00 12/31/1999 12.34 $10,021.47 0.24 0.21%
Neuberger Berman Partners 12/31/1998 12.77 $10,000.00 12/31/1999 13.54 $10,602.78 0.85 6.03%
Quality Bond Fund 12/31/1998 22.04 $10,000.00 12/31/1999 21.77 $9,874.65 1.12 -1.25%
Small Capitalization Fund 12/31/1998 14.40 $10,000.00 12/31/1999 14.03 $9,743.68 1.03 -2.56%
Value Equity Fund 12/31/1998 41.17 $10,000.00 12/31/1999 40.33 $9,792.38 3.99 -2.08%
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Penn Mutual
Diversifier II
Table 3b
1 Year Calculation
<TABLE>
<CAPTION>
begin unit beginning ending unit ending
fund name date value value date value value charges return
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Flexibly Managed Fund 12/31/1998 58.95 $10,000.00 12/31/1999 62.40 $10,579.14 5.19 5.79%
Growth Equity Fund - Non-Qualified 12/31/1998 66.96 $10,000.00 12/31/1999 88.68 $13,240.71 2.80 32.41%
Growth Equity Fund -Qualified 12/31/1998 67.51 $10,000.00 12/31/1999 89.41 $13,240.71 2.80 32.41%
High Yield Bond Fund 12/31/1998 34.64 $10,000.00 12/31/1999 35.67 $10,293.38 1.51 2.93%
International Equity Fund 12/31/1998 21.32 $10,000.00 12/31/1999 30.68 $14,386.60 2.77 43.87%
Quality Bond Fund 12/31/1998 22.04 $10,000.00 12/31/1999 21.77 $9,874.65 1.12 -1.25%
Value Equity Fund 12/31/1998 41.17 $10,000.00 12/31/1999 40.33 $9,792.38 3.99 -2.08%
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Penn Mutual
Diversifier II
Table 1a
5 Year Calculation
<TABLE>
<CAPTION>
begin unit beginning ending unit ending
fund name date value value date value value charges return
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Neuberger Berman Balanced 12/31/1994 10.22 $1,000.00 12/31/1999 22.72 $2,157.25 2.45 16.61%
Capital Appreciation 12/31/1994 10.86 $1,000.00 12/31/1999 19.92 $1,783.72 4.10 12.26%
Flexibly Managed Fund 12/31/1994 35.50 $1,000.00 12/31/1999 62.40 $1,676.73 17.30 10.88%
Growth Equity Fund - Non-Qualified 12/31/1994 25.89 $1,000.00 12/31/1999 88.68 $3,305.65 9.35 27.00%
Growth Equity - Qualified 12/31/1994 26.10 $1,000.00 12/31/1999 89.41 $3,305.65 9.35 27.00%
High Yield Bond Fund 12/31/1994 22.64 $1,000.00 12/31/1999 35.67 $1,523.40 5.05 8.78%
International Equity Fund 12/31/1994 12.84 $1,000.00 12/31/1999 30.68 $2,299.89 9.25 18.11%
Neuberger Berman Limited Maturity 12/31/1994 10.04 $1,000.00 12/31/1999 12.34 $1,184.57 0.80 3.44%
Quality Bond Fund 12/31/1994 15.56 $1,000.00 12/31/1999 21.77 $1,354.48 3.75 6.25%
Value Equity Fund 12/31/1994 18.36 $1,000.00 12/31/1999 40.33 $2,112.32 13.30 16.12%
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Penn Mutual
Diversifier II
Table 1b
5 Year Calculation
<TABLE>
<CAPTION>
begin unit beginning ending unit ending
fund name date value value date value value charges return
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Neuberger Berman Balanced 12/31/1994 10.22 $1,000.00 12/31/1999 22.72 $2,147.27 2.45 16.50%
Capital Appreciation 12/31/1994 10.86 $1,000.00 12/31/1999 19.92 $1,775.47 4.10 12.16%
Flexibly Managed Fund 12/31/1994 35.50 $1,000.00 12/31/1999 62.40 $1,668.94 17.30 10.78%
Growth Equity Fund - Non-Qualified 12/31/1994 25.89 $1,000.00 12/31/1999 88.68 $3,290.35 9.35 26.88%
Growth Equity - Qualified 12/31/1994 26.10 $1,000.00 12/31/1999 89.41 $3,290.35 9.35 26.88%
High Yield Bond Fund 12/31/1994 22.64 $1,000.00 12/31/1999 35.67 $1,516.35 5.05 8.68%
International Equity Fund 12/31/1994 12.84 $1,000.00 12/31/1999 30.68 $2,289.24 9.25 18.00%
Neuberger Berman Limited Maturity 12/31/1994 10.04 $1,000.00 12/31/1999 12.34 $1,179.08 0.80 3.35%
Quality Bond Fund 12/31/1994 15.56 $1,000.00 12/31/1999 21.77 $1,348.21 3.75 6.15%
Value Equity Fund 12/31/1994 18.36 $1,000.00 12/31/1999 40.33 $2,102.53 13.30 16.01%
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Penn Mutual
Diversifier II
Table 1c
5 Year Calculation
<TABLE>
<CAPTION>
begin unit beginning ending unit ending
fund name date value value date value value charges return
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Neuberger Berman Balanced 12/31/1994 10.22 $1,000.00 12/31/1999 22.72 $2,167.14 2.45 16.72%
Capital Appreciation 12/31/1994 10.86 $1,000.00 12/31/1999 19.92 $1,783.23 4.10 12.26%
Flexibly Managed Fund 12/31/1994 35.50 $1,000.00 12/31/1999 62.40 $1,673.42 17.30 10.84%
Growth Equity Fund - Non-Qualified 12/31/1994 25.89 $1,000.00 12/31/1999 88.68 $3,347.46 9.35 27.32%
Growth Equity - Qualified 12/31/1994 26.10 $1,000.00 12/31/1999 89.41 $3,347.46 9.35 27.32%
High Yield Bond Fund 12/31/1994 22.64 $1,000.00 12/31/1999 35.67 $1,515.72 5.05 8.67%
International Equity Fund 12/31/1994 12.84 $1,000.00 12/31/1999 30.68 $2,313.80 9.25 18.26%
Neuberger Berman Limited Maturity 12/31/1994 10.04 $1,000.00 12/31/1999 12.34 $1,167.51 0.80 3.14%
Quality Bond Fund 12/31/1994 15.56 $1,000.00 12/31/1999 21.77 $1,342.10 3.75 6.06%
Value Equity Fund 12/31/1994 18.36 $1,000.00 12/31/1999 40.33 $2,121.05 13.30 16.22%
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Penn Mutual
Diversifier II
Table 1d
5 Year Calculation
<TABLE>
<CAPTION>
begin unit beginning ending unit ending
fund name date value value date value value charges return
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Neuberger Berman Balanced 12/31/1994 10.22 $1,000.00 12/31/1999 22.72 $2,117.33 2.45 16.18%
Capital Appreciation 12/31/1994 10.86 $1,000.00 12/31/1999 19.92 $1,750.72 4.10 11.85%
Flexibly Managed Fund 12/31/1994 35.50 $1,000.00 12/31/1999 62.40 $1,645.60 17.30 10.47%
Growth Equity Fund - Non-Qualified 12/31/1994 25.89 $1,000.00 12/31/1999 88.68 $3,244.44 9.35 26.52%
Growth Equity - Qualified 12/31/1994 26.10 $1,000.00 12/31/1999 89.41 $3,244.44 9.35 26.52%
High Yield Bond Fund 12/31/1994 22.64 $1,000.00 12/31/1999 35.67 $1,495.19 5.05 8.37%
International Equity Fund 12/31/1994 12.84 $1,000.00 12/31/1999 30.68 $2,257.29 9.25 17.67%
Neuberger Berman Limited Maturity 12/31/1994 10.04 $1,000.00 12/31/1999 12.34 $1,162.62 0.80 3.06%
Quality Bond Fund 12/31/1994 15.56 $1,000.00 12/31/1999 21.77 $1,329.40 3.75 5.86%
Value Equity Fund 12/31/1994 18.36 $1,000.00 12/31/1999 40.33 $2,073.16 13.30 15.69%
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Penn Mutual
Diversifier II
Table 2a
5 Year Calculation
<TABLE>
<CAPTION>
begin unit beginning ending unit ending
fund name date value value date value value charges return
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Neuberger Berman Balanced 12/31/1994 10.22 $1,000.00 12/31/1999 22.72 $2,218.61 2.45 17.27%
Capital Appreciation 12/31/1994 10.86 $1,000.00 12/31/1999 19.92 $1,826.26 4.10 12.79%
Fidelity Asset Manager 12/31/1994 9.66 $1,000.00 12/31/1999 18.75 $1,938.52 1.65 14.15%
Fidelity Equity Income 12/31/1994 8.99 $1,000.00 12/31/1999 19.70 $2,178.97 6.55 16.85%
Fidelity Growth 12/31/1994 9.24 $1,000.00 12/31/1999 31.92 $3,429.91 8.55 27.94%
Fidelity Index 500 12/31/1994 5.60 $1,000.00 12/31/1999 18.34 $3,266.33 4.65 26.69%
Flexibly Managed Fund 12/31/1994 35.50 $1,000.00 12/31/1999 62.40 $1,727.24 17.30 11.54%
Growth Equity Fund - Non-Qualified 12/31/1994 25.89 $1,000.00 12/31/1999 88.68 $3,399.68 9.35 27.71%
Growth Equity - Qualified 12/31/1994 26.10 $1,000.00 12/31/1999 89.41 $3,399.68 9.35 27.71%
High Yield Bond Fund 12/31/1994 22.64 $1,000.00 12/31/1999 35.67 $1,566.52 5.05 9.39%
International Equity Fund 12/31/1994 12.84 $1,000.00 12/31/1999 30.68 $2,366.22 9.25 18.79%
Neuberger Berman Limited Maturity 12/31/1994 10.04 $1,000.00 12/31/1999 12.34 $1,227.84 0.80 4.19%
Neuberger Berman Partners 12/31/1994 5.50 $1,000.00 12/31/1999 13.54 $2,455.96 3.45 19.67%
Quality Bond Fund 12/31/1994 15.56 $1,000.00 12/31/1999 21.77 $1,392.80 3.75 6.85%
Value Equity Fund 12/31/1994 18.36 $1,000.00 12/31/1999 40.33 $2,172.66 13.30 16.78%
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Penn Mutual
Diversifier II
Table 2b
5 Year Calculation
<TABLE>
<CAPTION>
begin unit beginning ending unit ending
fund name date value value date value value charges return
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Flexibly Managed Fund 12/31/1994 35.50 $1,000.00 12/31/1999 62.40 $1,727.24 17.30 11.54%
Growth Equity Fund - Non-Qualified 12/31/1994 25.89 $1,000.00 12/31/1999 88.68 $3,399.68 9.35 27.71%
Growth Equity - Qualified 12/31/1994 26.10 $1,000.00 12/31/1999 89.41 $3,399.68 9.35 27.71%
High Yield Bond Fund 12/31/1994 22.64 $1,000.00 12/31/1999 35.67 $1,566.52 5.05 9.39%
International Equity Fund 12/31/1994 12.84 $1,000.00 12/31/1999 30.68 $2,366.22 9.25 18.79%
Quality Bond Fund 12/31/1994 15.56 $1,000.00 12/31/1999 21.77 $1,392.80 3.75 6.85%
Value Equity Fund 12/31/1994 18.36 $1,000.00 12/31/1999 40.33 $2,172.66 13.30 16.78%
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Penn Mutual
Diversifier II
Table 3a
5 Year Calculation
<TABLE>
<CAPTION>
begin unit beginning ending unit ending
fund name date value value date value value charges return
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Neuberger Berman Balanced 12/31/1994 10.22 $10,000.00 12/31/1999 22.72 $22,234.85 3.70 17.32%
Capital Appreciation 12/31/1994 10.86 $10,000.00 12/31/1999 19.92 $18,341.32 6.15 12.89%
Fidelity Asset Manager 12/31/1994 9.66 $10,000.00 12/31/1999 18.75 $19,413.91 2.45 14.18%
Fidelity Equity Income 12/31/1994 8.99 $10,000.00 12/31/1999 19.70 $21,901.25 9.80 16.97%
Fidelity Growth 12/31/1994 9.24 $10,000.00 12/31/1999 31.92 $34,508.49 12.80 28.09%
Fidelity Index 500 12/31/1994 5.60 $10,000.00 12/31/1999 18.34 $32,764.54 6.95 26.77%
Flexibly Managed Fund 12/31/1994 35.50 $10,000.00 12/31/1999 62.40 $17,548.07 25.95 11.90%
Growth Equity Fund - Non-Qualified 12/31/1994 25.89 $10,000.00 12/31/1999 88.68 $34,229.66 14.00 27.89%
Growth Equity - Qualified 12/31/1994 26.10 $10,000.00 12/31/1999 89.41 $34,229.65 14.00 27.89%
High Yield Bond Fund 12/31/1994 22.64 $10,000.00 12/31/1999 35.67 $15,742.40 7.55 9.49%
International Equity Fund 12/31/1994 12.84 $10,000.00 12/31/1999 30.68 $23,864.04 13.85 18.99%
Neuberger Berman Limited Maturity 12/31/1994 10.04 $10,000.00 12/31/1999 12.34 $12,289.74 1.20 4.21%
Neuberger Berman Partners 12/31/1994 5.50 $10,000.00 12/31/1999 13.54 $24,608.51 4.25 19.72%
Quality Bond Fund 12/31/1994 15.56 $10,000.00 12/31/1999 21.77 $13,982.35 5.60 6.93%
Value Equity Fund 12/31/1994 18.36 $10,000.00 12/31/1999 40.33 $21,940.89 19.95 17.01%
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Penn Mutual
Diversifier II
Table 3b
5 Year Calculation
<TABLE>
<CAPTION>
begin unit beginning ending unit ending
fund name date value value date value value charges return
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Flexibly Managed Fund 12/31/1994 35.50 $10,000.00 12/31/1999 62.40 $17,548.07 25.95 11.90%
Growth Equity Fund - Non-Qualified 12/31/1994 25.89 $10,000.00 12/31/1999 88.68 $34,229.66 14.00 27.89%
Growth Equity - Qualified 12/31/1994 26.10 $10,000.00 12/31/1999 89.41 $34,229.65 14.00 27.89%
High Yield Bond Fund 12/31/1994 22.64 $10,000.00 12/31/1999 35.67 $15,742.40 7.55 9.49%
International Equity Fund 12/31/1994 12.84 $10,000.00 12/31/1999 30.68 $23,864.04 13.85 18.99%
Quality Bond Fund 12/31/1994 15.56 $10,000.00 12/31/1999 21.77 $13,982.35 5.60 6.93%
Value Equity Fund 12/31/1994 18.36 $10,000.00 12/31/1999 40.33 $21,940.89 19.95 17.01%
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Penn Mutual
Diversifier II
Table 1a
10 Year Calculation
<TABLE>
<CAPTION>
begin unit beginning ending unit ending
fund name date value value date value value charges return
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Flexibly Managed Fund 12/31/1989 23.71 $1,000.00 12/31/1999 62.40 $2,535.20 34.60 9.74%
Growth Equity Fund - Non-Qualified 12/31/1989 21.03 $1,000.00 12/31/1999 88.68 $4,132.82 18.70 15.24%
Growth Equity - Qualified 12/31/1989 21.20 $1,000.00 12/31/1999 89.41 $4,132.82 18.70 15.24%
High Yield Bond Fund 12/31/1989 15.03 $1,000.00 12/31/1999 35.67 $2,347.52 10.10 8.90%
Quality Bond Fund 12/31/1989 11.78 $1,000.00 12/31/1999 21.77 $1,832.62 7.50 6.24%
Value Equity Fund 12/31/1989 13.16 $1,000.00 12/31/1999 40.33 $2,985.04 26.60 11.55%
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Penn Mutual
Diversifier II
Table 1b
10 Year Calculation
<TABLE>
<CAPTION>
begin unit beginning ending unit ending
fund name date value value date value value charges return
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Flexibly Managed Fund 12/31/1989 23.71 $1,000.00 12/31/1999 62.40 $2,512.33 34.60 9.64%
Growth Equity Fund - Non-Qualified 12/31/1989 21.03 $1,000.00 12/31/1999 88.68 $4,095.60 18.70 15.13%
Growth Equity - Qualified 12/31/1989 21.20 $1,000.00 12/31/1999 89.41 $4,095.59 18.70 15.13%
High Yield Bond Fund 12/31/1989 15.03 $1,000.00 12/31/1999 35.67 $2,326.38 10.10 8.80%
Quality Bond Fund 12/31/1989 11.78 $1,000.00 12/31/1999 21.77 $1,816.12 7.50 6.15%
Value Equity Fund 12/31/1989 13.16 $1,000.00 12/31/1999 40.33 $2,958.14 26.60 11.45%
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Penn Mutual
Diversifier II
Table 1c
10 Year Calculation
<TABLE>
<CAPTION>
begin unit beginning ending unit ending
fund name date value value date value value charges return
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Flexibly Managed Fund 12/31/1989 23.71 $1,000.00 12/31/1999 62.40 $2,485.20 34.60 9.53%
Growth Equity Fund - Non-Qualified 12/31/1989 21.03 $1,000.00 12/31/1999 88.68 $4,082.82 18.70 15.10%
Growth Equity - Qualified 12/31/1989 21.20 $1,000.00 12/31/1999 89.41 $4,082.82 18.70 15.10%
High Yield Bond Fund 12/31/1989 15.03 $1,000.00 12/31/1999 35.67 $2,297.52 10.10 8.67%
Quality Bond Fund 12/31/1989 11.78 $1,000.00 12/31/1999 21.77 $1,782.62 7.50 5.95%
Value Equity Fund 12/31/1989 13.16 $1,000.00 12/31/1999 40.33 $2,935.04 26.60 11.36%
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Penn Mutual
Diversifier II
Table 1d
10 Year Calculation
<TABLE>
<CAPTION>
begin unit beginning ending unit ending
fund name date value value date value value charges return
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Flexibly Managed Fund 12/31/1989 23.71 $1,000.00 12/31/1999 62.40 $2,503.44 34.60 9.61%
Growth Equity Fund - Non-Qualified 12/31/1989 21.03 $1,000.00 12/31/1999 88.68 $4,081.12 18.70 15.09%
Growth Equity - Qualified 12/31/1989 21.20 $1,000.00 12/31/1999 89.41 $4,081.12 18.70 15.09%
High Yield Bond Fund 12/31/1989 15.03 $1,000.00 12/31/1999 35.67 $2,318.16 10.10 8.77%
Quality Bond Fund 12/31/1989 11.78 $1,000.00 12/31/1999 21.77 $1,809.70 7.50 6.11%
Value Equity Fund 12/31/1989 13.16 $1,000.00 12/31/1999 40.33 $2,947.67 26.60 11.41%
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Penn Mutual
Diversifier II
Table 2a
10 Year Calculation
<TABLE>
<CAPTION>
begin unit beginning ending unit ending
fund name date value value date value value charges return
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Neuberger Berman Balanced 12/31/1989 7.82 $1,000.00 12/31/1999 22.72 $2,890.60 4.90 11.19%
Capital Appreciation 12/31/1989 7.74 $1,000.00 12/31/1999 19.92 $2,554.03 8.20 9.82%
Fidelity Asset Manager 12/31/1989 6.18 $1,000.00 12/31/1999 18.75 $3,025.60 3.30 11.70%
Fidelity Equity Income 12/31/1989 5.81 $1,000.00 12/31/1999 19.70 $3,352.54 13.10 12.85%
Fidelity Growth 12/31/1989 5.87 $1,000.00 12/31/1999 31.92 $5,357.77 17.10 18.27%
Flexibly Managed Fund 12/31/1989 23.71 $1,000.00 12/31/1999 62.40 $2,545.89 34.60 9.79%
Growth Equity Fund - Non-Qualified 12/31/1989 21.03 $1,000.00 12/31/1999 88.68 $4,139.45 18.70 15.26%
Growth Equity - Qualified 12/31/1989 21.20 $1,000.00 12/31/1999 89.41 $4,139.45 18.70 15.26%
High Yield Bond Fund 12/31/1989 15.03 $1,000.00 12/31/1999 35.67 $2,349.62 10.10 8.91%
Neuberger Berman Limited Maturity 12/31/1989 7.91 $1,000.00 12/31/1999 12.34 $1,556.51 1.60 4.52%
Quality Bond Fund 12/31/1989 11.78 $1,000.00 12/31/1999 21.77 $1,834.28 7.50 6.25%
Value Equity Fund 12/31/1989 13.16 $1,000.00 12/31/1999 40.33 $2,990.12 26.60 11.57%
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Penn Mutual
Diversifier II
Table 2b
10 Year Calculation
<TABLE>
<CAPTION>
begin unit beginning ending unit ending
fund name date value value date value value charges return
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Flexibly Managed Fund 12/31/1989 23.71 $1,000.00 12/31/1999 62.40 $2,545.89 34.60 9.79%
Growth Equity Fund - Non-Qualified 12/31/1989 21.03 $1,000.00 12/31/1999 88.68 $4,139.45 18.70 15.26%
Growth Equity - Qualified 12/31/1989 21.20 $1,000.00 12/31/1999 89.41 $4,139.45 18.70 15.26%
High Yield Bond Fund 12/31/1989 15.03 $1,000.00 12/31/1999 35.67 $2,349.62 10.10 8.91%
Quality Bond Fund 12/31/1989 11.78 $1,000.00 12/31/1999 21.77 $1,834.28 7.50 6.25%
Value Equity Fund 12/31/1989 13.16 $1,000.00 12/31/1999 40.33 $2,990.12 26.60 11.57%
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Penn Mutual
Diversifier II
Table 3a
10 Year Calculation
<TABLE>
<CAPTION>
begin unit beginning ending unit ending
fund name date value value date value value charges return
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Neuberger Berman Balanced 12/31/1989 7.82 $10,000.00 12/31/1999 22.72 $29,033.69 7.40 11.24%
Capital Appreciation 12/31/1989 7.74 $10,000.00 12/31/1999 19.92 $25,730.72 12.30 9.91%
Fidelity Asset Manager 12/31/1989 6.18 $10,000.00 12/31/1999 18.75 $30,333.88 4.90 11.73%
Fidelity Equity Income 12/31/1989 5.81 $10,000.00 12/31/1999 19.70 $33,890.89 19.60 12.97%
Fidelity Growth 12/31/1989 5.87 $10,000.00 12/31/1999 31.92 $54,281.50 25.60 18.42%
Flexibly Managed Fund 12/31/1989 23.71 $10,000.00 12/31/1999 62.40 $26,228.66 51.90 10.12%
Growth Equity Fund - Non-Qualified 12/31/1989 21.03 $10,000.00 12/31/1999 88.68 $42,091.13 28.00 15.45%
Growth Equity - Qualified 12/31/1989 21.20 $10,000.00 12/31/1999 89.41 $42,091.11 28.00 15.45%
High Yield Bond Fund 12/31/1989 15.03 $10,000.00 12/31/1999 35.67 $23,699.93 15.10 9.01%
Neuberger Berman Limited Maturity 12/31/1989 7.91 $10,000.00 12/31/1999 12.34 $15,590.48 2.40 4.54%
Quality Bond Fund 12/31/1989 11.78 $10,000.00 12/31/1999 21.77 $18,471.75 11.20 6.33%
Value Equity Fund 12/31/1989 13.16 $10,000.00 12/31/1999 40.33 $30,576.77 39.90 11.82%
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Penn Mutual
Diversifier II
Table 3b
10 Year Calculation
<TABLE>
<CAPTION>
begin unit beginning ending unit ending
fund name date value value date value value charges return
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Flexibly Managed Fund 12/31/1989 23.71 $10,000.00 12/31/1999 62.40 $26,228.66 51.90 10.12%
Growth Equity Fund - Non-Qualified 12/31/1989 21.03 $10,000.00 12/31/1999 88.68 $42,091.13 28.00 15.45%
Growth Equity - Qualified 12/31/1989 21.20 $10,000.00 12/31/1999 89.41 $42,091.11 28.00 15.45%
High Yield Bond Fund 12/31/1989 15.03 $10,000.00 12/31/1999 35.67 $23,699.93 15.10 9.01%
Quality Bond Fund 12/31/1989 11.78 $10,000.00 12/31/1999 21.77 $18,471.75 11.20 6.33%
Value Equity Fund 12/31/1989 13.16 $10,000.00 12/31/1999 40.33 $30,576.77 39.90 11.82%
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Penn Mutual
Diversifier II
Table 1a
Since Inception Calculation
<TABLE>
<CAPTION>
begin unit beginning ending unit ending
fund name date value value date value value charges return
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Neuberger Berman Balanced 05/03/1993 10.00 $1,000.00 12/31/1999 22.72 $2,241.46 2.94 12.87%
Capital Appreciation 05/03/1993 10.00 $1,000.00 12/31/1999 19.92 $1,971.81 4.92 10.72%
Emerging Growth Fund 05/01/1997 10.00 $1,000.00 12/31/1999 52.08 $4,969.22 1.24 82.36%
MS Emerging Market International 05/01/1997 10.00 $1,000.00 12/31/1999 12.93 $1,233.97 0.50 8.20%
Fidelity Asset Manager 05/01/1995 10.00 $1,000.00 12/31/1999 18.75 $1,821.52 1.32 13.70%
Fidelity Equity Income 05/01/1995 10.00 $1,000.00 12/31/1999 19.70 $1,912.93 5.24 14.90%
Fidelity Growth 05/01/1995 10.00 $1,000.00 12/31/1999 31.92 $3,101.96 6.84 27.42%
Fidelity Index 500 05/01/1997 10.00 $1,000.00 12/31/1999 18.34 $1,750.01 1.86 23.33%
Flexibly Managed Fund 07/31/1984 10.00 $1,000.00 12/31/1999 62.40 $6,020.97 51.90 12.34%
Growth Equity Fund - Non-Qualified 06/01/1983 10.00 $1,000.00 12/31/1999 88.68 $8,655.91 29.92 13.89%
Growth Equity - Qualified 08/11/1983 10.00 $1,000.00 12/31/1999 89.41 $8,734.28 29.92 14.13%
High Yield Bond Fund 08/06/1984 10.00 $1,000.00 12/31/1999 35.67 $3,518.52 15.15 8.51%
International Equity Fund 11/01/1992 10.00 $1,000.00 12/31/1999 30.68 $3,023.82 12.95 16.69%
Neuberger Berman Limited Maturity 05/03/1993 10.00 $1,000.00 12/31/1999 12.34 $1,205.48 0.96 2.84%
Neuberger Berman Partners 05/01/1997 10.00 $1,000.00 12/31/1999 13.54 $1,287.65 1.14 9.94%
Quality Bond Fund 03/17/1987 10.00 $1,000.00 12/31/1999 21.77 $2,153.49 9.00 6.18%
Small Capitalization Fund 05/01/1995 10.00 $1,000.00 12/31/1999 14.03 $1,357.74 2.76 6.77%
Value Equity Fund 03/17/1987 10.00 $1,000.00 12/31/1999 40.33 $3,913.68 31.92 11.25%
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Penn Mutual
Diversifier II
Table 1b
Since Inception Calculation
<TABLE>
<CAPTION>
begin unit beginning ending unit ending
fund name date value value date value value charges return
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Neuberger Berman Balanced 05/03/1993 10.00 $1,000.00 12/31/1999 22.72 $2,210.91 2.94 12.64%
Capital Appreciation 05/03/1993 10.00 $1,000.00 12/31/1999 19.92 $1,944.94 4.92 10.49%
Emerging Growth Fund 05/01/1997 10.00 $1,000.00 12/31/1999 52.08 $4,969.22 1.24 82.36%
MS Emerging Market International 05/01/1997 10.00 $1,000.00 12/31/1999 12.93 $1,233.97 0.50 8.20%
Fidelity Asset Manager 05/01/1995 10.00 $1,000.00 12/31/1999 18.75 $1,813.09 1.32 13.59%
Fidelity Equity Income 05/01/1995 10.00 $1,000.00 12/31/1999 19.70 $1,904.08 5.24 14.78%
Fidelity Growth 05/01/1995 10.00 $1,000.00 12/31/1999 31.92 $3,087.62 6.84 27.30%
Fidelity Index 500 05/01/1997 10.00 $1,000.00 12/31/1999 18.34 $1,750.01 1.86 23.33%
Flexibly Managed Fund 07/31/1984 10.00 $1,000.00 12/31/1999 62.40 $6,020.97 51.90 12.34%
Growth Equity Fund - Non-Qualified 06/01/1983 10.00 $1,000.00 12/31/1999 88.68 $8,655.91 29.92 13.89%
Growth Equity - Qualified 08/11/1983 10.00 $1,000.00 12/31/1999 89.41 $8,734.28 29.92 14.13%
High Yield Bond Fund 08/06/1984 10.00 $1,000.00 12/31/1999 35.67 $3,518.52 15.15 8.51%
International Equity Fund 11/01/1992 10.00 $1,000.00 12/31/1999 30.68 $2,969.33 12.95 16.40%
Neuberger Berman Limited Maturity 05/03/1993 10.00 $1,000.00 12/31/1999 12.34 $1,189.03 0.96 2.63%
Neuberger Berman Partners 05/01/1997 10.00 $1,000.00 12/31/1999 13.54 $1,287.65 1.14 9.94%
Quality Bond Fund 03/17/1987 10.00 $1,000.00 12/31/1999 21.77 $2,153.49 9.00 6.18%
Small Capitalization Fund 05/01/1995 10.00 $1,000.00 12/31/1999 14.03 $1,351.46 2.76 6.66%
Value Equity Fund 03/17/1987 10.00 $1,000.00 12/31/1999 40.33 $3,913.68 31.92 11.25%
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Penn Mutual
Diversifier II
Table 1c
Since Inception Calculation
<TABLE>
<CAPTION>
begin unit beginning ending unit ending
fund name date value value date value value charges return
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Neuberger Berman Balanced 05/03/1993 10.00 $1,000.00 12/31/1999 22.72 $2,211.83 2.94 12.65%
Capital Appreciation 05/03/1993 10.00 $1,000.00 12/31/1999 19.92 $1,939.72 4.92 10.45%
Emerging Growth Fund 05/01/1997 10.00 $1,000.00 12/31/1999 52.08 $5,153.41 1.24 84.86%
MS Emerging Market International 05/01/1997 10.00 $1,000.00 12/31/1999 12.93 $1,242.13 0.50 8.46%
Fidelity Asset Manager 05/01/1995 10.00 $1,000.00 12/31/1999 18.75 $1,822.07 1.32 13.71%
Fidelity Equity Income 05/01/1995 10.00 $1,000.00 12/31/1999 19.70 $1,916.03 5.24 14.94%
Fidelity Growth 05/01/1995 10.00 $1,000.00 12/31/1999 31.92 $3,138.05 6.84 27.74%
Fidelity Index 500 05/01/1997 10.00 $1,000.00 12/31/1999 18.34 $1,782.50 1.86 24.19%
Flexibly Managed Fund 07/31/1984 10.00 $1,000.00 12/31/1999 62.40 $6,020.97 51.90 12.34%
Growth Equity Fund - Non-Qualified 06/01/1983 10.00 $1,000.00 12/31/1999 88.68 $8,655.91 29.92 13.89%
Growth Equity - Qualified 08/11/1983 10.00 $1,000.00 12/31/1999 89.41 $8,734.28 29.92 14.13%
High Yield Bond Fund 08/06/1984 10.00 $1,000.00 12/31/1999 35.67 $3,518.52 15.15 8.51%
International Equity Fund 11/01/1992 10.00 $1,000.00 12/31/1999 30.68 $2,973.82 12.95 16.42%
Neuberger Berman Limited Maturity 05/03/1993 10.00 $1,000.00 12/31/1999 12.34 $1,166.45 0.96 2.34%
Neuberger Berman Partners 05/01/1997 10.00 $1,000.00 12/31/1999 13.54 $1,298.41 1.14 10.28%
Quality Bond Fund 03/17/1987 10.00 $1,000.00 12/31/1999 21.77 $2,153.49 9.00 6.18%
Small Capitalization Fund 05/01/1995 10.00 $1,000.00 12/31/1999 14.03 $1,345.46 2.76 6.56%
Value Equity Fund 03/17/1987 10.00 $1,000.00 12/31/1999 40.33 $3,913.68 31.92 11.25%
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Penn Mutual
Diversifier II
Table 1d
Since Inception Calculation
<TABLE>
<CAPTION>
begin unit beginning ending unit ending
fund name date value value date value value charges return
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Neuberger Berman Balanced 05/03/1993 10.00 $1,000.00 12/31/1999 22.72 $2,160.00 2.94 12.25%
Capital Appreciation 05/03/1993 10.00 $1,000.00 12/31/1999 19.92 $1,900.17 4.92 10.11%
Emerging Growth Fund 05/01/1997 10.00 $1,000.00 12/31/1999 52.08 $4,969.22 1.24 82.36%
MS Emerging Market International 05/01/1997 10.00 $1,000.00 12/31/1999 12.93 $1,233.97 0.50 8.20%
Fidelity Asset Manager 05/01/1995 10.00 $1,000.00 12/31/1999 18.75 $1,787.81 1.32 13.24%
Fidelity Equity Income 05/01/1995 10.00 $1,000.00 12/31/1999 19.70 $1,877.53 5.24 14.44%
Fidelity Growth 05/01/1995 10.00 $1,000.00 12/31/1999 31.92 $3,044.57 6.84 26.91%
Fidelity Index 500 05/01/1997 10.00 $1,000.00 12/31/1999 18.34 $1,750.01 1.86 23.33%
Flexibly Managed Fund 07/31/1984 10.00 $1,000.00 12/31/1999 62.40 $6,020.97 51.90 12.34%
Growth Equity Fund - Non-Qualified 06/01/1983 10.00 $1,000.00 12/31/1999 88.68 $8,655.91 29.92 13.89%
Growth Equity - Qualified 08/11/1983 10.00 $1,000.00 12/31/1999 89.41 $8,734.28 29.92 14.13%
High Yield Bond Fund 08/06/1984 10.00 $1,000.00 12/31/1999 35.67 $3,518.52 15.15 8.51%
International Equity Fund 11/01/1992 10.00 $1,000.00 12/31/1999 30.68 $2,887.61 12.95 15.95%
Neuberger Berman Limited Maturity 05/03/1993 10.00 $1,000.00 12/31/1999 12.34 $1,161.61 0.96 2.27%
Neuberger Berman Partners 05/01/1997 10.00 $1,000.00 12/31/1999 13.54 $1,287.65 1.14 9.94%
Quality Bond Fund 03/17/1987 10.00 $1,000.00 12/31/1999 21.77 $2,153.49 9.00 6.18%
Small Capitalization Fund 05/01/1995 10.00 $1,000.00 12/31/1999 14.03 $1,332.60 2.76 6.34%
Value Equity Fund 03/17/1987 10.00 $1,000.00 12/31/1999 40.33 $3,913.68 31.92 11.25%
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Penn Mutual
Diversifier II
Table 2a
Since Inception Calculation
<TABLE>
<CAPTION>
begin unit beginning ending unit ending
fund name date value value date value value charges return
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Neuberger Berman Balanced 02/28/1989 6.79 $1,000.00 12/31/1999 22.72 $3,329.87 2.94 11.73%
Capital Appreciation 11/20/1987 5.89 $1,000.00 12/31/1999 19.92 $3,352.48 4.92 10.50%
Emerging Growth Fund 05/01/1997 10.00 $1,000.00 12/31/1999 52.08 $5,202.94 1.24 85.53%
MS Emerging Market International 10/01/1996 9.28 $1,000.00 12/31/1999 12.93 $1,398.68 0.50 10.88%
Fidelity Asset Manager 09/06/1989 6.15 $1,000.00 12/31/1999 18.75 $3,037.15 1.32 11.36%
Fidelity Equity Income 10/09/1986 4.24 $1,000.00 12/31/1999 19.70 $4,586.54 5.24 12.20%
Fidelity Growth 10/09/1986 3.87 $1,000.00 12/31/1999 31.92 $8,125.51 6.84 17.15%
Fidelity Index 500 08/27/1992 4.85 $1,000.00 12/31/1999 18.34 $3,762.95 1.86 19.76%
Flexibly Managed Fund 07/31/1984 10.00 $1,000.00 12/31/1999 62.40 $6,045.26 51.90 12.37%
Growth Equity Fund - Non-Qualified 06/01/1983 10.00 $1,000.00 12/31/1999 88.68 $8,678.54 29.92 13.91%
Growth Equity - Qualified 08/11/1983 10.00 $1,000.00 12/31/1999 89.41 $8,750.63 29.92 14.14%
High Yield Bond Fund 08/06/1984 10.00 $1,000.00 12/31/1999 35.67 $3,522.60 15.15 8.51%
International Equity Fund 11/01/1992 10.00 $1,000.00 12/31/1999 30.68 $3,028.11 12.95 16.72%
Neuberger Berman Limited Maturity 09/10/1984 4.95 $1,000.00 12/31/1999 12.34 $2,487.91 0.96 6.13%
Neuberger Berman Partners 03/22/1994 5.67 $1,000.00 12/31/1999 13.54 $2,381.58 1.14 16.20%
Quality Bond Fund 03/17/1987 10.00 $1,000.00 12/31/1999 21.77 $2,155.93 9.00 6.19%
Small Capitalization Fund 03/01/1995 10.01 $1,000.00 12/31/1999 14.03 $1,396.35 2.76 7.14%
Value Equity Fund 03/17/1987 10.00 $1,000.00 12/31/1999 40.33 $3,921.23 31.92 11.27%
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Penn Mutual
Diversifier II
Table 2b
Since Inception Calculation
<TABLE>
<CAPTION>
begin unit beginning ending unit ending
fund name date value value date value value charges return
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Flexibly Managed Fund 07/31/1984 10.00 $1,000.00 12/31/1999 62.40 $6,045.26 51.90 12.37%
Growth Equity Fund - Non-Qualified 06/01/1983 10.00 $1,000.00 12/31/1999 88.68 $8,678.54 29.92 13.91%
Growth Equity - Qualified 08/11/1983 10.00 $1,000.00 12/31/1999 89.41 $8,750.63 29.92 14.14%
High Yield Bond Fund 08/06/1984 10.00 $1,000.00 12/31/1999 35.67 $3,522.60 15.15 8.51%
International Equity Fund 11/01/1992 10.00 $1,000.00 12/31/1999 30.68 $3,028.11 12.95 16.72%
Quality Bond Fund 03/17/1987 10.00 $1,000.00 12/31/1999 21.77 $2,155.93 9.00 6.19%
Value Equity Fund 03/17/1987 10.00 $1,000.00 12/31/1999 40.33 $3,921.23 31.92 11.27%
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Penn Mutual
Diversifier II
Table 3a
Since Inception Calculation
<TABLE>
<CAPTION>
begin unit beginning ending unit ending
fund name date value value date value value charges return
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Neuberger Berman Balanced 02/28/1989 6.79 $10,000.00 12/31/1999 22.72 $33,443.29 7.40 11.78%
Capital Appreciation 11/20/1987 5.89 $10,000.00 12/31/1999 19.92 $33,802.12 14.76 10.57%
Emerging Growth Fund 05/01/1997 10.00 $10,000.00 12/31/1999 52.08 $52,078.97 1.86 85.59%
MS Emerging Market International 10/01/1996 9.28 $10,000.00 12/31/1999 12.93 $14,007.22 1.14 10.93%
Fidelity Asset Manager 09/06/1989 6.15 $10,000.00 12/31/1999 18.75 $30,457.51 4.90 11.39%
Fidelity Equity Income 10/09/1986 4.24 $10,000.00 12/31/1999 19.70 $46,425.29 25.48 12.30%
Fidelity Growth 10/09/1986 3.87 $10,000.00 12/31/1999 31.92 $82,389.78 33.28 17.27%
Fidelity Index 500 08/27/1992 4.85 $10,000.00 12/31/1999 18.34 $37,836.06 9.73 19.85%
Flexibly Managed Fund 07/31/1984 10.00 $10,000.00 12/31/1999 62.40 $62,201.53 77.85 12.58%
Growth Equity Fund - Non-Qualified 06/01/1983 10.00 $10,000.00 12/31/1999 88.68 $88,487.49 44.80 14.04%
Growth Equity - Qualified 08/11/1983 10.00 $10,000.00 12/31/1999 89.41 $89,222.68 44.80 14.28%
High Yield Bond Fund 08/06/1984 10.00 $10,000.00 12/31/1999 35.67 $35,622.17 22.65 8.59%
International Equity Fund 11/01/1992 10.00 $10,000.00 12/31/1999 30.68 $30,638.13 19.39 16.91%
Neuberger Berman Limited Maturity 09/10/1984 4.95 $10,000.00 12/31/1999 12.34 $24,926.74 3.60 6.15%
Neuberger Berman Partners 03/22/1994 5.67 $10,000.00 12/31/1999 13.54 $23,879.77 4.25 16.25%
Quality Bond Fund 03/17/1987 10.00 $10,000.00 12/31/1999 21.77 $21,748.30 13.44 6.26%
Small Capitalization Fund 03/01/1995 10.01 $10,000.00 12/31/1999 14.03 $14,011.46 4.12 7.22%
Value Equity Fund 03/17/1987 10.00 $10,000.00 12/31/1999 40.33 $40,217.38 47.88 11.49%
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Penn Mutual
Diversifier II
Table 3b
Since Inception Calculation
<TABLE>
<CAPTION>
begin unit beginning ending unit ending
fund name date value value date value value charges return
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Flexibly Managed Fund 07/31/1984 10.00 $10,000.00 12/31/1999 62.40 $62,201.53 77.85 12.58%
Growth Equity Fund - Non-Qualified 06/01/1983 10.00 $10,000.00 12/31/1999 88.68 $88,487.49 44.80 14.04%
Growth Equity - Qualified 08/11/1983 10.00 $10,000.00 12/31/1999 89.41 $89,222.68 44.80 14.28%
High Yield Bond Fund 08/06/1984 10.00 $10,000.00 12/31/1999 35.67 $35,622.17 22.65 8.59%
International Equity Fund 11/01/1992 10.00 $10,000.00 12/31/1999 30.68 $30,638.13 19.39 16.91%
Quality Bond Fund 03/17/1987 10.00 $10,000.00 12/31/1999 21.77 $21,748.30 13.44 6.26%
Value Equity Fund 03/17/1987 10.00 $10,000.00 12/31/1999 40.33 $40,217.38 47.88 11.49%
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
