<PAGE>
As filed with the Securities and Exchange Commission on June 21, 2000
FILE NO. 811-03457
FILE NO. _______
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------
FORM N-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
Pre-Effective Amendment No. __ [ ]
Post-Effective Amendment No. __ [ ]
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 31 [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
The Penn Mutual Life Insurance Company
600 Dresher Road
Horsham, Pennsylvania 19044
Copy to:
Richard W. Grant
C. Ronald Rubley
Morgan, Lewis & Bockius LLP
1701 Market Street
Philadelphia, PA 19103-2921
--------------------
Approximate date of public offering: As soon as practicable after effectiveness
of the Registration Statement
Title of Securities Being Registered:
Individual Variable and Fixed Annuity Contracts - Flexible Purchase Payments
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registration shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
shall determine.
================================================================================
<PAGE>
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
Location in Statement
=====================
Form N-4 Item Number Location in Prospectus of Additional Information
==================== ====================== =========================
<S> <C> <C> <C>
Item 1. Cover Page Cover Page N/A
Item 2. Definitions Glossary N/A
Item 3. Synopsis or Highlights Cover Page; Expenses N/A
Item 4. Condensed Financial N/A N/A
Information
Item 5. General Description of The Penn Mutual Life Insurance N/A
Registrant, Depositor Company;
and Portfolio Companies The Separate Account
Item 6. Deductions and Expenses The Contract - What Charges Do I Pay? N/A
Item 7. General Description of The Contract N/A
Variable Annuity
Contracts
Item 8. Annuity Period Options The Contract - What Types of Annuity N/A
Payments May I Choose?
Item 9. Death Benefit on Death The Contract - What are the Death N/A
benefits Under My Contract?
Item 10. Purchase and Contract The Contract - How do I Purchase a N/A
Value Contract?
The Separate Account - Accumulation
Units
Item 11. Redemptions The Contract - May I Withdraw Any of N/A
My Money?
Item 12. Taxes Federal Income Tax Considerations N/A
Item 13. Legal Proceedings N/A N/A
Item 14. Table of Contents of the Statement of Additional Information N/A
Statement of Additional Contents
Information
Item 15. Cover Page N/A Cover Page
Item 16. Table of Contents N/A Cover Page
Item 17. General Information and N/A N/A
History
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C>
Item 18. Services N/A Administrative and Recordkeeping
Services; Custodian; Independent
Auditors
Item 19. Purchase of Securities The Contract - How Do I Purchase a Distribution of Contracts
Being Offered and Contract?
Expenses The Contract - May I Transfer Money
Among Investment Options?
The Contract - What Charges Do I Pay?
Item 20. Underwriters N/A Distribution of Contracts
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>
PROSPECTUS -- ______, 2000
Individual Variable and Fixed Annuity Contract -- Flexible Purchase Payments
--------------------------------------------------------------------------------
PENN MUTUAL VARIABLE ANNUITY ACCOUNT III
THE PENN MUTUAL LIFE INSURANCE COMPANY
Philadelphia, Pennsylvania 19172 Telephone (800) 523-0650
--------------------------------------------------------------------------------
This Prospectus describes an individual variable and fixed annuity contract
("Contract") offered by The Penn Mutual Life Insurance Company ("Penn Mutual").
Please read it carefully and save it for future reference.
The Contract is an agreement between you and Penn Mutual. You agree to make one
or more payments to us and we agree to make annuity and other payments to you at
a future date. The Contract:
o has a variable component, which means that your Variable Account Value
and any variable payout will be based upon investment experience.
o has a fixed component, which means that your Fixed Account Value and
any fixed payout will be based on purchase payments accumulated with
interest at a rate of not less than 3%.
o has a purchase payment enhancement feature, which means that each time
you make a purchase payment, Penn Mutual will add an additional credit
to your Contract Value.
o is tax-deferred, which means that you will not pay taxes until we begin
to make annuity payments to you or you take money out.
o allows you to choose to receive your annuity payments over different
periods of time.
Under the variable component of the Contract, you may direct us to invest your
payments in one or more of the following Funds through Penn Mutual Variable
Annuity Account III (the "Separate Account").
<TABLE>
<CAPTION>
Penn Series Funds, Inc. Manager
<S> <C>
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
</TABLE>
A Prospectus for each of these Funds accompanies this Prospectus.
Under the fixed component of the Contract, you may direct us to allocate money
to 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.
<PAGE>
The Contract is not suitable for short-term investment. You may pay a deferred
sales charge of up to 8% 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.
Contract expenses are higher than other annuity contracts offered by Penn Mutual
without a purchase payment enhancement feature. The benefit of the purchase
payment enhancement may be more than offset by the higher expenses, relative to
other annuity contracts we offer, if withdrawals are made in the early years of
the contract.
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. The refund will not include the purchase payment
enhancement we credited to your contract.
You may obtain a Statement of Additional Information from us free of charge by
writing The Penn Mutual Life Insurance Company, Customer Service Group,
Philadelphia, PA 19172. Or, you can call us at (800) 523-0650. The Statement of
Additional Information contains more information about the Contract. It is filed
with the Securities and Exchange Commission and we incorporate it by reference
into this Prospectus. The table of contents of the Statement of Additional
Information is at the end of this Prospectus.
The Securities and Exchange Commission maintains a Web site (http://www.sec.gov)
that contains this Prospectus, the Statement of Additional Information, material
incorporated by reference, and other information regarding registrants that file
electronically with the Commission.
<PAGE>
<TABLE>
<S> <C>
-----------------------------------------------------------------------------------------------------------------
PROSPECTUS CONTENTS
-----------------------------------------------------------------------------------------------------------------
GLOSSARY.........................................................................................................
-----------------------------------------------------------------------------------------------------------------
EXPENSES.........................................................................................................
-----------------------------------------------------------------------------------------------------------------
EXAMPLES OF FEES AND EXPENSES....................................................................................
-----------------------------------------------------------------------------------------------------------------
CONDENSED FINANCIAL INFORMATION..................................................................................
-----------------------------------------------------------------------------------------------------------------
THE PENN MUTUAL LIFE INSURANCE COMPANY...........................................................................
-----------------------------------------------------------------------------------------------------------------
THE SEPARATE ACCOUNT.............................................................................................
Accumulation Units..........................................................................................
Voting Instructions.........................................................................................
Investment Options in the Separate Account..................................................................
Penn Series Funds, Inc. ................................................................................
Neuberger Berman Advisers Management Trust..............................................................
Fidelity Investments' Variable Insurance Products Fund..................................................
Fidelity Investments' Variable Insurance Products Fund II...............................................
Morgan Stanley's The Universal Institutional Funds, Inc. ...............................................
-----------------------------------------------------------------------------------------------------------------
THE FIXED INTEREST ACCOUNTS .....................................................................................
-----------------------------------------------------------------------------------------------------------------
THE CONTRACT.....................................................................................................
How Do I Purchase a Contract?...............................................................................
What Are Purchase Payment Enhancements? ....................................................................
Do I Always Get to Keep My Purchase Payment Enhancements? ..................................................
Do Purchase Payment Enhancements Benefit All People? .......................................................
What Types of Annuity Payments May I Choose?................................................................
Variable Annuity Payments ..............................................................................
Fixed Annuity Payments ................................................................................
Other Information ......................................................................................
What Are the Death Benefits Under My Contract?..............................................................
Enhanced Guaranteed Minimum Death Benefit ..............................................................
Choosing a Lump Sum or Annuity .........................................................................
May I Transfer Money Among Subaccounts and the One Year Fixed Interest Accounts?............................
Before the Annuity Date ...............................................................................
After the Annuity Date ...............................................................................
General Rules...........................................................................................
Dollar Cost Averaging...................................................................................
Automatic Rebalancing...................................................................................
May I Withdraw Any of My Money?.............................................................................
Systematic Withdrawals..................................................................................
403(b) Withdrawals......................................................................................
Deferment of Payments and Transfers.........................................................................
What Charges Do I Pay?......................................................................................
Administration Charges..................................................................................
Mortality and Expense Risk Charge.......................................................................
Contingent Deferred Sales Charge........................................................................
Free Withdrawals........................................................................................
Enhanced Guaranteed Minimum Death Benefit (Optional) ...................................................
Premium Taxes...........................................................................................
-----------------------------------------------------------------------------------------------------------------
PERFORMANCE INFORMATION..........................................................................................
-----------------------------------------------------------------------------------------------------------------
MORE INFORMATION ABOUT THE FIXED INTEREST ACCOUNTS...............................................................
General Information.........................................................................................
Loans Under Section 403(b) Contracts........................................................................
</TABLE>
1
<PAGE>
<TABLE>
<S> <C>
-----------------------------------------------------------------------------------------------------------------
FEDERAL INCOME TAX CONSIDERATIONS................................................................................
Withdrawals and Death Benefits..............................................................................
Annuity Payments............................................................................................
Early Withdrawals...........................................................................................
Transfers...................................................................................................
Separate Account Diversification............................................................................
Qualified Plans.............................................................................................
-----------------------------------------------------------------------------------------------------------------
FINANCIAL STATEMENTS.............................................................................................
-----------------------------------------------------------------------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION CONTENTS.....................................................................
</TABLE>
2
<PAGE>
--------------------------------------------------------------------------------
GLOSSARY
Accumulation Period: A period that begins with your first purchase
payment and ends on the Annuity Date.
Accumulation Unit: A unit of measure used to compute the Variable
Account Value under the Contract prior to the Annuity Date.
Administrative Office: A reference to our administrative office means
The Penn Mutual Life Insurance Company, Administrative Office, 600
Dresher Road, Horsham, Pennsylvania 19044.
Annuitant: The person during whose life annuity payments are made.
Annuity Date: The date on which annuity payments start.
Annuity Payout Period: The period of time, starting on the Annuity
Date, during which we make annuity payments.
Annuity Unit: A unit of measure used to calculate the amount of each
variable annuity payment.
Beneficiary: The person(s) named by the Contract Owner to receive the
death benefit payable upon the death of the Contract Owner or
Annuitant.
Contract: The combination variable and fixed annuity contract
described in this prospectus.
Contract Owner: The person specified in the Contract as the Contract
Owner.
Contract Value: The sum of the Variable Account Value and the Fixed
Interest Account Value.
Contract Year: Each twelve-month period following the contract date.
Fixed Account Value: The value of amounts held under the Contract in
the Fixed Interest Account.
Separate Account: Penn Mutual Variable Annuity Account III, a separate
account of The Penn Mutual Life Insurance Company that is registered as
a unit investment trust under the Investment Company Act of 1940.
Variable Account Value: The value of amounts held under the Contract
in all subaccounts of the Separate Account.
Valuation Period: The period from one valuation of Separate Account
assets to the next. Valuation is performed on each day the New York
Stock Exchange is open for trading.
We or Us: A reference to "we" or "us" denotes The Penn Mutual Life
Insurance Company, also referred to in this Prospectus as Penn Mutual.
You: A reference to "you" denotes the Contract Owner or prospective
Contract Owner.
--------------------------------------------------------------------------------
EXPENSES
<TABLE>
<S> <C>
Contract Owner Transaction Expenses
Sales Load Imposed on Purchase Payments................................................................... None
Maximum Contingent Deferred Sales Charge...................................8% of Purchase payments withdrawn(a)
Transfer Fee...............................................................................................None
Maximum Annual Contract Administration Charge............................................................$40(b)
Separate Account Annual Expenses (as a percentage of Variable Account Value)
Mortality and Expense Risk Charge.........................................................................1.25%
Contract Administration Charge............................................................................0.15%
-----
Total Separate Account Annual Expenses....................................................................1.40%(c)
</TABLE>
-------------------------
(a) The charge decreases to zero in the tenth year.
(b) You pay $40 or 2% of the Variable Account Value, whichever is less. You do
not pay this charge if your Variable Account Value is more than $100,000.
(c) If eligible, you may purchase either the step-up or rising floor Enhanced
Guaranteed Minimum Death Benefit rider with your Contract. The current annual
charge for the step-up rider is 0.25% of the Variable Account Value, and will
never be more than 0.30%. The annual charge for the rising floor rider is 0.35%.
See What Charges Do I Pay? in this Prospectus.
3
<PAGE>
--------------------------------------------------------------------------------
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>
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(1) ............... 0.07% 0.09% 0.06% 0.03% 0.25%(3)
Mid Cap Growth(1) .......... 0.70% 0.15% 0.08% 0.07% 1.00%
Mid Cap Value(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 Value Cap(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 Fees.
--------------------------------------------------------------------------------
Neuberger Berman Advisers Management Trust (a)
Underlying Fund Annual Expenses (as a % of portfolio average net assets)
Management,
Advisory and
Administration Other Total Fund
Fees Expenses Expenses
--------------- -------- ----------
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 show in this table. Without
this reduction, total expenses would be have been 0.57% for the Equity-Income
Portfolio and 0.66% for the Growth Portfolio.
4
<PAGE>
--------------------------------------------------------------------------------
Fidelity Investments' Variable Insurance Products Fund II
Underlying Fund Annual Expenses (as a % of portfolio average net assets)
<TABLE>
<CAPTION>
Management Fee Other Total Fund
(After Waiver) Expenses Expenses
-------------- -------- -----------
<S> <C> <C> <C>
Asset Manager (a).......................................... 0.54% 0.08% 0.62%
</TABLE>
---------------
(a) The expenses presented are for the last fiscal year. Some of the brokerage
commissions paid by the fund reduced the expenses shown in this table. Without
this reduction, total expenses would have been 0.63% for the Asset Manager
Portfolio.
--------------------------------------------------------------------------------
Morgan Stanley's The Universal Institutional Funds, Inc.
Underlying Fund Annual Expenses (as a % of portfolio average net assets)
<TABLE>
<CAPTION>
Management Other Total Fund
Fee Expenses Expenses
---------- -------- -----------
<S> <C> <C> <C>
Emerging Markets Equity (International).................... 1.25% 0.50% 1.75%
</TABLE>
--------------------------------------------------------------------------------
Please review these tables carefully. They show the expenses that you
pay directly and indirectly when you purchase a Contract. Your expenses include
Contract expenses and the expenses of the Funds that you select. See the
prospectuses of Penn Series Funds, Inc., 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.
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, plus a purchase payment enhancement of $30 added by Penn Mutual. The
examples also assume that you elected the optional death benefit with the
highest charge.
You would pay the following expenses on each $1,000 invested, plus a
purchase payment enhancement of $30 added by Penn Mutual (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*....................................... $ $ $ $
Penn Series Limited Maturity Bond Fund*(a)........................... $ $ $ $
Penn Series Quality Bond Fund*....................................... $ $ $ $
Penn Series High Yield Bond Fund**................................... $ $ $ $
Penn Series Flexibly Managed Fund*................................... $ $ $ $
Penn Series Growth Equity Fund*...................................... $ $ $ $
Penn Series Large Cap Value Fund*(b)................................. $ $ $ $
Penn Series Index 500 Fund*(c)....................................... $ $ $ $
Penn Series Mid Cap Growth Fund*(f).................................. $ $ $ $
Penn Series Mid Cap Value Fund*(d)................................... $ $ $ $
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
One Three Five Ten
Year Years Years Years
---- ----- ----- -----
<S> <C> <C> <C> <C>
Penn Series Emerging Growth Fund**................................... $ $ $ $
Penn Series Small Cap Value Fund*(e)................................. $ $ $ $
Penn Series International Equity Fund*............................... $ $ $ $
Neuberger Berman Balanced Portfolio**................................ $ $ $ $
Fidelity's Equity Income Portfolio**................................. $ $ $ $
Fidelity's Growth Portfolio**........................................ $ $ $ $
Fidelity's Asset Manager Portfolio**................................. $ $ $ $
Morgan Stanley Emerging Markets Equity (International) Portfolio**... $ $ $ $
</TABLE>
You would pay the following expenses on each $1,000 invested, plus a purchase
payment enhancement of $30 added by Penn Mutual, by the end of the year shown
(assuming a 5% annual return) if you do not surrender your Contract or if you
annuitize your Contract:
<TABLE>
<CAPTION>
One Three Five Ten
Year Years Years Years
---- ----- ----- -----
<S> <C> <C> <C> <C>
Penn Series Money Market Fund*....................................... $ $ $ $
Penn Series Limited Maturity Bond Fund*(a)........................... $ $ $ $
Penn Series Quality Bond Fund*....................................... $ $ $ $
Penn Series High Yield Bond Fund**................................... $ $ $ $
Penn Series Flexibly Managed Fund*................................... $ $ $ $
Penn Series Growth Equity Fund*...................................... $ $ $ $
Penn Series Large Cap Value Fund*(b)................................. $ $ $ $
Penn Series Index 500 Fund*(c)....................................... $ $ $ $
Penn Series Mid Cap Growth Fund*(f).................................. $ $ $ $
Penn Series Mid Cap Value Fund*(d)................................... $ $ $ $
Penn Series Emerging Growth Fund**................................... $ $ $ $
Penn Series Small Cap Value Fund*(e)................................. $ $ $ $
Penn Series International Equity Fund*............................... $ $ $ $
Neuberger Berman Balanced Portfolio**................................ $ $ $ $
Fidelity's Equity Income Portfolio**................................. $ $ $ $
Fidelity's Growth Portfolio**........................................ $ $ $ $
Fidelity's Asset Manager Portfolio**................................. $ $ $ $
Morgan Stanley Emerging Markets Equity (International) Portfolio**... $ $ $ $
</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.
(a) Neuberger Berman Limited Maturity Bond Portfolio Subaccount prior to May 1,
2000.
(b) Penn Series' Value Equity Fund Subaccount prior to May 1, 2000.
(c) Fidelity Investments' Index 500 Fund Subaccount prior to May 1, 2000.
(d) Neuberger Berman Partners Portfolio Subaccount prior to May 1, 2000.
(e) Penn Series Small Capitalization Fund Subaccount prior to May 1, 2000.
(f) American Century Capital Appreciation Fund Subaccount prior to May 1, 2000.
These are only examples. Your expenses may be more or less than what is shown.
6
<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. The financial data included in the 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 (a)
--------------------
<S> <C>
Accumulation Unit Value, beginning of period ......................... $10.000
Accumulation Unit Value, end of period ............................... $10.393
Number of Accumulation Units outstanding, end of period .............. 15,304
</TABLE>
-----------------
(a) For the period January 16, 1999 (date subaccount was established) through
December 31, 1999.
--------------------------------------------------------------------------------
PENN SERIES QUALITY BOND FUND SUBACCOUNT
Values of an Accumulation Unit Outstanding Throughout Each Period
<TABLE>
<CAPTION>
Year Ended
December 31,1999 (a)
--------------------
<S> <C>
Accumulation Unit Value, beginning of period........................ $10.000
Accumulation Unit Value, end of period............................... $ 9.872
Number of Accumulation Units outstanding, end of period.............. 28,113
</TABLE>
----------------
(a) For the period January 16, 1999 (date subaccount was established) through
December 31, 1999.
--------------------------------------------------------------------------------
PENN SERIES LIMITED MATURITY BOND FUND SUBACCOUNT(a)
Values of an Accumulation Unit Outstanding Throughout Each Period
<TABLE>
<CAPTION>
Year Ended
December 31, 1999 (b)
---------------------
<S> <C>
Accumulation Unit Value, end of period .............................. $10.015
Number of Accumulation Units outstanding, end of period ............. 4,391
</TABLE>
-----------------
(a) Neuberger Berman Limited Maturity Bond Portfolio Subaccount prior to May 1,
2000.
(b) For the period January 16, 1999 (date subaccount was established) through
December 31, 1999.
--------------------------------------------------------------------------------
PENN SERIES HIGH YIELD BOND FUND SUBACCOUNT
Values of an Accumulation Unit Outstanding Throughout Each Period
<TABLE>
<CAPTION>
Year Ended
December 31, 1999(a)
--------------------
<S> <C>
Accumulation Unit Value, beginning of period......................... $10.000
Accumulation Unit Value, end of period............................... $10.259
Number of Accumulation Units outstanding, end of period.............. 21,145
</TABLE>
------------------
(a) For the period January 16, 1999 (date subaccount was established) through
December 31, 1999.
7
<PAGE>
--------------------------------------------------------------------------------
PENN SERIES FLEXIBLY MANAGED FUND SUBACCOUNT
Values of an Accumulation Unit Outstanding Throughout Each Period
<TABLE>
<CAPTION>
Year Ended
December 31, 1999(a)
--------------------
<S> <C>
Accumulation Unit Value, beginning of period .................. $10.000
Accumulation Unit Value, end of period ........................ $10.547
Number of Accumulation Units outstanding, end of period ....... 39,752
</TABLE>
-----------------
(a) For the period January 16, 1999 (date subaccount was established) through
December 31, 1999.
--------------------------------------------------------------------------------
PENN SERIES GROWTH EQUITY FUND SUBACCOUNT
Values of an Accumulation Unit Outstanding Throughout Each Period
<TABLE>
<CAPTION>
Year Ended
December 31, 1999(a)
--------------------
<S> <C>
Accumulation Unit Value, beginning of period ................. $10.000
Accumulation Unit Value, end of period ....................... $13.260
Number of Accumulation Units outstanding, end of period ...... 25,504
</TABLE>
-----------------
(a) For the period January 16, 1999 (date subaccount was established) through
December 31, 1999.
--------------------------------------------------------------------------------
PENN SERIES LARGE CAP VALUE FUND SUBACCOUNT(a)
Values of an Accumulation Unit Outstanding Throughout Each Period
<TABLE>
<CAPTION>
Year Ended
December 31, 1999(b)
--------------------
<S> <C>
Accumulation Unit Value, beginning of period ................. $10.000
Accumulation Unit Value, end of period ....................... $ 9.818
Number of Accumulation Units outstanding, end of period ...... 22,230
</TABLE>
----------------
(a) Penn Series Value Equity Fund Subaccount prior to May 1, 2000.
(b) For the period January 16, 1999 (date subaccount was established) through
December 31, 1999.
--------------------------------------------------------------------------------
PENN SERIES INDEX 500 FUND SUBACCOUNT(a)
Values of an Accumulation Unit Outstanding Throughout Each Period
<TABLE>
<CAPTION>
Year Ended
December 31, 1999(b)
--------------------
<S> <C>
Accumulation Unit Value, beginning of period .......................... $10.000
Accumulation Unit Value, end of period ................................ $11.907
Number of Accumulation Units outstanding, end of period ............... 72,842
</TABLE>
---------------
(a) Fidelity Investments' Index 500 Fund Subaccount prior to May 1, 2000.
(b) For the period January 16, 1999 (date subaccount was established) through
December 31, 1999.
--------------------------------------------------------------------------------
PENN SERIES MID CAP VALUE FUND SUBACCOUNT(a)
Values of an Accumulation Unit Outstanding Throughout Each Period
<TABLE>
<CAPTION>
Year Ended
December 31, 1999(b)
--------------------
<S> <C>
Accumulation Unit Value, beginning of period ..................... $10.000
Accumulation Unit Value, end of period ........................... $10.601
Number of Accumulation Units outstanding, end of period .......... 25,519
</TABLE>
--------------
(a) Neuberger Berman Partners Portfolio Subaccount prior to May 1, 2000.
(b) For the period January 16, 1999 (date subaccount was established) through
December 31, 1999.
8
<PAGE>
--------------------------------------------------------------------------------
PENN SERIES EMERGING GROWTH FUND SUBACCOUNT
Values of an Accumulation Unit Outstanding Throughout Each Period
<TABLE>
<CAPTION>
Year Ended
December 31, 1999(a)
--------------------
<S> <C>
Accumulation Unit Value, beginning of period ..................... $10.000
Accumulation Unit Value, end of period ........................... $28.356
Number of Accumulation Units outstanding, end of period .......... 226,453
</TABLE>
-------------------
(a) For the period January 16, 1999 (date subaccount was established) through
December 31, 1999.
--------------------------------------------------------------------------------
PENN SERIES SMALL CAP VALUE FUND SUBACCOUNT (a)
Values of an Accumulation Unit Outstanding Throughout Each Period
<TABLE>
<CAPTION>
Year Ended
December 31, 1999(b)
--------------------
<S> <C>
Accumulation Unit Value, beginning of period ....................... $10.000
Accumulation Unit Value, end of period ............................. $9.747
Number of Accumulation Units outstanding, end of period ............ 1,759
</TABLE>
-----------------
(a) Penn Series Small Capitalization Fund Subaccount prior to May 1, 2000.
(b) For the period January 16, 1999 (date subaccount was established) through
December 31, 1999.
--------------------------------------------------------------------------------
PENN SERIES INTERNATIONAL EQUITY FUND SUBACCOUNT
Values of an Accumulation Unit Outstanding Throughout Each Period
<TABLE>
<CAPTION>
Year Ended
December 31, 1999 (a)
---------------------
<S> <C>
Accumulation Unit Value, beginning of period ........................ $10.000
Accumulation Unit Value, end of period .............................. $14.079
Number of Accumulation Units outstanding, end of period ............. 45,321
</TABLE>
----------------
(a) For the period January 16, 1999 (date subaccount was established) through
December 31, 1999.
--------------------------------------------------------------------------------
NEUBERGER BERMAN BALANCED PORTFOLIO SUBACCOUNT
Values of an Accumulation Unit Outstanding Throughout Each Period
<TABLE>
<CAPTION>
Year Ended
December 31, 1999 (a)
---------------------
<S> <C>
Accumulation Unit Value, beginning of period ................... $10.000
Accumulation Unit Value, end of period ......................... $13.279
Number of Accumulation Units outstanding, end of period......... 1,560
</TABLE>
-------------------
(a) For the period January 16, 1999 (date subaccount was established) through
December 31, 1999.
9
<PAGE>
--------------------------------------------------------------------------------
FIDELITY INVESTMENTS' EQUITY-INCOME FUND SUBACCOUNT
Values of an Accumulation Unit Outstanding Throughout Each Period
<TABLE>
<CAPTION>
Year Ended
December 31, 1999 (a)
---------------------
<S> <C>
Accumulation Unit Value, beginning of period ................... $10.000
Accumulation Unit Value, end of period ......................... $10.528
Number of Accumulation Units outstanding, end of period ........ 88,377
</TABLE>
------------------
(a) For the period January 16, 1999 (date subaccount was established) through
December 31, 1999.
--------------------------------------------------------------------------------
FIDELITY INVESTMENTS' GROWTH FUND SUBACCOUNT
Values of an Accumulation Unit Outstanding Throughout Each Period
<TABLE>
<CAPTION>
Year Ended
December 31, 1999(a)
--------------------
<S> <C>
Accumulation Unit Value, beginning of period.................... $10.000
Accumulation Unit Value, end of period .................... $13.555
Number of Accumulation Units outstanding, end of period......... 60,951
</TABLE>
------------------
(a) For the period January 16, 1999 (date subaccount was established) through
December 31, 1999.
--------------------------------------------------------------------------------
FIDELITY INVESTMENTS' ASSET MANAGER FUND SUBACCOUNT
Values of an Accumulation Unit Outstanding Throughout Each Period
<TABLE>
<CAPTION>
Year Ended
December 31, 1999(a)
--------------------
<S> <C>
Accumulation Unit Value, beginning of period....................... $10.000
Accumulation Unit Value, end of period............................. $10.975
Number of Accumulation Units outstanding, end of period............ 14,010
</TABLE>
------------------
(a) For the period January 16, 1999 (date subaccount was established) through
December 31, 1999.
--------------------------------------------------------------------------------
MORGAN STANLEY EMERGING MARKETS EQUITY (INTERNATIONAL) FUND SUBACCOUNT
Values of an Accumulation Unit Outstanding Throughout Each Period
<TABLE>
<CAPTION>
Year Ended
December 31, 1999 (a)
---------------------
<S> <C>
Accumulation Unit Value, beginning of period .......................... $10.000
Accumulation Unit Value, end of period ................................ $18.913
Number of Accumulation Units outstanding, end of period ............... 572
</TABLE>
------------------
(a) For the period January 16, 1999 (date subaccount was established) through
December 31, 1999.
As of the date of this Prospectus, the Mid Cap Growth Fund subaccount
had not yet commenced operations. Accordingly, financial information is not
presented.
The financial statements of the Separate Account at December 31, 1999
(audited) and June 30, 2000 (unaudited) are included in the statement of
additional information referred to on the cover page of this Prospectus.
10
<PAGE>
--------------------------------------------------------------------------------
THE PENN MUTUAL LIFE INSURANCE COMPANY
The Penn Mutual Life Insurance Company. Penn Mutual is a Pennsylvania mutual
life insurance company chartered in 1847. We are located at 600 Dresher Road,
Horsham, PA 19044. Our mailing address is Philadelphia, PA 19172. We issue and
are liable for all benefits and payments under the Contract.
--------------------------------------------------------------------------------
THE SEPARATE ACCOUNT
Penn Mutual established Penn Mutual Variable Annuity Account III (the
"Separate Account") on April 13, 1982. The Separate Account is registered with
the Securities and Exchange Commission as a unit investment trust and is a
"separate account" within the meaning of the federal securities laws. The
Separate Account is divided into subaccounts that invest in shares of different
mutual funds.
o The income, gains and losses of Penn Mutual do not have any effect
on the income, gains or losses of the Separate Account or any
subaccount.
o The Separate Account and its subaccounts are not responsible for the
liabilities of any other business of Penn Mutual.
--------------------------------------------------------------------------------
Accumulation Units
Your allocations and transfers to 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 Value next
computed after we receive your purchase payment or transfer request at our
administrative office. In the case of the your first purchase payment, you
receive the price next computed after we accept your application to purchase a
Contract. Any purchase payment enhancements credited to the Contract are
allocated to the subaccount and fixed interest options in the same proportions
as purchase payments are allocated.
The value of an Accumulation Unit is $10 when a subaccount begins
operation. The value of an Accumulation Unit may vary, and is determined by
multiplying its last computed value by the net investment factor for the
subaccount for the current valuation period. The net investment factor measures
(1) investment performance of fund shares held in the subaccount, (2) any taxes
on income or gains from investments held in the subaccount and (3) the mortality
and expense risk charge at an annual rate of 1.25% and contract administration
charge at an annual rate of 0.15%.
--------------------------------------------------------------------------------
Voting Instructions
You have the right to tell us how to vote proxies for the fund shares
in which your purchase payments are invested. If the law changes and permits us
to vote the fund shares, we may do so.
If you are a Contract Owner, we determine the number of fund shares
that you may vote by dividing your interest in a subaccount by the net asset
value per share of the fund. If you are receiving annuity payments, we determine
the number of Fund shares that you may vote by dividing the reserve allocated to
the subaccount by the net asset value per share of the Fund. We may change these
procedures whenever we are required or permitted to do so by law.
--------------------------------------------------------------------------------
Investment Options in the Separate Account
The Separate Account currently has subaccounts that invest in the following
Funds:
11
<PAGE>
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.
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 Fund -- 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
12
<PAGE>
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.
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 and Statements of Additional
Information.
13
<PAGE>
Read the Prospectuses of these Funds before investing.
--------------------------------------------------------------------------------
THE FIXED INTEREST ACCOUNTS
Interests in Penn Mutual's general account are not registered under the
Securities Act of 1933 and the general account is not registered as an
investment company under the Investment Company Act of 1940. The general account
and any interests held in the general account are not subject to the provisions
of these Acts. This Prospectus generally discusses only the variable portion of
the Contract. The staff of the Securities and Exchange Commission has not
reviewed the disclosure in this Prospectus relating to the Fixed Interest
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 ACCOUNT.
--------------------------------------------------------------------------------
THE CONTRACT
An individual variable and fixed annuity contract may be an attractive long-term
investment vehicle for many people. Our Contract allows you to invest in:
o the Separate Account, through which you may invest in one or more of
the available Funds of Penn Series Funds, Inc., Neuberger Berman
Advisers Management Trust, Fidelity Investments' Variable Insurance
Products Fund, Fidelity Investments' Variable Insurance Products
Fund II and Morgan Stanley's The Universal Institutional Funds, Inc.
See THE SEPARATE ACCOUNT in this Prospectus.
o one or more Fixed Interest Accounts. The Fixed Interest Accounts are
guaranteed and funded 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 and purchase payment enhancements 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 purchase payments and any purchase
payment enhancement 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.
14
<PAGE>
We may amend your Contract at any time to comply with legal
requirements. State law may require us to obtain your approval for any Contract
amendment. We may, with approval of the Securities and Exchange Commission and
the governing state insurance department, substitute another mutual fund for any
of the funds currently available.
The Contract is available to individuals and institutions. The
Contracts also may be issued as individual retirement annuities under section
408(b) of the Internal Revenue Code (the "Code") in connection with IRA
rollovers and as tax-deferred annuities under Section 403(b) of the Code (often
referred to as qualified Contracts).
You may contact us by writing The Penn Mutual Life Insurance Company,
Customer Service Group, Philadelphia, PA 19172. Or, you may call (800) 523-0650.
--------------------------------------------------------------------------------
How Do I Purchase a Contract?
Our representative will assist you in completing an application and
sending it, together with a check for your first purchase payment, to our
administrative office. All subsequent purchase payments should be sent to our
administrative office. We usually accept an application to purchase a Contract
within two business days after we receive it. If you send us an incomplete
application, we will return your purchase payment to you within five business
days unless you ask us to keep it while you complete the application.
The minimum initial purchase payment that we will accept is $25,000
with subsequent purchase payments of $5,000 ($1,000 subsequent purchase payments
for qualified Contracts), although we may decide to accept lower amounts. We
will accept total purchase payments under your Contract of up to $2 million. You
must obtain our prior approval to make total purchase payments in excess of $2
million.
The principal underwriter of the Contracts is Hornor, Townsend & Kent,
Inc., 600 Dresher Road, Horsham, PA 19044, a wholly-owned subsidiary of Penn
Mutual.
--------------------------------------------------------------------------------
What are Purchase Payment Enhancements?
We will credit purchase payment enhancements to your Contract based
upon the amounts of your purchase payments and withdrawals (if any).
When you make a purchase payment, we will determine your purchase
payment enhancement by multiplying the amount of the purchase payment by the
applicable purchase payment enhancement percentage set forth in the table below.
The purchase payment enhancement percentage is based on total purchase payment
less total withdrawals. We will credit the purchase payment enhancement to your
Contract and allocate the enhancement amount to the subaccounts of the Separate
Account and/or the Fixed Interests Accounts, along with your purchase payments,
in accordance with your direction.
If you make more than one purchase payment during the first Contract Year,
we will determine if any additional purchase payments enhancements will be
credited for the prior purchase payments you have made by taking the difference
between (1) the cumulative prior purchase payments made during the Contract Year
multiplied by the purchase payment enhancement percentage applied to the current
purchase payment, and (2) the prior cumulative purchase payment enhancements
credited to the Contract during that Contract Year. If the result exceeds zero,
the excess will be credited to the Contract as a purchase payment enhancement at
the same time as the purchase payment is credited.
The Contract provides no specific charge for providing the purchase payment
enhancement. Penn Mutual pays the purchase payment enhancement from its surplus
which reflects revenues from multiple sources, including the administrative,
mortality and expense risk, and deferred sales charges made under the Contract.
We reserve the right to discontinue crediting purchase payment enhancements
under this Contract in the future, provided we give you advance written notice.
15
<PAGE>
<TABLE>
<CAPTION>
Total Purchase Payments Less Withdrawals Purchase Payment Enhancement Percentage
<S> <C>
Less than $100,000 3%
$100,000 to $500,000 4%
More than $500,000 5%
</TABLE>
If purchase payment on initial application is equal to $2,000,000 or
more, a 6% purchase payment enhancement will be applied to the initial purchase
payment only.
--------------------------------------------------------------------------------
Do I Always Get To Keep My Purchase Payment Enhancements?
You won't always get to keep the purchase payment enhancements credited
to your Contract. We will take back or "recapture" some or all of the purchase
payment enhancements under certain circumstances:
o If you cancel your Contract during the "Right to Review" period
described in your Contract, we will recapture the purchase payment
enhancements we credit to your Contract Value.
o If you make a withdrawal from your Contract where a contingent
deferred sales charge is applied, we will recapture any purchase
payment enhancement credited to your Contract within 12 months of
the withdrawal. We will not recapture the purchase payment
enhancement when there is a free withdrawal. See FREE WITHDRAWALS in
this Prospectus.
--------------------------------------------------------------------------------
Do Purchase Payment Enhancements Benefit All People?
No. Penn Mutual issues a variety of individual variable and fixed
annuity contracts designed to meet different retirement planning goals. We issue
contracts with no purchase payment enhancement, lower mortality and expenses
risk charges, lower contingent deferred sales charges and/or shorter contingent
deferred sale charge periods. You should consider the following factors when
determining which annuity contract is appropriate for you:
o The length of time that you plan to continue to own your contract.
o The frequency, amount and timing of withdrawals you plan to make.
o The amount of purchase payments you plan to make.
o Whether you might experience an event that results in the loss of
some or all of the purchase payment enhancements.
--------------------------------------------------------------------------------
What Types of Annuity Payments May I Choose?
You may choose: (1) an annuity for a set number of years, (2) a life
annuity, (3) a life annuity with payments guaranteed for 10 or 20 years, (4) a
joint and survivor life annuity or (5) any other form of annuity that we may
agree upon. You may choose a variable annuity (except for a set number of
years), a fixed annuity, or a combination of both. You may choose a person other
than yourself to be the Annuitant. Currently, during the Annuity Payout Period,
your variable annuity may not be allocated to more than four subaccounts.
Variable Annuity Payments. The size of your variable annuity payments
will vary depending upon the performance of the investment options that you
choose for the Annuity Payout Period. Your payments also will depend on the size
of your investment, the type of annuity you choose, the expected length of the
annuity period, and the annuity purchase rates and charges in your Contract.
When you purchase a variable annuity, you will pick an assumed interest
rate of 3% or 5%. If the annual net investment return during the Annuity Payout
Period is greater than the rate chosen, your annuity payments will increase. If
the annual net investment return is less, your payments will decrease. Choosing
a higher assumed interest rate would mean a higher first annuity payment but
more slowly rising or more rapidly falling subsequent payments. Choosing a lower
assumed interest rate would have the opposite effect.
16
<PAGE>
During the Variable Annuity Payout Period, you (or your Beneficiary in
the event of death) may transfer your Annuity Unit Values among four subaccounts
of the Separate Account that you choose on the Annuity Date. You may not select
other subaccounts after the Annuity Date.
Fixed Annuity Payments. The size of your fixed annuity payments will
not change. The size of these payments is determined by a number of factors,
including the size of your investment, the form of annuity chosen, the expected
length of the annuity period, and a guaranteed 3% rate of return.
Other Information. Unless you tell us otherwise:
o you will receive a life annuity with payments guaranteed for 10
years. Tax deferred annuities under Section 403(b) of the Code will
receive a joint and survivor annuity.
o the annuity will be split between fixed and variable accounts in
the same proportions as your Contract Value on the Annuity Date,
except if your Contract Value is allocated to more than four
subaccounts, the variable portion will be allocated to the Money
Market subaccount until you give us instructions to allocate to not
more than four subaccounts.
o your annuity payments will begin on the later of (1) the first day
of the next month after the Annuitant's 95th birthday or (2) 10
years after the contract date, unless state law requires an earlier
Annuity Date. The Annuity Date under the Contract must be on the
first day of a month.
You may change the Annuity Date or your annuity option by giving us written
notice at our administrative office at least 30 days prior to the current
Annuity Date. If your Contract Value is less than $5,000, we may pay you in a
lump sum. We usually make annuity payments monthly, starting with the Annuity
Date, but we will pay you quarterly, semiannually or annually, if you prefer. If
necessary, we will adjust the frequency of your payments so that payments are at
least $50 each. For information on the treatment of annuity payments, see
FEDERAL INCOME TAX CONSIDERATIONS in this Prospectus.
--------------------------------------------------------------------------------
What are the Death Benefits Under My Contract?
You may designate a Beneficiary in your application. If you fail to
designate a Beneficiary, your Beneficiary will be your estate. You may change
the Beneficiary at any time before your death or the death of the Annuitant,
whichever occurs first.
If you die before the Annuity Date and you are not the Annuitant, we
will pay your Beneficiary the Contract Value as of the date our administrative
office receives proof of death and other information required to process the
payment. If you are the Annuitant, we will pay your Beneficiary the death
benefit described in the next paragraph.
If the Annuitant dies before the Annuity Date, we will pay a death
benefit equal to the sum of the Variable Account death benefit and the Fixed
Interest Account death benefit as of the date we receive proof of death and
other information required to process the payment. The Variable Account death
benefit is the greater of (1) the Variable Account Value; or (2) all purchase
payments allocated and transfers made to the Variable Account, less withdrawals,
and amounts transferred out. The Fixed Interest Account death benefit is the
Fixed Interest Account Value.
We generally pay the death benefit within seven days after we receive
proof of death and all required information.
17
<PAGE>
Enhanced Guaranteed Minimum Death Benefit. If the Annuitant is 75 years
of age or less, you may purchase an enhanced guaranteed minimum death benefit as
part of your Contract. The enhanced guaranteed minimum death benefit is paid in
place of the Variable Account death benefit, if it is greater, and if the
Annuitant dies before the Annuity Date and before age 80. We offer two different
enhanced guaranteed minimum death benefits. You may purchase either, but only at
the time you purchase your Contract.
The enhanced guaranteed minimum death benefit - step-up: This is the
highest Variable Account Value on the current or prior contract anniversary
dates, adjusted as follows. For this purpose, the Variable Account Value on an
anniversary date will be adjusted upward by the amount of any purchase payments
allocated and transfers made to the Variable Account after the anniversary date,
and before the next anniversary date, and adjusted downward by an amount that is
in the same proportion that the Variable Account Value was decreased by
transfers, and withdrawals (including any deferred sales charge) after the
anniversary date and before the next anniversary date.
The guaranteed minimum death benefit - rising floor: This is the sum of
all purchase payments allocated and transfers made to the Variable Account,
minus a reduction for any withdrawals or transfers made from the Variable
Account (as described below), plus interest at 5%, calculated as follows.
Interest is reflected for the periods amounts are held in the Variable Account,
but not for any period after the Annuitant attains 80 years of age. If a
withdrawal or transfer is made from the Variable Account prior to death, the
guaranteed minimum death benefit will be reduced by an amount that is in the
same proportion that the amount withdrawn or transferred from the Variable
Account (including any contingent deferred sales charge) was to the Variable
Account Value on the date of the withdrawal or transfer. The maximum rising
floor enhanced death benefit is two times the purchase payments you make,
adjusted to reflect withdrawals.
The enhanced guaranteed minimum death benefit will terminate if you
withdraw or transfer the full Variable Account Value from your Contract. For
information on the cost of the enhanced guaranteed minimum death benefits, see
What Charges Do I Pay? In this Prospectus.
Choosing a Lump Sum or Annuity. Your Beneficiary has one year from your
death to choose to receive the death benefit in a lump sum or as an annuity.
o The Beneficiary has only 60 days to make this election if the death
benefit is paid upon death of an Annuitant other than you.
o If the Beneficiary chooses a lump sum, he or she may ask us to
postpone payment of the lump sum for up to five years (until paid
out, the death benefit will be allocated to subaccounts of the
Separate Account and/or Fixed Interest Accounts as directed by the
Beneficiary).
o If the Beneficiary chooses an annuity, we will begin annuity
payments no later than one year from the date of death. Payments
will be made over the Beneficiary's life or over a period not
longer than the Beneficiary's life expectancy.
o If an election is not made within one year of the date of death of
the Contract Owner or within 60 days of the death of an Annuitant
other than you, the death benefit will be paid to the Beneficiary
in a lump sum.
If your Beneficiary is your surviving spouse, he or she may become the
Contract Owner rather than receive the death benefit. If there is more than one
surviving Beneficiary, they must choose their portion of the death benefit in
accordance with the above options. If the Annuitant dies on or after the Annuity
Date, the death benefit payable, if any, will be paid in accordance with your
choice of annuity.
For information on the tax treatment of death benefits, see FEDERAL
INCOME TAX CONSIDERATIONS in this Prospectus.
18
<PAGE>
--------------------------------------------------------------------------------
May I Transfer Money Among Subaccounts and the One Year Fixed Interest Account?
Before the Annuity Date. You may transfer your Contract Value among
subaccounts of the Separate Account and the One Year Fixed Interest Account.
o The minimum amount that may be transferred is $250 or, if less, the
amount held in the subaccount or Fixed Interest Account. In the
case of partial transfers, the amount remaining in the subaccount
or Fixed Interest Account must be at least $250.
o You may transfer amounts from the Fixed Interest Account only at
the end of the interest period or within 25 days thereafter.
o You may transfer amounts from the Six Month Dollar Cost Averaging
Account or the Twelve Month Dollar Cost Averaging Account to a
subaccount of the Separate Account as described under Dollar Cost
Averaging below.
o You may not transfer from a subaccount of the Separate Account to
the Six Month Dollar Cost Averaging Account or the Twelve Month
Dollar Cost Averaging Account.
After the Annuity Date. You or the Beneficiary (upon your death or the
death of the Annuitant) may transfer amounts among subaccounts of the Separate
Account.
o The minimum amount that may be transferred is $250 or, if less, the
amount held in the subaccount. In the case of partial transfers,
the amount remaining in the subaccount must be at least $250.
o Transfers are currently limited to the four subaccounts selected at
the time of annuitization.
General Rules. Transfers will be based on values at the end of the
valuation period in which the transfer request is received at our administrative
office. A transfer request must be received at our administrative office, and
all other administrative requirements must be met to make the transfer. We will
not 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. For
transfers other than dollar cost averaging and automatic rebalancing, we reserve
the right to charge a fee, although we have no present intention of doing so.
The Contract is not designed for individuals and professional market timing
organizations that use programmed and frequent transfers among investment
options. We therefore reserve the right to change our telephone transaction
policies and procedures at any time to restrict the use of telephone transfers
for market timing and to otherwise restrict market timing when we believe it is
in the interest of all of our Contract Owners to do so.
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. You can have a fixed percentage of the Six Month Dollar Cost Averaging
Account or Twelve Month Dollar Cost Averaging Account transferred monthly or
quarterly to one or more subaccounts to achieve dollar cost averaging. These
transfers may be made only from one of the following accounts: Money Market
Subaccount, Limited Maturity Bond Subaccount, Quality Bond Subaccount, or one of
the dollar cost averaging accounts. You may do this for up to 60 months with a
maximum of 6 months for the Six Month Dollar Cost Averaging Account or a maximum
of 12 months for the Twelve Month Dollar Cost Averaging Account. If you stop the
program while in a specific dollar cost averaging account, any money left in the
Six Month or Twelve Month Dollar Cost Averaging Account will be transferred into
the One Year Fixed Interest Account, unless you specify otherwise.
19
<PAGE>
Automatic Rebalancing. Automatic Rebalancing is a way to transfer money
from those subaccounts that have increased in value to those subaccounts that
have decreased in value. Over time, this may help you to sell high and buy low,
although there can be no assurance of this. If you have a Contract Value of at
least $10,000 you may elect to have your investments in subaccounts of the
Separate Account automatically rebalanced. We will transfer funds under your
Contract on a quarterly (calendar) basis among the subaccounts to maintain a
specified percentage allocation among your selected variable investment options.
Dollar cost averaging and automatic rebalancing may not be in effect at
the same time.
--------------------------------------------------------------------------------
May I Withdraw Any of My Money?
Before the Annuity Date and the death of the Contract Owner or
Annuitant, you may withdraw all or part of your Contract Value. We base your
withdrawal on your Contract Value next determined after we receive a proper
written request for withdrawal at our administrative office (and the Contract,
in case of a full withdrawal). We normally will pay you within seven days. You
may pay tax when you make a withdrawal, including an additional 10% tax under
certain circumstances. See FEDERAL INCOME TAX CONSIDERATIONS.
o The minimum withdrawal is $500. If it is your first withdrawal in a
Contract Year, the minimum withdrawal is the Free Withdrawal Amount
if less than $500. The Free Withdrawal Amount is equal to 15% of the
purchase payments as of the date of the request.
o You may make a partial withdrawal only if the amount remaining in
the contract is at least $5,000 and the balance remaining in each
subaccount or a fixed interest account is at least $250.
o If you do not tell us otherwise, the withdrawal will be taken pro
rata from the variable subaccounts; if the partial withdrawal
exhausts your Variable Account Value, then any remaining withdrawal
will be taken from a fixed interest account beginning with the fixed
interest account with the shortest interest period.
Systematic Withdrawals. If your Contract Value is at least $25,000 and
you have not made a Free Withdrawal in the current Contract Year, you can make
systematic withdrawals. These are regular payments that we make to you on a
monthly, quarterly, semiannual or annual basis. It is a convenient way for you
to withdraw a limited percentage of purchase payments without incurring a
contingent deferred sales charge. The total amount that you withdraw in a
Contract Year cannot exceed your Free Withdrawal Amount, and the minimum amount
of each withdrawal payment is $100. Your payments will begin on the next
withdrawal date after we receive your request. See Free Withdrawals below. For
information on the tax treatment of withdrawals, see FEDERAL INCOME TAX
CONSIDERATIONS in this Prospectus.
403(b) Withdrawals. There are restrictions on withdrawals from
Contracts qualifying under Section 403(b) of the Code. Generally, withdrawals
may be made only if the Contract Owner is over the age of 59 1/2, leaves the
employment of the employer, dies, or becomes disabled as defined in the Code.
Withdrawals (other than withdrawals attributable to income earned on purchase
payments) may also be possible in the case of hardship as defined in the Code.
The restrictions do not apply to transfers among subaccounts and may also not
apply to transfers to other investments qualifying under Section 403(b). For
information on the tax treatment of withdrawals under Section 403(b) Contracts,
see FEDERAL INCOME TAX CONSIDERATIONS in this Prospectus.
--------------------------------------------------------------------------------
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.
20
<PAGE>
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What Charges Do I Pay?
The following discussion explains the Contract charges that you pay.
You also pay expenses of the Funds that you select as investment options in the
Separate Account. See the prospectuses of the Funds for information on Fund
expenses.
Administration Charges:
These charges reimburse us for administering the Contract and the
Separate Account.
o We deduct from your Variable Account Value an annual contract
administration charge that is the lesser of $40 or 2% of your
Variable Account Value. You will not pay this charge if your
Variable Account Value is more than $100,000. To pay this charge, we
cancel Accumulation Units credited to your Contract, pro rata among
the subaccounts in which you invest.
o We deduct from the net asset value of the Separate Account a daily
administration charge that will not exceed an effective annual rate
of 0.15%.
For transfers among investment options other than dollar cost averaging
and automatic rebalancing, we reserve the right to charge for making the
transfer, although we have no present intention of doing so.
Mortality and Expense Risk Charge:
We deduct from the net asset value of the Separate Account a daily
mortality and expense risk charge that will not exceed an effective annual rate
of 1.25%. This charge compensates us for the mortality-related guarantees we
make under the Contract (e.g., the death benefit and the guarantee that the
annuity factors will never be decreased even if mortality experience is
substantially different than originally assumed), and for the risk that our
administration charges will be insufficient to cover administration expenses
over the life of the Contracts. The mortality and expense risk charge is paid
during both the accumulation and variable annuity pay-out phases of the
Contract.
Contingent Deferred Sales Charge:
This charge pays for our sales expenses. Sales expenses that are not
covered by the deferred sales charge are paid from the surplus of Penn Mutual,
which may include proceeds from the mortality and expense risk charge.
You pay this charge only if you withdraw a purchase payment within nine
years of the effective date of payment. The following table shows the schedule
of the contingent deferred sales charge that will be applied to withdrawal of a
purchase payment, after allowing for the free withdrawals which are described in
the next subsection. Purchase payments will be treated as withdrawn on a
first-in, first-out basis.
21
<PAGE>
Number of Full Contract
Years Since Purchase Payment Applicable Charge
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0 8%
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1 8%
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2 8%
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3 8%
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4 7%
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5 6%
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6 5%
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7 3%
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8 3%
--------------------------------------------------------------------------------
9+ 0%
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The contingent deferred sales charge may be reduced on Contracts sold
to a trustee, employer or similar party pursuant to a retirement plan or to a
group of individuals, if such sales are expected to involve reduced sales
expenses. The amount of reduction will depend upon such factors as the size of
the group, any prior or existing relationship with the purchaser or group, the
total amount of purchase payments and other relevant factors that might tend to
reduce expenses incurred in connection with such sales. The reduction will not
unfairly discriminate against any Contract Owner.
Free Withdrawals:
Nine Year-Old Purchase Payments. You may withdraw any purchase payment
that was made more than nine years before the withdrawal without incurring a
contingent deferred sales charge.
Annual Withdrawals of 15% of Purchase Payments. On the last day of the
first contract year and once each contract year thereafter, you may withdraw,
without incurring a contingent deferred sales charge, up to 15% of total
purchase payments as of the date of the request. You may take a free withdrawal
on a single sum basis or systematically, but not both. The free withdrawal
amount will be applied to purchase payments on a first-in, first-out basis. With
respect to any withdrawal in excess of the free withdrawal limit in a contract
year, the contingent deferred sales charge schedule set forth above will apply
to the remainder of the purchase payments so withdrawn on a first-in, first-out
basis. This free withdrawal applies only to the first withdrawal request made in
a contract year and the amount is not cumulative from year to year.
Medically Related Withdrawal. Subject to state law, after the first
contract year and before the Annuity Date, you may withdraw, without incurring a
contingent deferred sales charge, all or part of your Contract Value if certain
medically related contingencies occur. This free withdrawal is available if you
are (1) first confined in a nursing home or hospital while this Contract is in
force and remain confined for at least 90 days in a row or (2) first diagnosed
as having a fatal illness (an illness expected to result in death within 2 years
for 80% of diagnosed cases) while this Contract is in force. The precise terms
and conditions of this benefit are set forth in the Contract. It is not
available if your age at issue is greater than 75. The medically related
contingencies that must be met for free withdrawal vary in some states.
Disability Related Withdrawal. You may withdraw, without incurring a
contingent deferred sales charge, part or all of your Contract Value if you (you
or the Annuitant for qualified Contracts) become totally disabled as defined in
the Contract.
Other Withdrawals. There is no contingent deferred sales charge imposed
upon minimum distributions under qualified contracts which are required by the
Code.
22
<PAGE>
Enhanced Guaranteed Minimum Death Benefit (Optional):
If you purchase either the step-up or rising floor Enhanced Guaranteed
Minimum Death Benefit as part of your Contract, we will deduct a guaranteed
minimum death benefit charge from the Variable Account Value. For the step-up
Enhanced Guaranteed Minimum Death Benefit, the charge is currently 0.25% of the
average annual Variable Account Value, but may be raised to a maximum rate of
0.30% at the discretion of Penn Mutual. For the rising floor Enhanced Guaranteed
Minimum Death Benefit, the charge is 0.35%. The charge will be made on each
Contract anniversary and at any time the Variable Account Value is withdrawn or
transferred in full. The charge will be deducted by canceling Accumulation Units
credited to your Contract, with the charge allocated pro rata among the
subaccounts comprising the Variable Account Value.
Premium Taxes:
Some states and municipalities impose premium taxes on purchase
payments received by insurance companies. Generally, any premium taxes payable
will be deducted upon annuitization, although we reserve the right to deduct
such taxes when due in jurisdictions that impose such taxes on purchase
payments. Currently, state premium taxes on purchase payments range from
0% to 3 1/2%.
--------------------------------------------------------------------------------
PERFORMANCE INFORMATION
We may advertise total return performance and annual changes in
accumulation unit values.
Information on total return performance will include average annual
rates of total return for one, five and ten year periods, or lesser periods
depending on how long the underlying Fund has been available through a
subaccount of the Separate Account. Average annual total return figures will
show the average annual rates of increase or decrease in investments in the
subaccounts, assuming a hypothetical $1,000 investment at the beginning of the
period, withdrawal of the investment at the end of the period, and the deduction
of all applicable fund and Contract charges. We also may show average annual
rates of total return, assuming investment on the inception date of the
underlying Fund, other amounts invested at the beginning of the period and no
withdrawal at the end of the period. Average annual total return figures which
assume no withdrawals at the end of the period will reflect all recurring
charges, but will not reflect the contingent deferred sales charge (if
applicable, the contingent deferred sales charge would reduce the amount that
may be withdrawn under the Contracts).
--------------------------------------------------------------------------------
MORE INFORMATION ABOUT THE FIXED INTEREST ACCOUNTS
General Information
You may allocate or transfer money to our One Year Fixed Interest
Account. The interest rate that you earn on money in this account is set at the
time you invest and will not vary during the one year period. The rate will
never be less than 3%.
If you participate in our dollar cost averaging program, you may
allocate money to either our Six Month Dollar Cost Averaging Account or our
Twelve Month Dollar Cost Averaging Account. Amounts may be only allocated to one
of the dollar cost averaging accounts. The interest rate that you earn is set at
the time that you invest and will not vary during the period you selected. The
rate will never be less than 3%. If you stop dollar cost averaging before your
money has been in either account for the full six month or one year term, your
money will be transferred to the One Year Fixed Interest Account unless you
specify a different investment option.
You may transfer money in the Fixed Interest Accounts to subaccounts of
the Separate Account, subject to the fixed interest account provisions of your
Contract. If you do not withdraw or reallocate money in the One Year Fixed
Interest Account within 25 days after the end of an interest period, we will
treat it as a new allocation to the One Year Fixed Interest Account.
23
<PAGE>
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Loans Under Section 403(b) Contracts
If your Contract qualifies under Section 403(b) of the Code, and if
state law permits, you may be able to borrow against money that you have
invested in a Fixed Interest Account. Review your Contract loan endorsement or
consult our representative for a complete description of the terms of the loan
privilege, including minimum and maximum loan amounts, repayment terms, and
restrictions on prepayments.
When you borrow, an amount equal to your loan will be transferred, as
collateral, from your Separate Account subaccounts to an account in our general
account called the "Restricted Account." Amounts transferred to the Restricted
Account currently earn interest at a rate of 1 1/2 percentage points less than
the rate of interest that we charge you on the loan. The lowest possible
interest that you could earn on your Restricted Account assets is 2 1/2
percentage points less than the rate charged on the loan. On your Contract
Anniversary, the accrued interest in the Restricted Account will be transferred
to your Separate Account subaccounts in accordance with your current payment
allocation instructions.
Loan repayments are due quarterly. When you repay part of your loan, we
transfer an amount equal to the principal portion of the repayment from the
Restricted Account to the Money Market subaccount. You may then transfer amounts
from the Money Market subaccount to the other investment options offered under
the Contract.
If you are in default, we will report the default to the Internal
Revenue Service as a taxable distribution and, if you are then under age 59 1/2,
as a premature distribution that may be subject to a 10% penalty. We will repay
the loan by withdrawing the amount in default, plus interest and any applicable
contingent deferred sales charge, from your Separate Account subaccounts in
accordance with your Loan Request and Agreement. If Section 403(b) prevents us
from doing this, your outstanding loan balance will continue to accrue interest
and the amount due will be withdrawn when a withdrawal becomes permissible.
While a loan balance is outstanding, any withdrawal or death benefit proceeds
must first be used to pay the loan.
Loans are subject to the terms of your Contract, your Section 403(b)
plan and the Code, and, in the case of plans subject to the Employee Retirement
Income Security Act of 1974, the ERISA regulations on plan loans, all of which
may impose restrictions. We reserve the right to suspend, modify or terminate
the availability of loans. Where there is a plan fiduciary, it is the
responsibility of the fiduciary to ensure that any Contract loans comply with
plan qualification requirements, including ERISA.
--------------------------------------------------------------------------------
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.
24
<PAGE>
In the case of a nonqualified Contract and death of an Annuitant who
was not the Contract Owner, an election to receive the death benefit in the form
of annuity payment must be made within 60 days. If such election is not made,
the gain from the Contract will generally be taxed as a lump sum payment, as
described in the preceding paragraph.
Annuity Payments. The taxable portion of an annuity payment generally
is determined by a formula that establishes the ratio of the cost basis of the
Contract (as adjusted for any refund feature) to the expected return under the
Contract. The taxable portion, which is the amount of the annuity payment in
excess of the cost basis, is taxed at ordinary income tax rates.
Subject to certain exceptions, a Contract must be held by or on behalf
of a natural person in order to be treated as an annuity contract under federal
income tax law and to be accorded the tax treatment described in the preceding
paragraphs. If a contract is not treated as an annuity contract for federal
income tax purposes, the income on the Contract is treated as ordinary income
received or accrued by the Contract Owner during the taxable year.
Early Withdrawals. An additional income tax of 10% may be imposed on
the taxable portion of an early withdrawal or distribution unless one of several
exceptions apply. Generally, there will be no additional income tax on:
o early withdrawals that are part of a series of substantially equal
periodic payments (not less frequently than annually) made for life
(or life expectancy) of the taxpayer or the joint lives (or joint
life expectancies) of the taxpayer and a Beneficiary;
o withdrawals made on or after age 59 1/2;
o on distributions made after death; or
o withdrawals attributable to total and permanent disability.
Transfers. You may pay tax if you transfer your Contract to someone
else. If the transfer is for less than adequate consideration, the taxable
portion would be the Contract Value at the time of transfer over the investment
in the Contract at such time. This rule does not apply to transfers between
spouses or to transfers incident to a divorce.
Separate Account Diversification. Section 817(h) of the Code provides
that the investments of a separate account underlying a variable annuity
contract which is not purchased under a qualified retirement plan or certain
other types of plans (or the investments of a mutual fund, the shares of which
are owned by the variable annuity separate account) must be "adequately
diversified" in order for the Contract to be treated as an annuity contract for
tax purposes. The Treasury Department has issued regulations prescribing such
diversification requirements. The Separate Account, through each of the
available funds of the Penn Series Funds, Inc., Neuberger Berman Advisers
Management Trust, Variable Insurance Products Fund, Variable Insurance Products
Fund II, and Morgan Stanley'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 stated in published rulings that a variable
contract owner will be considered the owner of separate account assets if the
contract owner possesses incidents of ownership in those assets, such as the
ability to exercise investment control over the assets. If a variable contract
owner is treated as owner of separate account assets, income and gain from the
assets would be includable in the variable contract owner's gross income. In
1984 the Treasury Department announced that it would provide guidance, by way of
regulation or ruling, on the "extent to which Policyholders may direct their
investments to particular subaccounts without being treated as owners of
underlying assets." As of the date of this Prospectus, no ruling or regulation
has been issued.
25
<PAGE>
Qualified Plans. The Contracts may be used in connection with certain
retirement plans that qualify for special tax treatment under the Code. The
plans include rollover individual retirement annuities qualified under Section
408(b) of the Code (referred to as IRAs) and certain tax deferred annuities
qualified under Section 403(b) of the Code. Qualified Contracts have special
provisions in order to be treated as qualified under the Code.
For some types of qualified retirement plans, there may be no cost
basis in the Contract. In this case, the total payments received may be taxable.
Before purchasing a contract under a qualified retirement plan, the tax law
provisions applicable to the particular plan should be considered.
Distribution must generally commence from individual retirement
annuities and from contracts qualified under Section 403(b) no later than the
April 1 following the calendar year in which the Contract Owner attains age
70 1/2. Failure to make such required minimum distributions may result in a 50%
tax on the amount of the required distribution.
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
Penn Mutual 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.
This general summary of federal income tax does not address every issue
that may affect you. You should consult qualified tax counsel.
--------------------------------------------------------------------------------
FINANCIAL STATEMENTS
The consolidated financial statements of The Penn Mutual Life Insurance
Company at December 31, 1999 (audited), and the financial statements of the
Separate Account at December 31, 1999 (audited) and June 30, 2000 (unaudited),
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.
26
<PAGE>
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STATEMENT OF ADDITIONAL INFORMATION CONTENTS
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VARIABLE ANNUITY PAYMENTS....................................................B-2
First Variable Annuity Payments.....................................B-2
Subsequent Variable Annuity Payments................................B-2
Annuity Units.......................................................B-2
Value of Annuity Units..............................................B-2
Net Investment Factor...............................................B-2
Assumed Interest Rate...............................................B-3
Valuation Period....................................................B-3
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PERFORMANCE DATA.............................................................B-3
Average Annual Total Return.........................................B-3
Average Rate of Change in Accumulation..............................B-6
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ADMINISTRATIVE AND RECORDKEEPING SERVICES....................................B-8
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DISTRIBUTION OF CONTRACTS....................................................B-8
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CUSTODIAN....................................................................B-8
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INDEPENDENT AUDITORS.........................................................B-8
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LEGAL MATTERS................................................................B-8
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FINANCIAL STATEMENTS.........................................................B-9
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27
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION -- _______, 2000
================================================================================
PENN MUTUAL VARIABLE ANNUITY ACCOUNT III
THE PENN MUTUAL LIFE INSURANCE COMPANY
Philadelphia, Pennsylvania 19172 o Telephone (800) 523-0650
INDIVIDUAL VARIABLE AND FIXED ANNUITY CONTRACT
--------------------------------------------------------------------------------
This statement of additional information is not a prospectus. It should be read
in conjunction with the current Prospectus dated _____, 2000 for the individual
variable and fixed annuity contract (the "Contract"). The Contract is funded
through Penn Mutual Variable Account III (referred to as the "Separate Account"
in the Prospectus and this statement of additional information). To obtain the
Prospectus you may write to The Penn Mutual Life Insurance Company ("Penn
Mutual"), Customer Service Group, Philadelphia, PA 19172 or you may call (800)
523-0650. Terms used in this statement of additional information have the same
meaning as the Prospectus.
--------------------------------------------------------------------------------
Table of Contents
--------------------------------------------------------------------------------
VARIABLE ANNUITY PAYMENTS....................................................B-2
First Variable Annuity Payments.....................................B-2
Subsequent Variable Annuity Payments................................B-2
Annuity Units.......................................................B-2
Value of Annuity Units..............................................B-2
Net Investment Factor...............................................B-2
Assumed Interest Rate...............................................B-3
Valuation Period....................................................B-3
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PERFORMANCE DATA.............................................................B-3
Average Annual Total Return.........................................B-3
Annual Rate of Change in Accumulation Unit Values...................B-6
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ADMINISTRATIVE AND RECORDKEEPING SERVICES....................................B-8
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DISTRIBUTION OF CONTRACTS....................................................B-8
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CUSTODIAN....................................................................B-8
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INDEPENDENT AUDITORS.........................................................B-9
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LEGAL MATTERS................................................................B-9
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FINANCIAL STATEMENTS.........................................................B-9
<PAGE>
================================================================================
VARIABLE ANNUITY PAYMENTS
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First Variable Annuity Payment
When a variable annuity is effected, we will first deduct applicable
premium taxes, if any, from the Contract Value. The dollar amount of the first
monthly annuity payment will be determined by applying the net Contract Value to
the annuity table set forth in the contract for the annuity option chosen. The
annuity tables show the amount of the first monthly income payment under each
annuity option for each $1,000 of value applied, based on the Annuitant's age at
the Annuity Date. The annuity tables are based on the Annuity 2000 Basic Table
with interest rates at 3% or 5%.
--------------------------------------------------------------------------------
Subsequent Variable Annuity Payments
The dollar amount of subsequent variable annuity payments will vary in
accordance with the investment experience of the subaccount(s) of the Separate
Account applicable to the annuity. Each subsequent variable annuity payment will
equal the number of annuity units credited, multiplied by the value of the
annuity unit for the valuation period. 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 of your
annuity units will not change as a result of investment experience.
--------------------------------------------------------------------------------
Value of Annuity Units
The value of an annuity unit for each subaccount was arbitrarily set at
$10 when the subaccount was established. The value may increase or decrease from
one valuation period to the next. For a valuation period, the value of an
annuity unit for a subaccount is the value of an annuity unit for the subaccount
for the last prior valuation period multiplied by the net investment factor for
the subaccount for the valuation period. The result is then multiplied by a
factor to neutralize an assumed interest rate of 3% or 5%, as applicable, built
into the annuity tables.
--------------------------------------------------------------------------------
Net Investment Factor
For any subaccount, the net investment factor for a valuation period is
determined by dividing (a) by (b) and subtracting (c):
Where (a) is:
The net asset value per share of the mutual fund held in the
subaccount, as of the end of the valuation period
plus
The per share amount of any dividend or capital gain distributions by
the mutual fund if the "ex-dividend" date occurs in the valuation
period
plus or minus
A per share charge or credit, as we may determine as of the end of the
valuation period, for provision for taxes (if applicable).
B-2
<PAGE>
Where (b) is:
The net asset value per share of the mutual fund held in the subaccount
as of the end of the last prior valuation period
plus or minus
The per share charge or credit for provision for taxes as of the end of
the last prior valuation period (if applicable).
Where (c) is:
The sum of the mortality and expense risk charge and the daily
administration charge. On an annual basis, the sum of such charges
equals 1.40% of the daily net asset value of the subaccount.
--------------------------------------------------------------------------------
Assumed Interest Rate
Assumed interest rates of 3% or 5% are included in the annuity tables
in the contracts. A higher assumption would mean a higher first annuity payment
but more slowly rising or more rapidly falling subsequent payments. A lower
assumption would have the opposite effect. If the actual net investment rate on
an annual basis is equal to the assumed interest rate you have selected, annuity
payments will be level.
--------------------------------------------------------------------------------
Valuation Period
Valuation period is the period from one valuation of underlying fund
assets to the next. Valuation is performed each day the New York Stock Exchange
is open for trading.
================================================================================
PERFORMANCE DATA
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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.
<PAGE>
Table 1 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)................................. 3/17/87
(Independence Capital)
High Yield Bond (a).............................. 8/6/84
(T. Rowe Price)
Flexibly Managed (a)............................. 7/31/84
(T. Rowe Price)
Growth Equity (a)................................ 6/1/83
(Independence Capital)
Large Cap Value (a)(f)........................... 3/17/87
(Putnam)
Emerging Growth (a).............................. 5/1/97
(RS Investment Management)
Small Cap Value (a)(f)........................... 5/1/95
(Royce)
International Equity (a)......................... 11/1/92
(Vontobel)
Balanced (b)..................................... 5/3/93
(Neuberger Berman)
Equity-Income (c)................................ 5/1/95
(Fidelity Investments)
Growth (c)....................................... 5/1/95
(Fidelity Investments)
Asset Manager (d)................................ 5/1/95
(Fidelity Investments)
Emerging Markets Equity (International) (e)...... 5/1/97
(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.
B-3
<PAGE>
Table 2 Average Annual Total Return on $1,000 Investment - Assumes No
Contingent Deferred Sales Charge and Investment on Inception Date of
the Underlying Fund [NOTE: The numbers in Tables 2 - 4 are from the
Commander SAI.]
<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)............................... 3/17/87
(Independence Capital)
High Yield Bond (a)............................ 8/6/84
(T. Rowe Price)
Flexibly Managed (a)........................... 7/31/84
(T. Rowe Price)
Growth Equity (a).............................. 6/1/83
(Independence Capital)
Large Cap Value (a)(f)......................... 3/17/87
(Putnam)
Emerging Growth (a)............................ 5/1/97
(RS Investment Management)
Small Cap Value (a)(f)......................... 3/1/95
(Royce)
International Equity (a)....................... 11/1/92
(Vontobel)
Balanced (b).................................. 2/28/89
(Neuberger Berman)
Equity-Income (c).............................. 10/9/86
(Fidelity Investments)
Growth (c)..................................... 10/9/86
(Fidelity Investments)
Asset Manager (d).............................. 9/6/89
(Fidelity Investments)
Emerging Markets Equity (International) (e).... 10/1/96
(Morgan Stanley)
</TABLE>
-----------------
* Prior to May 1, 2000, the Limited Maturity Bond, Index 500, Mid Cap Growth
and Mid Cap Value Funds had no assets. Accordingly, no performance
information is presented.
** Date the underlying fund was first offered through a subaccount of the
Separate Account.
(a) Penn Series Funds, Inc.
(b) Neuberger Berman Advisers Management Trust
(c) Variable Insurance Products Fund
(d) Variable Insurance Products Fund II
(e) 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-4
<PAGE>
Table 3 Average Annual Total Return on $1,000 Investment - Assumes No Contingent
Deferred Sales Charge and Investment on Inception Date of the
Underlying Fund
<TABLE>
<CAPTION>
Average Annual Total Return
---------------------------------------------------------
From Ten Five One
Inception Years Years Year
Inception Through Ended Ended Ended
Fund (Manager)* Date** 12/31/99 12/31/99 12/31/99 12/31/99
--------------- ------ -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Quality Bond (a)................................. 3/17/87
(Independence Capital)
High Yield Bond (a).............................. 8/06/84
(T. Rowe Price)
Flexibly Managed (a)............................. 7/31/84
(T. Rowe Price)
Growth Equity (a)................................ 6/1/83
(Independence Capital)
Large Cap Value (a)(f)........................... 3/17/87
(Putnam)
Emerging Growth (a).............................. 5/1/97
(RS Investment Management)
Small Cap Value (a)(f)........................... 3/1/95
(Royce)
International Equity (a)......................... 11/1/92
(Vontobel)
Balanced (b)..................................... 2/28/89
(Neuberger Berman)
Equity-Income (c)................................ 10/9/86
(Fidelity Investments)
Growth (c)....................................... 10/9/86
(Fidelity Investments)
Asset Manager (d)................................ 9/6/89
(Fidelity Investments)
Emerging Markets Equity (International) (e)...... 10/1/96
(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 first offered through a subaccount of the
Separate Account.
(a) Penn Series Funds, Inc.
(b) Neuberger Berman Advisers Management Trust
(c) Variable Insurance Products Fund
(d) Variable Insurance Products Fund II
(e) 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-5
<PAGE>
Average annual total returns in Table 1 are computed by finding the
average annual compounded rates of return over the periods shown that would
equate the initial amount invested to the withdrawal value, in accordance with
the following formula: P(1+T)n=ERV. In the formula, P is a hypothetical
investment payment of $1,000; T is the average annual total return; n is the
number of years; and ERV is the withdrawal value at the end of the periods
shown. The computation assumes that the contract charge is allocated across all
available subaccounts by an average Contract Owner and that the Contract Value
is of average size. The returns are computed according to the formula and
assumptions prescribed by the SEC.
Average annual rates of total return in Tables 2 and 3 are computed by
finding the average annual compounded rates of return over the periods shown
that would equate the initial amount invested to the Contract account value at
the end of the periods shown, in accordance with the following formula:
P(1+T)n=FV. In the formula, P is a hypothetical investment of $1,000 in Table 2
and $10,000 in Table 3; T is the average annual total return; n is the number of
years; and FV is the Contract Value. The computations assume that no withdrawals
were made at the end of the periods, and therefore do not reflect the contract's
contingent deferred sales charge which declines from 8% to 0% over nine years.
The computation assumes that the contract charge is allocated across all
available subaccounts by an average Contract Owner and that the Contract Value
is of average size. The returns also show investment performance from the
inception date of the Fund, which may predate the date the Separate Account
began investing in the Fund. The returns are based upon hypothetical assumptions
which are not prescribed by the SEC.
--------------------------------------------------------------------------------
Annual Rate of Change in Accumulation Unit Values
Table 4 Annual Rate of Change in Accumulation Unit Values
Table 4 shows the changes in values of accumulation units for each
subaccount of the Separate Account for calendar year 1999. Accumulation unit
values do not reflect the $40 annual contract or account administration charge
or the contingent deferred sales charge that may be applicable to a withdrawal
from the Contract.
B-6
<PAGE>
Annual Rate of Change in
Accumulation Unit Values
------------------------
Fund (Manager)* 1999
--------------- ----
Money Market (a)...............................
(Independence Capital)
Quality Bond (a)...............................
(Independence Capital)
High Yield Bond (a)............................
(T. Rowe Price)
Flexibly Managed (a)...........................
(T. Rowe Price)
Growth Equity (a)..............................
(Independence Capital)
Large Cap Value (a)(f).........................
(Putnam)
Emerging Growth (a)............................
(RS Investment Management)
Small Cap Value (a)(f).........................
(Royce)
International Equity (a).......................
(Vontobel)
Balanced (b)...................................
(Neuberger Berman)
Equity-Income (c)..............................
(Fidelity Investments)
Growth (c).....................................
(Fidelity Investments)
Asset Manager (d)..............................
(Fidelity Investments)
Emerging Markets Equity (International) (e)...
(Morgan Stanley)
------------
* 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.
The performance information set forth above is for past performance
assuming the subaccounts of the Separate Account had invested in the Funds from
the date the underlying Fund was first available through a subaccount of the
Separate Account or the date the underlying Fund was established. The
performance information is not an indication or representation of future
performance.
B-7
<PAGE>
================================================================================
ADMINISTRATIVE AND RECORDKEEPING SERVICES
Penn Mutual performs all data processing, recordkeeping and other
related services with respect to the Contracts and the Separate Accounts.
================================================================================
DISTRIBUTION OF CONTRACTS
Hornor, Townsend & Kent, Inc. ("HTK"), a wholly owned subsidiary of
Penn Mutual, serves as principal underwriter of all annuity contracts funded
through the Separate Account, including the Contract. The address of HTK is 600
Dresher Road, Horsham, PA 19044.
The Contracts will be distributed by Hornor, Townsend & Kent, Inc.
through broker-dealers. Total commissions on purchase payments made under the
Contract will not exceed ___% and trailer commissions based on a percentage of
Contract Value may be paid. The offering of the Contracts is continuous, and
Penn Mutual does not anticipate discontinuing the offering of the Contract,
although we reserve the right to do so.
================================================================================
CUSTODIAN
Penn Mutual is custodian of the assets held in the Separate Account.
================================================================================
INDEPENDENT AUDITORS
Ernst & Young serves as independent auditors of Penn Mutual and the
Separate Account. Their offices are located at 2001 Market Street, Suite 4000,
Philadelphia, PA.
================================================================================
LEGAL MATTERS
Morgan, Lewis & Bockius LLP has provided advice on certain matters
relating to the federal securities laws and the offering of the Contracts. Their
offices are located at 1701 Market Street, Philadelphia, PA.
================================================================================
FINANCIAL STATEMENTS
The consolidated financial statement of Penn Mutual at December 31,
2000 (audited), and the financial statements of the Separate Account at December
31, 1999 (audited) and June 30, 2000 (unaudited), are set forth on the following
pages. 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.
B-8
<PAGE>
[Penn Mutual and Separate Account Financial
Statements will be added by amendment.]
B-9
<PAGE>
Item 24. Financial Statements and Exhibits
(a) Financial Statements included in Part B:
Financial Statements of Penn Mutual Variable Annuity Account III.
To be filed by amendment.
Consolidated Financial Statements of The Penn Mutual Life Insurance
Company. To be filed by amendment
(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
(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 (File No. 333-62825), as
filed with the Securities and Exchange Commission via
EDGAR (Accession No. 0000950116-99-000834) on April 27,
1999.
2. Not applicable
3. (a)(1) 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 (File No.
333-62811), as filed with the Securities and Exchange
Commission via EDGAR (Accession No.
0001036050-98-002055) on November 30, 1998.
(a)(2) Schedule I to the Sales Support Agreement between The
Penn Mutual Life Insurance Company and Horner, Townsend
& Kent, Inc., a wholly-owned subsidiary of Penn Mutual.
To be filed by amendment.
(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(b) to
Pre-Effective Amendment No. 1 to the Registration
Statement of Penn Mutual Variable Annuity Account III
(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 (File No.
333-62811), as filed with the Securities and Exchange
Commission via EDGAR (Accession No.
0001036050-98-001504) on September 3, 1998.
C-1
<PAGE>
(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 Annuity Account III (File No. 333-62811), 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
Post-Effective Amendment No. 1 to the Registration
Statement of Penn Mutual Variable Annuity Account III
(File No. 333-62825), as filed with the Securities and
Exchange Commission via EDGAR (Accession No.
0000950116-99-000834) on April 27, 1999.
(f) Form of Addendum (Form 98-1) to Broker-Dealer Selling
Agreement. Incorporated herein by reference to Exhibit
3(f) to the Registration Statement of Penn Mutual
Variable Annuity Account III (File No. 333-62811), as
filed with the Securities and Exchange Commission via
EDGAR (Accession No. 0001036050-98-001504) on September
3, 1998.
4. (a) Individual Variable and Fixed Annuity Contract
(Form BVA-00). Filed herwith
(b) Rider--Guaranteed Minimum Death Beneftit--Rising Floor
(GDBRF-00). Filed herewith.
(c) Rider--Guaranteed Minimum Death Benefit--Step Up
(GDBSU-98). Filed herewith.
5. Application (Form___) for Individual Variable Annuity
Contract. To be filed by amendment.
6. (a) Charter of The Penn Mutual Life Insurance Company (May
1983). Incorporated herein by reference to Exhibit 6(a)
to the Registration Statement of Penn Mutual Variable
Annuity Account III (File No. 333-62811), as filed with
the Securities and Exchange Commision 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
(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 (File No.
333-62811), as filed with the Securities and Exchange
Commission via EDGAR (Accession No.
0001036050-98-001504) on September 3, 1998.
C-2
<PAGE>
(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 (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 to Exhibit 8(b)(3) to Post-Effective
Amendment No.5 to the Registration Statement of Penn
Mutual Variable Life Account I 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. Filed
herewith.
(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 (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 (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., 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 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
1998.
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. To be filed by
amendment.
10. (a) Consent of Ernst & Young LLP. Filed herewith. To be
filed by amendment.
(b) Consent of Morgan, Lewis & Bockius LLP. To be filed by
amendment.
11. Not applicable.
12. Not applicable.
13. Schedule of Computation of Performance Quotations. To
be filed by a amendment.
C-3
<PAGE>
14. (a) Powers of Attorney of Trustees (except Ms. Bloch and
Messrs. Notebaert and Rock). Incorporated herein by
reference to Exhibit 14 to Post-Effective Amendment No.
22 to the Registration Statement of Penn Mutual
Variable Annuity Account III (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 the Registration
Statement of Penn Mutual Variable Annuity Account III
(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 the Registration Statement of Penn
Mutual Variable Annuity Account III (File No. 2-77283),
as filed with the Securities and Exchange Commission
via EDGAR (Accession No. 0000950116-99-00164) on June
11, 1999.
C-4
<PAGE>
Item 25. Directors and Officers of the Depositor
The following table sets forth the names of the officers and trustees
of the Depositor who are engaged directly or indirectly in activities
relating to the Registrant or the variable annuity contracts offered by
the Registrant and the executive officers of the Depositor.
<TABLE>
<CAPTION>
<S> <C>
Robert E. Chappell Ann M. Strootman
Chairman of the Board and Chief Vice President and Controller
Executive Officer and Member of
the Board of Trustees
Daniel J. Toran Ralph I. Pence
President and Chief Operating Vice President and Chief Actuary
Officer and Member of the Board of Trustees
Nancy S. Brodie Frederick M. Rackovan
Executive Vice President and Chief Financial Officer Vice President, New Business
Larry L. Mast Richard F. Plush
Executive Vice President, Sales and Marketing Vice President, Products and Programs
Peter M. Sherman James McElwain
Executive Vice President and Vice President, Broker Dealer Sales
Chief Investment Officer
Bill D. Fife Steven M. Herzberg
Senior Vice President, Assistant Vice President
Independence Financial Network and Treasurer
John M. Albanese Laura Ritzko
Senior Vice President, Customer Secretary
Service and Information Systems
</TABLE>
The business address of the director and officers is The Penn Mutual
Life Insurance Company, Philadelphia, PA 19172.
C-5
<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 Annuity Company Life Insurance and Annuities Delaware
Independence Capital Management, Inc. Investment Adviser Pennsylvania
Penn Janney Fund, Inc. Independence Square Investments Holding Company Pennsylvania
Properties, Inc.
The Pennsylvania Trust Company Trust Company Pennsylvania
Independence Square properties, Inc.
Wholly-Owned Subsidiaries
------------------------------------
Corporation Principal Business State of Incorporation
----------- ------------------ ----------------------
<S> <C> <C>
Indepro Corporation Real Estate Investment Delaware
WPI Investment Company Real Estate Investment Delaware
Hornor, Townsend & Kent, Inc. Registered Broker-Dealer and Pennsylvania
Investment Adviser
Penn Tallahassee Corporation Real Estate Investment Florida
Janney Montgomery Scott Inc. Registered Broker-Dealer and Delaware
Investment Adviser
Indepro Corporation
Wholly-Owned Subsidiaries
-------------------------
Corporation Principal Business State of Incorporation
----------- ------------------ ----------------------
<S> <C> <C>
Indepro Property Fund I Corporation Real Estate Investment Delaware
Indepro Property Fund II Corporation Real Estate Investment Delaware
Commons One Corporation Real Estate Investment Delaware
West Hazleton, Inc. Real Estate Investment Delaware
</TABLE>
C-6
<PAGE>
<TABLE>
<CAPTION>
Janney Montgomery Scott LLC
Wholly-Owned Subsidiaries
---------------------------
Corporation Principal Business State of Incorporation
----------- ------------------ ----------------------
<S> <C> <C>
JMS Resources, Inc. Oil and Gas Development Pennsylvania
JMS Investor Services, Inc. Insurance Sales Delaware
</TABLE>
Item 27. Number of Contract Owners
As of the date of this Registration Statement, there are no Contracts
outstanding that are the subject of this Registration Statement.
Item 28. Indemnification
Section 6.2 of the By-laws of The Penn Mutual Life Insurance Company
provides that, in accordance with the provisions of the Section, the
Company shall indemnify trustees and officers against expenses
(including attorneys' fees), judgments, fines, excise taxes and amounts
paid in settlement actually and reasonably incurred in connection with
actions, suits and proceedings, to the extent such indemnification is
not prohibited by law, and may provide other indemnification to the
extent not prohibited by law. The By-laws are filed as Exhibit 6(b) to
Post-Effective Amendment No. 12 to this Registration Statement and are
incorporated in this Post-Effective Amendment by reference.
Pennsylvania law (15 Pa. C.S.A.ss.ss.1741-1750) authorizes Pennsylvania
corporations to provide indemnification to directors, officers and
other persons.
Penn Mutual owns a directors and officers liability insurance policy
covering liabilities directors and officers of Penn Mutual and its
subsidiaries may incur in acting as directors and officers.
Selling Agreements entered into by The Penn Mutual Life Insurance
Company ("Penn Mutual") and its subsidiary, Hornor, Townsend & Kent,
Inc. ("HTK") with securities brokers and insurance agents generally
provide for indemnification of Penn Mutual and HTK and their directors
and officers in the event of liability resulting from unauthorized acts
of the brokers and insurance agents.
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
Horner, Townsend & Kent, Inc. principal underwriter for the Registrant,
also serves as principal underwriter for Penn Mutual Variable Life Account I, a
separate account of Penn Mutual, and for PIA Variable Annuity Account I, a
separate account of Penn Mutual's wholly-owned subsidiary, The Penn Insurance
and Annuity Company.
C-7
<PAGE>
Hornor, Townsend & Kent, Inc. - Directors and Officers
John J. Gray, Director and Chairman of the Board
Larry L. Mast, Director
Nina M. Mulrooney, Director
Norman T. Wilde, Jr., Director
Daniel J. Toran, Director
Ronald C. Zimmerman, President and Chief Executive Officer
Michael D. Sweeney, Assistant Vice President, Director of Compliance
and Secretary
Edward G. Pecelli - Assistant Vice President, Director of Sales and
Marketing
Laura M. Ritzko, Assistant Secretary
Henry S. Buck, Assistant Vice President and Assistant Treasurer
Barbara S. Wood, Senior Vice President, Finance and Treasurer
Joseph R. Englert, Assistant Vice President, Director of Operations
Franklin L. Best, Jr., Counsel
Constance Flaville, Assistant Secretary
The principal business address of Messrs. Gray and Wilde is Janney,
Montgomery, Scott Inc., 1801 Market Street, Philadelphia, Pennsylvania.
The principal business address of Mses. Mulrooney and Ritzko and
Messrs. 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.
As of the date of this Registration Statement, the Contract has not
been offered and therefore no commissions have been paid to the principal
underwriter with respect to the Contract.
Item 30. Location of Accounts and Records
The name and address of the person who maintains physical
possession of each account, book or other documents required by
Section 31(a) of the Investment Company Act of 1940 is as
follows:
The Penn Mutual Life Insurance Company
600 Dresher Road
Horsham, Pennsylvania 19044
Item 31. Management Services
See "Administrative and Recordkeeping Services" in Part B of
this Registration Statement.
Item 32. Undertakings
The Penn Mutual Life Insurance Company hereby undertakes:
(a) to file a post-effective amendment to this Registration
Statement as frequently as is necessary to ensure that the
audited financial statements in the Registration Statement are
never more than 16 months old for so long as payments under the
variable annuity contracts may be accepted;
(b) to include either (1) as part of any application to purchase a
contract or account offered by the prospectus, a space that an
applicant can check to request a statement of additional
information, or (2) a post card or similar written communication
affixed to or included in the prospectus that the applicant can
remove to send for a statement of additional information;
(c) to deliver any statement of additional information and any
financial statements required to be made available under Form
N-4 promptly upon written or oral request.
C-8
<PAGE>
Restrictions on withdrawals under Section 403(b) Contracts are
imposed in reliance upon, and in compliance with, a no-action
letter issued by the Chief of the Office of Insurance Products
and Legal Compliance of the Securities and Exchange Commission
to the American Council of Life Insurance on November 28, 1988.
The Penn Mutual Life Insurance Company represents that the fees
and charges deducted under the Individual Variable and Fixed
Annuity Contract, in the aggregate, are reasonable in relation
to the services rendered, the expenses expected to be incurred,
and the risks assumed by the Registrant.
C-9
<PAGE>
SIGNATURES
As required by the Securities Act of 1933 and the Investment Company
Act of 1940, the Registrant has caused this 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 21st day of June, 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 Registration Statement
has been signed by the following persons, in the capacities indicated, on the
21st day of June, 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
/s/Robert E. Chappell
---------------------
*By: Robert E. Chappell, attorney-in-fact
C-10
<PAGE>
EXHIBIT INDEX
4 (a) Individual Variable and Fixed Annuity Contract
(BVA-00).
(b) Rider--Guaranteed Minimum Death Benefit--Rising Floor
(GDBRF-00).
(c) Rider--Guaranteed Minimum Death Benefit--Step Up
(GDBSU-98).
8 (b) Sales Agreement between The Penn Mutual Life Insurance
Company and Penn Series Funds, Inc.
C-11
