<PAGE>
As filed with the Securities and Exchange Commission on September 3,
1998
FILE NO. ______
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________
FORM N-4
REGISTRATION STATEMENT UNDER SECURITIES ACT OF 1933 /X/
-
PRE-EFFECTIVE AMENDMENT NO. ___ /_/
POST-EFFECTIVE AMENDMENT NO. ___ /_/
REGISTRATION STATEMENT UNDER THE INVESTMENT
COMPANY ACT of 1940 /_/
AMENDMENT NO. 21 /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
(Name and Address of Agent for Service)
Copy to:
Richard W. Grant
C. Ronald Rubley
Morgan, Lewis & Bockius LLP
2000 One Logan Square
Philadelphia, PA 19103-6993
__________________
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 Contract - 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 Registrant 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 of
Form N-4 Item Number Location in Prospectuses Additional Information
- -------------------- ------------------------ ----------------------
<S> <C> <C>
Item 1. Cover Page Cover Page N/A
Item 2. Definitions Special Terms N/A
Item 3. Synopsis Cover Page; Expenses N/A
or Highlights
Item 4. Condensed N/A N/A
Financial
Information
Item 5. General The Penn Mutual Life N/A
Description Insurance Company;
of Registrant, The Separate Account
Depositor and
Portfolio
Companies
Item 6. Deductions The Contract - Charges N/A
and Expenses
Item 7. General The Contract N/A
Description
of Variable
Annuity
Contracts
Item 8. Annuity Period The Contract - Annuity N/A
Options Payments
Item 9. Death Benefit The Contract - Death Benefit N/A
On Death
Item 10. Purchases and The Contract - Purchases; N/A
Contract The Contract - Accumulation
Value Units
Item 11. Redemptions The Contract - Withdrawals N/A
Item 12. Taxes Federal Income Tax N/A
Considerations
Item 13. Legal N/A N/A
Proceedings
</TABLE>
<PAGE>
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
Location in Statement of
Form N-4 Item Number Location in Prospectuses Additional Information
- -------------------- ------------------------ ----------------------
<S> <C> <C>
Item 14. Table of Table of Contents of N/A
Contents of Statement of Additional
Statement of Information
Additional
Information
Item 15. Cover Page N/A Cover Page
Item 16. Table of N/A Cover Page
Contents
Item 17. General N/A N/A
Information
and History
Item 18. Services N/A Administrative and
Recordkeeping
Services; Custodian;
Independent Auditors
Item 19. Purchase of The Contract - Purchases; Distribution of
Securities The Contract - Transfers; Contracts
Being Offered The Contract - Charges
and Expenses
Item 20. Underwriters N/A Distribution of
Contracts
Item 21. Calculation of N/A Performance Data
Performance
Data
Item 22. Annuity N/A Variable Annuity
Payments Payments
Item 23. Financial N/A Financial Statements
Statements
</TABLE>
<PAGE>
PROSPECTUS -- JANUARY 1, 1999
INDIVIDUAL VARIABLE AND FIXED ANNUITY CONTRACT -- FLEXIBLE PURCHASE PAYMENTS
- --------------------------------------------------------------------------------
LOGO
PENN MUTUAL VARIABLE ANNUITY ACCOUNT III
THE PENN MUTUAL LIFE INSURANCE COMPANY
PHILADELPHIA, PENNSYLVANIA 19172 . TELEPHONE (215) 956-8000
- --------------------------------------------------------------------------------
This prospectus describes a combination variable and fixed annuity contract
offered by The Penn Mutual Life Insurance Company (the "Company"). Through Penn
Mutual Variable Annuity Account III (the "Separate Account"), you may allocate
amounts invested under the Contract among one or more of the funds as set forth
below:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
PENN SERIES FUNDS, INC. MANAGER
<S> <C>
Growth Equity Fund Independence Capital Management, Inc. (a wholly owned
subsidiary
of The Penn Mutual Life Insurance Company)
Value Equity Fund OpCap Advisors
Small Capitalization Fund OpCap Advisors
Emerging Growth Fund RS Investment Management, Inc.
Flexibly Managed Fund T. Rowe Price Associates, Inc.
International Equity Fund Vontobel USA, Inc.
Quality Bond Fund Independence Capital Management, Inc.
High Yield Bond Fund T. Rowe Price Associates, Inc.
Money Market Fund Independence Capital Management, Inc.
- -----------------------------------------------------------------------------------------------------------------------------------
AMERICAN CENTURY VARIABLE PORTFOLIOS, INC. MANAGER
Capital Appreciation Portfolio American Century Investment Management, Inc.
- -----------------------------------------------------------------------------------------------------------------------------------
NEUBERGER & BERMAN ADVISERS MANAGEMENT TRUST MANAGER
Balanced Portfolio Neuberger & Berman Management Incorporated
Limited Maturity Bond Portfolio Neuberger & Berman Management Incorporated
Partners Fund Portfolio Neuberger & Berman Management Incorporated
- -----------------------------------------------------------------------------------------------------------------------------------
FIDELITY INVESTMENTS' VARIABLE INSURANCE PRODUCTS FUND MANAGER
Equity-Income Portfolio Fidelity Management and Research Company
Growth Portfolio Fidelity Management and Research Company
- -----------------------------------------------------------------------------------------------------------------------------------
FIDELITY INVESTMENTS' VARIABLE INSURANCE PRODUCTS FUND II MANAGER
Asset Manager Portfolio Fidelity Management and Research Company
Index 500 Portfolio Fidelity Management and Research Company
- -----------------------------------------------------------------------------------------------------------------------------------
MORGAN STANLEY UNIVERSAL FUNDS, INC. MANAGER
- -----------------------------------------------------------------------------------------------------------------------------------
Emerging Markets Equity (International) Portfolio Morgan Stanley Asset Management Inc.
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
In addition, you may also invest in fixed accounts. The fixed accounts are
funded through and are backed by the Company's general account.
For many persons, a combination variable and fixed annuity contract may be
an attractive long-term investment vehicle. Its benefits include the manner in
which earnings on accumulated funds are taxed, the availability of multiple
investment options, and the provision of annuity and death benefit guarantees.
The Contract is not intended as a short-term investment vehicle. Early
withdrawals of purchase payments from the contract may be subject to a
contingent deferred sales charge of up to 7%, and withdrawals by an owner before
age 59 1/2 may be subject to a 10% additional income tax.
A Contract may be returned within ten days of receipt for a full refund of
the Contract Value (or purchase payments, if required under applicable law).
Longer free look periods apply in some states.
This prospectus sets forth concisely the information a prospective investor
should know before investing. It should be retained for future reference.
A statement of additional information dated the same as this prospectus has
been filed with the Securities and Exchange Commission and is incorporated
herein by reference. It is available, at no charge by writing The Penn Mutual
Life Insurance Company, Customer Service Group, Philadelphia, PA 19172. Or, you
can call (215) 956-8000. In addition, the Securities and Exchange Commission
maintains a Web site (http://www.sec.gov) that contains the Statement of
Additional Information, material incorporated by reference, and other
information regarding registrants that file electronically with the Commission.
The table of contents of the statement of additional information is at the end
of this prospectus.
THIS PROSPECTUS MUST BE ACCOMPANIED OR PRECEDED BY A CURRENT PROSPECTUS FOR EACH
APPLICABLE FUND.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
- --------------------------------------------------------------------------------
PROSPECTUS CONTENTS
- --------------------------------------------------------------------------------
SPECIAL TERMS...................................................................
- --------------------------------------------------------------------------------
EXPENSES........................................................................
- --------------------------------------------------------------------------------
EXAMPLES OF FEES AND EXPENSES...................................................
- --------------------------------------------------------------------------------
THE PENN MUTUAL LIFE INSURANCE COMPANY..........................................
- --------------------------------------------------------------------------------
THE SEPARATE ACCOUNT............................................................
Penn Series Funds, Inc.....................................................
American Century Variable Portfolios, Inc..................................
Neuberger & Berman Advisers Management Trust...............................
Fidelity Investments' Variable Insurance Products Fund.....................
Fidelity Investments' Variable Insurance Products Fund II..................
Morgan Stanley Universal Funds, Inc........................................
- --------------------------------------------------------------------------------
CONTRACT
- --------------------------------------------------------------------------------
Purchases..................................................................
Accumulation Units.........................................................
Annuity Payments...........................................................
Death Benefit..............................................................
Transfers..................................................................
Dollar Cost Averaging.................................................
Automatic Rebalancing.................................................
Withdrawals................................................................
Systematic Withdrawals................................................
403(b) Withdrawals....................................................
Deferment of Payments and Transfers........................................
Charges....................................................................
Administration Charges................................................
Mortality and Expense Risk Charge.....................................
Contingent Deferred Sales Charge......................................
Free Withdrawals......................................................
Enhanced Variable Account Death Benefit ..............................
Premium Taxes.........................................................
Performance Information....................................................
- --------------------------------------------------------------------------------
THE FIXED ACCOUNTS..............................................................
General Information........................................................
Loans Under Section 403(b) Contracts.......................................
- --------------------------------------------------------------------------------
FEDERAL INCOME TAX CONSIDERATIONS...............................................
- --------------------------------------------------------------------------------
FINANCIAL STATEMENTS............................................................
- --------------------------------------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION CONTENTS....................................
- --------------------------------------------------------------------------------
1
<PAGE>
________________________________________________________________________________
SPECIAL TERMS
As used in this prospectus, the following terms have the indicated meanings:
ACCUMULATION UNIT: A unit of measure used to compute the Variable Account
Value under the Contract prior to the Annuity Date.
ANNUITANT: The person during whose life annuity payments are made.
ANNUITY DATE: The date on which annuity payments start.
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
Account Value.
FIXED ACCOUNT VALUE: The value of amounts held under the Contract in all
fixed accounts.
SEPARATE ACCOUNT: Penn Mutual Variable Annuity Account III, a separate
account of The Penn Mutual Life Insurance Company that is registered as a
unit investment trust under the Investment Company Act of 1940.
VARIABLE ACCOUNT VALUE: The value of amounts held under the Contract in
all subaccounts of the Separate Account.
VALUATION PERIOD: The period from one valuation of Separate Account assets
to the next. Valuation is performed on each day the New York Stock Exchange
is open for trading.
WE OR US: A reference to "we" or "us" denotes The Penn Mutual Life
Insurance Company.
YOU: A reference to "you" denotes the Contract Owner or prospective
Contract Owner.
- --------------------------------------------------------------------------------
EXPENSES
- --------------------------------------------------------------------------------
CONTRACT OWNER TRANSACTION EXPENSES
Sales Load Imposed on Purchase Payments.....................................None
Maximum Contingent Deferred Sales Charge....7% of purchase payments withdrawn(a)
Exchange 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.........................................1.20%
Contract Administration Charge............................................0.15%
-----
Total Separate Account Annual Expenses..................................1.35%(c)
- ---------------------
(a) The charge does not apply to withdrawals of purchase payment which were
made more than seven years prior to withdrawal.
(b) The charge is 2% of the Variable Account Value if less than $40. There is
no charge under Contracts with a Variable Account Value
of more than $100,000.
(c) An enhanced Variable Account minimum death benefit rider may be purchased
with the Contract. An annual charge for the Rider is made against the
average annual Variable Account Value at the rate of 0.25%. See "Charges"
in this prospectus.
- --------------------------------------------------------------------------------
PENN SERIES FUNDS, INC. (a)
UNDERLYING FUND ANNUAL EXPENSES (AS A % OF PORTFOLIO AVG. NET ASSETS)
2
<PAGE>
<TABLE>
<CAPTION>
ADMINISTRATIVE
MANAGEMENT AND CORPORATE TOTAL
FEES (AFTER SERVICES FEES ACCOUNTING OTHER FUND
WAIVER) (AFTER WAIVER) FEES EXPENSES EXPENSES
------------ --------------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C>
Growth Equity............... 0.50% 0.15% 0.07% 0.05% 0.77%
Value Equity................ 0.50% 0.15% 0.06% 0.05% 0.76%
Small Capitalization........ 0.50% 0.15% 0.10% 0.10% 0.85%
Emerging Growth............. 0.80% 0.15% 0.08% 0.12% 1.15%
Flexibly Managed............ 0.50% 0.15% 0.05% 0.06% 0.76%
International Equity........ 0.75% 0.15% 0.08% 0.15% 1.13%
Quality Bond................ 0.45% 0.15% 0.08% 0.07% 0.75%
High Yield Bond............. 0.50% 0.15% 0.08% 0.08% 0.81%
Money Market................ 0.40% 0.15% 0.08% 0.07% 0.70%
</TABLE>
- --------------------
(a) The expenses presented are for the last fiscal year. In the absence of fee
waivers by the investment adviser and administrator of the Fund, the total
expenses of the Emerging Growth Fund would have been 1.41%.
- --------------------------------------------------------------------------------
AMERICAN CENTURY VARIABLE PORTFOLIOS, INC.
UNDERLYING FUND ANNUAL EXPENSES (AS A % OF PORTFOLIO AVG. NET ASSETS)
<TABLE>
<CAPTION>
MANAGEMENT OTHER TOTAL FUND
FEES 12B-1 FEES EXPENSES EXPENSES
----------- ---------- -------- -----------
<S> <C> <C> <C> <C>
Capital Appreciation 1.00% None None 1.00%
</TABLE>
- --------------------------------------------------------------------------------
NEUBERGER & BERMAN ADVISERS MANAGEMENT TRUST (A)
UNDERLYING FUND ANNUAL EXPENSES (AS A % OF PORTFOLIO AVG. NET ASSETS)
<TABLE>
<CAPTION>
MANAGEMENT,
ADVISORY AND
ADMINISTRATION OTHER TOTAL FUND
FEES EXPENSES EXPENSES
--------------- --------- -----------
<S> <C> <C> <C>
Limited Maturity Bond 0.65% 0.12% 0.77%
Balanced 0.85% 0.19% 1.04%
Partners Fund 0.80% 0.06% 0.86%
</TABLE>
(a) Neuberger & Berman Advisers Management Trust (the "Trust") is divided into
portfolios ("Portfolios"), each of which invests all of its net investable
assets in a corresponding series ("Series") of Advisers Managers Trust.
Expenses in the table reflect expenses of the Portfolios and include each
Portfolio's pro rata portion of the operating expenses of each Portfolio's
corresponding Series. The Portfolios pay Neuberger & Berman Management Inc.
("NBMI") an administration fee based on the Portfolio's net asset value.
Each Portfolio's corresponding Series pays NBMI a management fee based on
the Series' average daily net assets. Accordingly, this table combines
management fees at the Series level and administration fees at the
Portfolio's level in a unified fee rate. Total Annual Expenses for each
portfolio have been restated based upon current administration fees for the
Portfolio and management fees for its corresponding Series. See "Expenses"
in the Trust's Prospectus.
3
<PAGE>
- --------------------------------------------------------------------------------
FIDELITY INVESTMENTS' VARIABLE INSURANCE PRODUCTS FUND (a)
UNDERLYING FUND ANNUAL EXPENSES (AS A % OF PORTFOLIO AVG. NET ASSETS)
<TABLE>
<CAPTION>
MANAGEMENT OTHER TOTAL FUND
FEE EXPENSES EXPENSES
---------- -------- ----------
<S> <C> <C> <C>
Equity-Income ........................... 0.50% 0.07% 0.57%
Growth ................................ 0.60% 0.07% 0.67%
</TABLE>
___________
(a) The expenses presented are for the last fiscal year. A portion of the
brokerage commissions the fund paid was used to reduce its expenses. Without
this reduction, total expenses would have been 0.58% for the Equity Income
Portfolio and 0.69% for the Growth Portfolio.
- --------------------------------------------------------------------------------
FIDELITY INVESTMENTS' VARIABLE INSURANCE PRODUCTS FUND II
UNDERLYING FUND ANNUAL EXPENSES (AS A % OF PORTFOLIO AVG. NET ASSETS)
<TABLE>
<CAPTION>
MANAGEMENT OTHER TOTAL FUND
FEE EXPENSES EXPENSES
---------- -------- ----------
<S> <C> <C> <C>
Asset Manager (a) ........................ 0.55% 0.09% 0.64%
Index 500 (b) ............................ 0.24% 0.04% 0.28%
</TABLE>
(a) The expenses presented are for the last fiscal year. A portion of the
brokerage commissions the fund paid was used to reduce its expenses. Without
this reduction, total expenses would have been 0.65% for the Asset Manager
Portfolio.
(b) The expenses presented are for the last fiscal year. In the absence of
voluntary fee waivers by the investment adviser, total expenses would have been
0.40% for the Index 500 Portfolio.
- --------------------------------------------------------------------------------
MORGAN STANLEY UNIVERSAL FUNDS, INC.
UNDERLYING FUND ANNUAL EXPENSES (AS A % OF PORTFOLIO AVG. 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>
- --------------------------------------------------------------------------------
The purpose of the foregoing table is to assist you in understanding
the various costs and expenses that you will bear directly and indirectly. The
table shows Contract expenses and underlying fund expenses. See the prospectuses
of Penn Series Funds, Inc., American Century Variable Portfolios, Inc.,
Neuberger & Berman Advisers Management Trust, Fidelity Investments' Variable
Insurance Products Fund, Fidelity Investments' Variable Insurance Products Fund
II and Morgan Stanley Universal Funds, Inc. for additional information on fund
expenses.
Premium taxes may be applicable, but are not reflected in the tables
above or the examples below. See "Charges" in this prospectus.
4
<PAGE>
- --------------------------------------------------------------------------------
EXAMPLES OF FEES AND EXPENSES
The following examples illustrate the cumulative dollar amount of all
the above expenses that would be incurred on each $1,000 invested.
If you make a single purchase payment and surrender your Contract at
the end of the applicable period, you would pay the following expenses on each
$1,000 invested, assuming a 5% annual return on assets.
<TABLE>
<CAPTION>
ONE THREE FIVE TEN
YEAR YEARS YEARS YEARS
---- ----- ----- -----
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Penn Series Growth Equity Fund ..................................... $83 $115 $147 $254
Penn Series Value Equity Fund....................................... $83 $115 $147 $253
Penn Series Small Capitalization Fund............................... $84 $117 $151 $262
Penn Series Emerging Growth Fund.................................... $87 $126 $166 $292
Penn Series Flexibly Managed Fund................................... $83 $115 $147 $253
Penn Series International Equity Fund............................... $87 $125 $165 $290
Penn Series Quality Bond Fund....................................... $83 $115 $146 $252
Penn Series High Yield Bond Fund.................................... $84 $116 $149 $258
Penn Series Money Market Fund....................................... $83 $113 $144 $247
American Century Capital Appreciation Portfolio..................... $86 $122 $159 $277
Neuberger & Berman Limited Maturity Bond Portfolio.................. $83 $115 $147 $254
Neuberger & Berman Balanced Portfolio............................... $86 $123 $161 $281
Neuberger & Berman Partners Portfolio............................... $84 $118 $152 $263
Fidelity's Equity Income Portfolio.................................. $82 $109 $137 $233
Fidelity's Growth Portfolio......................................... $83 $112 $142 $243
Fidelity's Asset Manager Portfolio.................................. $82 $111 $141 $240
Fidelity's Index 500................................................ $79 $101 $123 $202
Morgan Stanley Emerging Markets Equity (International) Portfolio.... $93 $143 $194 $349
</TABLE>
If you make a single purchase payment and either you do not surrender
your Contract or you annuitize your Contract at the end of the period, you would
pay the following expenses on each $1,000 invested, assuming a 5% annual return
on assets:
<TABLE>
<CAPTION>
ONE THREE FIVE TEN
YEAR YEARS YEARS YEARS
---- ----- ----- -----
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Penn Series Growth Equity Fund...................................... $22 $69 $118 $254
Penn Series Value Equity Fund....................................... $22 $69 $118 $253
Penn Series Small Capitalization Fund............................... $23 $71 $122 $262
Penn Series Emerging Growth Fund.................................... $26 $80 $137 $292
Penn Series Flexibly Managed Fund................................... $22 $69 $118 $253
Penn Series International Equity Fund............................... $26 $80 $136 $290
Penn Series Quality Bond Fund....................................... $22 $68 $117 $252
Penn Series High Yield Bond Fund.................................... $23 $70 $120 $258
Penn Series Money Market Fund....................................... $22 $67 $115 $247
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
ONE THREE FIVE TEN
YEAR YEARS YEARS YEARS
---- ----- ----- -----
<S> <C> <C> <C> <C>
American Century Capital Appreciation Portfolio ........................... $25 $76 $130 $277
Neuberger & Berman Limited Maturity Bond Portfolio......................... $22 $69 $118 $254
Neuberger & Berman Balanced Portfolio...................................... $25 $77 $132 $281
Neuberger & Berman Partners Portfolio...................................... $23 $72 $123 $263
Fidelity's Equity Income Portfolio......................................... $20 $63 $108 $233
Fidelity's Growth Portfolio................................................ $21 $66 $113 $243
Fidelity's Asset Manager Portfolio......................................... $21 $65 $111 $240
Fidelity's Index 500....................................................... $17 $54 $ 93 $202
Morgan Stanley Emerging Markets Equity (International) Portfolio........... $32 $98 $166 $349
</TABLE>
- ----------------------------------------------
The examples are based upon fund data for the fiscal year ended December
31, 1997.
THE EXAMPLES SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES UNDER YOUR CONTRACT; ACTUAL EXPENSES MAY BE GREATER OR LESSER
THAN THOSE SHOWN.
- --------------------------------------------------------------------------------
THE PENN MUTUAL LIFE INSURANCE COMPANY
The Penn Mutual Life Insurance Company ("Penn Mutual") is a Pennsylvania
mutual life insurance company. We were chartered in 1847 and have been
continuously engaged in the life insurance business since that date. Our home
office is located at 600 Dresher Road, Horsham, PA 19044. Our mailing address is
Independence Square, Philadelphia, PA 19172.
- --------------------------------------------------------------------------------
THE SEPARATE ACCOUNT
Penn Mutual Variable Annuity Account III was established as a separate
account of Penn Mutual on April 13, 1982. The Separate Account is registered
with the Securities and Exchange Commission as a unit investment trust under the
Investment Company Act of 1940 and qualifies as a "separate account" within the
meaning of the federal securities laws.
The Separate Account is divided into subaccounts for investment in shares
of different Funds of Penn Series Funds, Inc., American Century Variable
Portfolios, Inc., Neuberger & Berman Advisers Management Trust, Fidelity
Investments' Variable Insurance Products Fund and Variable Insurance Products
Fund II and Morgan Stanley Universal Funds, Inc. Income, gains and losses,
realized or unrealized, of a subaccount are credited to or charged against the
subaccount without regard to any other income, gains or losses of Penn Mutual.
Assets equal to the reserves and other contract liabilities with respect to each
subaccount are not chargeable with liabilities arising out of any other business
of Penn Mutual. Penn Mutual is obligated to pay all benefits and make all
payments provided under the Contracts.
Assets held in the Separate Account under the Contracts described in this
prospectus are invested, at the direction of the Contract Owner, in one or more
Funds of Penn Series Funds, Inc., Neuberger & Berman Advisers Management Trust,
American Century Variable Portfolios, Inc., Fidelity Investments; Variable
Insurance Products Fund and Variable Insurance Products Fund II and Morgan
Stanley Universal Funds, Inc.
6
<PAGE>
Under the Investment Company Act of 1940, as currently interpreted,
Contract Owners and persons receiving annuity payments have the right to
instruct Penn Mutual as to the voting of the various Fund shares held in the
Separate Account pursuant to the Contracts. The number of shares of a Fund for
which voting instructions may be given by a Contract Owner is determined by
dividing the Contract Owner's interest in the applicable subaccount of the
Separate Account by the net asset value per share of the Fund. The number of
shares of a Fund for which voting instructions may be given by a person
receiving annuity payments is determined by dividing the reserve allocated to
the applicable subaccount by the net asset value per share of the Fund. Should
the applicable law, or interpretations thereof, change so as to permit us to
vote shares of the mutual funds in our own right, we may elect to do so.
Further, we reserve the right to modify the manner in which we calculate the
weight to be given to pass through voting instructions where such a change is
necessary to comply with federal law or interpretations thereof.
Shares of Penn Series are sold not only to the Separate Account, but
also to other separate accounts of Penn Mutual and its subsidiary, The Penn
Insurance and Annuity Company, that fund benefits under variable annuity and
variable life insurance contracts. Shares of American Century Variable
Portfolios, Inc., Neuberger & Berman Advisers Management Trust, Fidelity
Investments' Variable Insurance Products Fund and Variable Insurance Products
Fund II and Morgan Stanley Universal Funds, Inc. are offered not only to
variable annuity and variable life separate accounts of Penn Mutual, but also to
such accounts of other insurance companies unaffiliated with Penn Mutual and, in
the case of Neuberger & Berman Advisers Management Trust and Morgan Stanley
Universal Funds, Inc., directly to qualified pension and retirement plans. For
information on possible conflicts involved in the Separate Account investing in
Funds that are so offered, see the accompanying Fund prospectuses.
- --------------------------------------------------------------------------------
PENN SERIES FUNDS, INC.:
GROWTH EQUITY FUND -- seeks long term growth of capital and increase
of future income by investing primarily in common stocks of well established
growth companies;
VALUE EQUITY FUND -- seeks to maximize total return (capital
appreciation and income) primarily by investing in equity securities of
companies believed to be undervalued considering such factors as assets,
earnings, growth potential and cash flows;
SMALL CAPITALIZATION FUND -- seeks capital appreciation through
investment in a diversified portfolio of securities consisting primarily of
equity securities of companies with market capitalizations under $1 billion;
EMERGING GROWTH FUND -- seeks capital appreciation by investing
primarily in common stocks of emerging growth companies with above-average
growth prospects;
FLEXIBLY MANAGED FUND -- seeks to maximize total return (capital
appreciation and income) by investing in common stocks, other equity securities,
corporate debt securities, and/or short term reserves, in proportions considered
appropriate in light of the availability of attractively valued individual
securities and current and expected economic and market conditions;
INTERNATIONAL EQUITY FUND -- seeks to maximize capital appreciation by
investing in a carefully selected diversified portfolio consisting primarily of
equity securities. The investments will consist principally of equity securities
of European and Pacific Basin countries;
QUALITY BOND FUND -- seeks the highest income over the long term
consistent with the preservation of principal through investment primarily in
marketable investment grade debt securities;
7
<PAGE>
HIGH YIELD BOND FUND -- seeks high current income by investing
primarily in a diversified portfolio of long term high-yield/high-risk fixed
income securities in the medium to lower quality ranges; capital appreciation is
a secondary objective; such securities, which are commonly referred to as "junk"
bonds, generally involve greater risks of loss of income and principal than
higher rated securities (see accompanying Penn Series prospectuses);
MONEY MARKET FUND -- seeks to preserve capital, maintain liquidity and
achieve the highest possible level of current income consistent therewith, by
investing in high quality money market instruments; an investment in the Fund is
neither insured nor guaranteed by the U.S. Government and there can be no
assurance that the fund will be able to maintain a stable net asset value of
$1.00 per share.
Independence Capital Management, Inc., Horsham, Pennsylvania is
investment adviser to each of the Funds. OpCap Advisors, New York, New York, is
investment sub-adviser to the Value Equity and Small Capitalization Funds. T.
Rowe Price Associates, Baltimore, Maryland, is investment sub-adviser to the
Flexibly Managed and High Yield Bond Funds. Vontobel USA, Inc., New York, New
York, is investment sub-adviser to the International Equity Fund. RS Investment
Management, Inc., San Francisco, California, is investment sub-adviser to the
Emerging Growth Fund.
- --------------------------------------------------------------------------------
AMERICAN CENTURY VARIABLE PORTFOLIOS, INC.:
CAPITAL APPRECIATION PORTFOLIO -- seeks capital growth by investing
primarily in common stocks believed to have better-than-average prospects for
appreciation.
American Century Investment Management, Inc., Kansas City, Missouri,
is investment adviser to the Capital Appreciation Portfolio.
- --------------------------------------------------------------------------------
NEUBERGER & BERMAN ADVISERS MANAGEMENT TRUST:
LIMITED MATURITY BOND PORTFOLIO -- seeks highest current income
consistent with low risk to principal and liquidity, primarily by investing in a
diversified portfolio of limited maturity debt securities. A secondary
objective is capital appreciation.
BALANCED PORTFOLIO -- seeks long-term capital growth and reasonable
current income without undue risk to principal through investment of a portion
of its assets in common stock and a portion in debt securities.
PARTNERS PORTFOLIO -- seeks capital growth by investing primarily in
common stocks of established companies, using the value oriented investment
approach. Neuberger & Berman reserves the right to make changes in the
investment objective, but will notify shareholders thirty days in advance of any
proposed material change.
Neuberger & Berman Management Incorporated, New York, New York, is
investment adviser to the Limited Maturity Bond Portfolio, the Balanced
Portfolio and the Partners Portfolio.
- --------------------------------------------------------------------------------
FIDELITY INVESTMENTS' VARIABLE INSURANCE PRODUCTS FUND:
EQUITY-INCOME PORTFOLIO -- seeks reasonable income by investing
primarily in income-producing equity securities. In choosing these securities,
the fund will also consider the potential for capital appreciation. The fund's
goal is to achieve a yield which exceeds the composite yield on the securities
comprising the Standard & Poor's 500 Composite Stock Price Index.
8
<PAGE>
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.
INDEX 500 PORTFOLIO -- seeks to match the total return of the S&P 500
while keeping expenses low. The S&P 500 is an index of 500 common stocks, most
of which trade on the New York Stock Exchange.
Fidelity Management & Research Company, Boston, Massachusetts, is
investment adviser to the Asset Manager Portfolio and the Index 500 Portfolio.
- --------------------------------------------------------------------------------
MORGAN STANLEY UNIVERSAL FUNDS, INC.:
EMERGING MARKETS EQUITY (INTERNATIONAL) PORTFOLIO -- seeks long term
capital appreciation by investing primarily in equity securities of emerging
market country issuers. The Portfolio will focus on economies which are
developing strongly and in which the markets are becoming more sophisticated.
Morgan Stanley Asset Management Inc. , New York, New York, is
investment adviser to the Emerging Markets Equity (International) Portfolio.
- --------------------------------------------------------------------------------
FOR MORE INFORMATION ON THE MUTUAL FUNDS IN WHICH THE SUBACCOUNTS INVEST, SEE
THE PROSPECTUSES FOR PENN SERIES FUNDS, INC., AMERICAN CENTURY VARIABLE
PORTFOLIOS, INC., NEUBERGER & BERMAN ADVISERS MANAGEMENT TRUST, FIDELITY
INVESTMENTS' VARIABLE INSURANCE PRODUCTS FUND, FIDELITY INVESTMENTS' VARIABLE
INSURANCE PRODUCTS FUND II, AND MORGAN STANLEY UNIVERSAL FUNDS, INC. YOU SHOULD
READ THE PROSPECTUSES FOR THE FUNDS IN WHICH YOU ARE INTERESTED BEFORE
INVESTING.
- --------------------------------------------------------------------------------
THE CONTRACT
The Contract described in this prospectus is a combination variable
and fixed annuity contract. The Contract provides for investment, through
subaccounts of the Separate Account, in one or more of the available funds of
Penn Series Funds, Inc., American Century Variable Portfolios, Inc., Neuberger &
Berman Advisers Management Trust, Fidelity Investments' Variable Insurance
Products Fund, Fidelity Investments' Variable Insurance Products Fund II and
Morgan Stanley Universal Funds, Inc. It also provides for investment in one or
more fixed interest accounts. The fixed accounts are guaranteed and funded by
the Company through its general account. See THE FIXED ACCOUNTS in this
prospectus. Currently, over the life of the Contract, amounts may be allocated
or transferred to one or more of the 18 funds and fixed accounts.
9
<PAGE>
As the Contract Owner, you determine, within Contract limits (1) the
amount and frequency of the purchase payments to be made to the Company, (2) the
investment options to which the purchase payments are to be allocated, (3)
transfers among investment options, (4) the form of annuity to be paid after the
accumulation period and the person to whom it is to be paid, (5) the beneficiary
to whom death benefits are to be paid, and (6) the amount and frequency of
withdrawals from the Contract Value.
During the variable annuity payout period, you (or the beneficiary in
the event of your death or the Annuitant's death) may transfer Annuity Unit
values among up to four subaccounts of the Separate Account that must be
selected at the time of annuitization.
Upon the earlier of the death of the Contract Owner or Annuitant prior
to the Annuity Date, the beneficiary may elect to receive a death benefit in a
lump sum or in the form of an annuity. A spousal beneficiary may elect to become
the Owner of the Contract.
The Contract may be amended at any time to conform to applicable laws
or governmental regulations. If, in our judgment, investment in any of the
mutual funds becomes inappropriate to the purposes of the Contract, we may, with
approval of the Securities and Exchange Commission and the governing state
insurance department, substitute another fund for existing and future
investments.
The Contracts are available to individuals and institutions for
retirement and other funding purposes. The Contracts may also 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).
Contract Owner inquiries may be made by writing The Penn Mutual Life
Insurance Company, Customer Service Group, Philadelphia, PA 19172. Or, you may
call (215) 956-8000.
- --------------------------------------------------------------------------------
PURCHASES
To purchase a Contract, your completed application, together with a
check for the first purchase payment, should be forwarded to our administrative
offices in Horsham, Pennsylvania. Normally, a completed application form
received at our administrative offices will be accepted within two business
days. If an incomplete application is not completed and acted upon within five
business days, the purchase payment will be returned to you unless you request
that we retain it while you complete the application. All subsequent purchase
payments are sent directly to our administrative office.
The minimum initial purchase payment is $5,000. The minimum subsequent
purchase payment that will be accepted is $5,000. We may, in our discretion,
reduce the minimum requirements for initial and subsequent purchase payments. We
will accept total purchase payments under your Contract of up to $1 million.
Total purchase payments in excess of $1 million require our prior approval.
Purchase payments allocated to the Separate Account are credited in
the form of Accumulation Units of the subaccount selected. The number of
Accumulation Units credited is determined by dividing the purchase payment
allocated to the Separate Account by the value of the Accumulation Unit at the
end of the valuation period in which the purchase payment is received at our
administrative office or, in a case of the first purchase payment, is accepted
by us.
The principal underwriter of the Contract (under federal securities
laws) is Hornor, Townsend & Kent, Inc., 600 Dresher Road, Horsham, PA 19044, a
wholly-owned subsidiary of Penn Mutual.
10
<PAGE>
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ACCUMULATION UNITS
For each subaccount of the Separate Account available under the
contract the value of an Accumulation Unit will be $10 when the subaccount
commences operation. The value of an Accumulation Unit may increase or decrease
from one valuation period to the next.
The value of an Accumulation Unit for a valuation period is determined
by multiplying the value of an Accumulation Unit for the prior valuation period
by the net investment factor for the subaccount for the current valuation
period.
The net investment factor is a measure of (1) investment performance
of mutual 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 1.20% and contract administration charge at an
annual rate of 0.15% assessed against the subaccount. Under current law, no
taxes are levied against income or gain from investments held in a subaccount.
- --------------------------------------------------------------------------------
ANNUITY PAYMENTS
You may choose one of the following forms of annuity: (1) an annuity
for a specified 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) such other form of annuity as we may agree upon. You may select any one of
these forms of annuity as a variable annuity (except for a specified number of
years), a fixed annuity, or a combination of both.
The level of the variable annuity payments is determined by various
factors, including the amount accumulated and applied under the Contract to the
variable annuity, the form of annuity chosen, the expected duration of the
annuity period, the performance of the applicable investment options, and the
annuity purchase rates and charges specified in the Contract.
You may choose annuity purchase rates based on an assumed interest
rate of 3% or based on an assumed interest rate of 5%. If the annual net
investment return during the annuity payout period is greater than the rate
chosen, the level of the annuity payment increases. If the annual net investment
return is less than the rate chosen, the level of the annuity payments
decreases. The choice of a higher assumed interest rate would mean a higher
first annuity payment but more slowly rising or more rapidly falling subsequent
payments. The choice of a lower assumed interest rate would have the opposite
effect.
The level of fixed annuity payments under a Contract is determined by
various factors, including the amount accumulated and applied under the Contract
to the fixed annuity, the form of annuity chosen, the expected duration of the
annuity period, and a guaranteed 3% rate of return.
Unless you specify otherwise, you or such other person you designate
will receive a life annuity with payments guaranteed for 10 years except for tax
deferred annuities under Section 403(b) of the Code and pension or profit
sharing plans under Section 401 of the Code. Annuitants under those Contracts
will receive a joint and survivor annuity. Unless you specify otherwise, the
annuity will be split between fixed and variable in the same proportions as the
Contract Value on the Annuity Date.
Unless you specify otherwise, the Annuity Date will be 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.
11
<PAGE>
You may change the Annuity Date or annuity option by giving written
notice at our administrative office at least 30 days prior to the current
Annuity Date. If the Contract Value of a Contract is less than $5,000, we may
elect to pay such amount in a lump sum in place of an annuity. Annuity payments
are generally monthly, starting with the Annuity Date, but may also be made
quarterly, semiannually or annually at your request. However, if any payment
would be less than $50, we may change the frequency of annuity 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.
- --------------------------------------------------------------------------------
DEATH BENEFIT
We will pay a death benefit upon the earlier of the death of the
Contract Owner or the Annuitant.
If the Contract Owner dies prior to the Annuity Date, we will pay the
beneficiary the Contract Value for the valuation period in which proof of death
and any other required information needed to make payment is received at our
administrative office.
If the Annuitant dies before the Annuity Date, we will pay a death
benefit to the beneficiary equal to the sum of the Variable Account death
benefit and the Fixed Account death benefit as of the date we receive proof of
death. 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 from the amounts so allocated and transferred.
The Fixed Account death benefit is the Fixed Account Value. The death benefit
generally will be paid within seven days after we receive proof of death and all
information necessary to make payment to the beneficiary.
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 if the Annuitant dies before
the Annuity Date and the Annuitant and is less than 91 years of age. We offer
two different enhanced guaranteed minimum death benefits - a guaranteed minimum
death benefit step-up and a guaranteed minimum death benefit rising floor. You
may purchase one of them at the time you purchase your Contract.
The guaranteed minimum death benefit-step-up is the greater of the
guaranteed minimum death benefit currently in effect or the Variable Account
Value on the current contract anniversary. The guaranteed minimum death benefit
currently in effect is the guaranteed minimum death benefit on the current
contract anniversary adjusted as follows. If there were allocations or
transfers to the Variable Account after the contract anniversary, the guaranteed
minimum death benefit will be increased by such allocations and transfers. If
withdrawals or transfers were made from the Variable Account after the contract
anniversary, 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 guaranteed minimum death benefit-rising floor is the sum of all
purchase payments allocated and transfers made-to the Variable Account minus a
reduction (as described below) for any withdrawals or transfers made from the
Variable Account plus interest at 5%, calculated as follows. Interest is
reflected from the dates amounts are allocated to or removed from the Variable
Account to the date the guaranteed minimum death benefit is paid, or the date
the Annuitant attains 80 years of age, if earlier. If a withdrawal was
made from the Variable Account, the guaranteed minimum death benefit will be
reduced by an amount that is in the same proportion to the Variable Account
Value 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.
12
<PAGE>
For information on the cost of the enhanced guaranteed minimum death
benefits, see CHARGES.
Within one year of the date of death of the Contract Owner, the
beneficiary may elect to receive the death benefit in single sum or in the form
of an annuity. If the death benefit becomes payable upon death of the Annuitant
who is not the Contract Owner, an election to receive the death benefit in the
form of an annuity must be made within 60 days of the death of the Annuitant.
If payment is to be received in a single sum, it must be paid within five years
of the date of death (until paid out, the death benefit will be allocated to
subaccounts of the Separate Account and/or fixed interest options as directed by
the beneficiary). If an annuity is selected, payments must commence within one
year of the date of death and must be made over the beneficiary's life or over a
period not longer than the beneficiary's life expectancy. 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 Annuitant (who is not the Contract Owner), the death
benefit will be paid to the beneficiary in a single sum. If the Contract Owner
dies and the beneficiary is the Contract Owner's surviving spouse, the surviving
spouse has the right to become the Contract Owner rather than receive the death
benefit. If there is more than one surviving beneficiary, the beneficiaries must
choose their respective portions 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 according to the annuity option in force.
You may designate a beneficiary in your application. You may change
the beneficiary at any time before your death or the death of the Annuitant,
whichever occurs first.
For information on the tax treatment of death benefits, see FEDERAL
INCOME TAX CONSIDERATIONS in this Prospectus.
- --------------------------------------------------------------------------------
TRANSFERS
Prior to the Annuity Date, you may transfer amounts from one
subaccount of the Separate Account to another subaccount of the Separate
Account. Within certain additional limitations stated in the Contract, you may
also transfer amounts from the subaccounts of the Separate Account to the One
Year Fixed Account prior to the Annuity Date. You may not transfer amounts from
the subaccounts of the Separate Account to the Six Month Fixed Account. You may
make a transfer from the One Year Fixed Interest Account to the Variable Account
only at the completion of the interest period or within 25 days thereafter. You
may make a transfer from the Six Month Fixed Interest Account to the Variable
Account as described under "Dollar Cost Averaging" below or 100% at any time.
After the Annuity Date and during an annuity payout period, you may
transfer amounts (upon which the annuity payments are based) from one subaccount
of the Separate Account to another. Upon your death or the death of the
Annuitant, a beneficiary who is receiving annuity payments may transfer amounts
among the subaccounts of the Separate Account.
Transfers will be based on values at the end of the valuation period
in which the transfer request is received at our service office.
The minimum amount that may be transferred is $250 or, if less, the
amount held in the subaccount or the fixed account. In the case of partial
transfers, the amount remaining in the subaccount or the fixed account must be
at least $250.
13
<PAGE>
A request for transfer must be received at our service office and all
other administrative requirements for transfer must be met to make the transfer.
The Separate Account and the Company 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.
DOLLAR COST AVERAGING: You may elect to have a fixed percentage of
your initial or subsequent purchase payments transferred monthly or quarterly
from one source account to other accounts. These transfers may be made only
from one of the following accounts: Money Market Subaccount, Limited Maturity
Bond Subaccount, Quality Bond Subaccount, or the Six Month Fixed Interest
Account. The dollar cost averaging term may run up to 60 months with a maximum
of 6 months for the Six Month Fixed Interest Account, or until you give notice
of a change in allocation or cancellation of the feature. If you terminate the
dollar cost averaging program, any amounts remaining in the Six Month Fixed
Interest Account will be transferred into the One Year Fixed Interest Account.
AUTOMATIC REBALANCING: 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.
- --------------------------------------------------------------------------------
WITHDRAWALS
Prior to the Annuity Date and prior to the earlier of the death of the
Contract Owner and Annuitant, you may withdraw all or part of your Contract
Value. Withdrawals will be based on values at the end of the valuation period in
which a proper written request for withdrawal (and the Contract, in case of a
full withdrawal) is received at our administrative office. Payment will
normally be made within seven days of receipt of the written request and the
Contract, if required. A withdrawal may result in certain tax consequences,
including an additional 10% tax under certain circumstances. For information on
the tax treatment of withdrawals, see FEDERAL INCOME TAX CONSIDERATIONS in this
prospectus.
The minimum withdrawal is $500 or, if it is the first withdrawal in
each Contract Year, the Free Withdrawal Amount if this amount is less than $500.
The Free Withdrawal Amount is equal to 15% of the purchase payments as of the
date of the request. A partial withdrawal may be made from a subaccount of the
Separate Account or a fixed account only if the amount remaining in the contract
is at least $5,000 and the balance remaining in each subaccount or the fixed
account is at least $250. If you request a partial withdrawal without
specifying allocation of the withdrawal among investment options, it will be
taken pro rata from the variable subaccounts; if the partial withdrawal exhausts
your Variable Account Value, then any remaining withdrawal will be taken from
the fixed interest options beginning with the fixed interest option with the
shortest interest period.
SYSTEMATIC WITHDRAWALS: You may make a request for a systematic
withdrawal if there is no previous withdrawal in the current contract year. The
maximum value of a systematic withdrawal request is equal to the Free Withdrawal
Amount (as defined above). A level systematic withdrawal will begin one modal
period after the date of receipt of the request. The systematic withdrawals may
be made on a monthly, quarterly, semiannual or annual basis. The minimum
Contract Value that is eligible for a systematic withdrawal is $25,000. The
minimum amount of each withdrawal payment is $100. Payments can be made in
either a fixed dollar amount or a fixed percentage of purchase payments. The
latter option provides a convenient way to take advantage of the ability to
withdraw a limited percentage of purchase payments without incurring a
contingent deferred sales charge. See "Free Withdrawals" below. For
information on the tax treatment of withdrawals, see FEDERAL INCOME TAX
CONSIDERATIONS in this prospectus.
14
<PAGE>
403(B) WITHDRAWALS: With respect to Contracts qualifying under Section
403(b) of the Code, there are certain restrictions on withdrawals. Withdrawals
may generally 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 values 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 such that it is
not reasonably practical to dispose of securities held in the Separate Account
or to determine the value of its assets; or (d) the Securities and Exchange
Commission by order so permits for the protection of investors. Conditions
described in (b) and (c) will be decided by, or in accordance with rules of, the
Commission.
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CHARGES
ADMINISTRATION CHARGES:
Charges are assessed to reimburse us for the expenses we incur in
administering the Contract and the Separate Account. First, on an annual basis,
we deduct from the Variable Account Value a contract administration charge which
will be no greater than the lesser of $40 or 2% of the Variable Account Value.
We will not, however, deduct this charge if the Variable Account Value is
greater than $100,000. The charge is made by canceling Accumulation Units
credited to the Contract, with the charge allocated pro rata among the
subaccounts comprising the Variable Account Value. Second, we deduct from the
Separate Account a daily administration charge which will not exceed an
effective annual rate of 0.15% of the daily net asset value of the Separate
Account. These administration charges are guaranteed not to increase and are
intended to cover our average anticipated administration expenses over the
periods the Contracts are in force.
MORTALITY AND EXPENSE RISK CHARGE:
We deduct a daily mortality and expense risk charge which will not
exceed an effective annual rate of 1.20% of the daily net asset value of the
Separate Account. This charge is to compensate 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
assessed during both the accumulation and variable annuity pay-out phases of the
Contract.
CONTINGENT DEFERRED SALES CHARGE:
A contingent deferred sales charge may be deducted from withdrawals of
purchase payments prior to the Annuity Date. This charge is made to cover sales
expenses that we have incurred. Sales expenses which are not covered by the
deferred sales charge are paid from the surplus of the Company, which may
include proceeds from the mortality and expense risk charge.
15
<PAGE>
A contingent deferred sales charge, if applicable, will be imposed
only on a withdrawal of a purchase payment in cases where the purchase payment
was made within seven years of the date of the withdrawal. 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.
<TABLE>
<CAPTION>
NUMBER OF FULL CONTRACT
YEARS SINCE PURCHASE PAYMENT APPLICABLE CHARGE
- --------------------------------------------------------------------------------
<S> <C>
0 7%
- --------------------------------------------------------------------------------
1 7%
- --------------------------------------------------------------------------------
2 6%
- --------------------------------------------------------------------------------
3 5%
- --------------------------------------------------------------------------------
4 4%
- --------------------------------------------------------------------------------
5 3%
- --------------------------------------------------------------------------------
6 1.5%
- --------------------------------------------------------------------------------
7+ 0%
- --------------------------------------------------------------------------------
</TABLE>
The contingent deferred sales charge may be reduced on Contracts sold to a
trustee, employer or similar party pursuant to a retirement plan or to a group
of individuals, if such sales are expected to involve reduced sales expenses.
The amount of reduction will depend upon such factors as the size of the group,
any prior or existing relationship with the purchaser or group, the total amount
of purchase payments and other relevant factors that might tend to reduce
expenses incurred in connection with such sales. The reduction will not be
unfairly discriminatory to any Contract Owner.
FREE WITHDRAWALS:
Seven-Year-Old Purchase Payments. You may withdraw any purchase payment
---------------------------------
which was made more than 7 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, 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 applicable 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.
16
<PAGE>
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.
ENHANCED VARIABLE ACCOUNT DEATH BENEFIT (OPTIONAL):
If you purchase an enhanced Variable Account death benefit as part of
your Contract, we will deduct a guaranteed minimum death benefit charge from the
Variable Account Value. The charge is 0.25% of the average annual Variable
Account Value. The charge will be made on each Contract anniversary 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%.
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PERFORMANCE INFORMATION
The Company may advertise total return performance and annual changes
in accumulation unit values. We may also provide information on "yields" and
"effective yields" on investments in the Money Market Fund subaccount.
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 portfolio has been in existence. Such
figures are based on the hypothetical assumption that the Separate Account
invested in the underlying portfolios from the date those portfolios were first
available to other insurance company separate accounts. 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 may also show
average annual rates of total return, assuming 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).
The "yield" on an investment in the Money Market Fund subaccount
refers to the income generated by the investment over a 7-day period. This
income is then annualized. That is, the amount of income generated by the
investment during that week is assumed to be generated each week over a 52-week
period and is shown as a percentage of the investment. The "effective yield" is
calculated similarly, but, when annualized, the income earned by an investment
in the subaccount is assumed to be reinvested. The effective yield will be
slightly higher than the yield because of the compounding effect of this assumed
reinvestment.
- --------------------------------------------------------------------------------
THE FIXED ACCOUNTS
17
<PAGE>
BECAUSE OF EXEMPTIVE AND EXCLUSIONARY PROVISIONS, INTERESTS IN THE
COMPANY'S GENERAL ACCOUNT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933 AND THE GENERAL ACCOUNT HAS NOT BEEN REGISTERED AS AN INVESTMENT COMPANY
UNDER THE INVESTMENT COMPANY ACT OF 1940. THE GENERAL ACCOUNT AND ANY INTERESTS
HELD IN THE GENERAL ACCOUNT ARE THEREFORE NOT SUBJECT TO THE PROVISIONS OF THESE
ACTS. HENCE THIS PROSPECTUS GENERALLY DISCUSSES ONLY THE VARIABLE PORTION OF THE
CONTRACT. THE COMPANY HAS BEEN ADVISED THAT THE STAFF OF THE SECURITIES AND
EXCHANGE COMMISSION HAS NOT REVIEWED THE DISCLOSURE IN THIS PROSPECTUS RELATING
TO THE FIXED ACCOUNT. DISCLOSURE REGARDING THE FIXED ACCOUNT, HOWEVER, MAY BE
SUBJECT TO GENERALLY APPLICABLE PROVISIONS OF THE FEDERAL SECURITIES LAWS
RELATING TO THE ACCURACY AND COMPLETENESS OF STATEMENTS MADE IN THIS PROSPECTUS.
- --------------------------------------------------------------------------------
GENERAL INFORMATION
You may allocate or transfer amounts to the One Year Fixed Interest
Account. We periodically declare an effective annual interest rate applicable
to allocations to the One Year Fixed Interest Account. For each amount
allocated to the One Year Fixed Interest Account we credit interest at a rate
declared by us in the month in which the allocation is made. The declared rate
of interest will apply through the end of the 12-month period which begins on
the first day of the calendar month in which the allocation is made. We will not
declare an effective annual rate of interest on allocations and transfers to the
One Year Fixed Interest Account of less than 3%.
In conjunction with the election of the dollar cost averaging program,
you may allocate amounts to the Six Month Fixed Interest Account. For each
amount allocated to the Six Month Fixed Interest Account, we credit interest at
a rate of declared by us from the date you pay the initial or subsequent
purchase payment through the end of a six month interest period. The rate will
be renewed on the first of the month following the end of the period. The rate
will never be less than 3%. If you terminate dollar cost averaging prior to six
months after your allocation to this account, any balance will be transferred as
directed or, otherwise, transferred to the One Year Fixed Interest Account.
You may transfer amounts in the Fixed Accounts to subaccounts of the
Separate Account subject to the conditions and limitations in the fixed account
provisions of your Contract. Amounts in the One Year Fixed Interest Account not
withdrawn or reallocated within 25 days after the end of an interest period are
rolled over and treated as a new allocation to the One Year Fixed Interest
Account. In accordance with state law, we may defer a withdrawal or transfer
from the Fixed Account for up to six months if we reasonably determine that
investment conditions are such that an orderly sale of assets in the Company's
general account is not feasible.
- --------------------------------------------------------------------------------
LOANS UNDER SECTION 403(B) CONTRACTS
Subject to compliance with applicable state law, Contract Owners
qualifying under Section 403(b) of the Code may be able to borrow against a
portion of the amount credited to the Fixed Account under their Contract,
provided the loan privilege has been approved in the applicable state. The loan
will be made from the general account of the Company. Because this prospectus
generally is limited to describing the variable portion of the Contract, you
should review the Contract loan endorsement or consult your Company
representative for a complete description of the terms of the loan privilege,
including minimum and maximum loan amounts, repayment terms, and restrictions on
prepayments. The following paragraphs describe how exercise of the loan
privilege may relate to the Variable Account Value.
First, at the time a Contract loan is made and in accordance with your
direction, an amount equal to the initial loan amount will be transferred from
the Contract's investment options to an account in the Company's general account
called the "Restricted Account." Amounts transferred from investment options to
the Restricted
18
<PAGE>
Account will not participate in the investment experience of those investment
options. Amounts transferred to the Restricted Account will generally earn
interest at a rate [1 1/2] percentage points less than the rate of interest
charged on the loan.
Second, on your Contract Anniversary, the accrued interest in the
Restricted Account will be transferred to your investment options in accordance
with your current payment allocation instructions.
Third, loan repayments, which are due quarterly, will result in the
transfer of 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.
Fourth, if a payment or the entire loan is in default as defined in
the Contract, the Company will report the amount of 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.
Subject to restrictions in Section 403(b) of the Code, the amount of any missed
payment, plus interest, or the entire loan balance, plus interest, if the entire
loan is in default, plus any applicable contingent deferred sales charge, will
be withdrawn by us from your investment options in accordance with your
direction in the Loan Request and Agreement. We will use the net proceeds from
the withdrawal to repay the loan. If a withdrawal is restricted under the Code,
the outstanding loan balance will continue to accrue interest and the amount due
will be withdrawn when a withdrawal becomes permissible. Thus, when an event
takes place which makes withdrawal from the Contract permissible under the Code,
such as attainment of age 59 1/2, disability, or death, we will check the
Contract to determine if there is an outstanding loan balance for which one or
more payments have been missed. If so, we will withdraw from your investment
options, in accordance with your direction in the Loan Request and Agreement,
funds necessary to pay the overdue amount, plus any applicable contingent
deferred sales charge. 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. The Company reserves 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 brief discussion of federal income tax considerations is
based on the law in effect on the date of this prospectus, which may be changed
by legislative, judicial or administration action. The summary is general in
nature and does not consider any applicable state or local tax laws. For further
information, you should consult qualified tax counsel.
Under current law, no federal income taxes are imposed on increases in
the value of a Contract until distribution occurs, either in the form of a
withdrawal or death benefit or as annuity payment under an annuity option.
For a withdrawal or death benefit, the taxable portion is generally
the amount in excess of the cost basis of the Contract. Amounts withdrawn by the
Contract owner or received as a death benefit by the designated beneficiary are
treated first as taxable income to the extent of the excess of the Contract
Value over the purchase payments made under the Contract. Such taxable portion
is taxed at ordinary income tax rates. Designation of a beneficiary who is
either 37 1/2 years younger than the Contract Owner or a grandchild of the
Contract Owner may have Generation Skipping Transfer Tax consequences under
Section 2601 of the Code.
19
<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.
For annuity payments, the taxable portion is generally 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.
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.
There will be no additional income tax on early withdrawals which 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, or on
withdrawals made on or after age 59 1/2. There also will be no additional tax
on distributions made after death or on withdrawals attributable to total and
permanent disability. Further, there will be no additional tax on distributions
within certain other exceptions to the general rule.
The transfer of a Contract may result in the transferor incurring tax.
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.
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.
Section 817(h) of the Code provides that the investments of a separate
account underlying a variable annuity contract which is not purchased under a
qualified retirement plan or certain other types of plans (or the investments of
a mutual fund, the shares of which are owned by the variable annuity separate
account) must be "adequately diversified" in order for the Contract to be
treated as an annuity contract for tax purposes. The Treasury Department has
issued regulations prescribing such diversification requirements. The Separate
Account, through each of the available funds of the Penn Series Funds, Inc.,
American Century Variable Portfolios, Inc., Neuberger & Berman Advisers
Management Trust, Variable Insurance Products Fund, Variable Insurance Products
Fund II, and Morgan Stanley Universal Funds, Inc. intends to comply with those
requirements. The requirements are briefly discussed in the accompanying
prospectuses for the underlying funds.
The Treasury Department has indicated that in regulations or revenue
rulings under Section 817(d) (relating to the definition of a variable
contract), it will provide guidance on the extent to which Contract Owners may
direct their investments to particular subaccounts without being treated as
owners of the underlying shares. It is possible that when such regulations or
rulings are issued, the Contracts may need to be modified to comply with them.
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.
20
<PAGE>
For some types of qualified retirement plans, there may be no cost
basis in the Contract. In this case, the total payments received may be taxable.
Before 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
the Company believes are includable in gross income for tax purposes will be
subject to mandatory withholding to meet federal income tax obligations. The
same treatment will apply to distributions from a Section 403(b) annuity that
are payable as an annuity for the life or life expectancy of one or more
individuals, or for a period of at least 10 years, or are required minimum
distributions. Other distributions from a qualified plan or a Section 403(b)
annuity are subject to mandatory withholding, unless an election is made to
receive the distribution as a direct rollover to another eligible retirement
plan.
It should be understood that the foregoing description of federal
income taxes is not exhaustive and that special rules and considerations may be
applicable. For further information, a prospective purchaser should consult
qualified tax counsel.
- --------------------------------------------------------------------------------
FINANCIAL STATEMENTS
The consolidated financial statements of The Penn Mutual Life
Insurance Company at December 31, 1997, and for the year then ended, which
appear in the Statement of Additional Information, have been audited by Ernst &
Young LLP, independent auditors, and at December 31, 1996, and for each of the
two years in the period ended December 31, 1996, by PricewaterhouseCoopers LLP,
independent auditors, as set forth in their respective reports thereon, and are
included in reliance upon such reports given upon the authority of such firms as
experts in accounting and auditing. The consolidated financial statements of
Penn Mutual should be considered only as bearing upon Penn Mutual's ability to
meet its obligations under the Contracts.
New subaccounts of the Separate Account have been established under
the Contracts. There are, therefore, no financial statements for the subaccounts
at this time.
21
<PAGE>
- --------------------------------------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION CONTENTS
- --------------------------------------------------------------------------------
VARIABLE ANNUITY PAYMENTS...................................... B-
First Variable Annuity Payments........................... B-
Subsequent Variable Annuity Payments...................... B-
Annuity Units............................................. B-
Value of Annuity Units.................................... B-
Net Investment Factor..................................... B-
Assumed Interest Rate..................................... B-
Valuation Period.......................................... B-
- --------------------------------------------------------------------------------
PERFORMANCE DATA............................................... B-
Average Annual Total Return............................... B-
Yields (Money Market Fund)................................ B-
- --------------------------------------------------------------------------------
ADMINISTRATIVE AND RECORDKEEPING SERVICES...................... B-
- --------------------------------------------------------------------------------
DISTRIBUTION OF CONTRACTS...................................... B-
- --------------------------------------------------------------------------------
CUSTODIAN...................................................... B-
- --------------------------------------------------------------------------------
INDEPENDENT AUDITORS........................................... B-
- --------------------------------------------------------------------------------
LEGAL MATTERS.................................................. B-
- --------------------------------------------------------------------------------
FINANCIAL STATEMENTS........................................... B-
- --------------------------------------------------------------------------------
22
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION -- JANUARY 1 , 1999
- --------------------------------------------------------------------------------
LOGO
PENN MUTUAL VARIABLE ACCOUNT III
THE PENN MUTUAL LIFE INSURANCE COMPANY
PHILADELPHIA, PENNSYLVANIA 19172 . TELEPHONE (215) 956-8000
- --------------------------------------------------------------------------------
This statement of additional information is not a prospectus. It should be read
in conjunction with the current prospectus for the [Standard CDSC] Contract
dated January 1, 1999. The Contract is funded through Penn Mutual Variable
Account III (referred to as the "Separate Account"). To obtain a prospectus you
may write to The Penn Mutual Life Insurance Company, Customer Service Group,
Philadelphia, PA 19172. Or you may call (215) 956-8000. Terms used in this
statement of additional information have the same meaning as the
prospectus.
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
<TABLE>
<S> <C>
- --------------------------------------------------------------------------------
VARIABLE ANNUITY PAYMENTS.................................................... B-
First Variable Annuity Payments......................................... B-
Subsequent Variable Annuity Payments.................................... B-
Annuity Units........................................................... B-
Value of Annuity Units.................................................. B-
Net Investment Factor................................................... B-
Assumed Interest Rate................................................... B-
Valuation Period........................................................ B-
- --------------------------------------------------------------------------------
PERFORMANCE DATA............................................................. B-
Average Annual Total Return............................................. B-
Yields (Money Market Fund).............................................. B-
- --------------------------------------------------------------------------------
ADMINISTRATIVE AND RECORDKEEPING SERVICES.................................... B-
- --------------------------------------------------------------------------------
DISTRIBUTION OF CONTRACTS.................................................... B-
- --------------------------------------------------------------------------------
CUSTODIAN.................................................................... B-
- --------------------------------------------------------------------------------
INDEPENDENT AUDITORS......................................................... B-
- --------------------------------------------------------------------------------
LEGAL MATTERS................................................................ B-
- --------------------------------------------------------------------------------
FINANCIAL STATEMENTS......................................................... B-
- --------------------------------------------------------------------------------
</TABLE>
<PAGE>
- --------------------------------------------------------------------------------
VARIABLE ANNUITY PAYMENTS
- --------------------------------------------------------------------------------
FIRST VARIABLE ANNUITY PAYMENT
When a variable annuity is effected, we will first deduct applicable
premium taxes, if any, from the Contract Value. The dollar amount of the first
monthly annuity payment will be determined by applying the net Contract Value to
the annuity table set forth in the contract for the annuity option chosen. The
annuity tables show the amount of the first monthly income payment under each
annuity option for each $1,000 of value applied, based on the Annuitant's age at
the Annuity Date. The annuity tables are based on the Annuity 2000 Basic Table
with interest rates at 3% or 5%.
- --------------------------------------------------------------------------------
SUBSEQUENT VARIABLE ANNUITY PAYMENTS
The dollar amount of subsequent variable annuity payments will vary in
accordance with the investment experience of the subaccount(s) of the Separate
Account applicable to the annuity. Each subsequent variable annuity payment will
equal the number of annuity units credited, multiplied by the value of the
annuity unit for the valuation period. The Company guarantees that the amount of
each subsequent annuity payment will not be affected by variations in expense or
mortality experience.
- --------------------------------------------------------------------------------
ANNUITY UNITS
For each subaccount selected, the number of annuity units is the amount of
the first annuity payment allocated to the subaccount divided by the value of an
annuity unit for the subaccount on the Annuity Date. The number of your annuity
units will not change as a result of investment experience.
- --------------------------------------------------------------------------------
VALUE OF ANNUITY UNITS
The value of an annuity unit for each subaccount was arbitrarily set at $10
when the subaccount was established. The value may increase or decrease from one
valuation period to the next. For a valuation period, the value of an annuity
unit for a subaccount is the value of an annuity unit for the subaccount for the
last prior valuation period multiplied by the net investment factor for the
subaccount for the valuation period. The result is then multiplied by a factor
to neutralize an assumed interest rate of 3% or 5%, as applicable, built into
the annuity tables.
- --------------------------------------------------------------------------------
NET INVESTMENT FACTOR
For any subaccount, the net investment factor for a valuation period is
determined by dividing (a) by (b) and subtracting (c):
WHERE (a) IS:
The net asset value per share of the mutual fund held in the subaccount, as
of the end of the valuation period
plus
----
The per share amount of any dividend or capital gain distributions by the
mutual fund if the "ex-dividend" date occurs in the valuation period
plus or minus
-------------
A per share charge or credit, as we may determine as of the end of the
valuation period, for provision for taxes (if applicable).
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
1.35% 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
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN
Although the Separate Account was not available until the effective date of
this registration statement, the returns calculated below reflect a hypothetical
return as if the Separate Account had invested in the underlying funds for the
indicated periods.
Table 1 shows the average annual rates of total return on hypothetical
investments of $1,000, through the Separate Account, in funds of Penn Series
Funds, Inc., American Century Variable Portfolios, Inc., Neuberger and Berman
Advisers Management Trust, Fidelity Investments' Variable Insurance Products
Fund and Fidelity Investments' Variable Insurance Products Fund II, and Morgan
Stanley Universal Funds, Inc. for the periods ended December 31, 1997 and assume
withdrawal of the investments at the end of the period.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
TABLE 1
AVERAGE ANNUAL TOTAL RETURN
-----------------------------------------------------------
FIVE TEN FROM
ONE YEAR YEARS YEARS INCEPTION
INCEPTION ENDED ENDED ENDED THROUGH
FUND (MANAGER) DATE* 12/31/97 12/31/97 12/31/97 12/31/97
- -------------- --------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C>
Growth Equity (a)................ 06/01/83
(Independence Capital)
</TABLE>
B-3
<PAGE>
<TABLE>
<S> <C>
Value Equity (a)....................................... 03/17/87
(OpCap)
Small-Cap Fund......................................... 03/01/95
(OpCap)
Emerging Growth Fund (a)(g)............................ 05/01/97
(RS Investment Management)
Flexibly Managed (a)................................... 07/31/84
(T. Rowe Price)
International Equity (a)............................... 11/01/92
(Vontobel)
Quality Bond (a)....................................... 03/17/87
(Independence Capital)
High Yield Bond (a).................................... 08/06/84
(T. Rowe Price)
Capital Appreciation Portfolio (b)..................... 11/20/87
(American Century Investment Management)
Balanced Portfolio (c)................................. 02/28/89
(Neuberger & Berman)
Limited Maturity Bond Portfolio (c).................... 09/10/84
(Neuberger & Berman)
Partners Portfolio (c)................................. 03/22/94
(Neuberger & Berman)
Equity-Income Portfolio (d)............................ 10/09/86
(Fidelity Investments)
Growth Portfolio (d)................................... 10/09/86
(Fidelity Investments)
Asset Manager Portfolio (e)............................ 09/06/89
(Fidelity Investments)
Index 500 (e).......................................... 08/27/92
(Fidelity Investments)
Emerging Markets Equity (International)(f)............. 10/01/96
(Morgan Stanley)
</TABLE>
_______________________
* Represents the date the underlying fund was established.
(a) Penn Series Funds, Inc.
(b) American Century Variable Portfolios, Inc.
(c) Neuberger and Berman Advisers Management Trust
(d) Variable Insurance Products Fund
(e) Variable Insurance Products Fund II
(f) Morgan Stanley Universal Funds, Inc.
(g) Average Annual Total Return for period May 1, 1997 to December 31, 1997
The average annual rates of total return shown 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 annual contract administration charge is reflected
assuming an anticipated average Contract Value and assuming that the Contract
Value is allocated equally across all available subaccounts by an average
contract owner.
B-4
<PAGE>
- --------------------------------------------------------------------------------
Table 2 below shows the average annual rates of return on hypothetical
initial investments of $1,000, through the Separate Account, in funds of the
Penn Series Funds, Inc., American Century Variable Portfolios, Inc., Neuberger
and Berman Advisers Management Trust, Fidelity Investments' Variable Insurance
Products Fund, Fidelity Investments' Variable Insurance Products Fund II, and
Morgan Stanley Universal Funds, Inc. for the periods ended December 31, 1997 and
assumes the investments are not withdrawn at the end of the period.
- --------------------------------------------------------------------------------
TABLE 2
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
-----------------------------------------------------------
FIVE TEN FROM
ONE YEAR YEARS YEARS INCEPTION
INCEPTION ENDED ENDED ENDED THROUGH
FUND (MANAGER) DATE* 12/31/97 12/31/97 12/31/97 12/31/97
- -------------- --------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C>
Growth Equity (a).................................. 06/01/83
(Independence Capital)
Value Equity (a)................................... 03/17/87
(OpCap)
Small-Cap Fund..................................... 03/01/95
(OpCap)
Emerging Growth Fund (a)(g)........................ 05/01/97
(RS Investment Management)
Flexibly Managed (a)............................... 07/31/84
(T. Rowe Price)
International Equity (a)........................... 11/01/92
(Vontobel)
Quality Bond (a)................................... 03/17/87
(Independence Capital)
High Yield Bond (a)................................ 08/06/84
(T. Rowe Price)
Capital Appreciation Portfolio (b)................. 11/20/87
(American Century Investment
Management)
Balanced Portfolio (c)............................. 02/28/89
(Neuberger & Berman)
Limited Maturity Bond Portfolio (c)................ 09/10/84
(Neuberger & Berman)
Partners Portfolio (c)............................. 03/22/94
(Neuberger & Berman)
Equity-Income Portfolio (d)........................ 10/09/86
(Fidelity Investments)
Growth Portfolio (d)............................... 10/09/86
(Fidelity Investments)
Asset Manager Portfolio (e)........................ 09/06/89
(Fidelity Investments)
Index 500 (e)...................................... 08/27/92
(Fidelity Investments)
Emerging Markets Equity (International)(f)......... 10/01/96
(Morgan Stanley)
</TABLE>
_______________________
* Represents the date the underlying fund was established.
(a) Penn Series Funds, Inc.
B-5
<PAGE>
(b) American Century Variable Portfolios, Inc.
(c) Neuberger and Berman Advisers Management Trust
(d) Variable Insurance Products Fund
(e) Variable Insurance Products Fund II
(f) Morgan Stanley Universal Funds, Inc.
(g) Average Annual Total Return for period May 1, 1997 to December 31, 1997
- --------------------------------------------------------------------------------
Table 3 below shows the average annual rates of return on hypothetical
initial investments of $10,000, through the Separate Account, in funds of the
Penn Series Funds, Inc., American Century Variable Portfolios, Inc., Neuberger
and Berman Advisers Management Trust, Fidelity Investments' Variable Insurance
Products Fund, Fidelity Investments' Variable Insurance Products Fund II, and
Morgan Stanley Universal Funds, Inc. for the periods ended December 31, 1997 and
assumes the investments are not withdrawn at the end of the period.
- --------------------------------------------------------------------------------
TABLE 3
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
-----------------------------------------------------------
FIVE TEN FROM
ONE YEAR YEARS YEARS INCEPTION
INCEPTION ENDED ENDED ENDED THROUGH
FUND (MANAGER) DATE* 12/31/97 12/31/97 12/31/97 12/31/97
- -------------- --------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C>
Growth Equity (a)
(Independence Capital)............................ 06/01/83
Value Equity (a)
(OpCap)........................................... 03/17/87
Small-Cap Fund
(OpCap)........................................... 03/01/95
Emerging Growth Fund (a)(g)
(RS Investment Management)........................ 05/01/97
Flexibly Managed (a)
(T. Rowe Price)................................... 07/31/84
International Equity (a)
(Vontobel)........................................ 11/01/92
Quality Bond (a)
(Independence Capital)............................ 03/17/87
High Yield Bond (a)
(T. Rowe Price)................................... 08/06/84
Capital Appreciation Portfolio (b)
(American Century Investment Management).......... 11/20/87
Balanced Portfolio (c)
(Neuberger & Berman).............................. 02/28/89
Limited Maturity Bond Portfolio (c)
(Neuberger & Berman).............................. 09/10/84
Partners Portfolio (c)
(Neuberger & Berman).............................. 03/22/94
Equity-Income Portfolio (d)
(Fidelity Investments)............................ 10/09/86
Growth Portfolio (d)
(Fidelity Investments)............................ 10/09/86
Asset Manager Portfolio (e)
(Fidelity Investments)............................ 09/06/89
</TABLE>
B-6
<PAGE>
<TABLE>
<S> <C>
Index 500 (e)
(Fidelity Investments).......................... 08/27/92
Emerging Markets Equity (International)(f)
(Morgan Stanley)................................ 10/01/96
</TABLE>
_______________________
* Represents the date the underlying fund was established.
(a) Penn Series Funds, Inc.
(b) American Century Variable Portfolios, Inc.
(c) Neuberger and Berman Advisers Management Trust
(d) Variable Insurance Products Fund
(e) Variable Insurance Products Fund II
(f) Morgan Stanley Universal Funds, Inc.
(g) Average Annual Total Return for period May 1, 1997 to December 31, 1997
The average annual rates of total return shown 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
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 at the end of the periods shown.
The annual contract administrative charge is reflected assuming an anticipated
average Contract Value and assuming that the average Contract Value is allocated
equally across all available subaccounts by an average contract owner. The
average annual rates of total returns reflect all recurring charges, but do not
reflect the contingent deferred sales charge ranging from 7% to 1% which, if
applicable, would reduce the amount that may be withdrawn under the Contract.
- --------------------------------------------------------------------------------
YIELDS (MONEY MARKET FUND)
From time to time, advertisements and sales literature may quote the
current or effective yield of the Money Market subaccount.
[Supply current yield]
The yield is computed by determining the net change, exclusive of capital
changes, in the value of a hypothetical preexisting account having a balance of
one accumulation unit of the subaccount at the beginning of the period,
subtracting a hypothetical charge reflecting deductions from contract owner
accounts, and dividing the difference by the value of the account at the
beginning of the base period to obtain the base period return, and then
multiplying the base period return by (365/7) with the resulting figure carried
to at least the nearest hundredth of 1%. The hypothetical charge reflects
deductions from contract owners' accounts in proportion to the length of the
base period. The annual contract administrative charge is reflected assuming an
anticipated average Contract Value and assuming that the average Contract Value
is allocated equally across all available subaccounts by an average contract
owner.
The effective yield is obtained by taking the base period return as
computed above, and then compounding the base period return by adding 1, raising
the sum to a power equal to 365 divided by 7, and subtracting 1 from the result,
according to the following formula: Effective Yield = [(base period return + 1)
365/7] -1.
The yields do not reflect the contingent deferred sales charge ranging from
7% to 1%. The deferred sales charge may or may not be applicable to a withdrawal
from a Contract, depending on when the withdrawal is made.
THE YIELDS ON AMOUNTS HELD IN THE MONEY MARKET SUBACCOUNT NORMALLY WILL
FLUCTUATE ON A DAILY BASIS. THEREFORE, THE STATED YIELDS FOR ANY GIVEN PERIOD
ARE NOT AN INDICATION OR REPRESENTATION OF FUTURE YIELDS.
_____________________________
B-7
<PAGE>
THE PERFORMANCE INFORMATION SET FORTH ABOVE IS FOR PAST PERFORMANCE OF THE
FUNDS, ASSUMING THE SEPARATE ACCOUNT HAD INVESTED IN THE FUNDS FROM THEIR
INCEPTION, AND IS NOT AN INDICATION OR REPRESENTATION OF FUTURE PERFORMANCE.
- --------------------------------------------------------------------------------
ADMINISTRATIVE AND RECORDKEEPING SERVICES
The Company performs all data processing, recordkeeping and other related
services with respect to the Contracts and the Separate Accounts.
- --------------------------------------------------------------------------------
DISTRIBUTION OF CONTRACTS
Hornor, Townsend & Kent, Inc., a wholly owned subsidiary of The Penn
Mutual Life Insurance Company ("Penn Mutual"), serves as principal underwriter
of the Contracts. The address of Hornor, Townsend & Kent, Inc. is 600 Dresher
Road, Horsham, PA 19044.
The Contracts will be distributed by Hornor, Townsend & Kent, Inc. through
broker-dealers. Total commissions on purchase payments made under the Contract
will not exceed [7%] and trailer commissions based on a percentage of Contract
Value may be paid. The offering of the Contracts is continuous, and the Company
does not anticipate discontinuing the offering of the Contract, although we
reserve the right to do so.
- --------------------------------------------------------------------------------
CUSTODIAN
The Company is custodian of the assets held in the Separate Account.
- --------------------------------------------------------------------------------
INDEPENDENT AUDITORS
Ernst & Young LLP serves as independent auditors of The Penn Mutual Life
Insurance Company and Penn Mutual Variable Annuity Account III. Their offices
are located at 2001 Market Street, Suite 4000, Philadelphia, PA.
- --------------------------------------------------------------------------------
LEGAL MATTERS
Morgan, Lewis & Bockius LLP has provided advice on certain matters relating
to the federal securities laws and the offering of the Contracts. Their offices
are located at 2000 One Logan Square, Philadelphia, PA.
- --------------------------------------------------------------------------------
FINANCIAL STATEMENTS
The consolidated financial statements of Penn Mutual 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 Contract.
- --------------------------------------------------------------------------------
B-8
<PAGE>
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
THE BOARD OF TRUSTEES
THE PENN MUTUAL LIFE INSURANCE COMPANY
PHILADELPHIA, PENNSYLVANIA
We have audited the accompanying consolidated balance sheet of The Penn Mutual
Life Insurance Company and subsidiaries as of December 31, 1997 and the related
consolidated income statement, statement of changes in equity and statement of
cash flows for the year then ended. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit. The
financial statements of the Company as of December 31, 1996 and for each of the
two years in the period ended December 31, 1996 were audited by other auditors
whose report dated January 31, 1997 expressed an unqualified opinion on those
statements and included an explanatory paragraph that disclosed the Company's
adoption of several accounting principles which were not previously required to
be adopted. These changes are described in Note 1 to the financial statements.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the 1997 consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of The Penn Mutual Life Insurance Company and subsidiaries as of December 31,
1997, and the results of their operations and their cash flows for the year
then ended, in conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
Philadelphia, Pennsylvania
January 30, 1998
B-9
<PAGE>
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
THE BOARD OF TRUSTEES OF
THE PENN MUTUAL LIFE INSURANCE COMPANY
PHILADELPHIA, PENNSYLVANIA
We have audited the accompanying consolidated balance sheet of The Penn Mutual
Life Insurance Company as of December 31, 1996 and the related consolidated
statements of income, changes in equity and statement of cash flows for the two
years in the period ended December 31, 1996. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial condition of The
Penn Mutual Life Insurance Company and subsidiaries as of December 31, 1996, and
the results of their operations and their cash flows for the two years in the
period ended December 31, 1996, in conformity with generally accepted accounting
principles.
As discussed in Note 1 to the consolidated financial statements, in 1996 the
Company adopted Financial Accounting Standards Board Interpretation No. 40 (FIN
40) and Statement of Financial Accounting Standards No. 120 (SFAS 120), which
required implementation of several accounting pronouncements not previously
adopted. The effects of adopting FIN 40 and SFAS 120 were retroactively applied
to the Company's previously issued financial statements, consistent with the
implementation guidance of those standards.
/s/ PricewaterhouseCoopers LLP
2400 Eleven Penn Center
Philadelphia, Pennsylvania
January 31, 1997
B-10
<PAGE>
- --------------------------------------------------------------------------------
THE PENN MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
(in thousands)
ASSETS
Debt securities, at fair value........................... $5,427,652 $5,214,788
Equity securities, at fair value......................... 12,502 16,745
Mortgage loans on real estate............................ 52,996 124,914
Real estate, net of accumulated depreciation............. 22,358 97,805
Policy loans............................................. 642,989 656,073
Short-term investments................................... 43,470 37,515
Other invested assets.................................... 88,928 94,369
---------- ----------
TOTAL INVESTMENTS....................................... 6,290,895 6,242,209
Cash and cash equivalents................................ 37,064 37,314
Investment income due and accrued........................ 103,072 103,132
Deferred acquisition costs............................... 384,542 412,595
Amounts recoverable from reinsurers...................... 63,211 58,882
Broker/dealer receivables................................ 526,797 449,150
Other assets............................................. 92,203 85,382
Separate account assets.................................. 1,869,094 1,368,384
---------- ----------
TOTAL ASSETS............................................ $9,366,878 $8,757,048
========== ==========
LIABILITIES
Reserves for payment of future policy benefits........... $2,770,015 $2,782,621
Other policyholder funds................................. 2,973,434 3,053,412
Policyholders' dividends payable......................... 35,273 35,395
Broker/dealer payables................................... 333,104 303,089
Accrued income tax payable:
Current................................................. 17,476 25,487
Deferred................................................ 75,096 35,783
Other liabilities........................................ 283,666 282,501
Separate account liabilities............................. 1,869,094 1,368,384
---------- ----------
TOTAL LIABILITIES....................................... 8,357,158 7,886,672
---------- ----------
EQUITY
Unrealized gains/(losses) on investment securities, net
of taxes and amortization of deferred acquisition costs. 152,009 85,730
Retained earnings........................................ 857,711 784,646
---------- ----------
TOTAL EQUITY............................................ 1,009,720 870,376
---------- ----------
TOTAL LIABILITIES AND EQUITY........................... $9,366,878 $8,757,048
========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
B-11
<PAGE>
- --------------------------------------------------------------------------------
THE PENN MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENTS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, 1997 1996 1995
- --------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
REVENUES
Premium and annuity considerations.......... $ 195,220 $ 199,821 $ 187,907
Policy fee income........................... 102,398 89,349 80,652
Net investment income....................... 460,206 475,315 489,773
Net realized capital gains/(losses)......... 9,655 (10,078) 14,112
Broker/dealer fees and commissions.......... 290,005 241,068 200,223
Other income................................ 11,851 11,544 31,646
---------- ---------- ----------
TOTAL REVENUE.............................. 1,069,335 1,007,019 1,004,313
---------- ---------- ----------
BENEFITS AND EXPENSES
Benefits paid to policyholders and benefi-
ciaries.................................... 480,234 462,412 486,559
Policyholder dividends...................... 67,412 67,596 69,807
Increase/(decrease) in liability for future
policy benefits............................ (11,972) 42,652 38,038
General expenses............................ 202,731 178,554 186,204
Broker/dealer sales expense................. 160,730 132,724 109,492
Amortization of deferred acquisition costs.. 43,223 46,137 36,794
---------- ---------- ----------
TOTAL BENEFITS AND EXPENSES................ 942,358 930,075 926,894
---------- ---------- ----------
INCOME BEFORE INCOME TAXES................. 126,977 76,944 77,419
---------- ---------- ----------
Income taxes:
Current.................................... 50,061 37,944 11,740
Deferred................................... 3,851 (9,919) (33,179)
---------- ---------- ----------
NET INCOME................................. $ 73,065 $ 48,919 $ 98,858
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
B-12
<PAGE>
- --------------------------------------------------------------------------------
THE PENN MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
<TABLE>
<CAPTION>
UNREALIZED
APPRECIATION
(DEPRECIATION)
OF INVESTMENT RETAINED TOTAL
FOR THE YEARS ENDED DECEMBER 31, SECURITIES EARNINGS EQUITY
- --------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
BALANCE AT JANUARY 1, 1995.................. $(57,212) $636,869 $ 579,657
Net income for 1995........................ -- 98,858 98,858
Unrealized appreciation of securities...... 216,153 -- 216,153
-------- -------- ----------
BALANCE AT DECEMBER 31, 1995................ 158,941 735,727 894,668
Net income for 1996........................ -- 48,919 48,919
Unrealized depreciation of securities...... (73,211) -- (73,211)
-------- -------- ----------
BALANCE AT DECEMBER 31, 1996................ 85,730 784,646 870,376
Net income for 1997........................ -- 73,065 73,065
Unrealized appreciation of securities...... 66,279 -- 66,279
-------- -------- ----------
BALANCE AT DECEMBER 31, 1997................ $152,009 $857,711 $1,009,720
======== ======== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
B-13
<PAGE>
- --------------------------------------------------------------------------------
THE PENN MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, 1997 1996 1995
- ----------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income................................ $ 73,065 $ 48,919 $ 98,858
Adjustments to reconcile net income to net
cash provided by operations:
Capitalization of policy acquisition
costs................................... (64,427) (60,234) (52,147)
Amortization of deferred acquisition
costs................................... 43,223 46,137 36,794
Policy fees on universal life and invest-
ment contracts.......................... (104,342) (89,349) (80,652)
Interest credited on universal life and
investment contracts.................... 160,417 171,051 186,549
Depreciation and amortization............ 18,682 11,613 13,260
Premiums due and other receivables....... (7,291) (105) (2,219)
Realized capital (gains)/losses.......... (9,655) 10,078 (14,112)
(Increase)/decrease in accrued investment
income.................................. 60 6,474 7,880
(Increase)/decrease in amounts due from
reinsurers.............................. (4,329) (14,200) 9,994
(Increase)/decrease in net broker dealer
receivables............................. (47,632) 296 (37,142)
Increase/(decrease) in future policy ben-
efit reserves........................... (13,358) 58,697 9,276
Increase/(decrease) in claims payable.... -- -- (16,322)
Increase/(decrease) in income tax pay-
able.................................... (4,526) 7,798 (59,512)
Other, net............................... (6,693) 39,625 (5,232)
----------- ----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVI-
TIES................................... 33,194 236,800 95,273
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Sale of investments:
Debt securities available for sale....... 1,235,274 927,905 1,201,541
Equity securities........................ 20,374 25,413 153,985
Real estate.............................. 87,875 40,209 20,461
Other.................................... 14,355 15,284 10,834
Maturity and other principal repayments:
Debt securities available for sale....... 472,474 278,290 276,806
Equity securities........................ -- -- 1,992
Mortgage loans........................... 61,813 156,643 138,396
Cost of investments acquired:
Debt securities available for sale....... (1,772,007) (1,427,048) (1,448,184)
Equity securities........................ (15,268) (11,752) (80,999)
Mortgage loans........................... 0 (36,155) (115,047)
Real estate.............................. (15,600) (8,542) (15,428)
Other.................................... (15,503) (8,789) (8,420)
Change in policy loans, net............... 13,084 1,234 (18,708)
(Increase)/decrease in short-term invest-
ments, net............................... (5,955) 51,290 (80,740)
Purchases of furniture and equipment, net. (4,116) (6,449) (5,369)
----------- ----------- -----------
NET CASH (USED)/PROVIDED BY INVESTING
ACTIVITIES............................. 76,800 (2,467) 31,120
----------- ----------- -----------
</TABLE>
- CONTINUED -
The accompanying notes are an integral part of the consolidated financial
statements.
B-14
<PAGE>
- --------------------------------------------------------------------------------
THE PENN MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, 1997 1996 1995
- ----------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Deposits for universal life and investment con-
tracts......................................... $ 653,233 $ 625,816 $ 602,956
Withdrawals from universal life and investment
contracts...................................... (552,311) (567,697) (608,416)
Transfers to separate accounts.................. (236,008) (269,735) (114,332)
Issuance/(repayment) of debt.................... 24,842 (18,424) 1,354
--------- --------- ---------
NET CASH USED BY FINANCING ACTIVITIES......... (110,244) (230,040) (118,438)
--------- --------- ---------
NET DECREASE IN CASH AND CASH EQUIVALENTS..... (250) 4,293 7,955
CASH AND CASH EQUIVALENTS
Beginning of the year.......................... 37,314 33,021 25,066
--------- --------- ---------
End of the year................................ $ 37,064 $ 37,314 $ 33,021
========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Income Taxes................................... $ 54,507 $ 20,228 $ 46,286
Interest Paid.................................. 1,384 939 5,239
</TABLE>
See Note 2 for information on unrealized gains and losses and a 1996 non-cash
transaction related to mortgage loans.
The accompanying notes are an integral part of the consolidated financial
statements.
B-15
<PAGE>
- -------------------------------------------------------------------------------
THE PENN MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS OF DOLLARS)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
ORGANIZATION AND BASIS OF PRESENTATION
The Penn Mutual Life Insurance Company (the "Company") was founded and
commenced business in 1847 as a mutual life insurance company. The Company
concentrates primarily on the sale of individual life insurance and annuity
products. The primary products that the Company currently markets are
traditional whole life, term life, universal life, variable life, immediate
annuities and deferred annuities, both fixed and variable. The Company markets
its products through a network of career agents, independent agents, and
independent marketing organizations. The Company is also involved in the
broker-dealer business which offers a variety of investment products and
services and is conducted through the Company's non-insurance subsidiaries.
The Company sells its products in all fifty states and the District of
Columbia.
The accompanying consolidated financial statements have been prepared in
conformity with generally accepted accounting principles and include the
accounts of The Penn Mutual Life Insurance Company, its wholly owned life
insurance subsidiary, The Penn Insurance and Annuity Company ("PIA"), and non-
insurance subsidiaries (principally broker/dealer, investment advisory and
real estate subsidiaries) (the "Company"). All significant intercompany
accounts and transactions have been eliminated in consolidation. The
preparation of financial statements requires management to make estimates and
assumptions that affect the amounts reported in the consolidated financial
statements and notes to the consolidated financial statements.
ACCOUNTING CHANGES
As of January 1, 1996, the Company adopted Financial Accounting Standards
Board Interpretation No. 40 (FIN 40), "Applicability of Generally Accepted
Accounting Principles to Mutual Life Insurance and Other Enterprises", as
amended by Statement of Financial Accounting Standards (SFAS) No. 120,
"Accounting and Reporting by Mutual Life Insurance Enterprises for Certain
Long-Duration Participating Contracts". The initial effect of applying these
pronouncements has been reported retroactively, as of January 1, 1993. SFAS
No. 120 requires financial statements referred to as prepared in accordance
with generally accepted accounting principles (GAAP) to apply all applicable
authoritative GAAP pronouncements. Prior to the adoption of SFAS No. 120,
statutory financial statements were permitted to be referred to as being
prepared in accordance with GAAP. The significant GAAP authoritative
pronouncements requiring initial application were as follows:
. SFAS No. 60, "Accounting and Reporting by Insurance Enterprises",
. SFAS No. 87, "Employers' Accounting for Pensions",
. SFAS No. 94, "Consolidation of All Majority-Owned Subsidiaries",
. SFAS No. 97, "Accounting and Reporting by Insurance Enterprises for Certain
Long Duration Contracts and for Realized Gains and Losses from the Sale of
Investments",
. SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than
Pensions" ,
. SFAS No. 109, "Accounting for Income Taxes",
. SFAS No. 113, "Accounting and Reporting for Reinsurance of Short-Duration
and Long-Duration Contracts",
. Statement of Position (SOP) 95-1, "Accounting for Certain Insurance
Activities of Mutual Life Insurance Enterprises".
The cumulative effect of applying SFAS No. 120 and FIN 40 primarily consists
of the initial deferral of acquisition costs, the establishment of deferred
taxes, the change in methodology for insurance reserves, and the elimination
of the statutory asset valuation reserve and interest maintenance reserve and
the establishment of investment valuation allowances. In connection with the
adoption of FIN 40, the Company also adopted SFAS No. 115, "Accounting for
Certain Debt and Equity Securities" as of January 1, 1994.
B-16
<PAGE>
- --------------------------------------------------------------------------------
THE PENN MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS OF DOLLARS)
As a result of the change in accounting principles, net income as previously
reported, has been restated as follows:
<TABLE>
<CAPTION>
1995
---------
<S> <C>
Net income, as previously reported.............................. $ 729
Add adjustments for the cumulative effect on prior years
Deferred acquisition costs..................................... 15,353
Policy reserves................................................ (12,079)
Deferred taxes................................................. 32,341
Investment reserves............................................ 46,640
Other, net..................................................... 15,874
Total.......................................................... 98,129
---------
Net income, as adjusted......................................... $ 98,858
=========
As a result of the change in accounting principles, equity, as previously
reported has been restated as follows:
<CAPTION>
1995
---------
<S> <C>
Balance at beginning of year, as previously reported............ $ 315,321
---------
Add adjustments for the cumulative effect on prior years of ap-
plying retroactively the new basis of accounting
Deferred acquisition costs..................................... 466,446
Policy reserves................................................ (67,526)
Deferred taxes................................................. (527)
Investment reserves............................................ 13,651
Unrealized gains/(losses)...................................... (145,759)
Other, net..................................................... (1,949)
---------
Total.......................................................... 264,336
---------
Balance at beginning of year, as adjusted....................... 579,657
---------
Net income...................................................... 98,858
Net change in unrealized gains/(losses) on investment securi-
ties........................................................... 216,153
---------
315,011
---------
Balance at end of year.......................................... $ 894,668
=========
</TABLE>
INVESTMENTS
Debt securities (bonds, notes, redeemable preferred stocks and mortgage-backed
securities) which might be sold prior to maturity are classified as available
for sale. These securities are carried at fair value, with the change in
unrealized gains and losses reported through a separate component of equity.
Interest on debt securities is credited to income as it is earned.
Equity securities are classified as available for sale and carried at fair
value. Dividends on equity securities are credited to income on their ex-
dividend dates.
The Company regularly evaluates the carrying value of debt and equity
securities based on current economic conditions, past credit loss experience
and other circumstances of the investee. A decline in a security's fair value
that is deemed to be other than temporary is treated as a realized loss and a
reduction in the cost basis of the security.
Mortgage loans on real estate are stated at unpaid principal balances, net of
unamortized discounts and valuation allowances. Valuation allowances on
impaired loans are based on the present value of expected future cash flows
discounted at the loan's original effective interest rate or the collateral
value if the loan is collateral dependent. However, if foreclosure is or
becomes probable, the measurement method used is collateral value.
Investment real estate, which the Company has the intent to hold, is carried at
cost less accumulated depreciation and valuation reserves. The Company
establishes valuation reserves for investment real estate when declines in
value are deemed to be permanent based on an analysis of discounted future cash
flows. Properties held for sale are carried at the lower of
B-17
<PAGE>
- --------------------------------------------------------------------------------
THE PENN MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS OF DOLLARS)
depreciated cost or fair value less selling costs. Valuation reserves are
established for properties held for sale when the fair value less estimated
selling costs is below depreciated cost. Real estate acquired through
foreclosure is recorded at the lower of cost or fair value less estimated
selling costs at the time of foreclosure. Depreciation is calculated using the
straight-line method over the estimated useful lives of the real estate.
Policy loans are carried at the unpaid principal balances.
Short-term investments include securities purchased with a maturity date of 90
days to less than one year. Short-term investments are valued at cost.
Other invested assets primarily include joint venture real estate partnerships,
which are valued on the equity basis, and venture capital limited partnerships,
which are carried at fair value.
Realized gains and losses are determined by specific identification and are
included in income on the trade date. Unrealized gains and losses, net of
appropriate taxes and amortization of deferred acquisition costs, are accounted
for as a separate component of equity.
The Company utilizes various financial instruments, such as interest rate swaps
and financial futures, to hedge against interest rate fluctuation. These
instruments are recorded using a valuation method consistent with the valuation
method of the assets hedged. Gains and losses on these instruments are deferred
and recognized in the Consolidated Income Statements over the remaining life of
the hedged security. Changes in the fair value of these instruments are
reported as unrealized gains or losses. Realized gains or losses are recognized
when the hedged securities are sold.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on hand, money market instruments and
other debt securities with a maturity of 90 days or less when purchased.
OTHER ASSETS
Property and equipment and leasehold improvements are stated at cost, less
accumulated depreciation and amortization. Depreciation is calculated using the
straight-line method over the estimated useful lives of the related assets.
Amortization of leasehold improvements is calculated using the straight-line
method over the lesser of the term of the leases or the estimated useful life
of the improvements. Accumulated depreciation and amortization on property and
equipment and leasehold improvements was $44,329 and $40,671 at December 31,
1997 and 1996, respectively. Related depreciation and amortization expense was
$8,183, $7,510 and $6,914 for the years ended December 31, 1997, 1996 and 1995,
respectively.
Goodwill represents the excess of the cost of the businesses acquired over the
fair value of their net assets. These costs are amortized on a straight-line
basis over not more than 40 years and are included in other assets in the
Consolidated Balance Sheets. Unamortized goodwill amounted to $16,932 and
$17,740 at December 31, 1997 and 1996 respectively. Goodwill amortization was
$808, $909 and $907 for 1997, 1996 and 1995, respectively.
DEFERRED ACQUISITION COSTS
Costs of acquiring new insurance and annuity contracts, which vary with and are
primarily related to the production of new business, have been deferred to the
extent that such costs are deemed recoverable from future gross profits. Such
costs include commissions, certain costs of policy issuance and underwriting,
and certain variable agency expenses.
Deferred acquisition costs related to participating traditional and universal
life insurance policies and annuity products without mortality risk, that
include significant surrender charges, are being amortized over the lesser of
the estimated or actual contract life in proportion to estimated gross profits
arising principally from interest, mortality, expense margins and surrender
charges. The effects on amortization of deferred acquisition costs of revisions
to estimated gross profits are reflected in earnings in the period such
estimated gross profits are revised. Deferred acquisition costs are reviewed to
determine that the unamortized portion of such costs is recoverable from future
estimated gross profits. Certain costs and expenses reported in the
Consolidated Income Statements are net of amounts deferred.
B-18
<PAGE>
- --------------------------------------------------------------------------------
THE PENN MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS OF DOLLARS)
SEPARATE ACCOUNTS
Separate Account assets and liabilities represent segregated funds administered
and invested by the Company primarily for the benefit of variable life
insurance policyholders and annuity and pension contractholders, including
certain of the Company's benefit plans. The value of the assets in the Separate
Accounts reflects the actual investment performance of the respective accounts
and is not guaranteed by the Company. The carrying value for Separate Account
assets and liabilities approximates the estimated fair value of the underlying
assets.
INSURANCE LIABILITIES AND REVENUE RECOGNITION
Participating Traditional Life and Life Contingent Annuity Products
Future policy benefits include reserves for participating traditional life
insurance and life contingent annuity products and are established in amounts
adequate to meet the estimated future obligations of the policies in force.
Liabilities for participating traditional life products are computed using the
net level premium method, using assumptions for investment yields, mortality,
morbidity and withdrawals, which are consistent with the dividend fund interest
rate and mortality rates used in calculating cash surrender values. Interest
rate assumptions used in the calculation of the liabilities for participating
traditional life products ranged from 2.25% to 4.5%. Premiums are recognized as
income when due. Death and surrender benefits are reported in expense as
incurred.
Liabilities for life contingent annuity products are computed by estimating
future benefits and expenses. Assumptions are based on Company experience
projected at the time of policy issue, with provision for adverse deviations.
Interest rate assumptions range from 2.25% to 13.25%. Premiums are recognized
as income as they are received. Death and surrender benefits are reported in
expense as incurred.
Universal Life Products and Other Annuity Products
Other policyholder funds represent liabilities for universal life and
investment-type annuity products. The liabilities for these products are based
on the contract account value which consists of deposits received from
customers and investment earnings on the account value, less administrative and
expense charges. The liability for universal life products is also reduced by
mortality charges. Liabilities for the non-life contingent annuity products are
computed by estimating future benefits and expenses. Assumptions are based on
Company experience projected at the time of policy issue. Interest rate
assumptions range from 2.0% to 11.25%.
Contract charges assessed against account value for universal life and
investment-type annuities are reflected as policy fee income in revenue.
Interest credited to account values and universal life benefit claims in excess
of fund values are reflected as benefit expense.
Policyholders' Dividends
The majority of the Company's insurance products have been issued on a
participating basis. As of December 31, 1997, participating insurance expressed
as a percentage of insurance in force is 91%, and as a percentage of premium
income is 80%. The amount of policyholders' dividends to be paid is approved
annually by the Board of Trustees. The aggregate amount of policyholders'
dividends is calculated based on actual interest, mortality, morbidity and
expense experience for the year and on management's judgment as to the
appropriate level of equity to be retained by the Company. The carrying value
of this liability approximates the earned amount and fair value at December 31,
1997.
BROKER/DEALER REVENUE RECOGNITION
Broker-dealer transactions in securities and listed options, including related
commission revenue and expense, are recorded on a settlement-date basis.
FEDERAL INCOME TAXES
The Company files a consolidated federal income tax return with its life and
non-life insurance subsidiaries. Federal income taxes are charged or credited
to operations based upon amounts estimated to be payable or recoverable as a
result of taxable operations for the current year. Deferred income tax assets
and liabilities are established to reflect the impact of temporary differences
between the amount of assets and liabilities recognized for financial reporting
purposes and such amounts recognized for tax purposes. These deferred tax
assets or liabilities are measured by using the enacted tax rates expected to
apply to taxable income in the period in which the deferred tax liabilities or
assets are expected to be settled or realized.
B-19
<PAGE>
- --------------------------------------------------------------------------------
THE PENN MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS OF DOLLARS)
REINSURANCE
In the normal course of business, the Company seeks to limit its exposure to
loss on any single insured and to recover a portion of benefits paid by ceding
reinsurance to other insurance enterprises or reinsurers under excess coverage
and coinsurance contracts. The Company has set its retention limit for
acceptance of risk on life insurance policies at various levels up to $1,250.
Insurance liabilities are reported before the effects of reinsurance.
Reinsurance receivables (including amounts related to insurance liabilities)
are reported as assets. Estimated reinsurance receivables are recognized in a
manner consistent with the liabilities related to the underlying reinsured
contracts.
RECLASSIFICATIONS
Certain 1996 and 1995 amounts have been reclassified to conform with 1997
presentation.
NOTE 2 - INVESTMENTS:
DEBT SECURITIES
The following tables summarize the Company's investment in debt securities,
including redeemable preferred stocks. All debt securities are classified as
available for sale and are carried at estimated fair value. Amortized cost is
net of cumulative writedowns for other than temporary declines in value of
$1,208 and $1,390 as of December 31, 1997 and 1996, respectively.
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
U.S. Treasury securities and U.S.
Government and agency securities.. $ 107,539 $ 6,302 $ -- $ 113,841
States and political subdivisions.. 12,085 569 -- 12,654
Foreign governments................ 20,397 3,049 -- 23,446
Corporate securities............... 2,854,234 218,145 6,748 3,065,631
Mortgage and other asset-backed se-
curities.......................... 2,133,758 76,160 757 2,209,161
---------- -------- ------ ----------
Total bonds........................ 5,128,013 304,225 7,505 5,424,733
Redeemable preferred stocks........ 3,085 -- 166 2,919
---------- -------- ------ ----------
TOTAL............................. $5,131,098 $304,225 $7,671 $5,427,652
========== ======== ====== ==========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
U.S. Treasury securities and U.S.
Government and agency securities.. $ 42,928 $ 653 $ -- $ 43,581
States and political subdivisions.. 477 21 -- 498
Foreign governments................ 20,333 2,038 -- 22,371
Corporate securities............... 2,819,418 134,505 11,911 2,942,012
Mortgage and other asset-backed se-
curities.......................... 2,192,353 27,135 16,471 2,203,017
---------- -------- ------- ----------
Total bonds........................ 5,075,509 164,352 28,382 5,211,479
Redeemable preferred stocks........ 3,575 -- 266 3,309
---------- -------- ------- ----------
TOTAL............................. $5,079,084 $164,352 $28,648 $5,214,788
========== ======== ======= ==========
</TABLE>
B-20
<PAGE>
- --------------------------------------------------------------------------------
THE PENN MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS OF DOLLARS)
The following tables summarize the amortized cost and estimated fair value of
debt securities, including redeemable preferred stocks, by contractual
maturity.
<TABLE>
<CAPTION>
DECEMBER 31, 1997
---------------------
AMORTIZED ESTIMATED
COST FAIR VALUE
---------- ----------
<S> <C> <C>
Maturity:
Within one year.......................................... $ 241,759 $ 240,871
After one year through five years........................ 606,900 620,792
After five years through ten years....................... 613,951 644,749
After ten years through twenty years..................... 428,492 495,854
After twenty years....................................... 1,103,153 1,213,305
Mortgage and other asset-backed securities............... 2,133,758 2,209,162
---------- ----------
Total bonds............................................. 5,128,013 5,424,733
Redeemable preferred stocks.............................. 3,085 2,919
---------- ----------
TOTAL.................................................. $5,131,098 $5,427,652
========== ==========
</TABLE>
Expected maturities may differ from contractual maturities because certain
borrowers have the right to call or prepay obligations with or without call or
prepayment penalties. Mortgage and other asset-backed securities are presented
separately in the maturity schedule due to the potential for prepayment. The
weighted average life of these securities is 7.8 years.
At December 31, 1997, the Company held $2,209,162 in mortgage and other asset-
backed securities. The structured securities portfolio consists of commercial
and residential mortgage pass-through holdings totaling $1,961,662 and
securities backed by credit card receivables, auto loans, home equity and
manufactured housing loans totaling $247,500. These securities follow a
structured principal repayment schedule and are of high credit quality.
Securities totaling $1,810,481 are rated AAA and include $27,854 of interest
only tranches that were retained from the securitization of the Company's
mortgage loan portfolio.
At December 31, 1997, the largest industry concentration of the Company's
portfolio was investments in the finance industry of $734,428, representing 14%
of the total debt portfolio.
Effective November 30, 1995, the Company adopted the implementation guidance
contained in the Financial Accounting Series Special Report, "A Guide to
Implementation of Statement 115 on Accounting for Certain Investments in Debt
and Equity Securities." As a result of adopting this guidance, the Company
reclassified all of its held-to-maturity securities to available-for-sale based
upon a reassessment of the appropriateness of the classifications of all
securities held at that time. The amortized cost and net unrealized gain of the
securities reclassified were $546,834 and $47,348 respectively, at November 30,
1995.
Proceeds during 1997, 1996 and 1995 from sales of available for sale securities
were $1,235,274, $927,905 and $1,201,541, respectively. Gross gains and gross
losses realized on those sales were $21,799 and $8,990, respectively during
1997, $15,932 and $6,899, respectively during 1996 and $62,216 and $10,201,
respectively during 1995. The change in net unrealized gains and losses on debt
securities classified as available for sale included as a separate component of
equity was $160,850, $(149,259) and $438,883 for 1997, 1996 and 1995,
respectively.
The Company's investment portfolio of debt securities is predominantly
comprised of investment grade securities. At December 31, 1997 and 1996, debt
securities with amortized cost totaling $198,943 and $184,719, respectively,
were less than investment grade. At December 31, 1997 and 1996, the Company did
not hold any securities which are either in default as to principal and/or
interest payments, are to be restructured pursuant to commenced negotiations or
are in situations where the borrowers went into bankruptcy subsequent to
acquisition (collectively, "problem debt securities"). The Company did not hold
any debt securities which were non-income producing for the preceding twelve
months as of December 31, 1997 and 1996.
EQUITY SECURITIES
During 1997, 1996 and 1995, the proceeds from sales of equity securities
amounted to $20,374, $25,413 and $153,985, respectively. The gross gains and
gross losses realized on those sales were $975 and $558, $1,369 and $247, and
$9,604 and $3,753, for 1997, 1996 and 1995, respectively.
B-21
<PAGE>
- --------------------------------------------------------------------------------
THE PENN MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS OF DOLLARS)
MORTGAGE LOANS
On August 29, 1996, the Company securitized the majority of its mortgage loan
portfolio by transferring the loans to a trust which qualifies as a REMIC (Real
Estate Mortgage Investment Conduit) under the Internal Revenue Code. Prior to
transferring the loans with a principal value of $781,564 and a book value of
$780,942, the loans were written down to a fair market value of $755,559, and
the related reserve of $25,285 was released. The trust issued sixteen classes
of Commercial Mortgage Pass-Through Certificates with a total par value of
$781,564. The certificates evidence the entire beneficial ownership interest in
the trust. The cash flow from the mortgages will be used to repay the
certificates over an average life of 4.28 years. The actual date on which the
principal amount of the notes may be paid in full could be substantially
earlier or later based on performance of the mortgages. The cash flows of the
assets of the trust will be the sole source of payments on the notes. The
Company has not guaranteed these certificates or the mortgage loans held by the
trust. As a result of this transaction, the Company recognized a loss of $98
upon the transfer of the mortgages to the trust, representing the difference
between the fair market value of the certificates and the book value of the
mortgage loans transferred to the trust.
The Company retained the highest quality classes of certificates with a par
value of $715,126 and a fair market value of $734,326 at the time of the
securitization. As of December 31, 1997, the par value and fair value of these
securities was $570,130 and $597,248, respectively. The Company sold the lowest
rated classes of certificates with a par value of $66,438 and a fair market
value of $24,838.
The mortgage loans which were not included in the securitization and were
retained by the Company had a book value of $171,555 with a related reserve of
$21,907 and an estimated fair value of $153,405 on the date of the
securitization. Loans which the Company intended to dispose of within a period
of 6 to 24 months were written down to their estimated net realizable value.
These loans had a book value of $99,817 and an estimated net realizable value
of $81,310 at the time of the securitization. The writedown of $18,507 was
fully offset by a release in mortgage loss reserve. As of December 31, 1997,
the Company held $12,368 of these loans. The Company intended to hold mortgage
loans with a book value of $71,738 on the date of the securitization, through
their remaining terms. As of December 31, 1997, the Company continued to hold
$44,428 of these mortgages. The Company discontinued the origination of
commercial mortgage loans in 1996.
The following tables summarize the carrying value of mortgage loans, by
property type and geographic concentration, at December 31.
<TABLE>
<CAPTION>
1997 1996
------- --------
<S> <C> <C>
Property Type
Office buildings............................................. $20,012 $ 51,510
Retail....................................................... 7,862 39,090
Dwellings.................................................... 25,237 33,540
Other........................................................ 3,685 4,174
Valuation allowance.......................................... (3,800) (3,400)
------- --------
TOTAL....................................................... $52,996 $124,914
======= ========
</TABLE>
<TABLE>
<CAPTION>
1997 1996
------- --------
<S> <C> <C>
Geographic Concentration
Northeast.................................................... $23,313 $ 49,438
Midwest...................................................... 5,922 22,920
South........................................................ 12,502 20,717
West......................................................... 15,059 35,239
Valuation allowance.......................................... (3,800) (3,400)
------- --------
TOTAL....................................................... $52,996 $124,914
======= ========
</TABLE>
B-22
<PAGE>
- --------------------------------------------------------------------------------
THE PENN MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS OF DOLLARS)
The following table presents changes in the mortgage loan valuation allowance
for the years presented:
<TABLE>
<CAPTION>
1997 1996
------ -------
<S> <C> <C>
Balance at January 1............................................ $3,400 $47,192
Provision....................................................... 400 --
Charge offs..................................................... -- (43,792)
------ -------
BALANCE AT DECEMBER 31......................................... $3,800 $ 3,400
====== =======
</TABLE>
As of December 31, 1997 and 1996, the Company's mortgage loan portfolio
contained $0 and $15,726, respectively, of loans delinquent over 60 days or in
foreclosure. As of December 31, 1997 and 1996, there were no non-income
producing mortgage loans for the preceding twelve months.
During 1997, the Company did not restructure the terms of any outstanding
mortgages. During 1996, the Company restructured the terms of outstanding
mortgages with a carrying value of $4,000. As of December 31, 1997 and 1996,
the mortgage loan portfolio included $2,834 and $7,110, respectively, of
restructured mortgage loans. Restructured mortgage loans include commercial
loans for which the basic terms, such as interest rate, maturity date,
collateral or guaranty have been changed as a result of actual or anticipated
delinquency. Restructures do not include mortgages refinanced upon maturity at
or above current market rates. Gross interest income on restructured mortgage
loans on real estate that would have been recorded in accordance with the
original terms of such loans amounted to $298 and $893 in 1997 and 1996,
respectively. Gross interest income from these loans included in net investment
income totaled $262 and $674 in 1997 and 1996, respectively.
At December 31, 1997, the recorded investment in loans that are considered to
be impaired was $12,368 that, as a result of write-downs, do not have a
valuation allowance. The average recorded investment in impaired loans during
the year ended December 31, 1997 was approximately $38,096. During 1997, $1,454
was received on these impaired loans which was applied to the outstanding
principal balance or will be applied to principal at the date of foreclosure.
REAL ESTATE
The following table summarizes the carrying value of the Company's real estate
holdings at December 31.
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Investment.................................................... $19,999 $33,386
Properties held for sale...................................... 7,828 73,260
Less: valuation allowance (5,469) (8,841)
------- -------
TOTAL........................................................ $22,358 $97,805
======= =======
</TABLE>
At December 31, 1997 and 1996, accumulated depreciation on real estate amounted
to $6,498 and $38,781, respectively. Depreciation expense on real estate
totaled $5,709, $6,488 and $10,091 for the years ended December 31, 1997, 1996
and 1995, respectively. During 1997, the Company sold its largest real estate
investment for $65,007 cash to an unrelated buyer. At the date of the sale,
this property had a carrying value of $61,914, net of related reserves,
resulting in a gain of $3,093. During 1996, the Company wrote down the
statement value of this property by $16,000 to its estimated fair value, based
on changes in future valuation assumptions.
OTHER
Investments on deposit with regulatory authorities as required by law were
$7,106 and $7,085 at December 31, 1997 and 1996, respectively.
As of December 31, 1997 and 1996, the Company's investments included $597,248
and $725,806, respectively, of the tranches retained from the 1996
securitization of the Company's commercial mortgage loan portfolio. These
investments represented 59% and 86% of equity at December 31, 1997 and 1996,
respectively.
B-23
<PAGE>
- --------------------------------------------------------------------------------
THE PENN MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS OF DOLLARS)
NOTE 3 - INVESTMENT INCOME AND CAPITAL GAINS:
The following table summarizes the sources of investment income, excluding
investment gains/(losses), for the year ended December 31.
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Debt securities..................................... $390,852 $356,669 $331,644
Equity securities................................... 1,371 1,313 2,602
Mortgages........................................... 12,098 62,454 99,109
Real estate......................................... 17,519 24,143 31,661
Policy loans........................................ 40,921 40,580 41,762
Short-term investments.............................. 2,426 6,052 3,934
Other invested assets............................... 21,268 14,665 18,016
Cash and cash equivalents........................... 2 44 34
-------- -------- --------
Gross investment income............................. 486,457 505,920 528,762
Less: Investment expenses.......................... 26,251 30,605 38,989
-------- -------- --------
Investment income, net.............................. $460,206 $475,315 $489,773
======== ======== ========
</TABLE>
The following table summarizes net realized capital gains/(losses) on
investments for the year ended December 31. Net realized capital gains/(losses)
include decreases in valuation allowances of $3,154, $44,164 and $2,463 in
1997, 1996 and 1995, respectively.
<TABLE>
<CAPTION>
1997 1996 1995
------- -------- -------
<S> <C> <C> <C>
Debt securities..................................... $12,991 $ 10,412 $51,873
Equity securities................................... 417 1,122 6,652
Mortgage loans...................................... 280 (2,821) (2,799)
Real estate......................................... (684) (22,356) (41,617)
Other............................................... (811) 3,565 3
Amortization of deferred acquisition costs.......... (2,538) -- --
------- -------- -------
Realized gains/(losses)............................. $ 9,655 $(10,078) $14,112
======= ======== =======
</TABLE>
The following table summarizes the change in unrealized gains and losses for
investments carried at fair value for the year ended December 31.
<TABLE>
<CAPTION>
1997 1996 1995
-------- --------- --------
<S> <C> <C> <C>
Unrealized Gains/(Losses):
Debt securities.................................. $160,850 $(149,259) $438,883
Equity securities................................ 408 (582) 2,340
Other............................................ (14,581) (1,545) 11,190
-------- --------- --------
146,677 (151,386) 452,413
-------- --------- --------
Less:
Deferred policy acquisition costs................ (45,043) 38,324 (116,992)
Deferred income taxes............................ (35,355) 39,851 (119,268)
-------- --------- --------
Net change in unrealized gains/(losses).......... $ 66,279 $ (73,211) $216,153
======== ========= ========
</TABLE>
B-24
<PAGE>
- --------------------------------------------------------------------------------
THE PENN MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS OF DOLLARS)
NOTE 4 - FAIR VALUE INFORMATION:
The following table summarizes the carrying value and estimated fair value of
the Company's financial instruments as of December 31, 1997 and 1996.
<TABLE>
<CAPTION>
1997 1996
------------------------- -------------------------
CARRYING VALUE FAIR VALUE CARRYING VALUE FAIR VALUE
-------------- ---------- -------------- ----------
<S> <C> <C> <C> <C>
FINANCIAL ASSETS:
Debt securities
Available for sale........ $5,427,652 $5,427,652 $5,214,788 $5,214,788
Equity securities
Common stock.............. 3,051 3,051 660 660
Non-redeemable preferred
stocks................... 9,451 9,451 16,085 16,085
Mortgage loans............. 52,996 57,224 124,914 131,577
Policy loans............... 642,989 606,681 656,073 634,291
Cash & cash equivalents.... 37,064 37,064 37,314 37,314
Short-term investments..... 43,470 43,470 37,515 37,515
Separate account assets.... 1,869,094 1,869,094 1,368,384 1,368,384
Other invested assets...... 88,928 88,928 94,369 94,369
FINANCIAL LIABILITIES:
Investment-type contracts
Individual annuities...... $1,225,192 $1,260,639 $1,281,965 $1,317,257
Guaranteed investment con-
tracts................... 59,809 61,456 111,224 112,247
Other group annuities..... 147,061 148,257 161,889 163,524
Other policyholder funds.. 1,541,372 1,541,372 1,498,334 1,498,334
---------- ---------- ---------- ----------
Total policyholder funds. 2,973,434 3,011,724 3,053,412 3,091,362
Policyholders' dividends
payable................... 35,273 35,273 35,395 35,395
Separate account liabili-
ties...................... 1,869,094 1,869,094 1,368,384 1,368,384
</TABLE>
The estimated fair values for the Company's investments in debt and equity
securities are based on quoted market prices, where available. In situations
where market prices are not readily available, primarily private placements,
fair values are estimated using a formula pricing method based on fair values
of securities with similar characteristics. The estimated fair value of
currently performing mortgage loans is estimated by discounting the cash flows
associated with the investment, using an interest rate currently offered for
similar loans to borrowers with similar credit ratings. Loans with similar
credit quality, characteristics and time to maturity are aggregated for
purposes of discounted cash flow analysis. Assumptions regarding credit risk,
cash flows and discount rates are determined using the available market and
borrower-specific information. The estimated fair value for non-performing
loans is based on the estimated fair value of the underlying real estate, which
is based on recent appraisals or other estimation techniques. The estimated
fair value of policy loans is calculated by discounting estimated future cash
flows using interest rates currently being offered for similar loans. Loans
with similar characteristics are aggregated for purposes of the calculations.
The carrying values of cash, cash equivalents, short-term investments and
separate account assets approximate their fair values. The estimated fair value
for the venture capital limited partnerships are based on values determined by
the partnerships' managing general partners. The resulting estimated fair
values may not be indicative of the value negotiated in an actual sale.
The fair values of the Company's liabilities for individual annuities,
guaranteed investment contracts and certain group annuities are estimated by
discounting the cash flows associated with the contracts, using an interest
rate currently offered for similar contracts with maturities similar to those
remaining for the contracts being valued. The statement value for certain of
the other group annuities approximates their fair value due to the nature of
the contracts. The statement values of other policyholder funds, policyholders'
dividends payable and separate account liabilities approximate their fair
values.
Currently, disclosure of estimated fair values is not required for all the
Company's assets and liabilities. Therefore, presentation of the estimated fair
value of a significant portion of assets without a corresponding valuation of
liabilities associated with
B-25
<PAGE>
- --------------------------------------------------------------------------------
THE PENN MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS OF DOLLARS)
insurance contracts can be misinterpreted. The estimated fair values of
liabilities under all of the Company's contracts are considered in the overall
management of interest rate risk. The continuing management of the relationship
between the maturities of the Company's investments and the amounts due under
insurance contracts reduces the Company's exposure to changing interest rates.
The Company is exposed to interest rate risk on its interest sensitive
products. The Company's investment strategy is designed to minimize interest
risk by managing the durations and anticipated cash flows of the Company's
assets and liabilities.
To minimize exposure and reduce risk from exchange and interest rate
fluctuations in the normal course of business, the Company enters into interest
rate swap programs for purposes other than trading. As of December 31, 1997 and
1996, the Company had interest rate swaps with aggregate notional amounts equal
to $105,000 and $115,000, respectively, with average unexpired terms of 19 and
29 months, respectively. Interest rate swap agreements involve the exchange of
fixed and floating rate interest payment obligations without an exchange of the
underlying notional principal amounts. During the term of the swap, the net
settlement amount is accrued as an adjustment to interest income. Gross
unrealized gains and losses, which represent fair value based on dealer-quoted
prices, were $5,164 and $0, respectively at December 31, 1997 and $7,605 and
$0, respectively, at December 31, 1996. These fair values represent the amount
at risk if the counterparties default and the amount that the Company would
receive to terminate the contracts, taking into account current interest rates
and, where appropriate, the current credit worthiness of the counterparties.
In the normal course of business, the Company loans securities under
arrangements in which collateral is obtained in amounts greater than the
current market value of loaned securities. This collateral is held in the form
of cash, cash equivalents or securities issued or guaranteed by the United
States Government. The Company is at risk to the extent the value of loaned
securities exceeds the value of the collateral obtained. The Company controls
this risk by requiring collateral of the highest quality and requiring that
additional collateral be deposited when the market value of loaned securities
increases in relation to the collateral held or the value of the collateral
held decreases in relation to the value of the loaned securities. The Company
had loaned securities outstanding of $155,356 and $0 as of December 31, 1997
and 1996, respectively.
NOTE 5 - INCOME TAXES:
The Company follows the asset and liability method of accounting for income
taxes whereby current and deferred tax assets and liabilities are recognized
utilizing currently enacted tax laws and rates. Deferred taxes are adjusted to
reflect tax rates at which future tax liabilities or assets are expected to be
settled or realized.
Deferred income taxes reflect the impact for financial statement reporting
purposes of temporary differences between the financial statement carrying
amounts and tax bases of assets and liabilities. The significant temporary
differences that give rise to the deferred tax assets and liabilities at
December 31 relate to the following:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
DEFERRED TAX ASSETS
Future policy benefits...................................... $ 88,172 $ 83,327
Dividend award.............................................. 11,970 12,005
Allowances for investment losses............................ 3,667 8,411
Employee benefit liabilities................................ 27,979 27,113
Other....................................................... 23,467 27,530
-------- --------
Total deferred tax asset................................... 155,255 158,386
-------- --------
DEFERRED TAX LIABILITIES
Deferred acquisition costs.................................. 127,495 124,660
Real estate................................................. (1,261) 299
Unrealized gains............................................ 81,553 48,233
Other....................................................... 22,564 20,977
-------- --------
Total deferred tax liability............................... 230,351 194,169
-------- --------
Net deferred tax liability.................................. $ 75,096 $ 35,783
======== ========
</TABLE>
B-26
<PAGE>
- --------------------------------------------------------------------------------
THE PENN MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS OF DOLLARS)
The federal income taxes attributable to consolidated net income are different
from the amounts determined by multiplying consolidated net income before
federal income taxes by the expected federal income tax rate. The difference
between the amount of tax at the U.S. federal income tax rate of 35% and the
consolidated tax provision is summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- --------
<S> <C> <C> <C>
Tax expense at 35%................................ $44,442 $26,930 $ 27,096
Increase/(decrease) in income taxes resulting
from:
Differential earnings amount..................... 6,942 500 3,878
Resolution of tax issues......................... -- -- (57,000)
Other............................................ 2,528 595 4,587
------- ------- --------
Federal income tax expense/(benefit).............. $53,912 $28,025 $(21,439)
======= ======= ========
As a mutual life insurance company, the Company is subject to Internal Revenue
Code provisions which require mutual, but not stock, life insurance companies
to include the Differential Earnings Amount (DEA) in each year's taxable
income. This amount is computed by multiplying the Company's average taxable
equity base by a prescribed rate, which is intended to reflect the difference
between stock and mutual companies' earnings rates.
In 1995, the Company settled various tax issues with the IRS, including an
issue surrounding the tax treatment of certain traditional life insurance
policy updates. As a result of these settlements, the 1995 federal income tax
expense was decreased in the Income Statement by approximately $57,000, which
included $22,300 of interest, net of tax.
The Internal Revenue Service has examined the Company's income tax returns
through the year 1990 and is currently examining years 1991 through 1994.
Management believes that an adequate provision has been made for potential
assessments.
NOTE 6 - BENEFIT PLANS:
The Company maintains qualified and non-qualified defined benefit pension plans
covering substantially all of its employees. The plans are non-contributory and
provide pension benefits based on years of service and average annual
compensation (measured over 60 consecutive months of highest earnings in a 120-
month period). Contributions are determined by using the Projected Unit Credit
Method. The total pension expense related to these plans amounted to $5,917,
$5,963 and $5,054 in 1997, 1996 and 1995, respectively.
The Company's funding policy for its qualified defined benefit plans is to
contribute an amount between the minimum required contribution and the maximum
deductible amount in accordance with the Internal Revenue Code. The following
table summarizes the components of net periodic pension cost for the Company's
qualified defined benefit plans:
<CAPTION>
1997 1996 1995
------- ------- --------
<S> <C> <C> <C>
Service cost...................................... $ 2,161 $ 2,506 $ 1,827
Interest cost on projected benefit obligation..... 4,050 3,540 2,909
Actual return on assets........................... (4,925) (3,095) (5,515)
Net amortization and deferrals.................... 2,367 919 3,736
------- ------- --------
Net periodic pension cost......................... $ 3,653 $ 3,870 $ 2,957
======= ======= ========
</TABLE>
B-27
<PAGE>
- --------------------------------------------------------------------------------
THE PENN MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS OF DOLLARS)
The following table summarizes the funded status of the Company's qualified
defined benefit plans:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Actuarial present value of benefit obligation:
Vested.......................................... $ 44,964 $ 32,572 $ 29,744
Non-vested...................................... 924 935 763
-------- -------- --------
Accumulated benefit obligation................... 45,888 33,507 30,507
Provision for future salary increases............ 16,769 15,162 17,147
-------- -------- --------
Projected benefit obligation..................... 62,657 48,669 47,654
Plan assets at fair value........................ (42,783) (37,938) (34,067)
-------- -------- --------
Projected benefit obligation in excess of plan
assets.......................................... 19,874 10,731 13,587
Unrecognized prior service cost.................. (178) (203) (228)
Unrecognized net (gain) loss from past experi-
ence............................................ (9,605) (2,430) (6,859)
Unrecognized net asset obligation at transition.. (1,288) (1,609) (1,931)
-------- -------- --------
Accrued pension cost at December 31.............. $ 8,803 $ 6,489 $ 4,569
======== ======== ========
The assumptions used to measure the actuarial present value of the projected
benefit obligation were:
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Discount rate.................................... 7.00% 7.50% 7.00%
Expected long-term rate of return on plan assets. 8.00% 8.00% 8.00%
Salary scale..................................... 5.50% 5.50% 5.50%
</TABLE>
The qualified defined benefit pension plan's assets are held in trust and
administered under a participatory group annuity contract issued by the Company
with assets invested in various separate accounts of the Company. A non-
participatory annuity contract issued by the Company funds benefits accrued
prior to 1986.
The Company maintains four defined contribution pension plans for substantially
all of its employees and full-time agents. For two plans, designated
contributions of up to 6% or 8% of annual compensation are eligible to be
matched by the Company. Contributions for the third plan are based on tiered
earnings of full time agents. The last plan, which covers employees of a
subsidiary, are determined on a discretionary basis by the Board of Directors
of that subsidiary. At December 31, 1997, 1996 and 1995, the expense recognized
for these plans was $8,345, $6,092 and $5,083, respectively. The estimated fair
value of the defined contribution plans' assets were $229,378, $201,679 and
$176,832, respectively.
The Company also provides certain medical, life insurance and other welfare
benefits (postretirement benefits) for retired employees and full-time agents.
Substantially all employees and full-time agents become eligible for these
benefits if they reach retirement age while working for the Company and have at
least 10 years of service. Employees retiring after January 1, 1993 receive a
defined dollar benefit under the medical plan. The Company continues to fund
postretirement benefit costs on a pay-as-you-go basis.
B-28
<PAGE>
- --------------------------------------------------------------------------------
THE PENN MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS OF DOLLARS)
The following table sets forth the postretirement benefits plan's status,
reconciled to amounts recognized in the Company's Consolidated Balance Sheet
and Income Statements at December 31.
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Actuarial present value of accumulated
postretirement benefit obligation:
Retirees.......................................... $22,638 $21,301 $32,473
Fully eligible active plan participants........... 2,707 2,547 2,826
Other active plan participants.................... 6,068 5,710 5,672
------- ------- -------
Total............................................ 31,413 29,558 40,971
Plan assets at fair value.......................... -- -- --
------- ------- -------
Accumulated postretirement benefits obligation in
excess of plan assets............................. 31,413 29,558 40,971
Unrecognized prior service cost.................... -- -- --
Unrecognized net gain from past experience......... 13,730 16,261 5,129
------- ------- -------
Accrued postretirement benefits cost............... $45,143 $45,819 $46,100
======= ======= =======
Net periodic postretirement benefits cost includes
the following components:
Service cost...................................... 393 434 355
Interest cost on accumulated postretirement bene-
fits obligation.................................. 2,182 2,206 2,910
Actual return on assets........................... -- -- --
Net amortization and deferral..................... (1,060) (815) (573)
------- ------- -------
Net periodic postretirement benefits cost.......... $ 1,515 $ 1,825 $ 2,692
======= ======= =======
</TABLE>
At December 31, 1997, the assumed health care cost trend rate used in measuring
the accumulated postretirement benefit obligation was 8.5% in 1998, grading to
5.0% in the year 2004. The weighted-average discount rate used in determining
the accumulated postretirement benefit obligation was 7.00% at December 31,
1997. At December 31, 1996, the assumed health care cost trend rate used in
measuring the accumulated postretirement benefit obligation was 8.5% in 1997,
grading to 5.0% in the year 2004. The weighted-average discount rate used in
determining the accumulated postretirement benefit obligation was 7.5% at
December 31, 1996. At December 31, 1995, the assumed health care cost trend
rate used in measuring the accumulated postretirement benefit obligation was
9.0% in 1996, grading to 5.0% in the year 2004. The weighted-average discount
rate used in determining the accumulated postretirement benefit obligation was
7.0% at December 31, 1995.
If the health care cost trend rate was increased by one percentage point for
each future year, the accumulated postretirement benefit obligation as of
December 31, 1997 would increase by $1,948. The effect of this change on the
sum of the service cost and interest cost, before taxes, would be an increase
of $136.
B-29
<PAGE>
- --------------------------------------------------------------------------------
THE PENN MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS OF DOLLARS)
NOTE 7 - REINSURANCE:
The Company has assumed and ceded reinsurance on certain life and annuity
contracts under various agreements. Reinsurance permits recovery of a portion
of losses from reinsurers, although the Company remains primarily liable as the
direct insurer on all risks reinsured. The Company evaluates the financial
strength of potential reinsurers and continually monitors the financial
condition of present reinsurers to ensure that amounts due from reinsurers are
collectable. The table below highlights the amounts shown in the accompanying
financial statements.
<TABLE>
<CAPTION>
ASSUMED CEDED TO
GROSS FROM OTHER OTHER NET
AMOUNT COMPANIES COMPANIES AMOUNT
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
DECEMBER 31, 1997:
Life Insurance in Force.......... $31,027,764 $5,217,856 $4,620,599 $31,625,021
Premiums......................... 190,754 11,189 6,723 195,220
Benefits......................... 330,432 14,293 26,916 317,809
Reserves......................... 5,741,456 1,993 59,322 5,684,127
DECEMBER 31, 1996:
Life Insurance in Force.......... $30,057,996 $5,420,951 $3,186,567 $32,292,380
Premiums......................... 196,897 12,745 9,821 199,821
Benefits......................... 293,270 16,466 16,808 292,928
Reserves......................... 5,833,970 2,063 56,632 5,779,401
</TABLE>
During 1995, the Company had gross premiums of $184,362, assumed premiums of
$13,453 and ceded premiums of $9,908 and gross benefits of $303,911, assumed
benefits of $13,265 and ceded benefits of $14,700.
Reinsurance receivables with a carrying value of $50,617 and $50,522 were
associated with a single reinsurer at December 31, 1997 and 1996, respectively.
During 1995, the Company recaptured the portion of its disability income
business that was previously reinsured under a quota share and excess
reinsurance agreement with the Monarch Life Insurance Company ("Monarch"). As a
result of this recapture, approximately $21,200 of cash and policyholder
reserves were transferred to the Company from Monarch.
NOTE 8 - COMMITMENTS AND CONTINGENCIES:
The Company and its subsidiaries are respondents in a number of proceedings,
some of which involve extra-contractual damage in addition to other damages. In
addition, insurance companies are subject to assessments, up to statutory
limits, by state guaranty funds for losses of policyholders of insolvent
insurance companies. In the opinion of management, the outcome of the
proceedings and assessments are not likely to have a material adverse effect on
the financial position of the Company.
The Company, in the ordinary course of business, extends commitments relating
to its investment activities. As of December 31, 1997, the Company had
outstanding commitments totaling $38,326 relating to these investment
activities. The fair value of these commitments approximates the face amount.
NOTE 9 - STATUTORY INFORMATION:
State insurance regulatory authorities prescribe or permit statutory accounting
practices for calculating net income and capital and surplus which differ in
certain respects from generally accepted accounting principles (GAAP). The
significant differences relate to deferred acquisition costs, which are charged
to expenses as incurred; federal income taxes, which reflect amounts that are
currently taxable; and benefit reserves, which are determined using prescribed
mortality, morbidity and interest assumptions, and which, when considered in
light of the assets supporting these reserves, adequately provide for
obligations under policies and contracts. In addition, the recording of
impairments in the value of investments generally lags recognition under GAAP.
The combined insurance companies' statutory capital and surplus at December 31,
1997 and 1996 was $435,861 and $379,774, respectively. The combined insurance
companies' net income, determined in accordance with statutory accounting
practices, for the years ended December 31, 1997, 1996 and 1995, was $63,615,
$25,905 and $729, respectively.
B-30
<PAGE>
- --------------------------------------------------------------------------------
THE PENN MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS OF DOLLARS)
NOTE 10 - BUSINESS SEGMENT INFORMATION:
The operations of the Company are conducted principally through two business
units: Insurance and Broker-Dealer. The insurance operations offer a diverse
portfolio of life insurance products and both individual and group annuity
products. The Broker-Dealer operations provide broad financial and investment
services.
Assets are held directly by each business unit in amounts necessary to both
fund liabilities and to provide a margin to cover business risks.
The table below summarizes the information concerning the business units:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
REVENUES
Insurance...................................... $ 778,179 $ 765,210 $ 803,276
Broker-Dealer.................................. 291,156 241,809 201,037
---------- ---------- ----------
TOTAL......................................... $1,069,335 $1,007,019 $1,004,313
========== ========== ==========
PRETAX INCOME
Insurance...................................... $ 84,722 $ 43,765 $ 53,337
Broker-Dealer.................................. 42,255 33,178 24,082
---------- ---------- ----------
TOTAL......................................... $ 126,977 $ 76,943 $ 77,419
========== ========== ==========
<CAPTION>
DECEMBER 31,
---------------------
1997 1996
---------- ----------
<S> <C> <C> <C>
IDENTIFIABLE ASSETS
Insurance...................................... $8,784,570 $8,259,309
Broker-Dealer.................................. 582,308 497,739
---------- ----------
TOTAL......................................... $9,366,878 $8,757,048
========== ==========
</TABLE>
B-31
<PAGE>
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
---------------------------------
(a) Financial Statements included in Part B:
Financial Statements of The Penn Mutual Life Insurance Company:
Report of Independent Accountants
Statements of Financial Condition at December 31, 1997 and 1996
Statements of Operations and Surplus for the years
ended December 31, 1997, 1996 and 1995
Statements of Cash Flows for the years ended December 31, 1997
1996 and 1995
Notes to Financial Statements
(b) Exhibits
1. Resolutions of Executive Committee of Board of Trustees
of The Penn Mutual Life Insurance Company authorizing the
establishment of the Registrant. Filed herewith.
2. Not applicable
3. (a) Sales Support Agreement between The Penn Mutual Life
Insurance Company and Horner, Townsend & Kent, Inc., a
wholly-owned subsidiary of Penn Mutual. To be Filed by
Amendment.
(b) Distribution 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.
(c) Form of Agent's Agreement relating to broker-dealer
supervision. Filed herewith.
(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). Filed herewith.
(e) Form of Broker-Dealer Selling Agreement (for broker-
dealers with affiliated corporations licensed to sell
variable annuity contracts and/or variable life insurance
contracts under state insurance laws.) Filed herewith.
(f) Form of Addendum (Form 98-1) to Broker-Dealer Selling
Agreement. Filed herewith.
C-1
<PAGE>
4. (a) Individual Variable and Fixed Annuity Contract (Form
VAA-98). Filed herewith.
(b) Rider -- Guaranteed Minimum Death Benefit -- Rising
Floor (Form GDBRF-98). Filed herewith.
(c) Rider -- Guaranteed Minimum Death Benefit -- Step Up
(Form GDBSU-98). Filed herewith.
(d) Endorsement No. 1534-96 to Individual Variable and
Fixed Annuity Contract. Filed herewith.
(e) Endorsement No. 1542-97 to Individual Variable and
Fixed Annuity Contract. Filed herewith.
(f) Endorsement No. 1536-90 to Individual Variable and
Fixed Annuity Contract. Filed herewith.
5. Application (Form PM5790) for Individual Variable
Annuity and Fixed Contract. Filed herewith.
6. (a) Charter of The Penn Mutual Life Insurance Company.
Filed herewith.
(b) By-laws of The Penn Mutual Life Insurance Company.
Filed herewith.
7. None
8. (a) Fund Participation Agreement among The Penn Mutual Life
Insurance Company, TCI Portfolios, Inc.(renamed
American Century Variable Portfolios, Inc.) and
Investors Research Corporation (renamed American
Century Investment Management, Inc.). Filed herewith.
(b)(1) Form of Sales Agreement between The Penn Mutual Life
Insurance Company and Neuberger & Berman Advisers
Management Trust. Filed herewith.
(b)(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. Filed
herewith.
(b)(3) Amendment to Fund Participation Agreement between The
Penn Mutual Life Insurance Company and Neuberger &
Berman Advisers Management Trust. Incorporated herein
by reference to
C-2
<PAGE>
Exhibit 1.A(8)(b)(3) to Post-Effective Amendment No.5
to the Registration Statement of Penn Mutual Variable
Life Account I (File No. 33-54662) filed on April 30,
1997 (CIK No. 0000950109 & Accession No. 0000950109-97-
003328).
(c) Form of Sales Agreement between The Penn Mutual Life
Insurance Company and Penn Series Funds, Inc. Filed
herewith.
(d) Form of Participation Agreement between The Penn Mutual
Life Insurance Company, Variable Insurance Products
Fund and Fidelity Distributors Corporation. Filed
herewith.
(e) Form of Participation Agreement between The Penn Mutual
Life Insurance Company, Variable Insurance Products
Fund II and Fidelity Distributors Corporation. Filed
herewith.
(f) 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 (33-83120) filed on April 30, 1998
(CIK No. 0000928880 & Accession No. 0000950109-97-
003327).
9. Opinion of Counsel. To be Filed by Amendment.
10. (a) Consent of Ernst & Young LLP. Filed herewith.
(b) Consent of PricewaterhouseCoopers LLP. Filed herewith.
(c) Consent of Morgan, Lewis & Bockius LLP. Filed herewith.
11. Not applicable.
12. Not applicable.
13. Schedule of Computation of Performance Quotations set
forth in this Registration Statement. To be Filed by
Amendment.
14. (a) Powers of Attorney of Trustees (except Ms. Bloch and
Messrs. Notebaert and Rock). Incorporated herein by
reference to Exhibit 14 to Post-Effective Amendment No.
22 to the Registration Statement on Form N-4 of Penn
Mutual Variable Annuity Account III filed on April 29,
1997 (CIK No. 0000702184 & Accession No.
00001021408-97-000161).
C-3
<PAGE>
(b) Powers of Attorney of Edmond F. Notebaert and Robert H.
Rock . Incorporated herein by reference to Exhibit
14(b) to Post Effective Amendment No. 24 to the
Registration Statement on Form N-4 of Penn Mutual
Variable Annuity Account III filed on April 24, 1998
(CIK No. 0000702184 & Accession No. 000095109-98-
002717).
(c) Power of Attorney of Ms. Julia Chang Bloch. Filed
herewith.
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>
<S> <C>
ROBERT E. CHAPPELL NANCY S. BRODIE
Chairman of the Board and Chief Executive Vice President and Chief
Executive Officer and Member of Financial Officer
the Board of Trustees
DANIEL J. TORAN PETER M. SHERMAN
President and Chief Operating Senior Vice President and
Officer and Member of the Board of Chief Investment Officer
Trustees
LARRY L. MAST ANN M. STROOTMAN
Executive Vice President, Sales and Vice President and Controller
Marketing
HAROLD E. MAUDE, JR. STEVEN M. HERZBERG
Senior Vice President, Assistant Vice President
Independence Financial Network and Treasurer
RICHARD F. PLUSH JAMES MCELWAIN
Vice President and Senior Actuary Assistant Vice President, Retirement
and Investment Sales Operations
JOHN M. ALBANESE
Senior Vice President, Customer
Service and Information Systems
ROBERT P. DAVIS
FREDERICK M. ROCKOVAN Vice President and Chief Actuary
Vice President, Insurance Service
</TABLE>
The business address of the director and officers is The Penn Mutual
Life Insurance Company, Philadelphia, PA 19172.
C-4
<PAGE>
ITEM 26. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH THE DEPOSITOR OR
-------------------------------------------------------------------
REGISTRANT
----------
PENN MUTUAL WHOLLY-OWNED SUBSIDIARIES
-------------------------------------
<TABLE>
<CAPTION>
Corporation Principal Business State of Incorporation
- ----------- ------------------ ----------------------
<S> <C> <C>
The Penn Insurance and Life Insurance and Annuities Delaware
Annuity Company
Independence Capital Investment Adviser Pennsylvania
Management, Inc.
Penn Janney Fund, Inc. Investments Pennsylvania
INDEPENDENCE SQUARE Holding Company Pennsylvania
PROPERTIES, INC.
The Pennsylvania Trust Trust Company Pennsylvania
Company
INDEPENDENCE SQUARE PROPERTIES, INC.
WHOLLY-OWNED SUBSIDIARIES
-------------------------
Corporation Principal Business State of Incorporation
- ----------- ------------------ ----------------------
Penn Glenside Corporation Real Estate Investment Pennsylvania
Penn Wayne Corporation Real Estate Investment Pennsylvania
St. James Realty Corporation Real Estate Investment Pennsylvania
Investors' Mortgage Real Estate Investment Pennsylvania
Corporation
Christie Street Properties, Real Estate Investment Pennsylvania
Inc.
INDEPRO CORPORATION Real Estate Investment Delaware
Economic Resources Real Estate Investment Delaware
Associates, Inc.
WPI Investment Company Real Estate Investment Delaware
Hornor, Townsend & Kent, Registered Broker-Dealer Pennsylvania
Inc. and Investment Adviser
</TABLE>
C-5
<PAGE>
<TABLE>
<CAPTION>
Corporation Principal Business State of Incorporation
- ----------- ------------------ ----------------------
<S> <C> <C>
Penn Tallahassee
Corporation Real Estate Investment Florida
JANNEY MONTGOMERY SCOTT Registered Broker-Dealer Delaware
INC. and Investment Adviser
INDEPRO CORPORATION
WHOLLY-OWNED SUBSIDIARIES
-------------------------
Corporation Principal Business State of Incorporation
- ----------- ----------------- ----------------------
Indepro Property Fund I Real Estate Investment Delaware
Corporation
Indepro Property Fund II Real Estate Investment Delaware
Corporation
Commons One Corporation Real Estate Investment Delaware
West Hazleton, Inc. Real Estate Investment Delaware
JANNEY MONTGOMERY SCOTT, INC.
WHOLLY-OWNED SUBSIDIARIES
-------------------------
Corporation Principal Business State of Incorporation
- ----------- ------------------ ----------------------
Addison Capital Investment Adviser Pennsylvania
Management, Inc.
JMS Resources, Inc. Oil and Gas Development Pennsylvania
JMS Investor Services, Inc. Insurance Sales Delaware
</TABLE>
ITEM 27. NUMBER OF CONTRACT OWNERS
-------------------------
As of August 1, 1998, there were no contracts being registered under
this Registration Statement outstanding.
ITEM 28.
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,
C-6
<PAGE>
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. (S)(S) 1741-1750) authorizes
Pennsylvania corporations to provide indemnification to directors,
officers and other persons.
Penn Mutual owns a directors and officers liability insurance policy
covering liabilities directors and officers of Penn Mutual and its
subsidiaries may incur in acting as directors and officers.
Selling Agreements entered into by The Penn Mutual Life Insurance
Company ("Penn Mutual") and its subsidiary, Hornor, Townsend & Kent,
Inc. ("HTK") with securities brokers and insurance agents generally
provide for indemnification of Penn Mutual and HTK and their directors
and officers in the event of liability resulting from unauthorized
acts of the brokers and insurance agents.
Insofar as indemnification for liability arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or
otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against
public policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the
registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has
been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Act and will be
governed by the final adjudication of such issue.
ITEM 29. PRINCIPAL UNDERWRITERS
----------------------
Hornor Townsend & Kent, Inc. serves as principal underwriters of the
securities of the Registrant.
Hornor Townsend & Kent, Inc. serves as principal underwriter for
Addison Capital Shares, Inc., a registered investment company.
Hornor, Townsend & Kent, Inc. - Directors and Officers
------------------------------------------------------
John J. Gray, Director and Chairman of the Board
Harold E. Maude, Jr., Director
Nina M. Mulrooney, Director
C-7
<PAGE>
Norman T. Wilde, Jr., Director
Daniel J. Toran, Director
Ronald C. Zimmerman, President and Chief Executive Officer
Michael D. Sweeney, Assistant Vice President, Director of Compliance
and Secretary
Edward G. Pecelli - Assistant Vice President, Director of Sales and
Marketing
Laura M. Ritzko, Assistant Secretary
Henry S. Buck, Assistant Vice President and Assistant Treasurer
Barbara S. Wood, Senior Vice President, Finance and Treasurer
Bruce Ohrenich, Vice President, Sales
Joseph R. Englert, Assistant Vice President, Director of Operations
William H. Pentz, Counsel
Constance Flaville, Assistant Secretary
The principal business address of Messrs. Gray and Wilde is Janney,
Montgomery, Scott Inc., 1801 Market Street, Philadelphia,
Pennsylvania. The principal business address of Mses. Mulrooney and
Ritzko and Messrs. Maude, Toran and Pentz 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.
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;
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<PAGE>
(b) to include either (1) as part of any application to purchase a
contract or account offered by the prospectus, a space that an
applicant can check to request a statement of additional
information, or (2) a post card or similar written communication
affixed to or included in the prospectus that the applicant can
remove to send for a statement of additional information;
(c) to deliver any statement of additional information and any
financial statements required to be made available under Form N-4
promptly upon written or oral request.
Restrictions on withdrawals under Section 403(b) Contracts are imposed
in reliance upon, and in compliance with, a no-action letter issued by
the Chief of the Office of Insurance Products and Legal Compliance of
the Securities and Exchange Commission to the American Council of Life
Insurance on November 28, 1988.
The Penn Mutual Life Insurance Company represents that the fees and
charges deducted under the Individual 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 undesigned, thereunto duly authorized, in the Township of
Horsham and Commonwealth of Pennsylvania on this 3rd day of September, 1998.
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
3rd day of September, 1998.
Signature Title
--------- -----
/s/ ROBERT E. CHAPPELL Chairman of the Board of Trustees
----------------------
Robert E. Chappell and Chief Executive Officer
/s/ NANCY S. BRODIE Executive Vice President and
--------------------
Nancy S. Brodie Chief Financial Officer
*JULIA CHANG BLOCH Trustee
*JAMES A. HAGEN Trustee
*PHILLIP E. LIPPINCOTT Trustee
*JOHN F. MCCAUGHAN Trustee
*ALAN B. MILLER Trustee
*EDMOND F. NOTEBAERT Trustee
*ROBERT H. ROCK Trustee
*DANIEL J. TORAN Trustee
*NORMAN T. WILDE, JR. Trustee
*WESLEY S. WILLIAMS, JR. Trustee
*By:/s/ ROBERT E. CHAPPELL
-----------------------------------------
Robert E. Chappell, attorney-in-fact
<PAGE>
EXHIBIT INDEX
EX.99 B 1. Resolutions of Executive Committee of Board of Trustees of
The Penn Mutual Life Insurance Company authorizing the
establishment of the Registrant. Filed herewith.
EX.99 B 3. (c) Form of Agent's Agreement relating to broker-dealer
supervision. Filed herewith.
EX.99 B 3. (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). Filed
herewith.
EX.99 B 3. (e) Form of Broker-Dealer Selling Agreement (for broker-dealers
with affiliated corporations licensed to sell variable
annuity contracts and/or variable life insurance contracts
under state insurance laws.) Filed herewith.
EX.99 B 3. (f) Form of Addendum (Form 98-1) to Broker-Dealer Selling
Agreement. Filed herewith.
EX.99 B 4. (a) Individual Variable and Fixed Annuity Contract (Form VAA-
98). Filed herewith.
EX.99 B 4. (b) Rider -- Guaranteed Minimum Death Benefit -- Rising Floor
(Form GDBRF-98). Filed herewith.
EX.99 B 4. (c) Rider -- Guaranteed Minimum Death Benefit -- Step Up (Form
GDBSU-98). Filed herewith.
EX.99 B 4. (d) Endorsement No. 1534-96 to Individual Variable and Fixed
Annuity Contract. Filed herewith.
EX.99 B 4. (e) Endorsement No. 1542-97 to Individual Variable and Fixed
Annuity Contract. Filed herewith.
EX.99 B 4. (f) Endorsement No. 1536-90 to Individual Variable and Fixed
Annuity Contract. Filed herewith.
EX.99 B 5. Application (Form PM5790) for Individual Variable Annuity
and Fixed Contract. Filed herewith.
EX.99 B 6. (a) Charter of The Penn Mutual Life Insurance Company. Filed
herewith.
EX.99 B 6. (b) By-laws of The Penn Mutual Life Insurance Company. Filed
herewith.
EX.99 B 8. (a) Fund Participation Agreement among The Penn Mutual Life
Insurance Company, TCI Portfolios, Inc.(renamed American
Century Variable
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<PAGE>
Portfolios, Inc.) and Investors Research Corporation
(renamed American Century Investment Management, Inc.).
Filed herewith.
EX.99 B 8. (b)(1) Form of Sales Agreement between The Penn Mutual Life
Insurance Company and Neuberger & Berman Advisers
Management Trust. Filed herewith.
EX.99 B 8. (b)(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. Filed
herewith.
EX.99 B 8. (c) Form of Sales Agreement between The Penn Mutual Life
Insurance Company and Penn Series Funds, Inc. Filed
herewith.
EX.99 B 8. (d) Form of Participation Agreement between The Penn Mutual
Life Insurance Company, Variable Insurance Products
Fund and Fidelity Distributors Corporation. Filed
herewith.
EX.99 B 8. (e) Form of Participation Agreement between The Penn Mutual
Life Insurance Company, Variable Insurance Products
Fund II and Fidelity Distributors Corporation. Filed
herewith.
EX.99 B 10. (a) Consent of Ernst & Young LLP. Filed herewith.
EX.99 B 10. (b) Consent of PricewaterhouseCoopers LLP. Filed herewith.
EX.99 B 10. (c) Consent of Morgan, Lewis & Bockius LLP. Filed herewith.
EX.99 B 14. (c) Power of Attorney of Ms. Julia Chang Bloch. Filed
herewith.
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<PAGE>
Exhibit 1
THE PENN MUTUAL LIFE INSURANCE COMPANY
EXECUTIVE COMMITTEE
OF
THE BOARD OF TRUSTEES
Variable Annuity Contract,
--------------------------
Separate Account And Investment Company Resolutions
---------------------------------------------------
April 13, 1982
WHEREAS, it is advisable for the Company to establish a new separate
account and investment company for investments pursuant to variable annuity
contracts to be issued by the Company and it is advisable for the officers of
the Company to take all action necessary to comply with applicable regulations
and to provide for the successful operation of the variable annuity business, it
is
RESOLVED, that the Company hereby establishes, pursuant to Section 406.2 of
the Pennsylvania Insurance Company Law of 1921, as amended, a separate account,
designated Penn Mutual Variable Annuity Account III or such other name as the
officers of the Company deem appropriate (the "Separate Account");
RESOLVED FURTHER, the Separate Account shall be used for variable annuity
contracts (the "Contracts") which provide that part or all of the payments and
benefits thereunder will reflect the investment experience of investments held
in the Separate Account;
RESOLVED FURTHER, the officers of the Company are hereby, authorized to
take all action necessary to: (a) register the Separate Account as a unit
investment trust under the Investment Company Act of 1940; (b) register the
Contracts under the Securities Act of 1933 in such amounts as the officers of
the Company shall from time to time deem appropriate; (c) apply for such
exemptions from, and other orders pursuant to, the Investment Company Act of
1940 as the officers of the Company shall deem necessary or desirable; and
(d),take all other action . necessary or desirable to comply with the Investment
Company Act of 1940, the Securities Exchange Act of 1934, the Securities Act of
1933 and all other applicable state and federal laws in connection with offering
the Contracts and the operations of the Separate Account;
RESOLVED FURTHER, the officers of the Company are hereby authorized to take
all action necessary to: (a) sponsor and organize a corporation under the laws
of such state as they may determine to serve as an investment company for the
Separate Account; (b) cause the corporation to establish a money market fund;
(c) cause the corporation to be registered as a no-load, open-end, diversified
investment company under the Investment Company Act of 1940; (d) cause the
shares of the corporation to be registered under the Securities Act of 1933; and
(e) protect investments in the corporation.
<PAGE>
Exhibit 3(c)
AGENT'S AGREEMENT
VARIABLE ANNUITY
AND
VARIABLE LIFE INSURANCE
CONTRACTS
DATED__________________________
<PAGE>
AGENT'S AGREEMENT
VARIABLE ANNUITY AND VARIABLE LIFE INSURANCE CONTRACT SALES
THIS AGREEMENT entered into this __________ day of ______________, 19__
among THE PENN MUTUAL LIFE INSURANCE COMPANY, a Pennsylvania corporation ("Penn
Mutual"), PENN MUTUAL EQUITY SERVICES, INC., a Pennsylvania corporation (the
"Broker"), and
_____________________________, a soliciting agent of Penn Mutual ("Agent").
WITNESSETH
WHEREAS, Agent is engaged in the business of soliciting applications for
insurance policies and annuity contracts pursuant to a contract with Penn Mutual
or a general agent of Penn Mutual;
WHEREAS, Agent desires to solicit applications for variable annuity
contracts and/or variable life insurance contracts ("Contracts") issued by Penn
Mutual;
WHEREAS, the Contracts may be deemed to be securities under the Securities
Act of 1933, and applicable state laws, and the sale of such securities may be
deemed to be through an instrumentality of interstate commerce within the
meaning of Section 15(a) of the Securities Exchange Act of 1934 (the "1934
Act");
WHEREAS, the Broker is a wholly-owned subsidiary of Penn Mutual, is
registered as a broker-dealer under Section 15(b) of the 1934 Act and is a
member of the National Association of Securities Dealers, Inc. (the "NASD");
WHEREAS, Agent is, or expects shortly to be, duly qualified to act as a
representative of the Broker under the provisions of the 1934 Act and the
applicable rules of the NASD and has agreed to accept the supervision and
control of the Broker in connection with the sale of Contracts;
WHEREAS, the parties hereto desire to set forth the duties, authority and
responsibility of each of the parties in connection with the sale of Contracts;
NOW, THEREFORE, IT IS MUTUALLY AGREED AS FOLLOWS:
1. The Broker agrees to supervise diligently the securities activities of
Agent with respect to the sale of Contracts and agrees to establish, from time
to time, such rules and
2
<PAGE>
procedures as may be necessary to insure compliance with applicable federal and
state securities laws and rules of the NASD relating to the sale of Contracts.
2. Agent agrees to comply with such rules and regulations as the
Securities and Exchange Commission, the NASD or the Broker may establish from
time to time relating to the sale of Contracts, to observe all applicable
federal and state laws relating to Contracts and to submit to such supervision
regarding sales of Contracts as may be necessary to insure compliance herewith.
In addition to such other rules as may be established by the Broker from time to
time, Agent shall adhere to high standards of commercial honor and just and
equitable principles of trade in accordance with the Rules of Fair Practice of
the NASD and the interpretation of its Board of Governors in all respects in the
sale of Contracts, and shall not use any advertising or sales literature in
connection with the sales of Contracts other than that supplied by Penn Mutual
and approved by the Broker.
3. Agent agrees that he or she shall have authority to solicit
applications for Contracts only so long as (a) neither this Agreement nor
Agent's contract with Penn Mutual or with a general agent of Penn Mutual has
been terminated; (b) he or she continues to be qualified as an associated person
of the Broker pursuant to the 1934 Act and NASD rules; (c) he or she is
authorized to solicit applications for Contracts under the laws of the state in
which such solicitations are made; and (d) all such solicitations are made in
accordance with the requirements of federal and state securities laws and the
rules thereunder and the rules of the NASD.
4. The parties agree that:
(a) Except to the extent modified hereby, Agent's contract with Penn
Mutual or with a general agent of Penn Mutual shall continue in full force and
effect according to its terms.
(b) All commissions payable on sales of Contracts shall be paid by
Penn Mutual to Agent under Agent's contract with Penn Mutual or with a general
agent of Penn Mutual and nothing contained herein shall create any right, title
or interest in the Broker to such commissions nor any responsibility on the part
of the Broker for payment of such commissions.
(c) In the event the Broker shall notify Penn Mutual that Agent has
failed or refused to submit to supervision of the Broker or has otherwise failed
to meet the rules and standards imposed by the Broker, Agent's authority to
solicit applications for (and any other activity relating to) Contracts shall
immediately cease upon written or oral advice to Agent by the Broker or Penn
Mutual, notwithstanding anything to the contrary in Agent's contract with Penn
Mutual or with a general agent of Penn Mutual; provided, however, withdrawal of
such authority shall not, of itself, affect the authority of Agent to solicit
applications for other annuity contracts or insurance policies under his or her
contract with Penn Mutual or with a general agent of Penn Mutual.
3
<PAGE>
(d) Penn Mutual shall have the right to rely upon the advice of the
Broker in all matters relating to the supervision of securities activities of
Agent and the qualification of Agent to engage in such activities. Any decision
relating to such supervision or qualification by the Broker shall be final and
binding on the parties hereto.
5. This Agreement shall continue until terminated by any party on written
notice, except that in the event the Broker shall cease to be a registered
broker-dealer under the 1934 Act, or the Agent is no longer authorized to
solicit applications for Contracts under the terms and conditions hereof, this
Agreement shall immediately terminate.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the day and year first above written.
____________________________________
Agent
PENN MUTUAL EQUITY SERVICES, INC.
By _________________________________
____________________________________
Title
THE PENN MUTUAL LIFE INSURANCE
COMPANY
By _________________________________
___________________________________
Title
4
<PAGE>
Exhibit 3(d)
National Accounts - Broker-Dealers Licensed
to Sell Variable Annuities and/or Variable
Life Insurance under Federal Securities and
State Insurance Laws
BROKER-DEALER SELLING AGREEMENT
THE PENN MUTUAL LIFE INSURANCE COMPANY (hereinafter called "Penn
Mutual") and Hornor, Townsend & Kent, Inc. (hereinafter called
"Distributor") enter into this Agreement with __________________
_______________________ (hereinafter called "Broker-Dealer") on
this date ______________, 19_______ agree as follows:
W I T N E S S E T H :
WHEREAS, Penn Mutual is in the business of issuing annuity and
life insurance contracts to the public;
WHEREAS, Distributor is a wholly owned subsidiary of Penn Mutual,
is registered as a broker-dealer under the Securities Exchange
Act of 1934, is a member of the National Association of
Securities Dealers, Inc., and is assisting Penn Mutual in the
distribution of such contracts;
WHEREAS, Broker-Dealer is properly licensed to sell variable
annuity and variable life insurance contracts under the insurance
laws of the state(s) in which Broker-Dealer will act under this
agreement, is registered as a Broker-Dealer under the Securities
Exchange Act of 1934 and is a member of the National Association
of Securities Dealer, Inc.;
NOW THEREFORE, in consideration of these premises and mutual
covenants herein contained, the parties agree as follows:
1. Appointment of 1.1 Subject to the terms and conditions of this
agreement, Penn Mutual and Distributor appoint Broker-
Broker-Dealer Dealer as a non-exclusive Broker-Dealer for the
solicitation of applications for, and the servicing of,
annuity and/or variable life insurance contracts
identified in the schedule(s) attached hereto, and
Broker-Dealer accepts such appointment. The annuity
and/or variable life insurance contracts identified in
the schedules(s) are referred to herein as "Contracts".
1.2 Broker-Dealer and its representatives shall be
independent contractors as to Penn Mutual and
Distributor and, subject to the terms and conditions of
this agreement, free to exercise their own judgment as
to the time, place and means of performing all acts
hereunder. Nothing in this agreement is intended to
create a relationship of employer and employee as
between Penn Mutual or Distributor, on the one hand, and
representatives of Broker-Dealer on the other.
2. Sale of Contracts. 2.1 Broker-Dealer shall use its best efforts to solicit
applications for Contracts from persons for whom the
Contracts are suitable,and to service such Contracts in
accordance with the terms and conditions of this
agreement.
2.2 All applications for Contracts shall be made on
application forms authorized by Penn Mutual. Broker-
Dealer shall diligently review all such applications for
accuracy and completeness and shall take all reasonable
and appropriate measures to assure that applications
submitted to Penn Mutual are accurate and complete.
2.3 All payments collected by Broker-Dealer for Penn
Mutual shall be received in trust and shall be remitted
immediately together with all required documentation, to
Penn Mutual at the address indicated on the application
or to such other address as Penn Mutual may specify in
writing. All checks or money orders for payment under
Contracts shall be drawn to the order of Penn Mutual.
<PAGE>
2.4 All applications are subject to acceptance or
rejection by Penn Mutual in its sole discretion. Penn
Mutual may at any time in its sole discretion
discontinue issuing the Contracts or change the form and
content of new Contracts to be issued.
2.5 In soliciting applications for Contracts, Broker-
Dealer may not accept risks of any kind for or on behalf
of Penn Mutual and may not bind Penn Mutual by promise
or agreement or alter any Contract in any way.
3. Compensation. 3.1 In consideration of and as full compensation for the
services performed in accordance with this agreement,
Broker-Dealer will receive compensation from Penn Mutual
as set forth in the schedule(s) attached to this
agreement.
3.2. Should Penn Mutual for any reason return any
payment made under a Contract to the payor, Broker-
Dealer shall repay Penn Mutual the total amount of any
compensation which Penn Mutual may have paid with
respect to such payment.
3.3 Broker-Dealer may not withhold or deduct any part of
any premium or other payment due Penn Mutual for payment
of compensation under this agreement or for any other
purpose. The right of Broker-Dealer to receive any
compensation under this agreement shall at all times be
subordinate to the right of Penn Mutual or Distributor
to offset or apply such compensation against any
indebtedness of Broker-Dealer to Penn Mutual or
Distributor.
3.4 Penn Mutual may, in its sole discretion, change the
amount, terms and conditions, of compensation with
respect to payment received by Penn Mutual under
Contracts.
3.5 Penn Mutual shall not be obligated to pay any
compensation which would be in violation of applicable
laws of any jurisdiction, anything in this agreement to
the contrary notwithstanding.
4. Compliance With 4.1 Broker-Dealer and its representative shall not
solicit applications for Contracts in any state or
Insurance Laws jurisdiction unless they are duly licensed and qualified
to do so under the insurance laws and regulations of the
and Regulations. state or jurisdiction and unless Penn Mutual has
notified Broker-Dealer that the Contracts have been
approved for sale in the state or jurisdiction.
4.2 Penn Mutual may at any time, in its sole discretion,
withhold or withdraw authority of any representative of
Broker-Dealer to solicit applications for the Contracts.
Upon Penn Mutual giving written notice to Broker-Dealer
of its withdrawal of authority of a representative to
solicit applications, Broker-Dealer shall immediately
cause any such representative to cease all such
solicitations.
4.3 Broker-Dealer shall notify Penn Mutual in writing
immediately of the termination of the employment or
affiliation of an employee or representative who is an
appointed agent of Penn Mutual pursuant to this
agreement.
4.4 Broker-Dealer shall keep accurate and complete books
and records of all transactions relating to the
solicitation of applications and for servicing
Contracts. The books and records shall be made available
to Penn Mutual for inspection upon reasonable request.
4.5 If Broker-Dealer solicits applications for variable
life insurance contracts under this agreement, Broker-
Dealer and its representative shall observe the
Standards of Suitability for the Sale of Variable Life
Insurance set forth on the reverse side of the schedule
attached hereto identifying such contacts.
4.6 Broker-Dealer and its representatives shall comply
with all applicable insurance laws and regulations in
soliciting applications for and servicing Contracts.
Broker-Dealer shall be fully responsible for all acts of
its representatives in soliciting applications for and
servicing Contracts.
5. Compliance With 5.1 Broker-Dealer shall not solicit applications for
variable annuity or variable life insurance contracts
Securities Laws. unless Penn Mutual or Distributor has notified Broker-
Dealer that a registration statement required under the
Securities Act of 1933 is effective as to such contracts
and unless Broker-Dealer is duly registered as a broker-
dealer under the Securities Exchange Act of 1934, is a
member in good standing of the National Association of
Securities Dealers, Inc. and is duly licensed under any
applicable
<PAGE>
securities laws of the state or jurisdiction in which
Broker-Dealer engages in such activity.
5.2 Penn Mutual or Distributor shall furnish Broker-
Dealer with copies of the current prospectuses (and
current supplements thereto) required to be used in
soliciting application for variable annuity and/or
variable life insurance contracts.
5.3 Broker-Dealer and its representatives shall comply
with all applicable securities laws and regulations and
with the rules of the National Association of
Securities Dealers, Inc. in soliciting applications for
and servicing variable annuity and/or variable life
insurance contracts. Broker-Dealer shall be fully
responsible for all acts of its representatives in
soliciting applications for and servicing variable
annuity and/or variable life insurance contracts.
6. Advertisements, 6.1 Broker-Dealer shall not print, publish, distribute
or use any advertisements, sales literature or other
Sales Literature writing relating to the Contracts unless such
advertisements, sales literature or other writing shall
have first been approved in writing by Penn Mutual and
Distributor.
6.2 Broker-Dealer shall exercise care not to
misrepresent the Contracts or Penn Mutual and shall
make no oral or written representation which is
inconsistent with the terms of the Contracts or with
the information in any prospectus or sales literature
furnished by Penn Mutual or it misleading in any way.
7. Indemnification. 7.1 Broker-Dealer shall indemnify or hold harmless Penn
Mutual and Distributor and each director and officer of
Penn Mutual and Distributor against any losses, claims,
damages or liabilities, including but not limited to
reasonable attorneys' fees and court cost to which Penn
Mutual or Distributor and any such director or officer
may become subject, under the Securities Act of 1933 or
otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out
of or are based upon any unauthorized use of sales
materials or any verbal or written misrepresentations
or any unlawful sales practices, or the failure of
Broker-Dealer, its officers, employees or
representative to comply with the provisions of this
agreement or the willful misfeasance, bad faith,
negligence or misconduct of Broker-Dealer, its
officers, employees, or representatives in the
solicitation of applications for and the servicing of
Contracts.
7.2 Penn Mutual and Distributor shall indemnify and
hold harmless Broker-Dealer and each officer or
director of Broker-Dealer against any losses, claims,
damages or liabilities, joint or several, including but
not limited to reasonable attorneys' fees and court
cost, to which Broker-Dealer or such officer or
director becomes subject, under the Securities Act of
1933 or otherwise, insofar as such losses, claims,
damages or liabilities (or actions in respect thereof)
arise out of or are based upon any untrue statement or
alleged untrue statement of a material fact, required
to be stated therein or necessary to make the
statements therein not misleading, contained in any
registration statement or any post-effective amendment
or supplement to the prospectus, or in any sales
material written by Penn Mutual or Distributor.
7.3 In the event Penn Mutual suffers a loss resulting
from Broker-Dealer activities, Broker-Dealer hereby
assigns any proceeds received under its fidelity bond
to Penn Mutual to the extent of such losses. If there
is any deficiency amount, whether due to a deductible
or otherwise, Broker-Dealer shall promptly pay Penn
Mutual such amount on demand and Broker-Dealer shall
indemnify and hold harmless Penn Mutual from any such
deficiency and from the costs of collection thereof
(including reasonable attorneys' fees).
8. Complaints, 8.1 Broker-Dealer shall promptly notify Penn Mutual and
Distributor of any allegation that Broker-Dealer or any
Investigations of its representatives violated any law, regulation or
rule in soliciting applications for or servicing
& Proceedings. Contracts,and shall provide Penn Mutual with full
details, including copies of all legal documents
pertaining thereto.
8.2 Broker-Dealer shall cooperate fully with Penn
Mutual and Distributor in any regulatory investigation
or proceeding or judicial proceeding involving the
solicitation of application for and servicing Contracts
by Broker-Dealer or any of its representatives.
<PAGE>
9. Nonwaiver. 9.1 Forbearance by Penn Mutual or Distributor to enforce
any rights under this agreement shall not be construed
as a waiver of any of the terms and conditions of this
agreement and the same shall remain in full force and
effect. No waiver of any provision of this agreement
shall be deemed to be a waiver of any other provision,
whether or not similar, nor shall any waiver of a
provision of this agreement be deemed to constitute a
continuing waiver.
10. Amendment. 10.1 Penn Mutual reserves the right to amend this
Agreement at any time. Broker-Dealer's submission of an
application for a Contract after notice of any such
amendment shall constitute agreement of Broker-Dealer to
such amendment.
11. Termination and 11.1 This agreement may be terminated by any party, with
or without cause, upon giving written notices to the
Assignment. other parties. This agreement shall automatically
terminate if Broker-Dealer is adjudicated as bankrupt or
avails itself of any insolvency act or if a permanent
receiver or trustee in bankruptcy is appointed for the
property of Broker-Dealer. Upon termination of this
agreement, with or without cause, all authorizations,
rights and obligations shall cease, except the rights
and obligations set forth in sections 7 and 8 of this
agreement and the obligations to settle account
hereunder, including the immediate forwarding of all
payments received by Broker-Dealer under Contract to
Penn Mutual, and except as may be expressly stated
otherwise in this agreement.
11.2 This agreement may not be assigned without the
written consent of all parties.
12. Governing Law. 12.1 This agreement shall be construed in accordance
with and governed by the laws of the Commonwealth of
Pennsylvania.
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed by their officers designated
below on the day and year first written.
___________________________________________________
___________________
Name of Broker-Dealer
By:
___________________________________________________
__________________
Signature
___________________________________________________
________________
Name
___________________________________________________
________________
<PAGE>
Title
THE PENN MUTUAL LIFE INSURANCE COMPANY
By:
___________________________________________________
_______________
Signature
___________________________________________________
________________
Name
___________________________________________________
________________
Title
HORNOR, TOWNSEND & KENT, INC.
By:
___________________________________________________
Signature
___________________________________________________
Name
___________________________________________________
Title
<PAGE>
SCHEDULE A TO THE FOLLOWING SELLING AGREEMENTS:
BROKER-DEALER SELLING AGREEMENT
BROKER-DEALER SELLING AGREEMENT - FORM A-2
CORPORATE INSURANCE AGENT
SELLING AGREEMENT - FORM A-1
(EDITION OF OCTOBER, 1997)
Subject to the conditions and limitations of the
Broker's Selling Agreement, Broker is authorized to
solicit applications for the following contracts
issued by Penn Mutual (hereinafter referred to as
"contracts"), prior to termination of Broker's
Selling Agreement. No fee shall be paid with respect
to a purchase payment made after the Broker's Selling
Agreement has been terminated. Amounts transferred
among contracts are not purchase payments within the
meaning of the Broker's Selling Agreement or this
Schedule. This Schedule replaces and supersedes any
and all prior Schedules attached to the Broker's
Selling Agreement.
1. INDIVIDUAL FIXED ANNUITY CONTRACTS - DIVERSIFIER
II Subject to the conditions and limitations of the
Broker's Selling Agreement and this Schedule, Broker
shall be paid a fee for placing or servicing a
Diversifier II Individual Variable and Fixed Annuity
Contract equal to 6% of any purchase payment made
under such contract and a fee for placing and
servicing a Diversifier II Fixed-Only Annuity
Contract equal to 5% of any purchase payment under
such contract. If the Annuitant or Contractowner
(other than a trustee of a qualified plan) is over
age 81 on the date the Diversifier II contract is
issued, the fee shall be limited as follows: 80% of
such fee if the Annuitant or contractowner is age 82;
60% of such fee if the Annuitant or contractowner is
age 83; 40% of such fee if the Annuitant or
contractowner is age 84; 20% of such fee if the
Annuitant or contractowner is age 85.
2. INDIVIDUAL FIXED ANNUITY CONTRACTS - TRADEWIND
Subject to the conditions and limitations of the
Broker's Selling Agreement and this Schedule, Broker
shall be paid a fee for placing or servicing
TradeWind Annuity (TM) Contract equal to 6% of any
purchase payment under such contact. If the Annuitant
or Contractowner (other than a trustee of a qualified
plan) is over age 81 on the date the TradeWind (TM)
contract is issued, the fee shall be limited as
follows: 80% of such fee if the Annuitant or
contractowner is age 82; 60% of such fee if
<PAGE>
the Annuitant or contractowner is age 83; 40% of such
fee if the Annuitant or contractowner is age 84; 20%
of such fee if the Annuitant or contractowner is age
85.
3. SINGLE PREMIUM IMMEDIATE ANNUITIES Subject to the
conditions and limitations of the Broker's Selling
Agreement and this Schedule, Broker shall be paid a
fee for placing a Single Premium Immediate Annuity
equal to 4% of the single premium received under such
contract.
4. GROUP COVERAGES Subject to the conditions and
limitations of the Broker's Selling Agreement and
this Schedule, Broker shall be paid a fee for
placing, or servicing group annuity policies,
specifically, a group annuity contract of Penn Mutual
on Contract Forms D1-1088 (N.Y.), D1-1088A (N.Y.) and
any other policies in the D1-1088 series, (a contract
on any such form being hereinafter called a
"Diversifier I Flex Group Annuity"), placed in force
through Broker under this agreement in amounts
equivalent to a percentage of such premiums. Such
percentage or table of percentages shall be as agreed
in amounts equivalent to a percentage of such
premiums. Said written documentation of Broker's fee
shall be submitted to Penn Mutual with the
Diversifier I Flex Group Annuity application on a
form signed by the plan trustee and agreed to by the
Penn Mutual home office. No compensation shall be
payable pursuant to this agreement which would be in
excess of the limits of Section 4228 of the Insurance
Law of the State of New York for the sale of
insurance products.
5. VARIABLE ESTATEMAX
During the period the Broker-Dealer Selling Agreement
is in effect, and subject to and in accordance with
the provisions thereof, Broker-Dealer shall be
compensated as follows with respect to a policy of
Penn Mutual know as the Last Survivor Flexible
Premium Adjustable Variable Life Insurance Policy
(Policy Forms VALJ-94(S) and VALJ-94(U)), (a policy
on any such form being hereinafter called a "Variable
EstateMax Policy"), that is placed in force under
this agreement. With respect to each Variable
EstateMax Policy, Broker-Dealer may elect to receives
fees under Option 1 or 2. If no option is selected
the default will be Option 1. Once each policy is in
force, no changes will be permitted to the choice of
compensation.
A. OPTION 1.
---------
(a) Basic First Year Compensation
-----------------------------
A fee for the first policy year of 50% of A plus 2.0% of B where A is
equal to the lesser of:
(i) the premium paid in year 1
(ii) the target premium for the policy, or
(iii) the lesser of the premium scheduled to be paid in year 1 or 2,
and B is equal to the excess of the premium paid in year 1 over A.
Target premiums are maintained on file in Penn Mutual's Home Office.
<PAGE>
(b) Renewal Compensation
--------------------
A fee for the second through fifteenth years equal to 2.0% of the
premium paid for the policy year in question, and a fee for the
sixteenth and later policy years equal to 1.2% of the premium paid for
the policy year in question.
B. OPTION 2
--------
(a) Basic First Year Compensation
-----------------------------
Basic First Year Compensation is the same as in Option 1.
(b) Renewal Compensation
--------------------
Additionally, for the second through tenth policy years equal to 1.0% of
the premium paid for the policy year in question, and no fee for the
eleventh and later policy years. Additionally, for the second through
tenth policy years, an fee equal to 0.008333% of the policy value on
each monthly anniversary. Monthly anniversary is defined as the day in
each calendar month which is the same day of the month as the Policy
Date. For the eleventh and later policy years, fee equal to 0.020833% of
the policy value on each monthly anniversary. Policy value is as defined
in the policy.
C. EXPENSE ALLOWANCE
-----------------
For each calendar month while Broker-Dealer Selling Agreement is en
effect and before its termination, Broker-Dealer shall be entitled to the
expense from Penn Mutual described below, provided that the amount payable
as an expense allowance shall be limited to the total of reasonable
business expenses incurred by Broker-Dealer that are directly related to
the sale or service of Penn Mutual policies, and provided further that no
such allowance shall be payable to Broker-Dealer that would cause the total
of such allowances to exceed the limits of Section 4228 of the Insurance
Law of the State of New York. No payment pursuant to this agreement will be
used by Broker-Dealer to effect compensation for the sale of insurance in
excess of the limits of said Section 4228. Such allowance shall be 60% of
an amount equal to the Basic First Year Compensation during the calendar
month for which this allowance is being calculated.
D. COMPENSATION CHARGEBACKS
------------------------
A percentage of total compensation (including expense allowance, if any)
will be charged back for lapses, surrenders or if a policy is unwound
during the first policy year and during the 12 policy months following an
increase. The percentage is shown below and will vary depending on the
policy month of lapse/surrender/unwind.
Month of Chargeback
Lapse/Surrender/ Percentage
Unwind
------
0-6 100%
7-12 50%
6. CORNERSTONE VARIABLE UNIVERSAL LIFE
During the period the Broker-Dealer Selling Agreement is in effect, and subject
to and in accordance with the provisions thereof, Broker-Dealer shall be
compensated as follows with respect to a policy of Penn Mutual know as the
Flexible Premium Adjustable Variable Life Insurance Policy (Policy Forms VU-
90(S) and VU-90(U)), (a policy on any such form being hereinafter called a
"Cornerstone VUL Policy"), that is placed in force through Agent under this
agreement:
A. OPTION 1
--------
(a) Basic First Year Compensation
-----------------------------
A fee for the first policy year of 50% of A plus 3.75% of B where
A is equal to the lesser of:
(i) the premium paid in year 1
(ii) the target premium for the policy, or
(iii) the lesser of the premium scheduled to be paid in year
1 or 2, and B is equal to the excess of the premium paid in
year 1 over A. Target premiums are maintained on file in Penn
Mutual's Home Office.
<PAGE>
If the insured is over attained age 75 when the policy is issued, the
fee for the first policy year will be limited to 35% of A plus 3.75%
of B.
(b) Renewal Compensation
--------------------
A fee for the second and third policy years of 4% (4.0% where the
insured has an attained age greater than 75) of an amount equal to
premium paid for the policy year in question, a fee for the fourth
through fifteenth years, equal to 4.0% of the premium paid for the
policy year in question, and a fee for the sixteenth and later policy
years equal to 1.2% of the premium paid for the policy year in question.
(c) Basic Compensation on Increases
-------------------------------
In the case of an increase in the Specified Amount of insurance, a fee
of 46% (31% where the insured has an attained age greater than 75 of C
where: C is equal to the lesser of:
(i) the premium paid in the twelve months following the
effective date of the increase,
(ii) the target premium for the amount of the increase, or
(iii) the increase in the scheduled premium.
B. OPTION 2
--------
(a) Basic First Year Compensation
-----------------------------
Basic First Year Compensation is the same as in Option 1.
(b) Renewal Compensation
--------------------
A fee for the second through tenth policy years equal to 3.0% of the
premium paid for the policy year in question, and no fee for the
eleventh and later policy years. Additionally, for the second through
tenth policy years, an fee equal to 0.008333% of the policy value on
each monthly anniversary. Monthly anniversary is defined as the day in
each calendar month which is the same day of the month as the Policy
Date. For the eleventh and later policy years, fee equal to 0.020833% of
the policy value on each monthly anniversary. Policy value is as defined
in the policy.
(c) Basic Compensation on Increases
-------------------------------
In the case of an increase in the Specified Amount of insurance, a fee
of 47% (32% where the insured has an attained age greater than 75) of C
where:
C is equal to the lesser of:
(i) the premium paid in the twelve months following the effective
date of the increase
(ii) the target premium for the amount of the increase, or
(iii) the increase in the scheduled premium.
C. EXPENSE ALLOWANCE
-----------------
For each calendar month while Broker-Dealer Selling Agreement is en effect
and before its termination, Broker-Dealer shall be entitled to the expense
from Penn Mutual described below, provided that the amount payable as an
expense allowance shall be limited to the total of reasonable business
expenses incurred by Broker-Dealer that are directly related to the sale or
service of Penn Mutual policies, and provided further that no such
allowance shall be payable to Broker-Dealer that would cause the total of
such allowances to exceed the limits of Section 4228 of the Insurance Law
of the State of New York. No payment pursuant to this agreement will be
used by Broker-Dealer to effect compensation for the sale of insurance in
excess of the limits of said Section 4228. Such allowance shall be 60% of
an amount equal to the Basic First Year Compensation during the calendar
month for which this allowance is being calculated.
D. COMPENSATION CHARGEBACKS
------------------------
A percentage of total compensation (including expense allowance, if any)
will be charged back for lapses, surrenders or if a policy is unwound
during the first policy year and during the 12 policy months following an
increase. The percentage is shown below and will vary depending on the
policy month of lapse/surrender/unwind.
Month of Chargeback
Lapse/Surrender/ Percentage
Unwind
------
0-3 100%
<PAGE>
4-6 75%
7-9 50%
10-12 25%
7. CORNERSTONE VARIABLE UNIVERSAL LIFE II
During the period the Broker-Dealer Selling Agreement is in effect, and subject
to and in accordance with the provisions thereof, Broker-Dealer shall be paid a
fee for soliciting applications and servicing a policy of Penn Mutual known as
the Flexible Premium Adjustable Variable Universal Life Insurance Policy (Policy
Forms VU-94(S) and VU-94(U)), (a policy on any such form being hereinafter
called a "Cornerstone VUL II Policy"), that is placed in force before
termination of this agreement. With respect to each Cornerstone VUL II Policy,
Broker-Dealer may elect to receives fees under Option 1 or 2. If no option is
selected the default will be Option 1. Once each policy is in force, no changes
will be permitted to the choice of compensation.
A. OPTION 1
--------
(a) Basic First Year Compensation
-----------------------------
A fee for the first policy year equal to 50% of A plus 3.3% of B where
A is equal to the lesser of:
(i) the premium paid in year 1
(ii) the target premium for the policy, or
(iii) the lesser of the premium scheduled to be paid in year 1
or 2, and
B is equal to the excess of the premium paid in year 1 over A. Target
premiums are maintained on file in Penn Mutual's Home Office. If the
insured is over attained age 75 when the policy is issued, the fee for
the first policy year will be limited to 35% of A plus 3.3% of B.
(b) Renewal Compensation
--------------------
A fee for the second through fifteenth years equal to 3.0% of the
premium paid for the policy year in question, and a fee for the
sixteenth and later policy years equal to 1.2% of the premium paid for
the policy year in question.
(c) Basic Compensation on Increases
-------------------------------
In the case of an increase in the Specified Amount of insurance, a fee
of 47% (32% where the insured has an attained age greater than 75) of C
where:
C is equal to the lesser of:
(i) the premium paid in the twelve months following the effective
date of the increase
(ii) the target premium for the amount of the increase, or
(iii) the increase in the scheduled premium.
B. OPTION 2
--------
(a) Basic First Year Compensation
-----------------------------
Basic First Year Compensation is the same as in Option 1.
(b) Renewal Compensation
--------------------
A fee for the second through tenth policy years equal to
2.0% of the premium paid for the policy year in question, and no fee for
the eleventh and later policy years. Additionally, for the second
through tenth policy years, an fee equal to 0.008333% of the policy
value on each monthly anniversary. Monthly anniversary is defined as the
day in each calendar month which is the same day of the month as the
Policy Date. For the eleventh and later policy years, fee equal to
0.020833% of the policy value on each monthly anniversary. Policy value
is as defined in the policy.
(c) Basic Compensation on Increases
-------------------------------
In the case of an increase in the Specified Amount of insurance, a fee
of 47% (32% where the insured has an attained age greater than 75) of C
where:
C is equal to the lesser of:
(i) the premium paid in the twelve months following the effective
date of the increase
(ii) the target premium for the amount of the increase, or
(iii) the increase in the scheduled premium.
C. EXPENSE ALLOWANCE
-----------------
<PAGE>
For each calendar month while Broker-Dealer Selling Agreement is
en effect and before its termination, Broker-Dealer shall be
entitled to the expense from Penn Mutual described below, provided
that the amount payable as an expense allowance shall be limited to
the total of reasonable business expenses incurred by Broker-Dealer
that are directly related to the sale or service of Penn Mutual
policies, and provided further that no such allowance shall be
payable to Broker-Dealer that would cause the total of such
allowances to exceed the limits of Section 42289 of the Insurance
Law of the State of New York. No payment pursuant to this agreement
will be used by Broker-Dealer to effect compensation for the sale of
insurance in excess of the limits of said Section 4228. Such
allowance shall be 60% of an amount equal to the Basic First Year
Compensation during the calendar month for which this allowance is
being calculated.
D. COMPENSATION CHARGEBACKS
------------------------
A percentage of total compensation (including expense allowance, if
any) will be charged back for lapses, surrenders or if a policy is
unwound during the first policy year and during the 12 policy months
following an increase. The percentage is shown below and will vary
depending on the policy month of lapse/surrender/unwind.
Month of Lapse/ Chargeback
Surrender/ Unwind Percentage
----------------- ----------
0-3 100%
4-6 75%
7-9 50%
10-12 25%
8. REPLACEMENT OF PENN MUTUAL POLICES
It is agreed that the compensation otherwise payable to Broker-Dealer for any
policy shall be reduced in accordance with the replacement control program in
effect at the time such policy is placed in force. It is anticipated that such
replacement control program may be changed form time to time as to policies in
force after such change.
9. POLICY DELIVERY RECEIPT
It is agreed that the Broker-Dealer shall be responsible for obtaining a signed
policy delivery receipt in accordance with Company policy.
<PAGE>
Exhibit 3(e)
PENN THE PENN MUTUAL LIFE INSURANCE COMPANY
MUTUAl Independence Square, Philadelphia, PA 19172
- --------------------------------------------------------------------------------
National Accounts - Corporate Insurance Agents
Licensed to Sell Variable Annuities and/or Variable
Life Insurance under State Insurance Laws
(Companion Agreement - Form A-1)
CORPORATE INSURANCE AGENT SELLING AGREEMENT
THE PENN MUTUAL LIFE INSURANCE COMPANY (hereinafter
called "Penn Mutual"), and Horner Townsend & Kent, Inc.
(hereinafter called "Distributor") enter into this
Agreement with __________________________________
(hereinafter called "Corporate Insurance Agent") on
this date ______________, 19____ agrees as follows:
WITNESSETH:
WHEREAS, Penn Mutual is in the business of issuing
annuity and life insurance contracts to the public;
WHEREAS, Distributor is a wholly owned subsidiary of
Penn Mutual, is registered as a broker-dealer under the
Securities Exchange Act of 1934, is a member of the
National Association of Securities Dealers, Inc., and
is assisting Penn Mutual in the distribution of such
contracts;
WHEREAS, Corporate Insurance Agent is properly licensed
under the insurance laws of the state(s) in which it
will act under this agreement;
WHEREAS, Corporate Insurance Agent is affiliated with
______________________________ a corporation which is
registered as a broker-dealer under the Securities
Exchange Act of 1934 and is a member of the National
Association of Securities Dealers, Inc. (hereinafter
referred to as "Broker-Dealer");
WHEREAS, the parties desire to enter into an
arrangement under which Corporate Insurance Agent and
Broker-Dealer agree to sell certain annuity and life
insurance contracts issued by Penn Mutual;
NOW THEREFORE, in consideration of these premises and
mutual covenants herein contained, the parties agree as
follows:
- --------------------------------------------------------------------------------
1. APPOINTMENT OF 1.1 Subject to the terms and conditions of this
CORPORATE agreement, Penn Mutual and Distributor appoint
INSURANCE AGENT. Corporate Insurance Agent as a non-exclusive agent
for the solicitation of applications for, and the
servicing of, annuity Insurance Agent and/or
variable life insurance contracts identified in
the schedule(s) attached hereto, and Corporate
Insurance Agent accepts such appointment. The
annuity and/or variable life insurance contracts
identified in the schedules(s) are referred to
herein as "Contracts".
1.2 Corporate Insurance Agent and its representatives
shall be independent contractors as to Penn Mutual
and Distributor and, subject to the terms and
conditions of this agreement, free to exercise
their own judgment as to the time, place and means
of performing all acts hereunder. Nothing in this
agreement is intended to create a relationship of
employer and employee as between Penn Mutual or
Distributor, on the one hand, and representatives
of Corporate Insurance Agent on the other.
- --------------------------------------------------------------------------------
2. INSURANCE AND 2.1 The sale of variable annuity and variable life
SECURITIES insurance contracts identified in the schedule(s)
REGULATIONS- attached hereto is subject to and regulated under
COORDINATION OF federal securities laws (and may also be subject
AGREEMENTS. to and regulated under certain state securities
laws), in addition to state insurance laws. It is
understood and agreed that representatives of
Corporate Insurance Agent shall be registered
representative of Broker-Dealer and that Broker-
Dealer shall contemporaneously enter into a
Broker-Dealer Selling Agreement with Penn Mutual
and Distributor covering the sale of such
contracts. This agreement and the Broker-Dealer
Selling Agreement shall govern the sales of such
contracts.
- --------------------------------------------------------------------------------
3. SALE OF CONTRACTS. 3.1 Corporate insurance Agent shall use its best
efforts to solicit applications for Contracts from
persons for whom the Contracts are suitable, in
accordance with the terms and conditions of this
agreement.
<PAGE>
3.2 All applications for Contracts shall be made on
applications forms authorized by Penn Mutual.
Corporate Insurance Agent shall diligently review
all such applications for accuracy and
completeness and shall take all reasonable and
appropriate measures to assure that applications
submitted to Penn Mutual are accurate and
complete.
3.3 All purchase payments collected by Corporate
Insurance Agent for Penn Mutual shall be received
in trust and shall be remitted immediately
together with the application and any other
required documentation, to Penn Mutual at the
address indicated on the application or to such
other address as Penn Mutual may specify in
writing. All checks or money orders for payments
under Contracts shall be drawn to the order of
Penn Mutual.
3.4 All applications are subject to acceptance or
rejection by Penn Mutual in its sole discretion.
Penn Mutual may at any time in its sole discretion
discontinue issuing the Contracts or change the
form and content of new Contracts to be issued.
3.5 In soliciting applications for Contracts,
Corporate Insurance Agent may not accept risk of
any kind for or on behalf of Penn Mutual and may
not bind Penn Mutual by promise or agreement or
alter any Contract in any way.
- --------------------------------------------------------------------------------
4. COMPENSATION. 4.1 In consideration of and as full compensation for
the services performed in accordance with this
agreement, Corporate Insurance Agent will receive
compensation from Penn Mutual as set forth in the
schedule(s) attached to this agreement. The
schedule(s) shall be signed and dated by the
parties.
4.2 Should Penn Mutual for any reason return any
payment made under a Contract to the payor,
Corporate Insurance Agent shall repay Penn Mutual
the total amount of any compensation which Penn
Mutual may have paid with respect to such payment.
4.3 Corporate Insurance Agent may not withhold or
deduct any part of any premium or other payment
due Penn Mutual for payment of compensation under
this agreement or for any other purpose. The right
of Corporate Insurance Agent to receive any
compensation under this agreement shall at all
times be subordinate to the right of Penn Mutual
or Distributor to offset or apply such
compensation against any indebtedness of Corporate
Insurance Agent to Penn Mutual or Distributor.
4.4 Penn Mutual may, in its sole discretion, change
the amount, terms and conditions, of compensation
set forth in the schedule(s) attached to this
agreement, with respect to payment received by
Penn Mutual under Contracts.
4.5 Penn Mutual shall not be obligated to pay any
compensation which would be in violation of
applicable laws of any jurisdiction, anything in
this agreement to the contrary notwithstanding.
4.6 With respect to compensation paid in connection
with the sale of variable annuity and/or variable
life insurance contracts, Corporate Insurance
Agent shall, on behalf of Broker-Dealer, maintain
such books and records as are necessary for
Broker-Dealer to comply with applicable record
keeping requirements under federal and state
securities laws and under the rules of the
National Association of Securities Dealer, Inc.
Such records shall be maintained and preserved in
conformity with the requirements of Rules 17a-3
and 17a-4 under the Securities Exchange Act of
1934, to the extent that such requirements are
applicable to the variable annuity and/or variable
life contracts. Further, with respect to such
records, Corporate Insurance Agent shall be
subject to examination by the Securities and
Exchange Commission in accordance with Section
17(a) of the Securities Exchange Act of 1934.
- --------------------------------------------------------------------------------
5. COMPLIANCE WITH 5.1 Corporate Insurance Agent and its representative
INSURANCE LAWS shall not solicit applications for Contracts in
AND REGULATIONS. any state or jurisdiction unless they are duly
licensed and qualified to do so under the
insurance laws and regulations of the state or
jurisdiction and unless Penn Mutual has notified
Corporate Insurance Agent that the Contracts have
been approved for sale in the state or
jurisdiction.
5.2 Penn Mutual may at any time in its sole discretion
withhold or withdraw authority of any
representative of Corporate Insurance Agent to
solicit applications for the Contracts. Upon Penn
Mutual giving written notice to Corporate
Insurance Agent of its withdrawal of authority of
a representative to solicit applications,
Corporate Insurance Agent shall immediately cause
any such representative to cease all such
solicitations.
<PAGE>
5.3 Corporate Insurance Agent shall notify Penn Mutual
in writing immediately of the termination of the
employment or affiliation of an employee or
representative who is an appointed agent of Penn
Mutual pursuant to this agreement.
5.4 Corporate Insurance Agent shall keep accurate and
complete books and records of all transactions
relating to the solicitation of applications and
for servicing Contracts. The books and records
shall be made available to Penn Mutual for
inspection upon reasonable request.
5.5 If Corporate Insurance Agent solicits applications
for or servicing variable life insurance contracts
under this agreement, Corporate Insurance Agent
and its representative shall observe the Standards
of Suitability for the Sale of Variable Life
Insurance set forth on the reverse side of the
schedule attached hereto identifying such
contacts.
5.6 Corporate Insurance Agent and its representatives
shall comply with all applicable insurance laws
and regulations in soliciting applications for and
servicing Contracts. Corporate Insurance Agent
shall be fully responsible for all acts of its
representatives in soliciting applications for and
servicing Contracts.
- --------------------------------------------------------------------------------
6. ADVERTISEMENTS, 6.1 Corporate Insurance Agent shall not print,
SALES LITERATURE publish, distribute or use any advertisements,
AND OTHER sales literature or other writing relating to the
COMMUNICATIONS. Contracts unless such advertisements, sales
literature or other writing shall have first been
approved in writing by Penn Mutual and
Distributor.
6.2 Corporate Insurance Agent shall exercise care not
to misrepresent the Contracts or Penn Mutual and
shall make no oral or written representation which
is inconsistent with the terms of the Contracts or
with the information in any prospectus or sales
literature furnished by Penn Mutual or it
misleading in any way.
- --------------------------------------------------------------------------------
7. INDEMNIFICATION. 7.1 Corporate Insurance Agent shall indemnify or hold
harmless Penn Mutual and Distributor and each
director and officer of Penn Mutual and
Distributor against any losses, claims, damages or
liabilities, including but not limited to
reasonable attorneys' fees and court cost to which
Penn Mutual or Distributor and any such director
or officer may become subject, under the
Securities Act of 1933 or otherwise, insofar as
such losses, claims, damages or liabilities (or
actions in respect thereof) arise out of or are
based upon any unauthorized use of sales materials
or any verbal or written misrepresentations or any
unlawful sales practices, or the failure of
Corporate Insurance Agent, its officers, employees
or representative to comply with the provisions of
this agreement or the willful misfeasance, bad
faith, negligence or misconduct of Corporate
Insurance Agent, its officers, employees, or
representatives in the solicitation of
applications for and the servicing of Contracts.
7.2 Penn Mutual and Distributor shall indemnify and
hold harmless Corporate Insurance Agent and each
officer or director of Corporate Insurance Agent
against any losses, claims, damages or
liabilities, joint or several, including but not
limited to reasonable attorneys' fees and court
cost, to which Corporate Insurance Agent or such
officer or director becomes subject, under the
Securities Act of 1933 or otherwise, insofar as
such losses, claims, damages or liabilities (or
actions in respect thereof) arise out of or are
based upon any untrue statement or alleged untrue
statement of a material fact, required to be
stated therein or necessary to make the statements
therein not misleading, contained in any
registration statement or any post-effective
amendment or supplement to the prospectus, or in
any sales material written by Penn Mutual or
Distributor.
7.3 In the event Penn Mutual suffers a loss resulting
from Corporate Insurance Agent activities,
Corporate Insurance Agent hereby assigns any
proceeds received under its fidelity bond to Penn
Mutual to the extent of such losses. If there is
any deficiency amount, whether due to a deductible
or otherwise, Corporate Insurance Agent shall
promptly pay Penn Mutual such amount on demand and
Corporate Insurance Agent shall indemnify and hold
harmless Penn Mutual from any such deficiency and
from the costs of collection thereof (including
reasonable attorneys' fees).
- --------------------------------------------------------------------------------
8. COMPLAINTS, 8.1 Corporate Insurance Agent shall promptly notify
INVESTIGATIONS & Penn Mutual and Distributor of any allegation that
PROCEEDINGS. Corporate Insurance Agent or any of its
representatives violated any law, regulation or
rule in soliciting applications for or servicing
Contracts, and shall provide Penn Mutual with full
details, including copies of all legal documents
pertaining thereto.
<PAGE>
8.2 Corporate Insurance Agent shall cooperate fully
with Penn Mutual and Distributor in any regulatory
investigation or proceeding or judicial proceeding
involving the solicitation of application for and
servicing Contracts by Corporate Insurance Agent
or any of its representatives.
- --------------------------------------------------------------------------------
9. NONWAIVER. 9.1 Forbearance by Penn Mutual or Distributor to
enforce any rights under this agreement shall not
be construed as a waiver of any of the terms and
conditions of this agreement and the same shall
remain in full force and effect. No waiver of any
provision of this agreement shall be deemed to be
a waiver of any other provision, whether or not
similar, nor shall any waiver of a provision of
this agreement be deemed to constitute a
continuing waiver.
- --------------------------------------------------------------------------------
10. AMENDMENT. 10.1 Penn Mutual reserves the right to amend this
Agreement at any time. Corporate Insurance Agent's
submission of an application for a Contract after
notice of any such amendment shall constitute
agreement of Corporate Insurance Agent to such
amendment.
- --------------------------------------------------------------------------------
11. TERMINATION AND 11.1 This agreement may be terminated by any party,
ASSIGNMENT. with or without cause, upon giving written notices
to the other parties. This agreement shall
automatically terminate if Corporate Insurance
Agent is adjudicated as bankrupt or avails itself
of any insolvency act or if a permanent receiver
or trustee in bankruptcy is appointed for the
property of Corporate Insurance Agent. Upon
termination of this agreement, with or without
cause, all authorizations, rights and obligations
shall cease, except the rights and obligations set
forth in sections 7 and 8 of this agreement and
the obligations to settle account hereunder,
including the immediate forwarding of all payments
received by Corporate Insurance Agent under
Contract to Penn Mutual, and except as may be
expressly stated otherwise in this agreement.
11.2 This agreement may not be assigned without the
written consent of all parties.
- --------------------------------------------------------------------------------
12. GOVERNING LAW. 12.1 This agreement shall be construed in accordance
with and governed by the laws of the Commonwealth
of Pennsylvania.
- --------------------------------------------------------------------------------
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
by their officers designated below on the day and year first written.
_____________________________________________________
Name of Corporate Insurance Agent
By: ______________________________________________
Signature
______________________________________________
Name
______________________________________________
Title
THE PENN MUTUAL LIFE INSURANCE COMPANY
By: ______________________________________________
Signature
______________________________________________
Name
______________________________________________
Title
HORNOR, TOWNSEND & KENT, INC.
By: ______________________________________________
Signature
______________________________________________
Name
______________________________________________
Title
<PAGE>
PENN THE PENN MUTUAL LIFE INSURANCE COMPANY
MUTUAL Independence Square, Philadelphia, PA 19172
- --------------------------------------------------------------------------------
SCHEDULE 1 TO CORPORATE INSURANCE AGENT SELLING AGREEMENT
Individual Variable and Fixed Annuity Contracts -
Diversifier II
Individual Fixed - Only Annuity Contracts - Diversifier II
Date of Corporate Insurance Agent Selling Agreement to which
this schedule is attached: _____________
- --------------------------------------------------------------------------------
1. AUTHORIZATION Subject to the conditions and limitations of the Corporate
TO SELL. Insurance Agent Selling Agreement, Corporate Insurance Agent
is authorized to solicit applications for Diversifier II
Individual Variable and Fixed Annuity Contracts and
Diversifier II Individual Fixed-Only Annuity Contracts
issued by Penn Mutual (hereinafter referred to as
"Contracts").
- --------------------------------------------------------------------------------
2. COMPENSATION. Subject to the conditions and limitations of the Corporate
Insurance Agent Selling Agreements and this Schedule,
Corporate Insurance Agent shall be paid a fee for placing or
servicing a Diversifier II Individual Variable and Fixed
Annuity Contract equal to _____% of any purchase payment
made under such Contract and a fee for placing and servicing
a Diversifier II Fixed-Only Annuity Contract equal to _____%
of any purchase payment made under such Contract. No fee
shall be paid with respect to a purchase payment made under
a contract after the Corporate Insurance Agent Selling
Agreement has been terminated. If the Annuitant or
Contractowner (other than a trustee of a Qualified Plan) is
over age 81 on the date the Diversifier II Contract is
issued, the fee shall be limited as follows: 80% of such fee
if the Annuitant or Contractowner is age 82; 60% of such fee
if the Annuitant or Contractowner is age 83; 40% of such fee
if the Annuitant or Contractowner is age 84; and 20% of such
fee if the Annuitant of Contractowner is age 85. Amounts
transferred among Contracts are not purchase payments with
the meaning of the Corporate Insurance Agent Selling
Agreement of this Schedule.
This Schedule 1 replaces and supersedes any and all prior
Schedule 1's attached to the Corporate Insurance Agent
Selling Agreement.
Agreed:
Date: ____________________ ___________________________________________
Corporate Insurance Agent
By: ______________________________________
Signature
______________________________________
Name
______________________________________
Title
THE PENN MUTUAL LIFE INSURANCE COMPANY
By: ______________________________________
Signature
______________________________________
Name
______________________________________
Title
HORNOR, TOWNSEND & KENT, INC.
By: ______________________________________
Signature
______________________________________
Name
______________________________________
<PAGE>
Title
PENN THE PENN MUTUAL LIFE INSURANCE COMPANY
MUTUAL Independence Square, Philadelphia, PA 19172
- --------------------------------------------------------------------------------
SCHEDULE 3 TO CORPORATE INSURANCE AGENT SELLING AGREEMENT
Variable Universal Life Insurance Contracts - Penn Mutual
Cornerstone VUL II Date of Corporate Insurance Agent Selling
Agreement to which this schedule is attached:
________________________________________________
- --------------------------------------------------------------------------------
1. AUTHORIZATION Subject to and in accordance with the provision of the
TO SELL. Corporate Insurance Agent Selling Agreement, Corporate
Insurance Agent is authorized to solicit applications for
Form VU-94(s) and Form VU-94(u) Flexible Premium Adjustable
Variable Universal Life Insurance Policies and such
variations of such form of contract as may be designated by
Penn Mutual and approved under applicable state insurance
laws ("Cornerstone VUL II Policies").
- --------------------------------------------------------------------------------
2. COMPENSATION. During the period the Corporate Insurance Agent Selling
Agreement and this schedule is in effect, and subject to and
in accordance with the provisions thereof, Corporate
Insurance Agent shall be compensated as follows:
2.1 Basic First Year Compensation
-----------------------------
A fee for the first policy year of 50% of an amount
equal to the first T of premium paid for the first
policy year and 3.3% of an amount equal to the premium
paid for the first policy year in excess of T. However,
if the insured is over attained age 75 on the date the
policy is issued, the fee for the first policy year
will be limited to 35% of an amount equal to the first
T of premium paid for the first policy year and 3.3% of
an amount equal to premium paid for the first policy
year in excess of T. T is equal to the amount set forth
in Table 1 below for each $1,000 or fraction thereof
the initial Specified Amount of insurance as set forth
in the policy in question. In calculating compensation
payable pursuant to this subsection, it will be deemed
that any increase in Specified Amount of the policy in
question that is effective during the first six policy
months of such policy took place prior to the issuance
of such policy, and the calculations pursuant to this
subsection shall be based upon an initial Specified
Amount as so adjusted.
2.2 Renewal Compensation
--------------------
A fee for the second through fifteen policy years of
3.00% of an amount equal to premium paid for the policy
year in question, and a fee for the sixteenth and later
policy years equal to 1.20% of premium paid for the
policy year in question.
2.3 Basic Compensation on Increases
-------------------------------
In the case of an increase in the Specified Amount of
insurance, a fee of 47% (32% where the insured has an
attained age greater than 75) of an amount equal to the
smaller of (1) the first T of premium paid for the
twelve months following the effective date of any
increase in Specified Amount of the policy in question
and (2) total increase in scheduled annual basis
premium. Such fee shall be paid only once for each such
increase. T is defined in subsection 2.1 above.
- --------------------------------------------------------------------------------
<PAGE>
2.4 Expense Allowance
-----------------
For each calendar month while Corporate Insurance Agent
Selling Agreement is in effect and before its
termination, Corporate Insurance Agent shall be
entitled to the expense from Penn Mutual described
below, provided that the amount payable as an expense
allowance shall be limited to the total of reasonable
business expenses incurred by Corporate Insurance Agent
that are directly related to the sale or service of
Penn Mutual policies, and provided further that no such
allowance shall be payable to Corporate Insurance Agent
that would cause the total of such allowances to exceed
the limits of Section 4228 of the Insurance Law of the
State of New York. No payment pursuant to this
agreement will be used by Corporate Insurance Agent to
effect compensation for the sale of insurance in excess
of the limits of said Section 4228. Such allowance
shall be 60% of an amount equal to the Basic First Year
Compensation and Basic Compensation on Regular
increases for the Cornerstone, VUL Policies during the
calendar month for which this allowance is being
calculated.
2.5 Compensation Chargebacks
------------------------
A percentage of total compensation (including expense
allowance) will be charged back for lapses/surrenders
during the first policy year and during the 12 policy
months following an increase. The percentage is shown
below and is dependent on the policy month of
lapse/surrender.
Policy Month of Chargeback
Lapse/Surrender Percentage
--------------- ----------
1-3 100%
4-6 75%
7-9 50%
10-12 25%
13+ 0%
2.6 Replacement of Penn Mutual Policies
-----------------------------------
It is agreed that the compensation otherwise payable to
Corporate Insurance Agent for any policy shall be
reduced in accordance with the replacement control
program of Penn Mutual in effect at the time such
policy is placed in force. It is anticipated that such
replacement control program may be changed from time to
time as to policies in force after such change.
2.7 Policy Delivery Receipt
-----------------------
it is agreed that the Corporate Insurance Agent shall
be responsible for obtaining a signed policy delivery
receipt. No compensation otherwise payable to the
Corporate Insurance Agent for any policy shall be paid
until Penn Mutual is in possession of a signed policy
delivery receipt (or facsimile copy thereof) for said
policy.
This Schedule 3 replaces and supersedes any and
all prior Schedule 3's attached to the Corporate
Insurance Agent Selling Agreement.
Agreed:
Date: ____________________ _________________________________________
Name of Corporate Insurance Agent
By: _____________________________________
Signature
_____________________________________
Name
_____________________________________
Title
THE PENN MUTUAL LIFE INSURANCE COMPANY
By: _____________________________________
Signature
_____________________________________
<PAGE>
Name
_____________________________________
Title
HORNOR, TOWNSEND & KENT, INC.
By: _____________________________________
Signature
_____________________________________
Name
_____________________________________
Title
<PAGE>
TABLE 1
Variable Universal Life
Target Premiums
<TABLE>
<CAPTION>
Male Female Unisex Male Female Unisex
---- ------ ------ ---- ------ ------
Age NS SM NS SM NS SM Age NS SM NS SM NS SM
- --- -- -- -- -- -- -- --- -- -- -- -- -- --
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
0 N/A 2.82 N/A 2.44 N/A 2.77 41 11.35 13.61 9.72 11.40 11.01
1 N/A 2.81 N/A 2.45 N/A 2.77 42 11.88 14.27 10.15 11.91 11.53
2 N/A 2.91 N/A 2.53 N/A 2.86 43 12.45 14.96 10.60 12.43 12.07
3 N/A 3.00 N/A 2.61 N/A 2.96 44 13.04 15.68 11.08 12.98 12.64
4 N/A 3.11 N/A 2.70 N/A 3.06 45 13.67 16.45 11.58 13.56 13.24
5 N/A 3.22 N/A 2.79 N/A 3.17 46 14.34 17.26 12.11 14.16 13.88
6 N/A 3.33 N/A 2.89 N/A 3.28 47 15.05 18.11 12.67 14.80 14.56
7 N/A 3.46 N/A 2.99 N/A 3.40 48 15.80 19.02 13.26 15.47 15.27
8 N/A 3.59 N/A 3.10 N/A 3.53 49 16.60 19.97 13.89 16.17 16.03
9 N/A 3.73 N/A 3.21 N/A 3.67 50 17.45 20.98 14.55 16.91 16.84
10 N/A 3.87 N/A 3.33 N/A 3.81 51 18.35 22.05 15.24 17.69 17.70
11 N/A 4.03 N/A 3.45 N/A 3.96 52 19.31 23.19 15.98 18.51 18.61
12 N/A 4.19 N/A 3.59 N/A 4.12 53 20.33 24.39 16.77 19.38 19.58
13 N/A 4.36 N/A 3.72 N/A 4.28 54 21.42 25.65 17.59 20.29 20.60
14 N/A 4.53 N/A 3.86 N/A 4.45 55 22.57 26.99 18.47 21.26 21.70
15 N/A 4.70 N/A 4.01 N/A 4.62 56 23.80 28.40 19.40 22.28 22.86
16 N/A 4.88 N/A 4.16 N/A 4.79 57 25.10 29.88 20.40 23.36 24.09
17 N/A 5.06 N/A 4.32 N/A 4.96 58 26.50 31.46 21.46 24.51 25.40
18 N/A 5.25 N/A 4.48 N/A 5.13 59 27.98 33.13 22.59 25.74 26.81
19 N/A 5.44 N/A 4.65 N/A 5.31 60 29.57 34.91 23.82 27.07 28.31
20 4.83 5.65 4.17 4.82 4.70 5.50 61 31.27 36.80 25.13 28.50 29.92
21 5.00 5.84 4.32 5.01 4.86 5.69 62 33.09 38.80 26.54 30.03 31.63
22 5.17 6.05 4.49 5.20 5.04 5.90 63 35.03 40.93 28.06 31.68 33.47
23 5.36 6.27 4.66 5.41 5.22 6.12 64 37.11 43.18 29.69 33.43 35.43
24 5.56 6.51 4.84 5.62 5.41 6.35 65 39.33 45.54 31.43 35.29 37.53
25 5.76 6.76 5.02 5.83 5.62 6.59 66 41.69 48.04 33.29 37.27 39.76
26 5.99 7.03 5.22 6.08 5.83 6.85 67 44.22 50.00 35.28 39.38 42.15
27 6.22 7.31 5.43 6.32 6.06 7.13 68 46.93 50.00 37.44 41.65 44.71
28 6.47 7.62 5.65 6.58 6.31 7.43 69 49.85 50.00 39.78 44.12 47.46
29 6.74 7.94 5.87 6.85 6.57 7.74 70 50.00 50.00 42.33 46.80 50.00
30 7.02 8.28 6.11 7.14 6.84 8.07 71 50.00 50.00 45.12 49.74 50.00
31 7.31 8.64 6.37 7.44 7.12 8.42 72 50.00 50.00 48.16 50.00 50.00
32 7.63 9.03 6.63 7.75 7.43 8.79 73 50.00 50.00 50.00 50.00 50.00
33 7.96 9.43 6.91 8.08 7.75 9.18 74 50.00 50.00 50.00 50.00 50.00
34 8.31 9.86 7.20 8.43 8.08 9.59 75 50.00 50.00 50.00 50.00 50.00
35 8.67 10.31 7.51 8.80 8.44 10.03 76 50.00 50.00 50.00 50.00 50.00
36 9.06 10.79 7.84 9.19 8.81 10.49 77 50.00 50.00 50.00 50.00 50.00
37 9.47 11.30 8.18 9.59 9.21 10.97 78 50.00 50.00 50.00 50.00 50.00
38 9.90 11.83 8.53 10.01 9.62 11.48 79 50.00 50.00 50.00 50.00 50.00
39 10.36 12.39 8.91 10.46 10.06 12.02 80 50.00 50.00 50.00 50.00 50.00
- ----------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
40 10.84 12.99 9.30 10.92 10.52 12.58
</TABLE>
NS is to be used for both Nonsmoker Standard and Preferred.
THE PENN MUTUAL LIFE INSURANCE COMPANY
Standards of Suitability for Sale
---------------------------------
of Variable Life Insurance
--------------------------
The Standards of suitability for the sale of Variable Life Insurance Policies
are as follows:
(1) The applicant is furnished with a prospectus effective under the Securities
Act of 1933 which accurately and adequately inform the applicant of all
relevant particulars of the Variable Life Insurance Policy, including the
investment risks assumed under the Policy.
(2) The purchase of the Variable Life Insurance Policy by the applicant is
reasonably consistent with the insurance needs and financial objectives
expressed by the applicant; and
(3) The purchase of the Variable Life Insurance Policy by the applicant is
reasonably consistent with the insurance needs and financial objectives of
the applicant, as determined objectively by the Company's sales agent after
reasonable inquiry into the relevant financial and family situation of the
applicant.
No recommendation shall be made to an applicant to purchase a Variable Life
Insurance Policy in the absence of reasonable grounds to believe that the Policy
is not unsuitable for the applicant. Reasonable grounds for believing that the
Policy is not unsuitable shall be based upon information furnished after
reasonable inquiry of the applicant concerning the applicant's insurance and
investment objectives, financial situation and needs and any other information
known to the Company or the sales agent making the recommendation.
<PAGE>
PENN THE PENN MUTUAL LIFE INSURANCE COMPANY
MUTUAL Independence Square, Philadelphia, PA 19172
- --------------------------------------------------------------------------------
SCHEDULE 4 TO CORPORATE INSURANCE AGENT SELLING AGREEMENT
Variable Universal Life Insurance Contracts - Penn Mutual
Variable EstateMax
Date of Corporate Insurance Agent Selling Agreement to
which this schedule is attached: ________________________
- --------------------------------------------------------------------------------
1. AUTHORIZATION Subject to and in accordance with the provision of the
TO SELL. Corporate Insurance Agent Selling Agreement, Corporate
Insurance Agent is authorized to solicit applications for
Form VALJ-94(u) and Form VALJ-94(u) Last Survivor Flexible
Premium Adjustable Variable Life Insurance Policy and such
variations of such form of contract as may be designated by
Penn Mutual and approved under applicable state insurance
laws ("Variable EstateMax").
- --------------------------------------------------------------------------------
2. COMPENSATION. During the period the Corporate Insurance Agent Selling
Agreement and this schedule is in effect, and subject to
and in accordance with the provisions thereof, Corporate
Insurance Agent shall be compensated as follows:
2.1 Basic First Year Compensation
-----------------------------
A fee for the first policy year of 50% of an amount
equal to the first R of premium paid for the first
policy year and 2.00% of an amount equal to the
premium paid for the first policy year in excess of R.
R is equal to seventyfive percent (75%) of an Adjusted
Guideline Annual Premium for each $1,000 or fraction
thereof of the initial Specified Amount of insurance
as set forth in the Variable EstateMax Policy in
question. The Adjusted Guideline Annual Premium is the
Guideline Annual Premium as defined in Section 7702 of
the Internal Revenue Service Code of 1986, as amended,
or as set forth in any applicable successor provision
thereto, adjusted to reflect four percent (4%)
interest from the date of issue through the policy
maturity date, and excluding the effect of any per
policy expense loads and substandard ratings. The
policy maturity date is the date that the younger
insured would reach attained age 100.
2.2 Renewal Compensation
--------------------
A fee for the second through fifteen policy years of
2.0% of an amount equal to premium paid for the policy
year in question, and a fee for the sixteenth and
later policy years equal to 1.2% of premium paid for
the policy year in question.
2.3 Expense Allowance
-----------------
For each calendar month while Corporate Insurance
Agent Selling Agreement is in effect and before its
termination, Corporate Insurance Agent shall be
entitled to the expense from Penn Mutual described
below, provided that the amount payable as an expense
allowance shall be limited to the total of reasonable
business expenses incurred by Corporate Insurance
Agent that are directly related to the sale or service
of Penn Mutual policies, and provided further that no
such allowance shall be payable to Corporate Insurance
Agent that would cause the total of such allowances to
exceed the limits of Section 4228 of the Insurance Law
of the State of New York. No payment pursuant to this
agreement will be used by Corporate Insurance Agent to
effect compensation for the sale of insurance in
excess of the limits of said Section 4228. Such
allowance shall be 60% of an amount equal to the Basic
First Year Compensation and Basic Compensation on
Regular increases for the Variable EstateMax during
the calendar month for which this allowance is being
calculated.
2.4 Compensation Chargebacks
------------------------
A percentage of total compensation (including expense
allowance) will be charged back for lapses/surrenders
during the first policy year and during the 12 policy
months following an increase. The percentage is shown
below and is dependent on the policy month of
lapse/surrender.
<PAGE>
Policy Month of Chargeback
Lapse/Surrender Percentage
--------------- ----------
1-3 100%
4-6 100%
7-9 50%
10-12 50%
13+ 0%
2.5 Replacement of Penn Mutual Policies
-----------------------------------
It is agreed that the compensation otherwise payable
to Corporate Insurance Agent for any policy shall be
reduced in accordance with the replacement control
program of Penn Mutual in effect at the time such
policy is placed in force. It is anticipated that such
replacement control program may be changed from time
to time as to policies in force after such change.
2.6 Policy Delivery Receipt
-----------------------
it is agreed that the Corporate Insurance Agent shall
be responsible for obtaining a signed policy delivery
receipt. No compensation otherwise payable to the
Corporate Insurance Agent for any policy shall be paid
until Penn Mutual is in possession of a signed policy
delivery receipt (or facsimile copy thereof) for said
policy.
This Schedule 4 replaces and supersedes any and
all prior Schedule 4's attached to the Corporate
Insurance Agent Selling Agreement.
Agreed:
Date:____________________ ---------------------------------------------
Name of Corporate Insurance Agent
By: ---------------------------------------
Signature
---------------------------------------
Name
---------------------------------------
Title
THE PENN MUTUAL LIFE INSURANCE COMPANY
By: ---------------------------------------
Signature
---------------------------------------
Name
---------------------------------------
Title
HORNOR, TOWNSEND & KENT, INC.
By: ---------------------------------------
Signature
---------------------------------------
Name
---------------------------------------
Title
<PAGE>
THE PENN MUTUAL LIFE INSURANCE COMPANY
Standards of Suitability for Sale
---------------------------------
of Variable Life Insurance
--------------------------
The Standards of suitability for the sale of Variable Life Insurance Policies
are as follows:
(1) The applicant is furnished with a prospectus effective under the Securities
Act of 1933 which accurately and adequately inform the applicant of all
relevant particulars of the Variable Life Insurance Policy, including the
investment risks assumed under the Policy.
(2) The purchase of the Variable Life Insurance Policy by the applicant is
reasonably consistent with the insurance needs and financial objectives
expressed by the applicant; and
(3) The purchase of the Variable Life Insurance Policy by the applicant is
reasonably consistent with the insurance needs and financial objectives of
the applicant, as determined objectively by the Company''s sales agent
after reasonable inquiry into the relevant financial and family situation
of the applicant.
No recommendation shall be made to an applicant to purchase a Variable Life
Insurance Policy in the absence of reasonable grounds to believe that the Policy
is not unsuitable for the applicant. Reasonable grounds for believing that the
Policy is not unsuitable shall be based upon information furnished after
reasonable inquiry of the applicant concerning the applicant's insurance and
investment objectives, financial situation and needs and any other information
known to the Company or the sales agent making the recommendation.
<PAGE>
PENN THE PENN MUTUAL LIFE INSURANCE COMPANY
MUTUAL Independence Square, Philadelphia, PA 19172
- --------------------------------------------------------------------------------
National Accounts - Broker-Dealers Licensed
to Sell Variable Annuities and/or Variable
Life Insurance under Federal Securities Laws
(Companion Agreement - Form A-2)
BROKER-DEALER SELLING AGREEMENT
THE PENN MUTUAL LIFE INSURANCE COMPANY (hereinafter called
"Penn Mutual") and Hornor, Townsend & Kent, Inc.
(hereinafter called "Distributor") enter into this
Agreement with __________________________________
(hereinafter called "Broker-Dealer") on this date
_________________, 19___ agree as follows:
WITNESSETH:
WHEREAS, Penn Mutual is in the business of issuing annuity
and life insurance contracts to the public;
WHEREAS, Distributor is a wholly owned subsidiary of Penn
Mutual, is registered as a broker-dealer under the
Securities Exchange Act of 1934, is a member of the
National Association of Securities Dealers, Inc., and is
assisting Penn Mutual in the distribution of such
contracts;
WHEREAS, Broker-Dealer is registered as a Broker-Dealer
under the Securities Exchange Act of 1934 and is a member
of the National Association of Securities Dealers, Inc.;
WHEREAS, Broker-Dealer is affiliated with ____________
______________, (hereinafter referred to as "Corporate
Insurance Agent") a corporation which is properly licensed
under the insurance laws of the state(s) in which Broker-
Dealer will act under this agreement;
WHEREAS, the parties desire to enter into an arrangement
under which Broker-Dealer and Corporate Insurance Agent
agree to sell certain variable annuity and variable life
insurance contracts issued by Penn Mutual;
NOW THEREFORE, in consideration of these premises and
mutual covenants herein contained, the parties agree as
follows:
- --------------------------------------------------------------------------------
1. APPOINTMENT OF 1.1 Subject to the terms and conditions of this agreement,
BROKER-DEALER Penn Mutual and Distributor authorizes Broker-Dealer
as a non-exclusive agent for the solicitation of
applications for, and the servicing of, variable
annuity and/or variable life insurance contracts
identified in the schedule(s) attached hereto, and
Broker-Dealer accepts such authorization. The variable
annuity and/or variable life insurance contracts
identified in the schedule(s) are referred to herein
as "Contracts".
1.2 Broker-Dealer and its representatives shall be
independent contractors as to Penn Mutual and
Distributor and, subject to the terms and conditions
of this agreement, free to exercise their own judgment
as to the time, place and means of performing all acts
hereunder. Nothing in this agreement is intended to
create a relationship of employer and employee as
between Penn Mutual or Distributor, on the one hand,
and representatives of Broker-Dealer on the other.
- --------------------------------------------------------------------------------
2. SECURITY 2.1 The sale of variable annuity and variable life
REGULATIONS AND insurance contracts identified in the schedule(s)
INSURANCE attached hereto is subject to and regulated under
COORDINATION OF state insurance laws and regulations, in addition to
AGREEMENTS. federal securities laws and regulations, and in some
cases, state securities laws. It is understood and
agreed that registered representatives of Broker-
Dealer shall also be representative of Corporate
Insurance Agent and that Corporate Insurance Agent
shall contemporaneously enter into a Corporate
Insurance Agent Selling Agreement with Penn Mutual and
Distributor covering the sale of such contracts. This
agreement and the Corporate Insurance Agent Selling
Agreement shall govern the sales of such contracts.
- --------------------------------------------------------------------------------
3. SALE OF 3.1 Broker-Dealer shall use its best efforts to solicit
CONTRACTS. applications for Contracts from persons for whom the
Contracts are suitable, in accordance with the terms
and conditions of this agreement.
<PAGE>
3.2 All applications for Contracts shall be made on
applications forms authorized by Penn Mutual. Broker-
Dealer shall diligently review all such applications
for accuracy and completeness and shall take all
reasonable and appropriate measures to assure that
applications submitted to Penn Mutual are accurate and
complete.
3.3 All purchase payments collected by Broker-Dealer for
Penn Mutual shall be received in trust and shall be
remitted immediately, together with the application
and any other required documentation, to Penn Mutual
at the address indicated on the application or to such
other address as Penn Mutual may specify in writing.
All checks or money orders for payments under
Contracts shall be drawn to the order of Penn Mutual,
except as may be provided in the Corporate Insurance
Agent Selling Agreement (referred to in Section 2.1 of
this agreement).
3.4 All applications are subject to acceptance or
rejection by Penn Mutual in its sole discretion. Penn
Mutual may at any time in its sole discretion
discontinue issuing the Contracts or change the form
and content of new Contracts to be issued.
3.5 In soliciting applications for Contracts, Broker-
Dealer may not accept risk of any kind for or on
behalf of Penn Mutual and may not bind Penn Mutual by
promise or agreement or alter any Contract in any way.
- --------------------------------------------------------------------------------
4. COMPENSATION. 4.1 In consideration of and as full compensation for the
services performed in accordance with this agreement,
Corporate lnsurance Agent will receive compensation
from Penn Mutual as set forth in the schedule(s)
attached to the Corporate Insurance Agent Selling
Agreement referred to in Section 2.1 of this
agreement.
4.2 Should Penn Mutual for any reason return to the payor
any payment made under a Contract Broker-Dealer shall
cause Corporate Insurance Agent to repay Penn Mutual
the total amount of any compensation which Penn Mutual
may have paid Corporate Insurance Agent with respect
to such payment.
4.3 Penn Mutual may, in its sole discretion, change the
amount, terms and conditions of compensation with
respect to payment received by Penn Mutual under
Contracts.
4.4 Penn Mutual shall not be obligated to pay any
compensation which would be in violation of applicable
laws of any jurisdiction, anything in this agreement
to the contrary notwithstanding.
4.5 With respect to compensation paid to Corporate
Insurance Agent in connection with the sale of
variable annuity and/or variable life insurance
contracts, Broker-Dealer shall cause Corporate
Insurance Agent to maintain, on behalf of Broker-
Dealer, such books and records as are necessary for
Broker-Dealer to comply with applicable recordkeeping
requirements under federal and state securities laws
and under the rules of the National Association of
Securities Dealers, Inc.
- --------------------------------------------------------------------------------
5. COMPLIANCE WITH 5.1 Broker-Dealer shall not solicit applications for
SECURITIES LAW. Contracts unless Penn Mutual or Distributor has
notified Broker-Dealer that a registration statement
required under the Securities Act of 1933 is effective
as to such contracts and unless Broker-Dealer is duly
registered as a broker-dealer under the Securities
Exchange Act of 1934, is a member in good standing of
the National Association of Securities Dealers, Inc.,
and is duly licensed under any applicable securities
laws of the state or jurisdiction in which Broker-
Dealer engages in such activity.
5.2 Penn Mutual or Distributor shall furnish Broker-Dealer
with copies of the current prospectuses (and current
supplements thereto) required to be used in soliciting
applications for variable annuity and/or variable life
insurance contracts.
5.3 Broker-Dealer and its representatives shall comply
with all applicable securities laws and regulations
and with the rules of the National Association of
Securities Dealers, Inc. in soliciting applications
for and servicing Contracts. Broker-Dealer shall be
fully responsible for all acts of its representatives
in soliciting applications for and servicing
Contracts.
- --------------------------------------------------------------------------------
6. ADVERTISEMENTS, 6.1 Broker-Dealer shall not print, publish, distribute or
SALES LITERATURE use any advertisements, sales literature or other
AND OTHER writing relating to the Contracts unless such
COMMUNICATIONS. advertisements, sales literature or other writing
shall have first been approved in writing by Penn
Mutual and Distributor.
<PAGE>
6.2 Broker-Dealer shall exercise care not to misrepresent
the Contracts or Penn Mutual and shall make no oral or
written representation which is inconsistent with the
terms of the Contracts or with the information in any
prospectus or sales literature furnished by Penn
Mutual or it misleading in any way.
- --------------------------------------------------------------------------------
7. INDEMNIFICATION. 7.1 Broker-Dealer shall indemnify or hold harmless Penn
Mutual and Distributor and each director and officer
of Penn Mutual and Distributor against any losses,
claims, damages or liabilities, including but not
limited to reasonable attorneys' fees and court cost
to which Penn Mutual or Distributor and any such
director or officer may become subject, under the
Securities Act of 1933 or otherwise, insofar as such
losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon any
unauthorized use of sales materials or any verbal or
written misrepresentations or any unlawful sales
practices, or the failure of Broker-Dealer, its
officers, employees or representatives to comply with
the provisions of this agreement or the willful
misfeasance, bad faith, negligence or misconduct of
Broker-Dealer, its officers, employees, or
representatives in the solicitation of applications
for and the servicing of
Contracts.
7.2 Penn Mutual and Distributor shall indemnify and hold
harmless Broker-Dealer and each officer or director of
Broker-Dealer against any losses, claims, damages or
liabilities, joint or several, including but not
limited to reasonable attorneys' fees and court cost,
to which Broker-Dealer or such officer or director
becomes subject, under the Securities Act of 1933 or
otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out
of or are based upon any untrue statement or alleged
untrue statement of a material fact, required to be
stated therein or necessary to make the statements
therein not misleading, contained in any registration
statement or any post-effective amendment or
supplement to the prospectus, or in any sales material
written by Penn Mutual or Distributor.
7.3 In the event Penn Mutual suffers a loss resulting from
Broker-Dealer activities, Broker-Dealer hereby assigns
any proceeds received under its fidelity bond to Penn
Mutual to the extent of such losses. If there is any
deficiency amount, whether due to a deductible or
otherwise, Broker-Dealer shall promptly pay Penn
Mutual such amount on demand and Broker-Dealer shall
indemnify and hold harmless Penn Mutual from any such
deficiency and from the costs of collection thereof
(including reasonable attorneys' fees).
- --------------------------------------------------------------------------------
8. COMPLAINTS, 8.1 Broker-Dealer shall promptly notify Penn Mutual and
INVESTIGATIONS & Distributor of any allegation that Broker-Dealer or
PROCEEDINGS. any of its representatives violated any law,
regulation or rule in solicitin applications for or
servicing Contracts, and shall provide Penn Mutual
with full details, including copies of all legal
documents pertaining thereto.
8.2 Broker-Dealer shall cooperate fully with Penn Mutual
and Distributor in any regulatory investigation or
proceeding or judicial proceeding involving the
solicitation of application for and servicing
Contracts by Broker-Dealer or any of its
representatives.
- --------------------------------------------------------------------------------
9. NONWAIVER. 9.1 Forbearance by Penn Mutual or Distributor to enforce
any rights under this agreement shall not be construed
as a waiver of any of the terms and conditions of this
agreement and the same shall remain in full force and
effect. No waiver of any provision of this agreement
shall be deemed to be a waiver of any other provision,
whether or not similar, nor shall any waiver of a
provision of this agreement be deemed to constitute a
continuing waiver.
- --------------------------------------------------------------------------------
10.AMENDMENT. 10.1 Penn Mutual reserves the right to amend this Agreement
at any time. Broker-Dealer's submission of an
application for a Contract after notice of any such
amendment shall constitute agreement of Broker-Dealer
to such amendment.
- --------------------------------------------------------------------------------
11.TERMINATION AND 11.1 This agreement may be terminated by any party, with or
ASSIGNMENT. without cause, upon giving written notices to the
other parties. This agreement shall automatically
terminate if Broker-Dealer is adjudicated as bankrupt
or avails itself of any insolvency act or if a
permanent receiver or trustee in bankruptcy is
appointed for the property of Broker-Dealer. Upon
termination of this agreement, with or without cause,
all authorizations, rights and obligations shall
cease, except the rights and obligations set forth in
sections 7 and 8 of this agreement and the obligations
to settle account hereunder, including the immediate
forwarding of all payments received by Broker-Dealer
under Contract to Penn Mutual, and except as may be
expressly stated otherwise in this agreement.
11.2 This agreement may not be assigned without the written
consent of all parties.
- --------------------------------------------------------------------------------
12.GOVERNING LAW. 12.1 This agreement shall be construed in accordance with
and governed by the laws of the Commonwealth of
Pennsylvania.
- --------------------------------------------------------------------------------
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
by their officers designated below on the day and year first written.
____________________________________________
Name of Broker-Dealer
By: _______________________________________
Signature
_______________________________________
Name
_______________________________________
Title
THE PENN MUTUAL LIFE INSURANCE COMPANY
By: _______________________________________
Signature
_______________________________________
Name
_______________________________________
Title
HORNOR, TOWNSEND & KENT, INC.
By: _______________________________________
Signature
_______________________________________
Name
_______________________________________
Title
<PAGE>
PENN THE PENN MUTUAL LIFE INSURANCE COMPANY
MUTUAL Independence Square, Philadelphia, PA 19172
- --------------------------------------------------------------------------------
SCHEDULE 1 TO BROKER-DEALER SELLING AGREEMENT
Individual Variable and Fixed Annuity Contracts -
Diversifier II Individual Fixed - Only Annuity Contracts -
Diversifier II
Date of Broker-Dealer Selling Agreement to which this
schedule is attached: ________________
- --------------------------------------------------------------------------------
1. AUTHORIZATION Subject to the conditions and limitations of the Broker-
TO SELL. Dealer Selling Agreement, Broker-Dealer is authorized to
solicit applications for Diversifier II Individual Variable
and Fixed Annuity Contracts and Diversifier II Individual
Fixed-Only Annuity Contracts issued by Penn Mutual
(hereinafter referred to as "Contracts").
This Schedule 1 replaces and supersedes any and all prior Schedule 1's attached
to the Broker-Dealer Selling Agreement.
Agreed:
Date:___________________________ _____________________________________________
Name of Broker-Dealer
By:__________________________________________
Signature
__________________________________________
Name
__________________________________________
Title
THE PENN MUTUAL LIFE INSURANCE COMPANY
By:__________________________________________
Signature
__________________________________________
Name
__________________________________________
Title
HORNOR, TOWNSEND & KENT, INC.
By:__________________________________________
Signature
__________________________________________
Name
__________________________________________
Title
<PAGE>
PENN THE PENN MUTUAL LIFE INSURANCE COMPANY
MUTUAL Independence Square, Philadelphia, PA 19172
- --------------------------------------------------------------------------------
SCHEDULE 3 TO BROKER-DEALER SELLING AGREEMENT
Variable Universal Life Insurance Contracts - Penn Mutual
Cornerstone VUL II
Date of Broker-Dealer Selling Agreement to which this
schedule is attached:____________
- --------------------------------------------------------------------------------
1. AUTHORIZATION Subject to and in accordance with the provisions of the
TO SELL. Broker-Dealer Selling Agreement, Broker-Dealer is
authorized to solicit applications for Form VU-94(s) and
Form VU-94(u) Flexible Premium Adjustable Variable
Universal Life Insurance Policies and such variations of
such form of contracts as may be designated by Penn Mutual
and approved under applicable state insurance laws
("Cornerstone VUL II Policies").
This Schedule 3 replaces and supersedes any and all prior Schedule 3's attached
to the Broker-Dealer Selling Agreement.
Agreed:
Date:___________________________ _____________________________________________
Name of Broker-Dealer
By:__________________________________________
Signature
__________________________________________
Name
__________________________________________
Title
THE PENN MUTUAL LIFE INSURANCE COMPANY
By:__________________________________________
Signature
__________________________________________
Name
__________________________________________
Title
HORNOR, TOWNSEND & KENT, INC.
By:__________________________________________
Signature
__________________________________________
Name
__________________________________________
Title
<PAGE>
PENN THE PENN MUTUAL LIFE INSURANCE COMPANY
MUTUAL Independence Square, Philadelphia, PA 19172
- --------------------------------------------------------------------------------
SCHEDULE 4 TO BROKER-DEALER SELLING AGREEMENT
Variable Universal Life Insurance Contracts-Penn Mutual
Variable EstateMax
Date of Broker-Dealer Selling Agreement to which this
schedule is attached:____________
- --------------------------------------------------------------------------------
1. AUTHORIZATION Subject to and in accordance with the provision of the
TO SELL. Broker-Dealer Selling Agreement, Broker-Dealer is
authorized to solicit applications for Form VALJ-94(s) and
Form VALJ-94(u) Last Survivor Adjustable Variable Life
Insurance Policies and such variations of such form of
contract as may be designated by Penn Mutual and approved
under applicable state insurance laws ("Variable EstateMax
Policies").
This Schedule 4 replaces and supersedes any and all prior Schedule 4's attached
to the Broker-Dealer Selling Agreement.
Agreed:
Date:___________________________ _____________________________________________
Name of Broker-Dealer
By:__________________________________________
Signature
__________________________________________
Name
__________________________________________
Title
THE PENN MUTUAL LIFE INSURANCE COMPANY
By:__________________________________________
Signature
__________________________________________
Name
__________________________________________
Title
HORNOR, TOWNSEND & KENT, INC.
By:__________________________________________
Signature
__________________________________________
Name
__________________________________________
Title
<PAGE>
Exhibit 3(f)
ADDENDUM NO. 98-1
To the BROKER-DEALER SELLING AGREEMENT ("Agreement") dated February 15, 1994
between The Penn Mutual Life Insurance Company ("Penn Mutual"), Hornor,
Townsend, Kent Inc. ("HTK"), and __________________("Firm") . Notwithstanding
the representation contained in the Agreement, Firm is not licensed to sell
variable annuity and variable life insurance contracts in certain states. This
Addendum is only applicable to Penn Mutual variable annuity and variable life
insurance products that are approved for sale in the State of _____________.
Penn Mutual and Firm hereby agree that Penn Mutual will pay all compensation due
any sales agents of the Firm for business transacted on behalf of Penn Mutual
directly to, and in the name of, a compensation manager appointed by Firm, such
compensation manager being a duly licensed insurance agent in the State of
_________. The State of __________ will not permit Firm to be so licensed
because of its form or state of organization.
Firm shall appoint its compensation manager in writing, signed by an officer or
partner of Firm who has the authority to bind Firm to this Addendum. Penn Mutual
shall direct all payments for business transacted by sales agents of Firm to the
named compensation manager until such time as Firm notifies Penn Mutual, in
writing, that another compensation manager has been appointed. Firm will
properly report all compensation paid to the sales agents on its FOCUS and other
reports filed with the Securities and Exchange Commission and National
Association of
<PAGE>
Securities Dealers, Inc. Firm will at all times properly supervise the
activities of the compensation manager in ________ in a manner consistent with
the requirements of the federal securities laws.
The parties hereto agree that the compensation manager will be responsible for
the payment of compensation received from Penn Mutual to the sales agents of
Firm and that Penn Mutual will have no responsibility therefor. In addition,
Firm represents and warrants that all moneys received from Penn Mutual will be
distributed by the compensation manager only to duly licensed sales agents who
have been appointed with Penn Mutual in accordance with the Agreement and all
applicable laws of the State of __________.
Firm agrees to indemnify and hold harmless Penn Mutual from any and all claims,
and demands or causes of action that arise out of the compensation manager's
negligence, or failure to perform properly the responsibilities set forth in
this Addendum. Firm at its own cost will defend any legal proceeding that may be
brought against Penn Mutual on any such claims or demands in respect to which
Penn Mutual is indemnified and held harmless hereunder, and will satisfy any
judgment that may be rendered against Penn Mutual with respect to any such claim
or demand. Firm will notify Penn Mutual promptly upon receipt of any such claim
or demand which it receives.
<PAGE>
IN WITNESS WHEREOF, the undersigned have executed this Addendum on this _____
day of _______________, ______.
HORNOR, TOWNSEND & KENT, INC. THE PENN MUTUAL LIFE
INSURANCE COMPANY
By: _____________________________ By: ________________________
Title: ____________________________ Title:_______________________
Name of Firm: ______________________________
By: __________________________
Title: _______________________
The name and tax identification number of the compensation manager who is
licensed in the referenced state with Penn Mutual as follows:
Compensation Manager: _________________
Social Security No.: _________________
By executing this Addendum in the space below, the compensation manager
identified above agrees to be bound by the terms hereof. Further, the
undersigned confirms that [he] is duly licensed in the State of __________ to
perform the duties that the Addendum contemplates will be performed by the
compensation manager. Finally, the undersigned will make available to Penn
Mutual, HTK, Firm and any state or federal regulatory authorities the books and
records maintained in connection with the duties of the compensation manager.
______________________________
Signature
-3-
<PAGE>
Exhibit 4(a)
Penn Mutual Life Insurance Company
Founded 1847
Contract Owner William Penn 9999999 Contract Number
Contract Date August 7, 1998 September 1, 2058 Annuity Date
Annuitant William Penn 35 Age of Annuitant
VALUES AND PAYMENTS UNDER THIS CONTRACT, WHEN BASED UPON THE INVESTMENT
EXPERIENCE OF A SEPARATE ACCOUNT, ARE VARIABLE. THEY MAY DECREASE OR INCREASE
AND ARE NOT GUARANTEED AS TO FIXED DOLLAR AMOUNT.
RIGHT TO REVIEW CONTRACT: The Contract Owner may cancel this contract within
ten days after its receipt. Simply return or mail it to the Company or the
representative through whom it was purchased. The Company will refund the
Contract Value as of the time notification is received.
This is a legal contract between the Contract Owner and Penn Mutual. Please
read the contract carefully.
Executed on the Contract Date by The Penn Mutual Life Insurance Company.
Individual Variable and Fixed
Annuity Contract
Flexible Purchase Payments
Annuity Payments payable on Annuity Date
Flexible Purchase Payments payable until Annuity Date
Participating
The Company will make monthly annuity payments and
other payments as set forth in this contract.
The Penn Mutual Life Insurance Company, Philadelphia, Pennsylvania 19172
VAA-98
/s/ Laura M. Ritzko
Secretary
/s/ Robert E. Chappell
Chairman and Chief Executive Officer
A004260C
<PAGE>
<TABLE>
<CAPTION>
Guide to Contract Sections
<S> <C>
1. Contract Specifications 10. Fixed Annuity Payments
2. Endorsements 11. Variable Annuity Payments
3. Definitions 12. Annuity Options
4. Purchase Payments 13. Death Benefit
5. The Separate Account 14. Transfers
6. The Fixed Account 15. Withdrawal
7. Charges and Deductions 16. General
8. Contract Value
9. Annuity Payments
Additional Contract Specifications
and a copy of any applications follow
Section 16.
</TABLE>
A0042621
<PAGE>
1. Contract Specifications
Contract Owner: William Penn Contract Number: 9999999
Contract Date: August 7, 1998 Annuity Date: September 1, 2058
Annuitant: William Penn Age of Annuitant: 35
Market Type: Non-Qualified
Separate Account: PML Variable Annuity Account III
Schedule of Purchase Payments
- -----------------------------
Initial Purchase Payment of $10,000.00 was allocated to the contract on August
7, 1998 as follows:
Variable Account 70%
Fixed Account 30%
Subsequent Purchase Payments may be made subject to the provisions of the
contract.
Schedule of Annual Charges
- --------------------------
Annual Contract Administration Charge*: $40
Asset Based Contract Administration Charge**: .15%
Mortality & Expense Risk Charge**: 1.20%
Date Annual Charges are deducted each year: August 6
*THE CONTRACT ADMINISTRATION CHARGE APPLIES EACH YEAR THERE IS A VARIABLE
ACCOUNT VALUE WHICH IS LESS THAN $100,000.
**THE MORTALITY AND EXPENSE RISK CHARGE AS WELL AS THE ASSET BASED CONTRACT
ADMINISTRATION CHARGE ARE MADE DAILY AGAINST THE ASSETS OF THE SEPARATE ACCOUNT.
Schedule of Contingent Deferred Sales Charge
- --------------------------------------------
<TABLE>
<CAPTION>
Number of contract years since Contingent Deferred
purchase payment Sales Charge
(% of purchase payment)
<S> <C>
0 7.0%
1 7.0
2 6.0
3 5.0
4 4.0
5 3.0
6 1.5
7+ 0.0
</TABLE>
Refer to Section 7 of the contract for further information on the Contingent
Deferred Sales Charge.
1
<PAGE>
2. Endorsements
To be made only by the Company
This page is intentionally
--------------------------
left blank.
-----------
Page 4
------
B004253E
<PAGE>
3. Definitions
Accumulation Unit: A unit of measure used to compute the Variable Account Value
under the contract prior to the Annuity Date. See Section 8.
Annuitant: The person during whose life annuity payments are made.
Annuity Date: The date on which annuity payments start.
Annuity Unit: A unit of measure used to calculate the amount of a variable
annuity payment. See Section 11.
Contract Owner: The person specified in the contract as the contract owner.
The Contract Owner has all rights to control all aspects of the contract,
including, after the Annuity Date and before the death of the Annuitant, the
right to transfer amounts among the subaccounts of the Separate Account and the
right to change the beneficiary.
Fixed Account: The account under which amounts are held for the Contract Owner
under all fixed interest options prior to the Annuity Date.
Interest Period: The period of time for which an interest rate declared by the
Company is guaranteed. The period begins on the first day of the calendar month
in which allocation or transfer is made.
Qualified Plan: A retirement arrangement that receives special tax treatment
under Section 403, 408, or any similar provisions of the Internal Revenue Code.
Variable Account: The account under which amounts are held for the Contract
Owner under all subaccounts of the Separate Account prior to the Annuity Date.
The Company: The Penn Mutual Life Insurance Company.
A004291P
<PAGE>
4. Purchase Payments
Purchase payments will be allocated to the subaccounts of the Separate Account
and to the fixed interest options of the Fixed Account as directed by the
Contract Owner in the application for this contract.
Subsequent purchase payments will be allocated, as specified in the allocation
section of the application, to the subaccounts of the Separate Account and to
the fixed interest options of the Fixed Account unless the Contract Owner
directs that the purchase payments be allocated otherwise.
Purchase payments applied to the contract after issue may be made at any time
without prior notice to the Company. The minimum subsequent purchase payment is
$5,000.
Total purchase payments may not exceed $1,000,000 at any time without the
consent of the Company.
4
<PAGE>
5. The Separate Account
The Separate Account. The Separate Account named on Page 3 was established by
the Company for this and other variable contracts. The Separate Account is
divided into subaccounts for the investment of assets in shares of the mutual
funds which are listed in the Additional Contract Specifications Page.
The Company owns the assets held in the Separate Account. However, the portion
of the assets of each subaccount of the Separate Account equal to the reserves
and other contract liabilities with respect to the subaccount of the Separate
Account are not chargeable with the liabilities arising out of any other
business the Company may conduct. Income and realized and unrealized gains and
losses from the assets held in each subaccount are credited to or charged
against the subaccount without regard to the income, gains or losses in other
investment accounts of the Company. Shares of a mutual fund held in a subaccount
will be redeemed at current net asset value to make transfers, pay benefits and
cover applicable charges and deductions. Any dividend or capital gain
distribution from a mutual fund will be reinvested in shares of that mutual
fund.
Substitution of Investment. If investment in a subaccount should no longer be
possible, or a subaccount's investment in a particular mutual fund should no
longer be possible, or, in the judgment of the Company, investment in a
subaccount or mutual fund becomes inappropriate to the purposes of the contract,
or, if in the judgment of the Company, investment in another subaccount, mutual
fund or insurance company separate account is in the interest of Contract Owners
of this class of contracts, the Company may substitute another subaccount,
mutual fund or insurance company separate account. Substitution may be made with
respect to existing investments and the investment of future purchase payments.
Substitution will be subject to all approvals required under applicable law.
5
A00429P
<PAGE>
6. The Fixed Account
The Fixed Account. The Fixed Account consists of the fixed interest options
which are listed in the Additional Contract Specifications Page.
Amounts allocated or transferred to the Fixed Account under this contract become
a part of the general account assets of the Company and do not fluctuate with
regard to investment experience.
Six Month Fixed Interest Option. Amounts may be only allocated to this fixed
interest option in conjunction with an election of the dollar cost averaging
program. If the dollar cost averaging program is terminated at the request of
the Contract Owner, the remaining balance will be transferred to the One Year
Fixed Interest Option unless otherwise directed by the Contract Owner.
Amounts held in the Six Month Fixed Interest Option of the Fixed Account will be
credited with interest at effective annual rates declared by the Company. The
declared interest rate will apply from the date of the allocation through the
end of a six month interest period. At the expiration of the interest period,
the Company will declare a rate not less than 3% for that portion of the fixed
interest option.
One Year Fixed Interest Option. Amounts may be allocated or transferred to this
fixed interest option. Amounts held in this fixed interest option of the Fixed
Account will be credited with interest at effective annual rates declared by the
Company. The declared interest rate will apply from the date of the allocation
or transfer through the end of a one year interest period. At the expiration of
an interest period, the Company will renew the portion of the fixed interest
option that has expired at the new rate declared for the interest period at that
time. For the 25 days following the expiration of such period, the Contract
Owner may transfer all or a portion of the amount held in such fixed interest
option to subaccount(s) of the Separate Account.
The Company will not declare rates of interest for any fixed interest option of
less than 3%.
6
<PAGE>
7. Charges and Deductions
Contract Administration Charges. These charges are assessed against contracts
with a Variable Account Value. The first charge is the Annual Contract
Administration Charge which will be no greater than the lesser of 2% of the
Variable Account Value or dollar amount specified on Page 3. This charge will
only be applied if the Variable Account Value at the time the charge is incurred
is less than $100,000. It will be deducted annually on the dates specified on
Page 3. It will also be deducted when the Variable Account Value is withdrawn or
transferred in full if withdrawal or transfer is not on the date specified on
Page 3. The charge will not be deducted after the Annuity Date.
The second charge is an asset based contract administration charge. On an annual
basis the charge will be a percentage of the daily net asset value of the
Variable Account which will not exceed the charge shown on Page 3.
Mortality and Expense Risk Charge. This charge is made to compensate the Company
for the mortality guarantees made under this contract and for guaranteeing that
the contract administration charges will not be increased by the Company over
the life of this contract or other contracts under the same class. On an annual
basis the charge will be a percentage of the daily net asset value of the
Variable Account. The charge will not exceed the value shown on Page 3.
Contingent Deferred Sales Charge. This charge, if applicable, will be deducted
upon withdrawal, in whole or in part, of the Contract Value. This charge will
not be applied on payment at time of annuitization, on a death benefit payment,
medically related withdrawal payment or disability withdrawal payment . For
further definition of the charge, see Section 15 - Withdrawal.
Premium Taxes. The Company may deduct from the Contract Value any premium or
other taxes payable to a state or other government entity. Should the Company
elect not to assess any amount so due, the Company does not waive the right to
collect such amounts at a later date.
Deductions. The asset based contract administration charge and the mortality and
expense risk charge will be computed and deducted from each subaccount of the
Separate Account in which the Contract Owner is invested. These deductions will
be made daily.
The Company will deduct other charges applicable to the Variable Account by
canceling Accumulation Units or Annuity Units. The value of the canceled units
will be equal to the amount of the charges. Cancellation of Accumulation Units
will be in the ratio of the Contract Owner's share in each subaccount of the
Separate Account to the Variable Account Value.
7
A004293P
<PAGE>
8. Contract Value
The Contract Value. The contract value is the sum of the Variable Account Value
and the Fixed Account Value.
The Fixed Account Value. The Fixed Account Value is the sum of all money
allocated or transferred to the fixed interest options of the Fixed Account plus
all interest credited to the Fixed Account. This amount shall be adjusted for
withdrawals, transfers and charges.
The Variable Account Value. The Variable Account Value is the sum of the values
of the Accumulation Units held in the subaccounts of the Separate Account for
this contract.
Number of Accumulation Units. For each subaccount of the Separate Account, the
number of Accumulation Units is the sum of (a) divided by (b), where:
(a) is each amount allocated to the subaccount; and
(b) is the value of the Accumulation Unit for that subaccount for the valuation
period in which the purchase payment was received.
The number of Accumulation Units will be adjusted for transfers, withdrawals and
charges. Adjustments will be made as of the valuation period in which all
requirements for the transaction are received.
Value of Each Accumulation Unit. For each subaccount of the Separate Account,
the value was arbitrarily set at $10 when the subaccount was established. The
value may increase or decrease from one valuation period to the next. For any
valuation period the value is (a) multiplied by (b), where:
(a) is the value of an Accumulation Unit for the prior valuation period; and
(b) is the net investment factor for that subaccount for the current
valuation period.
Net Investment Factor. As used in this contract, net investment factor is an
index used to measure the investment performance of a subaccount from one
valuation period to the next.
For any subaccount, the net investment factor for a valuation period is found by
dividing (a) by (b) and subtracting (c), where:
(a) is the net result of:
(1) net asset value per-share of the mutual fund held in the subaccount as
of the end of the valuation period; plus
(2) 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
(3) a per-share charge or credit as the Company may determine, as of the
end of the valuation period, for tax reserves.
(b) is the net result of:
(1) 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
(2) the per-share charge or credit for tax reserves as of the end of the
last prior valuation period.
(c) is the sum of the daily asset based contract administration charge, the
daily mortality and expense risk charge. On an annual basis, the sum of
such charges will not exceed the values shown on Page 3.
Valuation Period. It is the interval of time from one valuation to the next.
Valuation is the time when shares of the applicable mutual funds are valued.
8
A004294P
<PAGE>
9. Annuity Payments
Annuity Date. Unless another Annuity Date was chosen in the application or later
written notification, the Annuity Date will be the later of the first day of the
next month after the Annuitant's 95th birthday or 10 years after the Contract
Date.
The Annuity Date must be on the first day of a month. The Contract Owner may
change the Annuity Date up to 30 days before the current Annuity Date.
Annuity Options. The Contract Owner may choose a fixed annuity option, a
variable annuity option, or a combination of both up to 30 days prior to the
Annuity Date.
On the Annuity Date, the Contract Value, net of premium taxes if applicable,
must be annuitized. If not otherwise specified by the Contract Owner, the
contract will be annuitized on the Annuity Date based on a life annuity with
payments guaranteed for a 10 year period. If not otherwise specified by the
Contract Owner, the Fixed Account Value will be annuitized under the fixed
annuity option and the Variable Account Value will be annuitized under the
variable annuity option.
Minimum Annuity Payments. If the Contract Value to be applied at the Annuity
Date is less than $5,000, the Company may pay such amount in a lump sum. Annuity
payments will be made monthly, quarterly, semi-annually or annually at the
Contract Owner's request. If any payment would be less than $50, the Company may
change the frequency so that payments are at least $50 each.
9
<PAGE>
10. Fixed Annuity Payments
Amount of Fixed Annuity Payments. The portion of the Contract Value designated
by the Contract Owner for a fixed annuity option, will be applied to that
annuity option as of the Annuity Date. In no event will the monthly income under
Option 1, Option 2, Option 3 and Option 4 be less than the guaranteed monthly
income. The guaranteed monthly income will be equal to that portion of the
Contract Value, designated by the Contract Owner for a fixed annuity option,
applied to the Fixed Annuity Options Table in this section. The Fixed Annuity
Options Table shows the amount of the first payment for each $1,000 so applied,
according to the age at the Annuity Date. The tables are based on the Annuity
2000 Basic Table, without projections, 50% male/50% female with an effective
annual interest rate of 3%. Adjusted ages are used in applying those tables.
Fixed Annuity Option Tables
The following tables show the amount of the first monthly income payment for
each $1,000 of value applied under an annuity option. "Age" as used in the
tables for Options 2,3, and 4 means an adjusted age determined in the following
manner from the actual age of the Annuitant on the birthday nearest the date of
the first payment:
Date of First Payment Adjusted Age
Before calendar year 2010
Actual Age
2010-2019 Actual age decreased by 1
2020-2029 Actual age decreased by 2
2030 and later Actual age decreased by 3
<TABLE>
<CAPTION>
Option 1 - Annuity for Specified Number of Years
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Number of Years 5 6 7 8 9 10 11 12 13 14 15 16 17
Monthly Income 17.91 15.14 13.16 11.68 10.53 9.61 8.86 8.24 7.71 7.26 6.87 6.53 6.23
Number of Years 18 19 20 21 22 23 24 25 26 27 28 29 30
Monthly Income 5.96 5.73 5.51 5.32 5.15 4.99 4.84 4.71 4.59 4.47 4.37 4.27 4.18
</TABLE>
<TABLE>
<CAPTION>
Option 2 - Life Annuity and Option 3 - Life Annuity with Payments Guaranteed for 10 or 20 Years
Life 10 Years 20 Years Life 10 Years 20 Years
Age Annuity Guaranteed Guaranteed Age Annuity Guaranteed Guaranteed
<S> <C> <C> <C> <C> <C> <C> <C>
50 3.95 3.93 3.86 75 7.61 6.88 5.34
51 4.02 3.99 3.91 76 7.93 7.06 5.37
52 4.08 4.06 3.96 77 8.27 7.25 5.40
53 4.16 4.12 4.02 78 8.64 7.44 5.42
54 4.23 4.20 4.08 79 9.03 7.62 5.44
55 4.31 4.27 4.14 80 9.46 7.81 5.46
56 4.39 4.35 4.20 81 9.91 7.99 5.47
57 4.48 4.43 4.26 82 10.41 8.16 5.48
58 4.58 4.52 4.33 83 10.93 8.32 5.49
59 4.68 4.61 4.39 84 11.50 8.48 5.50
60 4.78 4.71 4.46 85 12.11 8.62 5.50
61 4.90 4.81 4.53 86 12.76 8.76 5.51
62 5.02 4.92 4.60 87 13.46 8.88 5.51
63 5.15 5.03 4.66 88 14.20 8.99 5.51
64 5.28 5.15 4.73 89 14.98 9.09 5.51
65 5.43 5.28 4.80 90 15.81 9.17 5.51
66 5.59 5.41 4.87 91 16.68 9.25 5.51
67 5.76 5.55 4.93 92 17.59 9.32 5.51
68 5.94 5.70 4.99 93 18.55 9.38 5.51
69 6.13 5.85 5.05 94 19.55 9.44 5.51
70 6.33 6.01 5.11 95 20.62 9.48 5.51
71 6.56 6.17 5.17
72 6.79 6.34 5.21
73 7.05 6.51 5.26
74 7.32 6.69 5.30
</TABLE>
<TABLE>
<CAPTION>
Option 4 - Joint and Survivor Life Annuity
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Age 50 55 60 65 70 75 80 85 90 95 Age
--- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---
50 3.53 3.64 3.73 3.80 3.85 3.89 3.92 3.93 3.94 3.95 50
55 3.64 3.79 3.92 4.04 4.13 4.20 4.24 4.27 4.29 4.30 55
60 3.73 3.92 4.12 4.30 4.45 4.57 4.65 4.71 4.74 4.76 60
65 3.80 4.04 4.30 4.56 4.81 5.02 5.17 5.28 5.35 5.38 65
70 3.85 4.13 4.45 4.81 5.18 5.52 5.80 6.01 6.15 6.23 70
75 3.89 4.20 4.57 5.02 5.52 6.04 6.52 6.91 7.19 7.37 75
80 3.92 4.24 4.65 5.17 5.80 6.52 7.27 7.96 8.50 8.87 80
85 3.93 4.27 4.71 5.28 6.01 6.91 7.96 9.03 9.99 10.73 85
90 3.94 4.29 4.74 5.35 6.15 7.19 8.50 9.99 11.48 12.78 90
95 3.95 4.30 4.76 5.38 6.23 7.37 8.87 10.73 12.78 14.74 95
</TABLE>
10
A004296P
<PAGE>
11. Variable Annuity Payments
First Variable Annuity Payment. The portion of the Contract Value designated by
the Contract Owner for a variable annuity option will be applied to one of the
Variable Annuity Option Tables in this section for the variable annuity option
and the assumed interest rate chosen as of the Annuity Date. The tables are
based on the Annuity 2000 Basic Table, without projections, 50% male/50% female
with an effective annual interest rate stipulated on the table. Adjusted ages
are used in applying those tables.
Subsequent Variable Annuity Payments. Payments after the first will vary in
amount according to the investment performance of the subaccount(s). The
payment amount may change from month to month. The amount of each subsequent
payment is the sum of (a) multiplied by (b) for each applicable subaccount,
where:
(a) is the number of Annuity Units for the subaccount; and
(b) is the value of an Annuity Unit for that subaccount for the valuation period
in which payment is due.
The amount of each annuity payment after the first will not be affected by
variations in expense or mortality experience.
Number of Annuity Units. The number of units for the subaccount of each
investment account chosen is (a) divided by (b), where:
(a) is the amount of the first variable annuity payment attributable to that
subaccount; and
(b) is the value of an Annuity Unit for the subaccount as of the Annuity Date.
The number of Annuity Units is fixed except for adjustments for subaccount
transfers. Adjustments will be made as of the valuation period in which all
requirements for the transfer are received.
Value of Each Annuity Unit. For each subaccount, the value of an Annuity Unit
was arbitrarily set at $10 when the subaccount was established. The value may
increase or decrease from one valuation period to the next. For any valuation
period the value is (a) multiplied by (b) multiplied by (c), where:
(a) is the value of an Annuity Unit for the last prior valuation period
(b) is the net investment factor for that subaccount for the valuation period
(c) is an interest factor to neutralize the assumed interest rate built into the
annuity tables.
Net Investment Factor. The net investment factor is an index used to measure
the investment performance of a subaccount from one valuation period to the
next. For any subaccount, the net investment factor for a valuation period is
found by dividing (a) by (b) and subtracting (c), where:
(a) is the net result of:
(1) net asset value per-share of the mutual fund held in the subaccount as of
the end of the valuation period; plus
(2) 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
(3) a per-share charge or credit as the Company may determine, as of the end
of the valuation period, for tax reserves.
(b) is the net result of:
(1) 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
(2) the per-share charge or credit for tax reserves as of the end of the last
prior valuation period.
(c) is the sum of the daily asset based contract administration charge and the
daily mortality and expense risk charge. On an annual basis, this charge
will be a percentage of the daily net asset value of the Separate Account.
The sum of such charges will not exceed the values shown on Page 3.
Variable Annuity Option Tables - 3% Interest Option
The following tables show the amount of the first monthly income payment for
each $1,000 of value applied under an annuity option. "Age" as used in the
tables for Options 2,3, and 4 means an adjusted age determined in the following
manner from the actual age of the Annuitant on the birthday nearest the date of
the first payment:
Date of First Payment Adjusted Age
Before calendar year 2010 Actual Age
2010-2019 Actual age decreased by 1
2020-2029 Actual age decreased by 2
2030 and later Actual age decreased by 3
<TABLE>
<CAPTION>
Option 2 - Life Annuity and Option 3 - Life Annuity with Payments Guaranteed for 10 or 20 Years
Life 10 Years 20 Years Life 10 Years 20 Years
Age Annuity Guaranteed Guaranteed Age Annuity Guaranteed Guaranteed
<S> <C> <C> <C> <C> <C> <C> <C>
50 3.95 3.93 3.86 75 7.61 6.88 5.34
51 4.02 3.99 3.91 76 7.93 7.06 5.37
52 4.08 4.06 3.96 77 8.27 7.25 5.40
53 4.16 4.12 4.02 78 8.64 7.44 5.42
54 4.23 4.20 4.08 79 9.03 7.62 5.44
55 4.31 4.27 4.14 80 9.46 7.81 5.46
56 4.39 4.35 4.20 81 9.91 7.99 5.47
57 4.48 4.43 4.26 82 10.41 8.16 5.48
58 4.58 4.52 4.33 83 10.93 8.32 5.49
59 4.68 4.61 4.39 84 11.50 8.48 5.50
60 4.78 4.71 4.46 85 12.11 8.62 5.50
61 4.90 4.81 4.53 86 12.76 8.76 5.51
62 5.02 4.92 4.60 87 13.46 8.88 5.51
63 5.15 5.03 4.66 88 14.20 8.99 5.51
64 5.28 5.15 4.73 89 14.98 9.09 5.51
65 5.43 5.28 4.80 90 15.81 9.17 5.51
66 5.59 5.41 4.87 91 16.68 9.25 5.51
67 5.76 5.55 4.93 92 17.59 9.32 5.51
68 5.94 5.70 4.99 93 18.55 9.38 5.51
69 6.13 5.85 5.05 94 19.55 9.44 5.51
70 6.33 6.01 5.11 95 20.62 9.48 5.51
71 6.56 6.17 5.17
72 6.79 6.34 5.21
73 7.05 6.51 5.26
74 7.32 6.69 5.30
</TABLE>
Option 4 - Joint and Survivor Life Annuity
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Age 50 55 60 65 70 75 80 85 90 95 Age
50 3.53 3.64 3.73 3.80 3.85 3.89 3.92 3.93 3.94 3.95 50
55 3.64 3.79 3.92 4.04 4.13 4.20 4.24 4.27 4.29 4.30 55
60 3.73 3.92 4.12 4.30 4.45 4.57 4.65 4.71 4.74 4.76 60
65 3.80 4.04 4.30 4.56 4.81 5.02 5.17 5.28 5.35 5.38 65
70 3.85 4.13 4.45 4.81 5.18 5.52 5.80 6.01 6.15 6.23 70
75 3.89 4.20 4.57 5.02 5.52 6.04 6.52 6.91 7.19 7.37 75
80 3.92 4.24 4.65 5.17 5.80 6.52 7.27 7.96 8.50 8.87 80
85 3.93 4.27 4.71 5.28 6.01 6.91 7.96 9.03 9.99 10.73 85
90 3.94 4.29 4.74 5.35 6.15 7.19 8.50 9.99 11.48 12.78 90
95 3.95 4.30 4.76 5.38 6.23 7.37 8.87 10.73 12.78 14.74 95
</TABLE>
Variable Annuity Option Tables - 5% Interest Option
The following tables show the amount of the first monthly income payment for
each $1,000 of value applied under an annuity option. "Age" as used in the
tables for Options 2,3, and 4 means an adjusted age determined in the following
manner from the actual age of the Annuitant on the birthday nearest the date of
the first payment:
Date of First Payment Adjusted Age
Before calendar year 2010 Actual Age
2010-2019 Actual age decreased by 1
2020-2029 Actual age decreased by 2
2030 and later Actual age decreased by 3
<TABLE>
<CAPTION>
Option 2 - Life Annuity and Option 3 - Life Annuity with Payments Guaranteed for 10 or 20 Years
Life 10 Years 20 Years Life 10 Years 20 Years
Age Annuity Guaranteed Guaranteed Age Annuity Guaranteed Guaranteed
<S> <C> <C> <C> <C> <C> <C> <C>
50 5.17 5.14 5.04 75 8.79 7.93 6.35
51 5.23 5.19 5.09 76 9.11 8.10 6.38
52 5.29 5.25 5.13 77 9.45 8.28 6.41
53 5.36 5.31 5.18 78 9.82 8.46 6.43
54 5.43 5.38 5.23 79 10.22 8.64 6.44
55 5.50 5.45 5.29 80 10.65 8.81 6.46
56 5.58 5.52 5.34 81 11.12 8.98 6.47
57 5.67 5.60 5.40 82 11.62 9.14 6.48
58 5.76 5.68 5.45 83 12.15 9.29 6.49
59 5.86 5.77 5.51 84 12.73 9.44 6.50
60 5.96 5.86 5.57 85 13.34 9.58 6.50
61 6.07 5.96 5.63 86 14.00 9.70 6.51
62 6.19 6.06 5.69 87 14.71 9.81 6.51
63 6.32 6.17 5.75 88 15.46 9.92 6.51
64 6.45 6.28 5.82 89 16.25 10.01 6.51
65 6.60 6.40 5.88 90 17.08 10.09 6.51
66 6.75 6.53 5.94 91 17.96 10.17 6.51
67 6.92 6.66 5.99 92 18.88 10.23 6.51
68 7.10 6.80 6.05 93 19.84 10.29 6.51
69 7.29 6.95 6.10 94 20.84 10.34 6.51
70 7.50 7.10 6.15 95 21.91 10.38 6.51
71 7.72 7.25 6.20
72 7.96 7.42 6.24
73 8.22 7.58 6.28
74 8.49 7.75 6.32
</TABLE>
Option 4 - Joint and Survivor Life Annuity
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Age 50 55 60 65 70 75 80 85 90 95 Age
50 4.74 4.83 4.92 4.99 5.04 5.09 5.12 5.14 5.15 5.16 50
55 4.83 4.96 5.09 5.20 5.29 5.36 5.42 5.45 5.47 5.49 55
60 4.92 5.09 5.26 5.43 5.58 5.71 5.80 5.86 5.90 5.93 60
65 4.99 5.20 5.43 5.68 5.92 6.13 6.29 6.41 6.49 6.54 65
70 5.04 5.29 5.58 5.92 6.27 6.61 6.90 7.12 7.27 7.37 70
75 5.09 5.36 5.71 6.13 6.61 7.12 7.60 8.01 8.30 8.50 75
80 5.12 5.42 5.80 6.29 6.90 7.60 8.34 9.03 9.59 9.99 80
85 5.14 5.45 5.86 6.41 7.12 8.01 9.03 10.11 11.07 11.84 85
90 5.15 5.47 5.90 6.49 7.27 8.30 9.59 11.07 12.57 13.87 90
95 5.16 5.49 5.93 6.54 7.37 8.50 9.99 11.84 13.87 15.83 95
</TABLE>
11
A004297P
<PAGE>
12. Annuity Options
Option 1 - Annuity for Specified Number of Years. Payments will be made for a
specified number of years, which may not be less than 5 nor more than 30. This
option is available for a fixed annuity only.
Option 2 - Life Annuity. Payments will be made for the life of the Annuitant.
Payments will cease with the last payment due prior to the Annuitant's death.
Option 3 - Life Annuity with Payments Guaranteed for 10 or 20 years. Payments
will be made for the life of the Annuitant. A guaranteed payment period of
either 10 or 20 years may be chosen.
Option 4 - Joint and Survivor Life Annuity. The initial payment will be made if
either the Annuitant or the designated second Annuitant are living. Subsequent
payments will continue during the joint lives of the Annuitants and thereafter
during the life of the surviving annuitant. Payments will end with the last
payment due before the death of the last Annuitant to die.
Other annuity forms may be available with the consent of the Company.
If the Annuitant dies prior to the end of the specified period under Option 1 or
the guaranteed period under Option 3, the beneficiary may choose either:
(1) To have the payments continue for the remainder of the specified or
guaranteed period, or
(2) To receive at any time in one sum the present value of the remaining
payments to be made over the specified or guaranteed period.
If the beneficiary dies while receiving annuity payments under Option 1 or the
guaranteed period of Option 3, the present value of remaining payments will be
paid in one sum to the beneficiary's estate unless otherwise specified. The
present value will be computed as of the valuation period in which due proof of
death and the necessary forms to make payment to a beneficiary are received at
our Administrative Office. At that time, the present value of the fixed annuity
option will be commuted at a rate set by the Company on the annuity date and the
present value of the variable annuity option will be commuted at the assumed
interest rate built into the annuity table chosen at annuitization.
Payments. Payments will be made on the first day of the month starting with the
Annuity Date. Payments under all options will be made to or at the direction of
the Contract Owner.
12
A004299P
<PAGE>
13. Death Benefit
Death Before the Annuity Date. A death benefit shall be payable upon the earlier
of the death of:
(1) the Contract Owner or
(2) the Annuitant.
Prior to the Annuity Date and upon receipt of due proof of death and the
necessary forms to make payment to a beneficiary, the Company will pay a death
benefit to the beneficiary.
Upon the Contract Owner's death, the death benefit is equal to the Contract
Value on the date of receipt of due proof of death.
Upon the Annuitant's death, the death benefit is equal to the Fixed Account
death benefit plus the Variable Account death benefit. The Fixed Account death
benefit is equal to the Fixed Account Value on the date of receipt of due proof
of death and the necessary forms to make payment to a beneficiary. The
Variable death benefit is the greater of:
(1) the Variable purchase payments,
net of Variable Account transfers and less the total amount of any partial
withdrawals from the Variable Account; or
(2) the Variable Account Value at the
date of receipt of due proof of death and the necessary forms to make payment
to a beneficiary.
Within one year of the date of death, the beneficiary may elect one of the
following payout options if death occurs before the Annuity Date.
(1) The death benefit may be paid in a single sum. The payment will
generally be made within 7 days of receipt of the necessary forms to make
payment.
(2) The Contract Value may be paid out in a single sum within five years after
the date of death. At the time of this election, the beneficiary must
specify the allocation of the Contract Value to the subaccounts of the
Separate Account and the fixed interest options of the Fixed Account. During
this election and within five years after the date of death, the beneficiary
may transfer amounts among the subaccounts of the Separate Account and the
fixed interest options of the Fixed Account. Transfers from the fixed
interest options are subject to the limitations imposed on such options
prior to the end of the interest period.
(3) The death benefit may be paid in the form of one of the Annuity Options. If
the death benefit becomes payable upon the death of the Annuitant, election
to receive the death benefit in the form of an annuity must be made within
60 days of the death of the Annuitant. The payments must be made over the
life of the beneficiary or over a period not extending beyond the life
expectancy of the beneficiary. Payments under this option must commence
within one year after the date of death.
(4) If the beneficiary is the Contract Owner's surviving spouse, the surviving
spouse may elect to become the Contract Owner.
If no such election is made within one year of the date of death, the Company
will pay the Contract Value to the beneficiary at that time. If there is more
than one surviving beneficiary, the beneficiaries must choose to receive their
respective portions of the death benefit according to either (1) or (2) or (3)
in the preceding paragraph. If no beneficiary survives the first to die of the
Contract Owner or the Annuitant, the death benefit will be paid in a lump sum to
the Contract Owner's estate or the Contract Owner, respectively.
Death After the Annuity Date. This death benefit shall be payable upon the death
of the Annuitant. If death occurs after the Annuity Date, the death benefit
payable, if any, will be according to the annuity option in force.
Beneficiary. The beneficiary is the person(s) who is to receive:
(1) Payment on the earlier of the death of the Contract Owner or the Annuitant
prior to the Annuity Date, or
(2) Remaining payments under specified or guaranteed annuity payments, if any,
on death of the Annuitant on or after the Annuity Date.
The Contract Owner shall designate the beneficiary in the application. The
Contract Owner may change the beneficiary at any time before the death of the
Contract Owner or the Annuitant, whichever occurs first.
The estate of a beneficiary who dies before the first to die of the Contract
Owner or the Annuitant shall have no rights under this contract.
13
A004300P
<PAGE>
14. Transfers
Transfers. Subject to and in accordance with the provisions of this contract and
prior to the Annuity Date, the Contract Owner may transfer amounts among the
subaccounts of the Separate Account and the one year fixed interest option of
the Fixed Account, provided that:
(a) the minimum amount which may be transferred is $250 or, if less, the full
amount held in the subaccount or fixed interest option;
(b) for partial transfers, the amount remaining in a subaccount or fixed
interest option must be at least $250;
(c) amounts may be transferred from the one year fixed interest option(s) to
other subaccounts only during the 25 day period immediately following the
end of the interest period for which an interest rate is declared on such
fixed interest option(s).
Subject to and in accordance with the provisions of this contract and after the
Annuity Date, the Contract Owner may transfer amounts among subaccounts of the
Separate Account. Upon death of the Contract Owner or the Annuitant and under
the election of a Variable Annuity option, the beneficiary shall have the right
to transfer amounts among the subaccounts of the Separate Account, provided
that:
(a) the minimum amount which may be transferred is $250 or, if less, the full
amount held in the subaccount;
(b) for partial transfers, the amount remaining in a subaccount must be at
least $250.
14
<PAGE>
15. Withdrawal
Withdrawal. Prior to the earlier of the Annuity Date, the death of the Contract
Owner or the death of the Annuitant, the Contract Owner may withdraw all or part
of the Contract Value.
Withdrawal Payments. The Contract Owner may make a full or partial withdrawal.
The minimum withdrawal is $500 or, at the time of the first withdrawal in each
contract year, the free withdrawal amount defined below, if less.
At the time of a partial withdrawal, the amount remaining in the contract must
be at least $5,000 or such lower amount as the Company may require. A minimum
balance of $250 must be in each subaccount or a fixed interest option. If the
Contract Owner makes a full withdrawal, the contract must be returned to the
Company.
Unless otherwise specified by the Contract Owner, the withdrawal will be made
first prorata from the subaccounts of the Separate Account up to the Variable
Account Value, and then from the Fixed Account beginning with the fixed interest
option with the shortest interest period. Within a fixed interest option,
partial withdrawals will be made from amounts most recently allocated, renewed
or transferred.
Free Withdrawal. Prior to the Annuity Date, on the last day of the first
contract year and once each Contract year thereafter, the first withdrawal of
the contract year, up to the free withdrawal amount will not be assessed a
Contingent Deferred Sales Charge.
Free Withdrawal Amount. The free withdrawal amount is equal to 15% of the
purchase payments as of the date of the request.
Contingent Deferred Sales Charge. The Contingent Deferred Sales Charge will be
imposed upon withdrawals.
For purposes of calculating the Contingent Deferred Sales Charge, purchase
payments will be allocated to the amount withdrawn. The Company will allocate
the purchase payment with the earliest effective date first, then the next
earliest purchase payment until the allocation is equal to the withdrawal
amount. There will be no Contingent Deferred Sales Charge on amounts withdrawn
that exceed the total purchase payments of the contract. Subject to the
provisions of the contract, the free withdrawal amount will be applied to the
purchase payments that have been in the contract for the longest length of time.
The percentage charged will vary depending upon the number of full contract
years since the purchase payments were made to the time of the withdrawal in
accordance with the table shown on Page 3.
The Contingent Deferred Sales Charge will be equal to the sum of charges applied
to the purchase payments associated with the withdrawal. The charge applied to
each purchase payment is equal to the product of (a) multiplied by (b) for each
purchase payment associated with the withdrawal, where:
(a) is the amount of the purchase payment associated with the withdrawal, and
(b) is the percentage that corresponds to the number of full contract years
since the purchase payment.
Systematic Withdrawals. After the contract is issued and prior to the Annuity
Date, the Contract Owner may withdraw systematically if no previous free
withdrawal has been made during the current contract year. The minimum Contract
Value to be eligible for a withdrawal of this type is $25,000 or such lower
amount as the Company may require. The maximum systematic withdrawal amount is
set annually; it is equal to the Free Withdrawal Amount as defined in the
provision above. The minimum systematic withdrawal amount is $100. The
withdrawals can be made on a monthly, quarterly, semiannual or annual basis.
A level systematic withdrawal payment will begin one modal period after the date
of receipt of the request. No Contingent Deferred Sales Charge will be applied
to systematic withdrawals under this provision.
The Contract Owner must send the Company written notice to either stop the
systematic withdrawals or to change the amount or the mode of the withdrawals.
The systematic withdrawals will terminate upon the earlier of the death of the
Contract Owner or the Annuitant.
15
A004301P
<PAGE>
16. General
Ownership of Contract. The Contract Owner must be named in the application.
Upon written notice to the Company, the Contract Owner may assign the contract
to a new Contract Owner.
Disability. The Contract Owner may at any time withdraw all or any part of the
Contract Value free of Contingent Deferred Sales Charge if:
(i) the Contract Owner, or the Annuitant in a Qualified Plan, is then
disabled as defined in Section 72(m)(7) of the Internal Revenue Code and
as applied under the Social Security Act, and
(ii) the disability began after the Contract Date, and
(iii) the disability has continued without interruption for four months.
Medically Related Withdrawal. After the first contract year for contracts
issued to Contract Owners prior to their 75th birthday and prior to the Annuity
Date, the Contract Owner may request to withdraw all or any part of the Contract
Value free of Contingent Deferred Sales Charge if either of the following events
occur.
(a) While the contract is in force, the Contract Owner is first confined to a
Medical Care Facility and remains there for at least 90 consecutive days.
The Medical Care Facility must be a state licensed facility which provides
medically necessary in-patient care. The facility must be prescribed based
on physical limitations which prohibit daily living in a non-institutional
setting by a licensed physician in writing.
(b) While the contract in force, the Contract Owner is diagnosed by a licensed
physician with a Fatal Illness which is expected to result in death within 2
years of the diagnoses for 80% of the diagnosed cases.
The Company must receive due proof of the Contract Owner's confinement or Fatal
Illness in writing. The Contract Owner must be living as of the date the
Medically Related Withdrawal proceeds are paid. The maximum payout for all
annuities with this benefit, at or issued by the Company and affiliated
companies, is $500,000.
Deferment of Transfers and Payments. Transfers and payments of withdrawals from
the Variable Account and payment of the Variable Account death benefit will be
made within seven days after receipt by the Company of all documents required
for such transfer, payment of withdrawal or payment of death benefits. However,
the Company may defer a transfer, a withdrawal, a death benefit payment, the
Annuity Date or annuity payments under the contract, if:
(1) The New York Stock Exchange is closed (other than customary weekend and
holiday closings);
(2) Trading on the New York Stock Exchange is restricted;
(3) An emergency exists such that it is not reasonably practical to dispose of
securities held in the Separate Account or to fairly determine the value of
its assets; or
(4) The Securities and Exchange Commission by order so permits for the
protection of security holders.
Conditions in (2) and (3) will be decided by, or in accordance with rules of,
the Securities and Exchange Commission.
The Company may defer a transfer or payment of a withdrawal from the Fixed
Account or payment of the Fixed Account death benefit for a period not exceeding
six months, if it reasonably determines that investment conditions are such that
an orderly sale of assets held as part of general assets is not possible.
Incontestability. No material misstatement made by the applicant will void the
contract unless it is contained in the written application attached to the
contract. The contract will be incontestable after it has been in force for 2
years from the Contract Date.
Misstatement of Age. If the age of the Annuitant or a joint payee is misstated,
any amount payable under this contract will be that amount which the purchase
payments paid would have purchased on the basis of the correct age.
If the annuity payments have been overpaid because the age of the Annuitant or
joint payee has been misstated, the amount overpaid, with interest at the rate
of 6% per year or such higher rate as state law may require, compounded
annually, will be charged against the payments still to be made under this
contract.
If the annuity payments have been underpaid because the age of the Annuitant or
joint payee has been misstated, the amount underpaid, with interest at the rate
of 6% per year or such higher rate as state law may require, compounded
annually, will be paid in full with the next payment due under this contract.
Proof of Age and Survival. The Company may require satisfactory proof of correct
age at any time. If any payment under this contract depends on the payee being
alive, the Company may require satisfactory proof of survival.
The Contract. The contract, any endorsements, any riders and its application are
the entire contract. It is issued in consideration of the application and
purchase payments.
Only the President, a Vice President, an Associate Actuary, an Actuary or
Secretary of the Company may change the contract. Any change must be in writing.
At any time, the Company may make such changes in this contract as are required
to make it conform with any law or regulation issued by any government agency to
which it is subject.
Participating Contract. The contract may participate in divisible surplus of
Penn Mutual. Divisible surplus, if any, to be apportioned to the contract shall
be apportioned annually and shall be paid in cash or credited to the Contract
Value at the end of the contract year. No divisible surplus is expected to be
apportioned to this contract in the foreseeable future.
Dates. Contract years and anniversaries are measured from the Contract Date.
Notices, Changes and Choices. To be effective, all notices, changes and choices
which the Contract Owner may make under the contract must be in writing.
Contract Owner should provide notification on a form provided or approved by the
Company, signed and received by the Company at its Administrative Office or
designated service office. If acceptable to the Company, notices, changes and
choices relating to beneficiaries and ownership will take effect as of the date
signed unless the Company has already acted in reliance on the prior status. The
Company is not responsible for their validity.
Contract Payments. All sums payable to or by the Company are payable at its
designated service office.
Protection of Proceeds. Annuity payments under this contract may not be assigned
by the payee prior to their due dates. To the extent allowed by law, annuity
payments are not subject to legal process for debts of a payee.
Compliance with Minimum Value Requirements. Annuity, death and withdrawal
benefits are not less than the minimum benefits required under applicable laws
and regulations of the jurisdiction in which this contract is delivered.
The benefits provided under the Fixed Account of this contract are increased by
interest credited in excess of the guaranteed minimums, if any.
Periodic Reports. As required by federal and state law and at least once each
year, the Company will furnish the Contract Owner with periodic reports. The
periodic reports will contain information on the Separate Account, the Variable
Account Value, the number of Accumulation Units, the value per Accumulation Unit
and the Fixed Account Value.
16
A004302P
<PAGE>
Additional Contract Specifications
Eligible Mutual Funds
- ---------------------
Penn Series Funds, Inc.
Independence Capital (ICMI) Vontobel USA
Money Market International Equity
Quality Bond
Growth Equity T. Rowe Price
High Yield Bond
OpCap Advisors Flexibly Managed
Value Equity
Small Capitalization
TCI Portfolios, Inc. Neuberger & Berman Advisers Management Trust
Twentieth Century Neuberger & Berman
(Investors Research) Limited Maturity Bond Portfolio
TCI Growth Portfolio Balanced Portfolio
Variable Insurance Product Funds Variable Insurance Product Funds II
Fidelity Management Fidelity Management
Equity Income Asset Manager
Growth
Eligible Fixed Interest Options
-------------------------------
Six Month
One Year
EXCEPT WITH THE CONSENT OF PENN MUTUAL, THERE CAN BE NO ALLOCATION OF PURCHASE
PAYMENTS AND TRANSFERS TO MORE THAN 17 OF THE FUNDS AND THE FIXED INTEREST
ACCOUNTS PRIOR TO THE ANNUITY DATE. FOLLOWING THE ANNUITY DATE, THE INITIAL
ALLOCATION AND SUBSEQUENT TRANSFERS CAN BE TO NO MORE THAN 1 FIXED INTEREST
OPTION AND 3 FUNDS OVER THE PHASE OF THE CONTRACT.
17
A004386P
<PAGE>
Please notify the Company promptly of any change in address.
Annual Election - The Company is a mutual life insurance company. It has no
stockholders. The Contract Owner of this contract is a member of The Company
while this contract is in force during the life of the Annuitant before the
Annuity Date and before total withdrawal of the Contract Value. Members have the
right to vote in person or by proxy at the annual election of Trustees held at
the Home Office, on the first Tuesday of March. If more information is desired,
it may be obtained from the Secretary.
VALUES AND PAYMENTS UNDER THIS CONTRACT, WHEN BASED UPON THE INVESTMENT
EXPERIENCE OF A SEPARATE ACCOUNT, ARE VARIABLE AND ARE NOT GUARANTEED AS TO
FIXED DOLLAR AMOUNT.
Individual Variable and Fixed
Annuity Contract
Flexible Purchase Payments
Annuity Payments payable on Annuity Date
Flexible Purchase Payments payable until
Annuity Date Participating
The Company will make monthly annuity
payments and other payments as set forth
in this contract.
The Penn Mutual Life Insurance Company, Philadelphia, Pennsylvania 19172
VAA-98
18
A004261B
<PAGE>
Exhibit 4(b)
RIDER - GUARANTEED MINIMUM DEATH BENEFIT - RISING FLOOR
A004263R
The Penn Mutual Life Insurance Company agrees, subject to the provisions of this
supplemental agreement, to provide the Guaranteed Minimum Death Benefit as
applied for on the application. The Company also agrees to provide all of the
other benefits which are stated in this agreement.
This agreement is a part of the policy to which it is attached. It is subject
to all of the provisions of the policy unless stated otherwise in this
agreement. This agreement enhances the death benefit section in the contract
to which it is attached.
DEATH BEFORE THE ANNUITY DATE - Prior to the Annuity Date and upon receipt of
due proof of the Annuitant's death and the necessary forms to make payment to a
beneficiary, the Company will pay to the beneficiary the Guaranteed Minimum
Death Benefit in place of the Variable Account Death Benefit if it is greater.
The Guaranteed Minimum Death Benefit will be the sum of the purchase payments
paid into the Variable Account less any reduction for a withdrawal from the
Variable Account as described below accumulated with interest at an effective
annual rate of 5%. The accumulation will be from the effective date of the
purchase payment or the withdrawal to the date of payment of the Guaranteed
Minimum Death Benefit or to age 80, if earlier. After age 80, the purchase
payments and withdrawals will be reflected in the Guaranteed Minimum Death
Benefit value but will not accumulate further interest.
When part of the Variable Account Value is withdrawn, the withdrawal will reduce
the Guaranteed Minimum Death Benefit in the same proportion that the Variable
Account Value was reduced on the date of withdrawal. For each withdrawal, the
Guaranteed Minimum Death Benefit reduction is calculated by multiplying the
Guaranteed Minimum Death Benefit on the date of withdrawal by a fraction, the
numerator of which is the amount of the withdrawal including any applicable
Contingent Deferred Sales Charge and the denominator of which is the Variable
Account Value immediately prior to the withdrawal.
Transfers into the Variable Account will be treated as purchase payments
allocated to the Variable Account for the Guaranteed Minimum Death Benefit
calculation described above. Similarly, transfers out of the Variable Account
will be treated as withdrawals from the Variable Account.
CHARGE - While this agreement is in force, an asset based charge will be
assessed. The charge will be a percentage of the average variable account
value. On an annual basis the percentage will not exceed the amount shown on
Page 3 of the contract. The charge will be deducted on the dates specified on
Page 3. It will also be deducted when the Variable Account Value is withdrawn
or transferred in full if withdrawal or transfer is not on the date specified on
Page 3. The charge will be deducted on the date of payment of the Death Benefit
and on the date of annuitization. If the charge is deducted on a date other
than that specified on Page 3, only a fraction of the charge will be deducted.
The fraction will be equal to the portion of the year that the contract was
inforce.
AVERAGE VARIABLE ACCOUNT VALUES - The average variable account value is equal to
the variable account value at the beginning of the contract year plus the
variable account value at the time the charge is assessed divided by two. At
the time of the first deduction, the beginning of the contract year value will
be equal to the initial purchase payment allocated to the variable account.
TERMINATION OF AGREEMENT - This agreement will terminate upon :
(a) the Termination Date for this agreement shown on Page 3 of the Contract;
(b) surrender of this contract;
<PAGE>
(c) full withdrawal of the variable account;
(d) annuitization; or
(e) receipt by the Company of a written request by the Owner to discontinue it.
EFFECTIVE DATE - The effective date of this agreement is the same as the Date of
Issue of this policy unless another effective date is shown below.
/s/ Robert E. Chappell
Chairman and Chief Executive Officer
GDBRF-98
<PAGE>
Exhibit 4(c)
RIDER - GUARANTEED MINIMUM DEATH BENEFIT - STEP UP
A004264R
The Penn Mutual Life Insurance Company agrees, subject to the provisions of this
supplemental agreement, to provide the Guaranteed Minimum Death Benefit as
applied for on the application. The Company also agrees to provide all of the
other benefits which are stated in this agreement.
This agreement is a part of the policy to which it is attached. It is subject
to all of the provisions of the policy unless stated otherwise in this
agreement. This agreement enhances the death benefit section in the contract
to which it is attached.
DEATH BEFORE THE ANNUITY DATE. Prior to the Annuity Date and upon receipt of
due proof of the Annuitant's death and the necessary forms to make payment to a
beneficiary, the Company will pay to the beneficiary the Guaranteed Minimum
Death Benefit in place of the Variable Account Death Benefit if it is greater.
On each Contract Anniversary, the Guaranteed Minimum Death Benefit will be equal
to the greater of:
(1) the Guaranteed Minimum Death Benefit currently in effect; or
(2) the Variable Account Value on the current Contract Anniversary.
The Guaranteed Minimum Death Benefit after the Contract Anniversary will be the
Guaranteed Minimum Death Benefit on the Contract Anniversary plus the sum of
purchase payments paid into the Variable Account after the Contract Anniversary
less any reduction for a withdrawal from the Variable Account as described
below.
When part of the Variable Account Value is withdrawn, the withdrawal will reduce
the Guaranteed Minimum Death Benefit in the same proportion that the Variable
Account Value was reduced on the date of withdrawal. For each withdrawal, the
Guaranteed Minimum Death Benefit reduction is calculated by multiplying the
Guaranteed Minimum Death Benefit on the date of withdrawal by a fraction, the
numerator of which is the amount of the withdrawal including any applicable
Contingent Deferred Sales Charge and the denominator of which is the Variable
Account Value immediately prior to the withdrawal.
Transfers into the Variable Account will be treated as purchase payments
allocated to the Variable Account for the Guaranteed Minimum Death Benefit
calculation described above. Similarly, transfers out of the Variable Account
will be treated as withdrawals from the Variable Account.
CHARGE--While this agreement is in force, an asset based charge will be
assessed. The charge will be a percentage of the average variable account
value. On an annual basis the percentage will not exceed the amount shown on
Page 3 of the contract. The charge will be deducted on the dates specified on
Page 3. It will also be deducted when the Variable Account Value is withdrawn
or transferred in full if withdrawal or transfer is not on the date specified on
Page 3. The charge will be deducted on the date of payment of the Death Benefit
and on the date of annuitization. If the charge is deducted on a date other
than that specified on Page 3, only a fraction of the charge will be deducted.
The fraction will be equal to the portion of the year that the contract was
inforce.
AVERAGE VARIABLE ACCOUNT VALUES--The average variable account value is equal to
the variable account value at the beginning of the contract year plus the
variable account value at the time the charge is assessed divided by two. At
the time of the first deduction, the beginning of the contract year value will
be equal to the initial purchase payment allocated to the variable account.
TERMINATION OF AGREEMENT--This agreement will terminate upon:
(a) the Termination Date for this agreement shown on Page 3 of the Contract;
(b) surrender of this contract;
<PAGE>
(c) full withdrawal of the variable account;
(d) annuitization; or
(e) receipt by the Company of a written request by the Owner to discontinue it.
EFFECTIVE DATE--The effective date of this agreement is the same as the Date of
Issue of this policy unless another effective date is shown below.
/s/ Robert E. Chappell
Chairman and Chief Executive Officer
GDBSU-98
<PAGE>
Exhibit 4(d)
2. ENDORSEMENTS
A003935E
ENDORSEMENT - INDIVIDUAL RETIREMENT ANNUITY
The contract is amended as follows:
1. CONTRACT OWNER
The definition of Contract Owner is amended by the addition of the following
provision: The contract is established for the exclusive benefit of the
individual or his or her beneficiaries.
2. PURCHASE PAYMENTS
The following provision is added to the Purchase Payments Section:
There are no fixed Purchase Payments under this contract.
No Purchase Payments under this contract may be made unless this contract is
an Individual Retirement Annuity which meets the requirements of section
408(b) of the Internal Revenue Code ("Code") for the taxable year of the
Contract Owner for or during which the Purchase Payment is made.
Consequently, no Purchase Payments will be accepted under a SIMPLE plan
established by any employer pursuant to Code section 408(p). No transfer or
rollover of funds attributable to contributions made by a particular employer
under its SIMPLE plan will be accepted from a SIMPLE IRA, that is, an IRA
used in conjunction with a SIMPLE plan, prior to the expiration of the 2-year
period beginning on the date the individual first participated in that
employer's SIMPLE plan. Purchase Payments must be paid in cash and either:
(a) must meet the requirements for deduction under Section 219 of the code
and must not exceed the lesser of $2,000 for the Contract Owner or 100%
of the Contract Owner's compensation per year except,
(i) in the case of an Individual Retirement Annuity established by the
Contract Owner for the Contract Owner's spouse, effective January
1, 1997, the maximum Purchase Payment per year for the Contract
Owner's spouse shall not exceed $2,000, provided that the combined
contributions of the Contract Owner and the Contract Owner's spouse
do not exceed the combined compensation of the Contract Owner and
the Contract Owner's spouse, and the Contract Owner and the
Contract Owner's spouse file a joint tax return;
(ii) in the case of an Individual Retirement Annuity that is a
simplified employee pension plan as defined in section 408(k) of
the Code, the maximum Purchase Payment per year shall be equal to
the lesser of
(A) 15% of compensation not in excess of the first $150,000
($200,000 for benefits accruing in plan years beginning
before 1994), adjusted pursuant to Section 415 of the
code, or
(B) $30,000 (as adjusted under the Code for
inflation); and
<PAGE>
(b) must be paid with funds which qualify as a rollover contribution under
section 402(c), 403(a)(4), 403(b)(8), or 408(d)(3) of the Internal
Revenue Code.
3. REQUIRED MINIMUM DISTRIBUTIONS
Any benefits payable under the Annuity Payments Section, or Withdrawal
Section are subject to the following provision:
Notwithstanding any provisions of this contract to the contrary, the
distribution of an individual's interest shall be made in accordance with the
minimum distribution requirements of section 401(a)(9) of the Code and the
regulations thereunder, including the incidental death benefit requirements
of section 401(a)(9)(G) of the Code and the regulations thereunder, and the
minimum distribution incidental benefit requirement of section 1.401(a)(9)-2
of the Proposed Income Tax Regulations, all of which are herein incorporated
by reference.
DISTRIBUTIONS BEFORE DEATH
The entire interest of the individual for whose benefit the contract is
maintained
(a) will be distributed, no later than the first day of April
following the calendar year in which such individual attains age 70 1/2
(required beginning date), or
Endorsement No. 1534-96
Page 4
A003936E Page 4 (con'd)
ENDORSEMENT - INDIVIDUAL RETIREMENT ANNUITY (CONTINUED)
(b) will begin to be distributed not later than the required
beginning date over the life of such individual, the lives of such
individual and his or her designated beneficiary, a period not extending
beyond the life expectancy of such individual, or the period not
extending beyond joint and last survivor expectancy of such individual
and his or her designated beneficiary. Distributions made under paragraph
(b) must be made in periodic payments at intervals of no longer than one
year and distributions made in years after the required beginning date
must be made on or before December 31. In addition, distributions made
under paragraph (b) must be either non-increasing or they may increase
only as provided in Q&A F-3 of section 1.401(a)(9)-1 of the Proposed
Income Tax Regulations.
For purposes of calculating the maximum period over which distributions can be
made under paragraph (b) above, life expectancy is computed by use of the
expected return multiples in Table V and VI of section 1.72-9 of the Income Tax
Regulations. Unless otherwise elected by the individual by the time
distributions are required to begin, life expectancies shall be recalculated
annually. Any affirmative election made by the individual shall be irrevocable
and shall apply to all subsequent years. The life expectancy of a non-spouse
beneficiary may not be recalculated. Instead, life expectancy will be
calculated using the attained age of such beneficiary during the calendar year
in which the individual attains ages 70 1/2, and payments for subsequent years
shall be calculated based on such life expectancy reduced by one for each
calendar year which has elapsed since the calendar year life expectancy was
first calculated.
A Contract Owner who maintains more than one IRA may satisfy the minimum
distribution requirements under section 401(a)(9) of the Code by receiving a
distribution from any one or more of his or her IRAs in an amount equal to the
total amount of the required minimum distributions of all his or her IRAs. For
this purpose, the Contract Owner of two or more IRAs may use the 'alternative
method' described in Notice 88-38, 1988-1 C.B. 524, to satisfy the minimum
distribution requirements described in this provision.
<PAGE>
DISTRIBUTION UPON DEATH
DISTRIBUTIONS BEGINNING BEFORE DEATH. If the individual dies after
distribution of his or her interest has begun, the remaining portion of such
interest will continue to be distributed at least as rapidly as under the
method of distribution being used prior to the individual's death.
DISTRIBUTIONS BEGINNING AFTER DEATH. If the individual dies before
distribution of his or her interest begins, distribution of the individual's
entire interest shall be completed by December 31 of the calendar year
containing the fifth anniversary of the individual's death except to the
extent that an election is made to receive distribution in accordance with
(1) or (2) below:
(1) If the individual's interest is payable to a designated beneficiary,
then the entire interest of the individual may be distributed over the
life or over a period certain not greater than the life expectancy of the
designated beneficiary commencing on or before December 31 of the
calendar year immediately following the calendar year in which the
individual died.
(2) If the designated beneficiary is the individual's surviving spouse,
the date distributions are required to begin in accordance with (1) above
shall not be earlier than the later of (A) December 31 of the calendar
year immediately following the calendar year in which the individual died
or (B) December 31 of the calendar year in which the individual would
have attained age 70 1/2.
(3) If the designated beneficiary is the individual's surviving spouse,
the spouse may treat the contract as his or her own IRA and, in such
event, shall be treated as the Contract Owner thereafter. This election
will be deemed to have been made if such surviving spouse makes a regular
IRA contribution to the contract, makes a rollover to or from such
contract, or fails to elect to receive a distribution within the
otherwise applicable time period described above.
Life expectancy is computed by use of the expected return multiples in Tables
V and VI of section 1.72-9 of the Income Tax Regulations. For purposes of
distributions beginning after the individual's death, unless otherwise
elected by the surviving spouse by the time distributions are required to
begin, life expectancies shall be recalculated annually. Such election shall
be irrevocable by the surviving spouse and shall apply to all
Endorsement No. 1534-96
ENDORSEMENT - INDIVIDUAL RETIREMENT ANNUITY (CONTINUED)
subsequent years. In the case of any other designated beneficiary, life
expectancies shall be calculated using the attained age of such
beneficiary during the calendar year in which distributions are required
to begin pursuant to this section, and payments for any subsequent
calendar year shall be calculated based on such life expectancy reduced by
one for each calendar year which has elapsed since the calendar year life
expectancy was first calculated.
Distributions under this section are considered to have begun if
distributions are made on account of the individual reaching his or her
required beginning date, or if prior to the required beginning date,
distributions irrevocably commence to an individual over a period permitted
and in an annuity form acceptable under section 1.401(a)(9)-1 of the
Proposed Income Tax Regulations.
4. ANNUITY PAYMENTS
In the Annuity Payments Section, the provision entitled "Annuity Date" is
changed to read as follows, subject to the minimum distribution requirements
of Paragraph 3 above being satisfied
<PAGE>
by such alternative methods as may from time to time be approved by the
Commissioner of Internal Revenue.
ANNUITY DATE. The Annuity Date shall be the first day of the month selected
by the Annuitant in the application. The Annuity Date shall not be later than
the first day of the next month after the Annuitant's 90th birthday. The
Annuitant may change the Annuity Date up to 30 days prior to the current
Annuity Date.
5. OWNERSHIP
Transferability and Forfeitability Restriction. The Annuitant is the Contract
Owner. This contract is nontransferable by the Contract Owner and the entire
interest of the Contract Owner is nonforfeitable in accordance with section
408(b)(1) and (4) of the Code.
6. REFUND OF PURCHASE PAYMENTS
Any refund of purchase payments (other than those attributable to excess
contributions) will be applied, before the close of the calendar year
following the close of the year of the refund, toward the payment of future
Purchase Payments or the purchase of additional benefits.
7. AMENDMENT OF CONTRACT.
To the extent necessary to comply with applicable laws and regulations,
including the Internal Revenue Code and rules and regulations thereunder, the
Company reserves the right to amend this contract without the consent of the
Contract Owner. Such amendment may, to the extent necessary, have retroactive
effect. The Contract Owner will be given a copy of any such amendments when
they are made.
8. PERIODIC REPORTS.
As required by federal and state law and at least once each year Penn Mutual
will furnish the Owner with a periodic report on the Separate Account, the
Variable Account Value, the number of Accumulation Units, the value per
Accumulation Unit and the Fixed Account Value as they apply to the contract.
9. The terms of this endorsement shall override any inconsistent or conflicting
provisions in the contract. The Effective Date of this endorsement is the
Contract Date.
Philadelphia, Pennsylvania The Penn Mutual Life Insurance Company
/s/ Peter R. Schafer
Actuary
Endorsement No. 1534-96
A003937E Page 4 (con'd)
<PAGE>
Exhibit 4(e)
2. ENDORSEMENT
A004077E
ENDORSEMENT - TAX DEFERRED ANNUITY - 403(b)
The following provisions are added to the contract:
1. NON-TRANSFERABLE
This contract is non-transferable in accordance with section 401(g) of the
Internal Revenue Code. It may not be sold, assigned, discounted or pledged as
collateral for a loan or as security for the performance of an obligation or
for any other purpose, to any person other than the Company.
2. BENEFIT COMMENCEMENT DATE
On the Annuity Date or, if earlier, within 90 days following receipt of the
Contract Owner's written notice of intent to commence annuity benefit
payments, annuity benefit payments will commence. The form of such benefit
payments will be determined in accordance with the provisions of the
following paragraphs.
3. COMPENSATION
For purposes of determing the maximum annual contribution that can be made
under section 415 of the Internal Revenue Code, effective for contributions
made after December 31, 1997, the Contract Owner's compensation from the
employer for the year includes any elective deferrals made under a 401(k)
plan, 403(b) plan, employer contributions made to a SEP (simplified employer
pension), and any amount which is contributed or deferred by the employer at
the election of the Contract Owner under a plan described in section 125 of
the Internal Revenue Code (a "cafeteria plan") or section 457 of the Internal
Revenue Code.
4. LIMITS ON CONTRIBUTIONS
Contributions made in any calendar year cannot exceed the annual limit on
elective deferrals under section 402(g) of the Internal Revenue Code, i.e.
$9,500 as adjusted for inflation.
Solely for a Contract Owner who has completed 15 years of service with a
single qualified employer, this limit will be increased by the lesser of:
(A) $3,000,
(B) $15,000 reduced by amounts not included in gross income for prior
taxable years by reason of this rule, or
(C) the excess of $5,000 multiplied by the Contract Owner's
number of years of service with the qualified employer, over all prior
elective deferrals made on behalf of the Contract Owner by the
qualified employer in prior taxable years.
For this purpose, a qualified employer means any educational organization,
hospital, home health service agency, health and welfare service agency,
church, or convention or association of churches, including an exempt
organization controlled by or associated with a church.
5. MULTIPLE SALARY DEFERRALS
<PAGE>
As permitted by the employer, a Contract Owner may enter into more than one
salary reduction agreement in any calendar year to defer compensation that
has not yet been paid or made available.
6. FORM OF BENEFIT - MARRIED OWNER
The term married owner shall mean a Contract Owner who has been married to
the same spouse for at least the twelve consecutive calendar months
immediately preceding the Benefit Commencement Date. Notwithstanding what is
stated in the Annuity Payments Section of the contract to the contrary, the
form of benefit for a Married Owner shall be a Qualified Joint and 50%
Survivor Annuity which is the actuarial equivalent of a single life annuity,
unless the Contract Owner elects an optional form of benefit in accordance
with Paragraph 9 below.
7. FORM OF BENEFIT - UNMARRIED OWNER
Notwithstanding what is stated in the Annuity Payments Section of the
contract to the contrary, the form of benefit for a Contract Owner who is not
a Married Owner shall be a single life annuity unless the Contract Owner
elects an optional form of benefit.
E n d o r s e m e n t N o. 1 5 4 2 - 9 7
Page 4
Page 4 (con'd)
A004078E
ENDORSEMENT - TAX DEFERRED ANNUITY (CONTINUED)
8. PAYMENT OF DEATH BENEFIT
If a married Contract Owner dies before the date benefits begin, the death
benefit will be paid to the Contract Owner's surviving spouse in the form of
a single life annuity, unless the Contract Owner has designated another form
of payment available under the contract, or the surviving spouse elects to
receive a lump sum payment or another form of payment available under the
contract.
9. NOTICE AND ELECTION
A. Notice
The Company must provide a Contract Owner written notice within the 30
to 90 day period before the date benefits are to begin. Such written notice
shall explain:
1. The terms and conditions of the automatic forms of benefits, the
alternative forms of benefits that the Contract Owner can choose, and
information about the relative values of each form of benefits;
2. The Contract Owner's right to waive the automatic form of benefit
and the effect of such waiver;
3. The rights of the Contract Owner's spouse regarding a waiver; and
4. The Contract Owner's right to revoke such waiver and the effect
of such revocation.
B. Election
A Contract Owner may elect a form of benefit other than the automatic form in
writing at any time during the 90 day period which ends on the date on which
payments are to begin; provided, however, that no election can be made
earlier than the date the Contract Owner receives the notice described in
Subsection A above.
If the married Contract Owner, after receiving the notice described above in
Subsection A, elects one of the available forms of distribution and the
Contract Owner's spouse consents
<PAGE>
to the form of distribution (if necessary), payments may begin before the end
of the 30 day period after the notice was given to the Contract Owner, as
long as
(A) the Contract Owner has been advised of his right to a 30 day period to
consider whether to waive the automatic form of benefit and consent to a form
of distribution other than the automatic form of benefit;
(B) payments do not begin to be paid to the Contract Owner until after the
Contract Owner receives the notice;
(C) payments do not begin before 7 days have elapsed after the notice is
provided to the Contract Owner; and
(D) the Contract Owner may revoke the election of a form of payment until the
end of the 7 day period described in (C) or the date payments begin, if
later.
Spousal Consent Requirement
A Contract Owner will automatically receive a Qualified Joint and 50%
Survivor Annuity unless the Company is satisfied that he or she is not
married on the date benefit payments are to begin. The Contract Owner may
elect an alternate form of benefit only if:
(A) the Contract Owner's spouse (or the spouse's legal guardian) consents in
writing that he or she consents to the Contract Owner's election to waive the
Qualified Joint and 50% Survivor Annuity; to the specific alternative form
elected by the Contract Owner, or to the Contract Owner's right to choose any
alternative form without any further consent by the spouse. If a beneficiary
other than the spouse is selected, the spouse must also consent in writing to
either the specific Beneficiary or Beneficiaries designated by the Contract
Owner or to the Contract Owner's right to designate any Beneficiary or
Beneficiaries without any further consent by the spouse. The written consent
also must acknowledge the effect of the election and be witnessed by a notary
public; or
Endorsement No. 1542-97
ENDORSEMENT - TAX DEFERRED ANNUITY (CONTINUED)
A004079E
(B) the Contract Owner satisfies the Company that his or her spouse cannot be
located, or furnishes a court order establishing that the Contract Owner is
legally separated or has been abandoned (within the meaning of local law),
unless a qualified domestic relations order pertaining to the Contract Owner
provides that the spouse's consent must be obtained.
Spousal consent shall not be effective with respect to any other spouses of
the Contract Owner, and shall become void if the circumstances causing the
consent of the spouse not to be required cease to exist prior to the date
that the Contract Owner's payments commence.
Revocation of Election
A Contract Owner may revoke an election to waive the automatic form of
payment at any time during the election period. revocation shall not void any
prospectively effective consent given by his or her spouse in connection with
the revoked election.
10. OPTIONAL FORMS OF BENEFIT
<PAGE>
Subject to the conditions and limitations in Paragraph 9 above, a Contract
Owner may elect any annuity payment option set forth in the Annuity Options
Section or Annuity Payments Section of the contract. The form of benefit
may not be changed after the Benefit Commencement Date.
11. BENEFIT RESTRICTIONS
Any benefits payable under the Annuity Payments Section, or the Withdrawal
Section are subject to the following added provisions:
A. Effective after December 31, 1988, withdrawals attributable to
contributions made pursuant to a salary reduction agreement may be made
only when the Contract Owner is over age 59 1/2, leaves the employment
of the employer who purchased the contract, dies, becomes disabled as
defined in section 72(m)(7) of the Code, or establishes hardship as
defined in the Code. In the case of hardship withdrawal, no income
attributable to such contributions may be withdrawn.
B. Notwithstanding any provisions of this contract to the contrary, the
distribution of an individual's interest shall be made in accordance
with the requirements of section 401(a)(31) of the Code and the minimum
distribution requirements of section 403(b)(10) of the Code and the
regulations thereunder, including the incidental death benefit
provisions of section 1.401(a)(9)-2 of the proposed regulations, all of
which are herein incorporated by reference.
C. The Contract Owner's entire interest in the contract must be
distributed, or begin to be distributed, by the Contract Owner's
required beginning date, which effective January 1, 1997, is the April 1
of the calendar year following the later of (i) the calendar year in
which the Contract Owner reaches age 70 1/2, or (ii) the calendar year
in which the Contract Owner retires. For a Contract Owner who is a 5%
owner of the employer in the plan year ending in the calendar year in
which the Contract Owner reaches age 70 1/2, such Contract Owner's
required beginning date is the April 1 following the calendar year in
which that Contract Owner reaches 70 1/2.
For each succeeding year, a distribution must be made on or before
December 31. By the required beginning date the Contract Owner may elect
to have the balance in the contract distributed in one of the following
forms:
a. a single sum payment;
b. equal or substantially equal periodic payments over the life of the
Contract Owner;
c. equal or substantially equal periodic payments over the lives of the
Contract Owner and his or her designated beneficiary;
d. equal or substantially equal periodic payments over a specified
period that may not be longer than the Contract Owner's life
expectancy ;
e. equal or substantially equal periodic payments over a specified
period that may not be longer than the joint life and last survivor
expectancy of the Contract Owner and his or her designated
beneficiary.
E n d o r s e m e n t N o . 1 5 4 2 - 9 7
Page 4 (con'd)
Page 4 (con'd)
A004080E
ENDORSEMENT - TAX DEFERRED ANNUITY (CONTINUED)
D. If the Contract Owner dies before his or her entire interest is
distributed, the entire remaining interest will be distributed as
follows:
<PAGE>
a. If the Contract Owner dies when or after distributions have begun under
Paragraph 11.C of this endorsement, the entire remaining interest must
be distributed at least as rapidly as provided under Paragraph 11.C.
b. If the Contract Owner dies before distributions have begun under
Paragraph 11.C, the entire remaining interest must be distributed as
elected by the Contract Owner or, if the Contract Owner has not so
elected, as elected by the beneficiary or beneficiaries, as follows:
1) by December 31st of the year containing the fifth anniversary of the
Contract Owner's death; or
2) in equal or substantially equal periodic payments over the life or
life expectancy of the designated beneficiary or beneficiaries starting
by December 31st of the year following the year of the Contract Owner's
death. If, however, the beneficiary is the Contract Owner's surviving
spouse, then this distribution is not required to begin before December
31st of the year in which the Contract Owner would have turned 70 1/2.
Unless otherwise elected by the Contract Owner prior to the commencement
of distributions under Paragraph 11.B or, if applicable, by the
surviving spouse where the Contract Owner dies before distributions have
commenced, life expectancies of a Contract Owner or spouse beneficiary
shall be recalculated annually for purposes of distributions under
Paragraphs 11.B and 11.C. An election not to recalculate shall be
irrevocable and shall apply to all subsequent years. The life expectancy
of a non-spouse beneficiary shall not be recalculated.
An individual may satisfy the minimum distribution requirements under
sections 403(b)(10) of the Code by receiving a distribution from one TDA
that is equal to the amount required to satisfy the minimum distribution
requirements for two or more TDAs. For this purpose, the Contract Owner of
two or more TDAs may use the 'alternative method' described in Notice 88-
39, 1988-1 C.B. 525, to satisfy the minimum distribution requirements
described above.
12. EFFECTIVE DATE
The Effective Date of this endorsement is the Contract Date unless another
Effective Date is shown below.
Philadelphia, Pennsylvania The Penn Mutual Life Insurance Company
/s/ Peter R. Schafer
Actuary
Endorsement No. 1542-97
<PAGE>
Exhibit 4(f)
SECTION 2 - ENDORSEMENTS
A002886E
ENDORSEMENT -403(b) CONTRACT LOANS
The Individual Variable and Fixed Annuity Contract is amended as follows:
1. The following is added to Subsection A. Interest Options; Section 6 -Fixed
Account Provisions:
RESTRICTED ACCOUNT. Amounts will be transferred to and from the Restricted
Account in accordance with the provisions of Section 11 -Loans and the terms of
a Loan Request and Agreement as provided therein. For each amount transferred to
the Restricted Account, interest will be credited at an effective annual rate
declared by Penn Mutual. Such rate will be 2 1/2% less than the interest rate
charged by Penn Mutual on the loan with respect to which the transfer to the
Restricted Account was made. Interest will be credited at the same rate for the
entire period that all or any part of the amount is held in the Restricted
Account. The declared effective annual interest rate under the Restricted
Account will never be less than 4%. On each contract anniversary, interest
credited to the Restricted Account will be transferred to the investment
accounts in accordance with the Owner's then current purchase payment allocation
instructions.
2. Section 7 -Payment on Death is amended by the addition of the following:
Any outstanding loan balance will be repaid before any death benefit proceeds
are payable.
3. Section 9 -Withdrawal is amended by the addition of the following:
The proceeds of any full or partial withdrawal must first be applied to the
repayment of any outstanding loan balance.
4. The following provision is added to Section 10 -Miscellaneous:
Any outstanding loan balance must be repaid before Account Values can be applied
to provide annuity payments and before the contract, or any part thereof or
right therein, is assigned, transferred or exchanged.
While a loan is outstanding, the net amount of any withdrawal, after deduction
of all applicable charges, must be at least equal to the scheduled loan payment.
5. The following Section 11 is added to the contract:
SECTION 11 -LOANS
CONTRACT LOANS. At any time following one month after the Contract Date, the
Owner may borrow funds from the general account of Penn Mutual if this contract
was issued as part of an arrangement under the provisions of Section 403(b) of
the Internal Revenue Code.
LOAN REQUEST AND AGREEMENT. To make a loan under this contract, the Owner must
submit a completed Loan Request and Agreement on a form provided by Penn Mutual.
LOAN AMOUNT. The maximum loan amount is one-half of the Contract Value but not
more than $50,000. The minimum loan amount is $2,000. No loan may be made if the
Contract Value is less than $4,000. No new loan may be made if any part of a
prior loan remains unpaid.
<PAGE>
RESTRICTED ACCOUNT. When a loan is made, an amount equal to the amount of the
loan will be transferred to the Restricted Account from investment accounts of
the Variable Account and the Fixed Account in accordance with direction provided
by the Owner in the Loan Request and Agreement. When a loan payment is received
by Penn Mutual, an amount equal to the portion which is repayment of principal
will be transferred from the Restricted Account to the Fixed Holding Account.
Transfers from the Restricted Account will be made as of the date a loan payment
is received or, if earlier, the due date of a payment received during the grace
period.
LOAN INTEREST. The loan will bear interest at a rate declared by Penn Mutual for
the entire term of the loan. Such rate will be based on the Monthly Average of
the Composite Yield on Seasoned Corporate Bonds as published by Moody's Investor
Service, Inc. for the calendar month ending two months before the effective date
of the loan. If the Monthly Average of the Composite Yield on Seasoned Corporate
Bonds is no longer published, the rate used in its place will be as established
by law or by regulation of the insurance supervisory official of the
jurisdiction in which this policy is
Endorsement No. 1536-90
delivered. Interest will accrue on the outstanding loan balance until the entire
loan is repaid; provided, however, that in the event of prepayment of the entire
loan in the first loan year, the amount of interest payable as part of the
scheduled payments during the first loan year must still be paid. If interest is
not paid when due, it will be added to the outstanding loan balance and will
then bear interest at the same rate.
A002887E
TERM OF LOAN. A loan made for the purchase of a primary residence may be made
for 10 years. All other loans will be for a term of 5 years.
REPAYMENT. Each loan, together with all accrued interest, must be fully repaid
in equal quarterly payments over its term. Payments will be due three months
from the effective date of the loan and every three months thereafter. Payments
must be made to Penn Mutual at its Home Office or its designated service office.
GRACE PERIOD. Each scheduled loan payment shall have a grace period of 30 days
from its due date during which a loan payment will not be deemed in default. Any
scheduled loan payment which is not made within the grace period will be in
default. A payment made after the grace period but before the next scheduled
bill date will be deemed an unscheduled prepayment of principal.
PAYMENT IN DEFAULT. If a payment is in default, an amount equal to the defaulted
payment including interest accrued plus any applicable contract charges will be
withdrawn from the contract in accordance with the Owner's direction in the Loan
Request and Agreement but subject to the timing restrictions of Section
403(b)(11) of the Internal Revenue Code. The amount withdrawn will be applied to
the payment in default.
Such withdrawal will not be subject to minimum withdrawal amount or remaining
account balance.
LOAN IN DEFAULT. If at any time during the term of the loan four scheduled
payments are not made within the applicable grace periods, the entire loan will
be in default and immediately due and
<PAGE>
payable. An amount equal to the outstanding loan balance, including all accrued
interest plus any applicable contract charges, will be withdrawn from the
contract in accordance with the Owner's direction in the Loan Request and
Agreement but subject to the timing restrictions of Section 403(b)(11) of the
Internal Revenue Code. The amount withdrawn will be applied to repay the loan in
default.
Such withdrawal will not be subject to minimum withdrawal amount or remaining
account balance.
DEATH OF ANNUITANT. In the event of the death of the Annuitant, any outstanding
loan shall be considered immediately due and payable in full from proceeds
payable under the Payment on Death provisions of the contract.
6. The effective date of this endorsement is the Contract Date unless a later
date is shown below.
Philadelphia. Pennsylvania
(Included at Issue) The Penn Mutual Life Insurance Company
/s/ Richard F. Plush
Vice President and Senior Actuary
Endorsement No. 1536-90
<PAGE>
EXHIBIT 5
<TABLE>
<S> <C>
APPLICATION FOR INDIVIDUAL
THE PENN MUTUAL LIFE INSURANCE COMPANY VARIABLE AND FIXED ANNUITY
Philadelphia, Pa. 19172
====================================================================================================================================
1 MARKET TYPE: (Choose one) 2 DEATH BENEFIT OPTION: (Choose one)
[_] Non-Qualified [_] Standard If no option is elected, the contract
[_] IRA - (Select Type) [_] Rising Floor will be issued with a Standard
[_] Rollover [_] Transfer [_] Custodial [_] Step Up Death Benefit.
[_] 403(b) Transfer
====================================================================================================================================
3 CONTRACT OWNER: 4 ANNUITANT: (If different from Contract Owner)
________________________________________________________ _____________________________________________________
Name (First, Middle, Last) (Please Print) Name (First, Middle, Last) (Please Print)
________________________________________________________ _____________________________________________________
Address Address
________________________________________________________ _____________________________________________________
City State Zip Code City State Zip Code
________________________________________________________ _____________________________________________________
Date of Birth Sex Date of Birth Sex
________________________________________________________ _____________________________________________________
Social Security No./Tax ID Social Security No./Tax ID
________________________________________________________ _____________________________________________________
Daytime Telephone Number Daytime Telephone Number
________________________________________________________ _____________________________________________________
Employer Name Employer Name
________________________________________________________ _____________________________________________________
City State Zip Code City State Zip Code
====================================================================================================================================
5 BENEFICIARIES: 6 ANNUITY DATE:
PRIMARY BENEFICIARY:____________________________________ SELECT ANNUITY DATE:
Social Security No.:____________________________________
MO DAY YR
Relationship to Annuitant:______________________________
01
CONTINGENT BENEFICIARY:_________________________________
If no date is selected, the Annuity Date will be the
Social Security No.:____________________________________ later of the first day of the month following the
Annuitant's 95th birthday or 10 years after the issue
Relationship to Annuitant:______________________________ date.
====================================================================================================================================
7 PURCHASE PAYMENT: ($5,000 Minimum) MAKE CHECK PAYABLE TO:
PURCHASE PAYMENT $______________________________________ The Penn Mutual Life Insurance Company
====================================================================================================================================
8 DOLLAR COST AVERAGING:
Allocate ___% of my initial purchase payment to the following Dollar Cost Averaging Source Account (select one):
[_] Six Month Fixed Interest Option; [_] AMT Limited Maturity Bond Fund; [_] Quality Bond Fund; [_] Money Market Fund.
Over a ___ month period (maximum is 60 months; MUST BE 6 MONTHS FOR SIX MONTH FIXED INTEREST OPTION) transfer the initial
allocated purchase payment in equal monthly payments based on the allocation listed in the Fund Allocation section below. The
first monthly transfer will take place on the 15th of the month following the date of issue and each month thereafter for the
period indicated above. The Dollar Cost Averaging Program will terminate on the earlier of the end of the period indicated above
or after exhausting all amounts for the source account indicated above.
====================================================================================================================================
9 FUND ALLOCATION: (Indicate whole percentages. Total allocations in this section must equal 100%.)
Select the Variable Investment Options and/or Fixed Interest Options that will be used to allocate the initial purchase payment
(less the Dollar Cost Averaging Amount); the subsequent purchase payments and the monthly dollar cost averaging transactions.
FIDELITY INVESTMENTS NEUBERGER & BERMAN VONTOBEL USA
____% VIP Equity Income ____ % AMT Limited Maturity Bond ____% International Equity
____% VIP Growth ____ % AMT Balanced AMERICAN CENTURY
____% VIP II Asset Manager ____ % AMT Partners ____% VP Capital Appreciation
____% VIP II Index 500 MORGAN STANLEY
INDEPENDENCE CAPITAL (ICMI) OPCAP ADVISORS ____% Emerging Markets Equity (Int'l)
____% Money Market ____% Value Equity THE PENN MUTUAL LIFE INSURANCE COMPANY
____% Quality Bond ____% Small Capitalization FIXED INTEREST OPTIONS
____% Growth Equity T. ROWE PRICE ____% 1 Year Fixed Interest (not available
ICMI/ROBERTSON STEPHENS ____% High Yield Bond with Dollar Cost Averaging)
____% Emerging Growth ____% Flexibly Managed
VALUES AND PAYMENTS UNDER THIS CONRACT, WHEN BASED UPON THE INVESTMENT EXPERIENCE OF A SEPARATE ACCOUNT, ARE VARIABLE. THEY MAY
DECREASE OR INCREASE AND ARE NOT GUARANTEED AS TO FIXED DOLLAR AMOUNT.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
PM5790 VERSION 8/98
Page 1 of 2
<PAGE>
<TABLE>
<S> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
10 REPLACEMENT: IS THIS ANNUITY INTENDED TO REPLACE OR CHANGE EXISTING LIFE INSURANCE OR ANNUITIES? [_] Yes [_] No
If yes, list insurance company and policy number in the Remarks Section. If this is an exchange under IRC Section 1035, attach
necessary 1035 Exchange Forms.
===================================================================================================================================
11 NOTICES:
FRAUD - Any person, who knowingly and with intent to defraud any insurance company or other person, files an application for
-----
insurance or a statement of claim containing any materially false information or conceals for the purpose of misleading
information concerning any fact material thereto commits a fraudulent insurance act, which is a crime and subjects such person
to criminal and civil penalties.
====================================================================================================================================
12 ACKNOWLEDGEMENT:
I hereby represent that my answers to the above sections are correct and true to the best of my knowledge and belief. By
signing below, I understand that:
a) The contract value and annuity payments, when based on investment experience of a separate account, are variable and are not
guaranteed as to a fixed dollar amount;
b) This annuity is a long term commitment to meet insurance needs and financial goals; and I acknowledge receipt of the most
recent prospectus;
c) The annuity applied for is suitable for my investment objectives and my financial situation and needs; and
d) The owner has the privilege of Telephone Transfers.
VALUES AND PAYMENTS UNDER THIS CONTRACT, WHEN BASED UPON THE INVESTMENT EXPERIENCE OF A SEPARATE ACCOUNT, ARE VARIABLE. THEY MAY
DECREASE OR INCREASE AND ARE NOT GUARANTEED AS TO FIXED DOLLAR AMOUNT.
SIGNATURES:
Signed at:_____________________________________ __________________________________________ _____________________________
City State Date Signed
_______________________________________________ __________________________________________________
Signature of Contract Owner Signature of Annuitant (if different from Contract
Owner)
- ------------------------------------------------------------------------------------------------------------------------------------
13 REGISTERED REPRESENTATIVE:
Do you have any reason to believe the contract applied for is to replace existing insurance or annuities? [_] Yes [_] No
_______________________________________________ ________________________________________________________________________________
Signature of Registered Representative Printed Name of Registered Representative State License Number
(Resident agent if required by law)
_______________________________________________ ________________________________________________________________________________
Telephone No. Office Code (3 digit) Representative Code (5 digit)
_______________________________________________ ________________________________________________________________________________
Office/Firm Name Broker/Dealer Name
Commission Information Office 5-Digit
Representative Code Number Representative Code Percent (%)
_________________________________ ______________________________ _____________________________ __________________________
_________________________________ ______________________________ _____________________________ __________________________
_________________________________ ______________________________ _____________________________ __________________________
====================================================================================================================================
14 SEND APPLICATION, CHECK & OTHER REQUIRED FORMS TO:
The Penn Mutual Life Insurance Company
600 Dresher Road - C2L
Horsham, PA 19044
====================================================================================================================================
15 REMARKS:
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Page 2 of 2
<PAGE>
Exhibit 6(a)
CHARTER
OF
THE PENN MUTUAL
LIFE INSURANCE
COMPANY
-2-
<PAGE>
4
Explanatory Note
The Charter of The Penn Mutual Life Insurance Company consists of the
Act of Assembly of the Commonwealth of Pennsylvania approved February 24, 1847,
as specifically amended by supplementary acts and the Articles of Amendment
adopted by the Company in 1961, 1967, 1980, and 1983, and as modified by The
Insurance Company Law of 1921. This booklet states the text of those sections of
the original and supplementary acts which, as amended, are now in effect as part
of the Charter. Footnotes to each section of the Charter as reproduced indicate
its source, any amendments which have been made, and any supplementary act which
relates to it. The footnotes also indicate where repeal of an original section
has occurred.
The supplementary Act of March 20, 1860 granted to the Company certain
powers then held by The Pennsylvania Company for Insurances on Lives and
Granting Annuities with respect to the execution of trusts. Relevant sections of
acts granting such powers to The Pennsylvania Company are set forth below,
together with a reference to all acts which constituted the Charter of The
Pennsylvania Company at the time of enactment of the 1860 Supplement to the
Charter of The Penn Mutual Life Insurance Company.
The Pennsylvania Insurance Company Law of 1921 (Act of May 17, 1921,
P.L. 682) is applicable to companies such as The Penn Mutual Life Insurance
Company except as that law provides otherwise. Reference is made in the
footnotes to sections of that law, as amended, which relate to or affect
directly the provisions of the Charter as it is now constituted.
May, 1983
-3-
<PAGE>
CHARTER
SECTION 1. Be it enacted by the Senate and House of Representatives of
the Commonwealth of Pennsylvania in General Assembly met, and it is hereby
enacted by the authority of the same, That James E. Richardson, John G. Brenner,
Richard S. Newbould, William M. Clark, William B. Cooper, John W. Hornor, Samuel
C. Shepherd, William A. Everly, Daniel L. Miller, William Robertson, Samuel
Dutton, Daniel L. Hutchinson, Edward Lukens, William Martin, Edmund A. Souder,
Ellis S. Archer, William B. Hart, Edward H. Trotter, Samuel E. Stokes, Benjamin
Coates, Theodore S. Paulding, Lewis Cooper, Samuel W. Weer, Charles Schaffer, A.
W. Harker, Joseph M. Thomas, William H. Carr, and all other persons who may
hereafter associate with them, in the manner hereinafter prescribed, shall be a
body public and corporate, by the name of "The Penn mutual life insurance
company;" and by that name shall have perpetual succession, and may sue and be
sued, and hold, purchase, receive and convey real and personal estate, and may
make and use a common seal, and alter or change the same at pleasure, and make
by-laws, not inconsistent with any existing law, for the management of its
property and the regulation of its affairs./1/
SECTION 2. In addition to the general powers and privileges of a
corporation, as the same are declared by the foregoing section, the corporation
hereby created, shall have the power to insure the respective lives of its
members and others, and to make all and every insurance appertaining to or
connected with life risks, of whatsoever kind or nature, and to receive and
execute trusts, to make endowments, and to grant and purchase annuities. The
powers of the corporation shall include the power to insure against personal
injury, disablement, or death resulting from traveling or general accidents, and
against disablement resulting from sickness, and every insurance appertaining
thereto./2/
___________________________
/1/
Section 1 of the original Charter, Act of February 24,1847, P.L. 159, entitled
"An Act to incorporate the Penn mutual life insurance company," as amended by
the 1983 Articles of Amendment. The 1983 Articles of Amendment were adopted by a
special meeting of members held March 1, 1983. They were recorded in the office
of the Secretary of the Commonwealth (File 8319, p. 999) and were recorded in
the Department of Records of the City of Philadelphia (Misc. Book EFP-2001, p.
494) on April 15, 1983, on which date they became effective.
See Section 344 of The Insurance company Law of 1921 (May 17, 1921,
P.L. 682) for an additional provision concerning judicial proceedings.
/2/
Section 2 of the original Charter. The last sentence was added by the 1961
Articles of Amendment. The 1961 Articles of Amendment were adopted by a special
meeting of members held January 3, 1961. They were recorded in the office of the
Secretary of the Commonwealth (File 3-1-61.05 p. 426) and were recorded in the
Department of Records of the City of Philadelphia (Misc. Book 391 p. 440) on
February 23, 1961, on which date they became effective.
The Supplement of 1860, Section 2, adds the trust powers of The Pennsylvania
Company for Insurances on Lives and Granting Annuities. (See Explanatory Note on
page 3.)
Section 103 of The Insurance Company Law of 1921, as amended, provides:
"Scope of Act.-Except as in this act otherwise provided, the provisions of this
act, in so far as they are applicable, shall apply: *** (d) to all domestic
insurance companies, incorporated under any general or special law prior to the
thirteenth day of October, one thousand eight hundred and fifty-seven, which, by
the terms of their charters or the acts under which they were incorporated, hold
charters subject to alteration or revocation:***.
"All insurance companies to which this act applies and which have the
required capital and reserve may transact any one or more of the classes of
insurance authorized by section two hundred and two (202) of this act in the
same manner and to the same extent as insurance companies incorporated under the
provisions of this act.
"No insurance company heretofore created and to which this act applies shall
be deprived of any right which it enjoys under its charter to engage in any
business other than insurance.***"
Section 202 of The Insurance Company Law of 1921 provides: "Purposes for
Which Companies May be Incorporated; Underwriting Powers.-(a) Stock or mutual
life insurance companies may be incorporated for any or all of the following
purposes: (1) To insure the lives of persons and every insurance appertaining
thereto to grant and dispose of annuities: including variable life insurance
contracts and variable annuity; contracts under which values or payments
(continued.....)
-4-
<PAGE>
SECTION 3. All persons who shall insure with the corporation under a
policy of insurance or their heirs, executors, administrators or assigns, or who
under the terms of an annuity contract issued by it are entitled to receive
annuity payments shall thereby become members during the period such policy or
contract shall be in force as an unmatured insurance policy or as an annuity
contract during the life of the annuitant, except that (1) the holder of a group
policy or contract shall be a member while such policy or contract remains in
force, and shall be the only one entitled to qualify as a member with respect to
such policy or contract, and (2) in the case of a deferred annuity contract the
owner of the contract shall be the one entitled to qualify as a member with
respect to such contract during the period of deferment of annuity payments. No
person shall qualify for membership with respect to a life insurance policy or
an annuity contract which after surrender, maturity or death of the insured or
annuitant has become payable under an income form of settlement./3/
SECTION 4. (a) All the corporate powers of the corporation shall be
exercised by a board of trustees and such officers and agents as may be duly
elected or appointed. The board of trustees shall consist of members of the
corporation. The number of trusteees shall be as determined from time to time by
the board of trustees, but their number shall not be less than the number
required by the laws of the Commonwealth of Pennsylvania. The board shall be
divided into three classes equal in number or as nearly equal as possible but
subject to the provisions of subsection (b). Classes shall be determined by the
year in which terms expire, so that each year the members of only one class
shall retire and their successors be chosen by election by the members of the
corporation. This section shall not be construed to prevent reelection of an
outgoing trustee. Trustees shall be elected for a term of three years or until
their successors shall be elected and qualify, except that if such election will
result in an unequal number in each class the board of trustees shall fix the
terms for which successor trustees shall be elected at one, two or three years
in such manner as will result in an equal number or as nearly equal as possible
in each of the classes. At an election of trustees nominees for election to a
specific class who receive the highest number of votes among nominees for such
class shall be elected in the number necessary to fill such class.
___________________
/2/
(...continued)
or both vary in relation to the investment experience of the issuer or a
separate account or accounts maintained by the issuer and to insure against
personal injury, disablement, or death resulting from traveling or general
accidents, and against disablement resulting from sickness and every insurance
appertaining thereto, when written as a part of a policy of life insurance.***"
/3/
As supplied by the 1961 Articles of Amendment Section 3 of the original
charter was repealed by the 1983 Articles of Amendment. Section 4 of the
original Charter was repealed by the Supplement of 1851.
Section 309 of The Insurance Company Law of 1921 provides: "Voting by
Stockholders and Members; Proxies Record of Votes.-In the choice of directors or
trustees, and at all meetings of the company*** each member in a mutual company,
shall be entitled to one vote*** Proxies may be authorized by written power of
attorney. The record of the votes made by the secretary, which shall show
whether the same were cast in person or by proxy, shall be evidence of all such
elections."
Section 310 of The Insurance Company Law of 1921 provides: "Cumulative
Voting.-In all elections for directors or trustees of any stock or mutual
insurance company, each member or stockholder having a right to vote may cast
the whole number of his votes for one candidate, or distribute them upon two or
more candidates, as he may prefer, that is to say: If the member or stockholder
having a right to vote owns one share of stock, or has one vote, or is entitled
to one vote for each of seven directors or trustees by virtue thereof, he may
give one vote to each of said seven directors or trustees, or seven votes for
any one thereof, or a less number of votes for any less number of directors or
trustees, whatever may be the actual number to be elected, and in this manner
may distribute or cumulate his votes as he may see fit."
-5-
<PAGE>
Death or resignation of an incumbent trustee or the ceasing of an
incumbent trustee to be a member of the corporation shall create a vacancy if
the number of incumbents remaining in office in his class is less than the
stated number for his class and the number of incumbents remaining in all
classes is less than the stated number for all classes.
(b) The board of trustees may by resolution change the stated number of
trustees. Such resolution shall divide the stated number into three classes
equal in number or as nearly equal as possible determined by terms expiring in
successive years, provided that a change in number shall become effective
subject to the provisions of this subsection.
If the stated number of trustees is increased, the number added to a
class shall constitute a vacancy or vacancies in such class with term expiring
at the same time as for other trustees in the class.
A reduction in a class to the stated number fixed for such class shall
be made only as vacancies shall occur by death or resignation of an incumbent in
such class or the ceasing of such an incumbent to be a member of the
corporation.
(c) Any vacancies in the board of trustees, including vacancies
resulting from an increase in the number of trustees or failure of the members
to fill any class of trustees, may be filled by an election by the board of
trustees for the unexpired term.
(d) The trustees shall annually elect a president, a secretary, a
treasurer and such other officers as the by-laws may provide, who shall continue
in office for a term of one year or until others shall be elected in their
stead. The president shall be elected from among the members of the corporation.
The by-laws may provide for appointment of additional officers by the president
subject to annual approval by the trustees./4/
_________________
/4/
Section 5 of the original Charter as amended by the 1967, 1980 and 1983
Articles of Amendment. The 1967 Articles of Amendment were adopted at a special
meeting of members held February 20, 1967. They were recorded in the office of
the Secretary of the Commonwealth (File 3-1-67.10, p. 675) and were recorded in
the Department of Records of the City of Philadelphia (Misc. Book No.798, p.
215-224) on April 24, 1967, on which date they became effective.
The 1980 Articles of Amendment were adopted at a special meeting of members
held March 4, 1980. They were recorded in the office of the Secretary of the
Commonwealth (File 80-20, p. 430) on March 25, 1980, and recorded in the
Department of Records of the City of Philadelphia (Misc. Book 1729, p. 165) on
April 16, 1980, on which date they became effective.
Section 308 of The Insurance Company Law of 1921, as amended by the Acts of
July 2, 1953, P.L. 336 and 337, and November 27, 1968 P.L. 1118 provides:
"Election of Directors and Trustees; Terms; Vacancies.-At the annual meeting,
the stockholders or members shall elect by ballot, from their own number, not
less than seven directors or trustees, who shall be natural persons of full age,
and who need not be residents of this Commonwealth unless the articles or
by-laws so require: Provided, however, That at least two-thirds of the said
directors or trustees shall be citizens of the United States or its territories
or possessions. Such persons shall serve for one year and until their successors
are duly chosen and qualified.
"Any insurance company may provide in its by-laws for the division of its
board of directors or trustees into two, three, or four classes, and may provide
for the election thereof at its annual meetings in such manner that the members
of one class only shall retire, and their successors be chosen, each year.
Vacancies, including vacancies resulting from an increase in the number of
directors or from failure of the stockholders to fill any class of directors,
may be filled by an election by the board of directors or trustees for the
unexpired term.
"Any stockholder or member elected to the post of director or trustee shall
continue in office unless the insurance commissioner, after such investigation
as he deems proper, shall determine that the responsibility, character, and
general fitness for the business, of such individual are not such as to command
the confidence of the public and to warrant the belief that the business of the
company will be honestly and efficiently conducted in accordance with the intent
and purpose of this act. Any adjudication by the insurance commissioner pursuant
to this section shall be subject to the provisions of the `Administrative Agency
Law,' act of June 4, 1945 (P. L. 1388)."
Section 312 of The Insurance Company Law of 1921 provides: "Acceptance by
Directors and Trustees Powers; Quorum Salaries.-The directors or trustees,
before they are qualified to act, shall file with the secretary a written
acceptance of the trust; and they, or a majority of them, when statedly convened
at the
(...continued)
-6-
<PAGE>
SECTION 5. The persons named in the first section of this act,/5/ shall
constitute the first board of trustees./6/
SECTION 6. The annual meeting for the election of trustees shall be
held at such time on or before the first day of May as the by-laws of the
corporation may direct, at such place in the city or county wherein the
corporation is domiciled as the board of trustees shall designate. Notice of
such time and place shall be given to the members as may be required by the laws
of the Commonwealth of Pennsylvania./7/ The board of trustees shall appoint
three members of the said corporation, not trustees, to be inspectors, to
conduct such elections; and if any of said inspectors decline or fail to attend,
the trustees may appoint others to fill such vacancies./8/
SECTION 7. No member of this corporation shall be liable or assessed
for any losses or expenses of said corporation beyond the amount of the premium
which he may agree to pay said corporation./9/
SECTION 8. The trustees may establish the procedure for determining the
rates of premium, terms of insurance, and the sum to be insured./10/
SECTION 9. Suits at law may be maintained by said corporation against
any of its members, for any cause relating to the business of said corporation;
also, suits at law may be prosecuted and maintained by any member against the
said corporation, for losses by death, if payment is withheld more than three
months after the company is duly notified of such losses; and no member of the
corporation shall be debarred his testimony as a witness in any case, on account
of his being a member of the said company; and no member of the said
corporation, not
__________________
/4/
(...continued)
office of the company, or when convened after special notice to each
member, shall be competent to exercise all the powers vested in them by law. A
majority of the directors or trustees shall constitute a quorum. Any insurance
company may allow and pay to directors compensation for acting as such."
/5/
Section 1 of the original Charter as set forth above.
/6/
Section 6 of the original Charter .
/7/
Section 304 of The Insurance Company Law of 1921, as amended, provides: "Annual
Meeting of Stockholders or Members; Notice-The annual meeting for the election
of directors or trustees of any insurance company shall be held at such time on
or before the first day of May as the by-laws of the company may direct; of the
time and place of which meeting at least thirty days' previous notice shall be
given to the stockholders, or, in the case of a mutual company, to the members,
by publication not less than three times in at least two daily or weekly
newspapers, and in the legal periodical, if any, designated by the rules of
court of the proper county for the publication of legal notices, published in
the city or county wherein the company is domiciled.
/8/
Section 7 of the original Charter as amended by the 1961, 1967 and 1983
Articles of Amendment. Section 8 of the original Charter was repealed by the
Supplement of 1851.
/9/
Section 9 of the original Charter, as amended and renumbered by the 1961
Articles of Amendment, and as amended by the 1980 Articles of Amendment.
/10/
Section 10 of the original Charter, as renumbered by the 1961 and 1983
Articles of Amendment, and as amended by the 1980 Articles of Amendment.
-7-
<PAGE>
being in his individual capacity or party to such suit, shall be incompetent as
a witness in any such suit, on account of his being a member or an officer of
said company./11/
SECTION 10. The principal office of the corporation shall be at such
place in the Commonwealth of Pennsylvania as the trustees shall from time to
time direct, and the business of the corporation shall be carried on at its
principal office and at such other offices and agencies in such locations as the
chief executive officer may from time to time establish./12/
SECTION 11. No policy shall be issued by said company, until
application shall be made for insurance of sums on lives, amounting, in the
aggregate, to one hundred thousand dollars at least; and the trustees shall have
the right to purchase, for the benefit of the company, all policies of insurance
or other obligations, issued by the company./13/
SECTION 12. The legislature may, at any time, alter or repeal this act,
in such manner, however, as shall do no injustice to the corporators, or
injuriously effect any contract or engagement made by or with the said
company./14/
_______________
/11/
Section 13 of the original Charter as renumbered by the 1961 and 1983 Articles
of Amendment. Section 11 of the original Charter was repealed by the 1983
Articles of Amendment. Sections 12, 14 and 15 of the original Charter were
repealed by the Supplement of 1851. Section 16 of the original Charter was
repealed by the 1961 Articles of Amendment.
/12/
Section 17 of the original Charter as renumbered by the 1961 Articles of
Amendment, and as amended by the 1980 Articles of Amendment.
/13/
Section 18 of the original Charter as renumbered by the 1961 and 1983 Articles
of Amendment. Sections 19, 20 and 21 of the original Charter were repealed by
the 1983 Articles of Amendment.
/14/
Section 22 of the original Charter as renumbered by the 1961 and 1983 Articles
of Amendment.
-8-
<PAGE>
Act of February 18, 1851, P. L. 86
A SUPPLEMENT
To the act entitled "An Act to incorporate the
Penn Mutual Life Insurance Company."
SECTION 3./15/ That it shall be lawful for the said corporation to
invest their premiums, profits, and capital, in bonds and mortgages, ground
rents, stocks, and loans of the United States and State of Pennsylvania, and
also in all stocks created by or under the laws of the United States or of this
State, or of any of the other States of the Union, and to lend the same upon the
security of such stocks, and to sell, transfer, and change the same, and to
invest the funds of said corporation when the trustees shall deem the same
expedient./16/
SECTION 4. That it shall also be lawful for the said corporation to
lend or invest, not exceeding fifty per cent of their funds in loans or stocks
of an incorporated city, district, or borough, or other good securities, and the
same to sell, transfer, change, or re-invest, as the trustees may deem
proper./17/
SECTION 5. That the officers of said company shall each year, cause a
statement to be made of the affairs of the company; and if after paying all
losses and expenses of the said company, and providing for outstanding risks for
the year preceding the same, there remain a surplus, each member shall be
entitled to such a proportion of the said surplus as the cash premiums paid by
such members may bear to the aggregate surplus so declared the statement so made
shall be binding upon all persons entitled to receive certificates as
hereinafter mentioned; for the proportionate share of each member so
ascertained, a certificate shall be issued declaring him or them to be entitled
to such a portion of the accumulated capital of the company, such certificates
to be construed and governed as hereinafter mentioned; but no certificate shall
be redeemed or paid off, until the assets of the company amount to four hundred
thousand dollars; no certificate shall be issued for a less amount than ten
dollars, or for any fractional part of ten dollars. Whenever the accumulated
capital shall exceed four hundred thousand dollars, the excess may be applied
from year to year thereafter, towards the redemption of each years certificates
in whole or in part, as may be determined on by the board of trustees, provided
the assets of the company exceed the value of the policies in force, to an
amount equal to the dividend or certificates to be paid off; but the
certificates of a subsequent year are not to be redeemed until those of a
preceding year are provided for; the trustees may at their
______________
/15/Sections 1 and 2 of this Act were deleted by the 1961 Articles of Amendment.
/16/See note 11.
/17/See note 11.
-9-
<PAGE>
discretion declare and pay interest on such certificates, at a rate not
exceeding six per cent. per annum./18/
SECTION 6. That in case of the death of any member of the said company,
the amount of the policy in his name shall be paid to the party entitled thereto
by the terms thereof, within sixty days thereafter; the certificates of dividend
standing in his name or to his credit, shall also be transferred at the same
time to the person legally entitled thereto, except that in the case of any
husband insuring his life for the benefit of his widow; in all such cases the
said certificates shall be transferred to the widow. But the profits and
accumulation standing to the credit of such persons as have ceased to be members
by nonpayment of premiums, or a renewal of their policies, agreeably to the
by-laws, shall be deemed forfeited for the use of the corporation.
SECTION 7. That the sections of the act entitled "An Act to incorporate
the Penn Mutual Life Insurance Company, and numbered respectively sections four,
eight, twelve, fourteen, and fifteen, /19/be, and the same are hereby repealed."
JOHN CESSNA
Speaker of the House of Representatives.
BENJN. MATTHIAS,
Speaker of the Senate.
Approved-The eighteenth day of February, A.D., one thousand eight
hundred and fifty-one.
Wm. F. Johnston.
___________________
/18/As amended by the 1961 Articles of Amendment. See Supplement of 1864 and
Supplement of 1870, sec. 3, for further provisions concerning distribution of
surplus.
/19/For the sources of the Sections of the present Charter bearing these
numbers, see the footnotes to these Sections.
-10-
<PAGE>
Act of February 24, 1853, P.L. 107
A FURTHER SUPPLEMENT
To an act entitled "An Act to incorporate the
Penn Mutual Life Insurance Company."
SECTION 1. Be it enacted by the Senate and House of Representatives of the
Commonwealth of Pennsylvania in General Assembly met, and it is hereby enacted
by the authority of the same, That the third section of the act to which this is
a supplement shall not be so construed as to prevent said company from
purchasing, receiving, taking, and holding as investments and conveying the
same, any ground rents or life interests in real estate, but the said company
shall have authority to purchase, receive, take, hold, and convey in fee simple
or for any less estate, from time to time as they may deem fit, any and all
ground rents and life estates in any and all real property./20/
W. P. SCHELL,
Speaker of the House of Representatives.
THO. CARSON,
Speaker of the Senate.3
Approved-The twenty-fourth day of February, A.D., one thousand eigth hundred and
fifty-three.
WM. BIGLER.
_______________
/20/See note 3.
-11-
<PAGE>
Act of March 20, 1860, P. L. 202
A SUPPLEMENT
To the act to incorporate the
Penn Mutual Life Insurance Company."
SECTION 1. Be it enacted by the Senate and House of Representatives of
the Commonwealth of Pennsylvania in General Assembly met, and it is hereby
enacted by the authority of the same, That the Penn mutual life insurance
company be and are hereby authorized to take and hold the title, in fee simple,
to a certain messuage and lot of ground, situate on the north side of Chestnut
street, between Ninth and Tenth streets, in the city of Philadelphia, containing
in front on Chestnut street forty-eight feet one and a half inches, more or
less, and extending in depth northward two hundred and twenty-two feet, more or
less, to a forty feet wide court; and also at any time to grant, sell and convey
the same, or any part thereof, in fee simple.
SECTION 2. That all powers, rights and privileges heretofore given to,
conferred upon, and now exercised by the Pennsylvania company for insurances on
lives and granting annuities, as to the receipt, custody and payment of trust
moneys, the acceptance and execution of trusts in the capacity of assignee,
trustee, guardian, executor, administrator or committee of lunatics, be and the
same are hereby given to and conferred upon the said the Penn mutual life
insurance company, to be exercised as fully in all respects as the same are now
held and exercised by the said the Pennsylvania company for insurances on lives
and granting annuities; subject, however, to all the restrictions and provisions
of the several acts of assembly conferring said powers, in regard to the rate of
interest to be paid to depositors, and the investments of trust funds./21/
JOHN M. THOMPSON
Speaker of the House of Representatives pro tem.
WM. M. FRANCIS,
Speaker of the Senate.
Approved-The twentieth day of March, Anno Domini one thousand eight
hundred and sixty.
_______________
/21/The Charter of The Pennsylvania Company for Insurances on Lives and Granting
Annuities as of the date of enactment of the Supplement of 1860 consisted of the
following acts: Act of March 10, 1812 P.L. 94; Act of April 8, 1829, P.L. 142;
Act of February 26, 1836, P.L. 49; Act of March 24, 1851 P.L. 225; Act of March
18, 1852, P.L. 167, and Act of March 26, 1853; P.L. 232.
Section 1 of the Act of 1836 provides: "*** That the Pennsylvania Company
for Insurances on lives and granting annuities, be and they hereby are
authorized, and empowered to accept and receive moneys, or other property, real
or personal, in trust, to accumulate the interest or income thereof, at such
rates and in such manner as may be agreed on, or to allow and pay such interest
or income therefor and thereon, as may be stipulated and agreed on between the
parties, not exceeding the legal rate of interest. And also to accept and
execute trusts of any and every description, which may be committed or
transferred with their consent to them, by any person or persons whatever,
bodies corporate or politic, or by any court of the United States, or of the
commonwealth of Pennsylvania."
The Act of 1853 provides that the powers conferred by the Act of 1836
include the power to act as executors or administrators.
-12-
<PAGE>
Wm. F. Packer
-13-
<PAGE>
Act of March 16, 1864, P.L. 15
A FURTHER SUPPLEMENT
To an act incorporating the
Penn Mutual Life Insurance Company."
SECTION 1. Be it enacted by the Senate and House of Representatives of
the Commonwealth of Pennsylvania in General Assembly met, and it is hereby
enacted by the authority of the same, That all life premiums, hereafter paid to
the said company, whether by note, or in cash, shall participate equally in such
division of surplus as shall hereafter be declared, in pursuance of the
provisions of section fourteen of the act of incorporation of the said, the Penn
Mutual Life Insurance Company./22/
HENRY C. JOHNSON,
Speaker of the House of Representatives.
JOHN P. PENNEY,
Speaker of the Senate.
Approved-The sixteenth day of March, Anno Domini one thousand eight
hundred and sixty-four.
A. G. CURTIN.
_________________
/22/Section 14 of original Charter had been repealed by Supplement of 1851. See
section 5 of that Supplement and section 3 of the Supplement of 1870 for other
existing provisions concerning distribution of surplus.
-14-
<PAGE>
Act of March 11, 1870, P.L. 384
A SUPPLEMENT
To the act incorporating the Penn Mutual Life Insurance
Company of Philadelphia, granted February
twenty-fourth, one thousand eight
hundred and forty-seven.
WHEREAS, The time allowed by the original charter of said company for
the election of trustees is inconveniently brief:
And Whereas A difference of opinion has arisen respecting the legality
of voting by proxy at such elections:
And Whereas Experience has proved that the present system of declaring
dividends is unjust to the insured:***/23/
SECTION 3. That in lieu of the manner of returning the surplus to
insured members, as directed by section fourteenth of the original charter, it
shall and may be lawful for said company to return the same either in cash or in
script, or by reversionary addition to the policies, and in such sums as may
express the equitable proportion of the aggregate surplus to which each member
is entitled, according to the actual value of the premiums paid, which sums
shall be credited to the insured or received in reduction of premiums, as their
annual premiums mature./24/
BUTLER B. STRANG,
Speaker of the House of Representatives.
CHARLES H. STINSON,
Speaker of the Senate.
Approved-The eleventh day of March, Anno Domini one thousand eight
hundred and seventy.
JNO. W. GEARY
_____________________
/23/Sections 1 and 2 of this act were deleted by the 1961 Articles of Amendment.
/24/See the Supplement of 1851, sec. 5, and the Supplement of 1864 for other
provisions concerning distributions of surplus.
-15-
<PAGE>
Exhibit 6(b)
BY-LAWS
OF
THE PENN MUTUAL LIFE
INSURANCE COMPANY
<PAGE>
CONTENTS
<TABLE>
<S> <C>
ARTICLE I
Meetings of Members -
Election of Trustees
SECTION 1.1 Meetings of Members - Election of Trustees 1
SECTION 1.2 Notice 1
SECTION 1.3 Nominations for Trustees by Board of Trustees 1
SECTION 1.4 Nominations for Trustees by Members 1
SECTION 1.5 Voting by Members 2
SECTION 1.6 Inspectors of Election 2
SECTION 1.7 Quorum 3
SECTION 1.8 Vacancies on the Board of Trustees 3
ARTICLE II
Board of Trustees
SECTION 2.1 Regular Meetings 3
SECTION 2.2 Special Meetings 3
SECTION 2.3 Quorum 3
SECTION 2.4 Election of Officers 3
SECTION 2.5 Designation of Chief Executive Officer 4
SECTION 2.6 Financial Statements 4
ARTICLE III
Committees of the Board
SECTION 3.1 Appointment of Committees 4
SECTION 3.2 Meetings - Quorum 4
SECTION 3.3 Minutes 4
SECTION 3.4 Audit Committee 5
SECTION 3.5 Executive Committee 5
SECTION 3.6 Executive Personnel and Compensation Committee 6
SECTION 3.7 Marketing Committee 6
SECTION 3.8 Corporate Governance and Nominating Committee 7
ARTICLE IV
Officers
SECTION 4.1 Chairman of the Board 7
SECTION 4.2 President 8
</TABLE>
i
<PAGE>
<TABLE>
<S> <C>
SECTION 4.3 Chief Executive Officer 8
SECTION 4.4 Secretary 8
SECTION 4.5 Treasurer 8
SECTION 4.6 Auditor 8
ARTICLE V
Execution of Documents
and Other Instruments
SECTION 5.1 Execution of Documents 8
SECTION 5.2 Checks 9
SECTION 5.3 Policy Contracts 9
SECTION 5.4 Facsimile Signatures of Deceased or Retired Officers 9
ARTICLE VI
Additional Provisions Relating
to Trustees and Officers
SECTION 6.1 Liability of Trustees 9
SECTION 6.2 Indemnification 10
ARTICLE VII
Amendments
SECTION 7.1 Amendments 11
CERTIFICATION
</TABLE>
ii
<PAGE>
BY-LAWS
OF
THE PENN MUTUAL LIFE
INSURANCE COMPANY
ARTICLE I
MEETINGS OF MEMBERS -
ELECTION OF TRUSTEES
SECTION 1.1 Meetings Of Members - Election Of Trustees. The board of trustees
or the executive committee may call meetings of members. The board of trustees
or executive committee, as the case may be, may designate any place, either
within or without the Commonwealth of Pennsylvania, as the place of any meeting.
If no designation is made the place of meeting shall be the Home Office of the
Company. The chief executive officer shall preside at meetings of members unless
otherwise provided by the board of trustees or the executive committee. The
annual election of trustees by members of the Company shall be held at the Home
Office of the Company from 10 a.m. to 2 p.m. on the first Tuesday of March.
SECTION 1.2 Notice. Notice of the meeting of members for the annual election
shall be published three times in two daily or weekly newspapers and in such
other legal periodical designated by the rules for the publication of legal
notices of the Court of Common Pleas of the county in which the Company has its
principle domicile, not less than thirty days before the date of the meeting for
election. The notice shall state the time and place of the meeting for election
and the purpose for which it is to be held. Notice of special meetings shall be
governed by applicable law.
SECTION 1.3 Nominations for Trustees by Board of Trustees. At the last
regularly scheduled meeting in each calendar year, the board of trustees shall
nominate members of the Company for election to succeed trustees whose terms are
about to expire. The board of trustees may at any time before the next annual
election of trustees nominate a member for election to succeed a trustee who was
elected to fill a vacancy resulting from an increase made in the stated number
of trustees after the last regularly scheduled meeting in each calendar year.
The board of trustees may substitute another candidate for any candidate so
nominated who shall die or withdraw before the annual election of trustees.
SECTION 1.4 Nominations for Trustees by Members. Members of the Company may
nominate members of the Company for election to succeed trustees whose terms are
about to expire by
1
<PAGE>
filing with the secretary on or before the November 1 preceding the annual
election of trustees a certificate of nomination signed by 1,000 members stating
their respective names and addresses, the name and address of each candidate
nominated, and accompanied by the written acceptance of such nomination by each
nominee.
If a candidate so nominated shall die or withdraw before the annual election of
trustees a majority of the members who signed the certificate of nomination of
the candidate may substitute another candidate by filing with the secretary
before the annual election of trustees a certificate of nomination signed by a
majority of such members and stating the name and address of the substitute
candidate provided that such certificate is accompanied by the written
acceptance of such nomination by the substitute candidate.
SECTION 1.5 Voting by Members. At all elections of trustees each member shall
be entitled to one vote for each trustee to be elected and to cast the whole
number of votes for one candidate or to distribute the votes among two or more
candidates. Votes shall be limited to candidates nominated as provided in the
by-laws and shall be cast only upon the official ballot furnished by the Company
at the election.
A member may authorize the casting of votes at an annual election of trustees or
at a meeting of members by written power of attorney to vote by proxy executed
within three months prior to the annual election of trustees or the meeting of
members and stating the number of at least one policy of the Company held by
such member.
Revocation of a revocable power of attorney to vote by proxy shall be effective
only upon receipt of written notice thereof by the secretary prior to the
election or upon the appearance at the election of the maker of the power and
upon claim by that member of the right to vote in person. The fact that the
Company, by mail or otherwise, furnishes a proxy to any person shall not
constitute or be construed as an admission of the validity of any policy or
contract or that such person is a member entitled to vote at the election or
meeting, and such fact shall not be competent evidence in any action or
proceeding in which the validity of any policy or contract or claim under it is
at issue.
SECTION 1.6 Inspectors of Election. At the last regularly scheduled meeting in
each calendar year preceding the election of trustees, the board of trustees
shall appoint three members of the Company who are not trustees, officers or
candidates for election as inspectors of election. The board of trustees shall
at the same time appoint an alternate member of the Company for each inspector
to act for any inspector who is unable or unwilling to act.
The inspectors shall receive and count the votes of members entitled to vote and
shall report in writing to the secretary the names of all persons voted for, the
number of votes cast for each, the number of votes cast in person, and the
number of votes cast by proxy and shall certify the names of the members who
have been duly elected trustees.
2
<PAGE>
SECTION 1.7 Quorum. At any election of trustees those members or proxy holders
present and voting shall be competent to proceed with the election.
The presence in person or by proxy of two hundred fifty members at any meeting
of members held for any other purpose shall constitute a quorum. If a quorum is
not present at any meeting, a majority of the members present may adjourn the
meeting from time to time without further notice.
SECTION 1.8 Vacancies on the Board of Trustees. Election of members of the
Company as trustees to fill vacancies on the board of trustees, including a
vacancy resulting from the death or withdrawal of a candidate before election
for whom no substitute was nominated, shall be by the board of trustees. The
board of trustees may elect a member of the Company to fill a vacancy on the
board of trustees for the unexpired portion of the term by a vote of the
majority of the members of the board of trustees at a regular or special
meeting, following nomination of such member by not less than five trustees or
by the nominating committee. Each trustee shall be notified of the proposed
nominee(s) not later than ten days prior to the meeting at which a new trustee
is to be so elected.
ARTICLE II
BOARD OF TRUSTEES
SECTION 2.1 Regular Meetings. At least four regular meetings of the board of
trustees shall be held in each calendar year at such place and upon such day and
at such hour as the board of trustees may from time to time designate. The board
of trustees at any prior meeting may reschedule or dispense with any regular
meeting of the board of trustees, provided that no less than four regular
meetings of the board of trustees shall be held in each calendar year.
SECTION 2.2 Special Meetings. Special meetings of the board of trustees may be
called by the chief executive officer at any time and shall be called by the
secretary upon written request of not fewer than five trustees. Written or oral
notice of special meetings stating the time, place and purpose of the meeting
shall be delivered to each trustee at least forty-eight hours in advance of such
meeting.
SECTION 2.3 Quorum. A majority of the trustees of the board of trustees shall
constitute a quorum at any meeting of the board of trustees.
SECTION 2.4 Election of Officers. The board of trustees by the ballots of at
least a majority of the members of the board of trustees shall annually elect a
president, a secretary, a treasurer, and an auditor and, if desired, a chairman
of the board, to serve for the term of one year or until their successors have
been elected. The president and, if a chairman of the board is elected, the
chairman of the board shall be elected from among the members of the board.
Officers elected by the board of trustees may be removed by the vote of a
majority of the members of the board of
3
<PAGE>
trustees. Vacancies in any elective office may be filled by an election of the
board of trustees at any meeting.
SECTION 2.5 Designation of Chief Executive Officer. The board of trustees, by
resolution, shall not less frequently than annually designate either the
chairman of the board, if one has been elected, or the president as chief
executive officer. The board of trustees may, by resolution, remove the
designation of chief executive officer and designate a new chief executive
officer at any time.
SECTION 2.6 Financial Statements. The board or any authorized committee
thereof shall approve from time to time both the form and substance of the
Company's financial statements and the extent and manner of distribution of such
financial statements to the Company's policyholders.
ARTICLE III
COMMITTEES OF THE BOARD
SECTION 3.1 Appointment of Committees. Subject to the approval of the board of
trustees, the chief executive officer shall appoint annually from the members of
the board of trustees the following standing committees: audit committee,
executive committee, executive personnel and compensation committee, marketing
committee, corporate governance and nominating committee, and such other
committees, other than standing committees, as the board of trustees may
determine to be desirable for the conduct of the Company's affairs. With like
approval, the chief executive officer may appoint a member of the board of
trustees to fill, for the unexpired term, any vacancy which shall occur in a
committee.
The standing committees shall each consist of not fewer than three trustees and,
except for the audit committee, executive personnel and compensation committee,
and the corporate governance and nominating committee, the chairman of the
board, if any, and the president. The chairman of the board, the president, and
other officers shall not be members of the audit committee, executive personnel
and compensation committee, or the corporate governance and nominating
committee.
SECTION 3.2 Meetings - Quorum. Meetings of the committees shall be held at
such places and at such times and subject to such provision for notice as the
board of trustees or, in the absence of action by the board of trustees, the
respective committees shall determine. Two members of any standing committee,
including a minimum of one non-management member, shall constitute a quorum.
SECTION 3.3 Minutes. Full minutes of the meetings of the standing committees
shall be kept and shall be made available to each trustee upon request.
4
<PAGE>
SECTION 3.4 Audit Committee. The audit committee shall exercise general
supervision of internal accounting controls and related operations; shall make
from time to time such examination thereof as it may deem necessary through
independent public accountants or otherwise; and in respect to such matters may
require such reports from the auditor and chief financial officer as it may deem
necessary or desirable.
The audit committee shall annually, or in its discretion more often, recommend
to the board of trustees for its approval the appointment of independent public
accountants to examine the affairs of the Company and the audit committee shall
make a report of the examination to the board of trustees.
The audit committee shall consult with the independent public accountants so
appointed with regard to the scope of any audits and shall review the audit
reports of the independent public accountants, including any management letter.
It shall review significant reports of examinations of the affairs of the
Company made by governmental authorities and by the internal auditors of the
Company.
The audit committee shall consider such matters as may be referred to it by the
board of trustees, the chief executive officer or the executive committee.
The audit committee shall investigate and report to the board of trustees with
respect to any matters which it deems advisable.
In the discharge of its duties the audit committee shall have direct access to
the independent public accountants, the internal auditor and the chief financial
officer and, in turn, the aforementioned shall have direct access to the audit
committee.
The audit committee is authorized to employ such special auditors, public
accountants, counsel or other assistants as it considers desirable to aid it in
the discharge of the duties of the committee.
SECTION 3.5 Executive Committee. The executive committee shall have the power
to exercise the authority of the board of trustees in the conduct of the
business of the Company and shall report to the board of trustees actions taken
in the exercise of such power.
The executive committee shall oversee the investment of the Company's funds and
shall have general supervision of the investment and banking policy of the
Company.
The executive committee shall have charge of all property of the Company and
shall have power to authorize the sale, lease, mortgage, pledge, encumbrance or
any other disposition of the Company's real estate or other property of whatever
nature, including power to authorize the renewal, extention, assignment, sale,
release, partial release, satisfaction, compromise or extinguishment of any
mortgages, deeds of trust, loan deeds, ground rents, easements, rights of
5
<PAGE>
way, interest in real estate, chattel mortgages, security agreements, liens,
judgements, bonds, notes, shares of stock, securities, investments, claims and
obligations owned or held by the Company and the selection of depositories of
the Company's funds, and including the power to authorize the execution of
proxies to vote any shares of stock owned by the Company and to authorize any
action which the executive committee shall determine to be advisable or
necessary in connection with the assets of the Company or its financial affairs.
The executive committee shall supervise expenditures in connection with the
foregoing powers.
The executive committee shall oversee the conduct of the operations of the
Company, except for functions which are overseen by the marketing committee
pursuant to section 3.7.
The executive committee shall oversee the operation of all corporations in the
holding company system of the Company other than corporations supervised by the
officers of the sales or marketing functions of the Company, provided, however,
that the executive committee shall have the power to authorize investments and
loans by the Company to any corporation in the holding company system of the
Company.
SECTION 3.6 Executive Personnel and Compensation Committee. The executive
personnel and compensation committee shall oversee planning and activities
relating to executive development and succession and shall, as directed by the
board of trustees, review and make recommendations to the board of trustees
covering executive compensation policies and practices.
The executive personnel and compensation committee shall have the power,
exercising the authority of the board of trustees in the conduct of the business
of the Company, to authorize any salary, compensation or emolument to be paid to
the chairman of the board, the president, the secretary, the treasurer and the
auditor and to other officers or employees in those salary grades designated
from time to time by the board of trustees and shall report to the board of
trustees actions taken in the exercise of such power, except that with respect
to officers comprising the executive group, as defined by the executive
personnel and compensation committee and approved by the board of trustees from
time to time, the executive personnel and compensation committee shall make
recommendations to the board of trustees pertaining to salary, compensation or
emolument. The executive group shall always include the five highest paid
officers.
SECTION 3.7 Marketing Committee. The marketing committee shall have the power
to exercise the authority of the board of trustees in the conduct of the
business of the Company in the areas stated in this section 3.7 and shall report
to the board of trustees actions taken in the exercise of such power.
The marketing committee shall oversee:
The conduct of the marketing and sales operations of the
Company, including the determination of the marketing and
sales
6
<PAGE>
policies and plans of the Company, field operations and the
operations of those corporations supervised by the officers
of the marketing or sales functions of the Company, provided
however, that only the executive committee shall have the
power to authorize investments and loans by the Company in
or to any corporation in the holding company system of the
Company.
SECTION 3.8 Corporate Governance and Nominating Committee. The corporate
governance and nominating committee shall have the power to exercise the
authority of the board of trustees in the conduct of the business of the Company
in the areas stated in this section 3.8 and shall report to the board of
trustees actions taken in the exercise of such power.
The committee shall oversee the procedures, rules and conventions which guide
the meetings of the board of trustees and the committees thereof; it may propose
to the chief executive officer and the board of trustees the agendas and subject
matters which it considers appropriate for consideration by the board or another
committee thereof; it shall oversee the corporate policies of the Company
relating to business conduct as proposed for adoption or revision from time to
time; it shall recommend to the board of trustees amendments to these by-laws
pursuant to Article 7 as proposed by the chief executive officer, the committee,
or another committee of the board, and it may recommend to the board of trustees
or to other committees thereof any other actions which it deems to be
appropriate.
The corporate governance and nominating committee shall in each year upon call
by the board of trustees or the chief executive officer, not later than the last
regularly scheduled meeting in each calendar year of the board of trustees,
recommend to the board of trustees the names of members of the Company for
nomination by the board of trustees for election to succeed trustees whose terms
are about to expire, and upon request of the board of trustees or of the chief
executive officer, shall make nominations to the board of trustees of members of
the Company for election to fill vacancies on the board of trustees.
The corporate governance and nominating committee may from time to time, and
upon request of the board of trustees or the chief executive officer, shall,
make recommendations concerning the number of members which this committee deems
appropriate to constitute the board of trustees, subject to applicable statutory
requirements concerning the minimum number of trustees.
ARTICLE IV
OFFICERS
SECTION 4.1 Chairman of the Board. The chairman of the board of trustees, if
one has been elected by the board of trustees, shall preside at meetings of the
board of trustees and shall perform such other duties as shall be assigned by
the board of trustees or chief executive officer.
7
<PAGE>
SECTION 4.2 President. The president shall perform such duties as shall be
assigned by the board of trustees or the chief executive officer. The president
shall preside at meetings of the board of trustees in the absence of the
chairman of the board.
SECTION 4.3 Chief Executive Officer. The chief executive officer shall
supervise and direct the affairs of the Company and shall have in his/her care
the Company's assets. The chief executive officer shall appoint not less
frequently than annually such officers in addition to those elected by the board
of trustees as the chief executive officer shall determine are necessary or
desirable for the proper conduct of the business of the Company. All such
appointments shall be reported to the board of trustees. Officers appointed by
the chief executive officer shall hold office at the will of the chief executive
officer, but may also be removed by a vote of a majority of the members of the
board of trustees. The chief executive officer shall assign to all officers the
various duties they are to perform.
SECTION 4.4 Secretary. The secretary shall attend the meetings of the board of
trustees and the meetings of members and shall keep the minutes of the
proceedings; shall be the custodian of the corporate seal of the Company; as
directed by the board of trustees and standing committees, shall send notices of
the meetings of the board of trustees and of the standing committees and shall
publish the notice required by these by-laws of the annual election of trustees
and of any meeting of members and shall perform such other duties as shall be
assigned by the chief executive officer.
SECTION 4.5 Treasurer. The treasurer, under the direction of an officer
designated by the chief executive officer, shall have custody of the cash funds
of the Company and shall perform such other duties as shall be assigned by such
officer. The treasurer and assistant treasurers shall give bond in such amounts
and with such sureties as the board of trustees shall require.
SECTION 4.6 Auditor. The auditor shall be responsible for the scheduling and
development of audit programs for reviews of internal accounting and
administrative controls for all activities of the company and its affiliates and
shall perform such other duties as the chief executive officer or the audit
committee shall assign. The auditor shall report to the audit committee.
ARTICLE V
EXECUTION OF DOCUMENTS
AND OTHER INSTRUMENTS
SECTION 5.1 Execution of Documents. The chairman of the board, the president,
any vice president, second vice president, assistant vice president, assistant
to the president and any other officer designated by the board of trustees or
the executive committee shall each have the power on behalf of the Company to
execute:
(a) Contracts for the sale of land, deeds, leases, documents necessary to
accomplish the purchase, renewal, assignment, transfer or sale of notes, bonds,
mortgages, deeds of trust, loan
8
<PAGE>
deeds, ground rents, stocks, or any other assets or property whatsoever and
proxies for voting stock held in the name of the Company;
(b) Releases, partial releases, deeds to extinguish ground rents, covenants of
exoneration, consents to releases, satisfaction pieces and agreements;
(c) Powers of attorney to appoint, where necessary or convenient, a substitute,
deputy or attorney in special cases to execute any of the documents heretofore
mentioned in this article; and
(d) All other instruments related to the transaction and management of the
Company's affairs.
The secretary, associate secretary, any assistant secretary, treasurer, any
assistant treasurer and any officer designated by the board of trustees or the
executive committee shall have power to attest such execution and to affix the
Company's corporate seal to any such instrument when required. Officers who
execute or attest instruments as provided herein are authorized to acknowledge
such execution on behalf of the Company.
SECTION 5.2 Checks. The executive committee shall determine the manner in
which checks drawn upon the funds of the Company shall be signed and may
authorize the use of facsimile signatures to checks of the Company.
SECTION 5.3 Policy Contracts. Policy contracts issued by the Company shall be
subscribed with the manual or facsimile signature of the chief executive
officer, or such other officer as may be designated by the board of trustees and
shall be attested by the manual or facsimile signature of the secretary or such
other officer as may be designated by the board of trustees.
SECTION 5.4 Facsimile Signatures of Deceased or Retired Officers. In the case
of the death or retirement from office of any officer whose facsimile signature
is authorized to be used in connection with policy forms, checks, receipts or
other instruments executed by the Company, such policies, checks, receipts or
other instruments may nevertheless be issued during a period not to exceed six
months thereafter bearing the facsimile signature of such officer.
ARTICLE VI
ADDITIONAL PROVISIONS RELATING
TO TRUSTEES AND OFFICERS
SECTION 6.1 Liability of Trustees. To the full extent provided under law, a
trustee shall not be personally liable for monetary damages for any action
taken, or any failure to take any action, unless (i) the trustee has breached or
failed to perform the duties of his or her office under 42 Pa. C.S.A. (S) 8363
(relating to standard of care and justifiable reliance) and (ii) the breach or
failure to perform constitutes self-dealing, willful misconduct or recklessness.
The provisions of this
9
<PAGE>
Section 6.1 shall not apply to (i) the responsibility or liability of a trustee
pursuant to any criminal statute or (ii) the liability of a trustee for the
payment of taxes pursuant to local, state or federal law. Any repeal or
modification of this Section 6.1 shall be prospective only, and shall not
affect, to the detriment of any trustee, any limitation on the personal
liability of a trustee of the Company existing at the time of such repeal or
modification.
SECTION 6.2 Indemnification.
(a) The Company shall indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative, by
reason of the fact that such person is or was a trustee or officer of the
Company, or, while a trustee or officer of the Company, is or was serving at the
request of the Company as a director, officer, employee, fiduciary or other
representative of another corporation, partnership, joint venture, trust or
other enterprise, including an employee benefit plan, against expenses
(including attorneys' fees), judgements, fines, excise taxes and amounts paid in
settlement actually and reasonably incurred by such person in connection with
such action, suit or proceeding, whether or not the indemnified liability arises
or arose from any threatened, pending or completed action by or in the right of
the corporation or other entity, to the extent that such person is not otherwise
indemnified and to the extent that such indemnification is not prohibited by
law.
(b) To the extent not prohibited by law, expenses incurred by such person in
defending a civil or criminal action, suit or proceeding shall be paid by the
Company in advance of the final disposition of such action, suit or proceeding
upon receipt of an undertaking by such person to repay such amount if it shall
ultimately be determined that such person is not entitled to be indemnified by
the Company.
(c) To determine whether any indemnification or advance of expenses under this
Section 6.2 is permissible, the board of trustees by a majority vote of a quorum
consisting of trustees not parties to such action, suit or proceeding may, and
on request of any person seeking indemnification or advance of expenses shall be
required to, determine in each case whether the applicable standards in any
applicable statute have been met, or such determination shall be made by
independent legal counsel if such quorum is not obtainable, or, even if
obtainable, a majority vote of a quorum of disinterested trustees so directs,
provided that, if there has been a change in control of the Company between the
time of the action or failure to act giving rise to the claim for
indemnification or advance of expenses and the time such claim is made, at the
option of the person seeking indemnification or advance of expenses, the
permissibility of indemnification or advance of expenses shall be determined by
independent legal counsel. The reasonable expenses of such person in prosecuting
a successful claim for indemnification, and the fees and expenses of any special
legal counsel engaged to determine permissibility of indemnification or advance
of expenses, shall be borne by the Company.
10
<PAGE>
(d) The obligations of the Company to indemnify a person under this Section
6.2, including the duty to advance expenses, shall be considered a contract
between the Company and such person, and no modification or repeal of any
provision of this Section 6.2 shall affect, to the detriment of such person, the
obligations of the Company in connection with a claim based on any act or
failure to act occurring before such modification or repeal.
(e) The indemnification and advancement of expenses provided by this Section
6.2 shall not be deemed exclusive of any other right to which one indemnified
may be entitled under any agreement, vote of policyholders or shareholders or
otherwise, both as to action in such person's official capacity and as to action
in another capacity while holding such office, and shall inure to the benefit of
the heirs, executors and administrators of any such person.
(f) The board of trustees shall have the power to (i) authorize the Company to
purchase and maintain, at the Company's expense, insurance on behalf of the
Company and others to the extent that power to do so has not been prohibited by
law, (ii) create any fund of any nature, whether or not under the control of a
trustee, or otherwise secure any of its indemnification obligations and (iii)
give other indemnification to the extent not prohibited by law.
ARTICLE VII
AMENDMENTS
SECTION 7.1 Any amendment to these by-laws shall be first submitted in writing
to the board of trustees at a regular meeting and may be adopted only at a
subsequent regular meeting of the board of trustees by a vote of at least a
majority of the members of the board of trustees.
CERTIFICATION
The undersigned certifies that the foregoing are the by-laws of The Penn Mutual
Life Insurance Company as adopted and amended through February 21, 1997 and that
they are in full force and effect.
___________________________________
Secretary
___________________________________
Date
11
<PAGE>
Exhibit 8(a)
FUND PARTICIPATION AGREEMENT
The Penn Mutual Life Insurance Company (the "Company") and TCI
Portfolios, Inc. ("TCIP") and its investment adviser, Investors Research
Corporation ("Investors Research") hereby agree to an arrangement whereby shares
of TCI Growth (the "Fund") shall be made available to serve as underlying
investment media for variable annuity and variable life insurance contracts
("Contracts") to be offered to the public by the Company, subject to the
following provisions:
1. Establishment of Separate Accounts; Availability of Fund; TCIP Compliance.
--------------------------------------------------------------------------
(a) The Company represents that it has established Penn Mutual Variable
Annuity Account III and Penn Mutual Variable Life Account I (the "Separate
Accounts"), separate accounts under Pennsylvania law, and has registered each of
them as a unit investment trust under the Investment Company Act of 1940 (the
"1940 Act") to serve as investment vehicles for the Contracts. The Contracts
provide for the allocation of net amounts received by the Company to separate
subaccounts of the Separate Accounts for investment in the shares of specified
investment companies that are available through the Separate Accounts to act as
underlying investment media. Selection of a particular investment company is
made by the Contract owner, who may change such selection from time to time in
accordance with the terms of the applicable Contract.
<PAGE>
(b) TCIP represents and warrants that Fund shares sold pursuant to this
Agreement shall be registered under the Securities Act of 1933 and duly
authorized for issuance, and shall be issued, in compliance in all material
respects with applicable law, and that TCIP is and shall remain registered under
the 1940 Act for so long as the Fund shares are sold. TCIP further represents
and warrants that the Fund currently qualifies and will make every reasonable
effort to continue to qualify as a Regulated Investment Company under Subchapter
M of the Internal Revenue Code of 1986, as amended (the "Code"), and to maintain
such qualification (under Subchapter M or any successor or similar provision),
and that TCIP will notify the Company immediately upon having a reasonable basis
for believing that the Fund has ceased to so qualify or that the Fund might not
so qualify in the future. TCIP further represents and warrants that the Fund
will comply with Section 817(h) of the Code, and all regulations issued
thereunder, and that TCIP will notify the Company immediately upon having a
reasonable basis for believing that the Fund has ceased to so comply or that the
Fund might not so qualify in the future.
2. Marketing and Promotion.
-----------------------
The Company agrees to use reasonable efforts to market its Contracts. The
prospectuses and sales literature for the Contracts will not give undue emphasis
to investment choices offered under the Contracts other than the Fund to the
detriment of the Fund. In addition, the Company shall not impose any fee,
condition, rule or regulation for the use by Contractowners of the Fund as an
investment option that operates to the specific prejudice of the Fund, vis-a-vis
the other investment options offered by the Company to Contractowners. In
marketing and administering its Contracts, the Company will comply in all
material respects with all applicable state and Federal laws.
<PAGE>
3. Pricing Information; Orders; Settlement.
---------------------------------------
(a) TCIP will make Fund shares available to be purchased by the Company on
behalf of the Separate Accounts at the net asset value applicable to each order.
Fund shares shall be purchased and redeemed in such quantity and at such time
determined by the Company to be necessary to meet the requirements of the
Contracts.
(b) TCIP hereby appoints the Company as its agent for the limited purpose
of accepting purchase and redemption orders for Fund shares from the Separate
Accounts, based on allocations of net amounts to subaccounts of the Separate
Accounts and other transactions relating to the Contracts or the Separate
Accounts. Such orders for Fund shares for the Separate Accounts, based on
premiums and transaction requests received by the Company from Contract owners
prior to the close of trading each day that the New York Stock Exchange (the
"Exchange") is open (each such day, a "business day") and other contract
transactions effected as of the close of business on such business day, will be
executed by TCIP at the net asset value for such shares determined as of the
close of the Exchange on such business day. Any orders for Fund shares for the
Separate Accounts, based on premiums or transaction requests received by the
Company from Contract owners on such day but after the close of the Exchange,
will be executed by TCIP at the net asset value determined as of the close of
business on the next business day following the day of receipt of such order.
(c) TCIP will use its best efforts to provide to the Company closing net
asset value, dividend and capital gain information as of the close of the
Exchange each business day by 6:00 p.m. Eastern Time on such day. The Company
will send directly to TCIP or its specified agent orders to purchase and/or
redeem Fund shares on the basis of such closing net asset value by 10:00
<PAGE>
a.m. Eastern Time the following business day. Payment for purchases of Fund
shares (net of proceeds payable on contemporaneous redemptions of Fund shares)
will be wired by the Company to a custodial account designated by TCIP to
coincide with the order for shares of the Fund.
(d) Payment for net redemptions of shares of the Fund will be wired by
TCIP from the TCIP custodial account to an account designated by the Company in
writing pursuant to Section 13(b) of the Agreement, the next business day after
the Company transmits the redemption order to TCIP.
4. Expenses.
--------
(a) Except as otherwise provided in this Agreement, all expenses incident
to the performance by TCIP under this Agreement shall be paid by Investors
Research or TCIP, including the cost of registration of TCIP's shares with the
Securities and Exchange Commission (the "SEC") and in states where required.
(b) TCIP shall provide to the Company its proxy material, periodic fund
reports to shareholders and other material that are required by law to be sent
to Contract owners, in each case in a sufficient quantity for distribution to
Contract owners. In addition, TCIP shall provide the Company with a sufficient
quantity of its prospectuses to be used in connection with the offerings and
transactions contemplated by this Agreement. The cost of preparing and printing
such materials shall be paid by TCIP (or Investors Research to the extent that
TCIP may not bear such costs), and the cost of distributing such materials shall
be paid the Company; provided, however, that at any time TCIP reasonably deems
--------
the usage of such materials to be excessive, it may request that the Company pay
the cost of printing (including press time and paper) of any additional copies
of such materials requested by the Company.
<PAGE>
5. Representations.
---------------
The Company and its agents shall not, without the written consent of TCIP,
make written representations concerning TCIP or its shares except those
contained in the then current prospectuses and in the then current printed sales
literature of TCIP.
6. Administration.
--------------
(a) Administrative services for the Separate Accounts or for purchasers of
Contracts are the responsibility of the Company and shall not be the
responsibility of TCIP or Investors Research. Administrative services for the
Fund and for purchasers of Fund shares are the responsibility of TCIP or
Investors Research.
(b) TCIP and Investors Research recognize the Company as the sole
shareholder of TCIP shares issued under this Agreement. TCIP and Investors
Research further recognize that they will derive a substantial savings in
administrative expenses, such as significant reductions in postage expense and
shareholder communications and recordkeeping, by virtue of having a sole
shareholder of record rather than multiple shareholders having record ownership
of the shares issued under this Agreement.
(c) The parties understand that Investors Research customarily pays, out
of its management fee, another affiliated corporation for the type of
administrative services to be provided by the Company with respect to
investments in Fund shares issued under this Agreement. In consideration of the
administrative savings resulting from such arrangement, Investors Research
agrees to pay to the Company an amount equal to 15 basis points (0.15%) per
annum of the
<PAGE>
average aggregate amount invested by the Company under this Agreement,
commencing with the month in which the average aggregate market value of
investments by the Company (on behalf of the Contract owners) in the Fund
exceeds $10 million. No payment obligation shall arise until the Company's
average aggregate investment in the Fund reaches $10 million, and such payment
obligation, once commenced, shall be suspended with respect to any month during
which the Company's average aggregate investment in the Fund drops below $10
million. The parties agree that Investors Research's payments to the Company,
like Investors Research's payments to its affiliated corporation, are for
administrative services only and do not constitute payment in any manner for
investment advisory services or for costs of distribution.
(d) For the purposes of computing the payment to the Company contemplated
by this Section 6, the average aggregate amount invested by the Company over a
one month period shall be computed by totaling the Company's aggregate
investment (share net asset value multiplied by total number of shares held by
the Company) on each business day during the month and dividing by the total
number of business days during such month.
(e) Investors Research will calculate the payment contemplated by this
Section 6 at the end of each calendar quarter and will make such payment to the
Company within 30 days thereafter. The check for such payment will be
accompanied by a statement showing the calculation of the monthly amounts
payable by Investors Research and such other supporting data as may be
reasonably requested by the Company.
7. Termination.
-----------
This agreement shall terminate as to the sale and issuance of new
Contracts:
<PAGE>
(a) at the option of either the Company or TCIP upon six months' advance
written notice to the other; provided, however, that the Company may terminate
this Agreement immediately upon written notice to TCIP as to the sale and
issuance of new Contracts if the Company reasonably determines in good faith
that it is no longer in the interests of Contractowners or consistent with the
purposes of the Contracts to continue to offer the Fund as an investment option;
(b) at the option of the Company if Fund shares are not available for any
reason to meet the requirements of the Contracts as determined by the Company,
provided that reasonable advance notice of election to terminate shall be
furnished by the Company;
(c) at the option of either the Company or TCIP, upon institution of
formal proceedings against the broker-dealer or broker-dealers marketing the
Contracts, the Separate Accounts, the Company, or TCIP by the National
Association of Securities Dealers, Inc. (the "NASD") the SEC or any other
regulatory body;
(d) upon termination of the Management Agreement between TCIP and
Investors Research, notice of the occurrence of which shall be promptly
furnished to the Company; provided, however, that this subsection (d) shall not
-------- -------
be deemed to apply if contemporaneously with such termination a new contract of
substantially similar terms is entered into between TCIP and investors Research;
(e) upon the requisite vote of Contract owners having an interest in the
Fund to substitute for the Fund shares the shares of another investment company
in accordance with the terms of Contracts for which TCIP's shares had been
selected to serve as the underlying
<PAGE>
investment medium; provided, however, that the Company shall give 60 days'
-------- -------
written notice to TCIP of any proposed vote to replace the Fund shares;
(f) upon assignment of this Agreement unless made with the written consent
of all other parties hereto;
(g) if TCIP's shares are not registered, issued or sold in conformance
with Federal law or such law precludes the use of Fund shares as the underlying
investment medium of Contracts issued or to be issued by the Company, provided
that prompt notice shall be given by either party should such situation occur;
or
(h) at the option of TCIP, if TCIP reasonably determines in good faith
that the Company is not offering shares of the Fund in conformity with the terms
of this Agreement.
8. Continuation of Agreement.
-------------------------
Termination as the result of any cause listed in Section 7 shall not affect
TCIP's obligation to furnish its shares to Contracts then in force for which its
shares serve or may serve as the underlying medium unless such further sale of
Fund shares is proscribed by law or the SEC or other regulatory body.
9. Advertising Materials; Filed Documents.
--------------------------------------
(a) Advertising and literature with respect to TCIP prepared by the
Company or its agents for use in marketing its Contracts will be submitted to
TCIP for review before such material is submitted to the SEC or NASD for review.
Advertising and literature with respect to the Company, the Separate Accounts or
the Contracts prepared by TCIP or Investors Research for use in marketing TCIP
or the Fund will be submitted to the Company for review before use.
<PAGE>
(b) TCIP will provide to the Company at least one complete copy of all
registration statements, prospectuses, statements of additional information,
annual and semi-annual reports, proxy statements, no-action letters, exemptive
applications and all amendments or supplements to any of the above that relate
to the Fund promptly after the filing of such document with the SEC or other
regulatory authorities. The Company will provide to TCIP at least one complete
copy of all registration statements, prospectuses, statements of additional
information, annual and semi-annual reports, proxy statements, no-action
letters, exemptive applications and all amendments or supplements to any of the
above that relate to a Separate Account promptly after the filing of such
document with the SEC or other regulatory authority.
10. Proxy Voting.
------------
(a) The Company shall provide pass-through voting privileges to all
Contract owners so long as the SEC continues to interpret the 1940 Act as
requiring such privileges, unless the Company determines that pass-through
voting privileges are not required under Rule 6e-2 or Rule 6e-3(T) under the
1940 Act and notifies TCIP of its determination. It shall be the responsibility
of the Company to assure that it and the separate accounts of the other
Participating Companies (as defined in Section 12(a) below) participating in any
Fund calculate voting privileges in a consistent manner. TCIP hereby confirms
that the manner in which the Company currently calculates voting privilege is
consistent with the manner in which other Participating Companies so calculate
voting privileges. TCIP and Investors Research will notify the Company if either
becomes aware that another Participating Company has changed the manner in which
it so calculates voting privileges.
<PAGE>
(b) So long as it shall be required to provide pass-through voting
privileges, the Company will distribute to Contract owners all proxy material
furnished by TCIP and will vote shares in accordance with instructions received
from such Contract owners, except as provided in Section 10(a) hereof. The
Company shall vote TCIP shares for which no instructions have been received in
the same proportion as shares for which such instructions have been received.
The Company and its agents shall not oppose or interfere with the solicitation
of proxies for TCIP shares held for Contractowners unless it reasonably
concludes in good faith that under applicable law it has a duty to do so.
11. Indemnification.
---------------
(a) The Company agrees to indemnify and hold harmless TCIP and each of its
directors, officers, employees, agents and each person, if any, who controls
TCIP or its investment adviser within the meaning of the Securities Act of 1933
(the "1933 Act") against any losses, claims, damages or liabilities to which
TCIP or any such director, officer, employee, agent, or controlling person may
become subject, under the 1933 Act or otherwise, insofar as such losses, claims,
damages, or liabilities (or actions in respect thereof): (1) arise out of or
are based upon any untrue statement or alleged untrue statement of any material
fact contained in the Registration Statement, prospectus or sales literature of
the Company or arise out of or are based upon the omission or the alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, or arise out of or as a
result of conduct, statements or representations (other than statements or
representations contained in the prospectuses, statements of additional
information or sales literature of TCIP) of the Company or its agents, with
respect to the sale and distribution of Contracts for which TCI Growth or TCI
<PAGE>
Balanced shares are the underlying investment; or (2) result from a breach of a
material provision of this Agreement. The Company will reimburse any legal or
other expenses reasonably incurred by TCIP or any such director, officer,
employee, agent, investment adviser, or controlling person in connection with
investigating or defending any such expense, loss, claim, damage, liability or
action; provided, however, that the Company will not be liable in any such case
-------- -------
to the extent that any such expense, loss, claim, damage or liability arises out
of or is based upon an untrue statement or omission or alleged omission made in
such Registration Statement or prospectus in conformity with written materials
furnished to the Company by TCIP specifically for use therein. This indemnity
agreement will be in addition to any liability which Company may other-wise
have.
(b) Investors Research agrees to indemnify and hold harmless the Company
and each of its directors, officers, employees, agents and each person, if any,
who controls the Company within the meaning of the 1933 Act against any losses,
claims, damages or liabilities to which the Company or any such director,
officer, employee, agent or controlling person may become subject, under the
1933 Act or otherwise, insofar as such losses, claims, damages or liabilities
(or actions in respect thereof): (1) arise out of or are based upon any untrue
statement or alleged untrue statement of any material fact contained in the
Registration Statement, prospectuses or sales literature of the Fund, TCIP or
Investors Research, or arise out of or are based upon the omission or the
alleged omission to state therein a material fact required to be stated therein
or material fact required to be stated therein or necessary to make the
statements therein not misleading; or (2) result from a breach of a material
provision of this Agreement. Investors Research will reimburse
<PAGE>
any legal or other expenses reasonably incurred by the Company or any such
director, officer, employee, agent, or controlling person in connection with
investigating or defending any such expense, loss, claim, damage, liability or
action; provided, however, that Investors Research will not be liable in any
-------- -------
such case to the extent that any such expense, loss, claim, damage or liability
arises out of or is based upon an untrue statement or omission or alleged
omission made in such Registration Statement or prospectuses in conformity with
written materials furnished to TCIP by the Company specifically for use therein.
This indemnity agreement will be in addition to any liability which Investors
Research may otherwise have.
(c) Promptly after receipt by an indemnified party hereunder of notice of
the commencement of action, such indemnified party will, if a claim in respect
thereof is to be made against the indemnifying party hereunder, notify the
indemnifying party of the commencement thereof; but the omission so to notify
the indemnifying party will not relieve it from any liability which it may have
to any indemnified party otherwise than under this Section 11. In case any such
action is brought against any indemnified party, and it notifies the
indemnifying party of the commencement thereof, the indemnifying party will be
entitled to participate therein and, to the extent that it may wish to, assume
the defense thereof, with counsel satisfactory to such indemnified party, and
after notice from the indemnifying party to such indemnified party of its
election to assume the defense thereof, the indemnifying party will not be
liable to such indemnified party under this Section 11 for any legal or other
expenses subsequently incurred by such indemnified party in connection with the
defense thereof other than reasonable costs of investigation.
<PAGE>
12. Potential Conflicts.
-------------------
(a) The Company has received a copy of an application for exemptive relief,
as amended, filed by TCIP on December 21, 1987, with the SEC and the order
issued by the SEC in response thereto (the "Shared Funding Exemptive Order").
The Company has reviewed the conditions to the requested relief set forth in
such application for exemptive relief. As set forth in such application, the
Board of Directors of TCIP (the "Board") will monitor TCIP for the existence of
any material irreconcilable conflict between the interests of the
contractholders of all separate accounts ("Participating Companies") investing
in TCIP. An irreconcilable material conflict may arise for a variety of
reasons, including: (i) an action by any state insurance regulatory authority;
(ii) a change in applicable federal or state insurance, tax, or securities laws
or regulations, or a public ruling, private letter ruling, no-action or
interpretative letter, or any similar actions by insurance, tax or securities
regulatory authorities; (iii) an administrative or judicial decision in any
relevant proceeding; (iv) the manner in which the investments of any portfolio
are being managed; (v) a difference in voting instructions given by variable
annuity contractholders and variable life insurance contractholders; or (vi) a
decision an insurer to disregard the voting instructions of contractholders. The
Board shall promptly inform the Company if it determines that an irreconcilable
material conflict exists and the implications thereof.
(b) The Company will report any potential or existing conflicts of which it
is aware to the Board. The Company will assist the Board in carrying out its
responsibilities under the Shared Funding Exemptive Order by providing the Board
with all information reasonably necessary for the Board to consider any issues
raised. This includes, but is not limited to, an obligation by the Company to
inform the Board whenever contractholder voting instructions are disregarded.
<PAGE>
(c) If a majority of the Board, or a majority of its disinterested Board
members, determines that a material reconcilable conflict exists with regard to
contractholder investments in a Fund, the Board shall give prompt notice to all
Participating Companies. If the Board determines that the Company is
responsible for causing or creating said conflict, the Company shall at its sole
cost and expense, and to the extent reasonably practicable (as determined by a
majority of the disinterested Board members), take such action as is necessary
to remedy or eliminate the irreconcilable material conflict. Such necessary
action may include but shall not be limited to:
(i) withdrawing the assets allocable to the Separate Accounts from
the Fund and reinvesting such assets in a different investment
medium or submitting the question of whether such segregation
should be implemented to a vote of all affected contractholders
and as appropriate, segregating the assets of any appropriate
group (i.e., annuity contract owners, life insurance contract
owners, or variable contract owners) that votes in favor of such
segregation, or offering to the affected contractholders the
option of making such a change; and/or
(ii) establishing a new registered management investment company or
managed separate account.
(d) If a material irreconcilable conflict arises as a result of a decision
by the Company to disregard its contractholder voting instructions and said
decision represents a minority position or would preclude a majority vote by all
of its contractholders having an interest in TCIP, the Company at its sole cost,
may be required, at the Board's election, to withdraw a Separate Account's
investments in TCIP and terminate this Agreement; provided, however, that such
withdrawal and termination shall be limited to the extent required by the
foregoing material reconcilable conflict as determined by a majority of the
disinterested members of the Board.
<PAGE>
(e) For the purpose of this Section 12, a majority of the disinterested
Board members shall determine whether or not any proposed action adequately
remedies any irreconcilable material conflict, but in no event will TCIP be
required to establish a new funding medium for any Contract. The Company shall
not be required by this Section 12 to establish a new funding medium for any
Contract if an offer to do so has been declined by vote of a majority of the
Contract owners materially adversely affected by the irreconcilable material
conflict.
13. Miscellaneous.
-------------
(a) Amendment and Waiver. Neither this Agreement, nor any provision
--------------------
hereof, may be amended, waived, discharged or terminated orally, but only by an
instrument in writing signed by all parties hereto.
(b) Notices. All notices and other communications hereunder shall be given
-------
or made in writing and shall be delivered personally, or sent by telex,
telecopier or registered certified mail, postage prepaid, return receipt
requested, to the party or parties to whom they are directed at the following
addresses, or at such other addresses as may be designated by notice from such
party to all other parties.
To the Company:
The Penn Mutual Life Insurance
Company
Independence Square
Philadelphia, PA 19172
Attention: C. Ronald Rubley
To TCIP or Investors Research:
TCI Portfolios, Inc.
4500 Main Street
Kansas City, Missouri 64111
<PAGE>
Attention: Patrick A. Looby
Any notice, demand or other communication given in a manner prescribed in this
subsection (b) shall be deemed to have been delivered on receipt.
(f) Successors and Assigns. This Agreement shall be binding upon and inure
----------------------
to the benefit of the parties hereto and their respective permitted successors
and assigns.
(g) Counterparts. This Agreement may be executed in any number of
------------
counterparts, all of which taken together shall constitute one agreement, and
any party hereto may execute this agreement by signing any such counterpart.
(h) Severability. In case any one or more of the provisions contained in
------------
this Agreement should be invalid, illegal or unenforceable in any respect, the
validity, legality and enforceability of the remaining provisions contained
herein shall not in any way be affected or impaired thereby.
(i) Entire Agreement. This Agreement constitutes the entire agreement and
----------------
understanding between the parties hereto and supersedes all prior agreement and
understandings relating to the subject matter hereof.
IN WITNESS WHEREOF, the undersigned have executed this Agreement by their
duly authorized officers as of this 26th day of February, 1993.
THE PENN MUTUAL LIFE INSURANCE
COMPANY
By /s/ Kenneth J. Kempf
-----------------------------------------
Name: Kenneth J. Kempf
--------------------------------
Title: Senior Vice President, Pensions
-------------------------------
INVESTORS RESEARCH CORPORATION
<PAGE>
By /s/ William M. Lyons
--------------------------------------
Name: William M. Lyons
Title: Senior Vice President
<PAGE>
TCI PORTFOLIOS, INC.
By /s/ Patrick A. Looby
---------------------------------------
Name: Patrick A. Looby
Title: Vice President
<PAGE>
Exhibit 8(b)(1)
FORM OF SALES AGREEMENT
THIS AGREEMENT is made by and between NEUBERGER & BERMAN ADVISERS
MANAGEMENT TRUST ("TRUST"), a Massachusetts business trust, and THE PENN MUTUAL
LIFE INSURANCE COMPANY ("LIFE COMPANY"), a life insurance company organized
under the laws of the State of Pennsylvania.
WHEREAS, TRUST is registered with the Securities and Exchange
Commission (the "SEC") under the Investment Company Act of 1940 ("`40 Act") as
an open-end diversified management investment company; and
WHEREAS, TRUST is organized as a series fund with a number of
Portfolios, two of which, namely the Limited Maturity Bond Portfolio and
Balanced Portfolio (a "Portfolio," collectively, the "Portfolios") are to be
made available under this Agreement; and
WHEREAS, TRUST was organized to act as a funding vehicle for certain
variable contracts offered by life insurance companies through separate accounts
of such life insurance companies; and
WHEREAS, LIFE COMPANY has established or will establish one or more
separate accounts (the "Separate Accounts") to offer variable contracts
participating in such Separate Accounts (the "Contracts") and is desirous of
having TRUST as an underlying funding vehicle for the Contracts.
NOW, THEREFORE, it is hereby agreed by and between TRUST and LIFE
COMPANY as follows:
1. TRUST represents and warrants that TRUST shares sold pursuant to this
Agreement shall be registered under the Securities Act of 1933 (the "1933 Act")
and duly authorized for issuance, and shall be issued, in compliance in all
material respects with applicable law, and that TRUST is and shall remain
registered under the `40 Act for so long as required thereunder. TRUST further
represents and warrants that TRUST currently qualifies and will make every
effort to continue to qualify as a Regulated Investment Company under Subchapter
M of the Internal Revenue Code of 1986, as amended (the "Code"), and to maintain
such qualification (under Subchapter M or any successor or similar provision),
and that TRUST will notify LIFE COMPANY immediately upon having a reasonable
basis for believing that it has ceased to so qualify or that it might not so
qualify in the future. TRUST further represents and warrants that TRUST will
comply with Section 817(h) of the Code, and all regulations issued thereunder,
and that TRUST will notify LIFE COMPANY immediately upon having a
<PAGE>
reasonable basis for believing that TRUST has ceased to so qualify or that TRUST
might not so qualify in the future.
2. LIFE COMPANY has established or will establish one or more Separate
Accounts and will do so in such a manner as to enable it to offer each Portfolio
of TRUST as a funding vehicle for the Contracts.
3. TRUST will make available to the Separate Accounts shares of the
Portfolios for investment under the Contracts. TRUST will make the shares
available to the Separate Accounts at net asset value next computed after
receipt of each order by TRUST in accordance with Section 4 of this Agreement.
Each Portfolio issues a separate class of shares which will have its own net
asset value.
TRUST will credit LIFE COMPANY with the appropriate number of shares
in each Portfolio. Such shares shall share pro rata in the investment
performance of such Portfolio and shall be subject to the same valuation
procedures and the same periodic charges as are other shares of such Portfolio.
4. TRUST hereby appoints LIFE COMPANY as its agent for the limited
purpose of accepting purchase and redemption orders for TRUST shares from the
Separate Accounts, based on allocations of net amounts to subaccounts of the
Separate Accounts and other transactions relating to the Contracts or the
Separate Accounts. Such orders for TRUST shares for the Separate Accounts,
based on premiums and transaction requests received by LIFE COMPANY from
Contract owners prior to the close of trading each day that the New York Stock
Exchange (the "Exchange") is open (each such day, a "business day") and other
Contract transactions effected as of the close of business on such business day,
will be executed by TRUST at the net asset value for such shares determined as
of the close of the Exchange on such business day. Any orders for TRUST shares
for the Separate Accounts, based on premiums or transaction requests received by
LIFE COMPANY from Contract owners on such day but after the close of the
Exchange, will be executed by TRUST at the net asset value determined as of the
close of business on the next business day following the day of receipt of such
order.
5. TRUST will provide to LIFE COMPANY closing net asset value, dividend
and capital gain information at the close of the Exchange each business day,
such information to be provided to LIFE COMPANY by 6:15 p.m. Eastern Time. LIFE
COMPANY will send directly to TRUST orders to purchase and/or redeem TRUST
shares on the basis of such closing net asset value by 9:30 a.m. Eastern Time
the following business day, provided that this deadline shall be extended if
TRUST fails to make such net asset value per share available by 6:15 p.m.
Eastern Time, such extension to be in direct proportion to the additional time
required by TRUST to make its daily net asset value per share available.
Payment for purchases of TRUST shares (net of proceeds payable on
contemporaneous redemptions of TRUST shares) will be wired by LIFE COMPANY to a
custodial account designated by TRUST to coincide with the order for TRUST
shares.
2
<PAGE>
6. Payment for net redemptions of TRUST shares will be wired by TRUST
from the TRUST custodial account to an account designated by LIFE COMPANY in
writing pursuant to Section 16 of this Agreement, the same business day LIFE
COMPANY transmits the redemption order to TRUST.
7. LIFE COMPANY shall not be responsible for expenses incurred under this
Agreement by TRUST or TRUST's investment adviser, including the cost of
registration of TRUST's shares with the SEC and in states where required.
8. TRUST will provide LIFE COMPANY with a camera ready of the current
TRUST prospectus and any supplements thereto for printing by LIFE COMPANY.
TRUST will provide LIFE COMPANY a copy of the current TRUST statement of
additional information and any supplements thereto, suitable for duplication.
TRUST will provide LIFE COMPANY copies of its proxy material suitable for
printing. TRUST will provide LIFE COMPANY with annual and semi-annual reports
and any supplements thereto, in camera ready form.
9. Any materials utilized by LIFE COMPANY which describe TRUST, its
shares, or the TRUST's investment adviser shall be submitted to TRUST and
TRUST's distributor for approval prior to use, not less than five (5) business
days before such approval is needed by LIFE COMPANY. Advertising and
literature, if and to the extent that it describes LIFE COMPANY, the Separate
Accounts or the Contracts, prepared by TRUST's distributor for use in marketing
TRUST or the Portfolios will be submitted to LIFE COMPANY for approval before
use, not less than five (5) business days before such approval is needed by
TRUST's distributor.
10. TRUST will provide LIFE COMPANY with at least one complete copy of all
registration statements, prospectuses, statements of additional information,
annual and semi-annual reports, proxy statements, no-action letters, exemptive
applications and all amendments or supplements to any of the above that relate
to the Portfolios promptly after the filing of each such document with the SEC
or other regulatory authority. LIFE COMPANY will provide TRUST with at least
one complete copy of all registration statements, prospectuses, statements of
additional information,. annual and semi-annual reports, proxy statements no-
action letters, exemptive applications and all amendments or supplements to any
of the above that relate to a Separate Account promptly after the filing of each
such document with the SEC or other regulatory authority.
11. LIFE COMPANY and its agents will not make any written representations
concerning the TRUST or TRUST shares except those contained in the then current
prospectus and statement of additional information of the TRUST and in current
printed sales literature of the TRUST.
12. LIFE COMPANY agrees to inform the Board of Trustees of TRUST of the
existence of or any potential for any material irreconcilable conflict of
interest between the
3
<PAGE>
interests of the contract owners of the Separate Accounts and/or any other
separate account of any other insurance company investing in the Trust.
A material irreconcilable conflict may arise for a variety of reasons,
including:
(a) an action by any state insurance regulatory authority;
(b) a change in applicable federal or state insurance, tax, or
securities laws or regulations, or a public ruling, private
letter ruling, or any similar action by insurance, tax or
securities regulatory authorities;
(c) an administrative or judicial decision in any relevant
proceeding;
(d) the manner in which the investments of any Portfolio are being
managed;
(e) a difference in voting instructions given by variable annuity
contract owners and variable life insurance contract owners or by
contract owners of different life insurance companies utilizing
TRUST; or
(f) a decision by LIFE COMPANY to disregard the voting instructions
of contract owners.
LIFE COMPANY will be responsible for assisting the Board of Trustees
of TRUST in carrying out its responsibilities by providing the Board with all
information reasonably necessary for the Board to consider any issue raised
including information as to a decision by LIFE COMPANY to disregard voting
instructions of contract owners.
It is agreed that if it is determined by a majority of the members of
the Board of Trustees of TRUST or a majority of its disinterested Trustees that
a material irreconcilable conflict exists affecting LIFE COMPANY, LIFE COMPANY
shall, at its own expense, take whatever steps are necessary to remedy or
eliminate the irreconcilable material conflict, which steps may include, but are
not limited to,
(a) withdrawing the assets allocable to some or all of the Separate
Accounts from TRUST or any Portfolio and reinvesting such assets
in a different investment medium, including another Portfolio of
the TRUST or submitting the question of whether such segregation
should be implemented to a vote of all affected contract owners
and, as appropriate, segregating the assets of any particular
group (i.e., annuity contract owners, life insurance contract
owners or qualified contract owners) that votes in favor of such
segregation, or offering to the affected contract owners the
option of making such a change;
4
<PAGE>
(b) establishing a new registered management investment company or
managed separate account.
If a material irreconcilable conflict arises because of LIFE COMPANY's
decision to disregard contract owner voting instructions and that decision
represents a minority position or would preclude a majority vote, the LIFE
COMPANY may be required, at TRUST's election, to withdraw a Separate Account's
investment in TRUST. No charge or penalty will be imposed against a Separate
Account or LIFE COMPANY as a result of such a withdrawal. LIFE COMPANY agrees
that any remedial action taken by it in resolving any material conflicts of
interest will be carried out with a view only to the interests of contract
owners.
For purposes hereof, a majority of the disinterested Members of the
Board of Trustees of TRUST shall determine whether or not any proposed action
adequately remedies any material irreconcilable conflict. In no event will
TRUST be required to establish a new funding medium for any variable contracts.
LIFE COMPANY shall not be required by the terms hereof to establish a new
funding medium for any Contracts if an offer to do so has been declined by vote
of a majority of affected Contract owners.
TRUST will undertake to promptly make known to LIFE COMPANY the Board
of Trustees' determination of the existence of a material irreconcilable
conflict and its implications.
13. LIFE COMPANY shall provide pass-through voting privileges to all
Contract owners so long as the SEC continues to interpret the `40 Act to require
such pass-through voting privileges for variable contract owners; provided,
however, that LIFE COMPANY may disregard voting instructions of Contract owners
to the extent and in the circumstances permitted by Rule 6e-3(T) under the `40
Act or as the SEC may otherwise permit. LIFE COMPANY shall be responsible for
assuring that each of its Separate Accounts calculates voting privileges in a
manner consistent with other life companies utilizing TRUST. It is a condition
of this Agreement that LIFE COMPANY will vote shares, for which it has not
received voting instructions as well as shares attributable to it, in the same
proportion as it votes shares for which it has received instructions. TRUST
hereby confirms that the manner in which LIFE COMPANY currently calculates
voting privileges is consistent with the manner in which other life companies
utilizing TRUST so calculate voting privileges. TRUST will notify LIFE COMPANY
if TRUST becomes aware that another life company utilizing TRUST has changed the
manner in which it so calculates voting privileges.
14. This Agreement shall terminate as to the sale and issuance of new
Contracts:
(a) at the option of either LIFE COMPANY or TRUST upon six months'
advance written notice to the other; provided, however, that LIFE
COMPANY may terminate this Agreement upon 30 days prior written
notice to TRUST as to the sale and issuance of new Contracts if
LIFE
5
<PAGE>
COMPANY reasonably determines in good faith that it is no
longer in the interests of Contract owners or consistent with the
purposes of the Contracts to continue to offer the Portfolios as
investment options;
(b) at the option of LIFE COMPANY if TRUST shares are not available
for any reason to meet the requirements of the Contracts as
determined by LIFE COMPANY, provided that reasonable advance
notice of election to terminate shall be furnished by LIFE
COMPANY;
(c) at the option of either LIFE COMPANY or TRUST, upon institution
of formal proceedings against the broker-dealer or broker-dealers
marketing the Contracts, the Separate Accounts, LIFE COMPANY, or
TRUST by the National Association of Securities Dealers, Inc.
(the "NASD"), the SEC or any other regulatory body;
(d) upon termination of the Investment Advisory Agreement between
TRUST and Neuberger & Berman Management Incorporated, notice of
the occurrence of which shall be promptly furnished to LIFE
COMPANY; provided, however, that this subsection (d) shall not be
-------- -------
deemed to apply if contemporaneously with such termination a new
contract of substantially similar terms is entered into between
TRUST and Neuberger & Berman Management Incorporated;
(e) upon the requisite vote of Contract owners having an interest in
TRUST to substitute for TRUST's shares the shares of another
investment company in accordance with the terms of Contracts for
which TRUST's shares had been selected to serve as the underlying
investment medium; provided, however, that LIFE COMPANY shall
-------- -------
give 60 days' written notice to TRUST of any proposed vote to
replace TRUST shares;
(f) upon assignment of this Agreement unless made with the written
consent of all other parties hereto;
(g) if TRUST's shares are not registered, issued or sold in
conformance with Federal law or such law precludes the use of
TRUST shares as the underlying investment medium of Contracts
issued or to be issued by LIFE COMPANY, provided that prompt
notice shall be given by either party should such situation
occur; or
(h) at the option of LIFE COMPANY if TRUST ceases to qualify as a
Regulated Investment Company under Subchapter M of the Code, or
under any successor or similar provision, or fails to meet the
diversification requirements specified in Section 817(h) of the
Code and
6
<PAGE>
any regulations thereunder, or if LIFE COMPANY reasonably
believes that TRUST may cease or fail to so qualify.
Termination as the result of any cause listed in this Section shall not
affect TRUST's obligation to furnish its shares to Contracts then in force for
which its shares serve or may serve as the underlying medium unless such further
sale of TRUST shares is proscribed by law or the SEC or other regulatory body.
15. This Agreement shall be subject to the provisions of the `40 Act and
the rules and regulations thereunder, including any exemptive relief therefrom
and the orders of the SEC setting forth such relief.
16. All notices and other communications hereunder shall be given or made
in writing and shall be delivered personally, or sent by telex, telecopier or
registered certified mail, postage prepaid, return receipt requested, to the
party or parties to whom they are directed at the following addresses, or at
such other addresses as may be designated by notice from such party to all other
parties.
To LIFE COMPANY:
The Penn Mutual Life Insurance Company
Independence Square
Philadelphia, PA 19172
Attention: Kenneth J. Kempf
Senior Vice President, Pensions
To TRUST:
Neuberger & Berman Advisers Management Trust
605 Third Avenue
Second Floor
New York, NY 10158-0006
Attention: Stanley Egener
Chairman, Trustee and Principal
Executive Officer
Any notice, demand or other communication given in a manner prescribed in this
Section shall be deemed to have been delivered on receipt.
17. This Agreement shall be binding upon and inure to the benefit of the
parties hereto and their respective permitted successors and assigns.
7
<PAGE>
18. This Agreement may be executed in any number of counterparts, all of
which taken together shall constitute one agreement, and any party hereto may
execute this Agreement by signing any such counterpart.
19. In case any one or more of the provisions contained in this Agreement
should be invalid, illegal or unenforceable in any respect, the validity,
legality and enforceability of the remaining provisions contained herein shall
not in any way be affected or impaired thereby.
20. This Agreement constitutes the entire agreement and understanding
between the parties hereto and supersedes all prior agreements and
understandings relating to the subject matter hereof.
8
<PAGE>
21. It is understood by the parties that this Agreement is not to be
deemed an exclusive arrangement.
Executed this _____ day of ________ 1993.
NEUBERGER & BERMAN ADVISERS
MANAGEMENT TRUST
ATTEST:__________________________ By:____________________________________
Stanley Egener, Chairman
THE PENN MUTUAL LIFE
INSURANCE COMPANY
ATTEST:___________________________ By:____________________________________
Kenneth J. Kempf, Senior
Vice President, Pensions
9
<PAGE>
Exhibit 8(b)(2)
FORM OF ASSIGNMENT AND MODIFICATION AGREEMENT
This Agreement is made by and between Neuberger & Berman Advisers
Management Trust ("Trust"), a Massachusetts business trust, Neuberger & Berman
Management Incorporated ("N&B Management"), a New York corporation, Neuberger &
Berman Advisers Management Trust ("Successor Trust"), a Delaware business trust,
Advisers Managers Trust ("Managers Trust") and The Penn Mutual Life Insurance
Company ("Life Company"), a life insurance company organized under the laws of
the State of Pennsylvania.
WHEREAS, the Life Company has previously entered into a Sales Agreement
dated April 5, 1993 (the "Sales Agreement") with the Trust regarding the
purchase of shares of the Trust by Life Company; and
WHEREAS, as part of the reorganization into a "master-feeder" fund
structure (the "Reorganization"), the Trust will be converted into the Successor
Trust, a Delaware business trust; and
WHEREAS, as part of the Reorganization, each Portfolio of the Trust will
transfer all of its assets to the corresponding Portfolio of the Successor Trust
("Successor Portfolio") and each Successor Portfolio will invest all of its net
investable assets in a corresponding series of Managers Trusts; and
WHEREAS, as part of the Reorganization, an Order under Section 6(c) of the
Investment Company Act of 1940 ("40 Act") is expected to be issued by the
Securities and Exchange Commission ("SEC") granting exemptions from Sections
9(a), 13(a), 15(a) and 15(b) of the `40 Act and Rules 6e-2(b)(15) and 6e-
3(T)(b)(15) thereunder; and
WHEREAS, the Order is expected to require that certain conditions (the
"Conditions") as set forth in the Notice (Investment Company Act Release No.
21003 (April 12, 1995)) be made a part of the Sales Agreement; and
WHEREAS, the parties hereto desire to assign the Sales Agreement from the
Trust to the Successor Trust, to modify the Sales Agreement to include the
Conditions and Indemnification and to rename the Sales Agreement; and
WHEREAS, N&B Management and Managers Trust will become parties to the Sales
Agreement as modified hereby, due to and for purposes of their obligations under
the Conditions and N&B Management's obligations under the Indemnification
provision.
NOW, THEREFORE, in consideration of their mutual promises, Trust, N&B
Management, Successor Trust, Managers Trust and Life Company agree as follows:
<PAGE>
1. The Sales Agreement is hereby assigned by the Trust to the Successor
Trust.
2. Pursuant to such assignment, the Successor Trustee hereby accepts all
rights and benefits of the Trust under the Sales Agreement and agrees to perform
all duties and obligations of the Trust under the Sales Agreement. Upon the
effectiveness of this Assignment and Modification Agreement, the Trust will be
released from all obligations and duties under the Sales Agreement.
3. The Sales Agreement is hereby modified to include the Conditions as
follows:
Sections 12 and 13 of the Sales Agreement are replaced by the following:
12. a) The Board of Trustees of each of the Successor Trust and Managers
Trust (the "Boards") will monitor the Successor Trust and Managers Trust,
respectively, (collectively the "Funds") for the existence of any material
irreconcilable conflict between the interests of the contract owners of all
insurance company separate accounts investing in the Funds. A material
irreconcilable conflict may arise for a variety of reasons, including: (a)
state insurance regulatory authority action; (b) a change in applicable federal
or state insurance, tax, or securities laws or regulations, or a public ruling,
private letter ruling, or any similar action by insurance, tax, or securities
regulatory authorities; (c) an administrative or judicial decision in any
relevant proceeding; (d) the manner in which the investments of the Funds are
being managed; (e) a difference in voting instructions given by variable annuity
and variable life insurance contract owners or by contract owners of different
participating insurance companies; or (f) a decision by a participating
insurance company to disregard voting instructions of contract owners.
b) Life Company will report any potential or existing conflicts to
the Boards. Life Company will be responsible for assisting the appropriate Board
in carrying out its responsibilities under the Conditions set forth in the
notice issued by the SEC for the Funds on April 12, 1995 (the "Notice") by
providing the Board with all information reasonably necessary for it to consider
any issues raised. This responsibility includes, but is not limited to, an
obligation by Life Company to inform the Board whenever variable contract owner
voting instructions are disregarded by Life Company. These responsibilities
will be carried out with a view only to the interests of the contract owners.
c) If a majority of the Board of a Fund or a majority of its
disinterested trustees or directors, determines that a material irreconcilable
conflict exists, affecting the Life Company, Life Company, at its expense and to
the extent reasonably practicable (as determined by a majority of disinterested
trustees or directors), will take any steps necessary to remedy or eliminate the
irreconcilable material conflict, including: (a) withdrawing the assets
allocable to some or all of the separate accounts from the Funds or any series
thereof and reinvesting those assets in a different investment medium, which may
include another series of the Successor Trust or Managers Trust, or another
investment company or submitting the question as to whether such segregation
should be implemented to a vote of all affected variable contract owners and, as
2
<PAGE>
appropriate, segregating the assets of any appropriate group (i.e., variable
annuity or variable life contract owners of one or more Participants) that votes
in favor of such segregation, or offering to the affected variable contract
owners the option of making such a change; and (b) establishing a new registered
management investment company or managed separate account. If a material
irreconcilable conflict arises because of Life Company's decision to disregard
contract owner voting instructions, and that decision represents a minority
position or would preclude a majority vote, the Life Company may be required, at
the election of the relevant Fund, to withdraw its separate account's investment
in such Fund, and no charge or penalty will be imposed as a result of such
withdrawal. The responsibility to take such remedial action shall be carried
out with a view only to the interests of the contract owners.
For the purposes of Condition (c), a majority of the
disinterested members of the applicable Board shall determine whether or not any
proposed action adequately remedies any irreconcilable material conflict, but in
no event will the relevant Fund or N&B Management (or any other investment
advisor of the Funds) be required to establish a new funding medium for any
variable contract. Further, Life Company shall not be required by this condition
(c) to establish a new funding medium for any variable contract if any offer to
do so has been declined by a vote of a majority of contract owners materially
affected by the irreconcilable material conflict.
d) Any Board's determination of the existence of an irreconcilable
material conflict and its implications shall be made known promptly and in
writing to all Participants.
13. a) Life Company will provide pass-through voting privileges to
all contract owners so long as the SEC continues to interpret the `40 Act as
requiring pass-through voting privileges for variable contract owners. This
condition will apply to UIT-separate accounts investing in the Successor Trust
and to managed separated accounts investing in Managers Trust to the extent a
vote is required with respect to matters relating to Managers Trust.
Accordingly, Life Company, where applicable, will vote shares of a Fund held in
its separate accounts in a manner consistent with voting instructions timely
received from its variable contract owners. Life Company will be responsible
for assuring that each of its separate accounts that participates in the Funds
calculates voting privileges in a manner consistent with other Participants as
defined in the Conditions set forth in the Notice. Each Participant will vote
shares for which is has not received timely voting instructions, as well as
shares it owns, in the same proportion as its votes those shares for which it
has received voting instructions. Funds hereby confirm that the manner in which
Life Company currently calculates voting privileges is consistent with the
manner in which other Participants so calculate voting privileges. Funds will
notify Life Company if Funds become aware that another participant has changed
the manner in which it so calculates voting privileges.
b) If and to the extent Rule 6e-2 and Rule 6e-3(T) are amended, or
Rule 6e-3 is adopted, to provide exemptive relief from any provision of the `40
Act or the rules thereunder with respect to mixed and shared funding on terms
and conditions materially different from any
3
<PAGE>
exemptions granted in the Order, then the Successor Trust, Managers Trust and/or
the Participants, as appropriate, shall take such steps as may be necessary to
comply with Rule 6e-2 and Rule 6e-3(T), as amended, and Rule 6e-3, as adopted,
to the extent such Rules are applicable.
c) No less than annually, the Participants shall submit to the
Boards such reports, materials or data as such Boards may reasonably request so
that the Boards may fully carry out the obligations imposed upon them by these
Conditions. Such reports, materials, and data shall be submitted more frequently
if deemed appropriate by the applicable Boards.
4. The Sales Agreement is hereby modified to include indemnification as
follows:
22. (a) Except as limited by and in accordance with the provisions of
Sections 22(b) and 22(c) hereof, N&B MANAGEMENT agrees to indemnify and hold
harmless LIFE COMPANY and each of its directors and officers and each person, if
any, who controls LIFE COMPANY within the meaning of Section 15 of the `33 Act
(collectively the "Indemnified Parties") against any and all losses, claims,
damages, liabilities (including amounts paid in settlement with the written
consent of N&B MANAGEMENT, which consent shall not be unreasonably withheld) or
litigation expenses (including attorney's fees, legal and other expenses) to
which the Indemnified Parties may become subject under any statute, or
regulation, at common law or otherwise, insofar as such losses, claims, damages,
liabilities or expenses (or actions in respect thereof) or settlements are
related to the sale or acquisition of, or investment in, TRUST's share or the
variable contracts or the exercise of any ownership rights with respect to such
shares or contracts, and arise as a result of a failure by Trust to comply with
the diversification requirements of Section 817(h) of the Code.
(b) N&B MANAGEMENT shall not be liable under this
indemnification provision with respect to any losses, claims,
damages, liabilities or litigation to which an Indemnified Party
would otherwise be subject by reason of such Indemnified Party's
willful misfeasance, bad faith, or gross negligence in the
performance of such Indemnified Party's duties or by reason of
such Indemnified Party's reckless disregard of obligations and
duties under this Agreement or to LIFE COMPANY.
(c) N&B MANAGEMENT shall not be liable under this
indemnification provision with respect to any claim made against
an Indemnified party unless such Indemnified Party shall have
notified N&B MANAGEMENT in writing within a reasonable time after
the summons or other first legal process giving information of
the nature of the claim shall have been served upon such
Indemnified Party (or after such Indemnified Party shall have
received notice of such service on any designated agent), but
failure to notify N&B MANAGEMENT of any such claim shall not
relieve N&B MANAGEMENT from any liability which it may have to
the Indemnified Party against whom such action is brought
otherwise than on account of this indemnification provision. In
4
<PAGE>
case any such action is brought against the Indemnified Parties,
N&B MANAGEMENT shall be entitled to participate at its own
expense in the defense thereof. N&B MANAGEMENT also shall be
entitled to assume the defense thereof, with counsel satisfactory
to the party named in the action. After notice from N&B
MANAGEMENT to such party of N&B MANAGEMENT'S election to assume
the defense thereof, the Indemnified Party shall bear the fees
and expenses of any additional counsel retained by it, and N&B
MANAGEMENT will not be liable to such party under this Agreement
for any legal or other expenses subsequently incurred by such
party independently in connection with the defense thereof other
than reasonable costs of investigation.
5. The Sales Agreement shall be renamed Fund Participation Agreement.
6. This Assignment and Modification Agreement shall be effective on May
1, 1995, the closing date of the conversion. In the event of a conflict between
the terms of this Assignment and Modification Agreement and the terms of the
Sales Agreement, the terms of this Assignment and Modification Agreement shall
control.
7. All other terms and conditions of the Sales Agreement remain in full
force and effect.
5
<PAGE>
Executed this ______ day of _____________________, 1995.
Neuberger & Berman Advisers
Management Trust
(a Massachusetts business trust)
Attest: ___________________ By: ____________________________
Stanley Egener, Chairman
Neuberger & Berman Advisers
Management Trust
(a Delaware business trust)
Attest: ___________________ By: ____________________________
Stanley Egener, Chairman
Advisers Managers Trust
Attest: ___________________ By: ____________________________
Neuberger & Berman Management
Incorporated
Attest: ___________________ By: ____________________________
The Penn Mutual Life Insurance Company
Attest: ___________________ By: ____________________________
6
<PAGE>
Exhibit 8(c)
Form of Sales Agreement
Between
Penn Series Funds, Inc.
and
The Penn Mutual Life Insurance Company
for
Penn Mutual Variable Annuity Account III
May 1, 1997
<PAGE>
Agreement made as of the 1st day of May, 1997, between Penn Series Funds,
Inc., a Maryland Corporation ("Penn Series") and The Penn Mutual Life Insurance
Company, a Pennsylvania corporation ("Penn Mutual").
WHEREAS, Penn Series is engaged in business as a diversified open-end
management investment company and is registered as such under the Investment
Company Act of 1940;
WHEREAS, Penn Mutual is engaged in the business of issuing life insurance
policies and annuity contracts and as part of that business has established a
separate account known as Penn Mutual Variable Annuity Account III (the
"Separate Account") for the purposes of segregating assets for certain variable
annuity contracts;
WHEREAS, Penn Series desires to sell to Penn Mutual for the Separate
Account separate classes of shares of common stock that participate in separate
investment funds and Penn Mutual desires to purchase such shares for the
Separate Account.
NOW, THEREFORE, in consideration of the mutual covenants herein contained,
it is agreed as follows:
1. Subject to and in accordance with the applicable law, Penn Series will
sell to Penn Mutual for the Separate Account shares of the following classes of
Common Stock, par value $.10 per share ("Shares"), at such times and in such
amounts as Penn Mutual shall specify:
Penn Series Growth Equity Fund Common Stock
Penn Series Value Equity Fund Common Stock
Penn Series Small Capitalization Fund
Penn Series Emerging Growth Fund
Penn Series Flexibly Managed Fund Common Stock
Penn Series International Equity Fund Common Stock
Penn Series Quality Bond Fund Common Stock
Penn Series High Yield Bond Fund Common Stock
Penn Series Money Market Fund Common Stock
2. The price per Share shall be equal to the net asset value of the Share
as determined from time to time in accordance with the Investment Company Act of
1940 and as described in the prospectus of Penn Series in effect under the
Securities Act of 1933 at the time of the sale of such Share.
3. No commission or other fee shall be charged or paid to any person or
entity in connection with the sale of Shares to Penn Mutual for the Separate
Account.
4. Penn Mutual will pay cash for the Shares.
<PAGE>
5. Penn Mutual shall not purchase Shares with the view to distribution of
such Shares.
6. Penn Series will provide Penn Mutual with copies of the then current
prospectus and statement of additional information of Penn series and copies of
all other periodic reports, proxy materials and all other stockholder
communications of a general nature as may be necessary for the sale and
maintenance of variable annuity contracts issued by Penn Mutual and funded in
whole or in part through the Separate Account.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement the day
and year first written above.
PENN SERIES FUNDS, INC.
Attest:________________________ By_____________________________
Assistant Secretary James B. McElwain
Executive Vice President
THE PENN MUTUAL LIFE
INSURANCE COMPANY
Attest:________________________ By_____________________________
Secretary Richard F. Plush
Vice President
2
<PAGE>
Exhibit 8(d)
FORM OF PARTICIPATION AGREEMENT
-------------------------------
Among
VARIABLE INSURANCE PRODUCTS FUND,
--------------------------------
FIDELITY DISTRIBUTORS CORPORATION
---------------------------------
and
THE PENN MUTUAL LIFE INSURANCE COMPANY
--------------------------------------
THIS AGREEMENT, made and entered into as of the 1st day of May, 1995
by and among THE PENN MUTUAL LIFE INSURANCE COMPANY, (hereinafter the
"Company"), a Pennsylvania corporation, on its own behalf and on behalf of each
segregated asset account of the Company set forth on Schedule A hereto as may be
amended from time to time (each such account hereinafter referred to as the
"Account"), and the VARIABLE INSURANCE PRODUCTS FUND, an unincorporated business
trust organized under the laws of the Commonwealth of Massachusetts (hereinafter
the "Fund") and FIDELITY DISTRIBUTORS CORPORATION (hereinafter the
"Underwriter"), a Massachusetts corporation.
WHEREAS, the Fund engages in business as an open-end management
investment company and is available to act as the investment vehicle for
separate accounts established for variable life insurance policies and variable
annuity contracts (collectively, the "Variable Insurance Products") to be
offered by insurance companies which have entered into participation agreements
with the Fund and the Underwriter (hereinafter "Participating Insurance
Companies"); and
WHEREAS, the beneficial interest in the Fund is divided into several
series of shares, each representing the interest in a particular managed
portfolio of securities and other assets, any one or more of which may be made
available under this Agreement, as may be amended from time to time by mutual
agreement of the parties hereto (each such series hereinafter referred to as a
"Portfolio"); and
WHEREAS, the Fund has obtained an order from the Securities and
Exchange Commission, dated October 15, 1985 (File No. 812-6102), granting
Participating Insurance Companies and variable annuity and variable life
insurance separate accounts exemptions from the provisions of sections 9(a),
13(a), 15(a), and 15(b) of the Investment Company Act of 1940, as amended,
(hereinafter the "1940 Act") and Rules 6e-2(b) (15) and 6e-3(T) (b) (15)
thereunder, to the extent necessary to permit shares of the Fund to be sold to
and held by variable annuity
<PAGE>
and variable life insurance separate accounts of both affiliated and
unaffiliated life insurance companies (hereinafter the "Shared Funding Exemptive
Order"); and
WHEREAS, the Fund is registered as an open-end management investment
company under the 1940 Act and its shares are registered under the Securities
Act of 1933, as amended (hereinafter the "1933 Act"); and
WHEREAS, Fidelity Management & Research Company (the "Adviser") is
duly registered as an investment adviser under the federal Investment Advisers
Act of 1940 and any applicable state securities law; and
WHEREAS, the Company has registered or will register certain variable
life insurance and variable annuity contracts under the 1933 Act; and
WHEREAS, each Account is a duly organized, validly existing segregated
asset account, established by resolution of the Board of Directors of the
Company, on the date shown for such Account on Schedule A hereto, to set aside
and invest assets attributable to the aforesaid variable annuity contracts; and
WHEREAS, the Company has registered or will register each Account as a
unit investment trust under the 1940 Act; and
WHEREAS, the Underwriter is registered as a broker dealer with the
Securities and Exchange Commission ("SEC") under the Securities Exchange Act of
1934, as amended, (hereinafter the "1934 Act"), and is a member in good standing
of the National Association of Securities Dealers, Inc. (hereinafter "NASD");
and
WHEREAS, to the extent permitted by applicable insurance laws and
regulations, the Company intends to purchase shares in the Portfolios on behalf
of each Account to fund certain of the aforesaid variable life and variable
annuity contracts and the Underwriter is authorized to sell such shares to unit
investment trusts such as each Account at net asset value;
NOW, THEREFORE, in consideration of their mutual promises, the
Company, the Fund and the Underwriter agree as follows:
ARTICLE I. Sale of Fund Shares
-------------------
1.1 The Underwriter agrees to sell to the Company those shares of the
Fund which each Account orders, executing such orders on a daily basis at the
net asset value next computed after receipt by the Fund or its designee of the
order for the shares of the Fund. For purposes of this Section 1.1, the Company
shall be the designee of the Fund for receipt of such orders from each Account
and receipt by such designee shall constitute receipt by the Fund;
2
<PAGE>
provided that the Fund receives notice of such order by 10:00 a.m. Boston time
on the next following Business Day. "Business Day" shall mean any day on which
the New York Stock Exchange is open for trading and on which the Fund calculates
its net asset value pursuant to the rules of the Securities and Exchange
Commission.
1.2 The Fund agrees to make its shares available indefinitely for
purchase at the applicable net asset value per share by the Company and its
Accounts on those days on which the Fund calculates its net asset value pursuant
to rules of the Securities and Exchange Commission and the Fund shall use
reasonable efforts to calculate such net asset value on each day which the New
York Stock Exchange is open for trading. Notwithstanding the foregoing, the
Board of Trustees of the Fund (hereinafter the "Board") may refuse to sell
shares of any Portfolio to any person, or suspend or terminate the offering of
shares of any Portfolio if such action is required by law or by regulatory
authorities having jurisdiction or is, in the sole discretion of the Board
acting in good faith and in light of their fiduciary duties under federal and
any applicable state laws, necessary in the best interests of the shareholders
of such Portfolio.
1.3 The Fund and the Underwriter agree that shares of the Fund will
be sold only to Participating Insurance Companies and their separate accounts.
No shares of any Portfolio will be sold to the general public.
1.4 The Fund and the Underwriter will not sell Fund shares to any
insurance company or separate account unless an agreement containing provisions
substantially the same as Articles I, II, V, VII and Section 2.5 of Article II
of this Agreement is in effect to govern such sales.
1.5 The Fund agrees to redeem for cash, on the Company's request, any
full or fractional shares of the Fund held by the Company, executing such
requests on a daily basis at the net asset value next computed after receipt by
the Fund or its designee of the request for redemption. For purposes of this
Section 1.5, the Company shall be the designee of the Fund for receipt of
requests for redemption from each Account and receipt by such designee shall
constitute receipt by the Fund; provided that the Fund receives notice of such
request for redemption on the next following Business Day.
1.6 The Company agrees that purchases and redemptions of Portfolio
shares offered by the then current prospectus of the Fund shall be made in
accordance with the provisions of such prospectus. The variable annuity
contracts and/or variable life insurance policies issued by the Company, under
which amounts may be invested in the Fund (the "Contracts"), are listed on
Schedule A attached hereto and incorporated herein by reference, as such
Schedule A may be amended from time to time by mutual written agreement of all
of the parties hereto. The Company will give the Fund and the Underwriter 45
days written notice of its intention to make available in the future, as a
funding vehicle under the Contracts, any other investment company.
3
<PAGE>
1.7 The Company shall pay for Fund shares on the next Business Day
after an order to purchase Fund shares is made in accordance with the provisions
of Section 1.1 hereof. Payment shall be in federal funds transmitted by wire.
For purpose of Section 2.10 and 2.11, upon receipt by the Fund of the federal
funds so wired, such funds shall cease to be the responsibility of the Company
and shall become the responsibility of the Fund.
1.8 Issuance and transfer of the Fund's shares will be by book entry
only. Stock certificates will not be issued to the Company or any Account.
Shares ordered from the Fund will be recorded in an appropriate title for each
Account or the appropriate subaccount of each Account.
1.9 The Fund shall furnish same day notice (by wire or telephone,
followed by written confirmation) to the Company of any income, dividends or
capital gain distributions payable on the Fund's shares. The Company hereby
elects to receive all such income dividends and capital gain distributions as
are payable on the Portfolio shares in additional shares of that Portfolio. The
Company reserves the right to revoke this election and to receive all such
income dividends and capital gain distributions in cash. The Fund shall notify
the Company of the number of shares so issued as payment of such dividends and
distributions.
1.10 The Fund shall make the net asset value per share for each
Portfolio available to the Company on a daily basis as soon as reasonably
practical after the net asset value per share is calculated (normally by 6:30
p.m. Boston time) and shall use its best efforts to make such net asset value
per share available by 7 p.m. Boston time.
1.11 The Fund and the Company shall cooperate and communicate with
each other to assure each other than purchases and sales of shares of Portfolios
of the Fund are processed in a timely and accurate manner, in accordance with
the Investment Company Act of 1940, as amended, and the rules and regulations
thereunder. The Fund and the Company shall provide the necessary personnel at
the end of the work day to facilitate good communication and confirmation that
the days' transactions have been adequately and accurately recorded. The
parties shall cooperate with each other in maintaining compatible and easily
transmittable electronic files in order to facilitate efficiency in
communicating and recording information. The Fund shall electronically confirm
shares transactions and balances not later than 2:00 p.m. on the day following
the date of the transaction.
ARTICLE II. Representations and Warranties
------------------------------
2.1 The Company represents and warrants that the Contracts are or
will be registered under the 1933 Act; that the Contracts will be issued and
sold in compliance in all material respects with all applicable Federal and
State laws and that the sale of the Contracts shall comply in all material
respects with state insurance suitability requirements. The Company further
represents and warrants that it is an insurance company duly organized and in
good
4
<PAGE>
standing under applicable law and that it has legally and validly established
each Account prior to any issuance or sale thereof as a segregated asset account
under Section 40 P.S. 506.2 of the Pennsylvania Insurance Code and has
registered or, prior to any issuance or sale of the Contracts, will register
each Account as a unit investment trust in accordance with the provisions of the
1940 Act to serve as a segregated investment account for the Contracts.
2.2 The Fund represents and warrants that Fund shares sold pursuant
to this Agreement shall be registered under the 1933 Act, duly authorized for
issuance and sold in compliance with the laws of the State of Pennsylvania and
all applicable federal and state securities laws and that the Fund is and shall
remain registered under the 1940 Act. The Fund shall amend the Registration
Statement for its shares under the 1933 Act and the 1940 Act from time to time
as required in order to effect the continuous offering of its shares. The Fund
shall register and qualify the shares for sale in accordance with the laws of
the various states only if and to the extent deemed advisable by the Fund or the
Underwriter.
2.3 The Fund represents that it is currently qualified as a Regulated
Investment Company under Subchapter M of the Internal Revenue Code of 1986, as
amended, (the "Code") and that it will make every effort to maintain such
qualification (under Subchapter M or any successor or similar provision) and
that it will notify the Company immediately upon having a reasonable basis for
believing that it has ceased to so qualify or that it might not so qualify in
the future.
2.4 The Company represents that the Contracts are currently treated
as life insurance policies or annuity contracts, under applicable provisions of
the Code and that it will make every effort to maintain such treatment and that
it will notify the Fund and the Underwriter immediately upon having a reasonable
basis for believing that the Contracts have ceased to be so treated or that they
might not be so treated in the future.
2.5 The Fund currently does not intend to make any payments to
finance distribution expenses pursuant to Rule 12b-1 under the 1940 Act or
otherwise, although it may make such payments in the future. The Fund has
adopted a "no fee" or "defensive" Rule 12b-1 Plan under which it makes no
payments for distribution expenses. To the extent that it decides to finance
distribution expenses pursuant to Rule 12b-1, the Fund undertakes to have a
board of trustees, a majority of whom are not interested persons of the Fund,
formulate and approve any plan under Rule 12b-1 to finance distribution
expenses.
2.6 The Fund makes no representation as to whether any aspect of its
operations (including, but not limited to, fees and expenses and investment
policies) complies with the insurance laws or regulations of the various states
except that the Fund represents that the Fund's investment policies, fees and
expenses are and shall at all times remain in compliance with the laws of the
State of Pennsylvania and the Fund and the Underwriter represent that their
respective operations are and shall at all times remain in material compliance
with the laws of the State of Pennsylvania to the extent required to perform
this Agreement.
5
<PAGE>
2.7 The Underwriter represents and warrants that it is a member in
good standing of the NASD and is registered as a broker-dealer with the SEC.
The Underwriter further represents that it will sell and distribute the Fund
shares in accordance with the laws of the State of Pennsylvania and all
applicable state and federal securities laws, including without limitation the
1933 Act, the 1934 Act, and the 1940 Act.
2.8 The Fund represents that it is lawfully organized and validly
existing under the laws of the Commonwealth of Massachusetts and that it does
and will comply in all material respects with the 1940 Act.
2.9 The Underwriter represents and warrants that the Adviser is and
shall remain duly registered in all material respects under all applicable
federal and state securities laws and that the Adviser shall perform its
obligations for the Fund in compliance in all material respects with the laws of
the State of Pennsylvania and any applicable state and federal securities laws.
2.10 The Fund and Underwriter represent and warrant that all of their
directors, officers, employees, investment advisers, and other
individuals/entities dealing with the money and/or securities of the Fund are
and shall continue to be at all times covered by a blanket fidelity bond or
similar coverage for the benefit of the Fund in an amount not less than the
minimal coverage as required currently by Rule 17g-(1) of the 1940 Act or
related provisions as may be promulgated from time to time. The aforesaid Bond
shall include coverage for larceny and embezzlement and shall be issued by a
reputable bonding company.
2.11 The Company represents and warrants that all of its directors,
officers, employees, investment advisers, and other individuals/entities dealing
with the money and/or securities of the Fund are covered by a blanket fidelity
bond or similar coverage, in an amount not less $5 million. The aforesaid
includes coverage for larceny and embezzlement is issued by a reputable bonding
company. The Company agrees to make all reasonable efforts to see that this
bond or another bond containing these provisions is always in effect, and agrees
to notify the Fund and the Underwriter in the event that such coverage no longer
applies.
ARTICLE III. Prospectuses, Reports to Shareholders and Proxy Statements; Voting
------------------------------------------------------------------
3.1 The Underwriter shall provide the Company with as many printed
copies of the Fund's current prospectus and Statement of Additional Information
as the Company may reasonably request. If requested by the Company in lieu
thereof, the Fund shall provide camera ready film or computer diskettes
containing the Fund's prospectus and Statement of Additional Information, and
such other assistance as is reasonably necessary in order for the Company once
each year (or more frequently if the prospectus and/or Statement of Additional
Information for the Fund is amended during the year) to have the prospectus for
the Contracts and the Fund's
6
<PAGE>
prospectus printed together in one document, and to have the Statement of
Additional Information for the Fund and the Statement of Additional Information
for the Contracts printed together in one document. Alternatively, the Company
may print the Fund's prospectus and/or its Statement of Additional Information
in combination with other fund companies' prospectuses and statements of
additional information. Except as provided in the following three sentences, all
expenses of printing and distributing Fund prospectuses and Statements of
Additional Information shall be the expense of the Company. For prospectuses and
Statements of Additional Information provided by the Company to its existing
owners of Contracts in order to update disclosure as required by the 1933 Act
and/or the 1940 Act, the cost of printing shall be borne by the Fund. If the
Company chooses to receive camera-ready film or computer diskettes in lieu of
receiving printed copies of the Fund's prospectus, the Fund will reimburse the
Company in an amount equal to the product of A and B where A is the number of
such prospectuses distributed to owners of the Contracts, and B is the Fund's
per unit cost of typesetting and printing the Fund's prospectus. The same
procedures shall be followed with respect to the Fund's Statement of Additional
Information.
The Company agrees to provide the Fund or its designee with such
information as may be reasonably requested by the Fund to assure that the Fund's
expenses do not include the cost of printing any prospectuses or Statements of
Additional Information other than those actually distributed to existing owners
of the Contracts.
3.2 The Fund's prospectus shall state that the Statement of
Additional Information for the Fund is available from the Underwriter or the
Company (or in the Fund's discretion, the Prospectus shall state that such
Statement is available from the Fund).
3.3 The Fund, at its expense, shall provide the Company with copies
of its proxy statements, reports to shareholders, and other communications
(except for prospectuses and Statements of Additional Information, which are
covered in Section 3.1) to shareholders in such quantity as the Company shall
reasonably require for distributing to Contract owners.
3.4 If and to the extent required by law the Company shall:
(i) solicit voting instructions from Contract owners;
(ii) vote the Fund shares in accordance with instructions
received from Contract owners; and
(iii) vote Fund shares for which no instructions have been
received in the same proportion as Fund shares of such
portfolio for which instructions have been received,
so long as and to the extent that the Securities and Exchange Commission
continues to interpret the 1940 Act to require pass-through voting privileges
for variable contract owners. The Company reserves the right to vote Fund
shares held in any segregated asset account in its own right, to the extent
permitted by law. The Fund, the Underwriter and the Company shall follow the
procedures, and shall have the corresponding responsibilities, for the handling
of proxy and
7
<PAGE>
voting instruction solicitations, as set forth in Schedule B attached hereto and
incorporated herein by reference. Participating Insurance Companies shall be
responsible for assuring that each of their separate accounts participating in
the Fund calculates voting privileges in a manner consistent with the standards
set forth on Schedule B, which standards will also be provided to the other
Participating Insurance Companies.
3.5 The Fund will comply with all provisions of the 1940 Act
requiring voting by shareholders, and in particular the Fund will either provide
for annual meetings or comply with Section 16(c) of the 1940 Act (although the
Fund is not one of the trusts described in Section 16(c) of that Act) as well as
with Sections 16(a) and, if and when applicable, 16(b). Further, the Fund will
act in accordance with the Securities and Exchange Commission's interpretation
of the requirements of Section 16(a) with respect to periodic elections of
trustees and with whatever rules the Commission may promulgate with respect
thereto.
3.6 The Fund and the Underwriter shall use reasonable efforts to
provide Fund prospectuses, reports to shareholders, proxy materials and other
Fund communications (or camera-ready equivalents) to the Company sufficiently in
advance of the Company's mailing dates to enable the Company to complete, at
reasonable cost, the printing, assembling and/or distribution of the
communications in accordance with applicable laws and regulations.
ARTICLE IV. Sales Material and Information
------------------------------
4.1 The Company shall furnish, or shall cause to be furnished, to the
Fund or its designee, each piece of sales literature or other promotional
material in which the Fund or its investment adviser or the Underwriter is
named, at least ten Business Days prior to its use. No such material shall be
used if the Fund or its designee reasonably objects to such use within fifteen
Business Days after receipt of such material.
4.2 The Company shall not give any information or make any
representations or statements on behalf of the Fund or concerning the Fund in
connection with the sale of the Contracts other than the information or
representations contained in the registration statement or prospectus for the
Fund shares, as such registration statement and prospectus may be amended or
supplemented from time to time, or in reports or proxy statements for the Fund,
or in sales literature or other promotional material approved by the Fund or its
designee or by the Underwriter, except with the permission of the Fund or the
Underwriter or the designee of either.
4.3 The Fund, Underwriter, or its designee shall furnish, or shall
cause to be furnished, to the Company or its designee, each piece of sales
literature or other promotional material in which the Company and/or its
separate account(s), is named at least ten Business Days prior to its use. No
such material shall be used if the Company or its designee reasonably objects to
such use within ten Business Days after receipt of such material.
8
<PAGE>
4.4 The Fund and the Underwriter shall not give any information or
make any representations on behalf of the Company or concerning the Company,
each Account, or the Contracts other than the information or representations
contained in a registration statement or prospectus for the Contracts, as such
registration statement and prospectus may be amended or supplemented from time
to time, or in published reports for each Account which are in the public domain
or approved by the Company for distribution to Contract owners, or in sales
literature or other promotional material approved by the Company or its
designee, except with the permission of the Company.
4.5 The Fund will provide to the Company at least one complete copy
of all registration statements, prospectuses, Statements of Additional
Information, reports, proxy statements, sales literature and other promotional
materials, applications for exemptions, requests for no-action letters, and all
amendments to any of the above, that relate to the Fund or its shares,
contemporaneously with the filing of such document with the Securities and
Exchange Commission or other regulatory authorities.
4.6 The Company will provide to the Fund at least one complete copy
of all registration statements, prospectuses, Statements of Additional
Information, reports, solicitations for voting instructions, sales literature
and other promotional materials, applications for exemptions, requests for no
action letters, and all amendments to any of the above, that relate to the
investment in the Fund under the Contracts, contemporaneously with the filing of
such document with the SEC or other regulatory authorities.
4.7 For purposes of this Article IV, the phrase "sales literature or
other promotional material" includes, but is not limited to, any of the
following that refer to the Fund or any affiliate of the Fund: advertisements
(such as material published, or designed for use in, a newspaper, magazine, or
other periodical, radio, television, telephone or tape recording, videotape
display, signs or billboards, motion pictures, or other public media), sales
literature (i.e., any written communication distributed or made generally
----
available to customers or the public, including brochures, circulars, research
reports, market letters, form letters, seminar texts, reprints or excerpts of
any other advertisement, sales literature, or published article), educational or
training materials or other communications distributed or made generally
available to some or all agents or employees, and registration statements,
prospectuses, Statements of Additional Information, shareholder reports, and
proxy materials.
ARTICLE V. Fees and Expenses
-----------------
5.1 The Fund and Underwriter shall pay no fee or other compensation
to the Company under this agreement, except that if the Fund or any Portfolio
adopts and implements a plan pursuant to Rule 12b-1 to finance distribution
expenses, then the Underwriter may make payments to the Company or to the
underwriter for the Contracts if and in amounts agreed to by the Underwriter in
writing and such payments will be made out of existing fees otherwise
9
<PAGE>
payable to the Underwriter, past profits of the Underwriter or other resources
available to the Underwriter. No such payments shall be made directly by the
Fund. Currently, no such payments are contemplated.
5.2 All expenses incident to performance by the Fund under this
Agreement shall be paid by the Fund. The Fund shall see to it that all its
shares are registered and authorized for issuance in accordance with applicable
federal law and, if and to the extent deemed advisable by the Fund, in
accordance with applicable state laws prior to their sale. The Fund shall bear
the expenses for the cost of registration and qualification of the Fund's
shares, preparation and filing of the Fund's prospectus and registration
statement, proxy materials and reports, setting the prospectus in type, setting
in type and printing the proxy materials and reports to shareholders (including
the costs of printing a prospectus that constitutes an annual report), the
preparation of all statements and notices required by any federal or state law,
and all taxes on the issuance or transfer of the Fund's shares.
5.3 The Company shall bear the expenses of distributing the Fund's
prospectus, proxy materials and reports to owners of Contracts issued by the
Company.
ARTICLE VI. Diversification
---------------
6.1 The Fund will at all times invest money from the Contracts in
such a manner as to ensure that the Contracts will be treated as variable
contracts under the Code and the regulations issued thereunder. Without
limiting the scope of the foregoing, the Fund will at all times comply with
Section 817(h) of the Code and Treasury Regulation 1.817-5, relating to the
diversification requirements for variable annuity, endowment, or life insurance
contracts and any amendments or other modifications to such Section or
Regulations. In the event of a breach of this Article VI by the Fund, it will
take all reasonable steps (a) to notify Company of such breach and (b) to
adequately diversify the Fund so as to achieve compliance with the grace period
afforded by Regulation 817-5.
ARTICLE VII Potential Conflicts
-------------------
7.1 The Board will monitor the Fund for the existence of any material
irreconcilable conflict between the interests of the contract owners of all
separate accounts investing in the Fund. An irreconcilable material conflict
may arise for a variety of reasons, including: (a) an action by any state
insurance regulatory authority; (b) a change in applicable federal or state
insurance, tax, or securities laws or regulations, or a public ruling, private
letter ruling, no-action or interpretative letter, or any similar action by
insurance, tax, or securities regulatory authorities; (c) an administrative or
judicial decision in any relevant proceeding; (d) the manner in which the
investments of any Portfolio are being managed; (e) a difference in voting
instructions given by variable annuity contract and variable life insurance
contract
10
<PAGE>
owners; or (f) a decision by an insurer to disregard the voting instructions of
contract owners. The Board shall promptly inform the Company if it determines
that an irreconcilable material conflict exists and the implications thereof.
7.2 The Company will report any potential or existing conflicts of
which it is aware to the Board. The Company will assist the Board in carrying
out its responsibilities under the Shared Funding Exemptive Order, by providing
the Board with all information reasonably necessary for the Board to consider
any issues raised. This includes, but is not limited to, an obligation by the
Company to inform the Board whenever contract owner voting instructions are
disregarded.
7.3 If it is determined by a majority of the Board, or a majority of
its disinterested trustees, that a material irreconcilable conflict exists, the
Company and other Participating Insurance Companies shall, at their expense and
to the extent reasonably practicable (as determined by a majority of the
disinterested trustees), take whatever steps are necessary to remedy or
eliminate the irreconcilable material conflict, up to and including: (1),
withdrawing the assets allocable to some or all of the separate accounts from
the Fund or any Portfolio and reinvesting such assets in a different investment
medium, including (but not limited to) another Portfolio of the Fund, or
submitting the question whether such segregation should be implemented to a vote
of all affected Contract owners and, as appropriate, segregating the assets of
any appropriate group (i.e., annuity contract owners, life insurance contract
----
owners, or variable contract owners of one or more Participating Insurance
Companies) that votes in favor of such segregation, or offering to the affected
contract owners the option of making such a change; and (2), establishing a new
registered management investment company or managed separate account.
7.4 If a material irreconcilable conflict arises because of a
decision by the Company to disregard contract owner voting instructions and that
decision represents a minority position or would preclude a majority vote, the
Company may be required, at the Fund's election, to withdraw the affected
Account's investment in the Fund and terminate this Agreement with respect to
such Account; provided, however that such withdrawal and termination shall be
limited to the extent required by the foregoing material irreconcilable conflict
as determined by a majority of the disinterested members of the Board. Any such
withdrawal and termination must take place within six (6) months after the Fund
gives written notice that this provision is being implemented, and until the end
of that six month period the Underwriter and Fund shall continue to accept and
implement orders by the Company for the purchase (and redemption) of shares of
the Fund.
7.5 If a material irreconcilable conflict arises because a particular
state insurance regulator's decision applicable to the Company conflicts with
the majority of other state regulators, then the Company will withdraw the
affected Account's investment in the Fund and terminate this Agreement with
respect to such Account within six months after the Board informs the Company in
writing that it has determined that such decision has created an
11
<PAGE>
irreconcilable material conflict; provided, however, that such withdrawal and
termination shall be limited to the extent required by the foregoing material
irreconcilable conflict as determined by a majority of the disinterested members
of the Board. Until the end of the foregoing six month period, the Underwriter
and Fund shall continue to accept and implement orders by the Company for the
purchase (and redemption) of shares of the Fund.
7.6 For purposes of Sections 7.3 through 7.6 of this Agreement, a
majority of the disinterested members of the Board shall determine whether any
proposed action adequately remedies any irreconcilable material conflict, but in
no event will the Fund be required to establish a new funding medium for the
Contracts. The Company shall not be required by Section 7.3 to establish a new
funding medium for the Contracts if an offer to do so has been declined by vote
of a majority of Contract owners materially adversely affected by the
irreconcilable material conflict. In the event that the Board determines that
any proposed action does not adequately remedy any irreconcilable material
conflict, then the Company will withdraw the Account's investment in the Fund
and terminate this Agreement within six (6) months after the Board informs the
Company in writing of the foregoing determination, provided, however, that such
withdrawal and termination shall be limited to the extent required by any such
material irreconcilable conflict as determined by a majority of the
disinterested members of the Board.
7.7 If and to the extent that Rule 6e-2 and Rule 6e-3(T) are amended,
or Rule 6e-3 is adopted, to provide exemptive relief from any provision of the
Act or the rules promulgated thereunder with respect to mixed or shared funding
(as defined in the Shared Funding Exemptive Order) on terms and conditions
materially different from those contained in the Shared Funding Exemptive Order,
then (a) the Fund and/or the Participating Insurance Companies, as appropriate,
shall take such steps as may be necessary to comply with Rules 6e-2 and 6e-3(T),
as amended, and Rule 6e-3, as adopted, to the extent such rules are applicable;
and (b) Sections 3.4, 3.5, 7.1, 7.2, 7.3, 7.4, and 7.5 of this Agreement shall
continue in effect only to the extent that terms and conditions substantially
identical to such Sections are contained in such Rule(s) as so amended or
adopted.
ARTICLE VII Indemnification
---------------
8.1 Indemnification By The Company
------------------------------
8.1(a). The Company agrees to indemnify and hold harmless the Fund
and each trustee of the Board and officers and each person, if any, who controls
the Fund within the meaning of Section 15 of the 1933 Act (collectively, the
"Indemnified Parties" for purposes of this Section 8.1) against any and all
losses, claims, damages, liabilities (including amounts paid in settlement with
the written consent of the Company) or litigation (including legal and other
expenses), to which the Indemnified Parties may become subject under any
statute, regulation, at common law or otherwise, insofar as such losses, claims,
damages, liabilities or expenses (or
12
<PAGE>
actions in respect thereof) or settlements are related to the sale or
acquisition of the Fund's shares or the Contracts and:
(i) arise out of or are based upon any untrue statements or
alleged untrue statements of any material fact contained in the
Registration Statement or prospectus for the Contracts or contained in
the Contracts or sales literature for the Contracts (or any amendment
or supplement to any of the foregoing), or arise out of or are based
upon the omission or the alleged omission to state therein a material
fact required to be stated therein or necessary to make the statements
therein not misleading, provided that this agreement to indemnify
shall not apply as to any Indemnified Party if such statement or
omission or such alleged statement or omission was made in reliance
upon and in conformity with information furnished to the Company by or
on behalf of the Fund for use in the Registration Statement or
prospectus for the Contracts or in the Contracts or sales literature
(or any amendment or supplement) or otherwise for use in connection
with the sale of the Contracts or Fund shares; or
(ii) arise out of or as a result of statements or
representations (other than statements or representations contained in
the Registration Statement, prospectus or sales literature of the Fund
not supplied by the Company, or persons under its control and other
than statements or representations authorized by the Fund or the
Underwriter) or unlawful conduct of the Company or persons under its
control, with respect to the sale or distribution of the Contracts or
Fund Shares; or
(iii) arise out of any untrue statement or alleged untrue
statement of a material fact contained in a Registration Statement,
prospectus, or sales literature of the Fund or any amendment thereof
or supplement thereto or the omission or alleged omission to state
therein a material fact required to be stated therein or necessary to
make the statements therein not misleading if such a statement or
omission was made in reliance upon and in conformity with information
furnished to the Fund by or on behalf of the Company; or
(iv) arise as a result of any failure by the Company to provide
the services and furnish the materials under the terms of this
Agreement; or
(v) arise out of or result from any material breach of any
representation and/or warranty made by the Company in this Agreement
or arise out of or result from any other material breach of this
Agreement by the Company, as limited by and in accordance with the
provisions of Sections 8.1(b) and 8.1(c) hereof.
13
<PAGE>
8.1(b). The Company shall not be liable under this indemnification
provision with respect to any losses, claims, damages, liabilities or litigation
incurred or assessed against an Indemnified Party as such may arise from such
Indemnified Party's willful misfeasance, bad faith, or gross negligence in the
performance of such Indemnified Party's duties or by reason of such Indemnified
Party's reckless disregard of obligations or duties under this Agreement or to
the Fund, whichever is applicable.
8.1(c). The Company shall not be liable under this indemnification
provision with respect to any claim made against an Indemnified Party unless
such Indemnified Party shall have notified the Company in writing within a
reasonable time after the summons or other first legal process giving
information of the nature of the claim shall have been served upon such
Indemnified Party (or after such Indemnified Party shall have received notice of
such service on any designated agent), but failure to notify the Company of any
such claim shall not relieve the Company from any liability which it may have to
the Indemnified Party against whom such action is brought otherwise than on
account of this indemnification provision. In case any such action is brought
against the Indemnified Parties, the Company shall be entitled to participate,
at its own expense, in the defense of such action. The Company also shall be
entitled to assume the defense thereof, with counsel satisfactory to the party
named in the action. After notice from the Company to such party of the
Company's election to assume the defense thereof, the Indemnified Party shall
bear the fees and expenses of any additional counsel retained by it, and the
Company will not be liable to such party under this Agreement for any legal or
other expenses subsequently incurred by such party independently in connection
with the defense thereof other than reasonable costs of investigation.
8.1(d). The Indemnified Parties will promptly notify the Company of
the commencement of any litigation or proceedings against them in connection
with the issuance or sale of the Fund Shares or the Contracts or the operation
of the Fund.
8.2 Indemnification by the Underwriter
----------------------------------
8.2(a). The Underwriter agrees to indemnify and hold harmless the
Company and each of its directors and officers and each person, if any, who
controls the Company within the meaning of Section 15 of the 1933 Act
(collectively, the "Indemnified Parties" for purposes of this Section 8.2)
against any and all losses, claims, damages, liabilities (including amounts paid
in settlement with the written consent of the Underwriter) or litigation
(including legal and other expenses) to which the Indemnified Parties may become
subject under any statute, at common law or otherwise, insofar as such losses,
claims, damages, liabilities or expenses (or actions in respect thereof) or
settlements are related to the sale or acquisition of the Fund's shares or the
Contracts and:
(i) arise out of or are based upon any untrue statement or
alleged untrue statement of any material fact contained in
the Registration Statement or prospectus or sales literature
of the Fund (or any
14
<PAGE>
amendment or supplement to any of the foregoing), or arise
out of or are based upon the omission or the alleged
omission to state therein a material fact required to be
stated therein or necessary to make the statements therein
not misleading, provided that this agreement to indemnify
shall not apply as to any Indemnified Party if such
statement or omission or such alleged statement or omission
was made in reliance upon and in conformity with information
furnished to the Underwriter or Fund by or on behalf of the
Company for use in the Registration Statement or prospectus
for the Fund or in sales literature (or any amendment or
supplement) or otherwise for use in connection with the sale
of the Contracts or Fund shares; or
(ii) arise out of or as a result of statements or representations
(other than statements or representations contained in the
Registration Statement, prospectus or sales literature for
the Contracts not supplied by the Underwriter or persons
under its control and other than statements or
representations authorized by the Company) or unlawful
conduct of the Fund, Adviser or Underwriter or persons under
their control, with respect to the sale or distribution of
the Contracts or Fund shares; or
(iii) arise out of any untrue statement or alleged untrue
statement of a material fact contained in a Registration
Statement, prospectus, or sales literature covering the
Contracts, or any amendment thereof or supplement thereto,
or the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to
make the statement or statements therein not misleading, if
such statement or omission was made in reliance upon
information furnished to the Company by or on behalf of the
Fund; or
(iv) arise as a result of any failure by the Fund to provide the
services and furnish the materials under the terms of this
Agreement (including a failure, whether unintentional or in
good faith or otherwise, to comply with the diversification
requirements specified in Article VI of this Agreement); or
(v) arise out of or result from any material breach of any
representation and/or warranty made by the Underwriter in
this Agreement or arise out of or result from any other
material breach of this Agreement by the Underwriter; as
limited by and in accordance with the provisions of Sections
8.2(b) and 8.2(c) hereof.
15
<PAGE>
8.2(b). The Underwriter shall not be liable under this
indemnification provision with respect to any losses, claims, damages,
liabilities or litigation to which an Indemnified Party would otherwise be
subject by reason of such Indemnified Party's willful misfeasance, bad faith, or
gross negligence in the performance of such Indemnified Party's duties or by
reason of such Indemnified Party's reckless disregard of obligations and duties
under this Agreement or to each Company or the Account, whichever is applicable.
8.2(c). The Underwriter shall not be liable under this
indemnification provision with respect to any claim made against an Indemnified
Party unless such Indemnified Party shall have notified the Underwriter in
writing within a reasonable time after the summons or other first legal process
giving information of the nature of the claim shall have been served upon such
Indemnified Party (or after such Indemnified Party shall have received notice of
such service on any designated agent), but failure to notify the Underwriter of
any such claim shall not relieve the Underwriter from any liability which it may
have to the Indemnified Party against whom such action is brought otherwise than
on account of this indemnification provision. In case any such action is
brought against the Indemnified Parties, the Underwriter will be entitled to
participate, at its own expense, in the defense thereof. The Underwriter also
shall be entitled to assume the defense thereof, with counsel satisfactory to
the party named in the action. After notice from the Underwriter to such party
of the Underwriter's election to assume the defense thereof, the Indemnified
Party shall bear the fees and expenses of any additional counsel retained by it,
and the Underwriter will not be liable to such party under this Agreement for
any legal or other expenses subsequently incurred by such party independently in
connection with the defense thereof other than reasonable costs of
investigation.
8.2(d). The Company agrees promptly to notify the Underwriter of the
commencement of any litigation or proceedings against it or any of its officers
or directors in connection with the issuance or sale of the Contracts or the
operation of each Account.
8.3 Indemnification By the Fund
---------------------------
8.3(a). The Fund agrees to indemnify and hold harmless the Company,
and each of its directors and officers and each person, if any, who controls the
Company within the meaning of Section 15 of the 1933 Act (collectively, the
"Indemnified Parties" for purposes of this Section 8.3) against any and all
losses, claims, damages, liabilities (including amounts paid in settlement with
the written consent of the Fund) or litigation (including legal and other
expenses) to which the Indemnified Parties may become subject under any statute,
at common law or otherwise, insofar as such losses, claims, damages, liabilities
or expenses (or actions in respect thereof) or settlements result from the gross
negligence, bad faith or willful misconduct of the Board or any member thereof,
are related to the operations of the Fund and:
(i) arise as a result of any failure by the Fund to provide the
services and furnish the materials under the terms of this
Agreement
16
<PAGE>
(including a failure to comply with the diversification
requirements specified in Article VI of this Agreement);or
(ii) arise out of or result from any material breach of any
representation and/or warranty made by the Fund in this
Agreement or arise out of or result from any other material
breach of this Agreement by the Fund;
as limited by and in accordance with the provisions of Sections 8.3(b) and
8.3(c) hereof.
8.3(b). The Fund shall not be liable under this indemnification
provision with respect to any losses, claims, damages, liabilities or litigation
incurred or assessed against an Indemnified Party as such may arise from such
Indemnified Party's willful misfeasance, bad faith, or gross negligence in the
performance of such Indemnified Party's duties or by reason of such Indemnified
Party's reckless disregard of obligations and duties under this Agreement or to
the Company, the Fund, the Underwriter or each Account, whichever is applicable.
8.3(c). The Fund shall not be liable under this indemnification
provision with respect to any claim made against an Indemnified Party unless
such Indemnified Party shall have notified the Fund in writing within a
reasonable time after the summons or other first legal process giving
information of the nature of the claim shall have been served upon such
Indemnified Party (or after such Indemnified Party shall have received notice of
such service on any designated agent), but failure to notify the Fund of any
such claim shall not relieve the Fund from any liability which it may have to
the Indemnified Party against whom such action is brought otherwise than on
account of this indemnification provision. In case any such action is brought
against the Indemnified Parties, the Fund will be entitled to participate, at
its own expense, in the defense thereof. The Fund also shall be entitled to
assume the defense thereof, with counsel satisfactory to the party named in the
action. After notice from the Fund to such party of the Fund's election to
assume the defense thereof, the Indemnified Party shall bear the fees and
expenses of any additional counsel retained by it, and the Fund will not be
liable to such party under this Agreement for any legal or other expenses
subsequently incurred by such party independently in connection with the defense
thereof other than reasonable costs of investigation.
8.3(d). The Company and the Underwriter agree promptly to notify the
Fund of the commencement of any litigation or proceedings against it or any of
its respective officers or directors in connection with this Agreement, the
issuance or sale of the Contracts, with respect to the operation of either
Account, or the sale or acquisition of shares of the Fund.
17
<PAGE>
ARTICLE IX. Applicable Law
--------------
9.1 This Agreement shall be construed and the provisions hereof
interpreted under and in accordance with the laws of the Commonwealth of
Massachusetts.
9.2 This Agreement shall be subject to the provisions of the 1933,
1934 and 1940 acts, and the rules and regulations and rulings thereunder,
including such exemptions from those statutes, rules and regulations as the
Securities and Exchange Commission may grant (including, but not limited to, the
Shared Funding Exemptive Order) and the terms hereof shall be interpreted and
construed in accordance therewith.
ARTICLE X. Termination
-----------
10. This Agreement shall continue in full force and effect until the
first to occur of:
(a) termination by any party for any reason by sixty (60) days
advance written notice delivered to the other parties; or
(b) termination by the Company by written notice to the Fund and the
Underwriter with respect to any Portfolio based upon the
Company's determination that shares of such Portfolio are not
reasonably available to meet the requirements of the Contracts;
or
(c) termination by the Company by written notice to the Fund and the
Underwriter with respect to any Portfolio in the event any of the
Portfolio's shares are not registered, issued or sold in
accordance with applicable state and/or federal law or such law
precludes the use of such shares as the underlying investment
media of the Contracts issued or to be issued by the Company; or
(d) termination by the Company by written notice to the Fund and the
Underwriter with respect to any Portfolio in the event that such
Portfolio ceases to qualify as a Regulated Investment Company
under Subchapter M of the Code or under any successor or similar
provision, or if the Company reasonably believes that the Fund
may fail to so qualify; or
(e) termination by the Company by written notice to the Fund and the
Underwriter with respect to any Portfolio in the event that such
Portfolio fails to meet the diversification requirements
specified in Article VI hereof; or
18
<PAGE>
(f) termination by either the Fund or the Underwriter by written
notice to the Company, if either one or both of the Fund or the
Underwriter respectively, shall determine, in their sole judgment
exercised in good faith, that the Company and/or its affiliated
companies has suffered a material adverse change in its business,
operations, financial condition or prospects since the date of
this Agreement or is the subject of material adverse publicity;
or
(g) termination by the Company by written notice to the Fund and the
Underwriter, if the Company shall determine, in its sole judgment
exercised in good faith, that either the Fund or the Underwriter
has suffered a material adverse change in its business,
operations, financial condition or prospects since the date of
this Agreement or is the subject of material adverse publicity;
or
(h) termination by the Fund or the Underwriter by written notice to
the Company, if the Company gives the Fund and the Underwriter
the written notice specified in Section 1.6 hereof and at the
time such notice was given there was no notice of termination
outstanding under any other provision of this Agreement;
provided, however any termination under this Section 10.1(h)
shall be effective forty five (45) days after the notice
specified in Section 1.6 was given.
10.2. Effect of Termination. Notwithstanding any termination of this
---------------------
Agreement, the Fund and the Underwriter shall at the option of the Company,
continue to make available additional shares of the Fund pursuant to the terms
and conditions of this Agreement, for all Contracts in effect on the effective
date of termination of this Agreement (hereinafter referred to as "Existing
Contracts"). Specifically, without limitation, the owners of the Existing
Contracts shall be permitted to reallocate investments in the Fund, redeem
investments in the Fund and/or invest in the Fund upon the making of additional
purchase payments under the Existing Contracts. The parties agree that this
Section 10.2 shall not apply to any terminations under Article VII and the
effect of such Article VII terminations shall be governed by Article VII of this
Agreement.
10.3. The Company shall not redeem Fund shares attributable to the
Contracts (as opposed to Fund shares attributable to the Company's assets held
in the Account) except (i) as necessary to implement Contract Owner initiated or
approved transactions, or (ii) as required by state and/or federal laws or
regulations or judicial or other legal precedent of general application
(hereinafter referred to as a "Legally Required Redemption") or (iii) as
permitted by an order of the SEC pursuant to Section 26(b) of the 1940 Act.
Upon request, the Company will promptly furnish to the Fund and the Underwriter
the opinion of counsel for the Company (which counsel shall be reasonably
satisfactory to the Fund and the Underwriter) to the effect that
19
<PAGE>
any redemption pursuant to clause (ii) above is a Legally Required Redemption.
Furthermore, except in cases where permitted under the terms of the Contracts,
the Company shall not prevent Contract Owners from allocating payments to a
Portfolio that was otherwise available under the Contracts without first giving
the Fund or the Underwriter 90 days notice of its intention to do so.
ARTICLE XI. Notices
-------
Any notice shall be sufficiently given when sent by registered or
certified mail to the other party at the address of such party set forth below
or at such other address as such party may from time to time specify in writing
to the other party.
If to the Fund:
82 Devonshire Street
Boston, Massachusetts 02109
Attention: Treasurer
If to the Company:
The Penn Mutual Life Insurance Company
Independence Square
510 Walnut Street
Philadelphia, Pennsylvania 19172
Attention: Legal Department
If to the Underwriter:
82 Devonshire Street
Boston, Massachusetts 02109
Attention: Treasurer
ARTICLE XII Miscellaneous
-------------
12.1. All persons dealing with the Fund must look solely to the
property of the Fund for the enforcement of any claims against the Fund as
neither the Board, officers, agents or shareholders assume any personal
liability for obligations entered into on behalf of the Fund.
12.2. Subject to the requirements of legal process and regulatory
authority, each party hereto shall treat as confidential the names and addresses
of the owners of the Contracts and all information reasonably identified as
confidential in writing by any other party hereto and, except as permitted by
this Agreement, shall not disclose, disseminate or utilize such names and
addresses and other confidential information until such time as it may come into
the public domain without the express written consent of the affected party.
20
<PAGE>
12.3. The captions in this Agreement are included for convenience of
reference only and in no way define or delineate any of the provisions hereof or
otherwise affect their construction or effect.
12.4. This Agreement may be executed simultaneously in two or more
counterparts, each of which taken together shall constitute one and the same
instrument.
12.5. If any provision of this Agreement shall be held or made
invalid by a court decision, statute, rule or otherwise, the remainder of the
Agreement shall not be affected thereby.
12.6. Each party hereto shall cooperate with each other party and all
appropriate governmental authorities (including without limitation the SEC, the
NASD and state insurance regulators) and shall permit such authorities
reasonable access to its books and records in connection with any investigation
or inquiry relating to this Agreement or the transactions contemplated hereby.
Notwithstanding the generality of the foregoing, each party hereto further
agrees to furnish the California Insurance Commissioner with any information or
reports in connection with services provided under this Agreement which such
Commissioner may request in order to ascertain whether the insurance operations
of the Company are being conducted in a manner consistent with the California
Insurance Regulations and any other applicable law or regulations.
12.7. The rights, remedies and obligations contained in this
Agreement are cumulative and are in addition to any and all rights, remedies and
obligations, at law or in equity, which the parties hereto are entitled to under
state and federal laws.
12.8. This Agreement or any of the rights and obligations hereunder
may not be assigned by any party without the prior written consent of all
parties hereto; provided, however, that the Underwriter may assign this
Agreement or any rights or obligations hereunder to any affiliate of or company
under common control with the Underwriter, if such assignee is duly licensed and
registered to perform the obligations of the Underwriter under this Agreement.
12.9. The Company shall furnish, or shall cause to be furnished, to
the Fund or its designee copies of the following reports:
(a) the Company's annual statement (prepared under statutory
accounting principles) and annual report (prepared under
generally accepted accounting principles ("GAAP"), if any),
as soon as practical and in any event within 90 days after
the end of each fiscal year;
21
<PAGE>
(b) the Company's quarterly statements (statutory) (and GAAP, if
any), as soon as practical and in any event within 45 days
after the end of each quarterly period:
(c) any financial statement, proxy statement, notice or report of
the Company sent to stockholders and/or policyholders, as
soon as practical after the delivery thereof to stockholders;
(d) any registration statement (without exhibits) and financial
reports of the Company filed with the Securities and Exchange
Commission or any state insurance regulator, as soon as
practical after the filing thereof;
(e) any other report submitted to the Company by independent
accountants in connection with any annual, interim or special
audit made by them of the books of the Company, as soon as
practical after the receipt thereof.
IN WITNESS WHEREOF, each of the parties hereto has caused this
Agreement to be executed in its name and on its behalf by its duly authorized
representative and its seal to be hereunder affixed hereto as of the date
specified above.
22
<PAGE>
THE PENN MUTUAL LIFE INSURANCE COMPANY
By:__________________________________
Name:________________________________
Title:_______________________________
VARIABLE INSURANCE PRODUCTS FUND
By:__________________________________
Name:________________________________
Title:_______________________________
FIDELITY DISTRIBUTORS CORPORATION
By:__________________________________
Name:________________________________
Title:_______________________________
23
<PAGE>
Schedule A
----------
Separate Accounts and Associated Contracts
------------------------------------------
Name of Separate Account and Policy Form Numbers of Contracts Funded
Date Established by Board of Directors By Separate Account
- -------------------------------------- -------------------
Penn Mutual Variable Account III DV-790, DI-783-V, DI-1182-V
(April 13, 1982)
(for registered variable annuities)
Penn Mutual Life Account I VU-90(S), VU-90(U), VU-94(S)
(January 27, 1987) VALJ-94(U), VALJ-94(S), BU-94(U)
(for registered variable life policies)
Penn Mutual Separate Account F Dl-1088, DI-985, DI-981
(March 30, 1985)
(for unregistered group annuities)
24
<PAGE>
SCHEDULE B
PROXY VOTING PROCEDURE
The following is a list of procedures and corresponding responsibilities for the
handling of proxies and voting instructions relating to the Fund by the
Underwriter, the Fund and the Company. The defined terms herein shall have the
meanings assigned in the Participation Agreement except that the term "Company"
shall also include the department or third party assigned by the Company to
perform the steps delineated below.
1. The proxy proposals are given to the Company by the Underwriter as early as
possible before the date set by the Fund for the shareholder meeting to
enable the Company to consider and prepare for the solicitation of voting
instructions from owners of the Contracts and to facilitate the
establishment of tabulation procedures. At this time the Underwriter will
inform the Company of the Record, Mailing and Meeting dates. This will be
done verbally approximately two months before meeting.
2. Promptly after the Record Date, the Company will perform a "tape run", or
other activity, which will generate the names, addresses and number of
units which are attributed to each contractowner/policyholder (the
"Customer") as of the Record Date. Allowance should be made for account
adjustments made after this date that could affect the status of the
Customers' accounts as of the Record Date.
Note: The number of proxy statements is determined by the activities
described in Step #2. The Company will use its best efforts to call in the
number of Customers to Fidelity, as soon as possible, but no later than two
weeks after the Record Date.
3. The Fund's Annual Report must be sent to each Customer by the Company
either before or together with the Customers' receipt of voting instruction
solicitation material. Underwriter will provide the last Annual Report to
the Company pursuant to the terms of Section 3.3 of the Agreement to which
this Schedule relates.
4. The text and format for the Voting Instruction Cards ("Cards" or "Card") is
provided to the Company by the Fund. The Company, at its expense, shall
produce and personalize the Voting Instruction Cards. The Legal Department
of the Underwriter or its affiliate ("Fidelity Legal") must approve the
Card before it is printed. Allow approximately 2-4 business days for
printing information on the Cards. Information commonly found on the Cards
includes:
a. name (legal name as found on account registration)
b. address
c. Fund or account number
d. coding to state number of units
25
<PAGE>
e. individual Card number for use in tracking and verification of
votes (already on Cards as printed by the Fund)
(This and related steps may occur later in the chronological process due to
possible uncertainties relating to the proposals.)
5. During this time, Fidelity Legal will develop, produce, and the Fund will
pay for the Notice of Proxy and the Proxy Statement (one document). Printed
and folded notices and statements will be sent to Company for insertion
into envelopes (envelopes and return envelopes are provided and paid for by
the Company). Contents of envelope sent to Customers by the Company will
include:
a. Voting Instruction Card(s)
b. One proxy notice and statement (one document)
c. return envelope (postage pre-paid by Company) addressed to the
Company or its tabulation agent
d. "urge buckslip" - optional, but recommended. (This is a small,
single sheet of paper that requests Customers to vote as quickly
as possible and that their vote is important. One copy will be
supplied by the Fund.)
e. cover letter - optional, supplied by Company and reviewed and
approved in advance by Fidelity Legal.
6. The above contents should be received by the Company approximately 3-5
business days before mail date. Individual in charge at Company reviews and
approves the contents of the mailing package to ensure correctness and
completeness. Copy of this approval sent to Fidelity Legal.
7. Package mailed by the Company.
* The Fund must allow at least a 15-day solicitation time to the Company
----
as the shareowner. (A 5-week period is recommended.) Solicitation time
is calculated as calendar days from (but not including) the meeting,
---
counting backwards.
8. Collection and tabulation of Cards begins. Tabulation usually takes place
in another department or another vendor depending on process used. An often
used procedure is to sort Cards on arrival by proposal into vote categories
of all yes, no, or mixed replies, and to begin data entry.
Note: Postmarks are not generally needed. A need for postmark information
would be due to an insurance company's internal procedure and has not been
required by Fidelity in the past.
9. Signatures on Card checked against legal name on account registration which
was printed on the Card.
26
<PAGE>
Note: For Example, If the account registration is under "Bertram C. Jones,
Trustee," then that is the exact legal name to be printed on the Card and
is the signature needed on the Card.
10. If Cards are mutilated, or for any reason are illegible or are not signed
properly, they are sent back to Customer with an explanatory letter, a new
Card and return envelope. The mutilated or illegible Card is disregarded
and considered to be not received for purposes of vote tabulation. Any
--- --------
Cards that have "kicked out" (e.g. mutilated, illegible) of the procedure
are "hand verified," i.e., examined as to why they did not complete the
system. Any questions on those Cards are usually remedied individually.
11. There are various control procedures used to ensure proper tabulation of
votes and accuracy of that tabulation. The most prevalent is to sort the
Cards as they first arrive into categories depending upon their vote; an
estimate of how the vote is progressing may then be calculated. If the
initial estimates and the actual vote do not coincide, then an internal
audit of that vote should occur. This may entail a recount.
12. The actual tabulation of votes is done in units which is then converted to
shares. (It is very important that the Fund receives the tabulations
stated in terms of a percentage and the number of shares.) Fidelity Legal
------
must review and approve tabulation format.
13. Final tabulation in shares is verbally given by the Company to Fidelity
Legal on the morning of the meeting not later than 10:00 a.m. Boston time.
Fidelity Legal may request an earlier deadline if reasonable and if
required to calculate the vote in time for the meeting.
14. A Certification of Mailing and Authorization to Vote Shares will be
required from the Company as well as an original copy of the final vote.
Fidelity Legal will provide a standard form for each Certification.
15. The Company will be required to box and archive the Cards received from the
Customers. In the event that any vote is challenged or if otherwise
necessary for legal, regulatory, or accounting purposes, Fidelity Legal
will be permitted reasonable access to such Cards.
16. All approvals and "signing-off" may be done orally, but must always be
followed up in writing.
27
<PAGE>
SCHEDULE C
The Company is planning to offer the following portfolios of the following
investment companies in May 1995:
FUNDS MANAGERS
- ----- --------
Penn Series Funds, Inc.
Growth Equity Fund Independence Capital Management, Inc. (a
subsidiary of The Penn Mutual Life
Insurance Company)
Flexibly Managed Fund T. Rowe Price Associates, Inc.
Value Equity Fund Quest for Value Advisors (a subsidiary of
Oppenheimer Capital)
Small Capitalization Fund Quest for Value Advisors
International Equity Fund Vontobel USA Inc. (a subsidiary of Vontobel
Holding Ltd.)
Quality Bond Fund Independence Capital Management, Inc.
High Yield Bond Fund T. Rowe Price Associates, Inc.
Money Market Fund Independence Capital Management, Inc.
TCI Portfolios, Inc.
TCI Growth Portfolio Investors Research Corporation (a Twentieth
Century company)
Neuberger & Berman Advisers Management Trust
Balanced Portfolio Neuberger & Berman Management Incorporated
Limited Maturity Bond Portfolio Neuberger & Berman Management Incorporated
Variable Insurance Products Fund
Equity-Income Portfolio Fidelity Management & Research Company
Growth Portfolio Fidelity Management & Research Company
Variable Insurance Products Fund II
Asset Manager Portfolio Fidelity Management & Research Company
28
<PAGE>
FORM OF PARTICIPATION AGREEMENT
-------------------------------
Among
VARIABLE INSURANCE PRODUCTS FUND II,
-----------------------------------
FIDELITY DISTRIBUTORS CORPORATION
---------------------------------
and
THE PENN MUTUAL LIFE INSURANCE COMPANY
--------------------------------------
THIS AGREEMENT, made and entered into as of the 1st day of May, 1995 by and
among THE PENN MUTUAL LIFE INSURANCE COMPANY, (hereinafter the "Company"), a
Pennsylvania corporation, on its own behalf and on behalf of each segregated
asset account of the Company set forth on Schedule A hereto as may be amended
from time to time (each such account hereinafter referred to as the "Account"),
and the VARIABLE INSURANCE PRODUCTS FUND II, an unincorporated business trust
organized under the laws of the Commonwealth of Massachusetts (hereinafter the
"Fund") and FIDELITY DISTRIBUTORS CORPORATION (hereinafter the "Underwriter"), a
Massachusetts corporation.
WHEREAS, the Fund engages in business as an open-end management investment
company and is available to act as the investment vehicle for separate accounts
established for variable life insurance policies and variable annuity contracts
(collectively, the "Variable Insurance Products") to be offered by insurance
companies which have entered into participation agreements with the Fund and the
Underwriter (hereinafter "Participating Insurance Companies"); and
WHEREAS, the beneficial interest in the Fund is divided into several series
of shares, each representing the interest in a particular managed portfolio of
securities and other assets, any one or more of which may be made available
under this Agreement, as may be amended from time to time by mutual agreement of
the parties hereto (each such series hereinafter referred to as a "Portfolio");
and
WHEREAS, the Fund has obtained an order from the Securities and Exchange
Commission, dated September 17, 1986 (File No. 812-6422), granting Participating
Insurance Companies and variable annuity and variable life insurance separate
accounts exemptions from the provisions of sections 9(a), 13(a), 15(a), and
15(b) of the Investment Company Act of 1940, as amended, (hereinafter the "1940
Act") and Rules 6e-2(b) (15) and 6e-3(T)(b)(15) thereunder, to the extent
necessary to permit shares of the Fund to be sold to and held by variable
annuity
1
<PAGE>
and variable life insurance separate accounts of both affiliated and
unaffiliated life insurance companies (hereinafter the "Shared Funding Exemptive
Order"); and
WHEREAS, the Fund is registered as an open-end management investment
company under the 1940 Act and its shares are registered under the Securities
Act of 1933, as amended (hereinafter the "1933 Act"); and
WHEREAS, Fidelity Management & Research Company (the "Adviser") is duly
registered as an investment adviser under the federal Investment Advisers Act of
1940 and any applicable state securities law; and
WHEREAS, the Company has registered or will register certain variable life
insurance and variable annuity contracts under the 1933 Act; and
WHEREAS, each Account is a duly organized, validly existing segregated
asset account, established by resolution of the Board of Directors of the
Company, on the date shown for such Account on Schedule A hereto, to set aside
and invest assets attributable to the aforesaid variable annuity contracts; and
WHEREAS, the Company has registered or will register each Account as a unit
investment trust under the 1940 Act; and
WHEREAS, the Underwriter is registered as a broker dealer with the
Securities and Exchange Commission ("SEC") under the Securities Exchange Act of
1934, as amended, (hereinafter the "1934 Act"), and is a member in good standing
of the National Association of Securities Dealers, Inc. (hereinafter "NASD");
and
WHEREAS, to the extent permitted by applicable insurance laws and
regulations, the Company intends to purchase shares in the Portfolios on behalf
of each Account to fund certain of the aforesaid variable life and variable
annuity contracts and the Underwriter is authorized to sell such shares to unit
investment trusts such as each Account at net asset value;
NOW, THEREFORE, in consideration of their mutual promises, the Company, the
Fund and the Underwriter agree as follows:
ARTICLE I Sale of Fund Shares
-------------------
1.1 The Underwriter agrees to sell to the Company those shares of the Fund
which each Account orders, executing such orders on a daily basis at the net
asset value next computed after receipt by the Fund or its designee of the order
for the shares of the Fund. For purposes of this Section 1.1, the Company shall
be the designee of the Fund for receipt of such orders from each Account and
receipt by such designee shall constitute receipt by the Fund; provided that the
2
<PAGE>
Fund receives notice of such order by 10:00 a.m. Boston time on the next
following Business Day. "Business Day" shall mean any day on which the New York
Stock Exchange is open for trading and on which the Fund calculates its net
asset value pursuant to the rules of the Securities and Exchange Commission.
1.2 The Fund agrees to make its shares available indefinitely for purchase
at the applicable net asset value per share by the Company and its Accounts on
those days on which the Fund calculates its net asset value pursuant to rules of
the Securities and Exchange Commission and the Fund shall use reasonable efforts
to calculate such net asset value on each day which the New York Stock Exchange
is open for trading. Notwithstanding the foregoing, the Board of Trustees of
the Fund (hereinafter the "Board") may refuse to sell shares of any Portfolio to
any person, or suspend or terminate the offering of shares of any Portfolio if
such action is required by law or by regulatory authorities having jurisdiction
or is, in the sole discretion of the Board acting in good faith and in light of
their fiduciary duties under federal and any applicable state laws, necessary in
the best interests of the shareholders of such Portfolio.
1.3 The Fund and the Underwriter agree that shares of the Fund will be
sold only to Participating Insurance Companies and their separate accounts. No
shares of any Portfolio will be sold to the general public.
1.4 The Fund and the Underwriter will not sell Fund shares to any
insurance company or separate account unless an agreement containing provisions
substantially the same as Articles I, III, V, VII and Section 2.5 of Article II
of this Agreement is in effect to govern such sales.
1.5 The Fund agrees to redeem for cash, on the Company's request, any full
or fractional shares of the Fund held by the Company, executing such requests on
a daily basis at the net asset value next computed after receipt by the Fund or
its designee of the request for redemption. For purposes of this Section 1.5,
the Company shall be the designee of the Fund for receipt of requests for
redemption from each Account and receipt by such designee shall constitute
receipt by the Fund; provided that the Fund receives notice of such request for
redemption on the next following Business Day.
1.6 The Company agrees that purchases and redemptions of Portfolio shares
offered by the then current prospectus of the Fund shall be made in accordance
with the provisions of such prospectus. The variable annuity contracts and/or
variable life insurance policies issued by the Company, under which amounts may
be invested in the Fund (the "Contracts"), are listed on Schedule A attached
hereto and incorporated herein by reference, as such Schedule A may be amended
from time to time by mutual written agreement of all of the parties hereto. The
Company will give the Fund and the Underwriter 45 days written notice of its
intention to make available in the future, as a funding vehicle under the
Contracts, any other investment company.
1.7 The Company shall pay for Fund shares on the next Business Day after
an order to purchase Fund shares is made in accordance with the provisions of
Section 1.1 hereof.
3
<PAGE>
Payment shall be in federal funds transmitted by wire. For purpose of Section
2.10 and 2.11, upon receipt by the Fund of the federal funds so wired, such
funds shall cease to be the responsibility of the Company and shall become the
responsibility of the Fund.
1.8 Issuance and transfer of the Fund's shares will be by book entry only.
Stock certificates will not be issued to the Company or any Account. Shares
ordered from the Fund will be recorded in an appropriate title for each Account
or the appropriate subaccount of each Account.
1.9 The Fund shall furnish same day notice (by wire or telephone, followed
by written confirmation) to the Company of any income, dividends or capital gain
distributions payable on the Fund's shares. The Company hereby elects to
receive all such income dividends and capital gain distributions as are payable
on the Portfolio shares in additional shares of that Portfolio. The Company
reserves the right to revoke this election and to receive all such income
dividends and capital gain distributions in cash. The Fund shall notify the
Company of the number of shares so issued as payment of such dividends and
distributions.
1.10 The Fund shall make the net asset value per share for each Portfolio
available to the Company on a daily basis as soon as reasonably practical after
the net asset value per share is calculated (normally by 6:30 p.m. Boston time)
and shall use its best efforts to make such net asset value per share available
by 7 p.m. Boston time.
1.11 The Fund and the Company shall cooperate and communicate with each
other to assure each other than purchases and sales of shares of Portfolios of
the Fund are processed in a timely and accurate manner, in accordance with the
Investment Company Act of 1940, as amended, and the rules and regulations
thereunder. The Fund and the Company shall provide the necessary personnel at
the end of the work day to facilitate good communication and confirmation that
the days' transactions have been adequately and accurately recorded. The
parties shall cooperate with each other in maintaining compatible and easily
transmittable electronic files in order to facilitate efficiency in
communicating and recording information. The Fund shall electronically confirm
shares transactions and balances not later than 2:00 p.m. on the day following
the date of the transaction.
ARTICLE II Representations and Warranties
------------------------------
2.1 The Company represents and warrants that the Contracts are or will be
registered under the 1933 Act; that the Contracts will be issued and sold in
compliance in all material respects with all applicable Federal and State laws
and that the sale of the Contracts shall comply in all material respects with
state insurance suitability requirements. The Company further represents and
warrants that it is an insurance company duly organized and in good standing
under applicable law and that it has legally and validly established each
Account prior to any issuance or sale thereof as a segregated asset account
under Section 40 P.S. 506.2 of the
4
<PAGE>
Pennsylvania Insurance Code and has registered or, prior to any issuance or sale
of the Contracts, will register each Account as a unit investment trust in
accordance with the provisions of the 1940 Act to serve as a segregated
investment account for the Contracts.
2.2 The Fund represents and warrants that Fund shares sold pursuant to
this Agreement shall be registered under the 1933 Act, duly authorized for
issuance and sold in compliance with the laws of the State of Pennsylvania and
all applicable federal and state securities laws and that the Fund is and shall
remain registered under the 1940 Act. The Fund shall amend the Registration
Statement for its shares under the 1933 Act and the 1940 Act from time to time
as required in order to effect the continuous offering of its shares. The Fund
shall register and qualify the shares for sale in accordance with the laws of
the various states only if and to the extent deemed advisable by the Fund or the
Underwriter.
2.3 The Fund represents that it is currently qualified as a Regulated
Investment Company under Subchapter M of the Internal Revenue Code of 1986, as
amended, (the "Code") and that it will make every effort to maintain such
qualification (under Subchapter M or any successor or similar provision) and
that it will notify the Company immediately upon having a reasonable basis for
believing that it has ceased to so qualify or that it might not so qualify in
the future.
2.4 The Company represents that the Contracts are currently treated as
life insurance policies or annuity contracts, under applicable provisions of the
Code and that it will make every effort to maintain such treatment and that it
will notify the Fund and the Underwriter immediately upon having a reasonable
basis for believing that the Contracts have ceased to be so treated or that they
might not be so treated in the future.
2.5 The Fund currently does not intend to make any payments to finance
distribution expenses pursuant to Rule 12b-1 under the 1940 Act or otherwise,
although it may make such payments in the future. The Fund has adopted a "no
fee" or "defensive" Rule 12b-1 Plan under which it makes no payments for
distribution expenses. To the extent that it decides to finance distribution
expenses pursuant to Rule 12b-1, the Fund undertakes to have a board of
trustees, a majority of whom are not interested persons of the Fund, formulate
and approve any plan under Rule 12b-1 to finance distribution expenses.
2.6 The Fund makes no representation as to whether any aspect of its
operations (including, but not limited to, fees and expenses and investment
policies) complies with the insurance laws or regulations of the various states
except that the Fund represents that the Fund's investment policies, fees and
expenses are and shall at all times remain in compliance with the laws of the
State of Pennsylvania and the Fund and the Underwriter represent that their
respective operations are and shall at all times remain in material compliance
with the laws of the State of Pennsylvania to the extent required to perform
this Agreement.
5
<PAGE>
2.7 The Underwriter represents and warrants that it is a member in good
standing of the NASD and is registered as a broker-dealer with the SEC. The
Underwriter further represents that it will sell and distribute the Fund shares
in accordance with the laws of the State of Pennsylvania and all applicable
state and federal securities laws, including without limitation the 1933 Act,
the 1934 Act, and the 1940 Act.
2.8 The Fund represents that it is lawfully organized and validly existing
under the laws of the Commonwealth of Massachusetts and that it does and will
comply in all material respects with the 1940 Act.
2.9 The Underwriter represents and warrants that the Adviser is and shall
remain duly registered in all material respects under all applicable federal and
state securities laws and that the Adviser shall perform its obligations for the
Fund in compliance in all material respects with the laws of the State of
Pennsylvania and any applicable state and federal securities laws.
2.10 The Fund and Underwriter represent and warrant that all of their
directors, officers, employees, investment advisers, and other
individuals/entities dealing with the money and/or securities of the Fund are
and shall continue to be at all times covered by a blanket fidelity bond or
similar coverage for the benefit of the Fund in an amount not less than the
minimal coverage as required currently by Rule 17g-(l) of the 1940 Act or
related provisions as may be promulgated from time to time. The aforesaid Bond
shall include coverage for larceny and embezzlement and shall be issued by a
reputable bonding company.
2.11 The Company represents and warrants that all of its directors,
officers, employees, investment advisers, and other individual entities dealing
with the money and/or securities of the Fund are covered by a blanket fidelity
bond or similar coverage, in an amount not less $5 million. The aforesaid
includes coverage for larceny and embezzlement is issued by a reputable bonding
company. The Company agrees to make all reasonable efforts to see that this
bond or another bond containing these provisions is always in effect, and agrees
to notify the Fund and the Underwriter in the event that such coverage no longer
applies.
ARTICLE III Prospectuses, Reports to Shareholders and Proxy Statements; Voting
------------------------------------------------------------------
3.1 The Underwriter shall provide the Company with as many printed copies
of the Fund's current prospectus and Statement of Additional Information as the
Company may reasonably request. If requested by the Company in lieu thereof,
the Fund shall provide camera-ready film or computer diskettes containing the
Fund's prospectus and Statement of Additional Information, and such other
assistance as is reasonably necessary in order for the Company once each year
(or more frequently if the prospectus and/or Statement of Additional Information
for the Fund is amended during the year) to have the prospectus for the
Contracts and the Fund's prospectus printed together in one document, and to
have the Statement of Additional Information for the Fund and the Statement of
Additional Information for the Contracts printed
6
<PAGE>
together in one document. Alternatively, the Company may print the Fund's
prospectus and/or its Statement of Additional Information in combination with
other fund companies' prospectuses and statements of additional information.
Except as provided in the following three sentences, all expenses of printing
and distributing Fund prospectuses and Statements of Additional Information
shall be the expense of the Company. For prospectuses and Statements of
Additional Information provided by the Company to its existing owners of
Contracts in order to update disclosure as required by the 1933 Act and/or the
1940 Act, the cost of printing shall be borne by the Fund. If the Company
chooses to receive camera-ready film or computer diskettes in lieu of receiving
printed copies of the Fund's prospectus, the Fund will reimburse the Company in
an amount equal to the product of A and B where A is the number of such
prospectuses distributed to owners of the Contracts, and B is the Fund's per
unit cost of typesetting and printing the Fund's prospectus. The same procedures
shall be followed with respect to the Fund's Statement of Additional
Information.
The Company agrees to provide the Fund or its designee with such
information as may be reasonably requested by the Fund to assure that the Fund's
expenses do not include the cost of printing any prospectuses or Statements of
Additional Information other than those actually distributed to existing owners
of the Contracts.
3.2 The Fund's prospectus shall state that the Statement of Additional
Information for the Fund is available from the Underwriter or the Company (or in
the Fund's discretion, the Prospectus shall state that such Statement is
available from the Fund).
3.3 The Fund, at its expense, shall provide the Company with copies of its
proxy statements, reports to shareholders, and other communications (except for
prospectuses and Statements of Additional Information, which are covered in
Section 3.1) to shareholders in such quantity as the Company shall reasonably
require for distributing to Contract owners.
3.4 If and to the extent required by law the Company shall:
(i) solicit voting instructions from Contract owners;
(ii) vote the Fund shares in accordance with instructions received
from Contract owners; and
(iii) vote Fund shares for which no instructions have been received in
the same proportion as Fund shares of such portfolio for which
instructions have been received,
so long as and to the extent that the Securities and Exchange Commission
continues to interpret the 1940 Act to require pass-through voting privileges
for variable contract owners. The Company reserves the right to vote Fund
shares held in any segregated asset account in its own right, to the extent
permitted by law. The Fund, the Underwriter and the Company shall follow the
procedures, and shall have the corresponding responsibilities, for the handling
of proxy and voting instruction solicitations, as set forth in Schedule B
attached hereto and incorporated herein by reference. Participating Insurance
Companies shall be responsible for assuring that each of
7
<PAGE>
their separate accounts participating in the Fund calculates voting privileges
in a manner consistent with the standards set forth on Schedule B, which
standards will also be provided to the other Participating Insurance Companies.
3.5 The Fund will comply with all provisions of the 1940 Act requiring
voting by shareholders, and in particular the Fund will either provide for
annual meetings or comply with Section 16(c) of the 1940 Act (although the Fund
is not one of the trusts described in Section 16(c) of that Act) as well as with
Sections 16(a) and, if and when applicable, 16(b). Further, the Fund will act
in accordance with the Securities and Exchange Commission's interpretation of
the requirements of Section 16(a) with respect to periodic elections of trustees
and with whatever rules the Commission may promulgate with respect thereto.
3.6 The Fund and the Underwriter shall use reasonable efforts to provide
Fund prospectuses, reports to shareholders, proxy materials and other Fund
communications (or camera-ready equivalents) to the Company sufficiently in
advance of the Company's mailing dates to enable the Company to complete, at
reasonable cost, the printing, assembling and/or distribution of the
communications in accordance with applicable laws and regulations.
ARTICLE IV Sales Material and Information
------------------------------
4.1 The Company shall furnish, or shall cause to be furnished, to the Fund
or its designee, each piece of sales literature or other promotional material in
which the Fund or its investment adviser or the Underwriter is named, at least
ten Business Days prior to its use. No such material shall be used if the Fund
or its designee reasonably objects to such use within fifteen Business Days
after receipt of such material.
4.2 The Company shall not give any information or make any representations
or statements on behalf of the Fund or concerning the Fund in connection with
the sale of the Contracts other than the information or representations
contained in the registration statement or prospectus for the Fund shares, as
such registration statement and prospectus may be amended or supplemented from
time to time, or in reports or proxy statements for the Fund, or in sales
literature or other promotional material approved by the Fund or its designee or
by the Underwriter, except with the permission of the Fund or the Underwriter or
the designee of either.
4.3 The Fund, Underwriter, or its designee shall furnish, or shall cause
to be furnished, to the Company or its designee, each piece of sales literature
or other promotional material in which the Company and/or its separate
account(s), is named at least ten Business Days prior to its use. No such
material shall be used if the Company or its designee reasonably objects to such
use within ten Business Days after receipt of such material.
4.4 The Fund and the Underwriter shall not give any information or make
any representations on behalf of the Company or concerning the Company, each
Account, or the Contracts other than the information or representations
contained in a registration statement or
8
<PAGE>
prospectus for the Contracts, as such registration statement and prospectus may
be amended or supplemented from time to time, or in published reports for each
Account which are in the public domain or approved by the Company for
distribution to Contract owners, or in sales literature or other promotional
material approved by the Company or its designee, except with the permission of
the Company.
4.5 The Fund will provide to the Company at least one complete copy of all
registration statements, prospectuses, Statements of Additional Information,
reports, proxy statements, sales literature and other promotional materials,
applications for exemptions, requests for no-action letters, and all amendments
to any of the above, that relate to the Fund or its shares, contemporaneously
with the filing of such document with the Securities and Exchange Commission or
other regulatory authorities.
4.6 The Company will provide to the Fund at least one complete copy of all
registration statements, prospectuses, Statements of Additional Information,
reports, solicitations for voting instructions, sales literature and other
promotional materials, applications for exemptions, requests for no action
letters, and all amendments to any of the above, that relate to the investment
in the Fund under the Contracts, contemporaneously with the filing of such
document with the SEC or other regulatory authorities.
4.7 For purposes of this Article IV, the phrase "sales literature or other
promotional material" includes, but is not limited to, any of the following that
refer to the Fund or any affiliate of the Fund: advertisements (such as material
published, or designed for use in, a newspaper, magazine, or other periodical,
radio, television, telephone or tape recording, videotape display, signs or
billboards, motion pictures, or other public media), sales literature (i.e.,
----
any written communication distributed or made generally available to customers
or the public, including brochures, circulars, research reports, market letters,
form letters, seminar texts, reprints or excerpts of any other advertisement,
sales literature, or published article), educational or training materials or
other communications distributed or made generally available to some or all
agents or employees, and registration statements, prospectuses, Statements of
Additional Information, shareholder reports, and proxy materials.
ARTICLE V Fees and Expenses
-----------------
5.1 The Fund and Underwriter shall pay no fee or other compensation to the
Company under this agreement, except that if the Fund or any Portfolio adopts
and implements a plan pursuant to Rule 12b-1 to finance distribution expenses,
then the Underwriter may make payments to the Company or to the underwriter for
the Contracts if and in amounts agreed to by the Underwriter in writing and such
payments will be made out of existing fees otherwise payable to the Underwriter,
past profits of the Underwriter or other resources available to the Underwriter.
No such payments shall be made directly by the Fund. Currently, no such
payments are contemplated.
9
<PAGE>
5.2 All expenses incident to performance by the Fund under this Agreement
shall be paid by the Fund. The Fund shall see to it that all its shares are
registered and authorized for issuance in accordance with applicable federal law
and, if and to the extent deemed advisable by the Fund, in accordance with
applicable state laws prior to their sale. The Fund shall bear the expenses for
the cost of registration and qualification of the Fund's shares, preparation and
filing of the Fund's prospectus and registration statement, proxy materials and
reports, setting the prospectus in type, setting in type and printing the proxy
materials and reports to shareholders (including the costs of printing a
prospectus that constitutes an annual report), the preparation of all statements
and notices required by any federal or state law, and all taxes on the issuance
or transfer of the Fund's shares.
5.3 The Company shall bear the expenses of distributing the Fund's
prospectus, proxy materials and reports to owners of Contracts issued by the
Company.
ARTICLE VI Diversification
---------------
6.1 The Fund will at all times invest money from the Contracts in such a
manner as to ensure that the Contracts will be treated as variable contracts
under the Code and the regulations issued thereunder. Without limiting the
scope of the foregoing, the Fund will at all times comply with Section 817(h) of
the Code and Treasury Regulation 1.817-5, relating to the diversification
requirements for variable annuity, endowment, or life insurance contracts and
any amendments or other modifications to such Section or Regulations. In the
event of a breach of this Article VI by the Fund, it will take all reasonable
steps (a) to notify Company of such breach and (b) to adequately diversify the
Fund so as to achieve compliance with the grace period afforded by Regulation
817-5.
ARTICLE VII Potential Conflicts
-------------------
7.1 The Board will monitor the Fund for the existence of any material
irreconcilable conflict between the interests of the contract owners of all
separate accounts investing in the Fund. An irreconcilable material conflict
may arise for a variety of reasons, including: (a) an action by any state
insurance regulatory authority; (b) a change in applicable federal or state
insurance, tax, or securities laws or regulations, or a public ruling, private
letter ruling, no-action or interpretative letter, or any similar action by
insurance, tax, or securities regulatory authorities; (c) an administrative or
judicial decision in any relevant proceeding; (d) the manner in which the
investments of any Portfolio are being managed; (e) a difference in voting
instructions given by variable annuity contract and variable life insurance
contract owners; or (f) a decision by an insurer to disregard the voting
instructions of contract owners. The Board shall promptly inform the Company if
it determines that an irreconcilable material conflict exists and the
implications thereof.
10
<PAGE>
7.2 The Company will report any potential or existing conflicts of which
it is aware to the Board. The Company will assist the Board in carrying out its
responsibilities under the Shared Funding Exemptive Order, by providing the
Board with all information reasonably necessary for the Board to consider any
issues raised. This includes, but is not limited to, an obligation by the
Company to inform the Board whenever contract owner voting instructions are
disregarded.
7.3 If it is determined by a majority of the Board, or a majority of its
disinterested trustees, that a material irreconcilable conflict exists, the
Company and other Participating Insurance Companies shall, at their expense and
to the extent reasonably practicable (as determined by a majority of the
disinterested trustees), take whatever steps are necessary to remedy or
eliminate the irreconcilable material conflict, up to and including: (1),
withdrawing the assets allocable to some or all of the separate accounts from
the Fund or any Portfolio and reinvesting such assets in a different investment
medium, including (but not limited to) another Portfolio of the Fund, or
submitting the question whether such segregation should be implemented to a vote
of all affected Contract owners and, as appropriate, segregating the assets of
any appropriate group (i.e., annuity contract owners, life insurance contract
----
owners, or variable contract owners of one or more Participating Insurance
Companies) that votes in favor of such segregation, or offering to the affected
contract owners the option of making such a change; and (2), establishing a new
registered management investment company or managed separate account.
7.4 If a material irreconcilable conflict arises because of a decision by
the Company to disregard contract owner voting instructions and that decision
represents a minority position or would preclude a majority vote, the Company
may be required, at the Fund's election, to withdraw the affected Account's
investment in the Fund and terminate this Agreement with respect to such
Account; provided, however that such withdrawal and termination shall be limited
to the extent required by the foregoing material irreconcilable conflict as
determined by a majority of the disinterested members of the Board. Any such
withdrawal and termination must take place within six (6) months after the Fund
gives written notice that this provision is being implemented, and until the end
of that six month period the Underwriter and Fund shall continue to accept and
implement orders by the Company for the purchase (and redemption) of shares of
the Fund.
7.5 If a material irreconcilable conflict arises because a particular
state insurance regulator's decision applicable to the Company conflicts with
the majority of other state regulators, then the Company will withdraw the
affected Account's investment in the Fund and terminate this Agreement with
respect to such Account within six months after the Board informs the Company in
writing that it has determined that such decision has created an irreconcilable
material conflict; provided, however, that such withdrawal and termination shall
be limited to the extent required by the foregoing material irreconcilable
conflict as determined by a majority of the disinterested members of the Board.
Until the end of the foregoing six
11
<PAGE>
month period, the Underwriter and Fund shall continue to accept and implement
orders by the Company for the purchase (and redemption) of shares of the Fund.
7.6 For purposes of Sections 7.3 through 7.6 of this Agreement, a majority
of the disinterested members of the Board shall determine whether any proposed
action adequately remedies any irreconcilable material conflict, but in no event
will the Fund be required to establish a new funding medium for the Contracts.
The Company shall not be required by Section 7.3 to establish a new funding
medium for the Contracts if an offer to do so has been declined by vote of a
majority of Contract owners materially adversely affected by the irreconcilable
material conflict. In the event that the Board determines that any proposed
action does not adequately remedy any irreconcilable material conflict, then the
Company will withdraw the Account's investment in the Fund and terminate this
Agreement within six (6) months after the Board informs the Company in writing
of the foregoing determination, provided, however, that such withdrawal and
termination shall be limited to the extent required by any such material
irreconcilable conflict as determined by a majority of the disinterested members
of the Board.
7.7 If and to the extent that Rule 6e-2 and Rule 6e-3(T) are amended, or
Rule 6e-3 is adopted, to provide exemptive relief from any provision of the Act
or the rules promulgated thereunder with respect to mixed or shared funding (as
defined in the Shared Funding Exemptive Order) on terms and conditions
materially different from those contained in the Shared Funding Exemptive Order,
then (a) the Fund and/or the Participating Insurance Companies, as appropriate,
shall take such steps as may be necessary to comply with Rules 6e-2 and 6e-3(T),
as amended, and Rule 6e-3, as adopted, to the extent such rules are applicable;
and (b) Sections 3.4, 3.5, 7.1, 7.2, 7.3, 7.4, and 7.5 of this Agreement shall
continue in effect only to the extent that terms and conditions substantially
identical to such Sections are contained in such Rule(s) as so amended or
adopted.
ARTICLE VII Indemnification
---------------
8.1 Indemnification By The Company
------------------------------
8.1(a) The Company agrees to indemnify and hold harmless the Fund and each
trustee of the Board and officers and each person, if any, who controls the Fund
within the meaning of Section 15 of the 1933 Act (collectively, the "Indemnified
Parties" for purposes of this Section 8.1) against any and all losses, claims,
damages, liabilities (including amounts paid in settlement with the written
consent of the Company) or litigation (including legal and other expenses), to
which the Indemnified Parties may become subject under any statute, regulation,
at common law or otherwise, insofar as such losses, claims, damages, liabilities
or expenses (or actions in respect thereof) or settlements are related to the
sale or acquisition of the Fund's shares or the Contracts and:
12
<PAGE>
(i) arise out of or are based upon any untrue statements or alleged
untrue statements of any material fact contained in the
Registration Statement or prospectus for the Contracts or
contained in the Contracts or sales literature for the Contracts
(or any amendment or supplement to any of the foregoing), or
arise out of or are based upon the omission or the alleged
omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not
misleading, provided that this agreement to indemnify shall not
apply as to any Indemnified Party if such statement or omission
or such alleged statement or omission was made in reliance upon
and in conformity with information furnished to the Company by or
on behalf of the Fund for use in the Registration Statement or
prospectus for the Contracts or in the Contracts or sales
literature (or any amendment or supplement) or otherwise for use
in connection with the sale of the Contracts or Fund shares; or
(ii) arise out of or as a result of statements or representations
(other than statements or representations contained in the
Registration Statement, prospectus or sales literature of the
Fund not supplied by the Company, or persons under its control
and other than statements or representations authorized by the
Fund or the Underwriter) or unlawful conduct of the Company or
persons under its control, with respect to the sale or
distribution of the Contracts or Fund Shares; or
(iii) arise out of any untrue statement or alleged untrue statement of
a material fact contained in a Registration Statement,
prospectus, or sales literature of the Fund or any amendment
thereof or supplement thereto or the omission or alleged omission
to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading if such a
statement or omission was made in reliance upon and in conformity
with information furnished to the Fund by or on behalf of the
Company; or
(iv) arise as a result of any failure by the Company to provide the
services and furnish the materials under the terms of this
Agreement; or
(v) arise out of or result from any material breach of any
representation and/or warranty made by the Company in this
Agreement or arise out of or result from any other material
breach of this Agreement by the Company, as limited by and in
accordance with the provisions of Sections 8.1(b) and 8.1(c)
hereof.
8.1(b) The Company shall not be liable under this indemnification provision
with respect to any losses, claims, damages, liabilities or litigation incurred
or assessed against an Indemnified Party as such may arise from such Indemnified
Party's willful misfeasance, bad
13
<PAGE>
faith, or gross negligence in the performance of such Indemnified Party's duties
or by reason of such Indemnified Party's reckless disregard of obligations or
duties under this Agreement or to the Fund, whichever is applicable.
8.1(c) The Company shall not be liable under this indemnification provision
with respect to any claim made against an Indemnified Party unless such
Indemnified Party shall have notified the Company in writing within a reasonable
time after the summons or other first legal process giving information of the
nature of the claim shall have been served upon such Indemnified Party (or after
such Indemnified Party shall have received notice of such service on any
designated agent), but failure to notify the Company of any such claim shall not
relieve the Company from any liability which it may have to the Indemnified
Party against whom such action is brought otherwise than on account of this
indemnification provision. In case any such action is brought against the
Indemnified Parties, the Company shall be entitled to participate, at its own
expense, in the defense of such action. The Company also shall be entitled to
assume the defense thereof, with counsel satisfactory to the party named in the
action. After notice from the Company to such party of the Company's election
to assume the defense thereof, the Indemnified Party shall bear the fees and
expenses of any additional counsel retained by it, and the Company will not be
liable to such party under this Agreement for any legal or other expenses
subsequently incurred by such party independently in connection with the defense
thereof other than reasonable costs of investigation.
8.1(d) The Indemnified Parties will promptly notify the Company of the
commencement of any litigation or proceedings against them in connection with
the issuance or sale of the Fund Shares or the Contracts or the operation of the
Fund.
8.2 Indemnification by the Underwriter
----------------------------------
8.2(a) The Underwriter agrees to indemnify and hold harmless the Company
and each of its directors and officers and each person, if any, who controls the
Company within the meaning of Section 15 of the 1933 Act (collectively, the
"Indemnified Parties" for purposes of this Section 8.2) against any and all
losses, claims, damages, liabilities (including amounts paid in settlement with
the written consent of the Underwriter) or litigation (including legal and other
expenses) to which the Indemnified Parties may become subject under any statute,
at common law or otherwise, insofar as such losses, claims, damages, liabilities
or expenses (or actions in respect thereof) or settlements are related to the
sale or acquisition of the Fund's shares or the Contracts and:
(i) arise out of or are based upon any untrue statement or alleged
untrue statement of any material fact contained in the
Registration Statement or prospectus or sales literature of the
Fund (or any amendment or supplement to any of the foregoing), or
arise out of or are based upon the omission or the alleged
omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not
14
<PAGE>
misleading, provided that this agreement to indemnify shall not
apply as to any Indemnified Party if such statement or omission
or such alleged statement or omission was made in reliance upon
and in conformity with information furnished to the Underwriter
or Fund by or on behalf of the Company for use in the
Registration Statement or prospectus for the Fund or in sales
literature (or any amendment or supplement) or otherwise for use
in connection with the sale of the Contracts or Fund shares; or
(ii) arise out of or as a result of statements or representations
(other than statements or representations contained in the
Registration Statement, prospectus or sales literature for the
Contracts not supplied by the Underwriter or persons under its
control and other than statements or representations authorized
by the Company) or unlawful conduct of the Fund, Adviser or
Underwriter or persons under their control, with respect to the
sale or distribution of the Contracts or Fund shares; or
(iii) arise out of any untrue statement or alleged untrue statement of
a material fact contained in a Registration Statement,
prospectus, or sales literature covering the Contracts, or any
amendment thereof or supplement thereto, or the omission or
alleged omission to state therein a material fact required to be
stated therein or necessary to make the statement or statements
therein not misleading, if such statement or omission was made in
reliance upon information furnished to the Company by or on
behalf of the Fund; or
(iv) arise as a result of any failure by the Fund to provide the
services and furnish the materials under the terms of this
Agreement (including a failure, whether unintentional or in good
faith or otherwise, to comply with the diversification
requirements specified in Article VI of this Agreement); or
(v) arise out of or result from any material breach of any
representation and/or warranty made by the Underwriter in this
Agreement or arise out of or result from any other material
breach of this Agreement by the Underwriter; as limited by and in
accordance with the provisions of Sections 8.2(b) and 8.2(c)
hereof.
8.2(b) The Underwriter shall not be liable under this indemnification
provision with respect to any losses, claims, damages, liabilities or litigation
to which an Indemnified Party would otherwise be subject by reason of such
Indemnified Party's willful misfeasance, bad faith, or gross negligence in the
performance of such Indemnified Party's duties or by reason of such Indemnified
Party's reckless disregard of obligations and duties under this Agreement or to
each Company or the Account, whichever is applicable.
15
<PAGE>
8.2(c) The Underwriter shall not be liable under this indemnification
provision with respect to any claim made against an Indemnified Party unless
such Indemnified Party shall have notified the Underwriter in writing within a
reasonable time after the summons or other first legal process giving
information of the nature of the claim shall have been served upon such
Indemnified Party (or after such Indemnified Party shall have received notice of
such service on any designated agent), but failure to notify the Underwriter of
any such claim shall not relieve the Underwriter from any liability which it may
have to the Indemnified Party against whom such action is brought otherwise than
on account of this indemnification provision. In case any such action is
brought against the Indemnified Parties, the Underwriter will be entitled to
participate, at its own expense, in the defense thereof. The Underwriter also
shall be entitled to assume the defense thereof, with counsel satisfactory to
the party named in the action. After notice from the Underwriter to such party
of the Underwriter's election to assume the defense thereof, the Indemnified
Party shall bear the fees and expenses of any additional counsel retained by it,
and the Underwriter will not be liable to such party under this Agreement for
any legal or other expenses subsequently incurred by such party independently in
connection with the defense thereof other than reasonable costs of
investigation.
8.2(d) The Company agrees promptly to notify the Underwriter of the
commencement of any litigation or proceedings against it or any of its officers
or directors in connection with the issuance or sale of the Contracts or the
operation of each Account.
8.3 Indemnification By the Fund
---------------------------
8.3(a) The Fund agrees to indemnify and hold harmless the Company, and each
of its directors and officers and each person, if any, who controls the Company
within the meaning of Section 15 of the 1933 Act (collectively, the "Indemnified
Parties" for purposes of this Section 8.3) against any and all losses, claims,
damages, liabilities (including amounts paid in settlement with the written
consent of the Fund) or litigation (including legal and other expenses) to which
the Indemnified Parties may become subject under any statute, at common law or
otherwise, insofar as such losses, claims, damages, liabilities or expenses (or
actions in respect thereof) or settlements result from the gross negligence, bad
faith or willful misconduct of the Board or any member thereof, are related to
the operations of the Fund and:
(i) arise as a result of any failure by the Fund to provide the
services and furnish the materials under the terms of this
Agreement (including a failure to comply with the diversification
requirements specified in Article VI of this Agreement);or
(ii) arise out of or result from any material breach of any
representation and/or warranty made by the Fund in this Agreement
or arise out of or result from any other material breach of this
Agreement by the Fund;
16
<PAGE>
as limited by and in accordance with the provisions of Sections 8.3(b) and
8.3(c) hereof.
8.3(b) The Fund shall not be liable under this indemnification provision
with respect to any losses, claims, damages, liabilities or litigation incurred
or assessed against an Indemnified Party as such may arise from such Indemnified
Party's willful misfeasance, bad faith, or gross negligence in the performance
of such Indemnified Party's duties or by reason of such Indemnified Party's
reckless disregard of obligations and duties under this Agreement or to the
Company, the Fund, the Underwriter or each Account, whichever is applicable.
8.3(c) The Fund shall not be liable under this indemnification provision
with respect to any claim made against an Indemnified Party unless such
Indemnified Party shall have notified the Fund in writing within a reasonable
time after the summons or other first legal process giving information of the
nature of the claim shall have been served upon such Indemnified Party (or after
such Indemnified Party shall have received notice of such service on any
designated agent), but failure to notify the Fund of any such claim shall not
relieve the Fund from any liability which it may have to the Indemnified Party
against whom such action is brought otherwise than on account of this
indemnification provision. In case any such action is brought against the
Indemnified Parties, the Fund will be entitled to participate, at its own
expense, in the defense thereof. The Fund also shall be entitled to assume the
defense thereof, with counsel satisfactory to the party named in the action.
After notice from the Fund to such party of the Fund's election to assume the
defense thereof, the Indemnified Party shall bear the fees and expenses of any
additional counsel retained by it, and the Fund will not be liable to such party
under this Agreement for any legal or other expenses subsequently incurred by
such party independently in connection with the defense thereof other than
reasonable costs of investigation.
8.3(d) The Company and the Underwriter agree promptly to notify the Fund of
the commencement of any litigation or proceedings against it or any of its
respective officers or directors in connection with this Agreement, the issuance
or sale of the Contracts, with respect to the operation of either Account, or
the sale or acquisition of shares of the Fund.
ARTICLE IX Applicable Law
--------------
9.1 This Agreement shall be construed and the provisions hereof
interpreted under and in accordance with the laws of the Commonwealth of
Massachusetts.
9.2 This Agreement shall be subject to the provisions of the 1933, 1934
and 1940 acts, and the rules and regulations and rulings thereunder, including
such exemptions from those statutes, rules and regulations as the Securities and
Exchange Commission may grant (including, but not limited to, the Shared Funding
Exemptive Order) and the terms hereof shall be interpreted and construed in
accordance therewith.
17
<PAGE>
ARTICLE X Termination
-----------
10.1 This Agreement shall continue in full force and effect until the first
to occur of:
(a) termination by any party for any reason by sixty (60) days
advance written notice delivered to the other parties; or
(b) termination by the Company by written notice to the Fund and the
Underwriter with respect to any Portfolio based upon the
Company's determination that shares of such Portfolio are not
reasonably available to meet the requirements of the Contracts;
or
(c) termination by the Company by written notice to the Fund and the
Underwriter with respect to any Portfolio in the event any of the
Portfolio's shares are not registered, issued or sold in
accordance with applicable state and/or federal law or such law
precludes the use of such shares as the underlying investment
media of the Contracts issued or to be issued by the Company; or
(d) termination by the Company by written notice to the Fund and the
Underwriter with respect to any Portfolio in the event that such
Portfolio ceases to qualify as a Regulated Investment Company
under Subchapter M of the Code or under any successor or similar
provision, or if the Company reasonably believes that the Fund
may fail to so qualify; or
(e) termination by the Company by written notice to the Fund and the
Underwriter with respect to any Portfolio in the event that such
Portfolio fails to meet the diversification requirements
specified in Article VI hereof; or
(f) termination by either the Fund or the Underwriter by written
notice to the Company, if either one or both of the Fund or the
Underwriter respectively, shall determine, in their sole judgment
exercised in good faith, that the Company and/or its affiliated
companies has suffered a material adverse change in its business,
operations, financial condition or prospects since the date of
this Agreement or is the subject of material adverse publicity;
or
(g) termination by the Company by written notice to the Fund and the
Underwriter, if the Company shall determine, in its sole judgment
exercised in good faith, that either the Fund or the Underwriter
has suffered a material adverse change in its business,
operations, financial
18
<PAGE>
condition or prospects since the date of this Agreement or is the
subject of material adverse publicity; or
(h) termination by the Fund or the Underwriter by written notice to
the Company, if the Company gives the Fund and the Underwriter
the written notice specified in Section 1.6 hereof and at the
time such notice was given there was no notice of termination
outstanding under any other provision of this Agreement;
provided, however any termination under this Section 10.1(h)
shall be effective forty five (45) days after the notice
specified in Section 1.6 was given.
10.2 Effect of Termination. Notwithstanding any termination of this
---------------------
Agreement, the Fund and the Underwriter shall at the option of the Company,
continue to make available additional shares of the Fund pursuant to the terms
and conditions of this Agreement, for all Contracts in effect on the effective
date of termination of this Agreement (hereinafter referred to as "Existing
Contracts"). Specifically, without limitation, the owners of the Existing
Contracts shall be permitted to reallocate investments in the Fund, redeem
investments in the Fund and/or invest in the Fund upon the making of additional
purchase payments under the Existing Contracts. The parties agree that this
Section 10.2 shall not apply to any terminations under Article VII and the
effect of such Article VII terminations shall be governed by Article VII of this
Agreement.
10.3 The Company shall not redeem Fund shares attributable to the
Contracts (as opposed to Fund shares attributable to the Company's assets held
in the Account) except (i) as necessary to implement Contract Owner initiated or
approved transactions, or (ii) as required by state and/or federal laws or
regulations or judicial or other legal precedent of general application
(hereinafter referred to as a "Legally Required Redemption") or (iii) as
permitted by an order of the SEC pursuant to Section 26(b) of the 1940 Act. Upon
request, the Company will promptly furnish to the Fund and the Underwriter the
opinion of counsel for the Company (which counsel shall be reasonably
satisfactory to the Fund and the Underwriter) to the effect that any redemption
pursuant to clause (ii) above is a Legally Required Redemption. Furthermore,
except in cases where permitted under the terms of the Contracts, the Company
shall not prevent Contract Owners from allocating payments to a Portfolio that
was otherwise available under the Contracts without first giving the Fund or the
Underwriter 90 days notice of its intention to do so.
ARTICLE XI Notices
-------
Any notice shall be sufficiently given when sent by registered or certified
mail to the other party at the address of such party set forth below or at such
other address as such party may from time to time specify in writing to the
other party.
19
<PAGE>
If to the Fund:
82 Devonshire Street
Boston, Massachusetts 02109
Attention: Treasurer
If to the Company:
The Penn Mutual Life Insurance Company
Independence Square
510 Walnut Street
Philadelphia, Pennsylvania 19172
Attention: Legal Department
If to the Underwriter:
82 Devonshire Street
Boston, Massachusetts 02109
Attention: Treasurer
ARTICLE XII Miscellaneous
-------------
12.1 All persons dealing with the Fund must look solely to the property of
the Fund for the enforcement of any claims against the Fund as neither the
Board, officers, agents or shareholders assume any personal liability for
obligations entered into on behalf of the Fund.
12.2 Subject to the requirements of legal process and regulatory
authority, each party hereto shall treat as confidential the names and addresses
of the owners of the Contracts and all information reasonably identified as
confidential in writing by any other party hereto and, except as permitted by
this Agreement, shall not disclose, disseminate or utilize such names and
addresses and other confidential information until such time as it may come into
the public domain without the express written consent of the affected party.
12.3 The captions in this Agreement are included for convenience of
reference only and in no way define or delineate any of the provisions hereof or
otherwise affect their construction or effect.
12.4 This Agreement may be executed simultaneously in two or more
counterparts, each of which taken together shall constitute one and the same
instrument.
12.5 If any provision of this Agreement shall be held or made invalid by a
court decision, statute, rule or otherwise, the remainder of the Agreement shall
not be affected thereby.
12.6 Each party hereto shall cooperate with each other party and all
appropriate governmental authorities (including without limitation the SEC, the
NASD and state insurance
20
<PAGE>
regulators) and shall permit such authorities reasonable access to its books and
records in connection with any investigation or inquiry relating to this
Agreement or the transactions contemplated hereby. Notwithstanding the
generality of the foregoing, each party hereto further agrees to furnish the
California Insurance Commissioner with any information or reports in connection
with services provided under this Agreement which such Commissioner may request
in order to ascertain whether the insurance operations of the Company are being
conducted in a manner consistent with the California Insurance Regulations and
any other applicable law or regulations.
12.7 The rights, remedies and obligations contained in this Agreement are
cumulative and are in addition to any and all rights, remedies and obligations,
at law or in equity, which the parties hereto are entitled to under state and
federal laws.
12.8 This Agreement or any of the rights and obligations hereunder may not
be assigned by any party without the prior written consent of all parties
hereto; provided, however, that the Underwriter may assign this Agreement or any
rights or obligations hereunder to any affiliate of or company under common
control with the Underwriter, if such assignee is duly licensed and registered
to perform the obligations of the Underwriter under this Agreement.
12.9 The Company shall furnish, or shall cause to be furnished, to the
Fund or its designee copies of the following reports:
(a) the Company's annual statement (prepared under statutory
accounting principles) and annual report (prepared under
generally accepted accounting principles ("GAAP"), if any), as
soon as practical and in any event within 90 days after the end
of each fiscal year;
(b) the Company's quarterly statements (statutory) (and GAAP, if
any), as soon as practical and in any event within 45 days after
the end of each quarterly period:
(c) any financial statement, proxy statement, notice or report of the
Company sent to stockholders and/or policyholders, as soon as
practical after the delivery thereof to stockholders;
(d) any registration statement (without exhibits) and financial
reports of the Company filed with the Securities and Exchange
Commission or any state insurance regulator, as soon as practical
after the filing thereof;
(e) any other report submitted to the Company by independent
accountants in connection with any annual, interim or special
audit made by them of the books of the Company, as soon as
practical after the receipt thereof.
21
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to
be executed in its name and on its behalf by its duly authorized representative
and its seal to be hereunder affixed hereto as of the date specified above.
22
<PAGE>
THE PENN MUTUAL LIFE INSURANCE COMPANY
By: ___________________________________
Name: ___________________________________
Title: ___________________________________
VARIABLE INSURANCE PRODUCTS FUND II
By: ___________________________________
Name: ___________________________________
Title: ___________________________________
FIDELITY DISTRIBUTORS CORPORATION
By: ___________________________________
Name: ___________________________________
Title: ___________________________________
23
<PAGE>
Schedule A
----------
Separate Accounts and Associated Contracts
------------------------------------------
Name of Separate Account and Date Policy Form Numbers of Contracts
Established by Board of Directors Funded By Separate Account
- --------------------------------- -------------------
Penn Mutual Variable Account III DV-790, DI-783-V, DI-1182-V
(April 13, 1982)
(for registered variable annuities)
Penn Mutual Life Account I VU-90(S), VU-90(U), VU-94(S)
(January 27, 1987) VALJ-94(U), VALJ-94(S), BU-94(U)
(for registered variable life policies)
Penn Mutual Separate Account F DI-1088, DI-985, DI-981
(March 30, 1985)
(for unregistered group annuities)
24
<PAGE>
SCHEDULE B
PROXY VOTING PROCEDURE
The following is a list of procedures and corresponding responsibilities for the
handling of proxies and voting instructions relating to the Fund by the
Underwriter, the Fund and the Company. The defined terms herein shall have the
meanings assigned in the Participation Agreement except that the term "Company"
shall also include the department or third party assigned by the Company to
perform the steps delineated below.
1. The proxy proposals are given to the Company by the Underwriter as early as
possible before the date set by the Fund for the shareholder meeting to
enable the Company to consider and prepare for the solicitation of voting
instructions from owners of the Contracts and to facilitate the
establishment of tabulation procedures. At this time the Underwriter will
inform the Company of the Record, Mailing and Meeting dates. This will be
done verbally approximately two months before meeting.
2. Promptly after the Record Date, the Company will perform a "tape run", or
other activity, which will generate the names, addresses and number of
units which are attributed to each contractowner/policyholder (the
"Customer") as of the Record Date. Allowance should be made for account
adjustments made after this date that could affect the status of the
Customers' accounts as of the Record Date.
Note: The number of proxy statements is determined by the activities
described in Step #2. The Company will use its best efforts to call in the
number of Customers to Fidelity, as soon as possible, but no later than two
weeks after the Record Date.
3. The Fund's Annual Report must be sent to each Customer by the Company
either before or together with the Customers' receipt of voting instruction
solicitation material. Underwriter will provide the last Annual Report to
the Company pursuant to the terms of Section 3.3 of the Agreement to which
this Schedule relates.
4. The text and format for the Voting Instruction Cards ("Cards" or "Card") is
provided to the Company by the Fund. The Company, at its expense, shall
produce and personalize the Voting Instruction Cards. The Legal Department
of the Underwriter or its affiliate ("Fidelity Legal") must approve the
Card before it is printed. Allow approximately 2-4 business days for
printing information on the Cards. Information commonly found on the Cards
includes:
a. name (legal name as found on account registration)
b. address
c. Fund or account number
d. coding to state number of units
25
<PAGE>
e. individual Card number for use in tracking and verification of
votes (already on Cards as printed by the Fund)
(This and related steps may occur later in the chronological process due to
possible uncertainties relating to the proposals.)
5. During this time, Fidelity Legal will develop, produce, and the Fund will
pay for the Notice of Proxy and the Proxy Statement (one document). Printed
and folded notices and statements will be sent to Company for insertion
into envelopes (envelopes and return envelopes are provided and paid for by
the Company). Contents of envelope sent to Customers by the Company will
include:
a. Voting Instruction Card(s)
b. One proxy notice and statement (one document)
c. return envelope (postage pre-paid by Company) addressed to the
Company or its tabulation agent
d. "urge buckslip" - optional, but recommended. (This is a small,
single sheet of paper that requests Customers to vote as quickly
as possible and that their vote is important. One copy will be
supplied by the Fund.)
e. cover letter - optional, supplied by Company and reviewed and
approved in advance by Fidelity Legal.
6. The above contents should be received by the Company approximately 3-5
business days before mail date. Individual in charge at Company reviews and
approves the contents of the mailing package to ensure correctness and
completeness. Copy of this approval sent to Fidelity Legal.
7. Package mailed by the Company.
* The Fund must allow at least a 15-day solicitation time to the
----
Company as the shareowner. (A 5-week period is recommended.)
Solicitation time is calculated as calendar days from (but not
---
including) the meeting, counting backwards.
8. Collection and tabulation of Cards begins. Tabulation usually takes place
in another department or another vendor depending on process used. An often
used procedure is to sort Cards on arrival by proposal into vote categories
of all yes, no, or mixed replies, and to begin data entry.
Note: Postmarks are not generally needed. A need for postmark information
would be due to an insurance company's internal procedure and has not been
required by Fidelity in the past.
9. Signatures on Card checked against legal name on account registration which
was printed on the Card.
26
<PAGE>
Note: For Example, If the account registration is under "Bertram C. Jones,
Trustee," then that is the exact legal name to be printed on the Card and
is the signature needed on the Card.
10. If Cards are mutilated, or for any reason are illegible or are not signed
properly, they are sent back to Customer with an explanatory letter, a new
Card and return envelope. The mutilated or illegible Card is disregarded
and considered to be not received for purposes of vote tabulation. Any
------------
Cards that have "kicked out" (e.g. mutilated, illegible) of the procedure
are "hand verified," i.e., examined as to why they did not complete the
system. Any questions on those Cards are usually remedied individually.
11. There are various control procedures used to ensure proper tabulation of
votes and accuracy of that tabulation. The most prevalent is to sort the
Cards as they first arrive into categories depending upon their vote; an
estimate of how the vote is progressing may then be calculated. If the
initial estimates and the actual vote do not coincide, then an internal
audit of that vote should occur. This may entail a recount.
12. The actual tabulation of votes is done in units which is then converted to
shares. (It is very important that the Fund receives the tabulations stated
in terms of a percentage and the number of shares.) Fidelity Legal must
------
review and approve tabulation format.
13. Final tabulation in shares is verbally given by the Company to Fidelity
Legal on the morning of the meeting not later than 10:00 a.m. Boston time.
Fidelity Legal may request an earlier deadline if reasonable and if
required to calculate the vote in time for the meeting.
14. A Certification of Mailing and Authorization to Vote Shares will be
required from the Company as well as an original copy of the final vote.
Fidelity Legal will provide a standard form for each Certification.
15. The Company will be required to box and archive the Cards received from the
Customers. In the event that any vote is challenged or if otherwise
necessary for legal, regulatory, or accounting purposes, Fidelity Legal
will be permitted reasonable access to such Cards.
16. All approvals and "signing-off' may be done orally, but must always be
followed up in writing.
27
<PAGE>
SCHEDULE C
The Company is planning to offer the following portfolios of the following
investment companies in May 1995:
<TABLE>
<CAPTION>
FUNDS MANAGERS
----- --------
<S> <C>
Penn Series Funds, Inc.
Growth Equity Fund Independence Capital Management, Inc. (a subsidiary of The
Penn Mutual Life Insurance Company)
Flexibility Managed Fund T. Rowe Price Associates, Inc.
Value Equity Fund Quest for Value Advisors (a subsidiary of Oppenheimer Capital)
Small Capitalization Fund Quest for Value Advisors
International Equity Fund Vontobel USA Inc. (a subsidiary of Vontobel Holding Ltd.)
Quality Bond Fund Independence Capital Management, Inc.
High Yield Bond Fund T. Rowe Price Associates, Inc.
Money Market Fund Independence Capital Management, Inc.
TCI Portfolios, Inc.
TCI Growth Portfolio Investors Research Corporation (a Twentieth Century company)
Neuberger & Berman Advisers Management Trust
Balanced Portfolio Neuberger & Berman Management Incorporated
Limited Maturity Bond Portfolio Neuberger & Berman Management Incorporated
Variable Insurance Products Fund
Equity-Income Portfolio Fidelity Management & Research Company
Growth Portfolio Fidelity Management & Research Company
Variable Insurance Products Fund II
Asset Manager Portfolio Fidelity Management & Research Company
</TABLE>
28
<PAGE>
Exhibit 10(a)
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Independent Auditors"
in the Statement of Additional Information, and to the use of our report dated
January 30, 1998 accompanying the financial statements of The Penn Mutual Life
Insurance Company for the year ended December 31, 1997, which is included in the
Statement of Additional Information in Amendment 21 to the Registration
Statement on Form N-4 of Penn Mutual Variable Annuity Account III.
/s/ Ernst & Young LLP
Philadelphia, Pennsylvania
August 31, 1998
<PAGE>
Exhibit 10(b)
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in the Statement of Additional Information of this
Registration Statement on Form N-4, filed on behalf of the Penn Mutual Life
Insurance Company and Penn Mutual Variable Annuity Account III under the
Securities Act of 1933 and as Amendment No. 21 under the Investment Company Act
of 1940 (file No. 2-77283), of our report, which includes an explanatory
paragraph regarding the adoption of several accounting pronouncements, dated
January 31, 1997 on our audits of the consolidated financial statements of The
Penn Mutual Life Insurance Company as of December 31, 1996 and for the two year
period ended December 31, 1996.
/s/ Pricewaterhouse Coopers LLP
August 31, 1998
<PAGE>
Exhibit 10(c)
2000 One Logan Square Morgan, Lewis
Philadelphia, PA 19103-6993 & Bockius LLP
215-963-5000 Counselors At Law
Fax: 215-963-5299
August 31, 1998
Board of Trustees
The Penn Mutual Life Insurance Company
Philadelphia, PA 19172
Re: Penn Mutual Variable Annuity Account III (the "Separate Account")
---------------------------------------------------------------
Dear Ladies and Gentlemen:
We hereby consent to the reference of our name under the caption "Legal Matters"
in the Statement of Additional Information filed as part of this Registration
Statement on Form N-4 under the Securities Act of 1933 on behalf of the Separate
Account and as Post-Effective Amendment No.21 to the Separate Account's
Registration Statement under the Investment Company Act of 1940. In giving this
consent, we do not admit that we are in the category of persons whose consent is
required under Section 7 of the Securities Act of 1933.
Very truly yours,
/s/ Morgan, Lewis & Bockius LLP
- -------------------------------
Morgan, Lewis & Bockius LLP
<PAGE>
Exhibit 14(c)
THE PENN MUTUAL LIFE INSURANCE COMPANY
Power of Attorney
-----------------
Julia Chang Bloch, whose signature appears below, does hereby constitute
and appoint Robert E. Chappell and Daniel J. Toran, and each of them severally,
her true and lawful attorneys and agents, with power of substitution and
resubstitution, to do any and all acts and things and to execute any and all
instruments which said attorney and agents, and each of them, may deem necessary
or advisable or which may be required to enable The Penn Mutual Life Insurance
Company (the "Company") to comply with the Investment Company Act of 1940 and
the Securities Act of 1933, as amended, and any rules, regulations or
requirements of the Securities and Exchange Commission in respect thereof, in
connection with the filing and effectiveness of the Company's Registration
Statement on Form N-4 (SEC Registration No. 2-77283) pursuant to such Acts,
including specifically, but without limiting the generality of the foregoing,
the power and authority to sign in the name and on behalf of the undersigned as
a trustee and/or officer of the Company such Registration Statement and any and
all amendments and supplements to such Registration Statement filed with the
Securities and Exchange Commission under said Acts, and any other instruments or
documents related thereto, and the undersigned does hereby ratify and confirm
all that said attorneys and agents, and each of them, shall do or cause to be
done by virtue hereof.
Date: April 30, 1998
/s/ Julia Chang Bloch
---------------------
Julia Chang Bloch
