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File Nos. 333-10285
811-7769
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Post-effective Amendment No. 2
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 3
SEPARATE ACCOUNT KG OF
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(Exact Name of Registrant)
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(Name of Depositor)
440 Lincoln Street
Worcester, MA 01653
(Address of Depositor's Principal Executive Offices)
(508) 855-1000
(Depositor's Telephone Number, including Area Code)
Abigail M. Armstrong, Secretary and Counsel
First Allmerica Financial Life Insurance Company
440 Lincoln Street
Worcester, MA 01653
(Name and Address of Agent for Service of Process)
It is proposed that this filing will become effective:
Immediately upon filing pursuant to paragraph (b) of Rule 485.
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X On May 1, 1998 pursuant to paragraph (b) of Rule 485
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60 days after filing pursuant to paragraph (a)(1) of Rule 485.
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On (date) pursuant to paragraph (a)(1) of Rule 485.
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this post-effective amendment designates a new
----- effective date for a previously filed post-effective
amendment.
VARIABLE ANNUITY POLICIES
Pursuant to Reg. Section 270.24f-2 of the Investment Company Act of 1940
("1940 Act"), Registrant has registered an indefinite amount of its
securities under the Securities Act of 1933 ("1933 Act"). The Rule 24f-2
Notice for the issuer's fiscal year ended December 31, 1997 was filed on or
before March 30, 1998.
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CROSS REFERENCE SHEET SHOWING LOCATION IN PROSPECTUS OF
ITEMS CALLED FOR BY FORM N-4
FORM N-4
ITEM NO. CAPTION IN PROSPECTUS
- -------- --------------------------------------------------------------------
1 Cover Page
2 Special Terms
3 Summary; Annual and Transaction Expenses
4 Condensed Financial Information; Performance Information
5 Description of the Company, the Variable Account, Investors Fund
Series and Scudder Variable Life Investment Fund
6 Charges and Deductions
7 Description of the Contract
8 Electing the Form of Annuity and the Annuity Date; Description of
Variable Annuity Option; Annuity Benefit Payments
9 Death Benefit
10 Payments; Computation of Values; Distribution and Annuity Payments
11 Surrender; Withdrawal; Charge for Surrender and Withdrawal; Withdrawal
Without Surrender Charge; Texas Optional Retirement Program
12 Federal Tax Considerations
13 Legal Matters
14 Statement of Additional Information-Table of Contents
FORM N-4
ITEM NO. CAPTION IN STATEMENT OF ADDITIONAL INFORMATION
- -------- --------------------------------------------------------------------
15 Cover Page
16 Table of Contents
17 General Information and History
18 Services
19 Underwriters
20 Underwriters
21 Performance Information
22 Annuity Payments
23 Financial Statements
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FIRST ALLMERICA FINANCIAL
LIFE INSURANCE COMPANY
KEMPER GATEWAY ELITE
A VARIABLE ANNUITY
THIS PROFILE IS A SUMMARY OF SOME OF THE MORE IMPORTANT
POINTS THAT YOU SHOULD KNOW AND CONSIDER BEFORE PURCHASING
THE KEMPER GATEWAY ELITE VARIABLE ANNUITY CONTRACT. THE
PROFILE CONTRACT IS MORE FULLY DESCRIBED LATER IN THIS PROSPECTUS.
MAY 1, 1998 PLEASE READ THE PROSPECTUS CAREFULLY.
1. KEMPER GATEWAY ELITE VARIABLE ANNUITY CONTRACT
The Kemper GATEWAY Elite variable annuity contract is a contract between you,
the contract owner, and First Allmerica Financial Life Insurance Company. It is
designed to help you accumulate assets for your retirement or other important
financial goals on a tax-deferred basis. The Kemper GATEWAY Elite contract
combines the concept of professional money management with the attributes of an
annuity contract.
Kemper GATEWAY Elite offers a customized investment portfolio with experienced
professional portfolio managers. You may allocate your payments among the 20
Kemper investment portfolios of the Investors Fund Series, the four investment
portfolios of the Scudder Variable Life Investment Fund, the Guarantee Period
Accounts and the Fixed Account (the Guaranteed Period Accounts and/or the Fixed
Account may not be available in certain jurisdictions.) This range of investment
choices enables you to allocate your money to meet your particular investment
needs.
Like all annuities, the contract has an ACCUMULATION PHASE and an ANNUITY PAYOUT
PHASE. During the ACCUMULATION PHASE you can make payments into the contract on
any frequency. Investment and interest gains accumulate tax deferred. You may
also withdraw money from your contract during the ACCUMULATION PHASE. However,
as with other tax-deferred investments, you pay taxes on earnings and any
untaxed payments to the contract when you withdraw them. A federal tax penalty
may apply if you withdraw prior to age 59 1/2.
During the ANNUITY PAYOUT PHASE you will receive regular payments from your
contract, provided you annuitize. Annuitization involves beginning a series of
payments from the capital that has built up in your contract. The amount of your
payments during the annuity payout phase will, in part, be determined by your
account's growth during the accumulation phase.
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2. ANNUITY BENEFIT PAYMENTS
If you choose to annuitize your contract, you may select one of six annuity
options: (1) monthly payments guaranteed for your lifetime; (2) monthly payments
guaranteed for your lifetime, but for not less than 10 years; (3) monthly
payments for your lifetime with the guarantee that if payments to you are less
than the accumulated value a refund of the remaining value will be paid; (4)
monthly payments guaranteed for your lifetime and your survivor's lifetime; (5)
monthly payments guaranteed for your lifetime and your survivor's lifetime with
the payment to the survivor being reduced to 2/3; and (6) monthly payments
guaranteed for a specified period of 1 to 30 years.
You also need to decide if you want your annuity payments on a variable basis
(i.e., subject to fluctuation based on investment performance), on a fixed basis
(with benefit payments guaranteed at a fixed amount), or on a combination
variable and fixed basis. Once payments begin, the annuity option cannot be
changed.
3. PURCHASING THIS CONTRACT
You can buy a contract through your financial representative, who can also help
you complete the proper forms. There is no fixed schedule for making additional
payments into this contract. There are no limits to the frequency of additional
payments, but there are certain limitations as to amount. Generally, the initial
payment must be at least $2,000 and additional payments must be at least $100.
However, minimums may be reduced for certain employer-sponsored plans.
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4. INVESTMENT OPTIONS
You have full investment control over the contract. You may allocate money to
the following portfolios:
<TABLE>
<S> <C>
KEMPER IFS PORTFOLIOS:
- --------------------------------------
Kemper-Dreman Financial Services Kemper Value+Growth
Kemper Small Cap Growth Kemper Horizon 20+
Kemper Small Cap Value Kemper Total Return
Kemper-Dreman High Return Equity Kemper Horizon 10+
Kemper International Kemper High Yield
Kemper International Growth Kemper Horizon 5
and Income
Kemper Global Blue Chip Kemper Global Income
Kemper Growth Kemper Investment Grade Bond
Kemper Contrarian Value Kemper Government Securities
Kemper Blue Chip Kemper Money Market
SCUDDER VLIF PORTFOLIOS:
- --------------------------------------
Scudder International Scudder Capital Growth
Scudder Global Discovery Scudder Growth and Income
</TABLE>
You may also allocate money to the Guarantee Period Accounts and the Fixed
Account. The Guarantee Period Accounts let you choose from among nine different
Guarantee Periods (ranging in maturity from 2 to 10 years) during which
principal and interest rates are guaranteed. The Fixed Account guarantees
principal and a minimum rate of interest (never less than 3% compounded
annually).
5. EXPENSES
Each year and upon surrender, a $30 contract fee is deducted from your contract.
The contract fee is waived if the value of the contract is $50,000 or more or if
the contract is issued to and maintained by the Trustees of a 401(k) plan. We
also deduct insurance charges which amount to 1.40% annually of the daily value
of your contract value allocated to the variable investment options. The
insurance charges include a mortality and expense risk charge of 1.25% and an
administrative expense charge of 0.15%. There are also investment management
fees and other portfolio operating expenses that vary by portfolio.
If you decide to surrender your contract, make withdrawals or receive payments
under certain annuity options, we may impose a surrender charge between 2% and
7% of the payment withdrawn, based on when your payments were made. In states
where premium taxes are imposed, a premium tax charge will be deducted either
when withdrawals are made or annuity payments commence.
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There is currently no charge for processing investment option transfers. We
reserve the right to assess a charge, not to exceed $25, for transfers in excess
of 12 per contract year.
The following chart is designed to help you understand the charges in your
contract. Column C labeled "Total Annual Charges" shows the total of the $30
contract fee (which is represented as 0.04%) and the 1.40% insurance charges
(Column A) plus the investment charges for each portfolio (Column B). Columns D
and E show you two examples of the charges, in dollar amounts, you would pay
under a contract. The examples assume that you invest $1,000 in a portfolio
earning 5% annually and that you withdraw your money: at the end of year 1
(Column D), and at the end of year 10 (Column E). In Column D, the Total Annual
Charges are assessed as well as the surrender charges. In Column E, the example
shows the aggregate of all the annual charges assessed for 10 years, but there
is no surrender charge. The premium tax is assumed to be 0% in both examples.
<TABLE>
<CAPTION>
A B C D E
TOTAL
<S> <C> <C> <C> <C> <C>
ANNUAL
EXPENSES
TOTAL TOTAL AT END OF
ANNUAL ANNUAL TOTAL ------------
INSURANCE PORTFOLIO ANNUAL 1 10
PORTFOLIO CHARGES CHARGES* CHARGES YEAR YEARS
- -------------------------------------------------- --------- -------- ------- ---- -----
Kemper-Dreman Financial Services* 1.44% 0.99% 2.43% $85 $273
Kemper Small Cap Growth 1.44% 0.71% 2.15% $83 $245
Kemper Small Cap Value 1.44% 0.84% 2.28% $84 $258
Kemper-Dreman High Return Equity* 1.44% 0.87% 2.31% $84 $258
Kemper International 1.44% 0.91% 2.35% $85 $265
Kemper International Growth and Income* 1.44% 1.12% 2.56% $87 $286
Kemper Global Blue Chip* 1.44% 1.56% 3.00% $91 $328
Kemper Growth 1.44% 0.65% 2.09% $82 $239
Kemper Contrarian Value 1.44% 0.80% 2.24% $84 $254
Kemper Blue Chip 1.44% 0.95% 2.39% $85 $269
Kemper Value+Growth 1.44% 0.84% 2.28% $84 $258
Kemper Horizon 20+ 1.44% 0.93% 2.37% $85 $267
Kemper Total Return 1.44% 0.60% 2.04% $82 $233
Kemper Horizon 10+ 1.44% 0.83% 2.27% $84 $257
Kemper High Yield 1.44% 0.65% 2.09% $82 $239
Kemper Horizon 5 1.44% 0.97% 2.41% $85 $271
Kemper Global Income 1.44% 1.05% 2.49% $86 $279
Kemper Investment Grade Bond 1.44% 0.80% 2.24% $84 $254
Kemper Government Securities 1.44% 0.64% 2.08% $82 $238
Kemper Money Market 1.44% 0.55% 1.99% $81 $228
Scudder International 1.44% 1.00% 2.44% $85 $274
Scudder Global Discovery 1.44% 1.50% 2.94% $90 $323
Scudder Capital Growth 1.44% 0.51% 1.95% $81 $224
Scudder Growth and Income 1.44% 0.58% 2.02% $81 $231
</TABLE>
* For newly formed Portfolios, the charges have been estimated. For more
detailed information, see the Fee Table in the Prospectus.
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6. TAXES
You will not pay taxes until you withdraw money from your contract. During the
accumulation phase, earnings are withdrawn first and are taxed as ordinary
income. If you make a withdrawal prior to age 59 1/2, you may be subject to a
10% federal tax penalty on the earnings. Payments during the annuity payout
phase are considered partly a return of your investment and partly earnings. You
will be subject to income taxes on the earnings portion of each payment.
However, if your contract is funded with pre-tax or tax deductible dollars (such
as a pension or profit sharing plan contribution), then the entire payment will
be taxable.
7. WITHDRAWALS
You can make withdrawals from your contract any time during the accumulation
phase. The minimum withdrawal amount is $100. Any payment invested in the
contract for more than six years can be withdrawn without a surrender charge.
For amounts invested six years or less, you will not be assessed a surrender
charge on the greatest of:
1. 100% of the cumulative earnings;
2. 15% or less of the contract value in any calendar year; or
3. if you are also the Annuitant, an amount calculated under the Life
Expectancy Distribution option. (Similarly, no surrender charge will apply
if an amount is withdrawn based on the Annuitant's life expectancy and the
Owner is a trust or other non-natural person.)
In addition, you may receive your money without a surrender charge if, after the
contract is issued and before age 65, you become disabled. Under New York
Contracts, the disability must also exist for a continuous period of at least
four months. Also, except in New York where not permitted by state law, you may
receive your money without a surrender charge if, after the contract is issued,
you are diagnosed with a fatal illness or are confined in a medical care
facility until the later of one year from the issue date or 90 days.
Any withdrawal from a Guarantee Period Account ("GPA") prior to the end of the
Guarantee Period will be subject to a market value adjustment which may increase
or decrease the value in that account. This adjustment will never impact your
original investment, nor will earnings in the GPA amount to less than an
effective annual rate of 3%.
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8. PERFORMANCE
The value of your contract will vary depending on the investment performance of
the portfolios you choose. From time to time, we may advertise "Total Return"
and "Average Annual Total Return" based upon the periods that the portfolios
have been in existence. These returns are based upon historical data and are not
intended to indicate future performance.
The contract was first offered in 1997. Therefore, performance for a complete
year is not available and is not shown here.
9. DEATH BENEFIT
If the annuitant dies during the accumulation phase, we will pay the beneficiary
a death benefit. The death benefit is equal to the GREATEST of: (a) the
accumulated value increased for any positive market value adjustment; (b) gross
payments, decreased proportionately to reflect any prior withdrawals; or (c) the
death benefit that would have been payable on the most recent contract
anniversary date, increased for subsequent payments and decreased
proportionately for subsequent withdrawals.
This guaranteed death benefit works in the following way assuming no withdrawals
are made. On the first anniversary, the death benefit will be equal to the
greater of (a) the Accumulated Value (increased by any positive Market Value
Adjustment) or (b) gross payments. The higher of (a) or (b) will then be locked
in until the second anniversary, at which time the death benefit will be equal
to the greatest of (a) the Contract's then current Accumulated Value increased
by any positive Market Value Adjustment; (b) gross payments or (c) the locked-in
value of the death benefit at the first anniversary. The greatest of (a), (b) or
(c) will be locked in until the next Contract anniversary. This calculation will
then be repeated on each anniversary date while the Contract remains in force
and prior to the Annuity Date. As noted above, the values of (b) and (c) will be
decreased proportionately if withdrawals are taken.
10. OTHER INFORMATION
FREE-LOOK PERIOD: If you cancel your contract within 10 days after receiving it
(or whatever period is required by your state), you will receive a refund in
accordance with the terms of the contract's "Right to Examine Contract"
provision.
DOLLAR COST AVERAGING: You may elect to automatically transfer money on a
periodic basis from the Kemper Money Market Portfolio, the Kemper Government
Securities Portfolio or the Fixed Account to one or more of the variable
investment options.
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AUTOMATIC ACCOUNT REBALANCING: You may elect to automatically have your
contract's accumulated value periodically reallocated ("rebalanced") among your
chosen investment options to maintain your designated percentage allocation mix.
11. INQUIRIES
If you need more information you may contact us at 1-800-782-8380 or send
correspondence to:
Kemper Gateway Annuities
First Allmerica
P.O. Box 8632
Boston, Massachusetts 02266-8632
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FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
WORCESTER, MASSACHUSETTS
FLEXIBLE PAYMENT DEFERRED VARIABLE AND FIXED ANNUITY CONTRACTS
This Prospectus describes interests under flexible payment deferred variable and
fixed annuity contracts, known as Kemper Gateway Elite Variable Annuity
Contracts, issued either on a group basis or as individual contracts by First
Allmerica Financial Life Insurance Company (the "Company") to individuals and
businesses in connection with retirement plans which may or may not qualify for
special federal income tax treatment. (For information about a contract's tax
status when used with a particular type of plan, see "FEDERAL TAX
CONSIDERATIONS.")
Additional information is contained in a Statement of Additional Information
("SAI") dated May 1, 1998, filed with the Securities and Exchange Commission
(the "SEC") and incorporated herein by reference. The Table of Contents of the
SAI is on page 5 of this Prospectus. The SAI is available upon request and
without charge through Allmerica Investments, Inc., telephone 800-782-8380.
Contract values may accumulate on a variable basis in the separate account known
as Separate Account KG (the "Variable Account"). The assets of the Variable
Account are divided into Sub-Accounts, each investing exclusively in shares of
one of the following Kemper Portfolios of Investors Fund Series ("Kemper IFS")
or Portfolios of Scudder Variable Life Investment Fund ("Scudder VLIF"):
<TABLE>
<S> <C>
KEMPER IFS PORTFOLIOS
- ----------------------------------------
KEMPER-DREMAN FINANCIAL SERVICES KEMPER VALUE+GROWTH
KEMPER SMALL CAP GROWTH KEMPER HORIZON 20+
KEMPER SMALL CAP VALUE KEMPER TOTAL RETURN
KEMPER-DREMAN HIGH RETURN EQUITY KEMPER HORIZON 10+
KEMPER INTERNATIONAL KEMPER HIGH YIELD
KEMPER INTERNATIONAL GROWTH AND INCOME KEMPER HORIZON 5
KEMPER GLOBAL BLUE CHIP KEMPER GLOBAL INCOME
KEMPER GROWTH KEMPER INVESTMENT GRADE BOND
KEMPER CONTRARIAN VALUE KEMPER GOVERNMENT SECURITIES
KEMPER BLUE CHIP KEMPER MONEY MARKET
SCUDDER VLIF PORTFOLIOS:
- ----------------------------------------
SCUDDER INTERNATIONAL SCUDDER CAPITAL GROWTH
SCUDDER GLOBAL DISCOVERY SCUDDER GROWTH AND INCOME
</TABLE>
THIS PROSPECTUS IS VALID ONLY WHEN ACCOMPANIED BY CURRENT PROSPECTUSES OF
INVESTORS FUND SERIES AND SCUDDER VARIABLE LIFE INVESTMENT FUND. INVESTORS
SHOULD RETAIN A COPY OF THIS PROSPECTUS FOR FUTURE REFERENCE.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
DATED MAY 1, 1998
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In most jurisdictions, values also may be allocated on a fixed basis to the
Fixed Account, which is part of the Company's General Account and, during the
accumulation period, to one or more of the Guarantee Period Accounts. Amounts
allocated to the Fixed Account earn interest at a guaranteed rate for one year
from the date allocated. Amounts allocated to a Guarantee Period Account earn a
fixed rate of interest for the duration of the applicable Guarantee Period if
held for the entire Guarantee Period. If removed prior to the end of the
Guarantee Period, the value may be increased or decreased by a Market Value
Adjustment. Amounts allocated to the Guarantee Period Accounts in the
accumulation phase are held in the Company's Separate Account GPA.
Participation in a group contract will be accounted for by the issuance of a
certificate describing the individual's interest under the group contract.
Participation in an individual contract will be evidenced by the issuance of an
individual contract. Certificates and individual contracts are referred to
collectively herein as the "Contract(s)." The following is a summary of
information about these Contracts. More detailed information can be found under
the referenced captions in this Prospectus.
THE CONTRACTS ARE OBLIGATIONS OF FIRST ALLMERICA FINANCIAL LIFE INSURANCE
COMPANY, AND ARE DISTRIBUTED BY ALLMERICA INVESTMENTS, INC. THE CONTRACTS ARE
NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY BANK OR CREDIT
UNION. THE CONTRACTS ARE NOT INSURED BY THE U.S. GOVERNMENT, THE FEDERAL DEPOSIT
INSURANCE CORPORATION (FDIC), OR ANY OTHER FEDERAL AGENCY. INVESTMENTS IN THE
CONTRACTS ARE SUBJECT TO VARIOUS RISKS, INCLUDING THE FLUCTUATION OF VALUE AND
POSSIBLE LOSS OF PRINCIPAL.
THE CONTRACTS OFFERED BY THIS PROSPECTUS MAY NOT BE AVAILABLE IN ALL STATES.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY JURISDICTION IN WHICH
SUCH OFFERING MAY NOT LAWFULLY BE MADE. NO PERSON IS AUTHORIZED TO MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS.
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TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
STATEMENT OF ADDITIONAL INFORMATION
TABLE OF CONTENTS 5
SPECIAL TERMS 6
SUMMARY 8
ANNUAL AND TRANSACTION EXPENSES 15
CONDENSED FINANCIAL INFORMATION 20
PERFORMANCE INFORMATION 22
DESCRIPTION OF THE COMPANY, THE VARIABLE ACCOUNT,
INVESTORS FUND SERIES AND SCUDDER
VARIABLE LIFE INVESTMENT FUND 29
INVESTMENT OBJECTIVES AND POLICIES 30
INVESTMENT MANAGEMENT SERVICES 32
DESCRIPTION OF THE CONTRACT 34
A. Payments 34
B. Right to Revoke Contract 35
C. Transfer Privilege 35
Automatic Transfers and Automatic Account Rebalancing
Options 36
D. Surrender 37
E. Withdrawals 38
Systematic Withdrawals 39
Life Expectancy Distributions 39
F. Death Benefit 40
Death of the Annuitant Prior to the Annuity Date 40
Death of an Owner Who is Not Also the Annuitant Prior to
the Annuity Date 41
Payment of the Death Benefit Prior to the Annuity Date 41
Death of the Annuitant On or After the Annuity Date 41
G. The Spouse of the Owner as Beneficiary 42
H. Assignment 42
I. Electing the Form of Annuity and the Annuity Date 42
J. Description of Variable Annuity Payout Options 44
K. Annuity Benefit Payments 45
The Annuity Unit 45
Determination of the First and Subsequent Annuity
Benefit Payments 45
L. NORRIS Decision 47
</TABLE>
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<TABLE>
<S> <C> <C>
M. Computation of Values 47
The Accumulation Unit 47
Net Investment Factor 48
CHARGES AND DEDUCTIONS 48
A. Variable Account Deductions 48
Mortality and Expense Risk Charge 48
Administrative Expense Charge 49
Other Charges 50
B. Contract Fee 50
C. Premium Taxes 50
D. Contingent Deferred Sales Charge 51
Charges for Surrender and Withdrawal 51
Reduction or Elimination of Surrender Charge 52
Withdrawal Without Surrender Charge 54
Surrenders 54
Charge at the Time Annuity Benefit Payments Begin 55
E. Transfer Charge 55
GUARANTEE PERIOD ACCOUNTS 56
FEDERAL TAX CONSIDERATIONS 59
A. Qualified and Non-Qualified Contracts 59
B. Taxation of the Contracts in General 60
Withdrawals Prior to Annuitization 60
Annuity Payouts After Annuitization 60
Penalty on Distribution 60
Assignments or Transfers 61
Non-Natural Owners 62
Deferred Compensation Plans of State and Local
Government and Tax-Exempt Organizations 62
C. Tax Withholding 62
D. Provisions Applicable to Qualified Employer Plans 62
Corporate and Self-Employed Pension and
Profit Sharing Plans 63
Individual Retirement Annuities 63
Tax-Sheltered Annuities 63
Texas Optional Retirement Program 64
</TABLE>
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<TABLE>
<S> <C> <C>
REPORTS 64
LOANS (QUALIFIED CONTRACTS ONLY) 64
ADDITION, DELETION OR SUBSTITUTION OF INVESTMENTS 65
CHANGES TO COMPLY WITH LAW AND AMENDMENTS 66
VOTING RIGHTS 66
DISTRIBUTION 67
SERVICES 67
LEGAL MATTERS 68
FURTHER INFORMATION 68
APPENDIX A -- MORE INFORMATION ABOUT THE FIXED
ACCOUNT A-1
APPENDIX B -- SURRENDER CHARGES AND THE MARKET
VALUE ADJUSTMENT B-1
STATEMENT OF ADDITIONAL INFORMATION
TABLE OF CONTENTS
GENERAL INFORMATION AND HISTORY 2
TAXATION OF THE CONTRACT, THE VARIABLE ACCOUNT AND THE COMPANY
3
SERVICES 3
UNDERWRITERS 3
ANNUITY BENEFIT PAYMENTS 4
EXCHANGE OFFER 6
PERFORMANCE INFORMATION 8
TAX-DEFERRED ACCUMULATION 10
FINANCIAL STATEMENTS F-1
</TABLE>
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SPECIAL TERMS
ACCUMULATED VALUE: the sum of the value of all Accumulation Units in the Sub-
Accounts and of the value of all accumulations in the Fixed Account and
Guarantee Period Accounts credited to the Contract on any date before the
Annuity Date.
ACCUMULATION UNIT: a measure of the Owner's interest in a Sub-Account before
annuity benefit payments begin.
ANNUITANT: the person designated in the Contract upon whose life annuity benefit
payments are to be made.
ANNUITY DATE: the date on which annuity benefit payments begin as specified
pursuant to the Contract.
ANNUITY UNIT: a measure of the value of the periodic annuity benefit payments
under the Contract.
FIXED ACCOUNT: the part of the Company's General Account that guarantees
principal and a fixed minimum interest rate and to which all or a portion of a
payment or transfer under this Contract may be allocated.
FIXED ANNUITY PAYOUT: an Annuity in the payout phase providing for annuity
benefit payments which remain fixed in amount throughout the annuity benefit
payment period selected.
GENERAL ACCOUNT: all the assets of the Company other than those held in a
separate account.
GUARANTEE PERIOD: the number of years that a Guaranteed Interest Rate is
credited.
GUARANTEE PERIOD ACCOUNT: an account which corresponds to a Guaranteed Interest
Rate for a specified Guarantee Period and is supported by assets in a
non-unitized separate account.
GUARANTEED INTEREST RATE: the annual effective rate of interest, after daily
compounding, credited to a Guarantee Period Account.
MARKET VALUE ADJUSTMENT: a positive or negative adjustment assessed if any
portion of a Guarantee Period Account is withdrawn or transferred prior to the
end of its Guarantee Period.
OWNER: the person, persons or entity entitled to exercise the rights and
privileges under this Contract. Joint Owners are permitted if one of the two is
the Annuitant.
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SUB-ACCOUNT: a subdivision of the Variable Account. Each Sub-Account available
under the Contract invests exclusively in the shares of a corresponding Kemper
portfolio of Investors Fund Series (Kemper IFS) or a corresponding portfolio of
Scudder Variable Life Investment Fund (Scudder VLIF).
SURRENDER VALUE: the Accumulated Value of the Contract on full surrender after
application of any Contract fee, contingent deferred sales charge, and Market
Value Adjustment.
UNDERLYING PORTFOLIOS (OR PORTFOLIOS): currently, the twenty Portfolios of
Kemper IFS and the four Portfolios of Scudder VLIF in which the Sub-Accounts
invest.
VALUATION DATE: a day on which the net asset value of the shares of any of the
Underlying Portfolios is determined and unit values of the Sub-Accounts are
determined. Valuation Dates currently occur on each day on which the New York
Stock Exchange is open for trading, as well as each day otherwise required.
VARIABLE ACCOUNT: Separate Account KG, one of the Company's separate accounts,
consisting of assets segregated from other assets of the Company. The investment
performance of the assets of the Variable Account is determined separately from
the other assets of the Company, and are not chargeable with liabilities arising
out of any other business which the Company may conduct.
VARIABLE ANNUITY PAYOUT: an annuity in the payout phase providing for payments
varying in amount in accordance with the investment experience of certain of the
Portfolios.
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SUMMARY
WHAT IS THE KEMPER GATEWAY ELITE VARIABLE ANNUITY?
The Kemper Gateway Elite variable annuity contract is an insurance contract
designed to help you accumulate assets for your retirement or other important
financial goals on a tax-deferred basis. The Contract combines the concept of
professional money management with the attributes of an annuity contract.
Features available through the Contract include:
- - A customized investment portfolio;
- - 20 Kemper IFS Portfolios and 4 Scudder VLIF Portfolios;
- - 1 Fixed Account;
- - 9 Guarantee Period Accounts;
- - Experienced professional portfolio managers;
- - Tax deferral on earnings;
- - Guarantees that can protect your beneficiaries during the accumulation phase;
- - Income that can be guaranteed for life.
The Contract has two phases: an accumulation phase and, if you choose to
annuitize, an annuity payout phase. During the accumulation phase, your initial
payment and any additional payments you choose to make may be allocated to the
combination of portfolio of securities ("Portfolios") under your Contract, to
the Guarantee Period Accounts, and to the Fixed Account. You select the
investment options most appropriate for your investment needs. As those needs
change, you may also change your allocation without incurring any tax
consequences. Your Contract's Accumulated Value is based on the investment
performance of the Portfolios and any accumulations in the Guarantee Period and
Fixed Accounts. No income taxes are paid on any earnings under the Contract
unless and until Accumulated Values are withdrawn. In addition, during the
accumulation phase, your beneficiaries receive certain protections and
guarantees in the event of the Annuitant's death. See discussion below "WHAT
HAPPENS UPON DEATH DURING THE ACCUMULATION PHASE?"
WHAT HAPPENS IN THE ANNUITY PAYOUT PHASE?
During the annuity payout phase, the Annuitant can receive income based on
several annuity payout options. You choose the annuity payout option and the
date for annuity benefit payments to begin. You also decide whether you want
variable annuity benefit payments based on the investment performance of certain
Portfolios, fixed annuity benefit payments with payment amounts guaranteed by
the Company, or a combination of fixed and variable annuity benefit payments.
Among the payout options available during the annuity payout phase are:
8
<PAGE>
- - periodic payments for your lifetime (assuming you are the Annuitant);
- - periodic payments for your life and the life of another person selected by
you;
- - periodic payments for your lifetime with guaranteed payments continuing to
your beneficiary for ten years in the event that you die before the end of ten
years;
- - periodic payments over a specified number of years (1 to 30) -- under this
option you may reserve the right to convert remaining payments to a lump-sum
payout by electing a "commutable" option.
WHO ARE THE KEY PERSONS UNDER THE CONTRACT?
The Contract is between you, (the "Owner") and us, First Allmerica Financial
Life Insurance Company (the "Company"). Each Contract has an Owner (or an Owner
and a Joint Owner, in which case one of the two also must be the Annuitant), an
Annuitant and one or more beneficiaries. As Owner, you make payments, choose
investment allocations and select the Annuitant and beneficiary. The Annuitant
is the individual to receive annuity benefit payments under the Contract. The
beneficiary is the person who receives any payment on the death of the Owner or
Annuitant.
HOW MUCH CAN I INVEST AND HOW OFTEN?
The number and frequency of your payments are flexible, subject to the minimum
and maximum payments stated in "A. Payments."
WHAT ARE MY INVESTMENT CHOICES?
The Contract permits net payments to be allocated among the Sub-Accounts
investing in the Portfolios, the Guarantee Period Accounts, and the Fixed
Account.
9
<PAGE>
VARIABLE ACCOUNT. You have a choice of Sub-Accounts investing in the following
Portfolios:
<TABLE>
<S> <C>
KEMPER IFS PORTFOLIOS:
- --------------------------------------
Kemper-Dreman Financial Services Kemper Value+Growth
Kemper Small Cap Growth Kemper Horizon 20+
Kemper Small Cap Value Kemper Total Return
Kemper-Dreman High Return Equity Kemper Horizon 10+
Kemper International Kemper High Yield
Kemper International Growth and Kemper Horizon 5
Income
Kemper Global Blue Chip Kemper Global Income
Kemper Growth Kemper Investment Grade Bond
Kemper Contrarian Value Kemper Government Securities
Kemper Blue Chip Kemper Money Market
SCUDDER VLIF PORTFOLIOS:
- --------------------------------------
Scudder International Scudder Capital Growth
Scudder Global Discovery Scudder Growth and Income
</TABLE>
For a more detailed description of the Portfolios, see "INVESTMENT OBJECTIVES
AND POLICIES."
GUARANTEE PERIOD ACCOUNTS. Assets supporting the guarantees under the Guarantee
Period Accounts are held in the Company's Separate Account GPA, a non-unitized
insulated separate account. Values and benefits calculated on the basis of
Guarantee Period Account allocations, however, are obligations of the Company's
General Account. Amounts allocated to a Guarantee Period Account earn a
Guaranteed Interest Rate declared by the Company. The level of the Guaranteed
Interest Rate depends on the number of years of the Guarantee Period selected.
The Company currently makes available nine Guarantee Periods ranging from two to
ten years in duration. Once declared, the Guaranteed Interest Rate will not
change during the duration of the Guarantee Period. If amounts allocated to a
Guarantee Period Account are transferred, surrendered or applied to any annuity
option at any time other than the day following the last day of the applicable
Guarantee Period, a Market Value Adjustment will apply that may increase or
decrease the Account's value; however, this adjustment will never be applied
against your principal. In addition, earnings in the GPA after application of
the Market Value Adjustment will not be less than an effective annual rate of
3%. For more information about the Guarantee Period Accounts and the Market
Value Adjustment, see "GUARANTEE PERIOD ACCOUNTS."
FIXED ACCOUNT. The Fixed Account is part of the General Account, which consists
of all the Company's assets other than those allocated to the Variable Account
and any other separate account. Allocations to the Fixed Account are
10
<PAGE>
guaranteed as to principal and a minimum rate of interest. Additional excess
interest may be declared periodically at the Company's discretion. Furthermore,
the initial rate in effect on the date an amount is allocated to the Fixed
Account will be guaranteed for one year from that date. For more information
about the Fixed Account see APPENDIX A, "MORE INFORMATION ABOUT THE FIXED
ACCOUNT."
THE GUARANTEE PERIOD ACCOUNTS AND/OR SOME OF THE SUB-ACCOUNTS MAY NOT BE
AVAILABLE IN ALL STATES.
WHO ARE THE PORTFOLIO MANAGERS?
Scudder Kemper Investments, Inc. ("SKI") is the investment manager of each
Portfolio of Kemper IFS and each Portfolio of Scudder VLIF. Zurich Investment
Management Limited ("ZIML"), an affiliate of SKI, is the sub-adviser for the
Kemper International Portfolio and the Kemper Global Income Portfolio. Dreman
Value Management, L.L.C. is the sub-advisor for the Kemper-Dreman Financial
Services Portfolio and Kemper-Dreman High Return Equity Portfolio. Zurich
Investment Management, Inc. ("ZIM"), an affiliate of SKI, is the investment
manager of the Guarantee Period Accounts pursuant to an investment advisory
agreement between the Company and ZIM.
CAN I MAKE TRANSFERS AMONG THE ACCOUNTS?
Yes. Prior to the Annuity Date, you may transfer among the Sub-Accounts
investing in the Portfolios, the Guarantee Period Accounts, and the Fixed
Account. You will incur no current taxes on transfers while your money remains
in the Contract. You also may elect Automatic Account Rebalancing to ensure
assets remain allocated according to a desired mix or choose automatic dollar
cost averaging to gradually move money into one or more Portfolios. See "C.
Transfer Privilege."
WHAT IF I NEED MY MONEY BEFORE MY ANNUITY PAYOUT PHASE BEGINS?
You may surrender your Contract or make withdrawals any time before the annuity
payout phase begins. Each year you can take without a surrender charge the
greatest of 100% of cumulative earnings, 15% of the Contract's Accumulated Value
or, if you are both an Owner and the Annuitant, an amount based on your life
expectancy. (Similarly, no surrender charge will apply if an amount is withdrawn
based on the Annuitant's life expectancy if the Owner is a trust or other
non-natural person.) A 10% tax penalty may apply on all amounts deemed to be
income if you are under age 59 1/2. Additional amounts may be withdrawn at any
time but may be subject to the surrender charge for payments that have not been
invested in the Contract for more than six years. (A Market Value
11
<PAGE>
Adjustment, which may increase or decrease the value of your account, may apply
to any withdrawal made from a Guarantee Period Account prior to the expiration
of the Guarantee Period.)
You may also withdraw all or a portion of your money without a surrender charge
if, after the Contract is issued and before age 65, you become disabled. Under
New York Contracts, the disability also must exist for a continuous period of at
least 4 months. In addition, except in New York where not permitted by state
law, the surrender charge will be waived if, after the Contract is issued, you
are diagnosed with a fatal illness or confined in a medical care facility until
the later of one year from the issue date or 90 days. For details and
restrictions, see "Reduction or Elimination of Surrender Charge."
WHAT HAPPENS UPON DEATH DURING THE ACCUMULATION PHASE?
If the Annuitant, Owner or Joint Owner should die before the Annuity Date, a
death benefit will be paid to the beneficiary. Upon the death of the Annuitant
(or an Owner who is also an Annuitant), the death benefit is equal to the
GREATEST of:
- - The Accumulated Value increased by any positive Market Value Adjustment;
- - Gross payments, decreased proportionately to reflect withdrawals; or
- - The death benefit that would have been payable on the most recent Contract
anniversary date, increased for subsequent payments and decreased
proportionately for subsequent withdrawals.
This guaranteed death benefit works in the following way assuming no withdrawals
are made. On the first anniversary, the death benefit will be equal to the
greater of (a) the Accumulated Value (increased by any positive Market Value
Adjustment) or (b) gross payments. The higher of (a) or (b) will then be locked
in until the second anniversary, at which time the death benefit will be equal
to the greatest of (a) the Contract's then current Accumulated Value increased
by any positive Market Value Adjustment; (b) gross payments or (c) the locked-in
value of the death benefit at the first anniversary. The greatest of (a), (b) or
(c) will be locked in until the next Contract anniversary. This calculation will
then be repeated on each anniversary date while the Contract remains in force
and prior to the Annuity Date. As noted above, the values of (b) and (c) will be
decreased proportionately if withdrawals are taken.
At the death of an Owner who is not also the Annuitant during the Accumulation
phase, the death benefit will equal the Accumulated Value of the Contract
increased by any positive Market Value Adjustment.
12
<PAGE>
(If the Annuitant dies after the Annuity Date but before all guaranteed annuity
benefit payments have been made, the remaining payments will be paid to the
beneficiary at least as rapidly as under the annuity option in effect. See "F.
Death Benefit.")
WHAT CHARGES WILL I INCUR UNDER MY CONTRACT?
If the Accumulated Value on a Contract anniversary and upon surrender is less
than $50,000, the Company will deduct a $30 Contract fee from the Contract.
There will be no Contract fee if the Accumulated Value is $50,000 or more. The
Contract fee is waived for a Contract issued to and maintained by a trustee of a
401(k) plan.
Should you decide to surrender the Contract, make withdrawals, or receive
payments under certain annuity options, you may be subject to a contingent
deferred sales charge. If applicable, this charge will be between 2% and 7% of
payments withdrawn, based on when the payments were made.
Depending upon the state in which you live, a deduction for state and local
premium taxes, if any, may be made as described under "C. Premium Taxes."
Currently, the Company makes no charge for processing transfers. The first 12
transfers in a Contract year are guaranteed to be free of a transfer charge. For
each subsequent transfer in a Contract year, the Company reserves the right to
assess a charge which is guaranteed never to exceed $25.
The Company will deduct, on a daily basis, an annual mortality and expense risk
charge and administrative expense charge equal to 1.25% and 0.15%, respectively,
of the average daily net assets invested in each Portfolio. The Portfolios will
incur certain management fees and expenses described more fully in "Other
Charges" under "A. Variable Account Deductions" and in the Kemper IFS and
Scudder VLIF prospectuses which accompany this Prospectus.
For more information, see "CHARGES AND DEDUCTIONS."
CAN I EXAMINE THE CONTRACT?
Yes. Your Contract will be delivered to you after your purchase. If you return
the Contract to the Company within ten days of receipt, the Contract will be
canceled. If you cancel the Contract, you will receive a refund of any amounts
allocated to the Fixed and Guarantee Period Accounts and the Accumulated Value
of any amounts allocated to the Sub-Accounts (plus any fees or charges that may
have been deducted). However, under any Contract issued in New York or if the
Contract was issued as an Individual Retirement Annuity (IRA) you will generally
receive a refund of your entire payment. (In certain states, the refund under an
IRA may be the greater of (1) your entire payment or (2) the amounts
13
<PAGE>
allocated to the Fixed and Guarantee Period Accounts plus the Accumulated Value
of amounts in the Sub-Accounts, plus any fees or charges previously deducted.
See "B. Right to Revoke Contract."
CAN I MAKE FUTURE CHANGES UNDER MY CONTRACT?
There are several changes you can make after receiving your Contract:
- - You may assign your ownership to someone else, except under certain qualified
plans.
- - You may change the beneficiary, unless you have designated a beneficiary
irrevocably.
- - You may change your allocation of payments.
- - You may make transfers of Contract value among your current investments
without any tax consequences.
- - You may cancel the Contract within ten days of delivery (or longer if required
by law).
14
<PAGE>
ANNUAL AND TRANSACTION EXPENSES
The following tables show charges under your Contract, expenses of the Sub-
Accounts, and expenses of the Underlying Portfolios. In addition to the charges
and expenses described below, premium taxes are applicable in some states and
deducted as described under "C. Premium Taxes."
CONTRACT CHARGES:
<TABLE>
<CAPTION>
YEARS FROM
DATE OF
PAYMENT CHARGE
----------- ---------
<S> <C> <C>
CONTINGENT DEFERRED SALES CHARGE:
This charge may be assessed upon surrender, 0-1 7.0%
withdrawal or annuitization under any 2 6.0%
commutable period certain option or a non- 3 5.0%
commutable period certain option of less 4 4.0%
than ten years. The charge is a percentage 5 3.0%
of payments applied to the amount 6 2.0%
surrendered (in excess of any amount that Thereafter 0.0%
is without a surrender charge) within the
indicated time periods.
TRANSFER CHARGE:
The Company currently makes no charge for None
processing transfers and guarantees that
the first 12 transfers in a Contract year
will not be subject to a transfer charge.
For each subsequent transfer, the Company
reserves the right to assess a charge,
guaranteed never to exceed $25, to
reimburse the Company for the costs of
processing the transfer.
CONTRACT FEE:
The fee is deducted annually and upon $30
surrender prior to the Annuity Date when
the Accumulated Value is less than $50,000.
The fee is waived for Contracts issued to
and maintained by the trustee of a 401(k)
plan.
SUB-ACCOUNT EXPENSES:
- -------------------------------------------
(on annual basis as percentage of average
daily net assets)
Mortality and Expense Risk Charge: 1.25%
Administrative Expense Charge: 0.15%
---------
Total Asset Charge 1.40%
</TABLE>
15
<PAGE>
PORTFOLIO EXPENSES: The following table shows the expenses of the Underlying
Portfolios as a percentage of average net assets for the year ended December 31,
1997. For more information concerning fees and expenses, see the prospectuses
for the Underlying Portfolios.
<TABLE>
<CAPTION>
MANAGEMENT FEE
(AFTER APPLICABLE OTHER TOTAL
PORTFOLIO WAIVERS) EXPENSES EXPENSES
- ----------------------------------- ----------------------- -------------- --------------
<S> <C> <C> <C>
Kemper-Dreman Financial
Services*......................... 0.75% 0.24% 0.99%
Kemper Small Cap Growth............ 0.65% 0.06% 0.71%
Kemper Small Cap Value............. 0.75% 0.09% 0.84%
Kemper-Dreman High Return
Equity*........................... 0.75% 0.12% 0.87%
Kemper International............... 0.75% 0.16% 0.91%
Kemper International Growth and
Income*........................... 0.70%(1) 0.42% 1.12%(1)
Kemper Global Blue Chip*........... 0.85%(1) 0.71% 1.56%(1)
Kemper Growth...................... 0.60% 0.05% 0.65%
Kemper Contrarian Value............ 0.75% 0.05% 0.80%
Kemper Blue Chip**................. 0.65% 0.30% 0.95%
Kemper Value+Growth................ 0.75% 0.09% 0.84%
Kemper Horizon 20+................. 0.60% 0.33% 0.93%
Kemper Total Return................ 0.55% 0.05% 0.60%
Kemper Horizon 10+................. 0.60% 0.23% 0.83%
Kemper High Yield.................. 0.60% 0.05% 0.65%
Kemper Horizon 5................... 0.60% 0.37% 0.97%
Kemper Global Income**............. 0.75% 0.30% 1.05%
Kemper Investment Grade Bond....... 0.60% 0.20% 0.80%
Kemper Government Securities....... 0.55% 0.09% 0.64%
Kemper Money Market................ 0.50% 0.05% 0.55%
Scudder International.............. 0.83% 0.17% 1.00%
Scudder Global Discovery........... 0.67%(2) 0.83% 1.50%(2)
Scudder Capital Growth............. 0.47% 0.04% 0.51%
Scudder Growth and Income.......... 0.48% 0.10% 0.58%
</TABLE>
* These Portfolios commenced operations on 5/1/98, therefore "other expenses"
are estimated and annualized and should not be considered representative of
future expenses. Actual expenses may be greater or less than shown.
** These Portfolios commenced operations on 5/1/97, therefore "other expenses"
are estimated and annualized and should not be considered representative of
future expenses. Actual expenses may be greater or less than shown.
16
<PAGE>
(1) Until further notice, the Adviser has agreed to voluntarily waive its
management fee for the Kemper International Growth and Income Portfolio by
0.30% of the average daily net assets and for the Kemper Global Blue Chip
Portfolio by 0.15% of the average daily net assets. Without such a waiver,
the management fee and total expenses would be as follows: Kemper
International Growth and Income - 1.00% and 1.42% and Kemper Global Blue
Chip - 1.00% and 1.71%. The declaration of a voluntary waiver does not bind
the Manager to declare future waivers with respect to these funds. These
limitations may be terminated at any time.
(2) The Adviser has agreed to waive all or a portion of its management fee to
limit the expense of the Scudder Global Discovery Portfolio to 1.50% of
average daily net assets. Without such a waiver, the management fee would
have been 0.98% and total operating expenses would been 1.79%.
EXAMPLES. The following examples demonstrate the cumulative expenses which
would be paid by the Owner at 1-year, 3-year, 5-year and 10-year intervals under
certain contingencies. Each example assumes a $1,000 investment in a Sub-Account
and a 5% annual return on assets, as required by rules of the SEC. Because the
expenses of the Underlying Portfolios differ, separate examples are used to
illustrate the expenses incurred by an Owner on an investment in the various
Sub-Accounts.
THE INFORMATION GIVEN UNDER THE FOLLOWING EXAMPLES SHOULD NOT BE CONSIDERED A
REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR
LESSER THAN THOSE SHOWN.
17
<PAGE>
(1) If, at the end of the applicable time period, you surrender the Contract or
annuitize* under a commutable variable period certain option or a non-commutable
period certain option of less than ten years, you would pay the following
expenses on a $1,000 investment, assuming a 5% annual return on assets:
<TABLE>
<CAPTION>
UNDERLYING PORTFOLIO 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- -------------------------------------------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Kemper-Dreman Financial Services.................. $ 85 $ 121 $ 157 $ 273
Kemper Small Cap Growth........................... $ 83 $ 113 $ 143 $ 245
Kemper Small Cap Value............................ $ 84 $ 116 $ 150 $ 258
Kemper-Dreman High Return Equity.................. $ 84 $ 117 $ 150 $ 258
Kemper International.............................. $ 85 $ 118 $ 153 $ 265
Kemper International Growth and Income............ $ 87 $ 124 $ 163 $ 286
Kemper Global Blue Chip........................... $ 91 $ 137 $ 184 $ 328
Kemper Growth..................................... $ 82 $ 111 $ 140 $ 239
Kemper Contrarian Value........................... $ 84 $ 115 $ 148 $ 254
Kemper Blue Chip.................................. $ 85 $ 120 $ 155 $ 269
Kemper Value+Growth............................... $ 84 $ 116 $ 150 $ 258
Kemper Horizon 20+................................ $ 85 $ 119 $ 154 $ 267
Kemper Total Return............................... $ 82 $ 109 $ 138 $ 233
Kemper Horizon 10+................................ $ 84 $ 116 $ 149 $ 257
Kemper High Yield................................. $ 82 $ 111 $ 140 $ 239
Kemper Horizon 5.................................. $ 85 $ 120 $ 156 $ 271
Kemper Global Income.............................. $ 86 $ 122 $ 160 $ 279
Kemper Investment Grade Bond...................... $ 84 $ 115 $ 148 $ 254
Kemper Government Securities...................... $ 82 $ 111 $ 140 $ 238
Kemper Money Market............................... $ 81 $ 108 $ 135 $ 228
Scudder International............................. $ 85 $ 121 $ 157 $ 274
Scudder Global Discovery.......................... $ 90 $ 135 $ 181 $ 323
Scudder Capital Growth............................ $ 81 $ 107 $ 133 $ 224
Scudder Growth and Income......................... $ 81 $ 109 $ 137 $ 231
</TABLE>
18
<PAGE>
(2) If, at the end of the applicable time period, you annuitize* under a life
option or a non-commutable period certain option of ten years or longer, or if
you do not surrender or annuitize the Contract, you would pay the following
expenses on a $1,000 investment, assuming a 5% annual return on assets:
<TABLE>
<CAPTION>
UNDERLYING PORTFOLIO 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- -------------------------------------------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Kemper-Dreman Financial Services.................. $ 24 $ 75 $ 128 $ 273
Kemper Small Cap Growth........................... $ 22 $ 66 $ 114 $ 245
Kemper Small Cap Value............................ $ 23 $ 70 $ 120 $ 258
Kemper-Dreman High Return......................... $ 23 $ 71 $ 122 $ 261
Kemper International.............................. $ 24 $ 72 $ 124 $ 265
Kemper International Growth and Income............ $ 26 $ 79 $ 134 $ 286
Kemper Global Blue Chip........................... $ 30 $ 92 $ 156 $ 328
Kemper Growth..................................... $ 21 $ 65 $ 111 $ 239
Kemper Contrarian Value........................... $ 22 $ 69 $ 118 $ 254
Kemper Blue Chip.................................. $ 24 $ 74 $ 126 $ 269
Kemper Value+Growth............................... $ 23 $ 70 $ 120 $ 258
Kemper Horizon 20+................................ $ 24 $ 73 $ 125 $ 267
Kemper Total Return............................... $ 20 $ 63 $ 108 $ 233
Kemper Horizon 10+................................ $ 23 $ 70 $ 120 $ 257
Kemper High Yield................................. $ 21 $ 65 $ 111 $ 239
Kemper Horizon 5.................................. $ 24 $ 74 $ 127 $ 271
Kemper Global Income.............................. $ 25 $ 77 $ 131 $ 279
Kemper Investment Grade Bond...................... $ 22 $ 69 $ 118 $ 254
Kemper Government Securities...................... $ 21 $ 64 $ 110 $ 238
Kemper Money Market............................... $ 20 $ 62 $ 106 $ 228
Scudder International............................. $ 24 $ 75 $ 128 $ 274
Scudder Global Discovery.......................... $ 29 $ 90 $ 153 $ 323
Scudder Capital Growth............................ $ 20 $ 60 $ 104 $ 224
Scudder Growth and Income......................... $ 20 $ 62 $ 107 $ 231
</TABLE>
As required in rules promulgated under the Investment Company Act of 1940 Act
(the "1940 Act"), the Contract fee is reflected in the examples by a method to
show the "average" impact on an investment in the Variable Account. The total
Contract fees collected are divided by the total average net assets attributable
to the Contract. The resulting percentage is 0.04%, and the amount of the
Contract fee is assumed to be $0.40 in the examples. The Contract fee is
deducted only when the accumulated value is less than $50,000. Lower costs apply
to Contracts owned and maintained under a 401(k) plan.
* The Contract fee is not deducted after annuitization. No contingent deferred
sales charge is assessed at the time of annuitization under an option including
a life contingency or under a non-commutable period certain option of ten years
or longer.
19
<PAGE>
CONDENSED FINANCIAL INFORMATION
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
SEPARATE ACCOUNT KG
<TABLE>
<CAPTION>
SUB-ACCOUNT 1997
- ----------------------------------------------------------------------------- ---------
<S> <C>
KEMPER SMALL CAP GROWTH PORTFOLIO
Unit Value:
Beginning of Period...................................................... 0
End of Period............................................................ 0.985
Number of Units Outstanding at End of Period (in thousands).................. 18
KEMPER SMALL CAP VALUE PORTFOLIO
Unit Value:
Beginning of Period...................................................... 0
End of Period............................................................ 1.003
Number of Units Outstanding at End of Period (in thousands).................. 52
KEMPER INTERNATIONAL PORTFOLIO
Unit Value:
Beginning of Period...................................................... 0
End of Period............................................................ 0.932
Number of Units Outstanding at End of Period (in thousands).................. 48
KEMPER GROWTH PORTFOLIO
Unit Value:
Beginning of Period...................................................... 0
End of Period............................................................ 0.973
Number of Units Outstanding at End of Period (in thousands).................. 16
KEMPER CONTRARIAN VALUE PORTFOLIO
Unit Value:
Beginning of Period...................................................... 0
End of Period............................................................ 1.014
Number of Units Outstanding at End of Period (in thousands).................. 174
KEMPER BLUE CHIP PORTFOLIO
Unit Value:
Beginning of Period...................................................... 0
End of Period............................................................ 1.105
Number of Units Outstanding at End of Period (in thousands).................. 43
KEMPER VALUE+GROWTH PORTFOLIO
Unit Value:
Beginning of Period...................................................... 0
End of Period............................................................ 0.960
Number of Units Outstanding at End of Period (in thousands).................. 125
</TABLE>
20
<PAGE>
CONDENSED FINANCIAL INFORMATION
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
SEPARATE ACCOUNT KG
<TABLE>
<CAPTION>
SUB-ACCOUNT 1997
- ----------------------------------------------------------------------------- ---------
KEMPER HORIZON 20+ PORTFOLIO
<S> <C>
Unit Value:
Beginning of Period...................................................... 0
End of Period............................................................ 0.980
Number of Units Outstanding at End of Period (in thousands).................. 5
KEMPER TOTAL RETURN PORTFOLIO
Unit Value:
Beginning of Period...................................................... 0
End of Period............................................................ 1.014
Number of Units Outstanding at End of Period (in thousands).................. 42
KEMPER HORIZON 10+ PORTFOLIO
Unit Value:
Beginning of Period...................................................... 0
End of Period............................................................ 1.016
Number of Units Outstanding at End of Period (in thousands).................. 21
KEMPER HIGH YIELD PORTFOLIO
Unit Value:
Beginning of Period...................................................... 0
End of Period............................................................ 1.004
Number of Units Outstanding at End of Period (in thousands).................. 75
KEMPER HORIZON 5 PORTFOLIO
Unit Value:
Beginning of Period...................................................... 0
End of Period............................................................ 1.017
Number of Units Outstanding at End of Period (in thousands).................. 81
KEMPER GLOBAL INCOME PORTFOLIO
Unit Value:
Beginning of Period...................................................... 0
End of Period............................................................ 1.019
Number of Units Outstanding at End of Period (in thousands).................. 11
KEMPER INVESTMENT GRADE BOND PORTFOLIO
Unit Value:
Beginning of Period...................................................... 0
End of Period............................................................ 1.004
Number of Units Outstanding at End of Period (in thousands).................. 21
</TABLE>
21
<PAGE>
CONDENSED FINANCIAL INFORMATION
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
SEPARATE ACCOUNT KG
<TABLE>
<CAPTION>
SUB-ACCOUNT 1997
- ----------------------------------------------------------------------------- ---------
KEMPER GOVERNMENT SECURITIES PORTFOLIO
<S> <C>
Unit Value:
Beginning of Period...................................................... 0
End of Period............................................................ 1.004
Number of Units Outstanding at End of Period (in thousands).................. 21
KEMPER MONEY MARKET PORTFOLIO
Unit Value:
Beginning of Period...................................................... 0
End of Period............................................................ 1.000
Number of Units Outstanding at End of Period (in thousands).................. 5
</TABLE>
No information is shown above for Sub-Accounts that commenced operations after
December 31, 1997.
PERFORMANCE INFORMATION
The Contract was first offered to the public in 1997. The Company, however, may
advertise "total return" and "average annual total return" performance
information based on the periods that the Sub-Accounts have been in existence
and the periods that the Underlying Portfolios have been in existence.
Performance results for all periods shown below are calculated with all charges
assumed to be those applicable to the Sub-Accounts, the Underlying Portfolios,
and, in Tables 1A and 2A, assuming that the Contract is surrendered at the end
of the applicable period and, alternatively, in Tables 1B and 2B, assuming that
it is not surrendered at the end of the applicable period. Both the total return
and yield figures are based on historical earnings and are not intended to
indicate future performance.
The total return of a Sub-Account refers to the total of the income generated by
an investment in the Sub-Account and of the changes in the value of the
principal (due to realized and unrealized capital gains or losses) for a
specified period, reduced by certain charges, and expressed as a percentage of
the investment.
The average annual total return represents the average annual percentage change
in the value of an investment in a Sub-Account over a given period of time.
Average annual total return represents averaged figures as opposed to the actual
performance of a Sub-Account, which will vary from year to year.
The yield of the Sub-Account investing in the Kemper Money Market Portfolio
refers to the income generated by an investment in the Sub-Account over a seven-
22
<PAGE>
day period (which period will be specified in the advertisement). This income is
then "annualized" by assuming that the income generated in the specific week is
generated over a 52-week period. This annualized yield is shown as a percentage
of the investment. The effective yield calculation is similar but, when
annualized, the income earned by an investment in the Sub-Account is assumed to
be reinvested. Thus the effective yield will be slightly higher than the yield
because of the compounding effect of this assumed reinvestment.
The yield of a Sub-Account investing in a Portfolio other than the Kemper Money
Market Portfolio refers to the annualized income generated by an investment in
the Sub-Account over a specified 30-day or one-month period. The yield is
calculated by assuming that the income generated by the investment during that
30-day or one-month period is generated each period over a 12-month period and
is shown as a percentage of the investment.
Quotations of average annual total return as shown in Table 1A are calculated in
the manner prescribed by the SEC and show the percentage rate of return of a
hypothetical initial investment of $1,000 for the most recent one, five and ten
year period or for a period covering the time the Sub-Account has been in
existence, if less than the prescribed periods. The calculation is adjusted to
reflect the deduction of the annual Sub-Account asset charge of 1.40%, the
Underlying Portfolio charges, the $30 annual Contract fee and the contingent
deferred sales charge which would be assessed if the investment were completely
withdrawn at the end of the specified period. Quotations of supplemental average
total returns, as shown in Table 1B, are calculated in exactly the same manner
and for the same periods of time except that it does not reflect the contingent
deferred sales charge but assumes that the Contract is not surrendered at the
end of the periods shown.
The performance shown in Tables 2A and 2B is calculated in exactly the same
manner as those in Tables 1A and 1B respectively; however, the period of time is
based on the Underlying Portfolios' lifetime, which may predate the
Sub-Account's inception date. These performance calculations are based on the
assumption that the Sub-Account corresponding to the applicable Underlying
Portfolio was actually in existence throughout the stated period and that the
contractual charges and expenses during that period were equal to those
currently assessed under the Contract.
For more detailed information about these performance calculations, including
actual formulas, see the SAI.
PERFORMANCE INFORMATION FOR ANY SUB-ACCOUNT REFLECTS ONLY THE PERFORMANCE OF A
HYPOTHETICAL INVESTMENT IN THE SUB-ACCOUNT DURING THE TIME PERIOD ON WHICH THE
CALCULATIONS ARE BASED. PERFORMANCE INFORMATION SHOULD BE CONSIDERED IN LIGHT OF
THE INVESTMENT OBJECTIVES AND POLICIES AND RISK CHARACTERISTICS OF THE
UNDERLYING PORTFOLIO IN WHICH THE SUB-ACCOUNT
23
<PAGE>
INVESTS AND THE MARKET CONDITIONS DURING THE GIVEN TIME PERIOD, AND SHOULD NOT
BE CONSIDERED AS A REPRESENTATION OF WHAT MAY BE ACHIEVED IN THE FUTURE.
Performance information for a Sub-Account may be compared, in reports and
promotional literature, to: (1) the Standard & Poor's 500 Composite Stock Price
Index ("S&P 500"), Dow Jones Industrial Average ("DJIA"), Shearson Lehman
Aggregate Bond Index or other unmanaged indices so that investors may compare
the Sub-Account results with those of a group of unmanaged securities widely
regarded by investors as representative of the securities markets in general;
(2) other groups of variable annuity separate accounts or other investment
products tracked by Lipper Analytical Services, a widely used independent
research firm which ranks mutual funds and other investment products by overall
performance, investment objectives, and assets, or tracked by other services,
companies, publications, or persons, who rank such investment products on
overall performance or other criteria; or (3) the Consumer Price Index (a
measure for inflation) to assess the real rate of return from an investment in
the Sub-Account. Unmanaged indices may assume the reinvestment of dividends but
generally do not reflect deductions for administrative and management costs and
expenses.
At times, the Company may also advertise the ratings and other information
assigned to it by independent rating organizations such as A.M. Best Company
("A.M. Best"), Moody's Investors Service ("Moody's"), Standard & Poor's
Insurance Rating Services ("S&P") and Duff & Phelps. A.M. Best's and Moody's
ratings reflect their current opinion of the Company's relative financial
strength and operating performance in comparison to the norms of the life/health
insurance industry. S&P's and Duff & Phelps' ratings measure the ability of an
insurance company to meet its obligations under insurance policies it issues and
do not measure the ability of such companies to meet other non-policy
obligations. The ratings also do not relate to the performance of the Underlying
Portfolios.
24
<PAGE>
TABLE 1A
AVERAGE ANNUAL TOTAL RETURNS OF SUB-ACCOUNT
FOR PERIODS ENDING DECEMBER 31, 1997
SINCE INCEPTION OF SUB-ACCOUNT
(ASSUMING COMPLETE WITHDRAWAL OF THE INVESTMENT)
<TABLE>
<CAPTION>
SUB-ACCOUNT SINCE INCEPTION
SUB-ACCOUNT INVESTING IN UNDERLYING PORTFOLIO INCEPTION DATE OF SUB-ACCOUNT
- ---------------------------------------------------- -------------- ---------------
<S> <C> <C>
Kemper-Dreman Financial Services.................... N/A N/A
Kemper Small Cap Growth............................. 10/16/97 -7.37 %
Kemper Small Cap Value.............................. 11/18/97 -5.73 %
Kemper-Dreman High Return Equity.................... N/A N/A
Kemper International................................ 10/16/97 -12.36 %
Kemper International Growth and Income.............. N/A N/A
Kemper Global Blue Chip............................. N/A N/A
Kemper Growth....................................... 10/16/97 -8.49 %
Kemper Contrarian Value............................. 10/14/97 -4.64 %
Kemper Blue Chip.................................... 5/1/97 3.91 %
Kemper Value+Growth................................. 10/14/97 -9.74 %
Kemper Horizon 20+.................................. 10/16/97 -7.87 %
Kemper Total Return................................. 11/17/97 -4.68 %
Kemper Horizon 10+.................................. 11/25/97 -4.51 %
Kemper High Yield................................... 10/16/97 -5.59 %
Kemper Horizon 5.................................... 11/10/97 -4.37 %
Kemper Global Income................................ 5/1/97 -4.19 %
Kemper Investment Grade Bond........................ 12/11/97 -5.61 %
Kemper Government Securities........................ 12/11/97 -5.62 %
Kemper Money Market................................. 12/29/97 -5.97 %
Scudder International............................... N/A N/A
Scudder Global Discovery............................ N/A N/A
Scudder Capital Growth.............................. N/A N/A
Scudder Growth and Income........................... N/A N/A
</TABLE>
25
<PAGE>
TABLE 1B
SUPPLEMENTAL AVERAGE ANNUAL TOTAL RETURNS OF SUB-ACCOUNT
FOR PERIODS ENDING DECEMBER 31, 1997
SINCE INCEPTION OF SUB-ACCOUNT
(ASSUMING NO WITHDRAWAL OF THE INVESTMENT)
<TABLE>
<CAPTION>
SUB-ACCOUNT SINCE INCEPTION
SUB-ACCOUNT INVESTING IN UNDERLYING PORTFOLIO INCEPTION DATE OF SUB-ACCOUNT
- ---------------------------------------------------- -------------- ---------------
<S> <C> <C>
Kemper-Dreman Financial Services.................... N/A N/A
Kemper Small Cap Growth............................. 10/16/97 -1.51 %
Kemper Small Cap Value.............................. 11/18/97 0.24 %
Kemper-Dreman High Return Equity.................... N/A N/A
Kemper International................................ 10/16/97 -6.81 %
Kemper International Growth and Income.............. N/A N/A
Kemper Global Blue Chip............................. N/A N/A
Kemper Growth....................................... 10/16/97 -2.70 %
Kemper Contrarian Value............................. 10/14/97 1.39 %
Kemper Blue Chip.................................... 5/1/97 10.49 %
Kemper Value+Growth................................. 10/14/97 -4.02 %
Kemper Horizon 20+.................................. 10/16/97 -2.04 %
Kemper Total Return................................. 11/17/97 1.35 %
Kemper Horizon 10+.................................. 11/25/97 1.53 %
Kemper High Yield................................... 10/16/97 0.38 %
Kemper Horizon 5.................................... 11/10/97 1.68 %
Kemper Global Income................................ 5/1/97 1.87 %
Kemper Investment Grade Bond........................ 12/11/97 0.37 %
Kemper Government Securities........................ 12/11/97 0.36 %
Kemper Money Market................................. 12/29/97 -0.02 %
Scudder International............................... N/A N/A
Scudder Global Discovery............................ N/A N/A
Scudder Capital Growth.............................. N/A N/A
Scudder Growth and Income........................... N/A N/A
</TABLE>
26
<PAGE>
TABLE 2A
AVERAGE ANNUAL TOTAL RETURNS OF SUB-ACCOUNT
FOR PERIODS ENDING DECEMBER 31, 1997
SINCE INCEPTION OF UNDERLYING PORTFOLIO
(ASSUMING COMPLETE WITHDRAWAL OF INVESTMENT)
<TABLE>
<CAPTION>
10 YEARS
YEAR (OR SINCE
ENDED INCEPTION IF
UNDERLYING PORTFOLIO 12/31/97 5 YEARS LESS)*
- ------------------------------------------ ----------- ----------- -----------------
<S> <C> <C> <C>
Kemper-Dreman Financial Services.......... N/A N/A N/A
Kemper Small Cap Growth................... 25.32 % N/A 23.41 %
Kemper Small Cap Value.................... 13.03 % N/A 8.74 %
Kemper-Dreman High Return Equity.......... N/A N/A N/A
Kemper International...................... 1.50 % 10.98 % 8.80 %
Kemper International Growth and Income.... N/A N/A N/A
Kemper Global Blue Chip................... N/A N/A N/A
Kemper Growth............................. 12.63 % 14.62 % 14.83 %
Kemper Contrarian Value................... 21.55 % N/A 24.07 %
Kemper Blue Chip.......................... N/A N/A 3.91 %
Kemper Value+Growth....................... 16.70 % N/A 19.34 %
Kemper Horizon 20+........................ 11.78 % N/A 16.83 %
Kemper Total Return....................... 11.27 % 10.34 % 12.23 %
Kemper Horizon 10+........................ 8.27 % N/A 12.06 %
Kemper High Yield......................... 3.49 % 9.86 % 10.10 %
Kemper Horizon 5.......................... 4.50 % N/A 8.47 %
Kemper Global Income...................... N/A N/A -4.20 %
Kemper Investment Grade Bond.............. 1.09 % N/A 2.72 %
Kemper Government Securities.............. 1.02 % 4.58 % 6.42 %
Kemper Money Market....................... -2.46 % 2.50 % 4.13 %
Scudder International..................... 1.12 % 11.71 % 10.21 %
Scudder Global Discovery.................. 4.20 % N/A 5.81 %
Scudder Capital Growth.................... 26.84 % 16.03 % 15.13 %
Scudder Growth and Income................. 21.63 % N/A 21.64 %
</TABLE>
27
<PAGE>
TABLE 2B
SUPPLEMENTAL AVERAGE ANNUAL TOTAL RETURNS OF SUB-ACCOUNT
FOR PERIODS ENDING DECEMBER 31, 1997
SINCE INCEPTION OF UNDERLYING PORTFOLIO
(ASSUMING NO WITHDRAWAL OF INVESTMENT)
<TABLE>
<CAPTION>
10 YEARS
YEAR (OR SINCE
ENDED INCEPTION IF
UNDERLYING PORTFOLIO 12/31/97 5 YEARS LESS)*
- ------------------------------------------- ----------- ----------- ------------------
<S> <C> <C> <C>
Kemper-Dreman Financial Services........... N/A N/A N/A
Kemper Small Cap Growth.................... 32.32 % N/A 24.02 %
Kemper Small Cap Value..................... 20.03 % N/A 12.10 %
Kemper-Dreman High Return Equity........... N/A N/A N/A
Kemper International....................... 7.92 % 11.37 % 9.02 %
Kemper International Growth
and Income................................ N/A N/A N/A
Kemper Global Blue Chip.................... N/A N/A N/A
Kemper Growth.............................. 19.63 % 14.96 % 14.83 %
Kemper Contrarian Value.................... 28.55 % N/A 27.16 %
Kemper Blue Chip........................... N/A N/A 10.48 %
Kemper Value+Growth........................ 23.70 % N/A 22.51 %
Kemper Horizon 20+......................... 18.78 % N/A 20.04 %
Kemper Total Return........................ 18.27 % 10.74 % 12.23 %
Kemper Horizon 10+......................... 15.13 % N/A 15.36 %
Kemper High Yield.......................... 10.04 % 10.27 % 10.10 %
Kemper Horizon 5........................... 11.11 % N/A 11.85 %
Kemper Global Income....................... N/A N/A 1.87 %
Kemper Investment Grade Bond............... 7.49 % N/A 6.00 %
Kemper Government Securities............... 7.42 % 5.07 % 6.42 %
Kemper Money Market........................ 3.72 % 3.03 % 4.13 %
Scudder International...................... 7.52 % 12.10 % 10.21 %
Scudder Global Discovery................... 10.79 % N/A 9.18 %
Scudder Capital Growth..................... 33.84 % 16.36 % 15.13 %
Scudder Growth and Income.................. 28.63 % N/A 22.29 %
</TABLE>
* The inception dates for the Underlying Portfolios are: 4/6/82 for Kemper Money
Market, Kemper Total Return and Kemper High Yield; 12/9/83 for Kemper Growth;
9/3/87 for Kemper Government Securities; 1/6/92 for Kemper International; 5/2/94
for Kemper Small Cap Growth and Scudder Growth and Income; 5/1/96 for Kemper
Investment Grade Bond, Kemper Contrarian Value, Kemper Small Cap Value, Kemper
Value+Growth, Kemper Horizon 20+, Kemper Horizon 10+, Kemper Horizon 5 and
Scudder Global Discovery; 5/1/97 for Kemper Global Income and Kemper Blue Chip;
5/1/87 for Scudder International; and 7/16/85 for Scudder Capital Growth.
28
<PAGE>
DESCRIPTION OF THE COMPANY, THE VARIABLE ACCOUNT,
INVESTORS FUND SERIES AND SCUDDER VARIABLE
LIFE INVESTMENT FUND
THE COMPANY. The Company, organized under the laws of Massachusetts in 1844, is
the fifth oldest life insurance company in America. As of December 31, 1997, the
Company and its subsidiaries had over $16.3 billion in combined assets and over
$43.8 billion of life insurance in force. Effective October 16, 1995, the
Company converted from a mutual life insurance company known as State Mutual
Life Assurance Company of America to a stock life insurance company and adopted
its present name. The Company is a wholly owned subsidiary of Allmerica
Financial Corporation ("AFC"). The Company's principal office (the "Principal
Office") is located at 440 Lincoln Street, Worcester, MA 01653, Telephone
508-855-1000.
The Company is subject to the laws of the Commonwealth of Massachusetts
governing insurance companies and to regulation by the Commissioner of Insurance
of Massachusetts. In addition, the Company is subject to the insurance laws and
regulations of other states and jurisdictions in which it is licensed to
operate.
The Company is a charter member of the Insurance Marketplace Standards
Association ("IMSA"). Companies that belong to IMSA subscribe to a rigorous set
of standards that cover the various aspects of sales and service for
individually sold life insurance and annuities. IMSA members have adopted
policies and procedures that demonstrate a commitment to honesty, fairness and
integrity in all customer contacts involving sales and service of individual
life insurance and annuity products.
THE VARIABLE ACCOUNT. Separate Account KG ("Variable Account") is a separate
investment account of the Company with 24 Sub-Accounts. The assets used to fund
the variable portions of the Contract are set aside in Sub-Accounts kept
separate from the general assets of the Company. Each Sub-Account invests in a
corresponding investment series ("Portfolio") of Investors Fund Series and
Scudder Variable Life Investment Fund. Each Sub-Account is administered and
accounted for as part of the general business of the Company. The income,
capital gains, or capital losses of each Sub-Account, however, are allocated to
each Sub-Account, without regard to any other income, capital gains or capital
losses of the Company. Under Massachusetts law, the assets of the Variable
Account may not be charged with any liabilities arising out of any other
business of the Company.
The Variable Account was authorized by vote of the Board of Directors of the
Company on June 13, 1996. The Variable Account meets the definition of "separate
account" under federal securities laws, and is registered with the SEC
29
<PAGE>
as a unit investment trust under the 1940 Act. This registration does not
involve the supervision of management or investment practices or policies of the
Variable Account by the SEC.
The Company reserves the right, subject to compliance with applicable law, to
change the names of the Variable Account and the Sub-Accounts.
INVESTORS FUND SERIES. Investors Fund Series ("Kemper IFS"), is a series-type
mutual fund registered with the SEC as an open-end, management investment
company. Registration of Kemper IFS does not involve supervision of its
management, investment practices or policies by the SEC. Kemper IFS is designed
to provide an investment vehicle for certain variable annuity contracts and
variable life insurance policies. Shares of the Portfolios of Kemper IFS are
sold only to insurance company separate accounts. Scudder Kemper Investments,
Inc. serves as the investment adviser of Kemper IFS.
SCUDDER VARIABLE LIFE INVESTMENT FUND. Scudder Variable Life Investment Fund
("Scudder VLIF") is an open-end, diversified management investment company
established as a Massachusetts business trust on March 15, 1985, and registered
with the SEC under the 1940 Act. Scudder Kemper Investments, Inc. serves as the
investment adviser of Scudder VLIF.
INVESTMENT OBJECTIVES AND POLICIES
A summary of investment objectives of each of the Underlying Portfolios is set
forth below. More detailed information regarding the investment objectives,
restrictions and risks, expenses paid by the Underlying Portfolios and other
relevant information regarding Kemper IFS and Scudder VLIF may be found in their
respective prospectuses, which accompany this Prospectus. Please read them
carefully before investing. The Statements of Additional Information of the
Underlying Portfolios are available upon request.
KEMPER IFS PORTFOLIOS:
KEMPER-DREMAN FINANCIAL SERVICES PORTFOLIO -- seeks long-term capital
appreciation by investing primarily in common stocks and other equity securities
of companies in the financial services industry believed by the Portfolio's
investment manager to be undervalued.
KEMPER SMALL CAP GROWTH PORTFOLIO -- seeks maximum appreciation of investors'
capital from a portfolio primarily of growth stocks of smaller companies.
KEMPER SMALL CAP VALUE PORTFOLIO -- seeks long-term capital appreciation from a
portfolio primarily of value stocks of smaller companies.
30
<PAGE>
KEMPER-DREMAN HIGH RETURN EQUITY PORTFOLIO -- seeks to achieve a high rate of
total return.
KEMPER INTERNATIONAL PORTFOLIO -- seeks total return, a combination of capital
growth and income, principally through an internationally diversified portfolio
of equity securities.
KEMPER INTERNATIONAL GROWTH AND INCOME PORTFOLIO -- seeks long-term growth of
capital and current income primarily from foreign equity securities.
KEMPER GLOBAL BLUE CHIP PORTFOLIO -- seeks long-term growth of capital through a
diversified worldwide portfolio of marketable securities, primarily equity
securities, including common stocks, preferred stocks and debt securities
convertible into common stocks.
KEMPER GROWTH PORTFOLIO -- seeks maximum appreciation of capital through
diversification of investment securities having potential for capital
appreciation.
KEMPER CONTRARIAN VALUE PORTFOLIO -- seeks to achieve a high rate of total
return from a portfolio primarily of value stocks of larger companies. This
Portfolio was formerly known as the Kemper Value Portfolio.
KEMPER BLUE CHIP PORTFOLIO -- seeks growth of capital and of income.
KEMPER VALUE+GROWTH PORTFOLIO -- seeks growth of capital through professional
management of a portfolio of growth and value stocks.
KEMPER HORIZON 20+ PORTFOLIO -- designed for investors with approximately a 20+
year investment horizon, seeks growth of capital, with income as a secondary
objective.
KEMPER TOTAL RETURN PORTFOLIO -- seeks a high total return, a combination of
income and capital appreciation, by investing in a combination of debt
securities and common stocks.
KEMPER HORIZON 10+ PORTFOLIO -- designed for investors with approximately a 10+
year investment horizon, seeks a balance between growth of capital and income,
consistent with moderate risk.
KEMPER HIGH YIELD PORTFOLIO -- seeks to provide a high level of current income
by investing in fixed-income securities.
KEMPER HORIZON 5 PORTFOLIO -- designed for investors with approximately a five
year investment horizon, seeks income consistent with preservation of capital,
with growth of capital as a secondary objective.
KEMPER GLOBAL INCOME PORTFOLIO -- seeks to provide high current income
consistent with prudent total return asset management.
31
<PAGE>
KEMPER INVESTMENT GRADE BOND PORTFOLIO -- seeks high current income by investing
primarily in a diversified portfolio of investment grade debt securities
KEMPER GOVERNMENT SECURITIES PORTFOLIO -- seeks high current return consistent
with preservation of capital from a portfolio composed primarily of U.S.
Government securities.
KEMPER MONEY MARKET PORTFOLIO -- seeks maximum current income to the extent
consistent with stability of principal from a portfolio of high quality money
market instruments that mature in 12 months or less.
SCUDDER VLIF PORTFOLIOS:
SCUDDER INTERNATIONAL PORTFOLIO -- seeks long term growth of capital principally
from a diversified portfolio of foreign equity securities.
SCUDDER GLOBAL DISCOVERY PORTFOLIO -- seeks above average capital appreciation
over the long term by investing primarily in the equity securities of small
companies located throughout the world.
SCUDDER CAPITAL GROWTH PORTFOLIO -- seeks to maximize long-term capital growth
from a portfolio consisting primarily of equity securities.
SCUDDER GROWTH AND INCOME PORTFOLIO -- seeks long-term growth of capital,
current income and growth of income from a portfolio consisting primarily of
common stocks and securities convertible into common stocks.
Certain Underlying Portfolios have investment objectives and/or policies similar
to those of other Underlying Portfolios. To choose the Sub-Accounts which best
meet individual needs and objectives, carefully read the Underlying Portfolio
prospectuses. In some states, insurance regulations may restrict the
availability of particular Sub-Accounts.
INVESTMENT MANAGEMENT SERVICES
Responsibility for overall management of Kemper IFS rests with the Board of
Trustees and officers of Kemper IFS. Responsibility for overall management of
Scudder VLIF rests with its Board of Trustees and officers. SKI is the
investment manager of all the Portfolios available under this Contract. Zurich
Investment Management Limited ("ZIML"), an affiliate of SKI, is a sub-adviser
for the Kemper International Portfolio and the Kemper Global Income Portfolio.
Dreman Value Management, L.L.C. serves as the sub-advisor for the Kemper-Dreman
Financial Services Portfolio and Kemper-Dreman High Return Equity Portfolio.
For its services, SKI receives a management fee, payable monthly at 1/12 of the
following annual rates based on the average daily net assets of each Portfolio:
32
<PAGE>
Money Market (.50%), Total Return (.55%), High Yield (.60%), Growth (.60%),
Government Securities (.55%), International (.75%), Small Cap Growth (.65%),
Investment Grade Bond (.60%), Contrarian Value (.75%), Small Cap Value (.75%),
Value+Growth (.75%), Horizon 20+ (.60%), Horizon 10+ (.60%), Horizon 5 (.60%),
Blue Chip (.65%), Global Income (.75%) and International Growth and Income
(1.00%).
The High Return Equity, Financial Services and Global Blue Chip Portfolios each
pay Scudder Kemper Investments, Inc. an investment management fee, payable
monthly, at 1/12 of the annual rates shown below.
<TABLE>
<S> <C>
High Return Equity
Portfolio and
Financial Services
Portfolio............. .75% for the first $250 million, .72% for the
next $750 million, .70% for the next $1.5
billion, .68% for the next $2.5 billion, .65%
for the next $2.5 billion, .64% for the next
$2.5 billion, .63% for the next $2.5 billion
and .62% over $12.5 billion.
Global Blue Chip
Portfolio............. 1.00% for the first $250 million, .95% for
the next $750 million and .90% over $1
billion.
</TABLE>
SKI pays ZIML for its services as sub-adviser for the Kemper International
Portfolio and the Kemper Global Income Portfolio a sub-advisory fee, payable
monthly, at 1/12 of the annual rate of 0.35% of average daily net assets of the
Kemper International Portfolio and 0.30% of average daily net assets of the
Kemper Global Income Portfolio. SKI also pays Dreman Value Management, L.L.C. a
fee for its services to the Kemper-Dreman Financial Services Portfolio and
Kemper-Dreman High Return Equity Portfolio. A sub-advisory fee, payable monthly,
at the annual rate of .24% of the first $250 million of each Portfolio's average
daily net assets, .23% of average daily net assets between $250 million and $1
billion, .224% of average daily net assets between $1 billion and $2.5 billion,
.218% of average daily net assets between $2.5 billion and $5 billion, .208% of
average daily net assets between $5 billion and $7.5 billion, .205% of average
daily net assets between $7.5 billion and $10 billion, .202% of average daily
net assets between $10 billion and $12.5 billion and .198% of each Portfolio's
average daily net assets over $12 billion.
For its investment management services to the Scudder VLIF Portfolios, SKI
receives compensation monthly at the following annual rates for each Portfolio:
Scudder International Portfolio (0.875% for the first $500,000,000 and 0.775%
for amounts in excess of $500,000,000); Scudder Global Discovery Portfolio
(0.975%); Scudder Capital Growth Portfolio (0.475%) and Scudder Growth and
Income Portfolio (0.475%).
For more information, see the Kemper IFS and Scudder VLIF prospectuses and SAIs.
33
<PAGE>
DESCRIPTION OF THE CONTRACT
A. PAYMENTS
The Company's underwriting requirements, which include receipt of the initial
payment and allocation instructions by the Company at its Principal Office, must
be met before a Contract can be issued. These requirements may also include the
proper completion of an application; however, where permitted, the Company may
issue a contract without completion of an application for certain classes of
annuity contracts.
Payments are to be made payable to the Company. A net payment is equal to the
payment received less the amount of any applicable tax. The initial net payment
will be credited to the Contract and allocated among the requested accounts as
of the date that all issue requirements are properly met. If all issue
requirements are not complied with within five business days of the Company's
receipt of the initial payment, the payment will be returned unless the Owner
specifically consents to the holding of the initial payment until completion of
any outstanding issue requirements. Subsequent payments will be credited as of
the Valuation Date received at the Principal Office.
Payments are not limited as to frequency and number, but there are certain
limitations as to amount. Currently, the initial payment must be at least
$2,000. Under a salary deduction or monthly automatic payment plan, the minimum
initial payment is $167. In all cases, each subsequent payment must be at least
$100. Where the contribution on behalf of an employee under an employer-
sponsored retirement plan is less than $600 but more than $300 annually, the
Company may issue a contract on the employee if the plan's average annual
contribution per eligible plan participant is at least $600. The minimum
allocation to a Guarantee Period Account is $1,000. If less than $1,000 is
allocated to a Guarantee Period Account, the Company reserves the right to apply
that amount to the Kemper Money Market Portfolio.
Generally, unless otherwise requested, all payments will be allocated among the
accounts in the same proportion that the initial net payment is allocated or, if
subsequently changed, according to the most recent allocation instructions. As
of the date of this Prospectus, payments may be allocated to a maximum of
seventeen variable Sub-Accounts during the life of the Contract in addition to
the Kemper Money Market Portfolio. There are no restrictions on the number of
times the Fixed Account and the Guarantee Period Accounts may be used over the
life of the Contract.
The Owner may change allocation instructions for new payments pursuant to a
written or telephone request. If telephone requests are elected by the Owner, a
properly completed authorization must be on file before telephone requests will
be honored. The Company will not be responsible for losses resulting from
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acting upon telephone requests reasonably believed to be genuine. The Company
will employ reasonable procedures to confirm that instructions communicated by
telephone are genuine; otherwise, the Company may be liable for any losses due
to unauthorized or fraudulent instructions. The procedures the Company follows
for transactions initiated by telephone include requirements that callers on
behalf of an Owner identify themselves by name and identify the Annuitant by
name, date of birth and social security number. All transfer instructions by
telephone are tape recorded.
B. RIGHT TO REVOKE CONTRACT
An individual purchasing a Contract may revoke the Contract at any time within
ten days after receipt of the Contract and receive a refund. In order to revoke
the Contract, the Owner must mail or deliver the Contract to the agent through
whom the Contract was purchased or to the Company's Principal Office at 440
Lincoln Street, Worcester, MA 01653. Mailing or delivery must occur on or before
ten days after receipt of the Contract for revocation to be effective.
Within seven days, the Company will provide a refund equal to gross payment(s)
received. In some states, however, the refund may equal the greater of (a) gross
payments or (b) the amounts allocated to the Fixed Account and the Guarantee
Period Accounts plus the Accumulated Value of amounts allocated to the Variable
Account plus any amounts deducted under the Contract or by the Underlying
Portfolios for taxes, charges or fees. At the time the Contract is issued, the
"Right to Examine Contract" provision on the cover page of the Contract will
specifically indicate whether the refund will be equal to gross payments or
equal to the greater of (a) or (b) as set forth above.
The liability of the Variable Account under this provision is limited to the
Owner's Accumulated Value in the Sub-Accounts on the date of cancellation. Any
additional amounts refunded to the Owner will be paid by the Company.
C. TRANSFER PRIVILEGE
At any time prior to the Annuity Date, an Owner may have amounts transferred
among accounts subject to the seventeen variable Sub-Account restriction noted
in "A. Payments." Transfer values will be effected at the Accumulation Value
next computed after receipt of the transfer order. The Company will make
transfers pursuant to written or telephone requests. As discussed in "A.
Payments," a properly completed authorization form must be on file before
telephone requests will be honored.
Transfers to a Guarantee Period Account must be at least $1,000. If the amount
to be transferred to a Guarantee Period Account is less than $1,000, the Company
may transfer that amount to the Sub-Account which invests in the Kemper Money
Market Portfolio.
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The Owner may authorize an independent third party to transact allocations and
transfers in accordance with an asset allocation strategy or other investment
strategy. The Company may provide administrative or other support services to
these independent third parties, however, the Company does not engage any third
parties to offer allocation or other investment services under this Contract,
does not endorse or review any allocation or transfer recommendations and is not
responsible for the investment results of such allocations or transfers
transacted on the Owner's behalf. In addition, the Company reserves the right to
discontinue services or limit the number of Portfolios that it may provide such
services for. The Company does not charge the Owner for providing additional
support services.
AUTOMATIC TRANSFERS (DOLLAR COST AVERAGING) AND AUTOMATIC ACCOUNT REBALANCING
OPTIONS. The Owner may elect automatic transfers of a predetermined dollar
amount, not less than $100, on a periodic basis (monthly, bi-monthly, quarterly,
semi-annually or annually) from the Sub-Account investing in the Kemper Money
Market Portfolio or the Kemper Government Securities Portfolio, or from the
Fixed Account (the source account) to one or more of the Sub-Accounts. Automatic
transfers may not be made into the Fixed Account, the Guarantee Period Accounts
or, if applicable, the Portfolio being used as the source account. If an
automatic transfer would reduce the balance in the source account to less than
$100, the entire balance will be transferred proportionately to the chosen
Portfolios. Automatic transfers will continue until the amount in the source
account on a transfer date is zero or the Owner's request to terminate the
option is received by the Company. If additional amounts are allocated to the
source account after its balance has fallen to zero, this option will not
restart automatically, and the Owner must provide a new request to the Company.
To the extent permitted by state law, the Company reserves the right, from time
to time, to credit an enhanced interest rate to certain initial and/or
subsequent payments which are deposited into the Fixed Account and which utilize
the Fixed Account as the source account for the payment from which to process
automatic transfers. For more information see APPENDIX A, "MORE INFORMATION
ABOUT THE FIXED ACCOUNT."
The Owner may request automatic rebalancing of Sub-Account allocations on a
monthly, bi-monthly, quarterly, semi-annual or annual basis in accordance with
specified percentage allocations. As frequently as requested, the Company will
review the percentage allocations in the Portfolios and, if necessary, transfer
amounts to ensure conformity with the designated percentage allocation mix. If
the amount necessary to re-establish the mix on any scheduled date is less than
$100, no transfer will be made. Automatic Account Rebalancing will continue
until the Owner's request to terminate or change the option is received by the
Company. As such, subsequent payments allocated in a manner different from the
percentage allocation mix in effect on the date the payment is received will be
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reallocated in accordance with the existing mix on the next scheduled date
unless the Owner's timely request to change the mix or terminate the option is
received by the Company.
The Company reserves the right to limit the number of Portfolios that may be
utilized for automatic transfers and rebalancing, and to discontinue either
option upon advance written notice. The first automatic transfer and all
subsequent transfers of that request in the same Contract year count as one
transfer towards the 12 transfers which are guaranteed to be free of a transfer
charge in each Contract year. Currently, Dollar Cost Averaging and Automatic
Account Rebalancing may not be in effect simultaneously. Either option may be
elected when the Contract is purchased or at a later date.
D. SURRENDER
At any time prior to the Annuity Date, an Owner may surrender the Contract and
receive its Accumulated Value, less applicable surrender charges and adjusted
for any Market Value Adjustment ("Surrender Value"). The Owner must return the
Contract and a signed, written request for surrender, satisfactory to the
Company, to the Principal Office. The amount payable to the Owner upon surrender
will be based on the Contract's Accumulated Value as of the Valuation Date on
which the request and the Contract are received at the Principal Office.
Before the Annuity Date, a contingent deferred sales charge may be deducted when
a Contract is surrendered if payments have been credited to the Contract during
the last six full Contract years. See "CHARGES AND DEDUCTIONS." The Contract fee
will be deducted upon surrender of the Contract.
After the Annuity Date, only a Contract under which future annuity benefit
payments are limited to a specified period (as specified in the period certain
annuity option) may be surrendered. The Surrender Amount is the commuted value
of any unpaid installments, computed on the basis of the assumed interest rate
incorporated in such annuity benefit payments. No contingent deferred sales
charge is imposed after the Annuity Date.
Any amount surrendered normally is payable within seven days following the
Company's receipt of the surrender request. The Company reserves the right to
defer surrenders and withdrawals of amounts in each Sub-Account in any period
during which (1) trading on the New York Stock Exchange is restricted as
determined by the SEC or such Exchange is closed for other than weekends and
holidays, (2) the SEC has, by order, permitted such suspension, or (3) an
emergency, as determined by the SEC, exists such that disposal of Portfolio
securities or valuation of assets of each separate account is not reasonably
practicable.
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The right is reserved by the Company to defer surrenders and withdrawals of
amounts allocated to the Company's Fixed Account and Guarantee Period Accounts
for a period not to exceed six months.
The surrender rights of Owners who are participants under Section 403(b) plans
or who are participants in the Texas Optional Retirement Program ("Texas ORP")
are restricted; see "FEDERAL TAX CONSIDERATIONS," "Tax-Sheltered Annuities" and
"Texas Optional Retirement Program."
For important tax consequences which may result from surrender, see "FEDERAL TAX
CONSIDERATIONS."
E. WITHDRAWALS
At any time prior to the Annuity Date, an Owner may withdraw a portion of the
Accumulated Value of his or her Contract, subject to the limits stated below.
The Owner must file a signed, written request for withdrawals, satisfactory to
the Company, at the Principal Office. The written request must indicate the
dollar amount the Owner wishes to receive and the accounts from which such
amount is to be withdrawn. The Contract value following the withdrawal will
reflect an amount withdrawn equal to the amount requested by the Owner plus any
applicable contingent deferred sales charge, as described under "CHARGES AND
DEDUCTIONS." In addition, amounts withdrawn from a Guarantee Period Account
prior to the end of the applicable Guarantee Period will be subject to a Market
Value Adjustment, as described under "GUARANTEE PERIOD ACCOUNTS."
Where allocations have been made to more than one account, a percentage of the
withdrawal may be allocated to each such account. A withdrawal from a Sub-
Account will result in cancellation of a number of units equivalent in value to
the amount withdrawn, computed as of the Valuation Date that the request is
received at the Principal Office.
Each withdrawal must be in a minimum amount of $100. No withdrawal will be
permitted if the Accumulated Value remaining under the Contract would be reduced
to less than $1,000. Withdrawals will be paid in accordance with the time
limitations described under "D. Surrender."
After the Annuity Date, only a Contract under which future variable annuity
benefit payments are limited to a specified period may be withdrawn. A
withdrawal after the Annuity Date will result in cancellation of a number of
Annuity Units equivalent in value to the amount withdrawn.
For important restrictions on withdrawals which are applicable to Owners who are
participants under Section 403(b) plans or under the Texas ORP, see "FEDERAL TAX
CONSIDERATIONS," "Tax-Sheltered Annuities" and "Texas Optional Retirement
Program."
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For important tax consequences which may result from withdrawals, see "FEDERAL
TAX CONSIDERATIONS."
SYSTEMATIC WITHDRAWALS. The Owner may elect an automatic schedule of
withdrawals (systematic withdrawals) from amounts in the Sub-Accounts and/or the
Fixed Account on a monthly, bi-monthly, quarterly, semi-annual or annual basis.
Systematic withdrawals from Guarantee Period Accounts are not available. The
minimum amount of each automatic withdrawal is $100, and will be subject to any
applicable withdrawal charges. If elected at the time of purchase, the Owner
must designate in writing the specific dollar amount of each withdrawal and the
percentage of this amount which should be taken from each designated Sub-Account
and/or the Fixed Account. Systematic withdrawals then will begin on the date
indicated on the application. If elected after the issue date, the Owner may
elect, by written request, a specific dollar amount and the percentage of this
amount to be taken from each designated Sub-Account and/or the Fixed Account, or
the Owner may elect to withdraw a specific percentage of the Accumulated Value
calculated as of the withdrawal dates, and may designate the percentage of this
amount which should be taken from each account. The first withdrawal will take
place on the date the written request is received at the Principal Office or, if
later, on a date specified by the Owner.
If a withdrawal would cause the remaining Accumulated Value to be less than
$1,000, systematic withdrawals will be discontinued. Systematic withdrawals will
cease automatically on the Annuity Date. The Owner may change or terminate
systematic withdrawals by written request to the Principal Office only.
LIFE EXPECTANCY DISTRIBUTIONS. Prior to the Annuity Date an Owner who also is
the Annuitant may elect to make a series of systematic withdrawals from the
Contract according to a life expectancy distribution ("LED") option by returning
a properly signed LED request form to the Principal Office. The LED option
permits the Owner to make systematic withdrawals from the Contract over his or
her lifetime. The amount withdrawn from the Contract changes each year, because
life expectancy changes each year that a person lives. For example, actuarial
tables indicate that a person age 70 has a life expectancy of 16 years, but a
person who attains age 86 has a life expectancy of another 6.5 years.
Where the Owner is a trust or other non-natural person, the Owner may elect the
LED option based on the Annuitant's life expectancy.
If an Owner elects the LED option, in each calendar year a fraction of the
Accumulated Value is withdrawn based on the Owner's then life expectancy. The
numerator of the fraction is 1 (one) and the denominator of the fraction is the
remaining life expectancy of the Owner, as determined annually by the Company.
The resulting fraction, expressed as a percentage, is applied to the Accumulated
Value at the beginning of the year to determine the amount to be distributed
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during the year. The Owner may elect monthly, bi-monthly, quarterly, semi-
annual, or annual distributions, and may terminate the LED option at any time.
LED will terminate automatically on the maximum Annuity Date permitted under the
Contract at which time an annuity payout option must be selected. The Owner also
may elect to receive distributions under a LED option which is determined on the
joint life expectancy of the Owner and a beneficiary. The Company also may offer
other systematic withdrawal options.
If an Owner makes withdrawals under the LED option prior to age 59 1/2, the
withdrawals may be treated by the Internal Revenue Service ("IRS") as premature
distributions from the Contract. The payments then would be taxed on an "income
first" basis and be subject to a 10% federal tax penalty. For more information,
see "FEDERAL TAX CONSIDERATIONS" and "B. Taxation of the Contracts in General."
F. DEATH BENEFIT
In the event that the Annuitant, Owner or Joint Owner, if applicable, dies while
the Contract is in force, the Company will pay the beneficiary a death benefit,
except where the Contract is continued as provided in "G. The Spouse of the
Owner as Beneficiary." The amount of the death benefit and the time requirements
for receipt of payment may vary depending upon whether the Annuitant or an Owner
dies first, and whether death occurs prior to or after the Annuity Date.
DEATH OF THE ANNUITANT PRIOR TO THE ANNUITY DATE. At the death of the Annuitant
(including an Owner who is also the Annuitant), the benefit is equal to the
greatest of (1) the Accumulated Value under the Contract increased for any
positive Market Value Adjustment; (2) gross payments decreased proportionately
to reflect withdrawals (for each withdrawal, the proportionate reduction is
calculated as the death benefit under this option immediately prior to the
withdrawal multiplied by the withdrawal amount and divided by the Accumulated
Value immediately prior to the withdrawal); or (3) the death benefit that would
have been payable on the most recent contract anniversary date, increased for
subsequent payments and decreased proportionately for subsequent withdrawals.
This guaranteed death benefit works in the following way assuming no withdrawals
are made. On the first anniversary, the death benefit will be equal to the
greater of (a) the Accumulated Value (increased by any positive Market Value
Adjustment) or (b) gross payments. The higher of (a) or (b) will then be locked
in
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until the second anniversary, at which time the death benefit will be equal to
the greatest of (a) the Contract's then current Accumulated Value increased by
any positive Market Value Adjustment; (b) gross payments or (c) the locked-in
value of the death benefit at the first anniversary. The greatest of (a), (b) or
(c) will be locked in until the next Contract anniversary. This calculation will
then be repeated on each anniversary date while the Contract remains in force
and prior to the Annuity Date. As noted above, the values of (b) and (c) will be
decreased proportionately if withdrawals are taken.
DEATH OF AN OWNER WHO IS NOT ALSO THE ANNUITANT PRIOR TO THE ANNUITY DATE. If
an Owner who is not also the Annuitant dies before the Annuity Date, the death
benefit will be the Accumulated Value increased by any positive Market Value
Adjustment. The death benefit never will be reduced by a negative Market Value
Adjustment.
PAYMENT OF THE DEATH BENEFIT PRIOR TO THE ANNUITY DATE. The death benefit
generally will be paid to the beneficiary in one sum within seven business days
of the receipt of due proof of death at the Principal Office unless the Owner
has specified a death benefit annuity option. Instead of payment in one sum, the
beneficiary may, by written request, elect to:
(1) defer distribution of the death benefit for a period no more than five
years from the date of death; or
(2) receive a life annuity or an annuity for a period certain not extending
beyond the beneficiary's life expectancy, with annuity benefit payments
beginning one year from the date of death.
If distribution of the death benefit is deferred under (1) or (2), any value in
the Guarantee Period Accounts will be transferred to the Sub-Account investing
in the Kemper Money Market Portfolio. The excess, if any, of the death benefit
over the Accumulated Value also will be added to the Kemper Money Market
Portfolio. The beneficiary may, by written request, effect transfers and
withdrawals during the deferral period and prior to annuitization under (2), but
may not make additional payments. The death benefit will reflect any earnings or
losses experienced during the deferral period. If there are multiple
beneficiaries, the consent of all is required.
With respect to the death benefit, the Accumulated Value under the Contract will
be based on the unit values next computed after due proof of the death has been
received.
DEATH OF THE ANNUITANT ON OR AFTER THE ANNUITY DATE. If the Annuitant's death
occurs on or after the Annuity Date but before completion of all guaranteed
annuity benefit payments, any unpaid amounts or installments will be paid
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to the beneficiary. The Company must pay out the remaining payments at least as
rapidly as under the payment option in effect on the date of the Annuitant's
death.
G. THE SPOUSE OF THE OWNER AS BENEFICIARY
The Owner's spouse, if named as the sole beneficiary, may by written request
continue the Contract in lieu of receiving the amount payable upon death of the
Owner. Upon such election, the spouse will become the Owner and Annuitant
subject to the following: (1) any value in the Guarantee Period Accounts will be
transferred to the Kemper Money Market Portfolio and (2) the excess, if any, of
the death benefit over the Contract's Accumulated Value also will be added to
the Kemper Money Market Portfolio. This value never will be subject to a
surrender charge when withdrawn. Additional payments may be made; however, a
surrender charge will apply to these amounts if they have not been invested in
the Contract for more than six years. All other rights and benefits provided in
the Contract will continue, except that any subsequent spouse of such new Owner
will not be entitled to continue the Contract upon such new Owner's death.
H. ASSIGNMENT
The Contract, other than those sold in connection with certain qualified plans,
may be assigned by the Owner at any time prior to the Annuity Date and while the
Annuitant is alive (see "FEDERAL TAX CONSIDERATIONS"). The Company will not be
deemed to have knowledge of an assignment unless it is made in writing and filed
at the Principal Office. The Company will not assume responsibility for
determining the validity of any assignment. If an assignment of the Contract is
in effect on the Annuity Date, the Company reserves the right to pay to the
assignee, in one sum, that portion of the Surrender Value of the Contract to
which the assignee appears to be entitled. The Company will pay the balance, if
any, in one sum to the Owner in full settlement of all liability under the
Contract. The interest of the Owner and of any beneficiary will be subject to
any assignment.
For important tax liability which may result from assignments, see "FEDERAL TAX
CONSIDERATIONS."
I. ELECTING THE FORM OF ANNUITY AND ANNUITY DATE
The Annuity Date is selected by the Owner. To the extent permitted in your
state, the Annuity Date may be the first day of any month: (1) before the
Annuitant's 85th birthday, if the Annuitant's age on the issue date of the
Contract is 75 or under, or (2) within ten years from the issue date of the
Contract and before the Annuitant's 90th birthday, if the Annuitant's age on the
issue date is between 76 and 90. The Owner may elect to change the Annuity Date
by sending a request to
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the Principal Office at least one month before the Annuity Date. The new Annuity
Date must be the first day of any month occurring before the Annuitant's 90th
birthday, and must be within the life expectancy of the Annuitant. The Company
shall determine such life expectancy at the time a change in Annuity Date is
requested. The Code and the terms of qualified plans impose limitations on the
age at which annuity benefit payments may commence and the type of annuity
option selected. See "FEDERAL TAX CONSIDERATIONS" for further information.
Subject to certain restrictions described below, the Owner has the right (1) to
select the annuity payout option under which annuity benefit payments are to be
made, and (2) to determine whether payments are to be made on a fixed basis, a
variable basis, or a combination fixed and variable basis. Annuity benefit
payments are determined according to the annuity tables in the Contract, by the
annuity option selected, and by the investment performance of the Accounts
selected.
To the extent a fixed annuity payout is selected, Accumulated Value will be
transferred to the Fixed Account, and the annuity benefit payments will be fixed
in amount. See APPENDIX A, "MORE INFORMATION ABOUT THE FIXED ACCOUNT."
Under a variable annuity payout, a payment equal to the value of the fixed
number of Annuity Units in the Sub-Accounts is made monthly, quarterly, semi-
annually or annually. Since the value of an Annuity Unit in a Sub-Account will
reflect the investment performance of the Sub-Account, the amount of each
annuity benefit payment will vary.
The annuity payout option selected must produce an initial payment of at least
$50 (a lower amount may be required in some states). The Company reserves the
right to increase this minimum amount. If the annuity payout option selected
does not produce an initial payment which meets this minimum, a single payment
will be made. Once the Company begins making annuity benefit payments, the
Annuitant cannot make withdrawals or surrender the annuity benefit, except where
the Annuitant has elected a commutable period certain option. Beneficiaries
entitled to receive remaining payments under either a commutable or non-
commutable "period certain" may elect instead to receive a lump sum settlement.
See "J. Description of Variable Annuity Payout Options."
If the Owner does not elect otherwise, a variable life annuity with periodic
payments for ten years guaranteed will be purchased. Changes in either the
Annuity Date or annuity option can be made up to one month prior to the Annuity
Date.
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J. DESCRIPTION OF VARIABLE ANNUITY PAYOUT OPTIONS
The Company provides the variable annuity payout options described below.
Currently, variable annuity payout options may be funded through the Sub-
Accounts investing in the Kemper Investment Grade Bond, Kemper Value+Growth,
Kemper Horizon 10+ and Kemper Horizon 5 Portfolios. The Company also provides
these same options funded through the Fixed Account (fixed-amount annuity
option). Regardless of how payments were allocated during the accumulation
period, any of the variable annuity options or the fixed-amount options may be
selected, or any of the variable annuity options may be selected in combination
with any of the fixed-amount annuity options. Other annuity options may be
offered by the Company. IRS regulations may not permit certain of the available
annuity options when used in connection with certain qualified Contracts.
VARIABLE LIFE ANNUITY WITH PAYMENTS GUARANTEED FOR TEN YEARS. This variable
annuity is payable periodically during the lifetime of the payee with the
guarantee that if the payee should die before all payments have been made, the
remaining annuity benefit payments will continue to the beneficiary.
VARIABLE LIFE ANNUITY PAYABLE PERIODICALLY DURING THE LIFETIME OF THE ANNUITANT
ONLY. It would be possible under this option for the Annuitant to receive only
one annuity benefit payment if the Annuitant dies prior to the due date of the
second annuity benefit payment, two annuity benefit payments if the Annuitant
dies before the due date of the third annuity benefit payment, and so on.
Payments will continue, however, during the lifetime of the Annuitant, no matter
how long he or she lives.
UNIT FUND VARIABLE LIFE ANNUITY. This is an annuity payable periodically during
the lifetime of the payee with the guarantee that if (1) exceeds (2) then
periodic variable annuity benefit payments will continue to the beneficiary
until the number of such payments equals the number determined in (1).
Where: (1) is the dollar amount of the Accumulated Value divided by the dollar
amount of the first payment, and
(2) is the number of payments paid prior to the death of the payee.
JOINT AND SURVIVOR VARIABLE LIFE ANNUITY. This variable annuity is payable
jointly to two payees during their joint lifetime, and then continues thereafter
during the lifetime of the survivor. The amount of each payment to the survivor
is based on the same number of Annuity Units which applied during the joint
lifetime of the two payees. One of the payees must be either the person
designated as the Annuitant in the Contract or the beneficiary. There is no
minimum number of payments under this option.
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JOINT AND TWO-THIRDS SURVIVOR VARIABLE LIFE ANNUITY. This variable annuity is
payable jointly to two payees during their joint lifetime, and then continues
thereafter during the lifetime of the survivor. The amount of each periodic
payment to the survivor, however, is based upon two-thirds of the number of
Annuity Units which applied during the joint lifetime of the two payees. One of
the payees must be the person designated as the Annuitant or the beneficiary in
the Contract. There is no minimum number of payments under this option.
PERIOD CERTAIN VARIABLE ANNUITY. This variable annuity has periodic payments
for a stipulated number of years ranging from one to 30. This option may be
commutable, that is, the payee reserves the right to receive a lump sum in place
of installments, or it becomes non-commutable. The payee must reserve this right
at the time benefits begin.
It should be noted that the period certain option does not involve a life
contingency. In the computation of the payments under this option, the charge
for annuity rate guarantees, which includes a factor for mortality risks, is
made. Although not contractually required to do so, the Company currently
follows a practice of permitting persons receiving payments under the period
certain option to elect to convert to a variable annuity involving a life
contingency. The Company may discontinue or change this practice at any time,
but not with respect to election of the option made prior to the date of any
change in this practice. See "FEDERAL TAX CONSIDERATIONS" for a discussion of
the possible adverse tax consequences of selecting a period certain option.
K. ANNUITY BENEFIT PAYMENTS
THE ANNUITY UNIT. On and after the Annuity Date, the Annuity Unit is a measure
of the value of the Annuitant's monthly annuity benefit payments under a
variable annuity option. The value of an Annuity Unit in each Sub-Account
initially was set at $1.00. The value of an Annuity Unit under a Sub-Account on
any Valuation Date thereafter is equal to the value of such unit on the
immediately preceding Valuation Date, multiplied by the product of (1) the net
investment factor of the Sub-Account for the current Valuation Period, and (2) a
factor to adjust benefits to neutralize the assumed interest rate. The assumed
interest rate, discussed below, is incorporated in the variable annuity options
offered in the Contract.
DETERMINATION OF THE FIRST AND SUBSEQUENT ANNUITY BENEFIT PAYMENTS. The first
periodic annuity benefit payment is based upon the Accumulated Value as of a
date not more than four weeks preceding the date that the first annuity benefit
payment is due. Variable annuity benefit payments are due on the first of a
month, which is the date the payment is to be received by the Annuitant, and
currently are based on unit values as of the 15th day of the preceding month.
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The Contract provides annuity rates which determine the dollar amount of the
first periodic payment under each form of annuity for each $1,000 of applied
value. For life contingency options and non-commutable period certain options of
ten or more years (six or more years under New York contracts), the annuity
value is the Accumulated Value less any premium taxes and adjusted for any
Market Value Adjustment. For commutable period certain options or any period
certain option for less than ten years (less than six years under New York
contracts), the value is surrender value less any premium tax. For a death
benefit annuity, the annuity value will be the amount of the death benefit. The
annuity rates in the Contract are based on a modification of the 1983(a)
Individual Mortality Table on rates.
The amount of the first monthly payment depends upon the form of annuity
selected, the sex (however, see "L. NORRIS Decision") and age of the Annuitant
and the value of the amount applied under the annuity option. The variable
annuity options offered by the Company are based on a 3.5% assumed interest
rate. Variable payments are affected by the assumed interest rate used in
calculating the annuity option rates. Variable annuity benefit payments will
increase over periods when the actual net investment result of the Sub-Accounts
funding the annuity exceeds the equivalent of the assumed interest rate for the
period. Variable annuity benefit payments will decrease over periods when the
actual net investment result of the respective Sub-Account is less than the
equivalent of the assumed interest rate for the period.
The dollar amount of the first periodic annuity benefit payment under life
annuity options and non-commutable period certain options of ten years or more
(six or more years under New York contracts), is determined by multiplying (1)
the Accumulated Value applied under that option (after application of any Market
Value Adjustment and less premium tax, if any) divided by $1,000, by (2) the
applicable amount of the first monthly payment per $1,000 of value. For
commutable period certain options and any period certain option of less than ten
years (six years under New York contracts), the Surrender Value less premium
taxes, if any, is used rather than the Accumulated Value. The dollar amount of
the first variable annuity benefit payment then is divided by the value of an
Annuity Unit of the selected Sub-Accounts to determine the number of Annuity
Units represented by the first payment. This number of Annuity Units remains
fixed under all annuity options except the joint and two-thirds survivor annuity
option. For each subsequent payment, the dollar amount of the variable annuity
benefit payment is determined by multiplying this fixed number of Annuity Units
by the value of an Annuity Unit on the applicable Valuation Date.
After the first benefit payment, the dollar amount of each periodic variable
annuity benefit payment will vary with subsequent variations in the value of the
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Annuity Unit of the selected Sub-Accounts. The dollar amount of each fixed
amount annuity benefit payment is fixed and will not change, except under the
joint and two-thirds survivor annuity option.
From time to time, the Company may offer Owners both fixed and variable annuity
rates more favorable than those contained in the Contract. Any such rates will
be applied uniformly to all Owners of the same class.
For an illustration of variable annuity benefit payment calculation using a
hypothetical example, see "ANNUITY BENEFIT PAYMENTS" in the SAI.
L. NORRIS DECISION
In the case of ARIZONA GOVERNING COMMITTEE V. NORRIS, the United States Supreme
Court ruled that, in connection with retirement benefit options offered under
certain employer-sponsored employee benefit plans, annuity options based on
sex-distinct actuarial tables are not permissible under Title VII of the Civil
Rights Act of 1964. The ruling requires that benefits derived from contributions
paid into a plan after August 1, 1983 be calculated without regard to the sex of
the employee. Annuity benefits attributable to payments received by the Company
under a Contract issued in connection with an employer-sponsored benefit plan
affected by the NORRIS decision will be based on the greater of (1) the
Company's unisex non-guaranteed current annuity option rates, or (2) the
guaranteed unisex rates described in such Contract, regardless of whether the
Annuitant is male or female.
M. COMPUTATION OF VALUES
THE ACCUMULATION UNIT. Each net payment is allocated to the accounts selected
by the Owner. Allocations to the Sub-Accounts are credited to the Contract in
the form of Accumulation Units. Accumulation Units are credited separately for
each Sub-Account. The number of Accumulation Units of each Sub-Account credited
to the Contract is equal to the portion of the net payment allocated to the
Sub-Account, divided by the dollar value of the applicable Accumulation Unit as
of the Valuation Date the payment is received in good order at the Company's
Principal Office. The number of Accumulation Units resulting from each payment
will remain fixed unless changed by a subsequent split of Accumulation Unit
value, a transfer, a withdrawal, or surrender. The dollar value of an
Accumulation Unit of each Sub-Account varies from Valuation Date to Valuation
Date based on the investment experience of that Sub-Account, and will reflect
the investment performance, expenses and charges of its Portfolios. The value of
an Accumulation Unit was set at $1.00 on the first Valuation Date for each
Sub-Account.
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Allocations to Guarantee Period Accounts and the Fixed Account are not converted
into Accumulation Units, but are credited interest at a rate periodically set by
the Company. See "GUARANTEE PERIOD ACCOUNTS" and APPENDIX A, "MORE INFORMATION
ABOUT THE FIXED ACCOUNTS."
The Accumulated Value under the Contract is determined by (1) multiplying the
number of Accumulation Units in each Sub-Account by the value of an Accumulation
Unit of that Sub-Account on the Valuation Date, (2) adding the products, and (3)
adding the amount of the accumulations in the Fixed Account and Guarantee Period
Accounts, if any.
NET INVESTMENT FACTOR. The Net Investment Factor is an index that measures the
investment performance of a Sub-Account from one Valuation Period to the next.
This factor is equal to 1.000000 plus the result from dividing (1) by (2) and
subtracting (3) and (4) where:
(1) is the investment income of a Sub-Account for the Valuation Period,
including realized or unrealized capital gains and losses during the
Valuation Period, adjusted for provisions made for taxes, if any;
(2) is the value of that Sub-Account's assets at the beginning of the
Valuation Period;
(3) is a charge for mortality and expense risks equal to 1.25% on an annual
basis of the daily value of the Sub-Account's assets; and
(4) is an administrative charge equal to 0.15% on an annual basis of the daily
value of the Sub-Account's assets.
The dollar value of an Accumulation Unit as of a given Valuation Date is
determined by multiplying the dollar value of the corresponding Accumulation
Unit as of the immediately preceding Valuation Date by the appropriate net
investment factor. For an illustration of Accumulation Unit calculation using a
hypothetical example see the SAI.
CHARGES AND DEDUCTIONS
Deductions under the Contract and charges against the assets of the Sub-Accounts
are described below. Other deductions and expenses paid out of the assets of the
Portfolios are described in the prospectuses and SAIs of Kemper IFS and Scudder
VLIF.
A. VARIABLE ACCOUNT DEDUCTIONS
MORTALITY AND EXPENSE RISK CHARGE. The Company makes a daily charge equal to an
annual rate of 1.25% of the value of each Sub-Account's assets to cover the
mortality and expense risk which the Company assumes in relation to
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the variable portion of the Contract. The charge is imposed during both the
accumulation period and the annuity payout period. The mortality risk arises
from the Company's guarantee that it will make annuity benefit payments in
accordance with annuity rate provisions established at the time the Contract is
issued for the life of the Annuitant (or in accordance with the annuity option
selected), no matter how long the Annuitant (or other payee) lives and no matter
how long all Annuitants as a class live. Therefore, the mortality charge is
deducted during the annuity payout phase on all Contracts, including those that
do not involve a life contingency, even though the Company does not bear direct
mortality risk with respect to variable annuity settlement options that do not
involve life contingencies. The expense risk arises from the Company's guarantee
that the charges it makes will not exceed the limits described in the Contract
and in this Prospectus.
If the charge for mortality and expense risks is not sufficient to cover actual
mortality experience and expenses, the Company will absorb the losses. If
expenses are less than the amounts provided to the Company by the charge, the
difference will be a profit to the Company. To the extent this charge results in
a profit to the Company, such profit will be available for use by the Company
for, among other things, the payment of distribution, sales and other expenses.
Since mortality and expense risks involve future contingencies which are not
subject to precise determination in advance, it is not feasible to identify
specifically the portion of the charge which is applicable to each. The Company
estimates that a reasonable allocation might be 0.85% for mortality risk and
0.40% for expense risk.
ADMINISTRATIVE EXPENSE CHARGE. The Company assesses each Sub-Account with a
daily charge at an annual rate of 0.15% of the average daily net assets of the
Sub-Account. The charge is imposed during both the accumulation phase and the
annuity payout phase. The daily administrative expense charge is assessed to
help defray administrative expenses actually incurred in the administration of
the Sub-Account, without profits. There is no direct relationship, however,
between the amount of administrative expenses imposed on a given Contract and
the amount of expenses actually attributable to that Contract.
Deductions for the Contract fee (described under "B. Contract Fee") and for the
administrative expense charge are designed to reimburse the Company for the cost
of administration and related expenses and are not expected to be a source of
profit. The administrative functions and expense assumed by the Company in
connection with the Variable Account and the Contract include, but are not
limited to, clerical, accounting, actuarial and legal services, rent, postage,
telephone, office equipment and supplies, expenses of preparing and printing
registration statements, expense of preparing and typesetting prospectuses and
the cost of printing prospectuses not allocable to sales expense, filing and
other fees.
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OTHER CHARGES. Because the Sub-Accounts hold shares of the Portfolios, the
value of the net assets of the Sub-Accounts will reflect the investment advisory
fee and other expenses incurred by the Portfolios. The prospectuses and SAIs of
the Underlying Portfolios contain additional information concerning expenses of
the Portfolios.
B. CONTRACT FEE
A $30 Contract fee currently is deducted on the Contract anniversary date and
upon full surrender of the Contract when the Accumulated Value is less than
$50,000. The Contract fee is waived for Contracts issued to and maintained by
the trustee of a 401(k) plan. Where Contract value has been allocated to more
than one account, a percentage of the total Contract fee will be deducted from
the value in each account. The portion of the charge deducted from each account
will be equal to the percentage which the value in that account bears to the
Accumulated Value under the Contract. The deduction of the Contract fee from a
Sub-Account will result in cancellation of a number of Accumulation Units equal
in value to the percentage of the charge deducted from that account.
Where permitted by law, the Contract fee also may be waived for Contracts where,
on the issue date, either the Owner or the Annuitant is within the following
classes of individuals: employees and registered representatives of any
broker-dealer which has entered into a sales agreement with the Company to sell
the Contract; employees of the Company, its affiliates and subsidiaries;
officers, directors, trustees and employees of any of the Portfolios; investment
managers or Sub-Advisers; and the spouses of and immediate family members
residing in the same household with such eligible persons. "Immediate family
members" means children, siblings, parents and grandparents.
C. PREMIUM TAXES
Some states and municipalities impose a premium tax on variable annuity
contracts. State premium taxes currently range up to 3.5%. The Company makes a
charge for state and municipal premium taxes, when applicable, and deducts the
amount paid as a premium tax charge. The current practice of the Company is to
deduct the premium tax charge in one of two ways:
1. if the premium tax was paid by the Company when payments were received, the
premium tax charge is deducted on a pro-rata basis when withdrawals are
made, upon surrender of the Contract, or when annuity benefit payments
begin (the Company reserves the right instead to deduct the premium tax
charge for these Contracts at the time the payments are received); or
2. the premium tax charge is deducted when annuity benefit payments begin.
In no event will a deduction be taken before the Company has incurred a tax
liability under applicable state law. If no amount for premium tax was deducted
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at the time the payment was received, but subsequently tax is determined to be
due prior to the Annuity Date, the Company reserves the right to deduct the
premium tax from the Contract value at the time such determination is made.
D. CONTINGENT DEFERRED SALES CHARGE
No charge for sales expense is deducted from payments at the time the payments
are made. A contingent deferred sales charge is deducted from the Accumulated
Value of the Contract, however, in the case of surrender and/or withdrawals or
at the time annuity benefit payments begin, within certain time limits described
below.
For purposes of determining the contingent deferred sales charge, the
Accumulated Value is divided into three categories: (1) New Payments - payments
received by the Company during the six years preceding the date of the
surrender; (2) Old Payments - accumulated payments not defined as New Payments;
and (3) the amount available under the Withdrawal Without Surrender Charge
provision. See "Withdrawal Without Surrender Charge" below. For purposes of
determining the amount of any contingent deferred sales charge, surrenders will
be deemed to be taken first from amounts available as a Withdrawal Without
Surrender Charge, if any; then from Old Payments, and then from New Payments.
Amounts available as a Withdrawal Without Surrender Charge, followed by Old
Payments, may be withdrawn from the Contract at any time without the imposition
of a contingent deferred sales charge. If a withdrawal is attributable all or in
part to New Payments, a contingent deferred sales charge may apply.
An Owner may withdraw the greater of 100% of cumulative earnings, or 15% of the
Accumulated Value in any calendar year, without assessment of a Withdrawal
Charge. If the Owner withdraws an amount in excess of the Withdrawal Without
Surrender Charge amount in any calendar year, the excess is subject to a
Withdrawal Charge.
CHARGES FOR SURRENDER AND WITHDRAWAL. If the Contract is surrendered or if New
Payments are withdrawn while the Contract is in force and before the Annuity
Date, a contingent deferred sales charge may be imposed. This surrender charge
never will be applied to earnings. The amount of the charge will depend upon the
number of years that the New Payments, if any, to which the withdrawal is
attributed have remained credited under the Contract. Amounts withdrawn are
deducted first from Old Payments. Then, for the purpose of calculating surrender
charges for New Payments, all amounts withdrawn are assumed to be deducted first
from the earliest New Payment and then from the next earliest New Payment and so
on, until all New Payments have been exhausted pursuant to the FIFO method of
accounting. (See "FEDERAL TAX CONSIDERATIONS" for a discussion of how
withdrawals are treated for income tax purposes.)
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The Contingent Deferred Sales Charges are as follows:
<TABLE>
<CAPTION>
YEARS FROM CHARGE AS PERCENTAGE
DATE OF OF NEW
PAYMENT PAYMENTS WITHDRAWN
- ------------- ---------------------
<S> <C>
Less than 1 7%
2 6%
3 5%
4 4%
5 3%
6 2%
Thereafter 0%
</TABLE>
The amount withdrawn equals the amount requested by the Owner plus the charge,
if any. The charge is applied as a percentage of the New Payments withdrawn, but
in no event will the total contingent deferred sales charge exceed a maximum
limit of 7% of total gross New Payments. Such total charge equals the aggregate
of all applicable contingent deferred sales charges for surrender, withdrawals
and annuitization.
REDUCTION OR ELIMINATION OF SURRENDER CHARGE. The Company will waive the
contingent deferred sales charge in the event that the Owner (or the Annuitant,
if the Owner is not an individual) becomes physically disabled after the issue
date of the Contract and before attaining age 65. Under New York Contracts, the
disability also must exist for a continuous period of at least four months. The
Company may require proof of such disability and continuing disability,
including written confirmation of receipt and approval of any claim for Social
Security Disability Benefits and reserves the right to obtain an examination by
a licensed physician of its choice and at its expense. In addition, except in
New York where not permitted by state law, the Company will waive the contingent
deferred sales charge in the event that an Owner (or the Annuitant, if the Owner
is not an individual) is: (1) admitted to a medical care facility and remains
confined there until the later of one year after the issue date or 90
consecutive days or (2) first diagnosed by a licensed physician as having a
fatal illness after the issue date of the Contract.
For purposes of the above provision, "medical care facility" means any state-
licensed facility (or, in a state that does not require licensing, a facility
that is operating pursuant to state law) providing medically necessary
in-patient care which is prescribed in writing by a licensed "physician" and
based on physical limitations which prohibit daily living in a non-institutional
setting; "fatal illness" means a condition diagnosed by a licensed physician
which is expected to result in death within two years of the diagnosis; and
"physician" means a person
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other than the Owner, Annuitant or a member of one of their families who is
state licensed to give medical care or treatment and is acting within the scope
of that license.
Where contingent deferred sales charges have been waived under any one of the
four situations discussed above, no additional payments under the Contract will
be accepted.
In addition, from time to time, where permitted by state law, the Company may
allow a reduction in or elimination of the contingent deferred sales charges,
the period during which the charges apply, or both, and/or credit additional
amounts on Contracts, when Contracts are sold to individuals or groups of
individuals in a manner that reduces sales expenses. The Company will consider
factors such as the following: (1) the size and type of group or class, and the
persistency expected from that group or class; (2) the total amount of payments
to be received and the manner in which payments are remitted; (3) the purpose
for which the Contracts are being purchased and whether that purpose makes it
likely that costs and expenses will be reduced; (4) other transactions where
sales expenses are likely to be reduced; or (5) the level of commissions paid to
selling broker-dealers or certain financial institutions with respect to
Contracts within the same group or class (for example, broker-dealers who offer
this Contract in connection with financial planning services offered on a
fee-for-service basis). The Company also may reduce or waive the contingent
deferred sales charge, and/or credit additional amounts on the Contract where
either the Owner or the Annuitant on the date of issue is within the following
classes of individuals ("eligible persons"): employees and registered
representatives of any broker-dealer which has entered into a Sales Agreement
with the Company to sell the Contract; employees of the Company, its affiliates
or subsidiaries; officers, directors, trustees and employees of any of the
Portfolios, investment managers or sub-advisers; and the spouses of and
immediate family members residing in the same household with such eligible
persons. "Immediate family members" means children, siblings, parents and
grandparents. Finally, if permitted by state law, contingent deferred sales
charges may be waived under Section 403(b) Contracts where the amount withdrawn
is being contributed to a life insurance policy issued by the Company as part of
the individual's Section 403(b) plan.
Any reduction or elimination in the amount or duration of the contingent
deferred sales charge will not discriminate unfairly among purchasers of the
Contract. The Company will not make any changes to this charge where prohibited
by law.
Pursuant to Section 11 of the 1940 Act and Rule 11a-2 thereunder, the contingent
deferred sales charge is modified to effect certain exchanges of existing
contracts issued by the Company for this Contract. See "EXCHANGE OFFER" in the
SAI.
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WITHDRAWAL WITHOUT SURRENDER CHARGE. In each calendar year, including the
calendar year in which the Contract is issued, the Company will waive the
contingent deferred sales charge, if any, on an amount ("Withdrawal Without
Surrender Charge") equal to the greatest of (1), (2) or (3):
Where (1) is: 100% of Cumulative Earnings (calculated as the Accumulated Value
as of the Valuation Date the Company receives the withdrawal
request, or the following day, reduced by the total gross
payments not previously withdrawn;
Where (2) is: 15% of the Accumulated Value as of the Valuation Date the
Company receives the withdrawal request, or the following day,
reduced by the total amount of any prior withdrawals made in the
same calendar year to which no contingent deferred sales charge
was applied;
Where (3) is: the amount calculated under the Company's life expectancy
distribution ("LED") option (see "Life Expectancy
Distributions," above) whether or not the withdrawal was part of
such distribution (applies only if Annuitant is also an Owner).
For example, an 81-year-old Owner/Annuitant with an Accumulated Value of
$15,000, of which $1,000 is Cumulative Earnings, would have a Withdrawal Without
Surrender Charge amount of $2,250, which is equal to the greatest of:
(1) Cumulative Earnings ($1,000);
(2) 15% of Accumulated Value ($2,250); or
(3) LED distribution of 10.2% of Accumulated Value ($1,530).
The Withdrawal Without Surrender Charge will be deducted first from Cumulative
Earnings. If the Withdrawal Without Surrender Charge exceeds Cumulative
Earnings, the excess amount will be deemed withdrawn from payments not
previously withdrawn on a LIFO basis. If more than one withdrawal is made during
the year, on each subsequent withdrawal the Company will waive the contingent
deferred sales charge, if any, until the entire Withdrawal Without Surrender
Charge has been withdrawn. Amounts withdrawn from a Guarantee Period Account
prior to the end of the applicable Guarantee Period may be subject to a Market
Value Adjustment.
SURRENDERS. In the case of a complete surrender, the amount received by the
Owner is equal to the entire Accumulated Value under the Contract, net of the
applicable contingent deferred sales charge on New Payments, the Contract fee
and any applicable tax withholding and adjusted for any applicable Market Value
Adjustment. Subject to the same rules applicable to withdrawals, the Company
will not assess a contingent deferred sales charge on an amount equal to the
highest Withdrawal Without Surrender Charge Amount, described above.
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Where an Owner who is a trustee under a pension plan surrenders, in whole or in
part, a Contract on a terminating employee, the trustee will be permitted to
reallocate all or a part of the total Accumulated Value under the Contract to
other contracts issued by the Company and owned by the trustee, with no
deduction for any otherwise applicable contingent deferred sales charge. Any
such reallocation will be at the unit values for the Sub-Accounts as of the
valuation date on which a written, signed request is received at the Principal
Office.
For further information on surrender and withdrawals, including minimum limits
on amount withdrawn and amount remaining under the Contract in the case of
withdrawals, and important tax considerations, see "D. Surrender" and "E.
Withdrawals" under "DESCRIPTION OF CONTRACT," and see "FEDERAL TAX
CONSIDERATIONS."
CHARGE AT THE TIME ANNUITY BENEFIT PAYMENTS BEGIN. If any commutable period
certain option or a non-commutable period certain option for less than ten years
(less than six years under a New York contract) is chosen, a contingent deferred
sales charge will be deducted from the Accumulated Value of the Contract if the
Annuity Date occurs at any time when the surrender charge would still apply had
the Contract been surrendered on the Annuity Date. (See discussion of period
certain variable annuity under "I. Description of Variable Annuity Payout
Options.")
No contingent deferred sales charge is imposed at the time of annuitization in
any Contract year under an option involving a life contingency or for any non-
commutable period certain option for ten years or more. A Market Value
Adjustment, however, may apply. See "GUARANTEE PERIOD ACCOUNTS."
If an owner of a fixed annuity contract issued by the Company wishes to elect a
variable annuity payout option, the Company may permit such owner to exchange,
at the time of annuitization, the fixed contract for a Contract offered in this
Prospectus. The proceeds of the fixed contract, minus any contingent deferred
sales charge applicable under the fixed contract if a period certain option is
chosen, will be applied towards the variable annuity option desired by the
owner. The number of Annuity Units under the option will be calculated using the
Annuity Unit values as of the 15th of the month preceding the Annuity Date.
E. TRANSFER CHARGE
The Company currently makes no charge for processing transfers. The Company
guarantees that the first 12 transfers in a Contract year will be free of
transfer charge, but reserves the right to assess a charge, guaranteed never to
exceed $25, for each subsequent transfer in a Contract year. For more
information, see "C. Transfer Privilege" under "DESCRIPTION OF THE CONTRACT."
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GUARANTEE PERIOD ACCOUNTS
Due to certain exemptive and exclusionary provisions in the securities laws,
interests in the Guarantee Period Accounts and the Fixed Account are not
registered as an investment company under the provisions of the Securities Act
of 1933 (the "1933 Act") or the 1940 Act. Accordingly, the staff of the SEC has
not reviewed the disclosures in this Prospectus relating to the Guarantee Period
Accounts or the Fixed Account. Nevertheless, disclosures regarding the Guarantee
Period Accounts and the Fixed Account of the Contract or any benefits offered
under these accounts may be subject to the provisions of the 1933 Act relating
to the accuracy and completeness of statements made in the Prospectus.
INVESTMENT OPTIONS. In most jurisdictions, there currently are nine Guarantee
Periods available under the Contract with durations of two, three, four, five,
six, seven, eight, nine and ten years. Each Guarantee Period Account established
for the Owner is accounted for separately in a non-unitized segregated account.
Each Guarantee Period Account provides for the accumulation of interest at a
Guaranteed Interest Rate. The Guaranteed Interest Rate on amounts allocated or
transferred to a Guarantee Period Account is determined from time to time by the
Company in accordance with market conditions; however, once an interest rate is
in effect for a Guarantee Period Account, the Company may not change it during
the duration of the Guarantee Period. In no event will the Guaranteed Interest
Rate be less than 3%.
To the extent permitted by law, the Company reserves the right at any time to
offer Guarantee Periods with durations that differ from those which were
available when a Contract initially was issued and to stop accepting new
allocations, transfers or renewals to a particular Guarantee Period. Owners may
allocate net payments or make transfers from any of the Sub-Accounts, the Fixed
Account or an existing Guarantee Period Account to establish a new Guarantee
Period Account at any time prior to the Annuity Date. Transfers from a Guarantee
Period Account on any date other than on the day following the expiration of
that Guarantee Period will be subject to a Market Value Adjustment. The Company
establishes a separate investment account each time the Owner allocates or
transfers amounts to a Guarantee Period Account except that amounts allocated to
the same Guarantee Period on the same day will be treated as one Guarantee
Period Account. The minimum that may be allocated to establish a Guarantee
Period Account is $1,000. If less than $1,000 is allocated, the Company reserves
the right to apply that amount to the Kemper Money Market Portfolio. The Owner
may allocate amounts to any of the Guarantee Periods available.
At least 45 days, but not more than 75 days, prior to the end of a Guarantee
Period, the Company will notify the Owner in writing of the expiration of that
Guarantee Period. At the end of a Guarantee Period the Owner may transfer
amounts to the Sub-Accounts, the Fixed Account or establish a new Guarantee
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Period Account of any duration then offered by the Company without a Market
Value Adjustment. If reallocation instructions are not received at the Principal
Office before the end of a Guarantee Period, the account value automatically
will be applied to a new Guarantee Period Account with the same duration unless
(1) less than $1,000 would remain in the Guarantee Period Account on the
expiration date, or (2) the Guarantee Period would extend beyond the Annuity
Date or is no longer available. In such cases, the Guarantee Period Account
value will be transferred to the Kemper Money Market Portfolio. Where amounts
have been renewed automatically in a new Guarantee Period, the Company will
allow transfers out of the Guarantee Period Account without application of a
Market Value Adjustment if the Owner's transfer request is received within ten
days of the renewal date.
MARKET VALUE ADJUSTMENT. No Market Value Adjustment will be applied to
transfers, withdrawals or a surrender from a Guarantee Period Account on the
expiration of its Guarantee Period. In addition, no negative Market Value
Adjustment will be applied to a death benefit, although a positive Market Value
Adjustment, if any, will be applied to increase the value of the death benefit
when based on the Contract's Accumulated Value. See "F. Death Benefit." A Market
Value Adjustment will apply to all other transfers, withdrawals or a surrender.
Amounts applied under an annuity option are treated as withdrawals when
calculating the Market Value Adjustment. The Market Value Adjustment will be
determined by multiplying the amount taken from each Guarantee Period Account
before deduction of any surrender charge by the market value factor. The market
value factor for each Guarantee Period Account is equal to:
[(1+i)/(1+j)](n/365)-1
where: i is the Guaranteed Interest Rate expressed as a decimal (for example:
3% = 0.03) being credited to the current Guarantee Period;
j is the new Guaranteed Interest Rate, expressed as a decimal, for a
Guarantee Period with a duration equal to the number of years remaining
in the current Guarantee Period, rounded to the next higher number of
whole years. If that rate is not available, the Company will use a
suitable rate or index allowed by the Department of Insurance; and
n is the number of days remaining from the effective Valuation Date to
the end of the current Guarantee Period.
Based on the application of this formula, the value of a Guarantee Period
Account will increase after the Market Value Adjustment is applied if the then
current market rates are lower than the rate being credited to the Guarantee
Period Account. Similarly, the value of a Guarantee Period Account will decrease
after the Market Value Adjustment is applied if the then current market rates
are higher than the rate being credited to the Guarantee Period Account. The
Market
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Value Adjustment is limited, however, so that even if the account value is
decreased after application of a Market Value Adjustment, it will equal or
exceed the Owner's principal plus 3% earnings per year less applicable Contract
fees. Conversely, if the then current market rates are lower and the account
value is increased after the Market Value Adjustment is applied, the increase in
value also is affected by the minimum guaranteed rate of 3% such that the amount
that will be added to the Guarantee Period Account is limited to the difference
between the amount earned and the 3% minimum guaranteed earnings. For examples
of how the Market Value Adjustment works, See APPENDIX B.
PROGRAM TO PROTECT PRINCIPAL AND PROVIDE GROWTH POTENTIAL. Under this feature,
the Owner elects a Guarantee Period and one or more Sub-Accounts. The Company
then will compute the proportion of the initial payment that must be allocated
to the Guarantee Period selected, assuming no transfers or withdrawals, in order
to ensure that on the last day of the Guarantee Period it will equal the amount
of the entire initial payment. The required amount then will be allocated to the
pre-selected Guarantee Period Account and the remaining balance to the other
investment options selected by the Owner in accordance with the procedures
described in "A. Payments."
WITHDRAWALS. Prior to the Annuity Date, the Owner may make withdrawals of
amounts held in the Guarantee Period Accounts. Withdrawals from these accounts
will be made in the same manner and be subject to the same rules as set forth
under "D. Surrender" and "E. Withdrawals." In addition, the following provisions
also apply to withdrawals from a Guarantee Period Account: (1) a Market Value
Adjustment will apply to all withdrawals, including Withdrawals without
Surrender Charge, unless made at the end of the Guarantee Period; and (2) the
Company reserves the right to defer payments of amounts withdrawn from a
Guarantee Period Account for up to six months from the date it receives the
withdrawal request. If deferred for 30 days or more, the Company will pay
interest on the amount deferred at a rate of at least 3%.
In the event that a Market Value Adjustment applies to a withdrawal of a portion
of the value of a Guarantee Period Account, it will be calculated on the amount
requested and deducted or added to the amount remaining in the Guarantee Period
Account. If the entire amount in a Guarantee Period Account is requested, the
adjustment will be made to the amount payable. If a contingent deferred sales
charge applies to the withdrawal, it will be calculated as set forth under "D.
Contingent Deferred Sales Charge" after application of the Market Value
Adjustment.
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FEDERAL TAX CONSIDERATIONS
The effect of federal income taxes on the value of the Contract, on withdrawals
or surrenders, on annuity benefit payments, and on the economic benefit to the
Owner, Annuitant, or beneficiary depends upon a variety of factors. The
following discussion is based upon the Company's understanding of current
federal income tax laws as they are interpreted as of the date of this
Prospectus. No representation is made regarding the likelihood of continuation
of current federal income tax laws or of current interpretations by the IRS.
IT SHOULD BE RECOGNIZED THAT THE FOLLOWING DISCUSSION OF FEDERAL INCOME TAX
ASPECTS OF AMOUNTS RECEIVED UNDER VARIABLE ANNUITY CONTRACTS IS NOT EXHAUSTIVE,
DOES NOT PURPORT TO COVER ALL SITUATIONS AND IS NOT INTENDED AS TAX ADVICE. A
QUALIFIED TAX ADVISER ALWAYS SHOULD BE CONSULTED WITH REGARD TO THE APPLICATION
OF LAW TO INDIVIDUAL CIRCUMSTANCES.
The Company intends to make a charge for any effect which the income, assets or
existence of the Contract, the Variable Account or the Sub-Accounts may have
upon its tax. The Variable Account presently is not subject to tax, but the
Company reserves the right to assess a charge for taxes should the Variable
Account at any time become subject to tax. Any charge for taxes will be assessed
on a fair and equitable basis in order to preserve equity among classes of
Owners and with respect to each separate account as though that separate account
were a separate taxable entity.
The Variable Account is considered a part of and taxed with the operations of
the Company. The Company is taxed as a life insurance company under Subchapter L
of the Code. The Company files a consolidated tax return with its affiliates.
The IRS has issued regulations relating to the diversification requirements for
variable annuity and variable life insurance contracts under Section 817(h) of
the Code. The regulations provide that the investments of a segregated asset
account underlying a variable annuity contract are adequately diversified if no
more than 55% of the value of its assets is represented by any one investment,
no more than 70% by any two investments, no more than 80% by any three
investments, and no more than 90% by any four investments. If the investments
are not adequately diversified, the income on the Contract, for any taxable year
of the Owner, would be treated as ordinary income received or accrued by the
Owner. It is anticipated that the Portfolios will comply with the
diversification requirements.
A. QUALIFIED AND NON-QUALIFIED CONTRACTS
From a federal tax viewpoint there are two types of variable annuity contracts:
"qualified" contracts and "non-qualified" contracts. A qualified contract is one
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that is purchased in connection with a retirement plan which meets the
requirements of Sections 401, 403 or 408 of the Code, while a non-qualified
contract is one that is not purchased in connection with one of the indicated
retirement plans. The tax treatment for certain withdrawals or surrenders will
vary according to whether they are made from a qualified contract or a
non-qualified contract. For more information on the tax provisions applicable to
qualified Contracts, see "D. Provisions Applicable to Qualified Employer Plans."
B. TAXATION OF THE CONTRACTS IN GENERAL
The Company believes that the Contract described in this Prospectus will, with
certain exceptions (see "Non-Natural Owners" below), be considered an annuity
contract under Section 72 of the Code. This section governs the taxation of
annuities. The following discussion concerns annuities subject to Section 72.
WITHDRAWALS PRIOR TO ANNUITIZATION. With certain exceptions, any increase in
the Contract's Accumulated Value is not taxable to the Owner until it is
withdrawn from the Contract. If the Contract is surrendered or amounts are
withdrawn prior to the Annuity Date, any withdrawal of investment gain in value
over the cost basis of the Contract will be taxed as ordinary income. Under the
current provisions of the Code, amounts received under an annuity contract prior
to annuitization (including payments made upon the death of the annuitant or
owner), generally are first attributable to any investment gains credited to the
contract over the taxpayer's "investment in the contract." Such amounts will be
treated as gross income subject to federal income taxation. "Investment in the
contract" is the total of all payments to the Contract which were not excluded
from the Owner's gross income less any amounts previously withdrawn which were
not included in income. Section 72(e)(11)(A)(ii) requires that all non-qualified
deferred annuity contracts issued by the same insurance company to the same
owner during a single calendar year be treated as one contract in determining
taxable distributions.
ANNUITY PAYOUTS AFTER ANNUITIZATION. When annuity benefit payments are
commenced under the Contract, generally a portion of each payment may be
excluded from gross income. The excludable portion generally is determined by a
formula that establishes the ratio that the investment in the Contract bears to
the expected return under the Contract. The portion of the payment in excess of
this excludable amount is taxable as ordinary income. Once all the investment in
the Contract is recovered, the entire payment is taxable. If the Annuitant dies
before the total investment in the Contract is recovered, a deduction for the
difference is allowed on the Annuitant's final tax return.
PENALTY ON DISTRIBUTION. A 10% penalty tax may be imposed on the withdrawal of
investment gains if the withdrawal is made prior to age 59 1/2. The penalty tax
will not be imposed on withdrawals taken on or after age 59 1/2, or if
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the withdrawal follows the death of the owner (or, if the Owner is not an
individual, the death of the primary annuitant, as defined in the Code) or, in
the case of the Owner's "total disability" (as defined in the Code).
Furthermore, under Section 72 of the Code, this penalty tax will not be imposed,
irrespective of age, if the amount received is one of a series of "substantially
equal" periodic payments made at least annually for the life or life expectancy
of the payee. This requirement is met when the owner elects to have
distributions made over the Owner's life expectancy, or over the joint life
expectancy of the Owner and beneficiary. The requirement that the amount be paid
out as one of a series of "substantially equal" periodic payments is met when
the number of units withdrawn to make each distribution is substantially the
same. Any modification, other than by reason of death or disability, of
distributions which are part of a series of substantially equal periodic
payments that occurs before the Owner's age 59 1/2 or five years, will subject
the Owner to the 10% penalty tax on the prior distributions. In addition to the
exceptions above, the penalty tax will not apply to withdrawals from a qualified
contract made to an employee who has terminated employment after reaching age
55.
In a Private Letter Ruling, the IRS took the position that where distributions
from a variable annuity contract were determined by amortizing the accumulated
value of the contract over the taxpayer's remaining life expectancy (such as
under the Contract's LED option), and the option could be changed or terminated
at any time, the distributions failed to qualify as part of a "series of
substantially equal payments" within the meaning of Section 72 of the Code. The
distributions, therefore, were subject to the 10% federal penalty tax. This
Private Letter Ruling may be applicable to an Owner who receives distributions
under the LED option prior to age 59 1/2. Subsequent Private Letter Rulings,
however, have treated LED-type withdrawal programs as effectively avoiding the
10% penalty tax. The position of the IRS on this issue is unclear.
ASSIGNMENTS OR TRANSFERS. If the Owner transfers (assigns) the Contract to
another individual as a gift prior to the Annuity Date, the Code provides that
the Owner will incur taxable income at the time of the transfer. An exception is
provided for certain transfers between spouses. The amount of taxable income
upon such taxable transfer is equal to any investment gain in value over the
Owner's cost basis at the time of the transfer. The transfer also is subject to
federal gift tax provisions. Where the Owner and Annuitant are different
persons, the change of ownership of the Contract to the Annuitant on the Annuity
Date, as required under the Contract, is a gift and will be taxable to the Owner
as such; however, the Owner will not incur taxable income. Instead, the
Annuitant will incur taxable income upon receipt of annuity benefit payments as
discussed above.
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NON-NATURAL OWNERS. As a general rule, deferred annuity contracts owned by
"non-natural persons" (e.g., a corporation) are not treated as annuity contracts
for federal tax purposes, and the investment income attributable to
contributions made after February 28, 1986 is taxed as ordinary income that is
received or accrued by the owner during the taxable year. This rule does not
apply to annuity contracts purchased with a single payment when the annuity date
is no later than a year from the issue date or to deferred annuities owned by
qualified employer plans, estates, employers with respect to a terminated
pension plan, and entities other than employers, such as a trust, holding an
annuity as an agent for a natural person. This exception, however, will not
apply in cases of any employer who is the owner of an annuity contract under a
non-qualified deferred compensation plan.
DEFERRED COMPENSATION PLANS OF STATE AND LOCAL GOVERNMENTS AND TAX-EXEMPT
ORGANIZATIONS. Under Section 457 of the Code, deferred compensation plans
established by governmental and certain other tax-exempt employers for their
employees may invest in annuity contracts. Contributions and investment earnings
are not taxable to employees until distributed; however, with respect to
payments made after February 28, 1986, a contract owned by a state or local
government or a tax-exempt organization will not be treated as an annuity under
Section 72 as well. In addition, plan assets are treated as property of the
employer and are subject to the claims of the employer's general creditors.
C. TAX WITHHOLDING
The Code requires withholding with respect to payments or distributions from
non-qualified contracts and IRAs, unless a taxpayer elects not to have
withholding. A 20% withholding requirement applies to distributions from most
other qualified contracts. In addition, the Code requires reporting to the IRS
of the amount of income received with respect to payment or distributions from
annuities.
The tax treatment of certain withdrawals or surrenders of the non-qualified
Contracts offered by this Prospectus will vary according to whether the amount
withdrawn or surrendered is allocable to an investment in the Contract made
before or after certain dates.
D. PROVISIONS APPLICABLE TO QUALIFIED EMPLOYER PLANS
The tax rules applicable to qualified employer plans, as defined by the Code,
are complex and vary according to the type of plan. Benefits under a qualified
plan may be subject to that plan's terms and conditions irrespective of the
terms and conditions of any annuity contract used to fund such benefits. As
such, the
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following is simply a general description of various types of qualified plans
that may use the Contract. Before purchasing any annuity contract for use in
funding a qualified plan, more specific information should be obtained.
A qualified Contract may include special provisions (endorsements) changing or
restricting rights and benefits otherwise available to an Owner of a
non-qualified Contract. Individuals purchasing a qualified Contract should
carefully review any such changes or limitations which may include restrictions
to ownership, transferability, assignability, contributions and distributions.
CORPORATE AND SELF-EMPLOYED ("H.R. 10" AND "KEOGH") PENSION AND PROFIT SHARING
PLANS. Sections 401(a), 401(k) and 403(a) of the Code permit business employers
and certain associations to establish various types of tax-favored retirement
plans for employees. The Self-Employed Individuals' Tax Retirement Act of 1962,
as amended, permits self-employed individuals to establish similar plans for
themselves and their employees. Employers intending to use qualified Contracts
in connection with such plans should seek competent advice as to the suitability
of the Contract to their specific needs and as to applicable Code limitations
and tax consequences.
The Company can provide prototype plans for certain pension or profit sharing
plans for review by the plan's legal counsel. For information, ask your
financial representative.
INDIVIDUAL RETIREMENT ANNUITIES. Section 408 of the Code permits eligible
individuals to contribute to an individual retirement program known as an
Individual Retirement Annuity ("IRA"). Note: this term covers all IRAs permitted
under Section 408(b) of the Code, including Roth IRAs. IRAs are subject to
limits on the amounts that may be contributed, the persons who may be eligible,
and on the time when distributions may commence. In addition, certain
distributions from other types of retirement plans may be "rolled over," on a
tax-deferred basis, to an IRA. Purchasers of an IRA Contract will be provided
with supplementary information as may be required by the IRS or other
appropriate agency, and will have the right to revoke the Contract as described
in this Prospectus. See "B. Right to Revoke Contract." Eligible employers that
meet specified criteria may establish simplified employee pension plans
(SEP-IRAs) or SIMPLE IRA plans for their employees using IRAs. Employer
contributions that may be made to such plans are larger than the amounts that
may be contributed to regular IRAs, and may be deductible to the employer.
TAX-SHELTERED ANNUITIES ("TSAS"). Under the provisions of Section 403(b) of the
Code, payments made to annuity contracts purchased for employees under annuity
plans adopted by public school systems and certain organizations which are tax
exempt under Section 501(c)(3) of the Code are excludable from the gross income
of such employees to the extent that total annual payments do not exceed the
maximum contribution permitted under the Code. Purchasers of TSA Contracts
should seek competent advice as to eligibility, limitations on permissible
payments and other tax consequences associated with the Contracts.
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Withdrawals or other distributions attributable to salary reduction
contributions (including earnings thereon) made to a TSA contract after December
31, 1988, may not begin before the employee attains age 59 1/2, separates from
service, dies or becomes disabled. In the case of hardship, an Owner may
withdraw amounts contributed by salary reduction, but not the earnings on such
amounts. Even though a distribution may be permitted under these rules (e.g.,
for hardship or after separation from service), it may be subject to a 10%
penalty tax as a premature distribution, in addition to income tax.
TEXAS OPTIONAL RETIREMENT PROGRAM. Distributions under a TSA Contract issued to
participants in the Texas Optional Retirement Program may not be received except
in the case of the participant's death, retirement or termination of employment
in the Texas public institutions of higher education. These additional
restrictions are imposed under the Texas Government Code and a prior opinion of
the Texas Attorney General.
REPORTS
An Owner is sent a report semi-annually which states certain financial
information about the Portfolios. The Company also will furnish an annual report
to the Owner containing a statement of his or her account, including unit values
and other information as required by applicable law, rules and regulations.
LOANS (QUALIFIED CONTRACTS ONLY)
Loans are available to owners of TSA Contracts (i.e., contracts issued under
Section 403(b) of the Code) and to Contracts issued to plans qualified under
Sections 401(a) and 401(k) of the Code. Loans are subject to provisions of the
Code and to applicable qualified retirement plan rules. Tax advisors and plan
fiduciaries should be consulted prior to exercising loan privileges.
Loaned amounts will be withdrawn first from Sub-Account and Fixed Account values
on a pro-rata basis until exhausted. Thereafter, any additional amounts will be
withdrawn from the Guarantee Period Accounts (pro-rata by duration and LIFO
within each duration), subject to any applicable Market Value Adjustments. The
maximum loan amount will be determined under the Company's maximum loan formula.
The minimum loan amount is $1,000. Loans will be secured by a security interest
in the Contract and the amount borrowed will be transferred to a loan asset
account within the Company's General Account, where it will accrue interest at a
specified rate below the then current loan rate. Generally, loans must be repaid
within five years or less, and repayments must be made quarterly and in
substantially equal amounts. Repayments will be allocated pro rata in accordance
with the most recent payment allocation, except that any allocations to a
Guarantee Period Account will be allocated to the Kemper Money Market Portfolio
instead.
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ADDITION, DELETION OR SUBSTITUTION OF INVESTMENTS
The Company reserves the right, subject to applicable law to make additions to,
deletions from, or substitutions for the shares that are held in the
Sub-Accounts or that the Sub-Accounts may purchase. If the shares of any
Portfolio no longer are available for investment or if in the Company's judgment
further investment in any Portfolio should become inappropriate in view of the
purposes of the Variable Account or the affected Sub-Account, the Company may
redeem the shares of that Portfolio and substitute shares of another registered
open-end management company. The Company will not substitute any shares
attributable to a Contract interest in a Sub-Account without notice to the Owner
and prior approval of the SEC and state insurance authorities, to the extent
required by the 1940 Act or other applicable law. The Variable Account may, to
the extent permitted by law, purchase other securities for other contracts or
permit a conversion between contracts upon request by an Owner.
The Company also reserves the right to establish additional sub-accounts of the
Variable Account, each of which would invest in shares corresponding to a new
portfolio or in shares of another investment company having a specified
investment objective. Subject to applicable law and any required SEC approval,
the Company may, in its sole discretion, establish new sub-accounts or eliminate
one or more Sub-Accounts if marketing needs, tax considerations or investment
conditions warrant. Any new sub-accounts may be made available to existing
Owners on a basis to be determined by the Company.
Shares of the Portfolios also are issued to separate accounts of other insurance
companies which issue variable life contracts ("mixed funding"). Shares of the
Portfolios also are issued to other unaffiliated insurance companies ("shared
funding"). It is conceivable that in the future such mixed funding or shared
funding may be disadvantageous for variable life owners or variable annuity
owners. Although the Company, Kemper IFS and Scudder VLIF do not currently
foresee any such disadvantages to either variable life insurance owners or
variable annuity owners, the Company and the trustees of Kemper IFS and Scudder
VLIF intend to monitor events in order to identify any material conflicts
between such Owners and to determine what action, if any, should be taken in
response thereto. If the trustees were to conclude that separate portfolios
should be established for variable life and variable annuity separate accounts,
the Company will bear the attendant expenses.
If any of these substitutions or changes is made, the Company may, by
appropriate endorsement, change the Contract to reflect the substitution or
change, and will notify Owners of all such changes. If the Company deems it to
be in the best interest of Owners, and subject to any approvals that may be
required under applicable law, the Variable Account or any Sub-Accounts may be
operated as a
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management company under the 1940 Act, may be deregistered under the 1940 Act if
registration no longer is required, or may be combined with other sub-accounts
or other separate accounts of the Company.
The Company reserves the right, subject to compliance with applicable law and to
the provisions of the Participation Agreements, to (1) transfer assets from the
Variable Account or Sub-Account to another of the Company's variable accounts or
sub-accounts having assets of the same class, (2) to operate the Variable
Account or any Sub-Account as a management investment company under the 1940 Act
or in any other form permitted by law, (3) to deregister the Variable Account
under the 1940 Act in accordance with the requirements of the 1940 Act, (4) to
substitute the shares of any other registered investment company for the
Portfolio shares held by a Sub-Account, in the event that Portfolio shares are
unavailable for investment, or if the Company determines that further investment
in such Portfolio shares is inappropriate in view of the purpose of the Sub-
Account, (5) to change the methodology for determining the net investment
factor, and (6) to change the names of the Variable Account or of the Sub-
Accounts. In no event will the changes described be made without notice to
Owners in accordance with the 1940 Act.
CHANGES TO COMPLY WITH LAW AND AMENDMENTS
The Company reserves the right, without the consent of Owners, to suspend sales
of the Contract as presently offered, and to make any change to provisions of
the Contract to comply with, or give Owners the benefit of, any federal or state
statute, rule or regulation, including but not limited to requirements for
annuity contracts and retirement plans under the Code and pertinent regulations
or any state statute or regulation.
VOTING RIGHTS
The Company will vote Portfolio shares held by each Sub-Account in accordance
with instructions received from Owners and, after the Annuity Date, from the
Annuitants. Each person having a voting interest in a Sub-Account will be
provided with proxy materials of the Portfolio, together with a form with which
to give voting instructions to the Company. Shares for which no timely
instructions are received will be voted in proportion to the instructions which
are received. The Company also will vote shares in a Sub-Account that it owns
and which are not attributable to the Contract in the same proportion. If the
1940 Act or any rules thereunder should be amended, or if the present
interpretation of the 1940 Act or such rules should change, and as a result the
Company determines that it is permitted to vote shares in its own right, whether
or not such shares are attributable to the Contract, the Company reserves the
right to do so.
The number of votes which an Owner or Annuitant may cast will be determined by
the Company as of the record date established by the Portfolio. During the
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accumulation phase, the number of Portfolio shares attributable to each Owner
will be determined by dividing the dollar value of the Accumulation Units of the
Sub-Account credited to the Contract by the net asset value of one Portfolio
share. During the annuity payout phase, the number of Portfolio shares
attributable to each Annuitant will be determined by dividing the reserve held
in each Sub-Account for the Annuitant's variable annuity by the net asset value
of one Portfolio share. Ordinarily, the Annuitant's voting interest in the
Portfolio will decrease as the reserve for the variable annuity is depleted.
DISTRIBUTION
The Contract offered by this Prospectus may be purchased from certain
independent broker-dealers, including representatives of Allmerica Investments,
Inc. (the Principal Underwriter) which are registered under the Securities
Exchange Act of 1934 and are members of the National Association of Securities
Dealers, Inc. ("NASD").
The Company pays commissions, not to exceed 6.0% of payments, to broker-dealers
which sell the Contract. Alternative commission schedules are available with
lower initial commission amounts based on payments, plus ongoing annual
compensation of up to 1% of Contract value. To the extent permitted by NASD
rules, promotional incentives or payments also may be provided to such broker-
dealers based on sales volumes, the assumption of wholesaling functions, or
other sales-related criteria. Additional payments may be made for other services
not directly related to the sale of the Contract, including the recruitment and
training of personnel, production of promotional literature, and similar
services.
The Company intends to recoup commissions and other sales expenses through a
combination of anticipated contingent deferred sales charges and profits from
the Company's General Account. Commissions paid on the Contract, including
additional incentives or payments, do not result in any additional charge to
Owners or to the Variable Account. Any contingent deferred sales charges
assessed on a Contract will be retained by the Company.
Owners may direct any inquiries to their financial representative or to
Allmerica Investments, Inc., 440 Lincoln Street, Worcester, MA 01653, Telephone
1-800-782-8380.
SERVICES
The Company receives fees from the investment advisers or other service
providers of certain Underlying Portfolios in return for providing certain
services to Owners. Currently, the Company receives service fees with respect to
the Scudder International Portfolio, Scudder Global Discovery Portfolio, Scudder
Capital Growth Portfolio and Scudder Growth and Income Portfolio. The Company
receives service fees at an annual rate of 0.15% per annum of the aggregate net
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asset value of shares held by the Variable Account. The Company may in the
future render services for which it will receive compensation from the
investment advisers or other service providers of other Underlying Portfolios.
LEGAL MATTERS
There are no legal proceedings pending to which the Variable Account is a party.
FURTHER INFORMATION
A Registration Statement under the 1933 Act relating to this offering has been
filed with the SEC. Certain portions of the Registration Statement and
amendments have been omitted in this Prospectus pursuant to the rules and
regulations of the SEC. The omitted information may be obtained from the SEC's
principal office in Washington, DC, upon payment of the SEC's prescribed fees.
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APPENDIX A
MORE INFORMATION ABOUT THE FIXED ACCOUNT
Because of exemption and exclusionary provisions in the securities laws,
interests in the Fixed Account generally are not subject to regulation under the
provisions of the 1933 Act or the 1940 Act. Disclosures regarding the fixed
portion of the Contract and the Fixed Account may be subject to the provisions
of the 1933 Act concerning the accuracy and completeness of statements made in
this Prospectus. The disclosures in this APPENDIX A have not been reviewed by
the SEC.
The Fixed Account is part of the Company's General Account which is made up of
all of the general assets of the Company other than those allocated to separate
accounts. Allocations to the Fixed Account become part of the assets of the
Company, and are used to support insurance and annuity obligations. A portion or
all of net payments may be allocated to accumulate at a fixed rate of interest
in the Fixed Account. Such net amounts are guaranteed by the Company as to
principal and a minimum rate of interest. Under the Contract, the minimum
interest which may be credited on amounts allocated to the Fixed Account is 3%
compounded annually. Additional "Excess Interest" may or may not be credited at
the sole discretion of the Company.
If the Contract is surrendered, or if an amount in excess of the Withdrawal
Without Surrender Charge Amount is withdrawn while the Contract is in force and
before the Annuity Date, a contingent deferred sales charge is imposed if such
event occurs before the payments attributable to the surrender or withdrawal
have been credited to the Contract for at least six full Contract years.
To the extent permitted by state law, the Company reserves the right, from time
to time, to credit an enhanced interest rate to certain initial and/or
subsequent payments ("eligible payments") which are deposited into the Fixed
Account under an Automatic Transfer Option (dollar cost averaging election) that
uses the Fixed Account as the source account from which automatic transfers are
then processed. The following are not considered eligible payments: amounts
transferred into the Fixed Account from the Variable Account and/or the
Guarantee Period Accounts; amounts already in the Fixed Account at the time an
eligible payment is deposited and amounts transferred to the Contract from
another annuity contract issued by the Company.
An eligible payment must be automatically transferred out of the Fixed Account
over a continuous six month period. The enhanced rate will apply during the six
month period to any portion of the eligible payment remaining in the Fixed
Account. Amounts automatically transferred out of the Fixed Account will no
longer earn the enhanced rate of interest and, as of the date of transfer, will
be subject to the variable investment performance of the sub-account(s)
transferred
A-1
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into. If the automatic transfer option is terminated prior to the end of the six
month period, the enhanced rate will no longer apply. The Company reserves the
right to extend the period of time that the enhanced rate will apply.
A-2
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APPENDIX B
SURRENDER CHARGES AND THE MARKET VALUE ADJUSTMENT
PART 1: SURRENDER CHARGES
FULL SURRENDER
Assume a Payment of $50,000 is made on the issue date and no additional payments
are made. Assume there are no withdrawals and that the Withdrawal Without
Surrender Charge amount is equal to the greater of 15% of the current
Accumulated Value or the accumulated earnings in the Contract. The table below
presents examples of the surrender charge resulting from a full surrender of the
Owners' Contract, based on hypothetical Accumulated Values.
<TABLE>
<CAPTION>
HYPOTHETICAL FREE SURRENDER
ACCOUNT ACCUMULATED WITHDRAWAL CHARGE SURRENDER
YEAR VALUE AMOUNT PERCENTAGE CHARGE
- --------- ------------- ------------- --------------- ------------
<S> <C> <C> <C> <C>
1 $ 54,000.00 $ 8,100.00 7% $ 3,213.00
2 58,320.00 8,748.00 6% 2,974.32
3 62,985.60 12,985.60 5% 2,500.00
4 68,024.45 18,024.45 4% 2,000.00
5 73,466.40 23,466.40 3% 1,500.00
6 79,343.72 29,343.72 2% 1,000.00
7 85,691.21 35,691.21 0% 0.00
</TABLE>
WITHDRAWAL
Assume a Payment of $50,000 is made on the issue date and no additional payments
are made. Assume that the Withdrawal Without Surrender Charge amount is equal to
the greater of 15% of the current Accumulated Value or the accumulated earnings
in the contract and there are withdrawals as detailed below. The table below
presents examples of the surrender charge resulting from withdrawals from the
Owners' Contract, based on hypothetical Accumulated Values.
<TABLE>
<CAPTION>
HYPOTHETICAL FREE SURRENDER
ACCOUNT ACCUMULATED WITHDRAWAL CHARGE SURRENDER
YEAR VALUE WITHDRAWAL AMOUNT PERCENTAGE CHARGE
- --------- ------------- ------------- ------------- ------------- -----------
<S> <C> <C> <C> <C> <C>
1 $ 54,000.00 $ 0.00 $ 8,100.00 7% $ 0.00
2 58,320.00 0.00 8,748.00 6% 0.00
3 62,985.60 0.00 12,985.60 5% 0.00
4 68,024.45 30,000.00 18,024.45 4% 479.02
5 41,066.40 10,000.00 6,159.96 3% 115.20
6 33,551.72 5,000.00 5,032.76 2% 0.00
7 30,835.85 10,000.00 4,625.38 0% 0.00
</TABLE>
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PART 2: MARKET VALUE ADJUSTMENT
The market value factor is: [(1+i)/(1+j)](n/365) -1
The following examples assume:
1. The payment was allocated to a ten-year Guarantee Period Account with a
Guaranteed Interest Rate of 8%.
2. The date of surrender is seven years (2,555 days) from the expiration
date.
3. The value of the Guarantee Period Account is equal to $62,985.60 at the
end of three years.
4. No transfers or withdrawals affecting this Guarantee Period Account have
been made.
5. Surrender charges, if any, are calculated in the same manner as shown in
the examples in Part 1.
NEGATIVE MARKET VALUE ADJUSTMENT (UNCAPPED)
Assume that on the date of surrender, the current rate (j) is 10.00% or 0.10
The market value factor = [(1+i)/(1+j)](n/365)-1
= [(1+.08)/(1+.10)](2555/365)-1
= (.98182)(7)-1
= -.12054
The market value adjustment = the market value factor multiplied by the
withdrawal
= -.12054 X $62,985.60
= -$7,592.11
POSITIVE MARKET VALUE ADJUSTMENT (UNCAPPED)
Assume that on the date of surrender, the current rate (j) is 7.00% or 0.07
The market value factor = [(1+i)/(1+j)](n/365)-1
= [(1+.08)/(1+.07)](2555/365)-1
= (1.0093)(7)-1
= .06694
The market value adjustment = the market value factor multiplied by the
withdrawal
= .06694 X $62,985.60
= $4,216.26
B-2
<PAGE>
NEGATIVE MARKET VALUE ADJUSTMENT (CAPPED)
Assume that on the date of surrender, the current rate (j) is 11.00% or 0.11
The market value factor = [(1+i)/(1+j)](n/365)-1
= [(1+.08)/(1+.11)](2555/365)-1
= (.97297)(7)-1
= -.17454
The market value adjustment = Minimum of the market value factor multiplied by
the withdrawal or the negative of the excess
interest earned over 3%
= Minimum of (-.17454 X $62,985.60 or
-$8,349.25)
= Minimum of (-$10,993.51 or -$8,349.25)
= -$8,349.25
POSITIVE MARKET VALUE ADJUSTMENT (CAPPED)
Assume that on the date of surrender, the current rate (j) is 6.00% or 0.06
The market value factor = [(1+i)/(1+j)](n/365)-1
= [(1+.08)/(1+.06)](2555/365)-1
= (1.01887)(7)-1
= .13981
The market value adjustment = Minimum of the market value factor multiplied by
the withdrawal or the excess interest earned over
3%
The market value factor = Minimum of (.13981 X $62,985.60 or $8,349.25)
= Minimum of ($8,806.02 or $8,349.25)
= $8,349.25
B-3
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
STATEMENT OF ADDITIONAL INFORMATION
OF
FLEXIBLE PAYMENT DEFERRED VARIABLE AND FIXED ANNUITY CONTRACTS FUNDED THROUGH
SUB-ACCOUNTS OF
SEPARATE ACCOUNT KG
INVESTING IN SHARES OF INVESTORS FUND SERIES AND
SCUDDER VARIABLE LIFE INVESTMENT FUND
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS. IT SHOULD BE READ
IN CONJUNCTION WITH THE PROSPECTUS FOR THE ABOVE SUB-ACCOUNTS OF SEPARATE
ACCOUNT KG DATED MAY 1, 1998 ("THE PROSPECTUS"). THE PROSPECTUS MAY BE OBTAINED
FROM ANNUITY CLIENT SERVICES, FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY,
INC., 440 LINCOLN STREET, WORCESTER, MASSACHUSETTS 01653, TELEPHONE
1-800-782-8380.
DATED MAY 1, 1998
1
<PAGE>
TABLE OF CONTENTS
GENERAL INFORMATION AND HISTORY. . . . . . . . . . . . . . . . . . . . . . . . 2
TAXATION OF THE CONTRACT, THE VARIABLE ACCOUNT AND THE
COMPANY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
SERVICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
UNDERWRITERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
ANNUITY BENEFIT PAYMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
EXCHANGE OFFER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
PERFORMANCE INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
TAX-DEFERRED ACCUMULATION. . . . . . . . . . . . . . . . . . . . . . . . . . .10
FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-1
GENERAL INFORMATION AND HISTORY
Separate Account KG (the "Variable Account") is a separate investment account of
First Allmerica Financial Life Insurance Company (the "Company") authorized by
vote of its Board of Directors on June 13, 1996. The Company, organized under
the laws of Massachusetts in 1844, is the fifth oldest life insurance company in
America. As of December 31, 1997, the Company and its subsidiaries had over
$16.3 billion in combined assets and over $43.8 billion in life insurance in
force. Effective October 16, 1995, the Company converted from a mutual life
insurance company, known as State Mutual Life Assurance Company of America, to a
stock life insurance company and adopted its present name. At that time, the
Company became a wholly owned subsidiary of Allmerica Financial Corporation
("AFC"). The Company's principal office (the "Principal Office") is located at
440 Lincoln Street, Worcester, Massachusetts 01653, telephone 508-855-1000.
The Company is subject to the laws of the Commonwealth of Massachusetts
governing insurance companies and to regulation by the Commissioner of Insurance
of Massachusetts. In addition, the Company is subject to the insurance laws and
regulations of other states and jurisdictions in which it is licensed to
operate.
Currently, 24 Sub-Accounts of the Variable Account are available under the
Contract. Each Sub-Account invests in a corresponding Kemper investment
portfolio of Investors Fund Series ("Kemper IFS") or a corresponding
portfolio of Scudder Variable Life Investment Fund ("Scudder VLIF"),
open-end, registered management investment companies. Twenty different
portfolios of Kemper IFS are available under the Contract: the Kemper-Dreman
Financial Services Portfolio, Kemper Small Cap Growth Portfolio, Kemper Small
Cap Value Portfolio, Kemper-Dreman High Return Equity Portfolio, Kemper
International Portfolio, Kemper International Growth and Income
2
<PAGE>
Portfolio, Kemper Global Blue Chip Portfolio, Kemper Growth Portfolio, Kemper
Contrarian Value Portfolio, Kemper Blue Chip Portfolio, Kemper Value + Growth
Portfolio, Kemper Horizon 20+ Portfolio, Kemper Total Return Portfolio, Kemper
Horizon 10+ Portfolio, Kemper High Yield Portfolio, Kemper Horizon 5 Portfolio,
Kemper Global Income Portfolio, Kemper Investment Grade Bond Portfolio, Kemper
Government Securities Portfolio, and Kemper Money Market Portfolio. Four
portfolios of Scudder VLIF are available under the Contract: the Scudder
International Portfolio, Scudder Global Discovery Portfolio, Scudder Capital
Growth Portfolio, and Scudder Growth and Income Portfolio (together, the
"Underlying Portfolios"). Each Underlying Portfolio available under the
Contract has its own investment objectives and certain attendant risks.
TAXATION OF THE CONTRACT, THE VARIABLE
ACCOUNT AND THE COMPANY
The Company currently imposes no charge for taxes payable in connection with the
Contract, other than for state and local premium taxes and similar assessments
when applicable. The Company reserves the right to impose a charge for any
other taxes that may become payable in the future in connection with the
Contract or the Variable Account.
The Variable Account is considered to be a part of and taxed with the operations
of the Company. The Company is taxed as a life insurance company under
subchapter L of the Internal Revenue Code (the "Code"), and files a consolidated
tax return with its affiliated companies.
The Company reserves the right to make a charge for any effect which the income,
assets or existence of the Contract or the Variable Account may have upon its
tax. Such charge for taxes, if any, will be assessed on a fair and equitable
basis in order to preserve equity among classes of Contract Owners ("Owners").
The Variable Account presently is not subject to tax.
SERVICES
CUSTODIAN OF SECURITIES. The Company serves as custodian of the assets of the
Variable Account. Underlying Portfolio shares owned by the Sub-Accounts are
held on an open account basis. A Sub-Account's ownership of Underlying
Portfolio shares is reflected on the records of the Underlying Portfolio and is
not represented by any transferable stock certificates.
EXPERTS. The financial statements of the Company as of December 31, 1997 and
1996 and for each of the three years in the period ended December 31, 1997,
and the financial statements of the Separate Account KG--Kemper Gateway Elite
of the Company as of December 31, 1997 and for the periods indicated,
included in this Statement of Additional Information constituting part of
this Registration Statement, have been so included in reliance on the reports
of Price Waterhouse LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
The financial statements of the Company included herein should be considered
only as bearing on the ability of the Company to meet its obligations under
the Contract.
UNDERWRITERS
Allmerica Investments, Inc. ("Allmerica Investments"), a registered
broker-dealer under the Securities Exchange Act of 1934 and a member of the
National Association of Securities Dealers, Inc. ("NASD"), serves as principal
underwriter and general distributor for the Contract pursuant to a contract with
Allmerica
3
<PAGE>
Investments, the Company and the Variable Account. Allmerica Investments
distributes the Contract on a best-efforts basis. Allmerica Investments, Inc.,
440 Lincoln Street, Worcester, Massachusetts 01653, was organized in 1969 as a
wholly owned subsidiary of First Allmerica, and presently is indirectly wholly
owned by First Allmerica.
The Contract offered by this Prospectus is offered continuously, and may be
purchased from certain independent broker-dealers which are NASD members and
whose representatives are authorized by applicable law to sell variable annuity
contracts.
All persons selling the Contract are required to be licensed by their respective
state insurance authorities for the sale of variable annuity contracts. The
Company pays commissions, not to exceed 6.0% of purchase payments, to entities
which sell the Contract. To the extent permitted by NASD rules, promotional
incentives or payments also may be provided to such entities based on sales
volumes, the assumption of wholesaling functions or other sales-related
criteria. Additional payments may be made for other services not directly
related to the sale of the Contract, including the recruitment and training of
personnel, production of promotional literature and similar services. A
Promotional Allowance of 1.0% of total payments is paid to Kemper Distributors,
Inc. for administrative and support services with respect to the distribution of
the Contract; however, Kemper Distributors, Inc. may direct the Company to pay
a portion of said allowance to broker-dealers who provide support services
directly.
Commissions paid by the Company do not result in any charge to Owners or to the
Variable Account in addition to the charges described under "CHARGES AND
DEDUCTIONS" in the Prospectus. The Company intends to recoup the commission and
other sales expense through a combination of anticipated surrender, withdrawal
and/or annuitization charges, profits from the Company's general account,
including the investment earnings on amounts allocated to accumulate on a fixed
basis in excess of the interest credited on fixed accumulations by the Company,
and the profit, if any, from the mortality and expense risk charge.
The aggregate amounts of commissions paid to Zurich Kemper, Inc. and to
independent broker-dealers, respectively, for sales of contracts funded by
Separate Account KG were $537.50 and $51,903.25 in 1997. Sales of these
contracts began in 1997.
ANNUITY BENEFIT PAYMENTS
The method by which the Accumulated Value under the Contract is determined is
described in detail under "Computation of Values" in the Prospectus.
ILLUSTRATION OF ACCUMULATION UNIT CALCULATION USING HYPOTHETICAL EXAMPLE. The
Accumulation Unit calculation for a daily Valuation Period may be illustrated by
the following hypothetical example: Assume that the assets of a Sub-Account at
the beginning of a one-day Valuation Period were $5,000,000; that the value of
an Accumulation Unit on the previous date was $1.135000; and that during the
Valuation Period, the investment income and net realized and unrealized capital
gains exceed net realized and unrealized capital losses by $1,675. The
Accumulation Unit Value at the end of the current Valuation Period would be
calculated as follows:
<TABLE>
<S> <C>
(1) Accumulation Unit Value -- Previous Valuation Period. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1.135000
(2) Value of Assets -- Beginning of Valuation Period. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $5,000,000
(3) Excess of Investment Income and Net Gains Over Capital Losses . . . . . . . . . . . . . . . . . . . . . . $1,675
(4) Adjusted Gross Investment Rate for the Valuation Period (3) divided by (2). . . . . . . . . . . . . . . . 0.000335
4
<PAGE>
(5) Annual Charge (one-day equivalent of 1.40% per annum) . . . . . . . . . . . . . . . . . . . . . . . . . . 0.000039
(6) Net Investment Rate (4) - (5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.000296
(7) Net Investment Factor 1.000000 + (6). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.000296
(8) Accumulation Unit Value -- Current Period (1) x (7) . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1.135336
</TABLE>
Conversely, if unrealized capital losses and charges for expenses and taxes
exceeded investment income and net realized capital gains by $1,675, the
Accumulation Unit Value at the end of the Valuation Period would have been
$1.134576.
The method for determining the amount of annuity benefit payments is described
in detail under "Determination of the First and Subsequent Annuity Benefit
Payments" in the Prospectus.
ILLUSTRATION OF VARIABLE ANNUITY BENEFIT PAYMENT CALCULATION USING HYPOTHETICAL
EXAMPLE. The determination of the Annuity Unit value and the variable annuity
benefit payment may be illustrated by the following hypothetical example:
Assume an Annuitant has 40,000 Accumulation Units in a Variable Account, and
that the value of an Accumulation Unit on the Valuation Date used to determine
the amount of the first variable annuity benefit payment is $1.120000.
Therefore, the Accumulation Value of the Contract is $44,800 (40,000 x
$1.120000). Assume also that the Owner elects an option for which the first
monthly payment is $6.57 per $1,000 of Accumulated Value applied. Assuming no
premium tax or contingent deferred sales charge, the first monthly payment would
be 44.800 multiplied by $6.57, or $294.34.
Next, assume that the Annuity Unit value for the assumed rate of 3.5% per annum
for the Valuation Date as of which the first payment was calculated was
$1.100000. Annuity Unit values will not be the same as Accumulation Unit values
because the former reflect the 3.5% assumed interest rate used in the annuity
rate calculations. When the Annuity Unit value of $1.100000 is divided into the
first monthly payment, the number of Annuity Units represented by that payment
is determined to be 267.5818. The value of this same number of Annuity Units
will be paid in each subsequent month under most options. Assume further that
the net investment factor for the Valuation Period applicable to the next
annuity benefit payment is 1.000190. Multiplying this factor by .999906 (the
one-day adjustment factor for the assumed interest rate of 3.5% per annum)
produces a factor of 1.000096. This then is multiplied by the Annuity Unit
value on the immediately preceding Valuation Date (assumed here to be
$1.105000). The result is an Annuity Unit value of $1.105106 for the current
monthly payment. The current monthly payment then is determined by multiplying
the number of Annuity Units by the current Annuity Unit value, or 267.5818 times
$1.105106, which produces a current monthly payment of $295.71.
METHOD FOR DETERMINING COMMUTED VALUE ON VARIABLE ANNUITY PERIOD CERTAIN OPTIONS
AND ILLUSTRATION USING HYPOTHETICAL EXAMPLE. The Contract offers both
commutable and non-commutable period certain annuity options. A commutable
option gives the Annuitant the right to exchange any remaining payments for a
lump sum payment based on the commuted value. The Commuted Value is the present
value of remaining payments calculated at 3.5% interest. The determination of
the Commuted Value may be illustrated by the following hypothetical example.
Assume a commutable period certain option is elected. The number of Annuity
Units upon which each payment is based would be calculated using the Surrender
Value less any premium tax rather than the Accumulated Value. Assume this
results in 250.0000 Annuity Units. Assume the Commuted Value is requested with
60 monthly payments remaining and a current Annuity Unit Value of $1.200000.
Based on these assumptions, the dollar amount of remaining payments would be
$300 a month for 60 months. The present value at 3.5% of all remaining payments
would be $16,560.72.
5
<PAGE>
EXCHANGE OFFER
A. VARIABLE ANNUITY CONTRACT EXCHANGE OFFER
The Company will permit Owners of certain variable annuity contracts issued by
Allmerica Financial Life Insurance and Annuity Company ("AFLIAC"), described
below, to exchange their contracts at net asset value for the variable annuity
contracts described in the Prospectus, which are issued on Form No. A3025-96 or
a state variation thereof ("new Contract"). The Company reserves the right to
suspend this exchange offer at any time.
This offer applies to the exchange of Elective Payment Variable Annuity
contracts issued by AFLIAC on Forms A3012-79 and A3013-79 ("Elective Payment
Exchanged Contract," all such contracts having numbers with a "JQ" or "JN"
prefix), and Single Payment Variable Annuity contracts issued on Forms A3014-79
and A3015-79 ("Single Payment Exchanged Contract," all such contracts having
numbers with a "KQ" or "KN" prefix). These contracts are referred to
collectively as the "Exchanged Contract." To effect an exchange, the Company
should receive (1) a completed application for the new Contract, (2) the
contract being exchanged, and (3) a signed Letter of Awareness.
CONTINGENT DEFERRED SALES CHARGE COMPUTATION. No surrender charge otherwise
applicable to the Exchanged Contract will be assessed as a result of the
exchange. Instead, the contingent deferred sales charge under the new Contract
will be computed as if the payments that had been made to the Exchanged Contract
were made to the new Contract, as of the date of issue of the Exchanged
Contract. Any additional payments to the new Contract after the exchange will
be subject to the contingent deferred sales charge computation outlined in the
new Contract and Prospectus; i.e., the charge will be computed based on the
number of years that the additional payment (or portion of that payment) that is
being withdrawn has been credited to the new Contract.
SUMMARY OF DIFFERENCES BETWEEN EXCHANGED CONTRACT AND THE NEW CONTRACT. The new
Contract and the Exchanged Contract differ substantially as summarized below.
There may be additional differences important to a person considering an
exchange, and the Prospectuses for the new Contract and the Exchanged Contract
should be reviewed carefully before the exchange request is submitted to the
Company.
CONTINGENT DEFERRED SALES CHARGE. The contingent deferred sales charge under
the new Contract, as described in the Prospectus, imposes higher charge
percentages against the excess amount redeemed than the Single Payment Exchanged
Contract. In addition, if an Elective Payment Exchanged Contract was issued
more than nine years before the date of an exchange under this offer, additional
payments to the Exchanged Contract would not be subject to a surrender charge.
New payments to the new Contract may be subject to a charge if withdrawn prior
to the surrender charge period described in the Prospectus.
CONTRACT FEE. Under the new Contract, the Company deducts a $30 fee on each
Contract anniversary and at surrender if the Accumulated Value is less than
$50,000. This fee is waived if the new Contract is part of a 401(k) plan. No
Contract fees are charged on the Single Payment Exchanged Contract. A $9
semi-annual fee is charged on the Elective Payment Exchanged Contract if the
Accumulated Value is $10,000 or less.
VARIABLE ACCOUNT ADMINISTRATIVE EXPENSE CHARGE. Under the new Contract, the
Company assesses each Sub-Account a daily administrative expense charge at an
annual rate of 0.15% of the average daily net assets of the Sub-Account. No
administrative expense charge based on a percentage of Sub-Account assets is
imposed under the Exchanged Contract.
TRANSFER CHARGE. No charge for transfers is imposed under the Exchanged
Contract. Currently, no transfer charge is imposed under the new Contract;
however, the Company reserves the right to assess a charge not to exceed $25 for
each transfer after the twelfth in any contract year.
6
<PAGE>
ANNUITY TABLES. The Exchanged Contract contains higher guaranteed annuity
rates.
INVESTMENTS. Accumulated Values and payments under the new Contract may be
allocated to significantly more investment options than are available under the
Exchanged Contract.
DEATH BENEFIT. The Exchanged Contract offers a death benefit that is guaranteed
to be the greater of a Contract's Accumulated Value or gross payments made (less
withdrawals). At the time an exchange is processed, the Accumulated Value of
the Exchanged Contract becomes the "payment" for the new Contract. Therefore,
prior purchase payments made under the Exchanged Contract (if higher than the
Exchanged Contract's Accumulated Value) no longer are a basis for determining
the death benefit under the new Contract. Consequently, whether the initial
minimum death benefit under the new Contract is greater than, equal to, or less
than, the death benefit of the Exchanged Contract depends on whether the
Accumulated Value transferred to the new Contract is greater than, equal to, or
less than, the gross payments under the Exchanged Contract. In addition, under
the Exchanged Contract, the amount of any prior withdrawals is subtracted from
the value of the death benefit. Under the new Contract, where there is a
reduction in the death benefit amount due to a prior withdrawal, the value of
the death benefit is reduced in the same proportion that the new Contract's
Accumulated Value was reduced on the date of the withdrawal.
B. FIXED ANNUITY EXCHANGE OFFER
This exchange offer also applies to all fixed annuity contracts issued by the
Company's subsidiary, Allmerica Financial Life Insurance and Annuity Company. A
fixed annuity contract to which this exchange offer applies may be exchanged at
net asset value for the Contract described in this Prospectus, subject to the
same provisions for effecting the exchange and for applying the new Contract's
contingent deferred sales charge as described above for variable annuity
contracts. This Prospectus should be read carefully before making such
exchange. Unlike a fixed annuity, the new Contract's value is not guaranteed
and will vary depending on the investment performance of the Underlying
Portfolios to which it is allocated. The new Contract has a different charge
structure than a fixed annuity contract, which includes not only a contingent
deferred sales charge that may vary from that of the class of contracts to which
the exchanged fixed contract belongs, but also Contract fees, mortality and
expense risk charges (for the Company's assumption of certain mortality and
expense risks), administrative expense charges, transfer charges (for transfers
permitted among Sub-Accounts and the Fixed Account), and expenses incurred by
the Underlying Portfolios. Additionally, the interest rates offered under the
Fixed Account of the new Contract and the Annuity Tables for determining minimum
annuity benefit payments may be different from those offered under the exchanged
fixed contract.
C. EXERCISE OF "FREE-LOOK PROVISION" AFTER ANY EXCHANGE
Persons who, under the terms of this exchange offer, exchange their contract for
the new Contract and subsequently revoke the new Contract within the time
permitted, as described in the sections of this Prospectus captioned "Right to
Revoke Individual Retirement Annuity" and "Right to Revoke All Other Contracts,"
will have their exchanged contract automatically reinstated as of the date of
revocation. The refunded amount will be applied as the new current Accumulated
Value under the reinstated contract, which may be more or less than it would
have been had no exchange and reinstatement occurred. The refunded amount will
be allocated initially among the Fixed Account and Sub-Accounts of the
reinstated contract in the same proportion that the value in the Fixed Account
and the value in each Sub-Account bore to the transferred Accumulated Value on
the date of the exchange of the contract for the new Contract. For purposes of
calculating any contingent deferred sales charge under the reinstated contract,
the reinstated contract will be deemed to have been issued and to have received
past purchase payments as if there had been no exchange.
7
<PAGE>
PERFORMANCE INFORMATION
Performance information for a Sub-Account may be compared, in reports and
promotional literature, to certain indices described in the Prospectus under
"PERFORMANCE INFORMATION." In addition, the Company may provide advertising,
sales literature, periodic publications or other material information on various
topics of interest to Owners and prospective Owners. These topics may include
the relationship between sectors of the economy and the economy as a whole and
its effect on various securities markets, investment strategies and techniques
(such as value investing, market timing, dollar cost averaging, asset
allocation, constant ratio transfer and account rebalancing), the advantages and
disadvantages of investing in tax-deferred and taxable investments, customer
profiles and hypothetical purchase and investment scenarios, financial
management and tax and retirement planning, and investment alternatives to
certificates of deposit and other financial instruments, including comparisons
between the Contract and the characteristics of and market for such financial
instruments. Total return data and supplemental total return information may be
advertised based on the period of time that an Underlying Portfolio and an
underlying Sub-Account have been in existence, even if longer than the period of
time that the Contract has been offered. The results for any period prior to a
Contract being offered will be calculated as if the Contract had been offered
during that period of time, with all charges assumed to be those applicable to
the Contract.
TOTAL RETURN
"Total Return" refers to the total of the income generated by an investment in a
Sub-Account and of the changes of value of the principal invested (due to
realized and unrealized capital gains or losses) for a specified period, reduced
by the Sub-Account's asset charge and any applicable contingent deferred sales
charge which would be assessed upon complete withdrawal of the investment.
Total Return figures are calculated by standardized methods prescribed by rules
of the Securities and Exchange Commission (the "SEC"). The quotations are
computed by finding the average annual compounded rates of return over the
specified periods that would equate the initial amount invested to the ending
redeemable values, according to the following formula:
(n)
P(1 + T) = ERV
Where: P = a hypothetical initial payment to the Variable Account
of $1,000
T = average annual total return
n = number of years
ERV = the ending redeemable value of the $1,000 payment at
the end of the specified period
The calculation of Total Return includes the annual charges against the asset of
the Sub-Account. This charge is 1.40% on an annual basis. The calculation of
ending redeemable value assumes (1) the Contract was issued at the beginning of
the period, and (2) a complete surrender of the Contract at the end of the
period. The deduction of the contingent deferred sales charge, if any,
applicable at the end of the period is included in the calculation, according to
the following schedule:
8
<PAGE>
<TABLE>
<CAPTION>
YEARS FROM DATE OF CHARGE AS PERCENTAGE OF
PAYMENT TO DATE OF NEW PURCHASE PAYMENTS
WITHDRAWAL WITHDRAWN*
---------- ----------
<S> <C>
0-1 7%
2 6%
3 5%
4 4%
5 3%
6 2%
Thereafter 0%
</TABLE>
* Subject to the maximum limit described in the Prospectus.
No contingent deferred sales charge is deducted upon expiration of the periods
specified above. In each calendar year, a certain amount (withdrawal without
surrender charge amount, as described in the Prospectus) is not subject to the
contingent deferred sales charge.
The calculations of Total Return reflect the deduction of the $30 annual
Contract fee.
SUPPLEMENTAL TOTAL RETURN INFORMATION
The Supplemental Total Return Information in this section refers to the total of
the income generated by an investment in a Sub-Account and of the changes of
value of the principal invested (due to realized and unrealized capital gains or
losses) for a specified period reduced by the Sub-Account's asset charges.
However, it is assumed that the investment is NOT withdrawn at the end of each
period.
The quotations of Supplemental Total Return are computed by finding the average
annual compounded rates of return over the specified periods that would equate
the initial amount invested to the ending values, according to the following
formula:
(n)
P(1 + T) = EV
Where: P = a hypothetical initial payment to the Variable Account
of $1,000
T = average annual total return
n = number of years
EV = the ending value of the $1,000 payment at the end of
the specified period
The calculation of Supplemental Total Return reflects the 1.40% annual charge
against the assets of the Sub-Accounts. The ending value assumes that the
Contract is NOT surrendered at the end of the specified period, and therefore
there is no adjustment for the contingent deferred sales charge that would be
applicable if the Contract was surrendered at the end of the period.
The calculations of Supplemental Total Return include the deduction of the $30
annual Contract fee.
YIELD AND EFFECTIVE YIELD - THE MONEY MARKET SUB-ACCOUNT
Set forth below is yield and effective yield information for the Money Market
Sub-Account for the seven-day period ended December 31, 1997:
9
<PAGE>
Yield 4.12%
Effective Yield 4.21%
The yield and effective yield figures are calculated by standardized methods
prescribed by rules of the SEC. Under those methods, the yield quotation is
computed by determining the net change (exclusive of capital changes) in the
value of a hypothetical pre-existing account having a balance of one
accumulation unit of the Sub-Account at the beginning of the period, subtracting
a charge reflecting the annual 1.40% deduction for mortality and expense risk
and the administrative charge, dividing the difference by the value of the
account at the beginning of the same period to obtain the base period return,
and then multiplying the return for a seven-day base period by (365/7), with the
resulting yield carried to the nearest hundredth of one percent.
The Money Market Sub-Account computes effective yield by compounding the
unannualized base period return by using the formula:
(365/7)
Effective Yield = [(base period return + 1) ] - 1
The calculations of yield and effective yield reflect the $30 annual Contract
fee.
TAX-DEFERRED ACCUMULATION
<TABLE>
<CAPTION>
NON-QUALIFIED CONVENTIONAL
ANNUITY CONTRACT SAVINGS PLAN
AFTER-TAX CONTRIBUTIONS
AND TAX-DEFERRED EARNINGS
-------------------------
TAXABLE LUMP AFTER-TAX CONTRIBUTIONS
NO WITHDRAWALS SUM WITHDRAWAL AND TAXABLE EARNINGS
-------------- -------------- ------------------------
<S> <C> <C> <C>
10 Years. . . . $107,946 $ 86,448 $ 81,693
20 Years. . . . 233,048 165,137 133,476
30 Years. . . . 503,133 335,021 218,082
</TABLE>
This chart compares the accumulation of a $50,000 initial investment into a
non-qualified annuity contract with a conventional savings plan. Contributions
to the non-qualified annuity contract and the conventional savings plan are made
after tax. Only the gain in the non-qualified annuity contract will be subject
to income tax in a taxable lump sum withdrawal. The chart assumes a 37.1%
federal marginal tax rate and an 8% annual return. The 37.1% federal marginal
tax is based on a marginal tax rate of 36%, representative of the target market,
adjusted to reflect a decrease of $3 of itemized deductions for each $100 of
income over $117,950. Tax rates are subject to change as is the tax-deferred
treatment of the Contract. Income on non-qualified annuity contracts is taxed
as ordinary income upon withdrawal. A 10% tax penalty may apply to early
withdrawals. See "Federal Income Taxes" in the Prospectus.
The chart does not reflect the following charges and expenses under the
Contract: 1.25% for mortality and expense risk; 0.15% administration charges; 7%
maximum deferred sales charge; and $30 annual Contract fee. The tax-deferred
accumulation would be reduced if these charges were reflected. No implication
is intended by the use of these assumptions that the return shown is guaranteed
in any way or that the return shown represents an average or expected rate of
return over the period of the Contract. (IMPORTANT -- THIS IS NOT AN
ILLUSTRATION OF YIELD OR RETURN.)
10
<PAGE>
Unlike savings plans, contributions to non-qualified annuity contracts provide
tax-deferred treatment on earnings. In addition, contributions to tax-deferred
retirement annuities are not subject to current tax in the year of contribution.
When monies are received from a non-qualified annuity contract (and you have
many different options on how you receive your funds), they are subject to
income tax. At the time of receipt, if the person receiving the monies is
retired, not working or has additional tax exemptions, these monies may be taxed
at a lesser rate.
FINANCIAL STATEMENTS
Financial Statements are included for First Allmerica Financial Life Insurance
Company and for its Separate Account KG.
11
<PAGE>
FIRST ALLMERICA
FINANCIAL LIFE
INSURANCE COMPANY
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholder of
First Allmerica Financial Life Insurance Company
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, of shareholder's equity, and of cash flows
present fairly, in all material respects, the financial position of First
Allmerica Financial Life Insurance Company and its subsidiaries at December 31,
1997 and 1996, and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles. These 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 of these statements in accordance with generally accepted auditing
standards which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/s/ Price Waterhouse LLP
Price Waterhouse LLP
Boston, Massachusetts
February 3, 1997
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
(IN MILLIONS) 1997 1996 1995
----------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
REVENUES
Premiums................................... $2,311.0 $2,236.3 $2,222.8
Universal life and investment product
policy fees.............................. 237.3 197.2 172.4
Net investment income...................... 641.8 670.8 710.5
Net realized investment gains.............. 76.5 66.8 19.1
Realized gain from sale of mutual fund
processing business...................... -- -- 20.7
Other income............................... 117.6 108.4 109.3
--------- --------- ---------
Total revenues......................... 3,384.2 3,279.5 3,254.8
--------- --------- ---------
BENEFITS, LOSSES AND EXPENSES
Policy benefits, claims, losses and loss
adjustment expenses...................... 2,004.6 1,957.0 2,010.3
Policy acquisition expenses................ 425.1 470.1 470.9
Loss from cession of disability income
business................................. 53.9 -- --
Other operating expenses................... 523.7 503.2 468.7
--------- --------- ---------
Total benefits, losses and expenses.... 3,007.3 2,930.3 2,949.9
--------- --------- ---------
Income before federal income taxes......... 376.9 349.2 304.9
--------- --------- ---------
FEDERAL INCOME TAX EXPENSE (BENEFIT)
Current.................................... 83.3 96.8 119.7
Deferred................................... 14.2 (15.7) (37.0)
--------- --------- ---------
Total federal income tax expense....... 97.5 81.1 82.7
--------- --------- ---------
Income before minority interest................ 279.4 268.1 222.2
Minority interest.............................. (79.4) (74.6) (73.1)
--------- --------- ---------
Income before extraordinary item............... 200.0 193.5 149.1
Extraordinary item -- demutualization
expenses...................................... -- -- (12.1)
--------- --------- ---------
Net income..................................... $ 200.0 $ 193.5 $ 137.0
--------- --------- ---------
--------- --------- ---------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-1
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
(IN MILLIONS) 1997 1996
-------------------------------------------------------- ---------- ----------
<S> <C> <C>
ASSETS
Investments:
Fixed maturities at fair value (amortized cost of
$6,992.8 and $7,279.1)............................. $ 7,253.5 $ 7,461.5
Equity securities at fair value (cost of $341.1 and
$327.9)............................................ 479.0 473.1
Mortgage loans...................................... 567.5 650.1
Real estate......................................... 50.3 120.7
Policy loans........................................ 141.9 132.4
Other long term investments......................... 148.3 128.8
---------- ----------
Total investments............................... 8,640.5 8,966.6
---------- ----------
Cash and cash equivalents............................. 213.9 175.9
Accrued investment income............................. 141.8 148.6
Deferred policy acquisition costs..................... 965.5 822.7
---------- ----------
Reinsurance receivables:
Future policy benefits.............................. 307.1 102.8
Outstanding claims, losses and loss adjustment
expenses........................................... 626.7 663.8
Unearned premiums................................... 32.9 46.2
Other............................................... 73.5 62.8
---------- ----------
Total reinsurance receivables................... 1,040.2 875.6
---------- ----------
Deferred federal income taxes......................... -- 66.9
Premiums, accounts and notes receivable............... 554.4 533.0
Other assets.......................................... 373.0 304.4
Closed block assets................................... 806.7 810.8
Separate account assets............................... 9,755.4 6,233.0
---------- ----------
Total assets.................................... $22,491.4 $18,937.5
---------- ----------
---------- ----------
LIABILITIES
Policy liabilities and accruals:
Future policy benefits.............................. $ 2,598.5 $ 2,613.7
Outstanding claims, losses and loss adjustment
expenses........................................... 2,825.0 2,944.1
Unearned premiums................................... 846.8 822.5
Contractholder deposit funds and other policy
liabilities........................................ 1,852.7 2,060.4
---------- ----------
Total policy liabilities and accruals........... 8,123.0 8,440.7
---------- ----------
Expenses and taxes payable............................ 662.6 617.5
Reinsurance premiums payable.......................... 37.7 31.4
Short term debt....................................... 33.0 38.4
Deferred federal income taxes......................... 12.9 --
Long term debt........................................ 2.6 2.7
Closed block liabilities.............................. 885.6 899.4
Separate account liabilities.......................... 9,749.7 6,227.2
---------- ----------
Total liabilities............................... 19,507.1 16,257.3
---------- ----------
Minority interest..................................... 748.9 784.0
Commitments and contingencies (Notes 13 and 18)
SHAREHOLDER'S EQUITY
Common stock, $10 par value, 1 million shares
authorized, 500,000 shares issued and outstanding... 5.0 5.0
Additional paid in capital............................ 453.7 392.4
Unrealized appreciation on investments, net........... 209.3 131.4
Retained earnings..................................... 1,567.4 1,367.4
---------- ----------
Total shareholder's equity...................... 2,235.4 1,896.2
---------- ----------
Total liabilities and shareholder's equity...... $22,491.4 $18,937.5
---------- ----------
---------- ----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-2
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
(IN MILLIONS) 1997 1996 1995
----------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
COMMON STOCK
Balance at beginning of period............. $ 5.0 $ 5.0 $ --
Demutualization transaction................ -- -- 5.0
--------- --------- ---------
Balance at end of period................... 5.0 5.0 5.0
--------- --------- ---------
ADDITIONAL PAID-IN-CAPITAL
Balance at beginning of period............. 392.4 392.4 --
Contributed from parent.................... 61.3 -- 392.4
--------- --------- ---------
Balance at end of period................... 453.7 392.4 392.4
--------- --------- ---------
RETAINED EARNINGS
Balance at beginning of period............. 1,367.4 1,173.9 1,071.4
Net income prior to demutualization........ -- -- 93.2
--------- --------- ---------
1,367.4 1,173.9 1,164.6
--------- --------- ---------
Demutualization transaction................ -- -- (34.5)
Net income subsequent to demutualization... 200.0 193.5 43.8
--------- --------- ---------
Balance at end of period................... 1,567.4 1,367.4 1,173.9
--------- --------- ---------
NET UNREALIZED APPRECIATION ON INVESTMENTS
Balance at beginning of period............. 131.4 153.0 (79.0)
Effect of transfer of securities from
held-to-maturity to available-for-sale:
Net appreciation on available-for-sale
debt securities...................... -- -- 22.4
Provision for deferred federal income taxes
and minority interest.................... -- -- (9.6)
--------- --------- ---------
-- -- 12.8
--------- --------- ---------
Net appreciation (depreciation) on
available for sale securities............ 170.9 (35.1) 466.0
(Benefit) provision for deferred federal
income taxes............................. (59.8) 11.8 (163.1)
Minority interest.......................... (33.2) 1.7 (83.7)
--------- --------- ---------
209.3 (21.6) 219.2
--------- --------- ---------
Balance at end of period................... 209.3 131.4 153.0
--------- --------- ---------
Total shareholder's equity............. $2,235.4 $1,896.2 $1,724.3
--------- --------- ---------
--------- --------- ---------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-3
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
(IN MILLIONS) 1997 1996 1995
-------------------------------------------- ---------- ---------- ----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.............................. $ 200.0 $ 193.5 $ 137.0
Adjustments to reconcile net income to
net cash provided by operating
activities:
Minority interest................... 79.4 74.6 73.1
Net realized gains.................. (77.8) (66.8) (39.8)
Net amortization and depreciation... 31.6 44.7 57.7
Deferred federal income taxes....... 14.2 (15.7) (37.0)
Change in deferred acquisition
costs............................... (189.7) (73.9) (38.4)
Change in premiums and notes
receivable, net of reinsurance...... (15.1) (16.8) (42.0)
Change in accrued investment
income.............................. 7.1 16.7 7.0
Change in policy liabilities and
accruals, net....................... (134.9) (184.3) 116.2
Change in reinsurance receivable.... 27.2 123.8 (75.6)
Change in expenses and taxes
payable............................. 49.4 26.0 7.5
Separate account activity, net...... -- 5.2 (0.1)
Loss from cession of disability
income business..................... 53.9 -- --
Payment related to cession of
disability income business.......... (207.0) -- --
Other, net.......................... 20.4 38.5 (33.8)
---------- ---------- ----------
Net cash (used in) provided by
operating activities......... (141.3) 165.5 131.8
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from disposals and maturities
of available-for-sale fixed
maturities............................. 2,947.9 3,985.8 2,738.4
Proceeds from disposals of
held-to-maturity fixed maturities...... -- -- 271.3
Proceeds from disposals of equity
securities............................. 162.7 228.7 120.0
Proceeds from disposals of other
investments............................ 116.3 99.3 40.5
Proceeds from mortgages matured or
collected.............................. 204.7 176.9 230.3
Purchase of available-for-sale fixed
maturities............................. (2,596.0) (3,771.1) (3,273.3)
Purchase of equity securities........... (67.0) (90.9) (254.0)
Purchase of other investments........... (175.0) (168.0) (24.8)
Proceeds from sale of mutual fund
processing business.................... -- -- 32.9
Capital expenditures.................... (15.3) (12.8) (14.1)
Other investing activities, net......... 1.3 4.3 4.7
---------- ---------- ----------
Net cash provided by (used in)
investing activities................ 579.6 452.2 (128.1)
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Deposits and interest credited to
contractholder deposit funds........... 457.6 268.7 445.8
Withdrawals from contractholder deposit
funds.................................. (647.1) (905.0) (1,069.9)
Change in short term debt............... (5.4) 10.4 (4.8)
Change in long term debt................ (0.1) (0.1) 0.2
Dividends paid to minority
shareholders........................... (9.4) (3.9) (4.1)
Additional paid in capital.............. 0.1 -- 392.4
Payments to policyholders' membership
interests.............................. -- -- (27.9)
Subsidiary treasury stock purchased, at
cost................................... (195.0) (42.0) (20.9)
---------- ---------- ----------
Net cash (used in) provided by
financing activities......... (399.3) (671.9) (289.2)
---------- ---------- ----------
Net change in cash and cash equivalents..... 39.0 (54.2) (285.5)
Net change in cash held in the Closed
Block...................................... (1.0) (6.5) (17.6)
Cash and cash equivalents, beginning of
period..................................... 175.9 236.6 539.7
---------- ---------- ----------
Cash and cash equivalents, end of period.... $ 213.9 $ 175.9 $ 236.6
---------- ---------- ----------
---------- ---------- ----------
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid........................... $ 3.6 $ 18.6 $ 4.1
Income taxes paid....................... $ 66.3 $ 72.0 $ 90.6
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-4
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
First Allmerica Financial Life Insurance Company ("FAFLIC", or the "Company")
was organized as a mutual life insurance company until October 16, 1995. FAFLIC
converted to a stock life insurance company pursuant to a plan of reorganization
effective October 16, 1995 and became a wholly owned subsidiary of Allmerica
Financial Corporation ("AFC"). The consolidated financial statements have been
prepared as if FAFLIC were organized as a stock life insurance company for all
periods presented. Thus, generally accepted accounting principles for stock life
insurance companies have been applied retroactively for all periods presented.
The consolidated financial statements of FAFLIC include the accounts of
Allmerica Financial Life Insurance and Annuity Company ("AFLIAC"), its wholly
owned life insurance subsidiary, non-insurance subsidiaries (principally
brokerage and investment advisory subsidiaries), and Allmerica Property and
Casualty Companies, Inc. (a 65.78%-owned non-insurance holding company). The
Closed Block assets and liabilities at December 31, 1997 and 1996, and its
results of operations subsequent to demutualization are presented in the
consolidated financial statements as single line items. Unless specifically
stated, all disclosures contained herein supporting the consolidated financial
statements at December 31, 1997 and 1996, and the years then ended exclude the
Closed Block related amounts. All significant intercompany accounts and
transactions have been eliminated.
Minority interest relates to the Company's investment in Allmerica P&C (APY) and
its only significant subsidiary, The Hanover Insurance Company ("Hanover").
Hanover's 82.5%-owned subsidiary is Citizens Corporation, the holding company
for Citizens Insurance Company of America ("Citizens"). Minority interest also
includes an amount related to the minority interest in Citizens Corporation.
APY and a wholly-owned subsidiary of AFC merged on July 16, 1997. Through the
merger, AFC acquired all of the outstanding common stock of Allmerica P&C that
it did not already own in exchange for cash and stock. The merger has been
accounted for as a purchase. A total of $90.6 million, representing the excess
of the purchase price over the fair values of the net assets acquired, net of
deferred taxes, has been allocated to goodwill and is being amortized over a
40-year period. Additional information pertaining to the merger agreement is
included in Note 2, significant transactions.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amount of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
B. CLOSED BLOCK
As of October 16, 1995, the Company established and began operating a closed
block (the "Closed Block") for the benefit of the participating policies
included therein, consisting of certain individual life insurance participating
policies, individual deferred annuity contracts and supplementary contracts not
involving life contingencies which were in force on October 16, 1995; such
policies constitute the "Closed Block Business". The purpose of the Closed Block
is to protect the policy dividend expectations of such FAFLIC dividend paying
policies and contracts after the demutualization. Unless the Commissioner
consents to an earlier termination, the Closed Block will continue to be in
effect until the date none of the Closed Block policies are in force. On October
16, 1995, FAFLIC, allocated to the Closed Block, assets in an amount that is
expected to produce cash flows which, together with future revenues from the
Closed Block Business, are reasonably sufficient to support the Closed Block
Business, including provision for payment of policy
F-5
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
benefits, certain future expenses and taxes and for continuation of policyholder
dividend scales in effect in 1994 so long as the experience underlying such
dividend scales continues. The Company expects that the factors underlying such
experience will fluctuate in the future and policyholder dividend scales for
Closed Block Business will be set accordingly.
Although the assets and income allocated to the Closed Block inure solely to the
benefit of the holders of policies included in the Closed Block, the excess of
Closed Block liabilities over Closed Block assets at October 16, 1995 measured
on a GAAP basis represent the expected future post-tax income from the Closed
Block which may be recognized in income over the period the policies and
contracts in the Closed Block remain in force.
If the actual income from the Closed Block in any given period equals or exceeds
the expected income for such period as determined at October 16, 1995, the
expected income would be recognized in income for that period. Further, any
excess of the actual income over the expected income would also be recognized in
income to the extent that the aggregate expected income for all prior periods
exceeded the aggregate actual income. Any remaining excess of actual income over
expected income would be accrued as a liability for policyholder dividends in
the Closed Block to be paid to the Closed Block policyholders. This accrual for
future dividends effectively limits the actual Closed Block income recognized in
income to the Closed Block income expected to emerge from operation of the
Closed Block as determined as of October 16, 1995.
If, over the period the policies and contracts in the Closed Block remain in
force, the actual income from the Closed Block is less than the expected income
from the Closed Block, only such actual income (which could reflect a loss)
would be recognized in income. If the actual income from the Closed Block in any
given period is less than the expected income for that period and changes in
dividends scales are inadequate to offset the negative performance in relation
to the expected performance, the income inuring to shareholders of the Company
will be reduced. If a policyholder dividend liability had been previously
established in the Closed Block because the actual income to the relevant date
had exceeded the expected income to such date, such liability would be reduced
by this reduction in income (but not below zero) in any periods in which the
actual income for that period is less than the expected income for such period.
C. VALUATION OF INVESTMENTS
In accordance with the provisions of Statement of Financial Accounting Standards
No. 115 ("Statement No. 115"), "ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND
EQUITY SECURITIES", the Company is required to classify its investments into one
of three categories: held-to-maturity, available-for-sale or trading. The
Company determines the appropriate classification of debt securities at the time
of purchase and reevaluates such designation as of each balance sheet date.
In November 1995, the Financial Accounting Standards Board ("FASB") issued a
Special Report, A GUIDE TO IMPLEMENTATION OF STATEMENT 115 ON ACCOUNTING FOR
CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES, which permitted companies to
reclassify securities, where appropriate, based on the new guidance. As a
result, the Company transferred securities with amortized cost and fair value of
$696.4 million and $725.6 million, respectively, from the held-to-maturity
category to the available-for-sale category, which resulted in a net increase in
shareholder's equity of $12.8 million.
Marketable equity securities and debt securities are classified as
available-for-sale. Available-for-sale securities are carried at fair value,
with the unrealized gains and losses, net of tax, reported in a separate
component of shareholders' equity. The amortized cost of debt securities is
adjusted for amortization of premiums and accretion of discounts to maturity.
Such amortization is included in investment income.
Mortgage loans on real estate are stated at unpaid principal balances, net of
unamortized discounts and reserves. Reserves on mortgage loans are based on
losses expected by the Company to be realized on transfers
F-6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
of mortgage loans to real estate (upon foreclosure), on the disposition or
settlement of mortgage loans and on mortgage loans which the Company believes
may not be collectible in full. In establishing reserves, the Company considers,
among other things, the estimated fair value of the underlying collateral.
Fixed maturities and mortgage loans that are delinquent are placed on
non-accrual status, and thereafter interest income is recognized only when cash
payments are received.
Policy loans are carried principally at unpaid principal balances.
During 1997, the Company committed to a plan to dispose of all real estate
assets by the end of 1998. As a result of this decision real estate held by the
Company and real estate joint ventures were written down to the estimated fair
value less cost to sell. Depreciation is not recorded on these assets while they
are held for disposal.
Realized investment gains and losses, other than those related to separate
accounts for which the Company does not bear the investment risk, are reported
as a component of revenues based upon specific identification of the investment
assets sold. When an other-than-temporary impairment of the value of a specific
investment or a group of investments is determined, a realized investment loss
is recorded. Changes in the valuation allowance for mortgage loans and real
estate are included in realized investment gains or losses.
D. FINANCIAL INSTRUMENTS
In the normal course of business, the Company enters into transactions involving
various types of financial instruments, including debt, investments such as
fixed maturities, mortgage loans and equity securities, investment and loan
commitments, and interest rate futures contracts. These instruments involve
credit risk and also may be subject to risk of loss due to interest rate
fluctuation. The Company evaluates and monitors each financial instrument
individually and, when appropriate, obtains collateral or other security to
minimize losses.
Derivative financial instruments are accounted for under three different
methods: fair value accounting, deferral accounting and accrual accounting.
Interest rate swap contracts used to hedge interest rate risk are accounted for
using a combination of the fair value method and accrual method, with changes in
fair value reported in unrealized gains and losses in equity consistent with the
underlying hedged security, and the net payment or receipt on the swaps reported
in net investment income. Foreign currency swap contracts used to hedge foreign
currency exchange risk are accounted for using a combination of the fair value
method and accrual method, with changes in fair value reported in unrealized
gains and losses in equity consistent with the underlying hedged security, and
the net payment or receipt on the swaps reported in net investment income.
Futures contracts used to hedge interest rate risk are accounted for using the
deferral method, with gains and losses deferred in unrealized gains and losses
in equity and recognized in earnings in conjunction with the earnings
recognition of the underlying hedged item. Other swap contracts entered into for
investment purposes are accounted for using the fair value method, with changes
in fair value reported in realized investment gains and losses in earnings.
E. CASH AND CASH EQUIVALENTS
Cash and cash equivalents includes cash on hand, amounts due from banks and
highly liquid debt instruments purchased with an original maturity of three
months or less.
F. DEFERRED POLICY ACQUISITION COSTS
Acquisition costs consist of commissions, underwriting costs and other costs,
which vary with, and are primarily related to, the production of revenues.
Property and casualty, group life and group health insurance business
acquisition costs are deferred and amortized over the terms of the insurance
policies. Acquisition
F-7
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
costs related to universal life products, variable annuities and contractholder
deposit funds are deferred and amortized in proportion to total estimated gross
profits from investment yields, mortality, surrender charges and expense margins
over the expected life of the contracts. This amortization is reviewed annually
and adjusted retrospectively when the Company revises its estimate of current or
future gross profits to be realized from this group of products, including
realized and unrealized gains and losses from investments. Acquisition costs
related to fixed annuities and other life insurance products are deferred and
amortized, generally in proportion to the ratio of annual revenue to the
estimated total revenues over the contract periods based upon the same
assumptions used in estimating the liability for future policy benefits.
Deferred acquisition costs for each life product and property and casualty line
of business are reviewed to determine if they are recoverable from future
income, including investment income. If such costs are determined to be
unrecoverable, they are expensed at the time of determination. Although
realization of deferred policy acquisition costs is not assured, management
believes it is more likely than not that all of these costs will be realized.
The amount of deferred policy acquisition costs considered realizable, however,
could be reduced in the near term if the estimates of gross profits or total
revenues discussed above are reduced. The amount of amortization of deferred
policy acquisition costs could be revised in the near term if any of the
estimates discussed above are revised.
G. PROPERTY AND EQUIPMENT
Property, equipment and leasehold improvements are stated at cost, less
accumulated depreciation and amortization. Depreciation is provided using the
straight-line or accelerated method over the estimated useful lives of the
related assets which generally range from 3 to 30 years. Amortization of
leasehold improvements is provided using the straight-line method over the
lesser of the term of the leases or the estimated useful life of the
improvements.
H. SEPARATE ACCOUNTS
Separate account assets and liabilities represent segregated funds administered
and invested by the Company for the benefit of certain pension, variable annuity
and variable life insurance contractholders. Assets consist principally of
bonds, common stocks, mutual funds, and short-term obligations at market value.
The investment income, gains, and losses of these accounts generally accrue to
the contractholders and, therefore, are not included in the Company's net
income. Appreciation and depreciation of the Company's interest in the separate
accounts, including undistributed net investment income, is reflected in
shareholder's equity or net investment income.
I. POLICY LIABILITIES AND ACCRUALS
Future policy benefits are liabilities for life, health and annuity products.
Such liabilities are established in amounts adequate to meet the estimated
future obligations of policies in force. The liabilities associated with
traditional life insurance products are computed using the net level premium
method for individual life and annuity policies, and are based upon estimates as
to future investment yield, mortality and withdrawals that include provisions
for adverse deviation. Future policy benefits for individual life insurance and
annuity policies are computed using interest rates ranging from 2 1/2% to 6% for
life insurance and 2% to 9 1/2% for annuities. Estimated liabilities are
established for group life and health policies that contain experience rating
provisions. Mortality, morbidity and withdrawal assumptions for all policies are
based on the Company's own experience and industry standards. Liabilities for
universal life include deposits received from customers and investment earnings
on their fund balances, less administrative charges. Universal life fund
balances are also assessed mortality and surrender charges. Liabilities for
outstanding claims, losses and loss adjustment expenses are estimates of
payments to be made on property and casualty and health insurance for reported
losses and estimates of losses incurred but not reported. These liabilities are
determined using case basis evaluations and statistical analyses and represent
estimates of the ultimate cost of all losses incurred but not paid. These
estimates are continually reviewed and adjusted as necessary; such adjustments
are reflected in
F-8
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
current operations. Estimated amounts of salvage and subrogation on unpaid
property and casualty losses are deducted from the liability for unpaid claims.
Premiums for property and casualty, group life, and accident and health
insurance are reported as earned on a pro-rata basis over the contract period.
The unexpired portion of these premiums is recorded as unearned premiums.
Contractholder deposit funds and other policy liabilities include
investment-related products such as guaranteed investment contracts, deposit
administration funds and immediate participation guarantee funds and consist of
deposits received from customers and investment earnings on their fund balances.
All policy liabilities and accruals are based on the various estimates discussed
above. Although the adequacy of these amounts cannot be assured, management
believes that it is more likely than not that policy liabilities and accruals
will be sufficient to meet future obligations of policies in force. The amount
of liabilities and accruals, however, could be revised in the near term if the
estimates discussed above are revised.
J. PREMIUM AND FEE REVENUE AND RELATED EXPENSES
Premiums for individual life and health insurance and individual and group
annuity products, excluding universal life and investment-related products, are
considered revenue when due. Property and casualty and group life, accident and
health insurance premiums are recognized as revenue over the related contract
periods. Benefits, losses and related expenses are matched with premiums,
resulting in their recognition over the lives of the contracts. This matching is
accomplished through the provision for future benefits, estimated and unpaid
losses and amortization of deferred policy acquisition costs. Revenues for
investment-related products consist of net investment income and contract
charges assessed against the fund values. Related benefit expenses primarily
consist of net investment income credited to the fund values after deduction for
investment and risk charges. Revenues for universal life products consist of net
investment income, and mortality, administration and surrender charges assessed
against the fund values. Related benefit expenses include universal life benefit
claims in excess of fund values and net investment income credited to universal
life fund values. Certain policy charges that represent compensation for
services to be provided in future periods are deferred and amortized over the
period benefited using the same assumptions used to amortize capitalized
acquisition costs.
K. POLICYHOLDER DIVIDENDS
Prior to demutualization, certain life, health and annuity insurance policies
contained dividend payment provisions that enabled the policyholder to
participate in the earnings of the Company. The amount of policyholders'
dividends was determined annually by the Board of Directors. The aggregate
amount of policyholders' dividends was related to the actual interest,
mortality, morbidity and expense experience for the year and the Company's
judgment as to the appropriate level of statutory surplus to be retained. Upon
demutualization, certain participating individual life insurance policies and
individual annuity and supplemental contracts were transferred to the Closed
Block. The Closed Block was funded to protect the dividend expectations of such
policies and contracts. Accordingly, these policies no longer participate in the
earnings and surplus of the Open Block. Subsequent to demutualization, the
Company ceased issuance of participating policies.
Prior to demutualization, the participating life insurance in force was 16.2% of
the face value of total life insurance in force at December 31, 1994. The
premiums on participating life, health and annuity policies were 11.3% and 6.4%
of total life, health and annuity statutory premiums prior to demutualization in
1995 and 1994, respectively. Total policyholders' dividends were $23.3 million
and $32.8 million prior to demutualization in 1995 and 1994, respectively.
F-9
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
L. FEDERAL INCOME TAXES
AFC, its life insurance subsidiaries, FAFLIC, AFLIAC, and its non-life insurance
domestic subsidiaries file a life-nonlife consolidated United States Federal
income tax return. Entities included within the consolidated group are
segregated into either a life insurance or non-life insurance company subgroup.
The consolidation of these subgroups is subject to certain statutory
restrictions on the percentage of eligible non-life insurance company taxable
operating losses that can be applied to offset life insurance company taxable
income. APY and its subsidiaries will be included in the AFC consolidated return
as part of the non-life insurance company subgroup for the period July 17, 1997
through December 31, 1997. For the period January 1, 1997 through July 16, 1997,
APY and its subsidiaries will file a separate consolidated United States Federal
income tax return.
The Board of Directors has delegated to AFC management, the development and
maintenance of appropriate Federal Income Tax allocation policies and
procedures, which are subject to written agreement between the companies. The
Federal income tax for all subsidiaries in the consolidated return of AFC is
calculated on a separate return basis. Any current tax liability is paid to AFC.
Tax benefits resulting from taxable operating losses or credits of AFC's
subsidiaries are not reimbursed to the subsidiary until such losses or credits
can be utilized by the subsidiary on a separate return basis.
Deferred income taxes are generally recognized when assets and liabilities have
different values for financial statement and tax reporting purposes, and for
other temporary taxable and deductible differences as defined by Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes (SFAS No.
109). These differences result primarily from loss reserves, policy acquisition
expenses, and unrealized appreciation/depreciation on investments.
M. NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued Statement No. 131, Disclosures About Segments of
an Enterprise and Related Information. This statement establishes standards for
the way that public enterprises report information about operating segments in
annual financial statements and requires that selected information about those
operating segments be reported in interim financial statements. This statement
supersedes Statement No. 14, Financial Reporting for Segments of a Business
Enterprise. Statement No. 131 requires that all public enterprises report
financial and descriptive information about their reportable operating segments.
Operating segments are defined as components of an enterprise about which
separate financial information is available that is evaluated regularly by the
chief operating decision maker in deciding how to allocate resources and in
assessing performance. This statement is effective for fiscal years beginning
after December 15, 1997. The Company anticipates no impact from the adoption of
Statement No. 131.
In June 1997, the FASB also issued Statement No. 130, Reporting Comprehensive
Income, which established standards for the reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements. All items that are required to be recognized under
accounting standards as components of comprehensive income are to be reported in
a financial statement that is displayed with the same prominence as other
financial statements. This statement stipulates that comprehensive income
reflect the change in equity of an enterprise during a period from transactions
and other events and circumstances from non-owner sources. This statement is
effective for fiscal years beginning after December 15, 1997. The Company
anticipates that the adoption of Statement No. 130 will result primarily in
reporting the changes in unrealized gains and losses on investments in debt and
equity securities in comprehensive income.
N. RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the current year
presentation.
F-10
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
2. SIGNIFICANT TRANSACTIONS
On February 3, 1997, AFC Capital Trust (the "Trust"), a subsidiary business
trust of AFC, issued $300 million Series A Capital Securities, which pay
cumulative dividends at a rate of 8.207% semiannually commencing August 15,
1997. The Trust exists for the sole purpose of issuing the Capital Securities
and investing the proceeds thereof in an equivalent amount of 8.207% Junior
Subordinated Deferrable Interest Debentures due 2027 of AFC (the "Subordinated
Debentures"). Through certain guarantees, the Subordinated Debentures and the
terms of related agreements, AFC has irrevocably and unconditionally guaranteed
the obligations of the Trust under the Capital Securities. Net proceeds from the
offering of approximately $296.3 million are intended to fund a portion of the
acquisition of the 24.2 million publicly-held shares of APY pursuant to an
Agreement and Plan of Merger dated February 19, 1997.
The merger of APY and a wholly-owned subsidiary of AFC was consummated on July
16, 1997. Through the merger, AFC acquired all of the outstanding common stock
of APY that FAFLIC did not already own in exchange for cash of $425.6 million
and approximately 9.7 million shares of AFC stock valued at $372.5 million. At
consummation of this transaction AFC owned 59.5% through FAFLIC and 40.5%
directly.
The merger has been accounted for as a purchase by AFC. Total consideration of
approximately $798.1 million has been allocated to the minority interest in the
assets and liabilities based on estimates of their fair values. The minority
interest acquired totaled $703.5 million. A total of $90.6 million representing
the excess of the purchase price over the fair values of the net assets
acquired, net of deferred taxes, has been allocated to goodwill and is being
amortized over a 40-year period.
The pushdown of goodwill to APY resulted in an increase to the consolidated
equity of FAFLIC of $61.3 million as additional paid in capital. The effects of
this transaction on the 1997 results of the Company are as follows:
<TABLE>
<CAPTION>
INCREASE (DECREASE)
-------------------
<S> <C>
Revenue........................................................................................ $ (6.7)
-----
-----
Realized capital gains included in revenue..................................................... $ (4.9)
-----
-----
Net income..................................................................................... $ (6.1)
-----
-----
Unrealized appreciation on investments......................................................... $ 4.4
-----
-----
</TABLE>
In December 1997, APY redeemed 5,735.3 shares of its issued and outstanding
common stock owned by AFC for $195 million in cash and securities. The effect of
this transaction was to increase FAFLIC's ownership of APY by 6.3%.
On April 14, 1997, the Company entered into an agreement in principle to
transfer the Company's individual disability income under a 100% coinsurance
agreement to Metropolitan Life Insurance Company. The coinsurance agreement
became effective October 1, 1997. The transaction has resulted in the
recognition of a $53.9 million pre-tax loss in the first quarter of 1997.
Effective January 1, 1998, the Company entered into an agreement with
Reinsurance Group of America, Inc. to reinsure the mortality risk on the
universal life and variable universal life blocks of business. Management
believes that this agreement will not have a material effect on the results of
operations or financial position of the Company.
Pursuant to the plan of reorganization effective October 16, 1995, AFC issued
37.5 million shares of its common stock to eligible policyholders. AFC also
issued 12.6 million shares of its common stock at a price of
F-11
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
$21.00 per share in a public offering, resulting in net proceeds of $248.0
million, and issued Senior Debentures in the principal amount of $200.0 million
which resulted in net proceeds of $197.2 million. AFC contributed $392.4 million
of these proceeds to FAFLIC.
Effective March 31, 1995, the Company entered into an agreement with TSSG, a
division of First Data Corporation, pursuant to which the Company sold its
mutual fund processing business and agreed not to engage in this business for
four years after that date. In accordance with this agreement, the Company
received proceeds of $32.1 million. A gain of $13.5 million, net of taxes of
$7.2 million, was recorded in March 1995. Additionally, the Company received a
non-recurring $3.1 million contingent payment, net of taxes of $1.7 million, in
1996, related to the aforementioned sale.
3. INVESTMENTS
A. SUMMARY OF INVESTMENTS
The Company accounts for its investments, all of which are classified as
available-for-sale, in accordance with SFAS No. 115.
The amortized cost and fair value of available-for-sale fixed maturities and
equity securities were as follows:
<TABLE>
<CAPTION>
1997
-----------------------------------------------
GROSS GROSS
DECEMBER 31 AMORTIZED UNREALIZED UNREALIZED FAIR
(IN MILLIONS) COST (1) GAINS LOSSES VALUE
- ---------------------------------------- --------- ---------- ----------- --------
<S> <C> <C> <C> <C>
U.S. Treasury securities and U.S.
government and agency securities....... $ 265.3 $ 9.5 $ 0.9 $ 273.9
States and political subdivisions....... 2,200.6 78.3 3.1 2,275.8
Foreign governments..................... 110.8 8.5 2.2 117.1
Corporate fixed maturities.............. 4,041.6 175.1 12.2 4,204.5
Mortgage-backed securities.............. 374.5 9.7 2.0 382.2
--------- ---------- ----------- --------
Total fixed maturities.................. $ 6,992.8 $281.1 $ 20.4 $7,253.5
--------- ---------- ----------- --------
--------- ---------- ----------- --------
Equity securities....................... $ 341.1 $141.9 $ 4.0 $ 479.0
--------- ---------- ----------- --------
--------- ---------- ----------- --------
<CAPTION>
1996
-----------------------------------------------
GROSS GROSS
DECEMBER 31 AMORTIZED UNREALIZED UNREALIZED FAIR
(IN MILLIONS) COST (1) GAINS LOSSES VALUE
- ---------------------------------------- --------- ---------- ----------- --------
<S> <C> <C> <C> <C>
U.S. Treasury securities and U.S.
government and agency securities....... $ 273.6 $ 9.3 $ 1.6 $ 281.3
States and political subdivisions....... 2,236.9 48.5 7.7 2,277.7
Foreign governments..................... 108.0 7.3 -- 115.3
Corporate fixed maturities.............. 4,277.5 140.3 15.7 4,402.1
Mortgage-backed securities.............. 383.1 4.7 2.7 385.1
--------- ---------- ----------- --------
Total fixed maturities.................. $ 7,279.1 $210.1 $ 27.7 $7,461.5
--------- ---------- ----------- --------
--------- ---------- ----------- --------
Equity securities....................... $ 327.9 $148.9 $ 3.7 $ 473.1
--------- ---------- ----------- --------
--------- ---------- ----------- --------
</TABLE>
(1) Amortized cost for fixed maturities and cost for equity securities.
In connection with AFLIAC's voluntary withdrawal of its license in New York,
AFLIAC agreed with the New York Department of Insurance to maintain, through a
custodial account in New York, a security deposit, the market value of which
will at all times equal 102% of all outstanding general account liabilities of
AFLIAC for New York policyholders, claimants and creditors. At December 31,
1997, the amortized cost and market
F-12
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
value of assets on deposit were $276.8 million and $291.7 million, respectively.
At December 31, 1996, the amortized cost and market value of assets on deposit
were $284.9 million and $292.2 million, respectively
In addition, fixed maturities, excluding those securities on deposit in New
York, with an amortized cost of $105.1 million and $98.0 million were on deposit
with various state and governmental authorities at December 31, 1997 and 1996,
respectively.
There were no contractual fixed maturity investment commitments at December 31,
1997 and 1996, respectively.
The amortized cost and fair value by maturity periods for fixed maturities are
shown below. Actual maturities may differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without call
or prepayment penalties, or the Company may have the right to put or sell the
obligations back to the issuers. Mortgage backed securities are included in the
category representing their ultimate maturity.
<TABLE>
<CAPTION>
1997
--------------------
DECEMBER 31 AMORTIZED FAIR
(IN MILLIONS) COST VALUE
- ---------------------------------------- --------- --------
<S> <C> <C>
Due in one year or less................. $ 464.5 $ 467.7
Due after one year through five years... 2,142.9 2,225.7
Due after five years through ten
years.................................. 2,137.3 2,217.1
Due after ten years..................... 2,248.1 2,343.0
--------- --------
Total................................... $ 6,992.8 $7,253.5
--------- --------
--------- --------
</TABLE>
The proceeds from voluntary sales of available-for-sale securities and the gross
realized gains and gross realized losses on those sales were as follows:
<TABLE>
<CAPTION>
PROCEEDS FROM
FOR THE YEARS ENDED DECEMBER 31 VOLUNTARY GROSS GROSS
(IN MILLIONS) SALES GAINS LOSSES
- --------------------------------------------- ------------------ ----- ------
<S> <C> <C> <C>
1997
Fixed maturities............................. $1,894.8 $27.6 $ 16.2
-------- ----- ------
Equity securities............................ $ 145.5 $55.8 $ 1.3
-------- ----- ------
1996
Fixed maturities............................. $2,432.8 $19.3 $ 30.5
-------- ----- ------
Equity securities............................ $ 228.1 $56.1 $ 1.3
-------- ----- ------
1995
Fixed maturities............................. $1,612.3 $23.7 $ 33.0
-------- ----- ------
Equity securities............................ $ 122.2 $23.1 $ 6.9
-------- ----- ------
</TABLE>
F-13
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
Unrealized gains and losses on available-for-sale and other securities, are
summarized as follows:
<TABLE>
<CAPTION>
EQUITY
SECURITIES
FOR THE YEARS ENDED DECEMBER 31 FIXED AND OTHER
(IN MILLIONS) MATURITIES (1) TOTAL
- ------------------------------------------------------------ ---------- ----------- -------
<S> <C> <C> <C>
1997
Net appreciation, beginning of year......................... $ 71.3 $ 60.1 $ 131.4
---------- ----------- -------
Net (depreciation) appreciation on available-for-sale
securities.............................................. 83.2 (5.9) 77.3
Appreciation due to AFC purchase of minority interest of
Allmerica P&C........................................... 50.7 59.6 110.3
Net depreciation from the effect on deferred policy
acquisition costs and on policy liabilities............. (16.7) -- (16.7)
Provision for deferred federal income taxes and minority
interest................................................ (65.9) (27.1) (93.0)
---------- ----------- -------
51.3 26.6 77.9
---------- ----------- -------
Net appreciation, end of year............................... $122.7 $ 86.6 $ 209.3
---------- ----------- -------
---------- ----------- -------
1996
Net appreciation, beginning of year......................... $108.7 $ 44.3 $ 153.0
---------- ----------- -------
Net (depreciation) appreciation on available-for-sale
securities.............................................. (94.1) 35.9 (58.2)
Net appreciation from the effect on deferred policy
acquisition costs and on policy liabilities............. 23.1 -- 23.1
Provision for deferred federal income taxes and minority
interest................................................ 33.6 (20.1) 13.5
---------- ----------- -------
(37.4) 15.8 (21.6)
---------- ----------- -------
Net appreciation, end of year............................. $ 71.3 $ 60.1 $ 131.4
---------- ----------- -------
---------- ----------- -------
1995
Net appreciation (depreciation), beginning of year.......... $(89.4) $ 10.4 $ (79.0)
---------- ----------- -------
Effect of transfer of securities between classifications:
Net appreciation on available-for-sale securities......... 29.2 -- 29.2
Net depreciation from the effect of accounting change on
deferred policy acquisition costs and on policy
liabilities............................................. (6.8) -- (6.8)
Provision for deferred federal income taxes and minority
interest................................................ (9.6) -- (9.6)
---------- ----------- -------
12.8 -- 12.8
---------- ----------- -------
Net appreciation on available-for-sale securities........... 465.4 87.5 552.9
Net depreciation from the effect on deferred policy
acquisition costs and on policy liabilities................ (86.9) (86.9)
Provision for deferred federal income taxes and minority
interest................................................... (193.2) (53.6) (246.8)
---------- ----------- -------
185.3 33.9 219.2
---------- ----------- -------
Net appreciation, end of year............................... $108.7 $ 44.3 $ 153.0
---------- ----------- -------
---------- ----------- -------
</TABLE>
(1) Includes net appreciation on other investments of $1.8 million, $0.6
million, and 2.2 million in 1997, 1996, and 1995, respectively.
B. MORTGAGE LOANS AND REAL ESTATE
FAFLIC's mortgage loans and real estate are diversified by property type and
location. Real estate investments have been obtained primarily through
foreclosure. Mortgage loans are collateralized by the related properties and
generally are no more than 75% of the property's value at the time the original
loan is made.
F-14
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
The carrying values of mortgage loans and real estate investments net of
applicable reserves were as follows:
<TABLE>
<CAPTION>
DECEMBER 31
(IN MILLIONS) 1997 1996
- ---------------------------------------- ------ --------
<S> <C> <C>
Mortgage loans.......................... $567.5 $ 650.1
------ --------
Real estate:
Held for sale......................... 50.3 110.4
Held for production of income......... -- 10.3
------ --------
Total real estate................... 50.3 120.7
------ --------
Total mortgage loans and real estate.... $617.8 $ 770.8
------ --------
------ --------
</TABLE>
Reserves for mortgage loans were $20.7 million and $19.6 million at December 31,
1997 and 1996, respectively.
During 1997, the Company committed to a plan to dispose of all real estate
assets by the end of 1998. As a result, real estate assets with a carrying
amount of $54.7 million were written down to the estimated fair value less cost
to sell of $50.3 million, and a net realized investment loss of $4.4 million was
recognized. Depreciation is not recorded on these assets while they are held for
disposal.
There were no non-cash investing activities, including real estate acquired
through foreclosure of mortgage loans, in 1997. During 1996 and 1995, non-cash
investing activities included real estate acquired through foreclosure of
mortgage loans, which had a fair value of $0.9 million and $26.1 million,
respectively.
At December 31, 1997, contractual commitments to extend credit under commercial
mortgage loan agreements amounted to approximately $39.4 million, of which $10.0
million related to the Closed Block. These commitments generally expire within
one year.
F-15
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
Mortgage loans and real estate investments comprised the following property
types and geographic regions:
<TABLE>
<CAPTION>
DECEMBER 31
(IN MILLIONS) 1997 1996
- ---------------------------------------- ------ --------
<S> <C> <C>
Property type:
Office building....................... $265.1 $ 317.1
Residential........................... 66.6 95.4
Retail................................ 132.8 177.0
Industrial / warehouse................ 107.2 124.8
Other................................. 66.8 91.0
Valuation allowances.................. (20.7) (34.5)
------ --------
Total................................... $617.8 $ 770.8
------ --------
------ --------
Geographic region:
South Atlantic........................ 173.4 227.0
Pacific............................... 152.8 154.4
East North Central.................... 102.0 119.2
Middle Atlantic....................... 73.8 112.6
West South Central.................... 34.9 41.6
New England........................... 46.9 50.9
Other................................. 54.7 99.6
Valuation allowances.................. (20.7) (34.5)
------ --------
Total................................... $617.8 $ 770.8
------ --------
------ --------
</TABLE>
At December 31, 1997, scheduled mortgage loan maturities were as follows: 1998
- -- $136.4 million; 1999 -- $70.8 million; 2000 -- $129.2 million; 2001 -- $26.4
million; 2002 -- $29.9 million; and $174.8 million thereafter. Actual maturities
could differ from contractual maturities because borrowers may have the right to
prepay obligations with or without prepayment penalties and loans may be
refinanced. During 1997, the Company did not refinance any mortgage loans based
on terms which differed from those granted to new borrowers.
F-16
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
C. INVESTMENT VALUATION ALLOWANCES
Investment valuation allowances which have been deducted in arriving at
investment carrying values as presented in the consolidated balance sheets and
changes thereto are shown below.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED BALANCE AT
DECEMBER 31 BALANCE AT DECEMBER
(IN MILLIONS) JANUARY 1 ADDITIONS DEDUCTIONS 31
- ------------------------- ---------- --------- ---------- ----------
<S> <C> <C> <C> <C>
1997
Mortgage loans........... $19.6 $ 2.5 $ 1.4 $20.7
Real estate.............. 14.9 6.0 20.9 --
----- --------- ----- -----
Total................ $34.5 $ 8.5 $22.3 $20.7
----- --------- ----- -----
----- --------- ----- -----
1996
Mortgage loans........... $33.8 $ 5.5 $19.7 $19.6
Real estate.............. 19.6 -- 4.7 14.9
----- --------- ----- -----
Total................ $53.4 $ 5.5 $24.4 $34.5
----- --------- ----- -----
----- --------- ----- -----
1995
Mortgage loans........... $47.2 $ 1.5 $14.9 $33.8
Real estate.............. 22.9 (0.6) 2.7 19.6
----- --------- ----- -----
Total................ $70.1 $ 0.9 $17.6 $53.4
----- --------- ----- -----
----- --------- ----- -----
</TABLE>
The carrying value of impaired loans was $30.5 million and $33.6 million, with
related reserves of $13.8 million and $11.9 million as of December 31, 1997 and
1996, respectively. All impaired loans were reserved as of December 31, 1997 and
1996.
The average carrying value of impaired loans was $30.8 million, $50.4 million
and $117.9 million, with related interest income while such loans were impaired
of $3.2 million, $5.8 million and $9.3 million as of December 31, 1997, 1996 and
1995 respectively.
D. FUTURES CONTRACTS
The Company purchases long futures contracts and sells short futures contracts
on margin to hedge against interest rate fluctuations associated with the sale
of Guaranteed Investment Contracts ("GICs"). The Company is exposed to interest
rate risk from the time of sale of the GIC until the receipt of the deposit and
purchase of the underlying asset to back the liability. The Company's exposure
to credit risk under futures contracts is limited to the margin deposited with
the broker. The Company only trades futures contracts with nationally recognized
brokers, which the Company believes have adequate capital to ensure that there
is minimal danger of default. The Company does not require collateral or other
securities to support financial instruments with credit risk.
There were no futures contracts outstanding at December 31, 1997, and $(33.0)
million notional amount of short contracts at December 31, 1996. The notional
amounts of the contracts represent the extent of the Company's investment but
not the future cash requirements, as the Company generally settles open
positions prior to maturity. The fair value of futures contracts outstanding
were $(32.4) million at December 31, 1996.
Gains and losses on hedge contracts related to interest rate fluctuations are
deferred and recognized in income over the period being hedged corresponding to
related guaranteed investment contracts. If instruments being hedged by futures
contracts are disposed, any unamortized gains or losses on such contracts are
included in the determination of the gain or loss from the disposition. There
were no deferred hedging gains (losses) in 1997.
F-17
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
Deferred hedging gains were $0.5 million and $5.6 million in 1996 and 1995,
respectively. Gains and losses on hedge contracts that are deemed ineffective by
the Company are realized immediately.
A reconciliation of the notional amount of futures contracts is as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
(IN MILLIONS) 1997 1996 1995
- --------------------------------------------- ------ ------ ------
<S> <C> <C> <C>
Contracts outstanding, beginning of year..... $(33.0) $ 74.7 $126.6
New contracts................................ (0.2) (1.1) 349.2
Contracts terminated......................... 33.2 (106.6) (401.1)
------ ------ ------
Contracts outstanding, end of year........... -- $(33.0) $ 74.7
------ ------ ------
------ ------ ------
</TABLE>
E. FOREIGN CURRENCY SWAP CONTRACTS
The Company enters into foreign currency swap contracts to hedge exposure to
currency risk on foreign fixed maturity investments. Interest and principal
related to foreign fixed maturity investments payable in foreign currencies, at
current exchange rates, are exchanged for the equivalent payment translated at a
specific currency exchange rate. The Company's maximum exposure to counterparty
credit risk is the difference between the foreign currency exchange rate, as
agreed upon in the swap contract, and the foreign currency spot rate on the date
of the exchange. The fair values of the foreign currency swap contracts
outstanding were $0.1 million and $(9.2) million at December 31, 1997 and 1996,
respectively. Changes in the fair value of contracts are reported in unrealized
gains or losses, consistent with the reporting for the underlying hedged
security. The Company does not require collateral or other security to support
financial instruments with credit risk.
The difference between amounts paid and received on foreign currency swap
contracts is reflected in the net investment income related to the underlying
assets and is not material in 1997, 1996 and 1995. Any gain or loss on the
termination of swap contracts is deferred and recognized with any gain or loss
on the hedged transaction. The Company had no deferred gains or losses on
foreign currency swap contracts.
A reconciliation of the notional amount of swap contracts is as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
(IN MILLIONS) 1997 1996 1995
- --------------------------------------------- ------ ------ ------
<S> <C> <C> <C>
Contracts outstanding, beginning of year..... $ 68.6 $104.6 $118.7
New contracts................................ 5.0 -- --
Contracts expired............................ (18.2) (36.0) --
Contracts terminated......................... -- -- (14.1)
------ ------ ------
Contracts outstanding, end of year........... $ 55.4 $ 68.6 $104.6
------ ------ ------
------ ------ ------
</TABLE>
Expected maturities of foreign currency swap contracts are $25.0 million in
1999, $11.6 million in 2000 and $18.8 million thereafter. There are no expected
maturities of foreign currency swap contracts in 1998, 2001 and 2002.
F. INTEREST RATE SWAP CONTRACTS
The Company enters into interest rate swap contracts to hedge exposure to
interest rate fluctuations. Under these swap contracts, the Company agrees to
exchange, at specified intervals, the difference between fixed and floating
interest amounts calculated on an agreed-upon notional principal amount. As with
foreign currency swap contracts, the primary risk associated with these
transactions is the inability of the counterparty to meet its obligation. The
Company regularly assesses the financial strength of its counterparties and
generally enters into forward or swap agreements with counterparties rated "A"
or better by the nationally
F-18
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
recognized rating agencies. Because the underlying principal of swap contracts
is not exchanged, the Company's maximum exposure to counterparty credit risk is
the difference in payments exchanged, which at December 31, 1997 was not
material to the Company. The Company does not require collateral or other
security to support financial instruments with credit risk.
The net amount receivable or payable is recognized over the life of the swap
contract as an adjustment to net investment income. The (decrease) or increase
in net investment income related to interest rate swap contracts was $(0.4)
million, $0.6 million and $0.7 million for the years ended December 31, 1997,
1996, and 1995, respectively. The fair values of interest rate swap contracts
outstanding were $(2.3) million at December 31, 1997. There were no interest
rate contracts outstanding at December 31, 1996. Changes in the fair value of
contracts are reported as an unrealized gain or loss, consistent with the
underlying hedged security. Any gain or loss on the termination of interest rate
swap contracts accounted for as hedges are deferred and recognized with the gain
or loss on the hedged transaction. The Company had no deferred gain or loss on
interest rate swap contracts in 1997 or 1996.
A reconciliation of the notional amount of interest rate and other swap
contracts is as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
(IN MILLIONS) 1997 1996 1995
- --------------------------------------------- ------ ------ ------
<S> <C> <C> <C>
Contracts outstanding, beginning of year..... $ 5.0 $ 17.5 $ 22.8
New contracts................................ 244.7 63.6 --
Contracts expired............................ (5.6) (17.5) (5.3)
------ ------ ------
Contracts outstanding, end of year........... $244.1 $ 63.6 $ 17.5
------ ------ ------
------ ------ ------
</TABLE>
Expected maturities of interest rate swap contracts outstanding at December 31,
1997 are as follows: $5.0 million in 1998 and $239.1 million in 2000 and
thereafter. There are no expected maturities of interest rate contracts in 1999.
G. OTHER SWAP CONTRACTS
The Company enters into security return-linked swap contracts and insurance
portfolio-linked swap contracts for investment purposes. Under the security
return-linked contracts, the Company agrees to exchange cash flows according to
the performance of a specified security or portfolio of securities. Under the
insurance portfolio-linked swap contracts, the Company agrees to exchange cash
flows according to the performance of a specified underwriter's portfolio of
insurance business. As with interest rate swap contracts, the primary risk
associated with these transactions is the inability of the counterparty to meet
its obligation. The Company regularly assesses the financial strength of its
counterparties and generally enters into forward or swap agreements with
counterparties rated "A" or better by the nationally recognized rating agencies.
Because the underlying principal of swap contracts is not exchanged, the
Company's maximum exposure to counterparty credit risk is the difference in
payments exchanged, which at December 31, 1997, were not material to the
Company. Swap contracts also subject the Company to market risk associated with
changes in interest rates. The Company does not require collateral or other
security to support financial instruments with credit risk.
The swap contracts are marked to market with any gain or loss recognized
currently. The net amount receivable or payable under these contracts is
recognized when the contracts are marked to market. The fair values of swap
contracts outstanding were $(0.1) million and $0.1 million at December 31, 1997
and 1996, respectively. The net decrease in realized investment gains related to
other swap contracts was $(1.6) million for the year ended December 31, 1997.
There were no realized investment gains on other swap contracts recognized in
1996 and 1995.
F-19
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
A reconciliation of the notional amount of other swap contracts is as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
(IN MILLIONS) 1997 1996 1995
- --------------------------------------------- ------ ------ ------
<S> <C> <C> <C>
Contracts outstanding, beginning of year..... $ 58.6 $ -- $ --
New contracts................................ 192.1 58.6 --
Contracts expired............................ (211.6) -- --
Contracts terminated......................... (24.1) -- --
------ ------ ------
Contracts outstanding, end of year........... $ 15.0 $ 58.6 $ --
------ ------ ------
------ ------ ------
</TABLE>
Expected maturities of other swap contracts outstanding at December 31, 1997 are
as follows: $10 million in
1999 and $5 million in 2001. There are no expected maturities of such other swap
contracts in 1998, 2000, or 2002.
H. OTHER
At December 31, 1997, FAFLIC had no concentration of investments in a single
investee exceeding 10% of shareholder's equity, except for investments with the
U.S. Treasury with a carrying value of $262.5 million.
4. INVESTMENT INCOME AND GAINS AND LOSSES
A. NET INVESTMENT INCOME
The components of net investment income were as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
(IN MILLIONS) 1997 1996 1995
- --------------------------------------------- ------ ------ ------
<S> <C> <C> <C>
Fixed maturities............................. $541.9 $553.8 $555.1
Mortgage loans............................... 57.5 69.5 97.0
Equity securities............................ 10.6 11.1 13.2
Policy loans................................. 10.9 10.3 20.3
Real estate.................................. 20.1 40.8 48.7
Other long-term investments.................. 12.4 19.9 7.5
Short-term investments....................... 12.8 10.6 21.2
------ ------ ------
Gross investment income...................... 666.2 716.0 763.0
Less investment expenses..................... (24.4) (45.2) (52.5)
------ ------ ------
Net investment income........................ $641.8 $670.8 $710.5
------ ------ ------
------ ------ ------
</TABLE>
At December 31, 1997, mortgage loans on non-accrual status were $3.6 million
which were all restructured loans. There were no fixed maturities which were on
non-accrual status at December 31, 1997. The effect of non-accruals, compared
with amounts that would have been recognized in accordance with the original
terms of the investments, had no impact in 1997, and reduced net income by $0.5
million and $0.6 million in 1996 and 1995, respectively.
The payment terms of mortgage loans may from time to time be restructured or
modified. The investment in restructured mortgage loans, based on amortized
cost, amounted to $40.3 million, $51.3 million and $98.9 million at December 31,
1997, 1996 and 1995, respectively. Interest income on restructured mortgage
loans that would have been recorded in accordance with the original terms of
such loans amounted to $3.9 million, $7.7 million and $11.1 million in 1997,
1996 and 1995, respectively. Actual interest income on these loans included in
net investment income aggregated $4.2 million, $4.5 million and $7.1 million in
1997, 1996 and 1995, respectively.
F-20
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
There were no fixed maturities or mortgage loans which were non-income producing
for the twelve months ended December 31, 1997.
Included in other long-term investments is income from limited partnerships of
$7.8 million, $13.7 million and $0.1 million in 1997, 1996 and 1995 respectively
B. REALIZED INVESTMENT GAINS AND LOSSES
Realized gains (losses) on investments were as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
(IN MILLIONS) 1997 1996 1995
- --------------------------------------------- ------ ------ ------
<S> <C> <C> <C>
Fixed maturities............................. $ 14.7 $ (9.7) $ (7.0)
Mortgage loans............................... (1.2) (2.4) 1.4
Equity securities............................ 53.6 54.8 16.2
Real estate.................................. 12.8 21.1 5.3
Other........................................ (3.4) 3.0 3.2
------ ------ ------
Net realized investment gains................ $ 76.5 $ 66.8 $ 19.1
------ ------ ------
------ ------ ------
</TABLE>
5. FAIR VALUE DISCLOSURES OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments", requires
disclosure of fair value information about certain financial instruments
(insurance contracts, real estate, goodwill and taxes are excluded) for which it
is practicable to estimate such values, whether or not these instruments are
included in the balance sheet. The fair values presented for certain financial
instruments are estimates which, in many cases, may differ significantly from
the amounts which could be realized upon immediate liquidation. In cases where
market prices are not available, estimates of fair value are based on discounted
cash flow analyses which utilize current interest rates for similar financial
instruments which have comparable terms and credit quality. Fair values of
interest rate futures were not material at December 31, 1997 and 1996.
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments:
CASH AND CASH EQUIVALENTS
For these short-term investments, the carrying amount approximates fair value.
FIXED MATURITIES
Fair values are based on quoted market prices, if available. If a quoted market
price is not available, fair values are estimated using independent pricing
sources or internally developed pricing models using discounted cash flow
analyses.
EQUITY SECURITIES
Fair values are based on quoted market prices, if available. If a quoted market
price is not available, fair values are estimated using independent pricing
sources or internally developed pricing models.
F-21
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
MORTGAGE LOANS
Fair values are estimated by discounting the future contractual cash flows using
the current rates at which similar loans would be made to borrowers with similar
credit ratings. The fair value of below investment grade mortgage loans are
limited to the lesser of the present value of the cash flows or book value.
POLICY LOANS
The carrying amount reported in the consolidated balance sheets approximates
fair value since policy loans have no defined maturity dates and are inseparable
from the insurance contracts.
REINSURANCE RECEIVABLES
The carrying amount reported in the consolidated balance sheets approximates
fair value.
INVESTMENT CONTRACTS (WITHOUT MORTALITY FEATURES)
Fair values for the Company's liabilities under guaranteed investment type
contracts are estimated using discounted cash flow calculations using current
interest rates for similar contracts with maturities consistent with those
remaining for the contracts being valued. Other liabilities are based on
surrender values.
DEBT
The carrying value of short-term debt reported in the balance sheet approximates
fair value. The fair value of long-term debt was estimated using market quotes,
when available, and, when not available, discounted cash flow analyses.
The estimated fair values of the financial instruments were as follows:
<TABLE>
<CAPTION>
1997 1996
-------------------- --------------------
DECEMBER 31 CARRYING FAIR CARRYING FAIR
(IN MILLIONS) VALUE VALUE VALUE VALUE
- --------------------------------------------- --------- -------- --------- --------
<S> <C> <C> <C> <C>
FINANCIAL ASSETS
Cash and cash equivalents.................. $ 213.9 $ 213.9 $ 175.9 $ 175.9
Fixed maturities........................... 7,253.5 7,253.5 7,461.5 7,461.5
Equity securities.......................... 479.0 479.0 473.1 473.1
Mortgage loans............................. 567.5 597.0 650.1 675.7
Policy loans............................... 141.9 141.9 132.4 132.4
--------- -------- --------- --------
$ 8,655.8 $8,685.3 $ 8,893.0 $8,918.6
--------- -------- --------- --------
--------- -------- --------- --------
FINANCIAL LIABILITIES
Guaranteed investment contracts............ $ 985.2 $1,004.7 $ 1,101.3 $1,119.2
Supplemental contracts without life
contingencies............................ 22.4 22.4 23.1 23.1
Dividend accumulations..................... 87.8 87.8 87.3 87.3
Other individual contract deposit funds.... 57.9 55.7 76.9 74.3
Other group contract deposit funds......... 714.8 715.5 789.1 788.3
Individual annuity contracts............... 907.4 882.2 935.6 911.7
Short-term debt............................ 33.0 33.0 38.4 38.4
Long-term debt............................. 2.6 2.6 2.7 2.7
--------- -------- --------- --------
$ 2,811.1 $2,803.9 $ 3,054.4 $3,045.0
--------- -------- --------- --------
--------- -------- --------- --------
</TABLE>
F-22
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
6. CLOSED BLOCK
Included in other income in the Consolidated Statement of Income in 1997 and
1996 is a net pre-tax contribution from the Closed Block of $9.1 million and
$8.6 million, respectively. Summarized financial information of the Closed Block
as of December 31, 1997 and 1996 and for the period ended December 31, 1997 and
1996 is as follows:
<TABLE>
<CAPTION>
DECEMBER 31
(IN MILLIONS) 1997 1996
- ----------------------------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
Assets
Fixed maturities, at fair value (amortized cost of $400.1 and $397.2 respectively)........... $ 412.9 $ 403.9
Mortgage loans............................................................................... 112.0 114.5
Policy loans................................................................................. 218.8 230.2
Cash and cash equivalents.................................................................... 25.1 24.1
Accrued investment income.................................................................... 14.1 14.3
Deferred policy acquisition costs............................................................ 18.2 21.1
Other assets................................................................................. 5.6 2.7
--------- ---------
Total assets................................................................................... $ 806.7 $ 810.8
--------- ---------
--------- ---------
Liabilities
Policy liabilities and accruals.............................................................. $ 875.1 $ 883.4
Other liabilities............................................................................ 10.4 16.0
--------- ---------
Total liabilities.............................................................................. $ 885.5 $ 899.4
--------- ---------
--------- ---------
</TABLE>
F-23
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
<TABLE>
<CAPTION>
DECEMBER 31
(IN MILLIONS) 1997 1996
- ----------------------------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
Revenues
Premiums..................................................................................... $ 58.3 $ 61.7
Net investment income........................................................................ 53.4 52.6
Realized investment loss..................................................................... 1.3 (0.7)
--------- ---------
Total revenues................................................................................. 113.0 113.6
--------- ---------
Benefits and expenses
Policy benefits.............................................................................. 100.5 101.2
Policy acquisition expenses.................................................................. 3.0 3.2
Other operating expenses..................................................................... 0.4 0.6
--------- ---------
Total benefits and expenses.................................................................... 103.9 105.0
--------- ---------
Contribution from the Closed Block............................................................. $ 9.1 $ 8.6
--------- ---------
--------- ---------
Cash flows
Cash flows from operating activities:
Contribution from the Closed Block......................................................... $ 9.1 $ 8.6
Initial cash transferred to the Closed Block............................................... -- --
Change in deferred policy acquisition costs, net........................................... 2.9 3.4
Change in premiums and other receivables................................................... -- 0.2
Change in policy liabilities and accruals.................................................. (11.6) (13.9)
Change in accrued investment income........................................................ 0.2 2.3
Deferred Taxes............................................................................. (5.1) 1.0
Change in other assets..................................................................... (2.9) (1.6)
Change in expenses and taxes payable....................................................... (2.0) 1.7
Other, net................................................................................. (1.2) 1.4
--------- ---------
Net cash (used in) provided by operating activities............................................ (10.6) 3.1
--------- ---------
Cash flows from investing activities:
Sales, maturities and repayments of investments............................................ 161.6 188.1
Purchases of investments................................................................... (161.4) (196.9)
Other, net................................................................................. 11.4 12.2
--------- ---------
Net cash provided by (used in) investing activities............................................ 11.6 3.4
--------- ---------
Net increase in cash and cash equivalents...................................................... 1.0 6.5
Cash and cash equivalents, beginning of year................................................... 24.1 17.6
--------- ---------
Cash and cash equivalents, end of year......................................................... $ 25.1 $ 24.1
--------- ---------
--------- ---------
</TABLE>
On October 16, 1995, there were no valuation allowances transferred to the
Closed Block on mortgage loans. There are no valuation allowances on mortgage
loans in the Closed Block at December 31, 1997 or 1996, respectively.
Many expenses related to Closed Block operations are charged to operations
outside the Closed Block; accordingly, the contribution from the Closed Block
does not represent the actual profitability of the Closed Block operations.
Operating costs and expenses outside of the Closed Block are, therefore,
disproportionate to the business outside the Closed Block.
F-24
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
7. DEBT
Short- and long-term debt consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31
(IN MILLIONS) 1997 1996
- ------------------------------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
Short-Term
Commercial paper............................................................................... $ 33.0 $ 37.8
Other.......................................................................................... -- 0.6
--------- ---------
Total short-term debt............................................................................ $ 33.0 $ 38.4
--------- ---------
--------- ---------
Long-term debt................................................................................... $ 2.6 $ 2.7
--------- ---------
--------- ---------
</TABLE>
FAFLIC issues commercial paper primarily to manage imbalances between operating
cash flows and existing commitments. Commercial paper borrowing arrangements are
supported by various lines of credit. At December 31, 1997, the weighted average
interest rate for outstanding commercial paper was approximately 5.8%.
At December 31, 1997, AFC had approximately $140.0 million in committed lines of
credit provided by U.S. banks, of which $107.2 million was available for
borrowing. These lines of credit generally have terms of less than one year, and
require the Company to pay annual commitment fees limited to 0.07% of the
available credit. Interest that would be charged for usage of these lines of
credit is based upon negotiated arrangements.
During 1996, the Company utilized repurchase agreements to finance certain
investments. These repurchase agreements were settled by the end of 1996.
In October, 1995, AFC issued $200.0 million face amount of Senior Debentures for
proceeds of $197.2 million net of discounts and issuance costs. These securities
have an effective interest rate of 7.65%, and mature on October 16, 2025.
Interest is payable semiannually on October 15 and April 15 of each year. The
Senior Debentures are subject to certain restrictive covenants, including
limitations on issuance of or disposition of stock of restricted subsidiaries
and limitations on liens. AFC is in compliance with all covenants. The primary
source of cash for repayment of the debt by AFC is dividends from FAFLIC and
APY.
Interest expense was $3.6 million, $16.8 million and $4.3 million in 1997, 1996
and 1995, respectively. Interest paid on the credit agreement during 1997 was
approximately $2.8 million. Interest expense during 1996 also included $11.0
million related to interest payments on repurchase agreements. All interest
expense is recorded in other operating expenses.
8. FEDERAL INCOME TAXES
Provisions for federal income taxes have been calculated in accordance with the
provisions of SFAS No. 109. A summary of the federal income tax expense
(benefit) in the consolidated statements of income is shown below:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
(IN MILLIONS) 1997 1996 1995
- ------------------------------------------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Federal income tax expense (benefit)
Current............................................................................ $ 83.3 $ 96.8 $ 119.7
Deferred........................................................................... 14.2 (15.7) (37.0)
--------- --------- ---------
Total................................................................................ $ 97.5 $ 81.1 $ 82.7
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-25
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
The federal income taxes attributable to the consolidated results of operations
are different from the amounts determined by multiplying income before federal
income taxes by the expected federal income tax rate. The sources of the
difference and the tax effects of each were as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
(IN MILLIONS) 1997 1996 1995
- ------------------------------------------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Expected federal income tax expense.................................................. $ 131.8 $ 122.3 $ 105.6
Tax-exempt interest................................................................ (37.9) (35.3) (32.2)
Differential earnings amount....................................................... - (10.2) (7.6)
Dividend received deduction........................................................ (3.2) (1.6) (4.0)
Changes in tax reserve estimates................................................... 7.8 4.7 19.3
Other, net......................................................................... (1.0) 1.2 1.6
--------- --------- ---------
Federal income tax expense........................................................... $ 97.5 $ 81.1 $ 82.7
--------- --------- ---------
--------- --------- ---------
</TABLE>
Until conversion to a stock life insurance company, FAFLIC, as a mutual company,
reduced its deduction for policyholder dividends by the differential earnings
amount. This amount was computed, for each tax year, by multiplying the average
equity base of the FAFLIC/AFLIAC consolidated group, as determined for tax
purposes, by the estimate of an excess of an imputed earnings rate over the
average mutual life insurance companies' earnings rate. The differential
earnings amount for each tax year was subsequently recomputed when actual
earnings rates were published by the Internal Revenue Service (IRS). The
differential earnings amount included in 1996 related to an adjustment for the
1994 tax year based on the actual mutual life insurance companies' earnings rate
issued by the IRS in 1996. As a stock life company, FAFLIC is no longer required
to reduce its policyholder dividend deduction by the differential earnings
amount.
The deferred income tax liability (asset) represents the tax effects of
temporary differences attributable to the Company's consolidated federal tax
return group. As a result of the purchase discussed in Note 2, all companies
will file a single consolidated federal income tax return for tax years ending
on and after December 31, 1997. Deferred tax amounts presented for 1996 reflect
the combination of the former FAFLIC/ AFLIAC consolidated group with the former
APY consolidated group. Its components were as follows:
<TABLE>
<CAPTION>
DECEMBER 31
(IN MILLIONS) 1997 1996
- --------------------------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
Deferred tax (assets) liabilities
AMT carryforwards.......................................................................... $ (15.6) $ (16.3)
Loss reserve discounting................................................................... (391.6) (355.1)
Deferred acquisition costs................................................................. 291.8 249.4
Employee benefit plans..................................................................... (48.0) (41.4)
Investments, net........................................................................... 175.4 128.5
Bad debt reserve........................................................................... (14.3) (26.2)
Other, net................................................................................. 15.2 (5.8)
--------- ---------
Deferred tax (asset) liability, net.......................................................... $ 12.9 $ (66.9)
--------- ---------
--------- ---------
</TABLE>
Gross deferred income tax assets totaled $469.5 million and $444.8 million at
December 31, 1997 and 1996, respectively. Gross deferred income tax liabilities
totaled $482.4 million and $377.9 million at December 31, 1997 and 1996,
respectively.
The Company believes, based on the its recent earnings history and its future
expectations, that the Company's taxable income in future years will be
sufficient to realize all deferred tax assets. In determining the adequacy of
future income, management considered the future reversal of its existing
temporary differences and available tax planning strategies that could be
implemented, if necessary. At December 31, 1997, there are available alternative
minimum tax credit carryforwards of $15.6 million.
F-26
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
The Company's federal income tax returns are routinely audited by the IRS, and
provisions are routinely made in the financial statements in anticipation of the
results of these audits. The IRS has examined the FAFLIC/ AFLIAC consolidated
group's federal income tax returns through 1991. The IRS has also examined the
former Allmerica P&C consolidated group's federal income tax returns through
1991. The Company has appealed certain adjustments proposed by the IRS with
respect to the federal income tax returns for 1989, 1990, and 1991 for both the
FAFLIC/AFLIAC consolidated group as well as the former Allmerica P&C
consolidated group. Also, certain adjustments proposed by the IRS with respect
to FAFLIC/AFLIAC's federal income tax returns for 1982 and 1983 remain
unresolved. If upheld, these adjustments would result in additional payments;
however, the Company will vigorously defend its position with respect to these
adjustments. In management's opinion, adequate tax liabilities have been
established for all years. However, the amount of these tax liabilities could be
revised in the near term if estimates of the Company's ultimate liability are
revised.
9. PENSION PLANS
FAFLIC provides retirement benefits to substantially all of its employees under
three separate defined benefit pension plans. Effective January 1, 1995, the
Company adopted a defined benefit cash balance formula, under which the Company
annually provides an allocation to each eligible employee based on a percentage
of that employee's salary, similar to a defined contribution plan arrangement.
The 1997 and 1996 allocations were based on 7.0% of each eligible employee's
salary. In addition to the cash balance allocation, certain transition group
employees, who have met specified age and service requirements as of December
31, 1994, are eligible for a grandfathered benefit based primarily on the
employees' years of service and compensation during their highest five
consecutive plan years of employment. The Company's policy for the plans is to
fund at least the minimum amount required by the Employee Retirement Income
Security Act of 1974.
Components of net pension expense were as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
(IN MILLIONS) 1997 1996 1995
- -------------------------------------------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Service cost -- benefits earned during the year....................................... $ 19.9 $ 19.0 $ 19.7
Interest accrued on projected benefit obligations..................................... 23.5 21.9 21.1
Actual return on assets............................................................... (64.0) (42.2) (89.3)
Net amortization and deferral......................................................... 29.0 9.3 66.1
--------- --------- ---------
Net pension expense................................................................... $ 8.4 $ 8.0 $ 17.6
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-27
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
The following table summarizes the combined status of the three pension plans.
At December 31, 1997 and 1996 the plans' assets exceeded their projected benefit
obligations.
<TABLE>
<CAPTION>
DECEMBER 31
(IN MILLIONS) 1997 1996
- ----------------------------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested benefit obligation.................................................................... $ 332.6 $ 308.9
Unvested benefit obligation.................................................................. 7.5 6.6
--------- ---------
Accumulated benefit obligation................................................................. $ 340.1 $ 315.5
--------- ---------
--------- ---------
Pension liability included in Consolidated balance Sheets:
Projected benefit obligation................................................................. $ 370.4 $ 344.2
Plan assets at fair value.................................................................... 395.5 347.8
--------- ---------
Plan assets greater (less) than projected benefit obligation............................... 25.1 3.6
Unrecognized net (gain) loss from past experience............................................ (44.9) (9.1)
Unrecognized prior service benefit........................................................... (13.9) (11.5)
Unamortized transition asset................................................................. (26.2) (24.7)
--------- ---------
Net pension liability.......................................................................... $ (59.9) $ (41.7)
--------- ---------
--------- ---------
</TABLE>
As a result of AFC's purchase of the minority shares of APY, certain pension
liabilities were reduced by $11.7 million to reflect their fair value as of the
purchase date.
Determination of the projected benefit obligations was based on a weighted
average discount rate of 7.0% in 1997 and 1996 and the assumed long-term rate of
return on plan assets was 9.0%. The actuarial present value of the projected
benefit obligations was determined using assumed rates of increase in future
compensation levels ranging from 5.0% to 5.5%. Plan assets are invested
primarily in various separate accounts and the general account of FAFLIC. The
plans also hold stock of AFC.
The Company has three separate defined contribution 401(k) plans for its
employees. The Company matches employee elective 401(k) contributions, up to a
maximum percentage determined annually by the Board of Directors. During 1997
and 1996, the Company matched 50% of employees' contributions up to 6.0% of
eligible compensation. The total expenses related to these plans were $3.3
million and $5.5 million, in 1997 and 1996, respectively. In addition to these
plans, the Company has a defined contribution plan for substantially all of its
agents. The Plan expense in 1997 and 1996 was $2.8 million and $2.0 million,
respectively.
On January 1, 1998, substantially all of the aforementioned defined benefit and
defined contribution 401k plans were merged with the existing benefit plans of
FAFLIC. The transfer of benefit plans will not have a material impact on the
results of operations or financial position of the Company.
10. OTHER POSTRETIREMENT BENEFIT PLANS
In addition to the Company's pension plans, the Company currently provides
postretirement medical and death benefits to certain full-time employees and
dependents, under several plans sponsored by FAFLIC, Hanover, and Citizens.
Generally, employees become eligible at age 55 with at least 15 years of
service. Spousal coverage is generally provided for up to two years after death
of the retiree. Benefits include hospital, major medical, and a payment at death
equal to retirees' final compensation up to certain limits. Effective January 1,
1996, the Company revised these benefits so as to establish limits on future
benefit payments and to restrict eligibility to current employees. The medical
plans have varying copayments and deductibles, depending on the plan. These
plans are unfunded.
F-28
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
The plan changes, effective January 1, 1996, resulted in a negative plan
amendment (change in eligibility and medical benefits) of $26.8 million and
curtailment (no future increases in life insurance) of $5.3 million. The
negative plan amendment will be amortized as prior service cost over the average
number of years to full eligibility (approximately 9 years or $3.0 million per
year). Of the $5.3 million curtailment gain, $3.3 million has been deducted from
unrecognized loss and $2.0 million has been recorded as a reduction of the net
periodic postretirement benefit expense.
The plans' funded status reconciled with amounts recognized in the Company's
consolidated balance sheet were as follows:
<TABLE>
<CAPTION>
DECEMBER 31
(IN MILLIONS) 1997 1996
- ---------------------------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees.................................................................................... $ 40.7 $ 40.4
Fully eligible active plan participants..................................................... 7.0 7.5
Other active plan participants.............................................................. 24.1 24.4
--------- ---------
71.8 72.3
Plan assets at fair value..................................................................... -- --
--------- ---------
Accumulated postretirement benefit obligation in excess of plan assets........................ 71.8 72.3
Unrecognized prior service benefit............................................................ 15.3 23.8
Unrecognized loss............................................................................. (0.8) (5.0)
--------- ---------
Accrued postretirement benefit costs.......................................................... $ 86.3 $ 91.1
--------- ---------
--------- ---------
</TABLE>
The components of net periodic postretirement benefit expense were as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
(IN MILLIONS) 1997 1996 1995
- ---------------------------------------------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Service cost............................................................................ $ 3.0 $ 3.2 $ 4.2
Interest cost........................................................................... 4.6 4.6 6.9
Amortization of (gain) loss............................................................. (2.8) (2.8) (0.5)
--------- --------- ---------
Net periodic postretirement benefit expense............................................. $ 4.8 $ 5.0 $ 10.6
--------- --------- ---------
--------- --------- ---------
</TABLE>
As a result of AFC's purchase of the minority shares of APY, certain
postretirement liabilities were reduced by $6.1 million to reflect their fair
value as of the purchase date.
For purposes of measuring the accumulated postretirement benefit obligation at
December 31, 1997, health care costs were assumed to increase 8.0% in 1998,
declining thereafter until the ultimate rate of 5.5% is reached in 2001 and
remains at that level thereafter. The health care cost trend rate assumption has
a significant effect on the amounts reported. For example, increasing the
assumed health care cost trend rates by one percentage point in each year would
increase the accumulated postretirement benefit obligation at December 31, 1997
by $4.9 million, and the aggregate of the service and interest cost components
of net periodic postretirement benefit expense for 1997 by $0.6 million.
The weighted-average discount rate used in determining the accumulated
postretirement benefit obligation was 7.0% at December 31, 1997 and 1996.
As described in Note 9, all of the postretirement benefit plans of the Company
were merged with the existing plans of FAFLIC, effective January 1, 1998.
F-29
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
11. DIVIDEND RESTRICTIONS
Massachusetts, Delaware, New Hampshire and Michigan have enacted laws governing
the payment of dividends to stockholders by insurers. These laws affect the
dividend paying ability of FAFLIC, AFLIAC, Hanover and Citizens, respectively.
Dividends from FAFLIC and APY (from Hanover) to AFC will be the primary source
of cash for repayment of the debt and capital securities by AFC and payment of
dividends to AFC stockholders.
Massachusetts' statute limits the dividends an insurer may pay in any twelve
month period, without the prior permission of the Commonwealth of Massachusetts
Insurance Commissioner, to the greater of (i) 10% of its statutory policyholder
surplus as of the preceding December 31 or (ii) the individual company's
statutory net gain from operations for the preceding calendar year (if such
insurer is a life company), or its net income for the preceding calendar year
(if such insurer is not a life company). In addition, under Massachusetts law,
no domestic insurer shall pay a dividend or make any distribution to its
shareholders from other than unassigned funds unless the Commissioner shall have
approved such dividend or distribution. No dividends were declared nor paid
during 1997,1996 or 1995 During 1998, FAFLIC could pay dividends of $196.3
million to AFC without prior approval of the Commissioner. On January 12, 1998
FAFLIC declared a dividend of $50 million to AFC of which $18 million was paid
in February, 1998.
Pursuant to Delaware's statute, the maximum amount of dividends and other
distributions that an insurer may pay in any twelve month period, without the
prior approval of the Delaware Commissioner of Insurance, is limited to the
greater of (i) 10% of its policyholders' surplus as of the preceding December 31
or (ii) the individual company's statutory net gain from operations for the
preceding calendar year (if such insurer is a life company) or its net income
(not including realized capital gains) for the preceding calendar year (if such
insurer is not a life company). Any dividends to be paid by an insurer, whether
or not in excess of the aforementioned threshold, from a source other than
statutory earned surplus would also require the prior approval of the Delaware
Commissioner of Insurance. No dividends were paid by AFLIAC to FAFLIC during
1997, 1996 or 1995. During 1998, AFLIAC could pay dividends of $33.9 million to
FAFLIC without prior approval.
Pursuant to New Hampshire's statute, the maximum dividends and other
distributions that an insurer may pay in any twelve month period, without the
prior approval of the New Hampshire Insurance Commissioner, is limited to 10% of
such insurer's statutory policyholder surplus as of the preceding December 31.
Hanover declared dividends to Allmerica P&C totaling $120.0 million, 105.0
million and 40.0 million during 1997, 1996 and 1995, respectively During 1998,
the maximum dividend and other distributions that could be paid to Allmerica P&C
by Hanover, without prior approval of the Insurance Commissioner, was
approximately $127.6 million.
Pursuant to Michigan's statute, the maximum dividends and other distributions
that an insurer may pay in any twelve month period, without prior approval of
the Michigan Insurance Commissioner, is limited to the greater of 10% of
policyholders' surplus as of December 31 of the immediately preceding year or
the statutory net income less realized gains, for the immediately preceding
calendar year. Citizens Insurance paid dividends to Citizens Corporation
totaling $6.3 million and $3.0 million during 1996 and 1995, respectively. No
dividends were paid by Citizens Insurance during 1997. During, 1998, Citizens
Insurance could pay dividends of $86.9 million to Citizens Corporation without
prior approval.
F-30
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
12. SEGMENT INFORMATION
The Company offers financial products and services in two major areas: Risk
Management and Retirement and Asset Accumulation. Within these broad areas, the
Company conducts business principally in five operating segments.
The Risk Management group includes two segments: Regional Property and Casualty
and Corporate Risk Management Services.
The Regional Property and Casualty segment includes property and casualty
insurance products, such as automobile insurance, homeowners insurance,
commercial multiple-peril insurance, and workers' compensation insurance. These
products are offered by Allmerica P&C through its operating subsidiaries,
Hanover and Citizens. Substantially all of the Regional Property and Casualty
segment's earnings are generated in Michigan and the Northeast (Connecticut,
Massachusetts, New York, New Jersey, New Hampshire, Rhode Island, Vermont and
Maine). The Corporate Risk Management Services segment includes group life and
health insurance products and services which assist employers in administering
employee benefit programs and in managing the related risks.
The Retirement and Asset Accumulation group includes three segments: Allmerica
Financial Services, Institutional Services and Allmerica Asset Management. The
Allmerica Financial Services segment includes variable annuities, variable
universal life-type, traditional and health insurance products distributed via
retail channels to individuals across the country. The Institutional Services
segment includes primarily group retirement products such as 401(k) plans,
tax-sheltered annuities and GIC contracts which are distributed to institutions
across the country via work-site marketing and other arrangements. Allmerica
Asset Management is a Registered Investment Advisor which provides investment
advisory services primarily to affiliates and to other institutions, such as
insurance companies and pension plans.
Summarized below is financial information with respect to business segments for
the year ended and as of December 31.
<TABLE>
<CAPTION>
DECEMBER 31
(IN MILLIONS) 1997 1996 1995
- --------------------------------------------------------------------------- ---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Risk Management
Regional Property and Casualty......................................... $ 2,275.3 $ 2,196.6 $ 2,109.0
Corporate Risk Management.............................................. 396.3 361.5 328.5
Subtotal............................................................... 2,671.6 2,558.1 2,437.5
Retirement and Asset Accumulation
Allmerica Financial Services........................................... 470.6 450.9 487.1
Institutional Services................................................. 243.4 270.7 330.2
Allmerica Asset Management............................................. 8.7 8.8 4.4
Subtotal............................................................... 722.7 730.4 821.7
Eliminations............................................................. (10.1) (8.7) (4.4)
Total...................................................................... $ 3,384.2 $ 3,279.8 $ 3,254.8
</TABLE>
F-31
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
<TABLE>
<CAPTION>
DECEMBER 31
(IN MILLIONS) 1997 1996 1995
- --------------------------------------------------------------------------- ---------- ---------- ----------
Income (loss) from continuing operations before income taxes:
<S> <C> <C> <C>
Risk Management
Regional Property and Casualty......................................... $ 206.4 $ 197.7 $ 206.3
Corporate Risk Management.............................................. 19.3 20.7 18.3
Subtotal............................................................... 225.7 218.4 224.6
Retirement and Asset Accumulation
Allmerica Financial Services........................................... 87.4 76.9 35.2
Institutional Services................................................. 62.4 52.8 42.8
Allmerica Asset Management............................................. 1.4 1.1 2.3
Subtotal............................................................... 151.2 130.8 80.3
Total...................................................................... $ 376.9 $ 349.2 $ 304.9
Identifiable assets:
Risk Management
Regional Property and Casualty......................................... $ 5,710.4 $ 5,703.9 $ 5,741.8
Corporate Risk Management.............................................. 568.8 522.1 458.9
Subtotal............................................................... 6,279.2 6,226.0 6,200.7
Retirement and Asset Accumulation
Allmerica Financial Services........................................... 12,049.6 8,822.4 7,218.6
Institutional Services................................................. 4,158.5 3,886.7 4,280.9
Allmerica Asset Management............................................. 4.1 2.4 2.1
Subtotal............................................................... 16,212.2 12,711.5 11,501.6
Total...................................................................... $ 22,491.4 $ 18,937.5 $ 17,702.3
</TABLE>
13. LEASE COMMITMENTS
Rental expenses for operating leases, principally with respect to buildings,
amounted to $33.6 million, $34.9 million and $36.4 million in 1997, 1996 and
1995, respectively. At December 31, 1997, future minimum rental payments under
non-cancelable operating leases were approximately $72.5 million, payable as
follows: 1998 -- $24.8 million; 1999 -- $19.8 million; 2000 -- $13.6 million;
2001 -- $7.9 million; and $6.4 million thereafter. It is expected that, in the
normal course of business, leases that expire will be renewed or replaced by
leases on other property and equipment; thus, it is anticipated that future
minimum lease commitments will not be less than the amounts shown for 1998.
14. REINSURANCE
In the normal course of business, the Company seeks to reduce the loss that may
arise from catastrophes or other events that cause unfavorable underwriting
results by reinsuring certain levels of risk in various areas of exposure with
other insurance enterprises or reinsurers. Reinsurance transactions are
accounted for in accordance with the provisions of SFAS No. 113, ACCOUNTING AND
REPORTING FOR REINSURANCE OF SHORT DURATION AND LONG DURATION CONTRACTS.
Amounts recoverable from reinsurers are estimated in a manner consistent with
the claim liability associated with the reinsured policy. Reinsurance contracts
do not relieve the Company from its obligations to policyholders. Failure of
reinsurers to honor their obligations could result in losses to the Company;
consequently, allowances are established for amounts deemed uncollectible. The
Company determines the appropriate amount of reinsurance based on evaluation of
the risks accepted and analyses prepared by consultants and reinsurers and on
market conditions (including the availability and pricing of reinsurance). The
Company also believes that the terms of its reinsurance contracts are consistent
with industry practice in that they contain standard terms with respect to lines
of business covered, limit and retention, arbitration and occurrence. Based
F-32
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
on its review of its reinsurers' financial statements and reputations in the
reinsurance marketplace, the Company believes that its reinsurers are
financially sound.
The Company is subject to concentration of risk with respect to reinsurance
ceded to various residual market mechanisms. As a condition to the ability to
conduct certain business in various states, the Company is required to
participate in various residual market mechanisms and pooling arrangements which
provide various insurance coverages to individuals or other entities that are
otherwise unable to purchase such coverage voluntarily provided by private
insurers. These market mechanisms and pooling arrangements include the
Massachusetts Commonwealth Automobile Reinsurers ("CAR"), the Maine Workers'
Compensation Residual Market Pool ("MWCRP") and the Michigan Catastrophic Claims
Association ("MCCA"). At December 31, 1997, CAR was the only reinsurer which
represented 10% or more of the Company's reinsurance business. As a servicing
carrier in Massachusetts, the Company cedes a significant portion of its private
passenger and commercial automobile premiums to CAR. Net premiums earned and
losses and loss adjustment expenses ceded to CAR in 1997, 1996 and 1995 were
$32.3 million and $28.2 million, $38.0 million and $21.8 million, and $49.1
million and $33.7 million, respectively.
The Company ceded to MCCA premiums earned and losses and loss adjustment
expenses in 1997, 1996 and 1995 of $9.8 million and $(0.8) million, $50.5
million and $(52.9) million, and $66.8 million and $62.9 million, respectively.
Because the MCCA is supported by assessments permitted by statute, and all
amounts billed by the Company to CAR, MWCRP and MCCA have been paid when due,
the Company believes that it has no significant exposure to uncollectible
reinsurance balances.
The effects of reinsurance were as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
(IN MILLIONS) 1997 1996 1995
- ------------------------------------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Life and accident and health insurance premiums:
Direct....................................................................... $ 417.4 $ 389.1 $ 438.9
Assumed...................................................................... 110.7 87.8 71.0
Ceded........................................................................ (170.1) (138.9) (150.3)
--------- --------- ---------
Net premiums................................................................... $ 358.0 $ 338.0 $ 359.6
--------- --------- ---------
--------- --------- ---------
Property and casualty premiums written:
Direct....................................................................... $ 2,068.5 $ 2,039.7 $ 2,039.4
Assumed...................................................................... 103.1 108.7 125.0
Ceded........................................................................ (179.8) (234.0) (279.1)
--------- --------- ---------
Net premiums................................................................... $ 1,991.8 $ 1,914.4 $ 1,885.3
--------- --------- ---------
--------- --------- ---------
Property and casualty premiums earned:
Direct....................................................................... $ 2,046.2 $ 2,018.5 $ 2,021.7
Assumed...................................................................... 102.0 112.4 137.7
Ceded........................................................................ (195.1) (232.6) (296.2)
--------- --------- ---------
Net premiums................................................................... $ 1,953.1 $ 1,898.3 $ 1,863.2
--------- --------- ---------
--------- --------- ---------
Life insurance and other individual policy benefits, claims, losses and loss
adjustment expenses:
Direct....................................................................... $ 656.4 $ 606.5 $ 741.0
Assumed...................................................................... 61.6 44.9 38.5
Ceded........................................................................ (158.8) (77.8) (69.5)
--------- --------- ---------
Net policy benefits, claims, losses and loss adjustment expenses............... $ 559.2 $ 573.6 $ 710.0
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-33
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
(IN MILLIONS) 1997 1996 1995
- ------------------------------------------------------------------------------- --------- --------- ---------
Property and casualty benefits, claims, losses and loss adjustment expenses:
<S> <C> <C> <C>
Direct....................................................................... $ 1,464.9 $ 1,299.8 $ 1,383.3
Assumed...................................................................... 101.2 85.8 146.1
Ceded........................................................................ (120.6) (2.2) (229.1)
--------- --------- ---------
Net policy benefits, claims, losses, and loss adjustment expenses.............. $ 1,445.5 $ 1,383.4 $ 1,300.3
--------- --------- ---------
--------- --------- ---------
</TABLE>
15. DEFERRED POLICY ACQUISITION COSTS
The following reflects changes to the deferred policy acquisition asset:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
(IN MILLIONS) 1997 1996 1995
- ---------------------------------------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Balance at beginning of year...................................................... $ 822.7 $ 735.7 $ 802.8
Acquisition expenses deferred................................................... 617.7 560.8 504.8
Amortized to expense during the year............................................ (476.0) (483.5) (470.3)
Adjustment to equity during the year............................................ (11.1) 9.7 (50.4)
Transferred to the Closed Block................................................. -- -- (24.8)
Adjustment for cession of term life insurance................................... -- -- (26.4)
Adjustment for cession of disability income insurance........................... (38.6) -- --
Adjustment for revision of universal and variable universal life insurance
mortality assumptions......................................................... 50.8 -- --
--------- --------- ---------
Balance at end of year............................................................ $ 965.5 $ 822.7 $ 735.7
--------- --------- ---------
--------- --------- ---------
</TABLE>
At October 1, 1997, the Company revised the mortality assumptions for universal
life and variable universal life product lines. These revisions resulted in a
$50.8 million recapitalization of deferred policy acquisition costs.
16. LIABILITIES FOR OUTSTANDING CLAIMS, LOSSES AND LOSS ADJUSTMENT EXPENSES
The Company regularly updates its estimates of liabilities for outstanding
claims, losses and loss adjustment expenses as new information becomes available
and further events occur which may impact the resolution of unsettled claims for
its property and casualty and its accident and health lines of business. Changes
in prior estimates are reflected in results of operations in the year such
changes are determined to be needed and recorded.
The liability for future policy benefits and outstanding claims, losses and loss
adjustment expenses related to the Company's accident and health business was
$533.6 million, $471.7 million and $446.9 million at December 31, 1997, 1996 and
1995, respectively. Accident and health claim liabilities were re-estimated for
all prior years and were decreased by $0.2 million and $0.6 million in 1997 and
1996, respectively, and increased by $17.6 million in 1995. Unfavorable
development in the accident and health business during 1995 was primarily due to
reserve strengthening and adverse experience in the Company's individual
disability line of business. Effective October 1, 1997, the Company ceded
substantially all of its individual disability income line of business, under a
100% coinsurance agreement to Metropolitan Life Insurance Company. At December
31, 1997, the individual disability income reserves ceded under this agreement
were $249.0 million, representing 46.7% of the Company's total accident and
health reserves.
F-34
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
The following table provides a reconciliation of the beginning and ending
property and casualty reserve for unpaid losses and loss adjustment expenses
(LAE):
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
(IN MILLIONS) 1997 1996 1995
- ------------------------------------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Reserve for losses and LAE, beginning of the year.............................. $ 2,744.1 $ 2,896.0 $ 2,821.7
Incurred losses and LAE, net of reinsurance recoverable:
Provision for insured events of the current year............................. 1,564.1 1,513.3 1,427.3
Decrease in provision for insured events of prior years...................... (127.9) (141.4) (137.6)
--------- --------- ---------
Total incurred losses and LAE.................................................. 1,436.2 1,371.9 1,289.7
--------- --------- ---------
Payments, net of reinsurance recoverable:
Losses and LAE attributable to insured events of current year................ 775.1 759.6 652.2
Losses and LAE attributable to insured events of prior years................. 732.1 627.6 614.3
--------- --------- ---------
Total payments................................................................. 1,507.2 1,387.2 1,266.5
--------- --------- ---------
Change in reinsurance recoverable on unpaid losses............................. (50.2) (136.6) 51.1
--------- --------- ---------
Other(1) (7.5) -- --
--------- --------- ---------
Reserve for losses and LAE, end of year........................................ $ 2,615.4 $ 2,744.1 $ 2,896.0
--------- --------- ---------
--------- --------- ---------
</TABLE>
(1) Includes purchase accounting adjustments.
As part of an ongoing process, the property and casualty reserves have been
re-estimated for all prior accident years and were decreased by $127.9 million,
$141.4 million and $137.6 million in 1997, 1996, and 1995, respectively.
The decrease in favorable development on prior years' reserves of $13.5 million
in 1997 results primarily from a $24.6 million decrease in favorable development
at Hanover to $58.4 million, partially offset by an $11.1 million increase in
favorable development at Citizens to $69.5 million. The decrease in Hanover's
favorable development of $24.6 million in 1997 reflects a decrease in favorable
development of $25.0 million, to $17.4 million in the personal automobile line,
as well as a decrease in favorable development of $8.5 million, to unfavorable
development of $2.8 million in the commercial multiple peril line. These
decreases were partially offset by an increase in favorable development in the
workers' compensation line of $11.5 million, to $28.8 million. The increase in
favorable development at Citizens in 1997 reflects improved severity in the
workers' compensation line where favorable development increased $13.9 million,
to $35.7 million and in the commercial multiple peril line where favorable
development increased $7.0 million to $4.3 million, partially offset by less
favorable development in the personal automobile line, where favorable
development decreased $10.5 million to $22.5 million in 1997.
The increase in favorable development on prior years' reserves of $3.8 million
in 1996 results primarily from an $11.4 million increase in favorable
development at Citizens. The increase in Citizens' favorable development of
$11.4 million in 1996 reflects improved severity in the personal automobile
line, where favorable development increased $28.6 million to $33.0 million in
1996, partially offset by less favorable development in the workers'
compensation line of $10.9 million Hanover's favorable development, including
voluntary and involuntary pools, decreased $7.7 million in 1996 to $82.9
million, primarily attributable to a decrease in favorable development in the
workers' compensation line of $19.8 million. Favorable development in the
personal automobile line also decreased $4.7 million, to $42.4 million in 1996.
These decreases were offset by increases in favorable development of $1.9
million and $5.6 million, to $12.6 million and $5.7 million, in the commercial
automobile and commercial multiple peril lines, respectively. Favorable
development in other lines increased by $8.8 million, primarily as a result of
environmental reserve strengthening in 1995. Favorable development in Hanover's
voluntary and involuntary pools increased $3.7 million to $4.1 million during
1996.
F-35
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
Citizens' favorable development in 1997 primarily reflects a modest shift over
the past few years of the workers' compensation business to Western and Northern
Michigan, which have demonstrated more favorable loss experience than Eastern
Michigan.
Citizens' favorable development in 1996 and 1995 primarily reflects the
initiatives taken by the Company to manage medical costs in both the automobile
and workers' compensation lines, as well as the impact of the Michigan Supreme
Court ruling on workers' compensation indemnity payments in 1995, which
decreases the maximum amount to be paid for indemnity cases on all existing and
future claims.
Hanover's favorable development from 1995 to 1997 primarily reflects favorable
legislation related to workers' compensation, improved safety features in
automobiles, improved driving habits and a moderation of medical costs and
inflation.
In 1995, Hanover's favorable development was primarily attributable to a
re-estimate of reserves with respect to certain types of workers' compensation
policies including large deductibles and excess of loss policies. In addition,
during 1995 Hanover refined its estimation of unallocated loss adjustment
expenses which increased favorable development in that year.
This favorable development reflects the Regional Property and Casualty
subsidiaries' reserving philosophy consistently applied over these periods.
Due to the nature of the business written by the Regional Property and Casualty
subsidiaries, the exposure to environmental liabilities is relatively small and
therefore their reserves are relatively small compared to other types of
liabilities. Loss and LAE reserves related to environmental damage and toxic
tort liability, included in the total reserve for losses and LAE were $53.1
million and $50.8 million, net of reinsurance of $15.7 million and $20.2 million
at the end of 1997 and 1996, respectively. The Regional Property and Casualty
subsidiaries do not specifically underwrite policies that include this coverage,
but as case law expands policy provisions and insurers' liability beyond the
intended coverage, the Regional Property and Casualty subsidiaries may be
required to defend such claims. Due to their unusual nature and absence of
historical claims data, reserves for these claims are not determined using
historical experience to project future losses. The Company estimated its
ultimate liability for these claims based upon currently known facts, reasonable
assumptions where the facts are not known, current law and methodologies
currently available. Although these claims are not material, their existence
gives rise to uncertainty and is discussed because of the possibility, however
remote, that they may become material. The Company believes that,
notwithstanding the evolution of case law expanding liability in environmental
claims, recorded reserves related to these claims for environmental liability
are adequate. In addition, the Company is not aware of any litigation or pending
claims that may result in additional material liabilities in excess of recorded
reserves. The environmental liability could be revised in the near term if the
estimates used in determining the liability are revised.
17. MINORITY INTEREST
The Company's interest in Allmerica P&C is represented by ownership of 65.8%,
59.5% and 58.3% of the outstanding shares of common stock at December 31, 1997,
1996 and 1995, respectively. Earnings and shareholder's equity attributable to
minority shareholders are included in minority interest in the consolidated
financial statements.
F-36
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
18. CONTINGENCIES
REGULATORY AND INDUSTRY DEVELOPMENTS
Unfavorable economic conditions may contribute to an increase in the number of
insurance companies that are under regulatory supervision. This may result in an
increase in mandatory assessments by state guaranty funds, or voluntary payments
by, solvent insurance companies to cover losses to policyholders of insolvent or
rehabilitated companies. Mandatory assessments, which are subject to statutory
limits, can be partially recovered through a reduction in future premium taxes
in some states. The Company is not able to reasonably estimate the potential
effect on it of any such future assessments or voluntary payments.
LITIGATION
In July 1997, a lawsuit was instituted in Louisiana against AFC and certain of
its subsidiaries by individual plaintiffs alleging fraud, unfair or deceptive
acts, breach of contract, misrepresentation and related claims in the sale of
life insurance policies. In October 1997, plaintiffs voluntarily dismissed the
Louisiana suit and refiled the action in Federal District Court in Worcester,
Massachusetts. The plaintiffs seek to be certified as a class. The case is in
early stages of discovery and the Company is evaluating the claims. Although the
Company believes it has meritorious defenses to plaintiffs' claims, there can be
no assurance that the claims will be resolved on a basis which is satisfactory
to the Company.
On June 23, 1995, the governor of Maine approved a legislative settlement for
the Maine Workers' Compensation Residual Market Pool deficit for the years 1988
through 1992. The settlement provides for an initial funding of $220.0 million
toward the deficit. The insurance carriers were liable for $65.0 million and
employers would contribute $110.0 million payable through surcharges on premiums
over the course of the next ten years. The major insurers are responsible for
90% of the $65.0 million. Hanover's allocated share of the settlement is
approximately $4.2 million, which was paid in December 1995. The remainder of
the deficit of $45.0 million will be paid by the Maine Guaranty Fund, payable in
quarterly contributions over ten years. A group of smaller carriers filed
litigation to appeal the settlement. Although the Company believes that adequate
reserves have been established for any additional liability, there can be no
assurance that the appeal will be resolved on a basis which is satisfactory to
the Company.
The Company has been named a defendant in various other legal proceedings
arising in the normal course of business. In the opinion of management, based on
the advice of legal counsel, the ultimate resolution of these proceedings will
not have a material effect on the Company's consolidated financial statements.
However, liabilities related to these proceedings could be established in the
near term if estimates of the ultimate resolution of these proceedings are
revised.
RESIDUAL MARKETS
The Company is required to participate in residual markets in various states.
The results of the residual markets are not subject to the predictability
associated with the Company's own managed business, and are significant to the
workers' compensation line of business and both the private passenger and
commercial automobile lines of business.
YEAR 2000
The Year 2000 Issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
computer programs that have date-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or
F-37
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices, or engage
in similar normal business activities. Although the Company does not believe
that there is a material contingency associated with the Year 2000 project,
there can be no assurance that exposure for material contingencies will not
arise.
19. STATUTORY FINANCIAL INFORMATION
The Company and its insurance subsidiaries are required to file annual
statements with state regulatory authorities prepared on an accounting basis
prescribed or permitted by such authorities (statutory basis). Statutory surplus
differs from shareholder's equity reported in accordance with generally accepted
accounting principles for stock life insurance companies primarily because
policy acquisition costs are expensed when incurred, investment reserves are
based on different assumptions, postretirement benefit costs are based on
different assumptions and reflect a different method of adoption, life insurance
reserves are based on different assumptions and income tax expense reflects only
taxes paid or currently payable. Statutory net income and surplus are as
follows:
<TABLE>
<CAPTION>
(IN MILLIONS) 1997 1996 1995
- ------------------------------------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Statutory net income (Combined)
Property and Casualty Companies.............................................. $ 190.3 $ 155.3 $ 155.3
Life and Health Companies.................................................... 191.2 133.3 134.3
Statutory Shareholder's Surplus (Combined)
Property and Casualty Companies.............................................. $ 1,279.8 $ 1,201.6 $ 1,128.4
Life and Health Companies.................................................... 1,221.3 1,120.1 965.6
</TABLE>
F-38
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of First Allmerica Financial Life Insurance Company
and Policyowners of the Separate Account KG - Kemper Gateway Elite of First
Allmerica Financial Life Insurance Company
In our opinion, the accompanying statements of assets and liabilities and the
related statements of operations and of changes in net assets present fairly,
in all material respects, the financial position of each of the Sub-Accounts
(Small Cap Value, Small Cap Growth, Value, International, Growth, Value+Growth,
Horizon 20+, Total Return, Horizon 10+, Horizon 5, High Yield, Investment
Grade Bond, Government Securities, Money Market, Global Income, and Blue
Chip) constituting the Separate Account KG - Kemper Gateway Elite of First
Allmerica Financial Life Insurance Company at December 31, 1997, the results
of each of their operations and the changes in each of their net assets for
the periods indicated, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of First
Allmerica Financial Life Insurance Company's management; our responsibility
is to express an opinion on these financial statements based on our audits.
We conducted our audits of these financial statements in accordance with
generally accepted auditing standards which 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, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of investments at December 31, 1997 by correspondence with the
Fund, provide a reasonable basis for the opinion expressed above.
/s/ Price Waterhouse LLP
PRICE WATERHOUSE LLP
Boston Massachusetts
March 25, 1998
<PAGE>
SEPARATE ACCOUNT KG -- KEMPER GATEWAY ELITE
STATEMENTS OF ASSETS AND LIABILITIES
DECEMBER 31, 1997
<TABLE>
<CAPTION>
SMALL CAP SMALL CAP
VALUE GROWTH VALUE INTERNATIONAL GROWTH
---------- ------------ ----------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
ASSETS (NOTES 3 AND 7):
Investments in shares of Investors Fund
Series..................................... $ 52,272 $ 17,837 $ 176,790 $ 44,376 $ 16,046
Dividend receivable......................... -- -- -- -- --
---------- ------------ ----------- ------------ ---------------
Total assets.............................. 52,272 17,837 176,790 44,376 16,046
LIABILITIES: -- -- -- -- --
---------- ------------ ----------- ------------ ---------------
Net assets................................ $ 52,272 $ 17,837 $ 176,790 $ 44,376 $ 16,046
---------- ------------ ----------- ------------ ---------------
---------- ------------ ----------- ------------ ---------------
Net asset distribution by category:
Qualified variable annuity policies....... $ 21,166 $ 7,163 $ 26,633 $ 4,778 $ 4,574
Non-qualified variable annuity policies... 31,106 10,674 150,157 39,598 11,472
Value of investment by First Allmerica
Financial Life
Insurance Company (Sponsor)............. -- -- -- -- --
Value of annuitant mortality fluctuation
reserve................................. -- -- -- -- --
---------- ------------ ----------- ------------ ---------------
$ 52,272 $ 17,837 $ 176,790 $ 44,376 $ 16,046
---------- ------------ ----------- ------------ ---------------
---------- ------------ ----------- ------------ ---------------
Qualified units outstanding, December 31,
1997....................................... 21,107 7,270 26,257 5,125 4,699
Net asset value per qualified unit, December
31, 1997................................... $1.002803 $0.985334 $ 1.014327 $0.932275 $ 0.973414
Non-qualified units outstanding, December
31, 1997................................... 31,019 10,834 148,037 42,475 11,786
Net asset value per non-qualified unit,
December 31, 1997.......................... $1.002803 $0.985334 $ 1.014327 $0.932275 $ 0.973414
<CAPTION>
VALUE+GROWTH HORIZON 20+ TOTAL RETURN
----------------- ------------- -----------------
<S> <C> <C> <C>
ASSETS (NOTES 3 AND 7):
Investments in shares of Investors Fund
Series..................................... $ 119,863 $ 4,852 $ 42,909
Dividend receivable......................... -- -- --
----------------- ------------- -----------------
Total assets.............................. 119,863 4,852 42,909
LIABILITIES: -- -- --
----------------- ------------- -----------------
Net assets................................ $ 119,863 $ 4,852 $ 42,909
----------------- ------------- -----------------
----------------- ------------- -----------------
Net asset distribution by category:
Qualified variable annuity policies....... $ -- $ 4,605 $ 26,289
Non-qualified variable annuity policies... 119,642 247 16,620
Value of investment by First Allmerica
Financial Life
Insurance Company (Sponsor)............. -- -- --
Value of annuitant mortality fluctuation
reserve................................. 221 -- --
----------------- ------------- -----------------
$ 119,863 $ 4,852 $ 42,909
----------------- ------------- -----------------
----------------- ------------- -----------------
Qualified units outstanding, December 31,
1997....................................... -- 4,699 25,928
Net asset value per qualified unit, December
31, 1997................................... $0.960159 $0.980022 $1.013904
Non-qualified units outstanding, December
31, 1997................................... 124,837 253 16,392
Net asset value per non-qualified unit,
December 31, 1997.......................... $0.960159 $0.980022 $1.013904
</TABLE>
The accompanying notes are an integral part of these financial statements.
SA-1
<PAGE>
SEPARATE ACCOUNT KG -- KEMPER GATEWAY ELITE
STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED)
DECEMBER 31, 1997
<TABLE>
<CAPTION>
INVESTMENT GOVERNMENT
HORIZON 10+ HORIZON 5 HIGH YIELD GRADE BOND SECURITIES
------------ ------------ ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
ASSETS (NOTES 3 AND 7):
Investments in shares of Investors Fund
Series..................................... $ 21,558 $ 82,678 $ 75,508 $ 20,792 $ 20,803
Dividend receivable......................... -- -- -- -- --
------------ ------------ ------------- ------------- -------------
Total assets................................ 21,558 82,678 75,508 20,792 20,803
LIABILITIES: -- -- -- -- --
------------ ------------ ------------- ------------- -------------
Net assets.................................. $ 21,558 $ 82,678 $ 75,508 $ 20,792 $ 20,803
------------ ------------ ------------- ------------- -------------
------------ ------------ ------------- ------------- -------------
Net asset distribution by category:
Qualified variable annuity policies....... $ 21,558 $ -- $ 14,314 $ -- $ --
Non-qualified variable annuity policies... -- 82,678 61,194 20,792 20,803
Value of investment by First Allmerica
Financial Life
Insurance Company (Sponsor)............. -- -- -- -- --
Value of annuitant mortality fluctuation
reserve................................. -- -- -- -- --
------------ ------------ ------------- ------------- -------------
$ 21,558 $ 82,678 $ 75,508 $ 20,792 $ 20,803
------------ ------------ ------------- ------------- -------------
------------ ------------ ------------- ------------- -------------
Qualified units outstanding, December 31,
1997....................................... 21,224 -- 14,254 -- --
Net asset value per qualified unit, December
31, 1997................................... $1.015720 $1.017200 $1.004242 $1.004072 $1.003954
Non-qualified units outstanding, December
31, 1997................................... -- 81,280 60,936 20,708 20,721
Net asset value per non-qualified unit,
December 31, 1997.......................... $1.015720 $1.017200 $1.004242 $1.004072 $1.003954
<CAPTION>
GLOBAL
MONEY MARKET INCOME BLUE CHIP
------------- ------------- -------------
<S> <C> <C> <C>
ASSETS (NOTES 3 AND 7):
Investments in shares of Investors Fund
Series..................................... $ 5,379 $ 10,742 $ 47,834
Dividend receivable......................... 2 -- --
------------- ------------- -------------
Total assets................................ 5,381 10,742 47,834
LIABILITIES: -- -- --
------------- ------------- -------------
Net assets.................................. $ 5,381 $ 10,742 $ 47,834
------------- ------------- -------------
------------- ------------- -------------
Net asset distribution by category:
Qualified variable annuity policies....... $ -- $ -- $ 21,537
Non-qualified variable annuity policies... 5,381 10,722 26,275
Value of investment by First Allmerica
Financial Life
Insurance Company (Sponsor)............. -- 20 22
Value of annuitant mortality fluctuation
reserve................................. -- -- --
------------- ------------- -------------
$ 5,381 $ 10,742 $ 47,834
------------- ------------- -------------
------------- ------------- -------------
Qualified units outstanding, December 31,
1997....................................... -- -- 19,485
Net asset value per qualified unit, December
31, 1997................................... $1.000218 $ 1.019101 $1.105304
Non-qualified units outstanding, December
31, 1997................................... 5,380 10,541 23,791
Net asset value per non-qualified unit,
December 31, 1997.......................... $1.000218 $ 1.019101 $1.105304
</TABLE>
The accompanying notes are an integral part of these financial statements.
SA-2
<PAGE>
SEPARATE ACCOUNT KG -- KEMPER GATEWAY ELITE
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SMALL CAP VALUE VALUE INTERNATIONAL
FOR THE SMALL CAP GROWTH FOR THE FOR THE
PERIOD FOR THE PERIOD PERIOD
11/18/97* PERIOD 10/16/97* 10/14/97* 10/16/97*
TO 12/31/97 TO 12/31/97 TO 12/31/97 TO 12/31/97
--------------- ---------------- -------------- --------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends.................................. $ -- $ -- $ -- $ --
----- ----- ------ -----
EXPENSES (NOTE 4):
Mortality and expense risk fees............ 55 22 268 45
Administrative expense fees................ 6 2 32 6
----- ----- ------ -----
Total expenses........................... 61 24 300 51
----- ----- ------ -----
Net investment income (loss)............. (61) (24) (300) (51)
----- ----- ------ -----
REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS:
Net realized gain (loss) from sales of
investments.............................. -- (1) 7 --
Net unrealized gain (loss)................. 581 361 5,455 693
----- ----- ------ -----
Net realized and unrealized gain
(loss)................................. 581 360 5,462 693
----- ----- ------ -----
Net increase (decrease) in net assets from
operations............................... $ 520 $336 $5,162 $ 642
----- ----- ------ -----
----- ----- ------ -----
<CAPTION>
GROWTH VALUE+GROWTH HORIZON 20+ TOTAL RETURN
FOR THE FOR THE FOR THE FOR THE
PERIOD PERIOD PERIOD PERIOD
10/16/97* 10/14/97* 10/16/97* 11/17/97*
TO 12/31/97 TO 12/31/97 TO 12/31/97 TO 12/31/97
-------------- ------------ -------------- --------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends.................................. $ -- $ -- $ -- $ --
--- ------ --- -----
EXPENSES (NOTE 4):
Mortality and expense risk fees............ 28 201 12 39
Administrative expense fees................ 3 24 1 5
--- ------ --- -----
Total expenses........................... 31 225 13 44
--- ------ --- -----
Net investment income (loss)............. (31) (225) (13) (44)
--- ------ --- -----
REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS:
Net realized gain (loss) from sales of
investments.............................. (1) (19) -- --
Net unrealized gain (loss)................. 44 1,063 (83) 623
--- ------ --- -----
Net realized and unrealized gain
(loss)................................. 43 1,044 (83) 623
--- ------ --- -----
Net increase (decrease) in net assets from
operations............................... $ 12 $819 $(96) $ 579
--- ------ --- -----
--- ------ --- -----
</TABLE>
* Date of initial investment.
The accompanying notes are an integral part of these financial statements.
SA-3
<PAGE>
SEPARATE ACCOUNT KG -- KEMPER GATEWAY ELITE
STATEMENTS OF OPERATIONS (CONTINUED)
<TABLE>
<CAPTION>
GOVERNMENT MONEY
INVESTMENT SECURITIES MARKET
HORIZON 10+ HIGH YIELD GRADE BOND FOR THE FOR THE
FOR THE HORIZON 5 FOR THE FOR THE PERIOD PERIOD
PERIOD FOR THE PERIOD PERIOD 12/11/97* 12/29/97*
11/25/97* PERIOD 11/10/97* 10/16/97* 12/11/97* TO TO
TO 12/31/97 TO 12/31/97 TO 12/31/97 TO 12/31/97 12/31/97 12/31/97
----------- ---------------- ----------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends.......................................... $ -- $ -- $ -- $ -- $-- $ 1
----- ------ ----- --- --- ---
EXPENSES (NOTE 4):
Mortality and expense risk fees.................... 26 138 64 6 6 --
Administrative expense fees........................ 3 17 8 1 1 --
----- ------ ----- --- --- ---
Total expenses................................... 29 155 72 7 7 --
----- ------ ----- --- --- ---
Net investment income (loss)..................... (29) (155) (72) (7) (7) 1
----- ------ ----- --- --- ---
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain (loss) from sales of
investments...................................... -- 6 (1) -- -- --
Net unrealized gain (loss)......................... 363 1,508 444 38 50 --
----- ------ ----- --- --- ---
Net realized and unrealized gain (loss).......... 363 1,514 443 38 50 --
----- ------ ----- --- --- ---
Net increase (decrease) in net assets from
operations..................................... $334 $1,359 $371 $ 31 $43 $ 1
----- ------ ----- --- --- ---
----- ------ ----- --- --- ---
<CAPTION>
GLOBAL
INCOME BLUE CHIP
FOR THE FOR THE
PERIOD PERIOD
5/1/97* 5/1/97*
TO 12/31/97 TO 12/31/97
----------- ------------
<S> <C> <C>
INVESTMENT INCOME:
Dividends.......................................... $ -- $ --
--- ------
EXPENSES (NOTE 4):
Mortality and expense risk fees.................... 1 34
Administrative expense fees........................ -- 5
--- ------
Total expenses................................... 1 39
--- ------
Net investment income (loss)..................... (1) (39)
--- ------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain (loss) from sales of
investments...................................... -- --
Net unrealized gain (loss)......................... (37) 1,023
--- ------
Net realized and unrealized gain (loss).......... (37) 1,023
--- ------
Net increase (decrease) in net assets from
operations..................................... $(38) $ 984
--- ------
--- ------
</TABLE>
* Date of initial investment.
The accompanying notes are an integral part of these financial statements.
SA-4
<PAGE>
SEPARATE ACCOUNT KG -- KEMPER GATEWAY ELITE
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
SMALL CAP SMALL CAP
VALUE GROWTH VALUE INTERNATIONAL
PERIOD FROM PERIOD FROM PERIOD FROM PERIOD FROM
11/18/97* 10/16/97* 10/14/97* 10/16/97*
TO TO TO TO
12/31/97 12/31/97 12/31/97 12/31/97
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
INCREASE IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss)............. $ (61) $ (24) $ (300) $ (51)
Net realized gain (loss)................. -- (1) 7 --
Net unrealized gain (loss)............... 581 361 5,455 693
----------- ----------- ----------- -----------
Net increase (decrease) in net assets
from operations........................ 520 336 5,162 642
----------- ----------- ----------- -----------
FROM CAPITAL TRANSACTIONS (NOTE 5):
Net purchase payments.................... 51,073 17,253 172,282 41,764
Withdrawals.............................. -- -- (739) --
Other transfers from the General Account
of First Allmerica Financial Life
Insurance Company (Sponsor)............ 679 248 85 1,970
Net increase in investment by First
Allmerica Financial Life Insurance
Company (Sponsor)...................... -- -- -- --
----------- ----------- ----------- -----------
Net increase in net assets from capital
transactions........................... 51,752 17,501 171,628 43,734
----------- ----------- ----------- -----------
Net increase in net assets............... 52,272 17,837 176,790 44,376
NET ASSETS:
Beginning of period........................ -- -- -- --
----------- ----------- ----------- -----------
End of period.............................. $52,272 $17,837 $176,790 $ 44,376
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
<CAPTION>
GROWTH HORIZON 20+
PERIOD FROM VALUE+GROWTH PERIOD FROM TOTAL RETURN
10/16/97* PERIOD FROM 10/16/97* PERIOD FROM
TO 10/14/97* TO TO 11/17/97* TO
12/31/97 12/31/97 12/31/97 12/31/97
----------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
INCREASE IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss)............. $ (31) $ (225) $ (13) $ (44)
Net realized gain (loss)................. (1) (19) -- --
Net unrealized gain (loss)............... 44 1,063 (83) 623
----------- ------------ ----------- ------------
Net increase (decrease) in net assets
from operations........................ 12 819 (96) 579
----------- ------------ ----------- ------------
FROM CAPITAL TRANSACTIONS (NOTE 5):
Net purchase payments.................... 15,681 119,828 4,681 40,859
Withdrawals.............................. -- (791) -- --
Other transfers from the General Account
of First Allmerica Financial Life
Insurance Company (Sponsor)............ 353 7 267 1,471
Net increase in investment by First
Allmerica Financial Life Insurance
Company (Sponsor)...................... -- -- -- --
----------- ------------ ----------- ------------
Net increase in net assets from capital
transactions........................... 16,034 119,044 4,948 42,330
----------- ------------ ----------- ------------
Net increase in net assets............... 16,046 119,863 4,852 42,909
NET ASSETS:
Beginning of period........................ -- -- -- --
----------- ------------ ----------- ------------
End of period.............................. $16,046 $119,863 $4,852 $ 42,909
----------- ------------ ----------- ------------
----------- ------------ ----------- ------------
</TABLE>
* Date of initial investment.
The accompanying notes are an integral part of these financial statements.
SA-5
<PAGE>
SEPARATE ACCOUNT KG -- KEMPER GATEWAY ELITE
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
INVESTMENT GOVERNMENT
HORIZON 10+ HORIZON 5 HIGH YIELD GRADE BOND SECURITIES
PERIOD FROM PERIOD FROM PERIOD FROM PERIOD FROM PERIOF FROM MONEY MARKET
11/25/97* 11/10/97* 10/16/97* 12/11/97* 12/11/97* PERIOD FROM
TO TO TO TO TO 12/29/97* TO
12/31/97 12/31/97 12/31/97 12/31/97 12/31/97 12/31/97
----------- ----------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
INCREASE IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss)............. $ (29) $ (155) $ (72) $ (7) $ (7) $ 1
Net realized gain (loss)................. -- 6 (1) -- -- --
Net unrealized gain (loss)............... 363 1,508 444 38 50 --
----------- ----------- ----------- ----------- ----------- ------
Net increase (decrease) in net assets
from operations........................ 334 1,359 371 31 43 1
----------- ----------- ----------- ----------- ----------- ------
FROM CAPITAL TRANSACTIONS (NOTE 5):
Net purchase payments.................... 21,224 82,180 74,320 20,761 20,760 5,380
Withdrawals.............................. -- (861) -- -- -- --
Other transfers from the General Account
of First Allmerica Financial Life
Insurance Company (Sponsor)............ -- -- 817 -- -- --
Net increase in investment by First
Allmerica Financial Life Insurance
Company (Sponsor)...................... -- -- -- -- -- --
----------- ----------- ----------- ----------- ----------- ------
Net increase in net assets from capital
transactions........................... 21,224 81,319 75,137 20,761 20,760 5,380
----------- ----------- ----------- ----------- ----------- ------
Net increase in net assets............... 21,558 82,678 75,508 20,792 20,803 5,381
NET ASSETS:
Beginning of period...................... -- -- -- -- -- --
----------- ----------- ----------- ----------- ----------- ------
End of period............................ $21,558 $82,678 $75,508 $20,792 $20,803 $5,381
----------- ----------- ----------- ----------- ----------- ------
----------- ----------- ----------- ----------- ----------- ------
<CAPTION>
GLOBAL
INCOME BLUE CHIP
PERIOD FROM PERIOD FROM
5/1/97* TO 5/1/97* TO
12/31/97 12/31/97
----------- -----------
<S> <C> <C>
INCREASE IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss)............. $ (1) $ (39)
Net realized gain (loss)................. -- --
Net unrealized gain (loss)............... (37) 1,023
----------- -----------
Net increase (decrease) in net assets
from operations........................ (38) 984
----------- -----------
FROM CAPITAL TRANSACTIONS (NOTE 5):
Net purchase payments.................... 10,760 46,776
Withdrawals.............................. -- --
Other transfers from the General Account
of First Allmerica Financial Life
Insurance Company (Sponsor)............ -- 54
Net increase in investment by First
Allmerica Financial Life Insurance
Company (Sponsor)...................... 20 20
----------- -----------
Net increase in net assets from capital
transactions........................... 10,780 46,850
----------- -----------
Net increase in net assets............... 10,742 47,834
NET ASSETS:
Beginning of period...................... -- --
----------- -----------
End of period............................ $10,742 $47,834
----------- -----------
----------- -----------
</TABLE>
* Date of initial investment.
The accompanying notes are an integral part of these financial statements.
SA-6
<PAGE>
SEPARATE ACCOUNT KG -- KEMPER GATEWAY ELITE
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- ORGANIZATION
Separate Account KG Kemper Gateway Elite (Separate Account KG) is a separate
investment account of First Allmerica Financial Life Insurance Company (the
Company). The Company is a wholly-owned subsidiary of Allmerica Financial
Corporation (AFC). Separate Account KG was established on November 14, 1997
(initial investment by the Company occurred on May 1, 1997), for the purpose of
separating from the general assets of the Company those assets used to fund
certain variable annuity contracts issued by the Company. Under applicable
insurance law, the assets and liabilities of Separate Account KG are clearly
identified and distinguished from the other assets and liabilities of the
Company. Separate Account KG cannot be charged with liabilities arising out of
any other business of the Company.
Separate Account KG is registered as a unit investment trust under the
Investment Company Act of 1940, as amended (the 1940 Act). Separate Account KG
currently offers sixteen Sub-Accounts under the Kemper Gateway Elite contracts.
Each Sub-Account invests exclusively in a corresponding investment portfolio of
Investors Fund Series (IFS). All investment portfolios, other than the Value and
Small Cap Value Portfolios, are managed by Zurich Kemper Investments, Inc.
(ZKI). The Value and Small Cap Value Portfolios are managed by Dreman Value
Advisors, Inc. (DVA), a wholly owned subsidiary of ZKI. IFS (the "Fund") is an
open-end management investment company registered under the 1940 Act.
Separate Account KG funds two types of variable annuity contracts,
"qualified" contracts and "non-qualified" contracts. A qualified contract is one
that is purchased in connection with a retirement plan which meets the
requirements of Section 401, 403, or 408 of the Internal Revenue Code, while a
non-qualified contract is one that is not purchased in connection with one of
the indicated retirement plans. The tax treatment for certain withdrawals or
surrenders will vary according to whether they are made from a qualified
contract or a non-qualified contract.
NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES
INVESTMENTS -- Security transactions are recorded on the trade date.
Investments held by the Sub-Accounts are stated at the net asset value per share
of the respective investment portfolio of IFS. Net realized gains and losses on
securities sold are determined using the average cost method. Dividends and
capital gain distributions are recorded on the ex-dividend date and are
reinvested in additional shares of the respective investment portfolio of IFS at
net asset value.
FEDERAL INCOME TAXES -- The Company is taxed as a "life insurance company"
under Subchapter L of the Internal Revenue Code (the Code) and files a
consolidated federal income tax return. The Company anticipates no tax liability
resulting from the operations of Separate Account KG. Therefore, no provision
for income taxes has been charged against Separate Account KG.
ANNUITANT MORTALITY FLUCTUATION RESERVE -- A strengthening reserve is
required for doing business in the State of New York. The purpose of the reserve
is to provide for future mortality experience which is less favorable than that
assumed in pricing the annuity. This reserve is funded by the Company.
SA-7
<PAGE>
SEPARATE ACCOUNT KG -- KEMPER GATEWAY ELITE
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 3 -- INVESTMENTS
The number of shares owned, aggregate cost, and net asset value per share of
each Sub-Account's investment in IFS at December 31, 1997 were as follows:
<TABLE>
<CAPTION>
PORTFOLIO INFORMATION
---------------------------------
NET ASSET
NUMBER OF AGGREGATE VALUE
INVESTMENT PORTFOLIO SHARES COST PER SHARE
- ---------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Small Cap Value......................... 42,584 $ 51,691 $1.227
Small Cap Growth........................ 9,059 17,476 1.969
Value................................... 116,499 171,335 1.518
International........................... 27,481 43,683 1.615
Growth.................................. 5,347 16,002 3.001
Value+Growth............................ 84,115 118,800 1.425
Horizon 20+............................. 3,523 4,935 1.378
Total Return............................ 15,204 42,286 2.822
Horizon 10+............................. 16,730 21,195 1.289
Horizon 5............................... 67,564 81,170 1.224
High Yield.............................. 58,259 75,064 1.296
Investment Grade Bond................... 18,591 20,754 1.118
Government Securities................... 17,231 20,753 1.207
Money Market............................ 5,379 5,379 1.000
Global Income........................... 10,442 10,779 1.029
Blue Chip............................... 42,883 46,811 1.115
</TABLE>
NOTE 4 -- RELATED PARTY TRANSACTIONS
The Company makes a charge of 1.25% per annum based on the average daily net
assets of each Sub-Account at each valuation date for mortality and expense
risks. The Company also charges each Sub-Account .15% per annum based on the
average daily net assets of each Sub-Account for administrative expenses. These
charges are deducted from the daily value of each Sub-Account and are paid to
the Company on a daily basis.
A contract fee of $30 is currently deducted on the contract anniversary date
and upon full surrender of the contract when the accumulated value is less than
$50,000. The contract fee is waived for contracts issued to and maintained by
the Trustee of a 401(k) plan. For the period ended December 31, 1997, there were
no contract fees deducted from Separate Account KG.
Allmerica Investments, Inc. (Allmerica Investments), a wholly-owned
subsidiary of the Company, is principal underwriter and general distributor of
Separate Account KG, and does not receive any compensation for sales of the
contracts. Commissions are paid to registered representatives of Allmerica
Investments by the Company. As the current series of contracts have a contingent
deferred sales charge, no deduction is made for sales charges at the time of the
sale. For the period ended December 31, 1997, there were no contingent deferred
sales charges deducted from Separate Account KG.
SA-8
<PAGE>
SEPARATE ACCOUNT KG -- KEMPER GATEWAY ELITE
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 5 -- CONTRACTOWNERS AND SPONSOR TRANSACTIONS
Transactions from contractowners and sponsor were as follows:
<TABLE>
<CAPTION>
PERIOD ENDED
DECEMBER 31, 1997
---------------------
UNITS AMOUNT
--------- ----------
<S> <C> <C>
Small Cap Value
Issuance of Units.......................... 52,126 $ 51,752
Redemption of Units........................ -- --
--------- ----------
Net increase............................. 52,126 $ 51,752
--------- ----------
--------- ----------
Small Cap Growth
Issuance of Units.......................... 18,104 $ 17,501
Redemption of Units........................ -- --
--------- ----------
Net increase............................. 18,104 $ 17,501
--------- ----------
--------- ----------
Value
Issuance of Units.......................... 175,040 $ 172,367
Redemption of Units........................ (746) (739)
--------- ----------
Net increase............................. 174,294 $ 171,628
--------- ----------
--------- ----------
International
Issuance of Units.......................... 47,600 $ 43,734
Redemption of Units........................ -- --
--------- ----------
Net increase............................. 47,600 $ 43,734
--------- ----------
--------- ----------
Growth
Issuance of Units.......................... 16,485 $ 16,034
Redemption of Units........................ -- --
--------- ----------
Net increase............................. 16,485 $ 16,034
--------- ----------
--------- ----------
Value+Growth
Issuance of Units.......................... 125,674 $ 119,835
Redemption of Units........................ (837) (791)
--------- ----------
Net increase............................. 124,837 $ 119,044
--------- ----------
--------- ----------
Horizon 20+
Issuance of Units.......................... 4,952 $ 4,948
Redemption of Units........................ -- --
--------- ----------
Net increase............................. 4,952 $ 4,948
--------- ----------
--------- ----------
Total Return
Issuance of Units.......................... 42,320 $ 42,330
Redemption of Units........................ -- --
--------- ----------
Net increase............................. 42,320 $ 42,330
--------- ----------
--------- ----------
</TABLE>
SA-9
<PAGE>
SEPARATE ACCOUNT KG -- KEMPER GATEWAY ELITE
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 5 -- CONTRACTOWNERS AND SPONSOR TRANSACTIONS (CONTINUED)
<TABLE>
<CAPTION>
PERIOD ENDED
DECEMBER 31, 1997
---------------------
UNITS AMOUNT
--------- ----------
<S> <C> <C>
Horizon 10+
Issuance of Units.......................... 21,224 $ 21,224
Redemption of Units........................ -- --
--------- ----------
Net increase............................. 21,224 $ 21,224
--------- ----------
--------- ----------
Horizon 5
Issuance of Units.......................... 82,138 $ 82,180
Redemption of Units........................ (858) (861)
--------- ----------
Net increase............................. 81,280 $ 81,319
--------- ----------
--------- ----------
High Yield
Issuance of Units.......................... 75,323 $ 75,270
Redemption of Units........................ (133) (133)
--------- ----------
Net increase............................. 75,190 $ 75,137
--------- ----------
--------- ----------
Investment Grade Bond
Issuance of Units.......................... 20,708 $ 20,761
Redemption of Units........................ -- --
--------- ----------
Net increase............................. 20,708 $ 20,761
--------- ----------
--------- ----------
Government Securities
Issuance of Units.......................... 20,721 $ 20,760
Redemption of Units........................ -- --
--------- ----------
Net increase............................. 20,721 $ 20,760
--------- ----------
--------- ----------
Money Market
Issuance of Units.......................... 5,380 $ 5,380
Redemption of Units........................ -- --
--------- ----------
Net increase............................. 5,380 $ 5,380
--------- ----------
--------- ----------
Global Income
Issuance of Units.......................... 10,541 $ 10,780
Redemption of Units........................ -- --
--------- ----------
Net increase............................. 10,541 $ 10,780
--------- ----------
--------- ----------
Blue Chip
Issuance of Units.......................... 43,276 $ 46,850
Redemption of Units........................ -- --
--------- ----------
Net increase............................. 43,276 $ 46,850
--------- ----------
--------- ----------
</TABLE>
SA-10
<PAGE>
SEPARATE ACCOUNT KG -- KEMPER GATEWAY ELITE
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 6 -- DIVERSIFICATION REQUIREMENTS
Under the provisions of Section 817(h) of the Internal Revenue Code, a
variable annuity contract, other than a contract issued in connection with
certain types of employee benefit plans, will not be treated as an annuity
contract for federal income tax purposes for any period for which the
investments of the segregated asset account on which the contract is based are
not adequately diversified. The Code provides that the "adequately diversified"
requirement may be met if the underlying investments satisfy either a statutory
safe harbor test or diversification requirements set forth in regulations issued
by the Secretary of The Treasury.
The Internal Revenue Service has issued regulations under Section 817(h) of
the Code. The Company believes that Separate Account KG satisfies the current
requirements of the regulations, and it intends that Separate Account KG will
continue to meet such requirements.
NOTE 7 -- PURCHASES AND SALES OF SECURITIES
Cost of purchases and proceeds from sales of IFS shares by Separate Account
KG during the period ended December 31, 1997 were as follows:
<TABLE>
<CAPTION>
INVESTMENT PORTFOLIO PURCHASES SALES
- --------------------------------------------- --------- ------
<S> <C> <C>
Small Cap Value.............................. $ 51,737 $ 46
Small Cap Growth............................. 17,497 20
Value........................................ 172,303 975
International................................ 43,722 39
Growth....................................... 16,030 27
Value+Growth................................. 119,797 978
Horizon 20+.................................. 4,947 12
Total Return................................. 42,320 34
Horizon 10+.................................. 21,224 29
Horizon 5.................................... 82,177 1,013
High Yield................................... 75,250 185
Investment Grade Bond........................ 20,759 5
Government Securities........................ 20,758 5
Money Market................................. 5,379 --
Global Income................................ 10,780 1
Blue Chip.................................... 46,843 32
--------- ------
Totals....................................... $751,523 $3,401
--------- ------
--------- ------
</TABLE>
SA-11
<PAGE>
PART C. OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(a) FINANCIAL STATEMENTS
Financial Statements Included in Part A
None
Financial Statements Included in Part B
Financial Statements for First Allmerica Financial Life Insurance Company
Financial Statements for Separate Account KG of First Allmerica Financial
Life Insurance Company
Financial Statements Included in Part C
None
(b) EXHIBITS
EXHIBIT 1 Vote of Board of Directors Authorizing Establishment of
Registrant dated June 13, 1996 was previously filed on
August 16, 1996 in initial Registration Statement and is
incorporated by reference herein.
EXHIBIT 2 Not Applicable. Pursuant to Rule 26a-2, the Insurance Company
may hold the assets of the registrant NOT pursuant to a
trust indenture or other such instrument.
EXHIBIT 3 (a) Underwriting and Administrative Services Agreement is
filed herewith.
(b) Wholesaling Agreement was previously filed on November 26,
1996 in Pre-Effective Amendment No. 1 and is
incorporated by reference herein.
(c) Sales Agreements with Commission Schedule are filed
herewith.
(d) Sales Agreement with Chase is filed herewith.
(e) General Agent's Agreement is filed herewith.
(f) Career Agent Agreement is filed herewith.
(g) Registered Representative's Agreement is filed herewith.
(h) Form of Indemnification Agreement with Scudder Kemper is
filed herewith.
EXHIBIT 4 Policy Form was previously filed on August 16, 1996 in initial
Registration Statement and is incorporated by reference herein.
EXHIBIT 5 Application Form was previously filed on August 16, 1996 in
initial Registration Statement and is incorporated by
reference herein.
EXHIBIT 6 The Depositor's Articles of Incorporation, as amended effective
October 1, 1995 to reflect its
<PAGE>
new name, and Bylaws were previously filed on August 16,
1996 in initial Registration Statement and are incorporated
by reference herein.
EXHIBIT 7 Not Applicable.
EXHIBIT 8 (a) BFDS Agreements for lockbox and mailroom services are
filed herewith.
(b) Form of Scudder Services Agreement is filed herewith.
EXHIBIT 9 Opinion of Counsel is filed herewith.
EXHIBIT 10 Consent of Independent Accountants is filed herewith.
EXHIBIT 11 None.
EXHIBIT 12 None.
EXHIBIT 13 None.
EXHIBIT 15 (a) Participation Agreement with Kemper is filed herewith.
(b) Form of Participation Agreement with Scudder Kemper is
filed herewith.
ITEM 25. DIRECTORS AND OFFICERS OF THE DEPOSITOR
The principal business address of all the following Directors and
Officers is:
440 Lincoln Street
Worcester, Massachusetts 01653
DIRECTORS AND PRINCIPAL OFFICERS OF THE COMPANY
NAME AND POSITION PRINCIPAL OCCUPATION(S) DURING
WITH COMPANY PAST FIVE YEARS
- ----------------- -------------------------------------------
Bruce C. Anderson Director of First Allmerica since 1996;
Director and Vice President Vice President, First Allmerica since 1984
Abigail M. Armstrong Secretary of First Allmerica since 1996;
Secretary and Counsel Counsel, First Allmerica since 1991
Robert E. Bruce Director and Chief Information Officer of
Director, Vice President and First Allmerica since 1997; Vice President
Chief Information Officer of First Allmerica since 1995; Corporate
Manager, Digital Equipment Corporation
1979 to 1995
John P. Kavanaugh Director and Chief Investment Officer of
Director, Vice President and First Allmerica since 1996; Vice
Chief Investment Officer President, First Allmerica since 1991
John F. Kelly Director of First Allmerica since 1996;
Director, Senior Vice President, Senior Vice President, First Allmerica
General Counsel and since 1986; General Counsel, First
Assistant Secretary Allmerica since 1981; Assistant Secretary,
First Allmerica since 1991
<PAGE>
NAME AND POSITION PRINCIPAL OCCUPATION(S) DURING
WITH COMPANY PAST FIVE YEARS
- ----------------- -------------------------------------------
J. Barry May Director of First Allmerica since 1996;
Director Director and President, The Hanover
Insurance Company since 1996; Vice
President, The Hanover Insurance Company
1993 to 1996; General Manager, The Hanover
Insurance Company 1989 to 1993
James R. McAuliffe Director of First Allmerica since 1996;
Director Director of Citizens Insurance Company of
America since 1992; President since 1994,
and CEO since 1996; Vice President, First
Allmerica 1982 to 1994 and Chief
Investment Officer, First Allmerica 1986
to 1994
John F. O'Brien Director, Chairman of the Board, President
Director, Chairman of the Board, and Chief Executive Officer, First
President and Chief Executive Allmerica since 1989
Officer
Edward J. Parry, III Director and Chief Financial Officer of
Director, Vice President, First Allmerica since 1996; Vice President
Chief Financial Officer and and Treasurer, First Allmerica since 1993;
Treasurer Assistant Vice President, 1992 to 1993
Richard M. Reilly Director of First Allmerica since 1996;
Director and Vice President Vice President, First Allmerica since
1990; Director, Allmerica Investments,
Inc. since 1990; Director and President,
Allmerica Financial Investment Management
Services, Inc. since 1990
Eric A. Simonsen Director of First Allmerica since 1996;
Director and Vice President Vice President, First Allmerica since
1990; Chief Financial Officer, First
Allmerica 1990 to 1996
Phillip E. Soule Director of First Allmerica since 1996;
Director and Vice President Vice President, First Allmerica since 1987
ITEM 26. PERSONS UNDER COMMON CONTROL WITH REGISTRANT
See attached organization chart .
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
NAME ADDRESS TYPE OF BUSINESS
- ---------------------------- -------------------- ---------------------------
AAM Equity Fund 440 Lincoln Street Massachusetts Grantor Trust
Worcester MA 01653
AFC Capital Trust I 440 Lincoln Street Statutory Business Trust
Worcester MA 01653
Allmerica Asset Management 440 Lincoln Street Investment advisory services
Limited Worcester MA 01653
Allmerica Asset Management, 440 Lincoln Street Investment advisory services
Inc. Worcester MA 01653
Allmerica Benefits, Inc. 440 Lincoln Street Non-insurance medical services
Worcester MA 01653
Allmerica Equity Index Pool 440 Lincoln Street Massachusetts Grantor Trust
Worcester MA 01653
<PAGE>
Allmerica Financial Alliance 100 North Parkway Multi-line property and
Insurance Company Worcester MA 01605 casualty insurance
Allmerica Financial Benefit 100 North Parkway Multi-line property and
Insurance Company Worcester MA 01605 casualty insurance
Allmerica Financial 440 Lincoln Street Holding Company
Corporation Worcester MA 01653
Allmerica Financial 440 Lincoln Street Insurance Broker
Insurance Brokers, Inc. Worcester MA 01653
Allmerica Financial Life 440 Lincoln Street Life insurance, accident and
Insurance and Annuity Worcester MA 01653 health insurance, annuities,
Company (formerly known variable annuities and
as SMA Life Assurance Company) variable life insurance
Allmerica Financial 440 Lincoln Street Insurance Agency
Services Insurance Worcester MA 01653
Agency, Inc.
Allmerica Funding Corp. 440 Lincoln Street Special purpose funding
Worcester MA 01653 vehicle for commercial paper
Allmerica Funds 440 Lincoln Street Investment Company
Worcester MA 01653
Allmerica, Inc. 440 Lincoln Street Common employer for
Worcester MA 01653 Allmerica Financial
Corporation entities
Allmerica Institutional 440 Lincoln Street Accounting, marketing and
Services, Inc. Worcester MA 01653 shareholder services for
(formerly known as 440 investment companies
Financial Group of
Worcester, Inc.)
Allmerica Investment 440 Lincoln Street Investment advisory services
Management Company, Inc. Worcester MA 01653
Allmerica Investments, Inc. 440 Lincoln Street Securities, retail
Worcester MA 01653 broker-dealer
Allmerica Investment Trust 440 Lincoln Street Investment Company
Worcester MA 01653
Allmerica Plus Insurance 440 Lincoln Street Insurance Agency
Agency, Inc. Worcester MA 01653
Allmerica Property & 440 Lincoln Street Holding Company
Casualty Companies, Inc. Worcester MA 01653
Allmerica Securities Trust 440 Lincoln Street Investment Company
Worcester MA 01653
Allmerica Services 440 Lincoln Street Internal administrative
Corporation Worcester MA 01653 services provider to
Allmerica Financial
Corporation entities
Allmerica Trust Company, 440 Lincoln Street Limited purpose national
N.A. Worcester MA 01653 trust company
<PAGE>
AMGRO, Inc. 100 North Parkway Premium financing
Worcester MA 01605
APC Funding Corp. 440 Lincoln Street Special purpose funding
Worcester MA 01653 vehicle for commercial paper
Beltsville Drive 440 Lincoln Street Real estate partnership
Limited Partnership Worcester MA 01653
Citizens Corporation 440 Lincoln Street Holding Company
Worcester MA 01653
Citizens Insurance 645 West Grand River Multi-line property and
Company of America Howell MI 48843 casualty insurance
Citizens Insurance 333 Pierce Road Multi-line property and
Company of Illinois Itasca IL 60143 casualty insurance
Citizens Insurance 3950 Priority Way Multi-line property and
Company of the Midwest South Drive, Suite 200 casualty insurance
Indianapolis IN 46280
Citizens Insurance 8101 N. High Street Multi-line property and
Company of Ohio P.O. Box 342250 casualty insurance
Columbus OH 43234
Citizens Management, Inc. 645 West Grand River Services management company
Howell MI 48843
First Allmerica 440 Lincoln Street Life, pension, annuity,
Financial Life Insurance Worcester MA 01653 accident and health
Company (formerly State insurance company
Mutual Life Assurance
Company of America)
First Sterling Limited 440 Lincoln Street Holding Company
Worcester MA 01653
First Sterling 440 Lincoln Street Reinsurance Company
Reinsurance Company Worcester MA 01653
Limited
Greendale Special 440 Lincoln Street Massachusetts Grantor Trust
Placements Fund Worcester MA 01653
The Hanover American 100 North Parkway Multi-line property and
Insurance Company Worcester MA 01605 casualty insurance
The Hanover Insurance 100 North Parkway Multi-line property and
Company Worcester MA 01605 casualty insurance
Hanover Texas Insurance 801 East Campbell Road Attorney-in-fact for
Management Company, Inc. Richardson TX 75081 Hanover Lloyd's Insurance
Company
Hanover Lloyd's Insurance 801 East Campbell Road Multi-line property and
Company Richardson TX 75081 casualty insurance
Linder Skokie Real Estate 440 Lincoln Street Real estate holding company
Corporation Worcester MA 01653
<PAGE>
Lloyds Credit Corporation 440 Lincoln Street Premium financing service
Worcester MA 01653 franchises
Logan Wells Water Company, 603 Heron Drive Water Company serving land
Inc. Bridgeport NJ 08014 development investment
Massachusetts Bay 100 North Parkway Multi-line property and
Insurance Company Worcester MA 01605 casualty insurance
SMA Financial Corp. 440 Lincoln Street Holding Company
Worcester MA 01653
Somerset Square, Inc. 440 Lincoln Street Real estate holding company
Worcester MA 01653
Sterling Risk Management 440 Lincoln Street Risk management services
Services, Inc. Worcester MA 01653
ITEM 27. NUMBER OF CONTRACT OWNERS
As of February 27, 1998 there were 8 Contract holders of qualified
Contracts and 29 Contract holders of non-qualified contracts.
ITEM 28. INDEMNIFICATION
Article VIII of the Bylaws of First Allmerica Financial Insurance Company
(the Depositor) states: Each Director and each Officer of the Corporation,
whether or not in office, (and his executors or administrators), shall be
indemnified or reimbursed by the Corporation against all expenses actually
and necessarily incurred by him in the defense or reasonable settlement of
any action, suit, or proceeding in which he is made a party by reason of
his being or having been a Director or Officer of the Corporation,
including any sums paid in settlement or to discharge judgement, except in
relation to matters as to which he shall be finally adjudged in such
action, suit or proceeding to be liable for negligence or misconduct in the
performance of his duties as such Director or Officer; and the foregoing
right of indemnification or reimbursement shall not affect any other rights
to which he may be entitled under the Articles of Incorporation, any
statute, bylaw, agreement, vote of stockholders, or otherwise.
ITEM 29. PRINCIPAL UNDERWRITERS
(a) Allmerica Investments, Inc. also acts as principal underwriter for the
following:
- VEL Account, VEL II Account, Inheiritage Account, Separate
Accounts VA-A, VA-B, VA-C, VA-G, VA-H, VA-K, Allmerica Select
Separate Account II, Group VEL Account, Separate Account KG,
Separate Account KGC, Fulcrum Separate Account, Fulcrum Variable
Life Separate Account, Allmerica Select Separate Account of
Allmerica Financial Life Insurance and Annuity Company
- Inheiritage Account, VEL II Account, Separate Account I, Separate
Account VA-K, Separate
<PAGE>
Account VA-P, Group VEL Account, Separate Account KG,
Separate Account KGC, Fulcrum Separate Account, Fulcrum
Variable Life Separate Account, and Allmerica Select Separate
Account of First Allmerica Financial Life Insurance Company.
- Allmerica Investment Trust
(b) The Principal Business Address of each of the following Directors and
Officers of Allmerica Investments, Inc. is:
440 Lincoln Street
Worcester, Massachusetts 01653
NAME POSITION OR OFFICE WITH UNDERWRITER
-------------------- ------------------------------------------------
Abigail M. Armstrong Secretary and Counsel
Emil J. Aberizk, Jr. Vice President
Edward T. Berger Vice President and Chief Compliance Officer
Richard F. Betzler, Jr. Vice President
Philip J. Coffey Vice President
Thomas P. Cunningham Vice President, Chief Financial Officer and
Controller
John F. Kelly Director
William F. Monroe, Jr. Vice President
David J. Mueller Vice President
John F. O'Brien Director
Stephen Parker President, Director and Chief Executive Officer
Edward J. Parry, III Treasurer
Richard M. Reilly Director
Eric A. Simonsen Director
Mark G. Steinberg Senior Vice President
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
Each account, book or other document required to be maintained by Section
31(a) of the 1940 Act and Rules 31a-1 to 31a-3 thereunder are maintained by
the Company at 440 Lincoln Street, Worcester, Massachusetts.
<PAGE>
ITEM 31. MANAGEMENT SERVICES
The Company provides daily unit value calculations and related services for
the Company's separate accounts.
ITEM 32. UNDERTAKINGS
(a) Subject to the terms and conditions of Section 15(d) of the Securities
Exchange Act of 1934, the undersigned registrant hereby undertakes to
file with the Securities and Exchange Commission ("SEC")such
supplementary and periodic information, documents, and reports as may
be prescribed by any rule or regulation of the SEC heretofore or
hereafter duly adopted pursuant to authority conferred in that
section.
(b) The registrant hereby undertakes to include in the prospectus a
postcard that the applicant can remove to send for a Statement of
Additional Information.
(c) The registrant hereby undertakes to deliver a Statement of Additional
Information promptly upon written or oral request, according to the
requirements of Form N-4.
(d) Insofar as indemnification for liability arising under the 1933 Act
may be permitted to Directors, Officers and Controlling Persons of
Registrant under any registration statement, underwriting agreement or
otherwise, Registrant has been advised that, in the opinion of the
SEC, such indemnification is against public policy as expressed in the
1933 Act and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment
by Registrant of expenses incurred or paid by a Director, Officer or
Controlling Person of 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,
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 1933 Act and will be
governed by the final adjudication of such issue.
(e) The Company and the Registrant hereby represent that the aggregate
fees and charges under the Contracts offered by this Registration
Statement are reasonable in relation to the services rendered, the
expenses expected to be incurred, and the risks assumed by the
Company.
ITEM 33. REPRESENTATIONS CONCERNING WITHDRAWAL RESTRICTIONS ON SECTION 403(b)
PLANS AND UNDER THE TEXAS OPTIONAL RETIREMENT PROGRAM
Registrant, a separate account of First Allmerica Financial Life Insurance
Company ("Company"), states that it is (a) relying on Rule 6c-7 under the
1940 Act with respect to withdrawal restrictions under the Texas Optional
Retirement Program ("Program") and (b) relying on the "no-action" letter
(Ref. No. IP-6-88) issued on November 28, 1988 to the American Council of
Life Insurance, in applying the withdrawal restrictions of Internal Revenue
Code Section 403(b)(11). Registrant has taken the following steps in
reliance on the letter:
<PAGE>
1. Appropriate disclosures regarding the redemption restrictions imposed
by the Program and by Section 403(b)(11) have been included in the
prospectus of each registration statement used in connection with the
offer of the Company's variable contracts.
2. Appropriate disclosures regarding the redemption restrictions imposed
by the Program and by Section 403(b)(11) have been included in sales
literature used in connection with the offer of the Company's variable
contracts.
3. Sales Representatives who solicit participants to purchase the
variable contracts have been instructed to specifically bring the
redemption restrictions imposed by the Program and by Section
403(b)(11) to the attention of potential participants.
4. A signed statement acknowledging the participant's understanding of
(i) the restrictions on redemption imposed by the Program and by
Section 403(b)(11) and (ii) the investment alternatives available
under the employer's arrangement will be obtained from each
participant who purchases a variable annuity contract prior to or at
the time of purchase.
Registrant hereby represents that it will not act to deny or limit a
transfer request except to the extent that a Service-Ruling or written
opinion of counsel, specifically addressing the fact pattern involved and
taking into account the terms of the applicable employer plan, determines
that denial or limitation is necessary for the variable annuity contracts
to meet the requirements of the Program or of Section 403(b). Any transfer
request not so denied or limited will be effected as expeditiously as
possible.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940 the Registrant certifies that it meets all the requirements
for effectiveness of this Registration Statement pursuant to Rule 485(b) under
the Securities Act of 1933 and has duly caused this Registration Statement to be
signed on its behalf by the undersigned, thereto duly authorized, in the City of
Worcester, and Commonwealth of Massachusetts on the 15th day of April, 1998.
SEPARATE ACCOUNT KG OF
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
By: /S/ ABIGAIL M. ARMSTRONG
----------------------------------
Abigail M. Armstrong, Secretary
SIGNATURES TITLE DATE
- ---------------------------- -------------------------- ---------------------
/s/ JOHN F. O'BRIEN Director, President and April 15, 1998
- ---------------------------- Chief Executive Officer
John F. O'Brien
/s/ BRUCE C. ANDERSON
- ---------------------------- Director and Vice President
Bruce C. Anderson
/s/ ROBERT E. BRUCE Director, Vice President and
- ---------------------------- Chief Information Officer
Robert E. Bruce
/s/ JOHN P. KAVANAUGH Director, Vice President and
- ---------------------------- Chief Investment Officer
John P. Kavanaugh
/s/ JOHN F. KELLY Director, Senior Vice President
- ---------------------------- and General Counsel
John F. Kelly
/s/ J. BARRY MAY
- ---------------------------- Director
J. Barry May
/s/ JAMES R. MCAULIFFE
- ---------------------------- Director
James R. McAuliffe
/s/ EDWARD J. PARRY, III Director, Vice President,
- ---------------------------- Chief Financial Officer
Edward J. Parry, III and Treasurer
/s/ RICHARD M. REILLY
- ---------------------------- Director and Vice President
Richard M. Reilly
/s/ ERIC A. SIMONSEN
- ---------------------------- Director and Vice President
Eric A. Simonsen
/s/ PHILLIP E. SOULE Director and Vice President
- ----------------------------
Phillip E. Soule
<PAGE>
EXHIBIT TABLE
Exhibit 3(a) Underwriting and Administrative Services Agreement
Exhibit 3(c) Sales Agreements with Commission Schedule
Exhibit 3(d) Chase Sales Agreement
Exhibit 3(e) General Agent's Agreement
Exhibit 3(f) Career Agent Agreement
Exhibit 3(g) Registered Representative's Agreement
Exhibit 3(h) Form of Indemnification Agreement with Scudder Kemper
Exhibit 8(a) BFDS Agreements
Exhibit 8(b) Form of Scudder Services Agreement
Exhibit 9 Opinion of Counsel
Exhibit 10 Consent of Independent Accountants
Exhibit 15(a) Participation Agreement with Kemper
Exhibit 15(b) Form of Participation Agreement with Scudder Kemper
<PAGE>
UNDERWRITING AND
ADMINISTRATIVE SERVICES AGREEMENT
AGREEMENT made this 26th day of November, 1997 between and among First Allmerica
Financial Life Insurance Company, a Massachusetts corporation (the "Company"),
each of its separate investment accounts (the "Accounts") which is a
registered investment company under the Investment Company Act of 1940 (the
"1940 Act"), as may be established by the Company from time-to-time, and
Allmerica Investments, Inc., a Massachusetts corporation (the "Distributor").
WITNESSETH:
WHEREAS, the Company and the respective Accounts issue certain variable annuity
contracts or variable insurance policies (the "contracts") which may be deemed
to be securities under the Securities Act of 1933 (the "1933 Act"), and the laws
of some states;
WHEREAS, the Distributor, an affiliate of the Company, is registered as a
broker-dealer with the Securities and Exchange Commission ("SEC") under the
Securities Exchange Act of 1934 (the "1934 Act") and is a member of the National
Association of Securities Dealers, Inc. ("NASD");
WHEREAS, the parties desire to have the Distributor act as principal underwriter
for the Accounts set forth in Exhibit A, as may be amended from time-to-time by
mutual consent of the parties, and to assume full responsibility for the
securities activities of all "persons associated" (as that term is defined in
Section 3(a)(18) of the 1934 Act) with the Distributor and engaged directly or
indirectly in the variable contract operation (the "associated persons");
WHEREAS, the parties desire to have the Company perform certain administrative
services in connection with the sale and servicing of the contracts.
NOW, THEREFORE, in consideration of the covenants and mutual promises of the
parties made to each other, it is hereby covenanted and agreed as follows:
1. The Distributor will act as the exclusive principal underwriter for the
Accounts and as such will assume full responsibility for the securities
activities of all the associated persons in connection with the sale of the
contracts. The Distributor will train the associated persons, use its best
efforts to prepare them to complete satisfactorily the applicable NASD and
state examinations so that they may be qualified, register the associated
persons as its registered representatives before they engage in the sale of
the contracts, and supervise and control them in the performance of such
activities. Notwithstanding anything in this Agreement to the contrary,
the Distributor may enter into sales agreements with independent
broker-dealers for the sale of the contracts. All such sales agreements
entered into by the Distributor with independent broker-dealers shall
provide that each independent broker-dealer will assume full responsibility
for continued compliance by itself and its associated persons with the NASD
Rules of Fair Practice and Federal and state securities laws.
2. The Distributor will assume full responsibility for the continued
compliance by itself and its associated persons with the NASD Rules of Fair
Practice and Federal and state securities laws, to the extent applicable in
connection with the sale of the contracts. The Distributor, directly or
through the Company as its agent, will make timely filings with the SEC,
NASD, and any other securities regulatory authorities of all reports and
any sales literature relating to the Accounts required by law to be filed
by the Distributor.
3. The Company will prepare and submit to the Accounts (a) all registration
statements and prospectuses (including amendments) and all reports required
by law to be filed by the Accounts with Federal and state securities
regulatory authorities, and (b) all notices, proxies, proxy statements, and
periodic
- 1 -
<PAGE>
reports that are to be transmitted to persons having voting rights with
respect to the Accounts.
4. The Company will, except as otherwise provided in this Agreement, bear the
cost of all services and expenses, including legal services and expenses,
filing fees, and other fees incurred in connection with (a) registering and
qualifying the Accounts and the contracts, and (b) preparing, printing, and
distributing all registration statements and prospectuses (including
amendments), contracts, notices, periodic reports, proxy solicitation
material, sales literature, and advertising filed or distributed in
connection with the sale of the contracts.
All cost associated with the variable contract compliance function
including, but not limited to, fees and expenses associated with qualifying
and licensing associated persons with Federal and state regulatory
authorities and the NASD and with performing compliance-related
administrative services, shall be allocated to the Company. To the extent
that the Distributor incurs out-of-pocket expenses in connection with the
variable contracts compliance function, the Company shall reimburse the
Distributor for such expenses. To the extent that such costs are in
connection with services provided by employees of the Company, they shall
be charged to the Company. The determination and allocation of all such
costs shall be pursuant to the Cost Distribution Policy as stated in the
Consolidated Service Agreement (effective January 1, 1993) among the
Allmerica Financial group of affiliated companies, as may be amended from
time.
5. All purchase payments made under the contracts will be forwarded by or on
behalf of Contract Owners directly to the Company and shall become the
exclusive property of the Company. The Company agrees to pay on behalf of
Distributor all sales commissions and any other remuneration due in
connection with the sale of the contracts by associated persons of the
Distributor and any independent broker-dealers having a sales agreement
with the Distributor. The Distributor or the Company as agent for the
Distributor shall pay all other remuneration due any other person for
activities relating to the sale of the contracts. The Company shall
reimburse the Distributor fully and completely for all amounts paid by the
Distributor to any person pursuant to this Section.
6. The Company will, as the Distributor's agent, (a) maintain and preserve in
accordance with Rules 17a-3 and 17a-4 under the 1934 Act all books and
records required to be maintained by the Distributor in connection with the
offer and sale of the contracts being offered for sale pursuant to this
Agreement, which books and records shall remain the property of the
Distributor, and shall at all times be subject to inspection by the SEC in
accordance with Section 17(a) of the 1934 Act, and all other regulatory
bodies having jurisdiction, and (b) send a written confirmation for each
such transaction reflecting the facts of the transaction and showing that
it is being sent on behalf of the Distributor acting in the capacity of
agent for the Accounts, in conformance with the requirements of Rule 10b-10
of the 1934 Act.
7. Each party hereto shall advise the others promptly of (a) any action of the
SEC or any authorities of any state or territory of which it has knowledge,
affecting registration or qualification of the Accounts or the contracts,
or the right to offer the contracts for sale, and (b) the happening of any
event which makes untrue any statement, or which requires the making of any
change in the registration statement or prospectus in order to make the
statements therein not misleading.
8. The Company agrees to be responsible to the Accounts for all sales and
administrative expenses incurred in connection with the administration of
the contracts and the Accounts other than applicable taxes arising from
income and capital gains of the Accounts and any other taxes arising from
the existence and operation of the Accounts.
9. As compensation for services performed and expenses incurred under this
Agreement, the Company will receive the charges and deductions as provided
in each outstanding series of the Company's contracts. Distributor will
receive the compensation provided for in Section 4, and may receive such
additional compensation, if any, as may be agreed upon by the parties from
time-to-time.
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<PAGE>
10. Each party hereto agrees to furnish any other state insurance commissioner
or regulatory authority with jurisdiction over the contracts with any
information or reports in connection with services provided under this
Agreement which may be requested in order to ascertain whether the variable
insurance product operations of the Company are being conducted in a manner
consistent with applicable statutes, rules and regulations.
11. This Agreement shall upon execution become effective as of the date first
above written, and
(a) Unless otherwise terminated, this Agreement shall continue in effect
from year-to-year;
(b) This Agreement may be terminated by any party at any time upon giving
60 days' written notice to the other parties hereto; and
(c) This Agreement shall automatically terminate in the event of its
assignment.
12. The initial Accounts covered by this Agreement are set forth in Appendix A.
This Agreement, including Appendix A, may be amended at any time by mutual
consent of the parties.
13. This Agreement shall be governed by and construed in accordance with the
laws of Massachusetts.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the day
and year first above written.
FIRST ALLMERICA FINANCIAL LIFE INSURANCE
COMPANY
By: /s/ David J. Mueller
-------------------------------------
Title: Vice President
ALLMERICA INVESTMENTS, INC.
By: /s/ Thomas P. Cunningham
-------------------------------------
Title: Vice President
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<PAGE>
Appendix A
SEPARATE ACCOUNTS OF FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
AS OF SEPTEMBER 1, 1997
VEL II Account
Inheiritage Account
Group VEL Account
Separate Account I
Separate Account VA-K
Separate Account VA-P
Allmerica Select Separate Account
Separate Account KG
Separate Account KGC
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<PAGE>
SALES
AGREEMENT ALLMERICA INVESTMENTS, INC.
440 Lincoln Street
Worcester, Massachusetts 01653
- ------------------------------------------------------------------------------
Agreement, effective as of _________________, 19___, by and between Allmerica
Investments, Inc., a Massachusetts corporation (herein "Allmerica"), ________
__________________________________________________________________________, a
_____________________________ corporation (herein the "Broker-Dealer") and the
affiliates of Broker-Dealer listed on Exhibit "A" attached hereto, each
affiliate being referred to herein as a "General Agent".
Allmerica, subject to the terms and conditions set forth in this Agreement,
authorizes and appoints each General Agent to solicit applications for the
sale of Contracts. Each General Agent accepts this appointment and each
General Agent and the Broker-Dealer agree to the terms and conditions set
forth below.
DEFINITIONS
INSURANCE COMPANIES - All Contracts will be issued by First Allmerica
Financial Life Insurance Company (herein "First Allmerica") or by Allmerica
Financial Life Insurance and Annuity Company (herein "Allmerica Financial
Life"), a subsidiary of First Allmerica. The Principal Office of First
Allmerica and Allmerica Financial Life (herein collectively referred to as
"the Insurance Companies") is located at 440 Lincoln Street, Worcester,
Massachusetts 01653.
CONTRACTS - The variable annuity and variable life insurance contracts of the
Insurance Companies listed on the attached Commission Schedule(s), for which
Allmerica Investments, Inc., an affiliate of First Allmerica, has been
appointed the exclusive distributor and principal underwriter.
REGISTERED REPRESENTATIVES - Individuals affiliated with each General Agent
and the Broker-Dealer who are licensed as life insurance agents in those
jurisdictions in which applications for the sale of Contracts are to be
solicited and who are also duly registered with the National Association of
Securities Dealers, Inc. (herein "NASD") in compliance with the '34 Act.
'33 ACT - The Securities Act of 1933, as amended.
'34 ACT - The Securities Exchange Act of 1934, as amended.
RELATIONSHIP OF PARTIES
SECTION 1. Nothing in this Agreement will be construed to create the
relationship of employer and employee between Allmerica or either Insurance
Company and any General Agent, the Broker-Dealer or any Registered
Representative. General Agents and Registered Representatives will be free
to exercise their independent judgment as to the time, place and manner of
solicitation and servicing of business underwritten by the Insurance
Companies. However, General Agents, the Broker-Dealer and Registered
Representatives shall have no authority to act on behalf of Allmerica or the
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Insurance Companies in a manner which does not conform to applicable
statutes, ordinances, or governmental regulations or to reasonable rules
adopted from time to time by Allmerica or the Insurance Companies.
LIMITATIONS ON AUTHORITY
SECTION 2. General Agents, the Broker-Dealer and Registered Representatives
will have no authority to accept risks of any kind; to make, alter or
discharge Contracts; to waive forfeitures or exclusions; to alter or amend
any papers received from either Insurance Company; to deliver any life
insurance Contract or any document, agreement or endorsement changing the
amount of insurance coverage if the General Agent, the Broker-Dealer or the
soliciting Registered Representative know or have reason to believe that the
insured is uninsurable; or to accept any payment unless the payment meets the
minimum payment requirement for the Contract established by the Insurance
Company.
LICENSING AND REGISTRATION
SECTION 3. Each General Agent is hereby authorized to recommend Registered
Representatives for appointment by the Insurance Companies and only
individuals so recommended by a General Agent shall become Registered
Representatives hereunder. Allmerica shall arrange for the Insurance
Companies to apply for life insurance agent appointments in the appropriate
jurisdictions for such recommended Registered Representatives. Until
Contracts of First Allmerica are offered for sale, applications for
appointments shall only be made on behalf of Allmerica Financial Life.
Notwithstanding the foregoing, the Insurance Companies and Allmerica reserve
the right to refuse to appoint any proposed Registered Representative and/or
to terminate any Registered Representative who has been appointed by the
Insurance Companies.
AGREEMENTS BY GENERAL AGENT AND BROKER-DEALER
SECTION 4. The Broker-Dealer agrees that at all times when performing its
duties under this Agreement it shall be duly registered as a securities
broker-dealer under the '34 Act, be a member in good standing of the NASD,
and be duly licensed or registered as a securities broker-dealer in each
jurisdiction where such licensing or registration is required in connection
with the sale of the Contracts or the supervision of Registered
Representatives who solicit applications for the Contracts.
Each General Agent agrees that at all times when performing its duties under
this Agreement it shall be duly licensed to sell Contracts in each
jurisdiction in which General Agent intends to perform hereunder.
Each General Agent and the Broker-Dealer shall be responsible for carrying
out their sales and administrative obligations under this Agreement in
continued compliance with the NASD Rules of Fair Practice, federal and state
securities laws and regulations, and state insurance laws and regulations.
Each General Agent and the Broker-Dealer agree to offer the Contracts for
sale through their Registered Representatives and to offer such Contracts
only in accordance with the prospectus. General Agents, the Broker-Dealer
and Registered Representatives are not authorized to give any information or
make any representations concerning such Contracts other
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than those contained in the prospectus or in such sales literature or
advertising as may be authorized by Allmerica.
Each General Agent and the Broker-Dealer agree that they shall be fully
responsible for ensuring that no person shall offer or sell Contracts on
their behalf until such person is appropriately licensed, registered or
otherwise qualified to offer and sell such Contracts under the state and
federal securities laws and the insurance laws of each jurisdiction in which
such person intends to solicit.
Each General Agent and the Broker-Dealer agree to train, supervise and be
solely responsible for the conduct of their Registered Representatives in the
solicitation and sale of the Contracts and for the supervision as to their
strict compliance with Allmerica's rules and procedures, the NASD rules of
Fair Practice, and applicable rules and regulations of any other governmental
or other agency that has jurisdiction over the offering for sale of the
Contracts.
Each General Agent and the Broker-Dealer shall take reasonable steps to
ensure that their Registered Representatives shall not make recommendations
to an applicant to purchase a Contract in the absence of reasonable grounds
to believe that the purchase of such Contract is suitable for such applicant.
Such determination will be based upon, but will not be limited to,
information furnished to a Registered Representative after reasonable inquiry
of such applicant concerning the applicant's insurance and investment
objectives, financial situation and needs.
Each General Agent and the Broker-Dealer agree that Registered
Representatives shall conduct their business with respect to the Contracts at
all times in compliance with all applicable federal and state laws and
regulations and shall be subject to a standard of conduct including, but not
limited to, the following:
(a) A Registered Representative shall not solicit or participate in the sale
of the Contracts in any jurisdiction until such Registered Representative
is trained and licensed.
(b) A Registered Representative shall not solicit for the sale of Contracts
without delivering the then currently effective prospectus for such
Contracts and any then applicable amendments or supplements thereto,
including the current prospectus(es) for any fund(s) in which Contract
separate account(s) invest.
(c) A Registered Representative shall have no authority to advertise for or
on behalf of the Insurance Companies or Allmerica without express written
authorization from Allmerica.
AGREEMENTS BY ALLMERICA
SECTION 5. Allmerica agrees that at all times while this Agreement remains
in force that it shall be a registered broker-dealer under the '34 Act and be
a member in good standing of the NASD.
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During the term of this Agreement, Allmerica will provide to, or cause to be
provided to, each General Agent and the Broker-Dealer, without charge, as
many copies of the prospectus(es) for the Contracts (and any amendments, or
supplements thereto), the current prospectus(es) for any underlying fund(s)
and applications for the Contracts as each General Agent and the
Broker-Dealer may reasonably request. Upon termination of the Agreement, any
prospectuses, applications, and other materials and supplies furnished by
Allmerica to General Agents and the Broker-Dealer shall be promptly returned
to Allmerica.
Allmerica agrees to promptly notify each General Agent and the Broker-Dealer
of newly declared effective prospectus(es) for the Contracts and any
amendments or supplements thereto.
Allmerica agrees to keep each General Agent and the Broker-Dealer informed of
all jurisdictions in which the Insurance Companies are licensed to sell the
Contracts and in which the Contracts may be offered for sale.
SUBMISSION OF APPLICATIONS; DELIVERY OF CONTRACTS; REJECTED BUSINESS
SECTION 6. Each General Agent or the Broker-Dealer will submit, or cause to
be submitted, directly to the Principal Office of the Insurance Companies all
Contract applications solicited by their Registered Representatives. Each
General Agent or the Broker-Dealer will deliver, or cause to be delivered,
within 10 days of the date of issue all Contracts issued on applications
submitted by the General Agent, the Broker-Dealer or their Registered
Representatives. Each General Agent or the Broker-Dealer will promptly
return, or cause to be returned, to the Insurance Companies any Contract
which is declined by the applicant or which cannot be delivered within the
time permitted by the Insurance Company's rules.
ILLUSTRATIONS AND PROPOSALS
SECTION 7. General Agents, the Broker-Dealer and Registered Representatives
will not furnish any prospective Contract owner with an illustration of the
financial or other aspects of a Contract or a proposal for a Contract unless
the same has been either furnished by the Insurance Companies or prepared
from computer software or other material furnished or approved by the
Insurance Companies. Any illustration or proposal will conform to standards
of completeness and accuracy established by the Insurance Companies. If the
proposal or illustration was not furnished by the Insurance Companies, each
General Agent or the Broker-Dealer will retain in its records for
availability to the Insurance Companies a copy thereof or the means to
duplicate the same. Any computer software or materials furnished by either
Insurance Company will be and remain its property.
ACCOUNTING FOR FUNDS COLLECTED
SECTION 8. In accordance with the rules of the Insurance Companies, each
General Agent and the Broker-Dealer will account for and remit immediately to
the Principal Office of the Insurance Companies all funds received or
collected for or on behalf of either Insurance Company without deduction for
any commissions, or other claim the General Agent, the Broker-Dealer or any
Registered Representative may have against either Insurance Company or
Allmerica and will make such reports and file such
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substantiating documents and records as the Insurance Companies may
reasonably require.
INDEMNIFICATION
SECTION 9. Each General Agent and the Broker-Dealer, jointly and severally,
shall indemnify and hold Allmerica and the Insurance Companies and their
officers, directors and employees harmless from any liability arising from
any act or omission of the General Agent, the Broker-Dealer or of any
affiliate of the Broker-Dealer, or any officer, director, employee of the
General Agent or the Broker-Dealer or of their Registered Representatives,
including but not limited to, any fines, penalties, attorney's fees, costs of
settlement, damages or financial loss. Each General Agent and the
Broker-Dealer expressly authorize Allmerica and the Insurance Companies,
without precluding them from exercising any other remedy they may have, to
charge against all compensation due or to become due to the General Agent or
the Broker-Dealer under this Agreement, any monies paid on any liability
incurred by Allmerica or the Insurance Companies by reason of any such act or
omission of any General Agent, the Broker-Dealer, any affiliate of the
Broker-Dealer, or of any officer, director, employee of a General Agent or
the Broker-Dealer or of their Registered Representatives.
Allmerica shall indemnify and hold each General Agent and the Broker-Dealer
and their officers, directors, employees and registered representatives
harmless from any liability arising from any act or omission of Allmerica,
the Insurance Companies or any affiliate of Allmerica or any of the Insurance
Companies (collectively the "Allmerica Companies"), or any officer, director
or employee of the Allmerica Companies, including but not limited to, any
fines, penalties, reasonable attorney's fees, costs of settlement, damages or
financial loss.
The indemnifications provided by this Section shall survive termination of
this Agreement.
If a Contract is not delivered to the Contract owner within 10 days of the
date of issue of the Contract and if after delivery the owner returns the
Contract to the Insurance Company and receives a full refund of all payments
made, in any situation where the failure to deliver in a timely manner was
due to the inaction or negligence of a General Agent, the Broker-Dealer or a
Registered Representative, the difference between the payments refunded and
the cash value of the Contract on the date the Contract is received by the
Insurance Company at its Principal Office shall be reimbursed to the
Insurance Company by the offending General Agent or the Broker-Dealer in any
case where the cash value is less than the payments refunded. Any such
reimbursement shall be paid to the affected Insurance Company within 30 days
of receipt of a written request for payment.
COMMISSION REFUNDS
SECTION 10. If a Contract owner rescinds a Contract or exercises a right to
surrender a Contract for return of all payments made, the soliciting General
Agent or the Broker-Dealer will repay the appropriate Insurance Company the
amount of any
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commissions received on the payments returned within 10 days of receipt of a
written request for repayment.
BASIS OF COMPENSATION
SECTION 11. While this Agreement remains in force, the Insurance Companies
agree to pay each General Agent commissions in accordance with the Commission
Schedule(s) attached hereto and incorporated herein, from which amounts the
General Agent agrees to pay its Registered Representatives. Commission
payments will be made for each Contract issued pursuant to an application
solicited by duly appointed Registered Representatives.
TIME OF PAYMENT OF COMMISSIONS
SECTION 12. A payment will not be considered made until it has been received
by the Insurance Company at its Principal Office. On payments made,
commissions will be paid at regular intervals in accordance with the rules of
the Insurance Companies.
TERMINATION
SECTION 13. This Agreement shall automatically terminate immediately and
without notice upon any General Agent's or the Broker-Dealer's ceasing to
comply with any of the terms and conditions of this Agreement or upon the
dissolution, bankruptcy or insolvency of a General Agent or the Broker-Dealer.
Whether or not there is a breach of this Agreement, the Broker-Dealer or
Allmerica may terminate this Agreement by giving ten (10) days' written
notice to the other party at any time during the first year hereof, and by
giving thirty (30) days' written notice after the expiration of the first
year hereof.
Upon termination of this Agreement all authorizations, rights and obligations
shall cease except the obligation to pay commissions due on payments received
prior to termination for Contracts in effect on the date of termination, or
for Contracts to be issued pursuant to applications received by the Insurance
Companies prior to termination. Except as provided in the preceding
sentence, no further commissions shall be paid after termination of this
Agreement.
RIGHT OF SET-OFF
SECTION 14. Allmerica and the Insurance Companies will have a lien on any
commissions payable under this Agreement, whether or not such payments are
now due or hereafter become due, and may apply any such monies to the
satisfaction of indebtedness to Allmerica or to either Insurance Company to
the extent permitted by law.
NON-WAIVER OF BREACH
SECTION 15. Waiver of any breach of any provision of this Agreement will not
be construed as a waiver of the provision or of the right of Allmerica to
enforce said provision thereafter.
ASSIGNABILITY
SECTION 16. This Agreement is not transferable. Without the written consent
of Allmerica and the Insurance Companies, no rights or interest in or to
commissions will be subject to assignment, and any attempted assignment, sale
or transfer of any commissions without such written consents will immediately
make this Agreement
6
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void and be a release to Allmerica and to the Insurance Companies in full of
any and all of their obligations hereunder.
RESERVATION OF RIGHT TO CHANGE
SECTION 17. Allmerica reserves the right at any time, and from time to time,
to change prospectively the terms and conditions of this Agreement, including
but not limited to, the rates of commissions. Any change will become
effective on the date specified in a notice or, if later, 10 days after the
notice is given to each General Agent and the Broker-Dealer. However, the
requirement to give advance notice shall not apply if the change becomes
necessary or expedient by reason of legislation or the requirements of any
governmental body and, in the opinion of Allmerica, it is not reasonably
possible to meet the 10 day requirement. Changes will not be retroactive and
will apply only to life insurance coverage solicited or annuity payments made
on or after the effective date of the change.
COMPLAINTS AND INVESTIGATIONS
SECTION 18. Each General Agent, the Broker-Dealer and Allmerica agree to
cooperate fully in any customer complaint, insurance or securities regulatory
proceeding or judicial proceeding with respect to the General Agent, the
Broker-Dealer, Allmerica, the Insurance Companies, their affiliates or their
Registered Representatives to the extent that such customer complaint or
proceeding is in connection with Contracts marketed under this Agreement. To
the extent required, Allmerica will arrange for the Insurance Companies to
cooperate in any such complaint or proceeding. Without limiting the
foregoing:
(a) General Agents and the Broker-Dealer will be notified promptly by
Allmerica or the Insurance Companies of any written customer complaint or
notice of any regulatory proceeding or judicial proceeding of which they
become aware including the General Agent, the Broker-Dealer or any
Registered Representative which may be related to the issuance of any
Contract marketed under this Agreement. Each General Agent or the
Broker-Dealer will promptly notify Allmerica of any written customer
complaint or notice of any regulatory proceeding or judicial proceeding
received by the General Agent or the Broker-Dealer including the General
Agent, the Broker-Dealer or any of their Registered Representatives which
may be related to the issuance of any Contract marketed under this
Agreement or any activity in connection with any such Contract(s).
(b) In the case of a customer complaint, each General Agent, the
Broker-Dealer, Allmerica and the Insurance Companies will cooperate in
investigating such complaint and any proposed response to such complaint
will be sent to the other parties to this Agreement for approval not less
than five business days prior to its being sent to the customer or
regulatory authority, except that if a more prompt response is required,
the proposed response shall be communicated by telephone or facsimile
transmission.
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CONFIDENTIALITY
SECTION 19. Allmerica agrees that the names and addresses of all customers
and prospective customers of each General Agent and the Broker-Dealer and of
any company or person affiliated with a General Agent or the Broker-Dealer,
and the names and addresses of any Registered Representatives of the
Broker-Dealer which may come to the attention of Allmerica exclusively as a
result of its relationship with a General Agent and the Broker-Dealer or any
affiliated company and not from any independent source, are confidential and
shall not be used by Allmerica, the Insurance Companies, or any company or
person affiliated with Allmerica or the Insurance Companies, nor divulged to
any party for any purpose whatsoever, except as may be necessary in
connection with the administration and marketing of the Contracts sold by or
through General Agents, including responses to specified requests to the
Insurance Companies for service by Contract owners or efforts to prevent the
replacement of such Contracts or to encourage the exercise of options under
the terms of the Contracts. In no event shall the names and addresses of
such customers, prospective customers and Registered Representatives be
furnished by Allmerica to any other company or person, including but not
limited to, any of their managers, registered representatives, or brokers who
are not Registered Representatives of the Broker-Dealer, any company
affiliated with Allmerica or any manager, agency, or broker of such company,
or any securities broker-dealer or any insurance agent affiliated with such
broker-dealer. The intent of this section is that Allmerica, the Insurance
Companies or companies or persons affiliated with them shall not utilize, or
permit to be utilized, their knowledge of each General Agent, the
Broker-Dealer or of any affiliated companies which is derived exclusively as
a result of the relationships created through the sale of the Contracts.
Notwithstanding the foregoing provisions of this Section 19, nothing herein
shall prohibit Allmerica, the Insurance Companies or any company or person
affiliated with Allmerica or the Insurance Companies from (i) seeking
business relationships and entering into separate sales agreements with
Registered Representatives of the Broker-Dealer if the names of said
Registered Representatives were obtained from independent sources and not
exclusively as a result of Allmerica's relationship with a General Agent and
the Broker-Dealer; (ii) from entering into separate sales agreements with
Registered Representatives of the Broker-Dealer upon the request and at the
initiation of said Registered Representatives; or (iii) divulging the names
and addresses of any such customers, prospective customers, Registered
Representatives, or other companies or persons described in the preceding
paragraph in connection with any customer complaint or insurance or
securities regulatory proceeding described in Section 18.
BONDING
SECTION 20. Each General Agent and the Broker-Dealer agree to furnish such
bond or bonds as Allmerica may require. Upon failure or inability of a
General Agent or the Broker-Dealer to obtain or renew any such bonds, this
Agreement shall terminate at Allmerica's discretion upon notice by Allmerica.
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NOTICE
SECTION 21. Whenever this Agreement requires a notice to be given, the
requirement will be considered to have been met, in the case of notice to the
Insurance Companies or to Allmerica, if delivered or mailed postage prepaid
to the address specified on page 1 of this Agreement and, in the case of
notice to a General Agent or the Broker-Dealer, if delivered or mailed
postage prepaid to the intended recipient's principal place of business.
CAPTIONS
SECTION 22. Captions are used for informational purposes only and no caption
shall be construed to affect the substance of any provision of this Agreement.
EFFECTIVENESS; ENTIRE CONTRACT; PRIOR AGREEMENTS
SECTION 23. This Agreement contains the entire contract between the parties.
Upon execution it will replace all previous agreements between each General
Agent or the Broker-Dealer and Allmerica and the Insurance Companies, or any
of them, relating to the solicitation of Contracts. It is hereby understood
and agreed that any other agreement or representation, commitment, promise or
statement of any nature, whether oral or written, relating to or purporting
to relate to the relationship of the parties is hereby rendered null and
void.
IN WITNESS WHEREOF, the parties have executed this Agreement in duplicate to
take effect on its effective date.
*For: _________________________________ For: Allmerica Investments, Inc.
Name of General Agent
By:__________________________________ By:________________________________
Name:________________________________ Name:______________________________
Title:_______________________________ Title:_____________________________
Date:________________________________ Date:______________________________
For: __________________________________
Name of Broker-Dealer
By:__________________________________
Name:________________________________
Title:_______________________________
Date:________________________________
* A separate signature line is required for each General Agent affiliate of the
Broker-Dealer.
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SALES
AGREEMENT ALLMERICA INVESTMENTS, INC.
440 Lincoln Street
Worcester, Massachusetts 01653
- ------------------------------------------------------------------------------
Agreement, effective as of _________________, 19___, by and between Allmerica
Investments, Inc., a Massachusetts corporation (herein "Allmerica") and
_________________________________________________________________, a
________________________ corporation (herein "Broker-Dealer").
Allmerica, subject to the terms and conditions set forth in this Agreement,
authorizes and appoints Broker-Dealer to solicit applications for the sale of
Contracts. Broker-Dealer accepts this appointment and agrees to the terms
and conditions set forth below.
DEFINITIONS
INSURANCE COMPANIES - All Contracts will be issued by First Allmerica
Financial Life Insurance Company (herein "First Allmerica") or by Allmerica
Financial Life Insurance and Annuity Company (herein "Allmerica Financial
Life"), a subsidiary of First Allmerica. The Principal Office of First
Allmerica and Allmerica Financial Life (herein collectively referred to as
"the Insurance Companies") is located at 440 Lincoln Street, Worcester,
Massachusetts 01653.
CONTRACTS - The variable annuity and variable life insurance contracts of the
Insurance Companies listed on the attached Commission Schedule(s), for which
Allmerica Investments, Inc., an affiliate of First Allmerica, has been
appointed the exclusive distributor and principal underwriter.
REGISTERED REPRESENTATIVES - Individuals affiliated with Broker-Dealer who
are licensed as life insurance agents in those jurisdictions in which
applications for the sale of Contracts are to be solicited and who are also
duly registered with the National Association of Securities Dealers, Inc.
(herein "NASD") in compliance with the '34 Act.
'33 ACT - The Securities Act of 1933, as amended.
'34 ACT - The Securities Exchange Act of 1934, as amended.
RELATIONSHIP OF PARTIES
SECTION 1. Nothing in this Agreement will be construed to create the
relationship of employer and employee between Allmerica or either Insurance
Company and any Broker-Dealer or Registered Representative. Broker-Dealer
and each Registered Representative will be free to exercise their independent
judgment as to the time, place and manner of solicitation and servicing of
business underwritten by the Insurance Companies. However, neither
Broker-Dealer nor any Registered Representative shall have authority to act
on behalf of Allmerica or the Insurance
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Companies in a manner which does not conform to applicable statutes,
ordinances, or governmental regulations or to reasonable rules adopted from
time to time by Allmerica or the Insurance Companies.
LIMITATIONS OF AUTHORITY
SECTION 2. Neither Broker-Dealer nor any Registered Representative will have
authority to accept risks of any kind; to make, alter or discharge Contracts;
to waive forfeitures or exclusions; to alter or amend any papers received
from either Insurance Company; to deliver any life insurance Contract or any
document, agreement or endorsement changing the amount of insurance coverage
if Broker-Dealer or the soliciting Registered Representative knows or has
reason to believe that the insured is uninsurable; or to accept any payment
unless the payment meets the minimum payment requirement for the Contract
established by the Insurance Company.
LICENSING AND REGISTRATION
SECTION 3. Broker-Dealer is hereby authorized to recommend Registered
Representatives for appointment by the Insurance Companies and only
individuals so recommended by Broker-Dealer shall become Registered
Representatives hereunder. Allmerica shall arrange for the Insurance
Companies to apply for life insurance agent appointments in the appropriate
jurisdictions for such recommended Registered Representatives of
Broker-Dealer.
Notwithstanding the foregoing, the Insurance Companies and Allmerica reserve
the right to refuse to appoint any proposed Registered Representative and/or
to terminate any Registered Representative or firm who has been appointed by
the Insurance Companies.
AGREEMENTS BY BROKER-DEALER
SECTION 4. Broker-Dealer agrees that at all times when performing its duties
under this Agreement it shall be duly registered as a securities
broker-dealer under the '34 Act, be a member in good standing of the NASD,
and be duly licensed or registered as a securities broker-dealer in each
jurisdiction where such licensing or registration is required in connection
with the sale of the Contracts or the supervision of Registered
Representatives who solicit applications for the Contracts.
Broker-Dealer agrees that at all times when performing its duties under this
Agreement it shall be duly licensed to sell Contracts in each jurisdiction in
which Broker-Dealer intends to perform hereunder.
Broker-Dealer shall be responsible for carrying out its sales and
administrative obligations under this Agreement in continued compliance with
the NASD Rules of Fair Practice, federal and state securities laws and
regulations, and state insurance laws and regulations. Broker-Dealer agrees
to offer the Contracts for sale through its Registered Representatives and to
offer such Contracts only in accordance with the prospectus. Broker-Dealer
and Registered Representative(s) are not authorized to give any information
or make any representations concerning such Contracts other than
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those contained in the prospectus or in such sales literature or advertising
as may be authorized by Allmerica.
Broker-Dealer agrees that it shall take reasonable steps to ensure that no
person shall offer or sell Contracts on its behalf until such person is
appropriately licensed, registered or otherwise qualified to offer and sell
such Contracts under the state and federal securities laws and the insurance
laws of each jurisdiction in which such person intends to solicit.
Broker-Dealer agrees to train, supervise and be solely responsible for the
conduct of its Registered Representatives in the solicitation and sale of the
Contracts and for the supervision as to their strict compliance with
Allmerica's rules and procedures, the NASD rules of Fair Practice, and
applicable rules and regulations of any other governmental or other agency
that has jurisdiction over the offering for sale of the Contracts.
Broker-Dealer shall take reasonable steps to ensure that its Registered
Representatives shall not make recommendations to an applicant to purchase a
Contract in the absence of reasonable grounds to believe that the purchase of
such Contract is suitable for such applicant. Such determination will be
based upon, but will not be limited to, information furnished to a Registered
Representative after reasonable inquiry of such applicant concerning the
applicant's insurance and investment objectives, financial situation and
needs.
Broker-Dealer shall take reasonable steps to ensure that Registered
Representatives of Broker-Dealer shall conduct their business with respect to
the Contracts at all times in compliance with all applicable federal and
state laws and regulations and shall be subject to a standard of conduct
including, but not limited to, the following:
(a) A Registered Representative shall not solicit or participate in the sale
of the Contracts in any jurisdiction until such Registered Representative
is trained and licensed.
(b) A Registered Representative shall not solicit applications for the sale of
the Contracts without delivering the then currently effective prospectus
for such Contracts and any then applicable amendments or supplements
thereto, including the current prospectus(es) for any fund(s) in which
Contract separate account(s) invest.
(c) A Registered Representative shall have no authority to advertise for or
on behalf of the Insurance Companies or Allmerica without express written
authorization from Allmerica.
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AGREEMENTS BY ALLMERICA
SECTION 5. Allmerica agrees that at all times while this Agreement remains
in force that it shall be a registered Broker-Dealer under the '34 Act and be
a member in good standing of the NASD.
During the term of this Agreement, Allmerica will provide Broker-Dealer,
without charge, with as many copies of the prospectus(es) for the Contracts
(and any amendments, or supplements thereto), the current prospectus(es) for
any underlying fund(s) and applications for the Contracts as Broker-Dealer
may reasonably request. Upon termination of the Agreement, any prospectuses,
applications, and other materials and supplies furnished by Allmerica to
Broker-Dealer shall be promptly returned to Allmerica by Broker-Dealer.
Allmerica agrees to promptly notify Broker-Dealer of newly declared effective
prospectus(es) for the Contracts and any amendments or supplements thereto.
Allmerica agrees to keep Broker-Dealer informed of all jurisdictions in which
the Insurance Companies are licensed to sell the Contracts and in which the
Contracts may be offered for sale.
SUBMISSION OF APPLICATIONS; DELIVERY OF CONTRACTS; REJECTED BUSINESS
SECTION 6. Broker-Dealer will submit, or cause to be submitted, directly to
the Principal Office of the Insurance Companies all Contract applications
solicited by Registered Representatives of the Broker-Dealer. Broker-Dealer
will deliver, or cause to be delivered, within 10 days of its receipt by
Broker-Dealer all Contracts issued on applications submitted by Broker-Dealer
or its Registered Representatives and will ensure that any Contract
endorsement, amendment or other agreement is properly executed by the
Contract owner at the time of Contract delivery. Broker-Dealer will promptly
return, or cause to be returned, to the Insurance Companies any Contract
which is declined by the applicant or which cannot be delivered within the
time permitted by the Insurance Company's rules.
ILLUSTRATIONS AND PROPOSALS
SECTION 7. Neither Broker-Dealer nor any Registered Representative of
Broker-Dealer will furnish any prospective Contract owner with an
illustration of the financial or other aspects of a Contract or a proposal
for a Contract unless the same has been either furnished by the Insurance
Companies or prepared from computer software or other material furnished or
approved by the Insurance Companies. Any illustration or proposal will
conform to standards of completeness and accuracy established by the
Insurance Companies. If the proposal or illustration was not furnished by
the Insurance Companies, Broker-Dealer will retain in its records for
availability to the Insurance Companies a copy thereof or the means to
duplicate the same. Any computer software or materials furnished by either
Insurance Company will be and remain its property.
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ACCOUNTING FOR FUNDS COLLECTED
SECTION 8. In accordance with the rules of the Insurance Companies,
Broker-Dealer will account for and remit immediately to the Principal Office
of the Insurance Companies all funds received or collected by Broker-Dealer
or by Registered Representatives of Broker-Dealer for or on behalf of either
Insurance Company without deduction for any commissions, or other claim
Broker-Dealer or the Registered Representative may have against either
Insurance Company or Allmerica and will make such reports and file such
substantiating documents and records as the Insurance Companies may
reasonably require.
INDEMNIFICATION
SECTION 9. Broker-Dealer shall indemnify and hold Allmerica and the
Insurance Companies and their officers, directors and employees harmless from
any liability arising from any act or omission of Broker-Dealer or of any
affiliate of Broker-Dealer, or any officer, director, employee of
Broker-Dealer or of its Registered Representatives, including but not limited
to, any fines, penalties, attorney's fees, costs of settlement, damages or
financial loss. Broker-Dealer expressly authorizes Allmerica and the
Insurance Companies, without precluding them from exercising any other remedy
they may have, to charge against all compensation due or to become due to
Broker-Dealer under this Agreement, any monies paid on any liability incurred
by Allmerica or the Insurance Companies by reason of any such act or omission
of Broker-Dealer, or any affiliate of Broker-Dealer, or of any officer,
director, employee of Broker-Dealer or of its Registered Representatives.
Allmerica shall indemnify and hold Broker-Dealer, its affiliates and their
officers, directors and employees harmless from any liability arising from
any act or omission of Allmerica, the Insurance Companies or any affiliate of
Allmerica or any of the Insurance Companies (collectively the "Allmerica
Companies"), or any officer, director or employee of the Allmerica Companies,
including but not limited to, any fines, penalties, reasonable attorney's
fees, costs of settlement damages or financial loss.
The indemnifications provided by this Section shall survive termination of this
Agreement.
If a Contract is not delivered to the Contract owner within 10 days of its
receipt by the Broker-Dealer and if after delivery the owner returns the
Contract to the Insurance Company and receives a full refund of all payments
made, in any situation where the failure to deliver in a timely manner was due
to the inaction or negligence of the Broker-Dealer or a Registered
Representative of Broker-Dealer, the difference between the payments refunded
and the cash value of the Contract on the date the Contract is received by the
Insurance Company at its Principal Office shall be reimbursed to the Insurance
Company by the Broker-Dealer in any case where the cash value is less than the
payments refunded. Any such reimbursement shall be paid by the Broker-Dealer to
the affected Insurance Company within 30 days of Broker-Dealer's receipt of a
written request for payment.
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If Broker-Dealer utilizes delivery receipts as part of its Contract delivery
rules and procedures, the date of execution of the delivery receipt by the
Contract owner shall be deemed to be the date of Contract delivery for
purposes of this Agreement.
COMMISSION REFUNDS
SECTION 10. If a Contract owner rescinds a Contract or exercises the
Contract's Right to Examine privilege (i.e., free-look), then Broker-Dealer
will repay the appropriate Insurance Company the amount of any commissions
received on the payments returned within 10 days of Broker-Dealer's receipt
of a written request for repayment.
BASIS OF COMPENSATION
SECTION 11. While this Agreement remains in force, the Insurance Companies
agree to pay Broker-Dealer commissions in accordance with the Commission
Schedule(s) attached hereto and incorporated herein, from which amounts
Broker-Dealer agrees to pay its Registered Representatives. Commission
payments will be made to Broker-Dealer for each Contract issued pursuant to
an application solicited by duly appointed Registered Representatives of
Broker-Dealer.
TIME OF PAYMENT OF COMMISSIONS
SECTION 12. A payment will not be considered made until it has been received
by the Insurance Company at its Principal Office. On payments made,
commissions will be paid at regular intervals in accordance with the rules of
the Insurance Companies.
TERMINATION
SECTION 13. This Agreement shall automatically terminate immediately and
without notice upon Broker-Dealer's or Allmerica's ceasing to comply with any
of the terms and conditions of this Agreement or upon the dissolution,
bankruptcy or insolvency of Broker-Dealer or Allmerica.
Whether or not there is a breach of this Agreement, Broker-Dealer or
Allmerica may terminate this Agreement by giving ten (10) days' written
notice to the other party at any time during the first year hereof, and by
giving thirty (30) days' written notice after the expiration of the first
year hereof.
Upon termination of this Agreement all authorizations, rights and obligations
shall cease except the obligation to pay commissions due on payments received
prior to termination for Contracts in effect on the date of termination, or
for Contracts to be issued pursuant to applications received by the Insurance
Companies prior to termination. Except as provided in the preceding
sentence, no further commissions shall be paid after termination of this
Agreement.
RIGHT TO SET-OFF
SECTION 14. Allmerica and the Insurance Companies will have a lien on any
commissions payable under this Agreement, whether or not such payments are
now due or hereafter become due, and may apply any such monies to the
satisfaction of indebtedness to Allmerica or to either Insurance Company to
the extent permitted by law.
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NON-WAIVER OF BREACH
SECTION 15. Waiver of any breach of any provision of this Agreement will not
be construed as a waiver of the provision or of the right of Allmerica or
Broker-Dealer to enforce said provision thereafter.
ASSIGNABILITY
SECTION 16. This Agreement is not transferable. Without the written consent
of Allmerica and the Insurance Companies, no rights or interest in or to
commissions will be subject to assignment, and any attempted assignment, sale
or transfer of any commissions without such written consents will be void and
of no effect hereunder.
RESERVATION OF RIGHT TO CHANGE
SECTION 17. Allmerica reserves the right at any time, and from time to time,
to change prospectively the terms and conditions of this Agreement, including
but not limited to, the rates of commissions. Any change will become
effective on the date specified in a notice or, if later, 30 days after the
notice is given to Broker-Dealer. However, the requirement to give advance
notice shall not apply if the change becomes necessary or expedient by reason
of legislation or the requirements of any governmental body and, in the
opinion of Allmerica, it is not reasonably possible to meet the 30 day
requirement. Changes will not be retroactive and will apply only to life
insurance coverage solicited or annuity payments made on or after the
effective date of the change.
COMPLAINTS AND INVESTIGATIONS
SECTION 18. Broker-Dealer and Allmerica agree to cooperate fully in any
customer complaint, insurance or securities regulatory proceeding or judicial
proceeding with respect to Broker-Dealer, Allmerica, the Insurance Companies,
their affiliates or their Registered Representatives to the extent that such
customer complaint or proceeding is in connection with Contracts marketed
under this Agreement. To the extent required, Allmerica will arrange for the
Insurance Companies to cooperate in any such complaint or proceeding.
Without limiting the foregoing:
(a) Broker-Dealer will be notified promptly by Allmerica or the Insurance
Companies of any written customer complaint or notice of any regulatory
proceeding or judicial proceeding of which they become aware including
Broker-Dealer or any Registered Representative of Broker-Dealer which may
be related to the issuance of any Contract marketed under this Agreement.
Broker-Dealer will promptly notify Allmerica of any written customer
complaint, or notice of any regulatory proceeding or judicial proceeding
received by Broker-Dealer, with respect to Broker-Dealer or any of its
Registered Representatives in connection with any Contract marketed under
this Agreement or any activity in connection with any such Contract(s).
(b) In the case of a customer complaint specified above, Broker-Dealer,
Allmerica and the Insurance Companies will cooperate in investigating
such complaint and any proposed response to such complaint will be sent
to the other party of this Agreement for approval not less than five
business days prior to its being sent to the customer or regulatory
authority, except that if a more prompt
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response is required, the proposed response shall be communicated by
telephone or facsimile transmission.
CONFIDENTIALITY
SECTION 19. Allmerica agrees that the names and addresses of all customers
and prospective customers of Broker-Dealer and of any company or person
affiliated with Broker-Dealer, and the names and addresses of any Registered
Representatives of Broker-Dealer which may come to the attention of Allmerica
exclusively as a result of its relationship with Broker-Dealer or any
affiliated company and not from any independent source, are confidential and
shall not be used by Allmerica, the Insurance Companies, or any company or
person affiliated with Allmerica or the Insurance Companies, nor divulged to
any party for any purpose whatsoever, except as may be necessary in
connection with the administration and marketing of the Contracts sold by or
through Broker-Dealer, including responses to specified requests to the
Insurance Companies for service by Contract owners or efforts to prevent the
replacement of such Contracts or to encourage the exercise of options under
the terms of the Contracts. In no event shall the names and addresses of
such customers, prospective customers and Registered Representatives be
furnished by Allmerica to any other company or person, including but not
limited to, any of their managers, registered representatives, or brokers who
are not Registered Representatives of Broker-Dealer, any company affiliated
with Allmerica or any manager, agency, or broker of such company, or any
securities broker-dealer or any insurance agent affiliated with such
broker-dealer. The intent of this section is that Allmerica, the Insurance
Companies or companies or persons affiliated with them shall not utilize, or
permit to be utilized, their knowledge of Broker-Dealer or of any affiliated
companies which is derived exclusively as a result of the relationships
created through the sale of the Contracts.
Notwithstanding the foregoing provisions of this Section 19, nothing herein
shall prohibit Allmerica, the Insurance Companies or any company or person
affiliated with Allmerica or the Insurance Companies from (i) seeking
business relationships and entering into separate sales agreements with
Registered Representatives of Broker-Dealer if the names of said Registered
Representatives were obtained from independent sources and not exclusively as
a result of Allmerica's relationship with Broker-Dealer; (ii) from entering
into separate sales agreements with Registered Representatives of
Broker-Dealer upon the request and at the initiation of said Registered
Representatives; or (iii) divulging the names and addresses of any such
customers, prospective customers, Registered Representatives, or other
companies or persons described in the preceding paragraph in connection with
any customer complaint or insurance or securities regulatory proceeding
described in Section 18. PROVIDED, HOWEVER, that Allmerica shall not enter
into separate sales agreements with Registered Representatives of
Broker-Dealer while such Registered Representatives are affiliated with
Broker-Dealer.
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BONDING
SECTION 20. Broker-Dealer represents that it shall maintain bonding in the
form, type, and amount required under the NASD Rules of Fair Practice.
NOTICE
SECTION 21. Whenever this Agreement requires a notice to be given, the
requirement will be considered to have been met, in the case of notice to the
Insurance Companies or to Allmerica, if delivered or mailed postage prepaid
to the address specified on page 1 of this Agreement and, in the case of
notice to Broker-Dealer, if delivered or mailed postage prepaid to the
intended recipient's principal place of business.
CAPTIONS
SECTION 22. Captions are used for informational purposes only and no caption
shall be construed to affect the substance of any provision of this Agreement.
EFFECTIVENESS; ENTIRE CONTRACT; PRIOR AGREEMENTS
SECTION 23. This Agreement contains the entire contract between the parties.
Upon execution it will replace all previous agreements between Broker-Dealer
and Allmerica and the Insurance Companies, or any of them, relating to the
solicitation of Contracts. It is hereby understood and agreed that any other
agreement or representation, commitment, promise or statement of any nature,
whether oral or written, relating to or purporting to relate to the
relationship of the parties is hereby rendered null and void.
IN WITNESS WHEREOF, the parties have executed this Agreement in duplicate to
take effect on its effective date.
*For: _________________________________ For: Allmerica Investments, Inc.
Name of Broker-Dealer
By:__________________________________ By:________________________________
Name:________________________________ Name:______________________________
Title:_______________________________ Title:_____________________________
Date:________________________________ Date:______________________________
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KEMPER GATEWAY FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
VARIABLE ANNUITIES ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY CO.
PRINCIPAL OFFICE: 440 LINCOLN ST.; WORCESTER, MA 01653
BROKER COMMISSION SCHEDULE
(PERCENT OF PREMIUM)
INDIVIDUAL ANNUITIES
COMMISSION SCHEDULE KG - 1 (Rev. 1/98) (Applicable to Individual
Annuities Issued on or after January 1, 1998)
FLEXIBLE PREMIUM VARIABLE ANNUITY CONTRACTS
Issued by Allmerica Financial Life Insurance and Annuity Company
(First Allmerica Financial Life Insurance Company in New York and
Hawaii).
COMMISSION PERCENTAGE
1. All contracts EXCEPT contracts issued to 401(k) plans or
contracts where the owner or annuitant is beyond age 85-1/2 at date
of contract issue.
THE FOLLOWING CHOICES ARE AVAILABLE:
(a) 6.00% of each premium paid, no trail commission
(b) 5.00% of each premium paid, .25% annual trail commission
(c) 4.00% of each premium paid, .50% annual trail commission
(d) 2.00% of each premium paid, 1.00% annual trail commission.
2. CONTRACTS ISSUED TO 401(k) PLANS
All upfront commissions on 401(k) contracts are reduced by 1.00%.
3. Contracts issued where the owner or annuitant is beyond age 85-1/2 at
date of issue.
NO CHOICE AVAILABLE
2.00% of each premium paid, 1.00% annual trail commission
RULES FOR TRAIL COMMISSION PAYMENTS
A Commission Option must be selected for each eligible contract on the
back of the contract application unless the Broker has pre-selected a
particular option for all contracts. If no commission selection is
made, the commission will be payable under the default commission
option pre-selected by the Broker. If the Broker has not pre-selected
a default option and no commission selection is made, the commission
will be payable under option (a) above.
Trail commissions will be paid quarterly in January, April, July and
October. The first trail commission for a contract will be paid on
the first quarterly payment date following the first anniversary of
the date of issue (e.g., if a contract is issued on July 5, 1997, the
first trail commission will be payable in October, 1998). Trail
commissions will continue to be paid while the Sales Agreement remains
in force and will be paid on a particular contract until the contract
is surrendered or annuity benefits begin to be paid under an annuity
option. Quarterly trail commissions will be a percentage of the
unloanded account value of each eligible contract. For purposes of
trail commission calculations, "unloaned account value" means the cash
value of the contract on the last day of the calendar quarter
immediately preceding the payment date less the principal of any
contract loan and accrued interest thereon. The quarterly trail
commission percentage will be 25% of the applicable annual rate (e.g.,
.0625% if the annual rate is .25%, .125% if the annual rate is .50%).
If a First Allmerica or Allmerica Financial Life annuity contract is
exchanged for another First Allmerica or Allmerica Financial Life
annuity contract, the commission rate, including any applicable trail
commission rate, will be applicable to the exchanged contract. No
commissions other than continuing trail commissions are payable on the
rollover amount allocated to the new contract. Trails will be paid as
described above based on the issue date of the new contract.
NOTE: NO TRAIL COMMISSIONS WILL BE PAYABLE AFTER THE DATE THE SALES AGREEMENT
IS TERMINATED FOR ANY REASON.
<PAGE>
SALES ALLMERICA INVESTMENTS, INC.
AGREEMENT 440 Lincoln Street
Worcester, Massachusetts 01653
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Agreement, effective as of February 13, 1998, by and
between Allmerica Investments, Inc., a Massachusetts
corporation (herein "Allmerica"), First Allmerica Financial
Life Insurance Company, a Massachusetts corporation (herein
"First Allmerica"), Allmerica Financial Life Insurance and
Annuity Company, a Delaware corporation (herein "Allmerica
Financial Life"), Chase Investment Services Corp., a
Delaware corporation (herein "Broker-Dealer") and Chase
Insurance Agency, Inc., an affiliate of Broker-Dealer
(herein "General Agent").
Allmerica, First Allmerica and Allmerica Financial Life,
subject to the terms and conditions set forth in this
Agreement, authorize and appoint General Agent to solicit
applications for the sale of Contracts. General Agent
accepts this appointment and General Agent and Broker-Dealer
agree to the terms and conditions set forth below.
DEFINITIONS
INSURANCE COMPANIES - All Contracts will be issued by First
Allmerica or by Allmerica Financial Life, a subsidiary of
First Allmerica. The Principal Office of First Allmerica
and Allmerica Financial Life (herein collectively referred
to as "the Insurance Companies") is located at 440 Lincoln
Street, Worcester, Massachusetts 01653.
CONTRACTS - The variable annuity and variable life insurance
contracts of the Insurance Companies listed on the attached
Commission Schedule(s) and, in the case of group variable
life insurance contracts, the individual certificates of
insurance issued thereunder, for which Allmerica
Investments, Inc., an affiliate of First Allmerica, has been
appointed the exclusive distributor and principal
underwriter.
REGISTERED REPRESENTATIVES - Individuals affiliated with
General Agent and Broker-Dealer who are licensed as life
insurance agents in those jurisdictions in which
applications for the sale of Contracts are to be solicited
and who are also duly registered with the National
Association of Security Dealers, Inc. (herein "NASD") in
compliance with the '34 Act.
'33 ACT - The Securities Act of 1933, as amended.
INDEPENDENT '34 ACT - The Securities Exchange Act of 1934, as amended.
CONTRACTOR
STATUS SECTION 1. Nothing in this Agreement will be construed to
create the relationship of employer and employee between
Allmerica or either Insurance Company and General Agent,
Broker-Dealer or any Registered Representative. General
Agent and Registered Representatives will be free to
exercise their independent judgment
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as to the time, place and manner of solicitation and
servicing of business underwritten by the Insurance
Companies. However, General Agent, Broker-Dealer and
Registered Representatives shall have no authority to
act on behalf of Allmerica or the Insurance Companies
in a manner which does not conform to applicable statutes,
ordinances, or governmental regulations or to reasonable
rules adopted from time to time by Allmerica or the
LIMITATIONS Insurance Companies, which said reasonable rules shall have
ON AUTHORITY been provided in writing to Broker-Dealer and General Agent.
SECTION 2. General Agent, Broker-Dealer and Registered
Representatives will have no authority to accept risks of
any kind; to make, alter or discharge Contracts; to waive
forfeitures or exclusions; to alter or amend any papers
received from either Insurance Company; to deliver any life
insurance Contract or any document, agreement or endorsement
changing the amount of insurance coverage if General Agent,
Broker-Dealer or the soliciting Registered Representative
knows or has reason to believe that the insured is
uninsurable; or to accept any payment unless the payment
LICENSING AND meets the minimum payment requirement for the Contract
REGISTRATION established by the Insurance Company.
SECTION 3. General Agent and Broker-Dealer are hereby
authorized to recommend Registered Representatives for
appointment by the Insurance Companies and only individuals
so recommended by General Agent or Broker-Dealer shall
become Registered Representatives hereunder. The Insurance
Companies agree to apply for life insurance agent
appointments in the appropriate jurisdictions for such
recommended Registered Representatives.
Notwithstanding the foregoing, the Insurance Companies and
Allmerica reserve the right to refuse to appoint any
proposed Registered Representative and/or to terminate any
Registered Representative who has been appointed by the
Insurance Companies. The Insurance Companies shall promptly
notify General Agent and Broker-Dealer in writing if the
AGREEMENTS BY Insurance Companies or Allmerica terminate the appointment
GENERAL AGENT of a Registered Representative.
AND BROKER-
DEALER SECTION 4. Broker-Dealer agrees that at all times when
performing its duties under this Agreement it shall be duly
registered as a securities broker-dealer under the '34 Act,
be a member in good standing of the NASD, and be duly
licensed or registered as a securities broker-dealer in each
jurisdiction where such licensing or registration is
required in connection with the sale of the Contracts or the
supervision of Registered Representatives who solicit
applications for the Contracts.
General Agent agrees that at all times when performing its
duties under this Agreement it shall be duly licensed to
sell Contracts in each jurisdiction in which General Agent
intends to perform hereunder.
General Agent and Broker-Dealer shall be responsible for
carrying out their sales and administrative obligations
under this Agreement in continued compliance with the NASD
Rules of Fair Practice, federal and state securities laws
and regulations,
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and state insurance laws and regulations. General Agent and
Broker-Dealer agree to offer the Contracts for sale through
their Registered Representatives and, in the case of
Contracts which require registration, to offer such
Contracts only in accordance with the prospectus. General
Agent, Broker-Dealer and Registered Representatives are not
authorized to give any information or make any
representations concerning such Contracts other than those
contained in the prospectus or in such sales literature or
advertising as may be authorized by Allmerica.
General Agent and Broker-Dealer agree that they shall be
responsible for ensuring that no person shall offer or sell
Contracts requiring registration on their behalf until such
person is appropriately licensed, registered or otherwise
qualified to offer and sell such Contracts under the state
and federal securities laws and the insurance laws of each
jurisdiction in which such person intends to solicit.
General Agent and Broker-Dealer agree to train, supervise
and be responsible for the conduct of their Registered
Representatives in the solicitation and sale of the
Contracts and for the supervision as to their strict
compliance with Allmerica's written rules and procedures,
the NASD Rules of Fair Practice, and applicable rules and
regulations of any other governmental or other agency that
has jurisdiction over the offering for sale of the
Contracts.
General Agent and Broker-Dealer shall take reasonable steps
to ensure that their Registered Representatives shall not
make recommendations to an applicant to purchase a Contract
subject to registration under the '33 Act in the absence of
reasonable grounds to believe that the purchase of such
Contract is suitable for such applicant. Such
determination will be based upon, but will not be limited
to, information furnished to the Broker-Dealer by a
Registered Representative after reasonable inquiry of such
applicant concerning the applicant's insurance and
investment objectives, financial situation and needs.
General Agent and Broker-Dealer agree that Registered
Representatives shall conduct their business with respect to
the Contracts at all times in compliance with all applicable
federal and state laws and regulations and shall be subject
to a standard of conduct including, but not limited to, the
following:
(a) A Registered Representative shall not solicit or
participate in the sale of the Contracts in any
jurisdiction until such Registered Representative is
trained and licensed.
(b) A Registered Representative shall not solicit for the
sale of registered Contracts without delivering the
then currently effective prospectus for such Contracts
and any then applicable amendments or supplements
thereto, including the current prospectus(es) for any
fund(s) in which Contract separate account(s) invest.
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AGREEMENTS
BY ALLMERICA (c) A Registered Representative shall have no authority to
advertise for or on behalf of the Insurance Companies
or Allmerica without express written authorization from
Allmerica.
SECTION 5. Allmerica agrees that at all times while this
Agreement remains in force that it shall be a registered
broker-dealer under the '34 Act and be a member in good
standing of the NASD.
During the term of this Agreement, Allmerica will provide
to, or cause to be provided to, General Agent and
Broker-Dealer, without charge, with as many copies of the
prospectus(es) for the Contracts (and any amendments, or
supplements thereto), the current prospectus(es) for any
underlying fund(s) and applications for the Contracts as
General Agent and Broker-Dealer may reasonably request.
Upon termination of the Agreement, any prospectuses,
applications, and other materials and supplies furnished by
Allmerica to General Agent and Broker-Dealer shall be
promptly returned to Allmerica. Alternatively, at the
option of the General Agent and Broker-Dealer, such
materials may be destroyed by the General Agent or
Broker-Dealer rather than returned to Allmerica.
Allmerica agrees to promptly notify and supply (or caused to
be supplied) General Agent and Broker-Dealer with a
reasonable number of all newly declared effective
prospectus(es) for the Contracts and any amendments or
supplements thereto.
SUBMISSION OF Allmerica agrees to keep General Agent and Broker-Dealer
APPLICATIONS; informed of all jurisdictions in which the Insurance
DELIVERY OF Companies are licensed to sell the Contracts and in which
CONTRACTS; the Contracts may be offered for sale.
REJECTED
BUSINESS SECTION 6. Broker-Dealer will advise Insurance Companies of
any and all instances, based upon information provided to
Broker-Dealer by Registered Representatives, of an
applicant's purchase appearing to not meet the suitability
standards of the Broker- Dealer. Applications will be
returned within five days of receipt by Insurance Companies
unless Broker-Dealer is provided additional information by
Registered Representative relative to adequate suitability.
General Agent or Broker-Dealer will submit, or cause to be
submitted, directly to the Principal Office of the Insurance
Companies all Contract applications solicited by Registered
Representatives. General Agent or Broker-Dealer will
deliver, or cause to be delivered, within 10 days of the
date of issue all Contracts issued on applications submitted
by General Agent, Broker-Dealer or their Registered
Representatives. General Agent or Broker-Dealer will
ILLUSTRATIONS promptly return, or cause to be returned, to the Insurance
AND PROPOSALS Companies any Contract which is declined by the applicant or
which cannot be delivered within the time permitted by the
issuing Insurance Company's rules.
SECTION 7. General Agent, Broker-Dealer and Registered
Representatives will not furnish any prospective Contract
owner with an illustration of the financial or other aspects
of a Contract or a proposal for a Contract unless the same
has been either furnished by the Insurance Companies or
prepared from computer software or other
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<PAGE>
material furnished or approved by the Insurance Companies.
Any illustration or proposal will conform to standards of
completeness and accuracy established by the Insurance
Companies. If the proposal or illustration was not furnished
by the Insurance Companies, General Agent or Broker-Dealer
ACCOUNTING will retain in its records for availability to the Insurance
FOR FUNDS Companies a copy thereof or the means to duplicate the
COLLECTED same. Any computer software or materials furnished by either
Insurance Company will be and remain its property.
SECTION 8. In accordance with the rules of the Insurance
Companies, General Agent and Broker-Dealer will account for
and remit promptly to the Principal Office of the Insurance
Companies all funds received or collected for or on behalf
of either Insurance Company without deduction for any
commissions, or other claim General Agent, Broker-Dealer or
INDEMNIFICATION any Registered Representative may have against either
Insurance Company or Allmerica and will make such reports
and file such substantiating documents and records as the
Insurance Companies may reasonably require.
SECTION 9. General Agent and Broker-Dealer, jointly and
severally, shall indemnify and hold Allmerica and the
Insurance Companies and their officers, directors and
employees harmless from any liability arising from any act
or omission of General Agent, Broker-Dealer or of any
affiliate of General Agent or Broker-Dealer, or any officer,
director, employee of General Agent or Broker-Dealer or of
their Registered Representatives, including but not limited
to, any fines, penalties, reasonable attorney's fees, costs
of settlement, damages or financial loss.
Allmerica and Insurance Companies, jointly and severally,
shall indemnify and hold harmless the General Agent and
Broker-Dealer and their directors, officers, employees and
agents from and against any damages, losses, liabilities,
claims, charges, reasonable attorney's fees, or other
expenses or costs arising from or in connection with any
claim, action, or proceeding relating to or arising from (i)
any act or omission or any negligent or intentional
misconduct by Allmerica and/or Insurance Companies relating
to the subject matter of this Agreement; (ii) the failure of
Allmerica and/or Insurance Companies to comply with the
terms of this Agreement; or (iii) Allmerica's and/or the
Insurance Companies' breach of any warranty, representation
or covenant of this Agreement.
With respect to any demand or proceeding involving a matter
("Indemnification Matter") against which a party(ies) to
this Agreement ("Indemnitee") is indemnified by Allmerica
and the Insurance Companies or the General Agent and
Broker-Dealer, whichever is appropriate ("Indemnitors")
under this Section 9, the Indemnitors shall be solely
responsible, at their sole expense, for litigating,
defending or otherwise attempting to resolve such demand or
proceeding, and the Indemnitee shall fully cooperate with
the Indemnitors and counsel in their efforts to litigate,
defend or otherwise attempt to resolve such demand or
proceeding, and the Indemnitee shall have the right to
participate therein at its sole expense, to the extent
permitted by law, through counsel of its own choice. The
Indemnitors shall
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<PAGE>
not agree to any settlement without the Indemnitee's prior
written consent, which consent shall not be unreasonably
withheld.
With respect to each Indemnification Matter:
Within 10 days after the Indemnitee receives documents
pertaining to any demand or proceeding constituting
such Indemnification Matter, or within such shorter
period of time as may be necessary under the
circumstances to avoid prejudice to the Indemnitors'
rights, the Indemnitee shall give notice to the
Indemnitors of the nature of such indemnification
Matter and shall deliver to the Indemnitors copies of
all such documents.
Within 10 days after a final agreement is reached or a
final judgment is rendered with respect to such
Indemnification Matter, the Indemnitors shall pay to
the Indemnitee any amounts to which the Indemnitee is
entitled under this Section 9.
If a Contract is not delivered to the Contract owner within
10 days of the date of issue of the Contract and if after
delivery the owner returns the Contract to the Insurance
Company and receives a full refund of all payments made, in
any situation where the failure to deliver in a timely
manner was due to the inaction or negligence of the General
Agent, the Broker-Dealer or a Registered Representative, the
difference between the payments refunded and the cash value
of the Contract on the date the Contract is received by the
Insurance Company at its Principal Office shall be
reimbursed to the Insurance Company by the General Agent or
Broker-Dealer in any case where the cash value is less than
the payments refunded. Any such reimbursement shall be paid
COMMISSION to the affected Insurance Company within 30 days of receipt
REFUNDS of a written request for payment.
The provisions of this Section 9 shall survive termination
of this Agreement.
BASIS OF SECTION 10. If a Contract owner rescinds a Contract or
COMPENSATION exercises a right to surrender a Contract for return of all
payments made, General Agent or Broker-Dealer will repay the
appropriate Insurance Company the amount of any commissions
received on the payments returned within 30 days of receipt
of a written request for repayment.
SECTION 11. While this Agreement remains in force, the
TIME OF PAYMENT Insurance Companies agree to pay General Agent and/or
OF COMMISSIONS Broker-Dealer commissions in accordance with the Commission
Schedule(s) attached hereto and incorporated herein, from
which amounts General Agent and Broker-Dealer agree to pay
their Registered Representatives. Commission payments will
be made for each Contract issued pursuant to an application
solicited by duly appointed Registered Representatives.
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<PAGE>
TERMINATION
SECTION 12. A payment will not be considered made until it
has been received by the Insurance Company at its Principal
Office. On payments made, commissions will be paid at
regular intervals in accordance with the written rules of
the Insurance Companies.
SECTION 13. This Agreement shall automatically terminate
immediately and without notice upon General Agent's or
Broker-Dealer's ceasing to comply with any of the terms and
conditions of this Agreement or upon the dissolution,
bankruptcy or insolvency of General Agent or Broker-Dealer.
Whether or not there is a breach of this Agreement, General
Agent, Broker-Dealer or Allmerica may terminate this
Agreement by giving thirty (30) days' advance written notice
to the other parties of such termination. PROVIDED,
HOWEVER, that any such termination by Allmerica shall
require the written consent of Broker-Dealer and General
Agent.
In the event of termination, Allmerica, the Insurance
Companies, Broker-Dealer and General Agent shall agree on
the wording of any notices to be sent to any person or
Contractholder, subject to the requirements of applicable
laws and regulations concerning any matter within the scope
of this Agreement, including replacement of the General
Agent.
Upon termination of this Agreement all authorizations,
RIGHT OF SET-OFF rights and obligations shall cease except the obligation to
pay commissions due on payments received prior to
termination for Contracts in effect on the date of
termination, or for Contracts to be issued pursuant to
applications received by the Insurance Companies prior to
termination. Except as provided in the preceding sentence,
no further commissions shall be paid after termination of
this Agreement.
SECTION 14. Allmerica and the Insurance Companies will have
a lien on any commissions payable under this Agreement,
whether or not such payments are now due or hereafter become
due, and may apply any such monies to the satisfaction of
any indebtedness to Allmerica or either Insurance Company
WAIVER AND arising under this Agreement, to the extent permitted by law.
MODIFICATION
Allmerica and the Insurance Companies can only exercise this
lien upon thirty (30) days' advance written notice to the
General Agent and Broker-Dealer and such written notice
shall set forth the basis of the exercise of any such lien.
SECTION 15. No waiver by any party of any default by
another in the performance of any promise, term or condition
of this Agreement shall be construed to be a waiver by such
party of any other or subsequent default in performance of
the same or any other covenant, promise, term or condition
hereof. No prior transactions or dealings between the
parties shall be deemed to establish any custom or usage
waiving or modifying any provision hereof. Except as
otherwise provided within the Agreement, this Agreement may
be modified only by a written agreement duly
7
<PAGE>
ASSIGNMENT signed by the persons authorized to sign agreements on
behalf of the parties. This Agreement and the attached
Schedules constitutes the entire agreement between the
parties with regard to this subject matter. The word
"Agreement" shall be understood to include any and all
Addenda attached in accordance with the terms and conditions
herein provided.
SECTION 16. This Agreement and the rights, duties and
obligations of the parties hereto shall not be assignable by
either without prior written consent of the other parties,
and any purported assignment shall be void, EXCEPT that the
General Agent or the Broker-Dealer shall be permitted to
RESERVATION OF assign the Agreement or any interest they may have in the
RIGHT TO CHANGE Agreement to their ultimate parent holding company and any
affiliate or subsidiary of the General Agent, the
Broker-Dealer, or their ultimate parent holding company,
upon notice to but without obtaining the consent of
Allmerica and the Insurance Companies. Any assignee shall
be appropriately licensed and shall comply with all
applicable insurance laws and regulations.
SECTION 17. Allmerica reserves the right at any time, and
from time to time, to change prospectively the terms and
conditions of this Agreement. PROVIDED, HOWEVER, that
Allmerica agrees that any such unilateral changes shall be
limited to the following: (i) changes which Allmerica
determines are reasonably necessary to comply with any
federal or state legislative or regulatory requirements,
(ii) amendments related to changes in Allmerica's and/or the
Insurance Companies' product line, contracts or distribution
structure affecting all broker-dealers and general agents
involved in the solicitation and servicing of variable life
insurance or variable annuity contracts substantially the
same as the Contracts described in this Agreement or (iii)
changes in Contract commission rates. Any change will
become effective on the date specified in a notice or, if
later, thirty (30) days after the notice is given to General
Agent and Broker-Dealer. However, the requirement to give
COMPLAINTS AND advance notice shall not apply if the change becomes
INVESTIGATIONS necessary or expedient by reason of legislation or the
requirements of any governmental body and, in the opinion of
Allmerica, it is not reasonably possible to meet the thirty
day requirement. Changes will not be retroactive and will
apply only to life insurance coverage solicited or annuity
payments made on or after the effective date of the change.
SECTION 18. General Agent, Broker-Dealer, Allmerica and the
Insurance Companies agree to cooperate fully in any customer
complaint, insurance or securities regulatory proceeding or
judicial proceeding with respect to General Agent,
Broker-Dealer, Allmerica, the Insurance Companies, their
affiliates or their Registered Representatives to the extent
that such customer complaint or proceeding is in connection
with Contracts marketed under this Agreement. Without
limiting the foregoing:
(a) General Agent and Broker-Dealer will be notified
promptly by Allmerica or the Insurance Companies of any
written customer complaint or notice of any regulatory
proceeding or judicial proceeding of which they become
aware
8
<PAGE>
including General Agent, Broker-Dealer or any Registered
Representative which may be related to the issuance of
any Contract marketed under this Agreement. General
Agent or Broker-Dealer will promptly notify Allmerica
and the Insurance Companies of any written customer
complaint, or notice of any regulatory proceeding or
judicial proceeding received by General Agent or
Broker-Dealer related to any Contract marketed under
this Agreement or any activity in connection with any
such Contract(s).
(b) In the case of a customer complaint, General Agent,
Broker-Dealer, Allmerica and the Insurance Companies
CONFIDENTIALITY will cooperate in investigating such complaint and any
proposed response to such complaint will be sent to the
other parties of this Agreement for approval not less
than five (5) business days prior to its being sent to
the customer or regulatory authority, except that if a
more prompt response is required, the proposed response
shall be communicated by telephone or facsimile
transmission.
SECTION 19. Allmerica and the Insurance Companies agree
that the names and addresses of all customers and
prospective customers of General Agent and Broker-Dealer and
of any company or person affiliated with General Agent or
Broker-Dealer, and the names and addresses of any Registered
Representatives of General Agent and Broker-Dealer which may
come to the attention of Allmerica or the Insurance
Companies exclusively as a result of its relationship with
General Agent and Broker-Dealer or any affiliated company
and not from any independent source, are confidential and
shall not be used by Allmerica, the Insurance Companies, or
any company or person affiliated with Allmerica or the
Insurance Companies, nor divulged to any party for any
purpose whatsoever, except as may be necessary in connection
with the administration and marketing of the Contracts sold
by or through General Agent, including responses to
specified requests to the Insurance Companies for service by
Contract owners or efforts to prevent the replacement of
such Contracts or to encourage the exercise of options under
the terms of the Contracts. In no event shall the names and
addresses of such customers, prospective customers and
Registered Representatives be furnished by Allmerica or the
Insurance Companies to any other company or person,
including but not limited to, any of their managers,
registered representatives, or brokers who are not
Registered Representatives of Broker-Dealer, any company
affiliated with Allmerica or the Insurance Companies or any
manager, agency, or broker of such company, or any
securities broker-dealer or any insurance agent affiliated
with such broker-dealer. The intent of this section is that
Allmerica, the Insurance Companies or companies or persons
affiliated with them shall not utilize, or permit to be
utilized, their knowledge of General Agent, Broker-Dealer or
of any affiliated companies which is derived exclusively as
a result of the relationships created through the sale of
the Contracts.
Should General Agent and/or Broker-Dealer or any affiliate or
subsidiary thereof make available customer information of any
type to Allmerica and Insurance Companies for purposes
contemplated pursuant to this Agreement, Allmerica and
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<PAGE>
Insurance Companies acknowledge that General Agent and
Broker-Dealer, their affiliates or subsidiaries, as the case
may be, are the owners and have the exclusive right to all
such customer lists, records (in writing or in other form)
or other information (including originals, copies or any
derivative material of any of the foregoing documents)
relating to customers or clients of General Agent and/or
Broker-Dealer, their affiliates or subsidiaries
("Customers"). Allmerica and Insurance Companies agree that
they will not knowingly solicit Customers for any other
products or services offered by Allmerica and Insurance
Companies, their subsidiaries, affiliates or any third party
without the prior written consent of General Agent and
Broker-Dealer, their subsidiaries or affiliates, which
consent may be unreasonably withheld.
Information obtained by Allmerica and/or Insurance Companies
in regard to Contracts issued by Allmerica and/or Insurance
Companies shall remain the property of Allmerica and/or
Insurance Companies.
Notwithstanding the foregoing provisions of this Section 19,
nothing herein shall prohibit Allmerica, the Insurance
Companies or any company or person affiliated with Allmerica
or the Insurance Companies from (i) seeking business
relationships and entering into separate sales agreements
with Registered Representatives of Broker-Dealer if the
names of said Registered Representatives were obtained from
independent sources and not exclusively as a result of
Allmerica's relationship with General Agent and
Broker-Dealer; (ii) from entering into separate sales
agreements with Registered Representatives of Broker-Dealer
upon the request and at the initiation of said Registered
Representatives; or (iii) divulging the names and addresses
of any Customers, prospective customers, Registered
BONDING Representatives, or other companies or persons described in
the preceding paragraph in connection with any customer
complaint or insurance or securities regulatory proceeding
described in Section 18.
The terms of this Section 19 shall survive termination of
this Agreement.
NOTICES
SECTION 20. General Agent and Broker-Dealer represent that
all of their directors, officers, employees and Registered
Representatives are and shall be continuously covered by a
blanket fidelity bond, including coverage for larceny and
embezzlement, issued by a reputable bonding company. This
bond shall be, at least, of the form, type and amount
required under the NASD Conduct Rules.
SECTION 21. All notices which are required to be given or
submitted pursuant to this Agreement shall be in writing and
shall be deemed given when deposited with the United States
Postal Service, postage prepaid, registered or certified
mail, return receipt requested, to the last address of
record of the party being notified which is maintained by
the other party in the ordinary course of business. Each
party agrees to notify the others immediately in writing of
any claims, demands or actions having any bearing on this
Agreement. Until further notice, all notices to Insurance
Companies and Allmerica shall be sent to the address
specified on page 1 of this
10
<PAGE>
Agreement. Until further notice, all notices to the
Broker-Dealer shall be addressed to Chase Investment
Services Corp., 55 Water Street, New York, NY 10041,
Attention: Gary Johnson, Vice President, and all notices
to the General Agent shall be addressed to Chase Insurance
Agency, Inc., 802 Delaware Avenue, 12th Floor, Wilmington,
DE 19801, Attention: Thomas Molitor, Vice President.
AUDIT
Notwithstanding the foregoing, proper notice shall also be
effective and deemed given when sent if given by facsimile
transmission, provided that such transmission is followed by
an original of the notice mailed within three (3) business
days of the date of the sending of the facsimile
transmission postage prepaid, registered or certified mail,
return receipt requested, as described above.
SECTION 22. General Agent and Broker-Dealer shall have the
right upon reasonable written notice to Allmerica and the
Insurance Companies during regular business hours, to audit
all the records and practices of Allmerica and the Insurance
Companies relating to the business contemplated hereunder in
order to determine if Allmerica and the Insurance Companies
are complying with the terms of this Agreement, including
USE OF NAME the payment of compensation. General Agent and
Broker-Dealer will have the right to inspect and copy all
such records at their own expense. At General Agent's and
Broker-Dealer's option, such audit may be conducted by
designated personnel or an independent auditor selected by
General Agent and Broker-Dealer. Any such audit shall be
conducted in a manner that avoids any material disruption of
Allmerica's or the Insurance Companies' business.
REPRESENTATIONS
AND WARRANTIES SECTION 23. Neither Allmerica nor the Insurance Companies
shall use the name "Chase Manhattan Bank", "Chase Investment
Services Corp.", "Chase Insurance Agency, Inc.", "Chase" or
any derivative thereof, in any manner whatsoever without the
express prior written consent of Broker-Dealer, General
Agent and The Chase Manhattan Bank, which consent may be
withheld in their sole and absolute discretion.
SECTION 24. In order to induce Broker-Dealer and General
Agent to enter into and to perform their obligations under
this Agreement, Allmerica and Insurance Companies represent
and warrant to Broker-Dealer and General Agent that:
(a) Allmerica and First Allmerica are corporations duly
incorporated, validly existing and in good standing
under the laws of the Commonwealth of Massachusetts.
Allmerica Financial Life is a corporation duly
incorporated, validly existing and in good standing
under the laws of the State of Delaware. Allmerica and
the Insurance Companies are qualified and licensed to
do business and are in good standing in each state
where the nature of their business requires such
qualification; have all requisite corporate right,
power and authority to own and lease their properties,
to carry on their business in the manner in which it is
now conducted and to enter into, execute and deliver
this Agreement and to perform their obligations
hereunder; and have completed all corporate proceedings
11
<PAGE>
necessary to authorize the execution and delivery of
this Agreement and the performance of their obligations
hereunder;
(b) The execution and delivery by Allmerica and Insurance
Companies of this Agreement and the performance of all
of their obligations hereunder will not violate any
provisions of their Articles of Incorporation or
By-laws;
(c) This Agreement will constitute a valid and binding
obligation of Allmerica and Insurance Companies, fully
enforceable in accordance with its terms, except as
such enforceability may be limited by applicable
bankruptcy, insolvency, reorganization or similar laws
affecting the rights of creditors generally and by
general equity principles;
(d) The execution and delivery by Allmerica and Insurance
Companies of this Agreement and the performance by
Allmerica and Insurance Companies of all of their
obligations hereunder will not violate or result in the
breach of any material term or provision of, constitute
a material default under or permit the acceleration of
maturity under, any material governmental or judicial
order, judgment or decree, or any material loan
agreement, debenture, mortgage, deed of trust or other
agreement or instrument, to which Allmerica and/or
Insurance Companies is a party or by which it is bound;
(e) There is no material threatened or pending legal
proceeding or government action to which Allmerica
and/or Insurance Companies is a party or to which any
of their property is subject which could materially and
adversely affect the ability of Allmerica and Insurance
Companies to enter into this Agreement and/or to
perform all of their obligations hereunder;
(f) Allmerica and Insurance Companies have complied with
and are not in default in any material respect under
any laws, ordinances, requirements, regulations, orders
or decrees of any court, commission, board or other
administrative body or governmental agency having
jurisdiction in respect of the conduct of their
business which could materially and adversely affect
their ability to enter into this Agreement and to
perform all of their obligations hereunder;
(g) All (i) insurance products issued by Insurance
Companies hereunder, and (ii) all compensation payable
hereunder to Broker-Dealer or General Agent, comply
CHANGE OF with all applicable laws, regulations and rulings, and
CONTROL - are or shall be filed with and approved by all
RIGHT OF administrative agencies as required by law; and
TERMINATION
(h) All materials, including but not limited to
advertising, promotional, software, sales
illustrations, and prospectuses, whether electronic,
written or otherwise, provided by Allmerica and/or
Insurance Companies, are current,
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<PAGE>
free from any known defects and comply with all
applicable laws, regulations and rulings, and are
or shall be filed with and approved by all
administrative agencies as required by law.
CHOICE SECTION 25. The Broker-Dealer and General Agent may
OF LAWS terminate this Agreement if: there is a transfer (i) of
stock or assets of the Insurance Companies which would
effect a change in control of such insurers, or (ii) by
reinsurance or otherwise of ten percent or more of the
CAPTIONS Insurance Companies' insurance in force. The term "control"
means the possession, direct or indirect of the power to
direct or cause the direction of the management and policies
of the Insurers, whether through the ownership of voting
securities, by contract or otherwise. Control shall
conclusively be deemed to exist if any person directly or
EFFECTIVENESS; indirectly owns, controls or holds with the power to vote
ENTIRE ten percent or more of the voting securities of the
CONTRACT; Insurance Companies or any person(s) controlling such
PRIOR insurers.
AGREEMENTS
SECTION 26. The laws of the State of New York shall govern
all matters concerning the validity, performance and
integration of this Agreement.
SECTION 27. Captions are used for informational purposes
only and no caption shall be construed to affect the
substance of any provision of this Agreement.
SECTION 28. This Agreement contains the entire contract
between the parties. Upon execution it will replace all
previous agreements between General Agent or Broker-Dealer
and Allmerica and the Insurance Companies, or any of them,
relating to the solicitation of Contracts. It is hereby
understood and agreed that any other agreement or
representation, commitment, promise or statement of any
nature, whether oral or written, relating to or purporting
to relate to the relationship of the parties is hereby
rendered null and void.
IN WITNESS WHEREOF, the parties have executed this Agreement in duplicate to
take effect on its effective date.
For: CHASE INSURANCE AGENCY, INC. For: ALLMERICA INVESTMENTS, INC.
By: /s/ Joseph D. Picarello By: /s/ Emil J. Aberizk Jr.
-------------------------------- ----------------------------------
Name: Joseph D. Picarello Name: Emil J. Aberizk Jr.
-------------------------------- ----------------------------------
Title: Vice President Title: Compliance Officer
-------------------------------- ----------------------------------
Date: 1/28/98 Date: 2/19/98
-------------------------------- ----------------------------------
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For: CHASE INVESTMENT SERVICES CORP. For: FIRST ALLMERICA FINANCIAL LIFE
INSURANCE COMPANY AND ALLMERICA
FINANCIAL LIFE INSURANCE AND
ANNUITY COMPANY
By: /s/ Arden D. Down By: /s/ Emil J. Aberizk Jr.
-------------------------------- ----------------------------------
Name: Arden D. Down Name: Emil J. Aberizk Jr.
-------------------------------- ----------------------------------
Title: Vice President Title: Compliance Officer
-------------------------------- ----------------------------------
Date: 2/5/98 Date: 2/19/98
-------------------------------- ----------------------------------
14
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ALLMERICA ALLMERICA 440 Lincoln Street GENERAL AGENT'S
FINANCIAL INVESTMENTS, INC. Worcester, MA 01653 AGREEMENT
- --------------------------------------------------------------------------------
Allmerica Investments, Inc. ("Company") hereby appoints
__________________________________________________
("General Agent") as local supervisor for the purpose of training and
supervising all associated persons and registered representatives of Company
assigned to _________________________________________________________
("Agency") engaged in the solicitation, sale or service of variable life
insurance and variable annuity contracts offered by Allmerica Financial Life
Insurance and Annuity Company and/or First Allmerica Financial Life Insurance
Company, mutual funds, limited partnerships and general securities (collectively
"Investment Products and Services") offered and/or distributed by Company. This
appointment is effective as of the date accepted by General Agent and
acknowledged by Company.
1. SUPERVISION: General Agent agrees to supervise all registered
representatives assigned to Agency, both those operating from Agency and
those operating from detached locations, consistent with the standards of
conduct outlined in Company's Business Conduct Guide, Company's Statement
of Compliance for the Office of Supervisory Jurisdiction and Branch
Offices, the Program for Allmerica Financial Life/Allmerica Investments
Office Examinations, and the procedures and requirements outlined in other
Company manuals, memoranda and other publications, as may be amended from
time to time.
General Agent agrees to be responsible for Investment Products and Services
activity conducted through Agency by monitoring Investment Products and
Services activity in order to ensure that the business is processed in
accordance with regulatory and Company standards and to notify Company of
any irregularities and/or deficiencies.
General Agent agrees to be responsible for the maintenance and periodic
review of the books and records of Agency, as required by Company.
On at least an annual basis, General Agent agrees to conduct and/or
participate, in coordination with Company's compliance personnel, an agency
compliance meeting which all registered representatives assigned to Agency
shall attend. If for any reason a registered representative does not
attend agency compliance meeting, General Agent will schedule a personal
interview, on at least an annual basis, for the purpose of reviewing
activity of registered representative with respect to Investment Products
and Services and to discuss the compliance topics reviewed at agency
compliance meeting.
General Agent agrees to acquire and/or comply with all of the applicable
laws, rules and regulations (General Securities Principal Registration) of
the Securities and Exchange Commission (SEC), National Association of
Securities Dealers, Inc. (NASD) and all other federal and state laws and
regulations.
General Agent agrees to maintain all NASD registrations required to
supervise the solicitation and sale of Investment Products and Services
offered through Agency. General Agent will maintain all state securities
licenses and state insurance licenses as may be required to offer and
solicit Investment Products and Services.
2. LIMITATIONS OF AUTHORITY: General Agent has no authority to accept any
risk on Company's behalf, to issue, make, alter or discharge any contract,
to extend the time of payments, to waive or extend any contract obligation
or condition, or to alter or amend any communication sent by Company
without express authority in writing from an officer of Company.
3. ASSIGNABILITY: No assignment, sale or transfer of this Agreement or any
of the rights, claims or interests under it may be made by General Agent
without the prior written consent of Company. An assignment, sale or
transfer by General Agent without written consent of Company will
immediately make this Agreement void and shall be a release in full to
Company of any and all of its obligations under this Agreement.
4. AGENCY STAFFING: General Agent agrees to recruit, train and supervise
registered representatives to solicit Investment Products and Services
offered through Company. General Agent agrees to develop a sales force of
sufficient size and quality to adequately penetrate the market with
Investment Products and Services of Company.
<PAGE>
5. BUSINESS AUTHORIZED: General Agent agrees to act for Company in the
solicitation of orders only for those Investment Products and Services for
which Company has executed sales agreements. General Agent shall monitor
his/her registered representatives on a continuing basis to prevent the
offering or the selling of Investment Products and Services not offered by
Company and to prevent registered representatives of Company from
exercising discretionary authority on behalf of any of their clients.
6. SUBMISSION OF APPLICATIONS/ACCOUNTING FOR FUNDS COLLECTED: General Agent
agrees to establish and maintain at Agency procedures, as outlined in
Company manuals, concerning the collection, recording and transmittal of
all applications and/or payments collected on behalf of Company, any
issuer, or any sponsor.
General Agent agrees to be responsible to Company for monies collected by
registered representatives and for any securities, certificates, payments,
receipts and other Company papers in the possession of registered
representatives and employees of Agency.
Purchase checks for Investment Products and Services are to be client
personal checks, cashier's checks or money orders made payable to either
the Company, appropriate issuer, sponsor or other designated agent.
Purchase checks may not be made payable to registered representative,
General Agent or any personal or Agency Accounts.
7. REVIEW OF INVESTMENT PRODUCT BUSINESS: General Agent agrees, in accordance
with Company procedures, to conduct periodic reviews of Investment Product
and Services business of each registered representative. Such review of
Investment Product and Services business shall include, but not be limited
to, reviews for adequate NASD registrations and state securities and/or
insurance licensing of registered representative, prompt transmittal of
applications, checks and other pertinent items to Agency and subsequently
to Home Office, the correct use of applications and proper mode of payment
and the suitability of Investment Products and Service based on client's
financial profile and objectives.
8. BOOKS AND RECORDS: General Agent agrees to maintain a regular and
accurate record of all Investment Products and Services transactions of
Agency, including any journal, account books, records, papers, customer
account files or any other material, as required by Company. General Agent
agrees, at such times that Company may request, to make detailed report to
Company, on forms furnished for that purpose, showing an accurate
accounting of all monies and other items received for, or on behalf of
Company.
General Agent agrees that all records, files and papers are, and remain,
property of Company and will at all times be freely exhibited for the
purpose of examinations and inspection by duly authorized personnel of
Company.
Upon termination, all records revert to Company and should be turned over
to a Company representative.
9. DISTRIBUTION AND USE OF ADVERTISING MATERIAL, CORRESPONDENCE: General
Agent agrees not to directly or indirectly recommend or distribute any
advertising and/or sales literature to registered representatives
(including but not limited to prospectuses, illustrations, circulars, form
letters or postal cards, business cards, stationary, booklets, schedules,
broadcasting and other sales material of any kind) concerning Company
and/or the offering of Investment Products and Services until the material
has been approved in writing by a registered principal in the Company's
Compliance Department.
General Agent also agrees to obtain from his/her registered
representatives, at the time of development, copies of all correspondence
pertaining to the solicitations and/or sale of any Investment Products and
Services or to any other aspect of their Investment Products and Services
business, and to forward the correspondence to Home Office to allow for the
review and endorsement of correspondence in writing, on an official record
of Company, by a registered principal in the Company's Compliance
Department. General Agent shall periodically inspect Registered
Representatives' materials, sales literature and correspondence to ensure
compliance with Company requirements.
10. COMPENSATION: General Agent, subject to the provisions of this Agreement,
will be allowed expense reimbursement or allowances and overriding
commissions on payments collected on all Investment Product sales solicited
by Registered Representatives assigned to General Agent and effected
through Agency at rates established and published by Company, as may be
amended from time to time.
<PAGE>
11. COMMISSIONS: Company will pay commissions to General Agent, after
concession payments are made to Company by an issuer or sponsor, in
connection with sales of Investment Products and Services effected through
General Agent's personal solicitation. Such commissions will be paid on
the same basis and terms as specified in Company's Registered
Representative Agreement, which is incorporated herein by reference and as
may be amended from time to time.
12. TERMINATION WITHOUT CAUSE: General Agent and Company may terminate this
Agreement at any time without cause.
13. RELATIONSHIP OF PARTIES: Nothing contained in this Agreement is to be
construed to create the relationship of employer and employee between
Company and General Agent. General Agent, however, is to always comply
with all of the applicable laws, rules and regulations of the SEC, NASD,
federal and state authorities as well as Company's rules, regulations and
procedures concerning methods of conducting Investment Products and
Services business, as may be amended from time to time.
14. EFFECTIVENESS OF CONTRACT: This Agreement between General Agent and
Company is not binding until Agreement has been duly executed by both
parties. This Agreement supersedes all previous agreements, whether oral
or written. This Agreement shall not cancel or affect any right, claim or
interest General Agent may have concerning commissions now due or hereafter
to become due under preceding agreements between General Agent and Company.
Neither shall Agreement cancel, terminate or affect in any way any lien,
right or interest which Company may have, or may hereafter acquire, with
respect to commissions or equities to General Agent under any other
agreement with Company, any provision of any such agreement which, by its
terms or by implications, continues beyond termination of such agreement.
IN WITNESS THEREOF, this Agreement has been executed by the undersigned on the
dates indicated below.
Allmerica Investments, Inc.
By: By:
---------------------------------- ----------------------------------
General Agent Signature Home Office Principal
Date: Date:
-------------------------------- --------------------------------
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE 440 Lincoln Street
INSURANCE COMPANY Worcester, MA 01653 CAREER AGENT AGREEMENT
- --------------------------------------------------------------------------------
First Allmerica Financial Life Insurance Company (the "Company") does hereby
appoint_____________________________ of _________________________________
("Career Agent") its Agent to solicit applications for insurance and annuities
and to submit such applications through the office of
__________________________________________ ("General Agent"), this appointment
to be effective on _____________________________.
Career Agent accepts this appointment, subject to the terms and provisions set
forth in this Agreement.
WITNESSETH:
Career Agent will solicit applications for coverages offered by the Company and
for which he/she is duly licensed. Career Agent is authorized to collect and
pay over to General Agent premiums on coverages solicited by him/her. Career
Agent shall not delegate any authority granted under this Agreement and shall
not appoint any solicitors or subagents to act on his/her behalf.
TERRITORY AND CLASSES OF BUSINESS
Territory SECTION 1. The district within which Career Agent may
solicit insurance and annuity applications for the Company
is the district assigned to General Agent.
Permissible SECTION 2. Career Agent agrees that in the sale and service
Activity of insurance and annuities he/she will act only on behalf of
the Company and such of its affiliates as he/she is
authorized to represent; and he/she will not engage in any
other activity for remuneration or profit which requires
his/her personal services without first obtaining the
consent of the Company. If the Company makes arrangements
with another business entity to make any of its products
available to Career Agents, this will constitute consent to
Career Agent to enter into an arrangement with such entity
to sell and service such products on its behalf. If, with
the consent of the Company, Career Agent engages in any
personal service activities for remuneration or profit,
he/she will, upon request of the Company, disclose the
amount of time expended and the amount of income derived
from such other activities.
STATUS, DUTIES AND AUTHORITY
Relationship SECTION 3. Nothing in this Agreement will be construed to
of Parties create the relationship of employer and employee between the
Company and Career Agent. Within the scope of his/her
authority, Career Agent will be free to exercise his/her
independent judgment as to the time, place and manner of
solicitation and servicing of business underwritten by the
Company. However, he/she will have no authority to act in a
manner which does not conform to applicable statutes,
ordinances or governmental regulations pertaining to the
conduct of the business or to reasonable rules adopted, from
time to time, by the Company.
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<PAGE>
Limitations SECTION 4. Career Agent will have no authority to accept
on Authority risks of any kind; to make, alter or discharge contracts of
insurance or annuities; to waive forfeitures or exclusions;
to fix any premium for hazardous or substandard risks; to
alter or amend any papers received by him/her from the
Company; to deliver any policy of insurance or any document,
agreement or endorsement changing the amount of insurance
coverage if Career Agent knows or has reason to believe that
the insured is uninsurable; to collect any premium after the
expiration of the policy grace period except in connection
with a policy reinstatement; to accept payment of any
premium unless the premium meets the minimum premium
requirement for the policy established by the Company; or to
contract any debt rendering or purporting to render the
Company liable therefor, without express authority in
writing from an authorized officer of the Company.
Implied SECTION 5. Career Agent will have no power or authority
Authority other than as expressly provided in this Agreement and no
other power or authority shall be implied from the grant or
denial of power specifically mentioned in this Agreement.
Duty of SECTION 6. Career Agent agrees that he/she will not
Compliance; intentionally violate any applicable state or Federal law,
Negative ruling or regulation pertaining to the insurance business or
Obligations any rule or regulation of the Company. Career Agent will
not knowingly engage in any activity which is detrimental to
the best interests of the Company or any of its affiliates.
Neither while this Career Agent Agreement is in force nor
for a period of two years following the termination of this
Agreement will Career Agent directly or indirectly interfere
with the relationship of the Company or any of its
affiliates with any agent or broker.
Policy While this Agreement remains in force, Career Agent agrees
Termination that he/she will not, directly or indirectly, replace or
and Replacement induce or attempt to induce any policyholder to terminate or
replace any policy issued by the Company or any of its
affiliates except when permitted by the rules of the issuing
insurer. For a period of two years following termination of
this Agreement, Career Agent agrees that he/she will not,
directly or indirectly, replace or induce or attempt to
induce any policyholder serviced through the office of the
General Agent to terminate or replace any policy issued by
the Company or any of its affiliates.
SOLICITATION OF INSURANCE AND ANNUITIES
Submission of SECTION 7. Career Agent will submit through General Agent
Applications; all Company policy applications solicited by him/her,
Delivery of whether or not it appears the proposed insured is an
Policies; acceptable risk under the rules of the Company. Career
Rejected Agent will deliver, or cause to be delivered, in accordance
Business with the rules of the Company all policies issued on
applications submitted by him/her and will return to General
Agent any policy which is declined by the applicant or which
cannot be delivered within the time permitted by the
Company's rules. If an application is declined by the
Company or is accepted at a rate higher than standard which
is not acceptable to the applicant, with the Company's
permission Career Agent may place the coverage with another
insurance company.
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<PAGE>
Limitation on SECTION 8. Career Agent will not solicit any insurance or
Solicitation annuities in any jurisdiction in which he/she is not
licensed nor will he/she solicit by mail or otherwise any
insurance or annuities outside the district assigned to
General Agent without first receiving consent of the Company
and ascertaining that he/she is properly licensed to solicit
such insurance or annuities.
Advertising SECTION 9. The Company, through General Agent, will make
Material, Rate available to Career Agent a supply of canvassing and
Books, Forms, advertising materials, stationery, books, records and forms
etc. necessary or suitable to properly solicit insurance and
annuities. Career Agent will not print, publish or
distribute any advertisement, circular, statement or
document relating to the business of the Company or any of
its affiliates or use any title or language descriptive of
his/her status without the prior approval of the Company.
Policyowner Solely to assist Career Agent in rendering service to
Service Aids policyowners, Career Agent may use whatever aids, such as
data cards, computer printouts, etc. as may be available.
All such aids, whether furnished by the Company or otherwise
- including any copies thereof - shall be the property of
the Company.
Illustrations Career Agent will not furnish any prospective insured or
and Proposals policyowner an illustration of the financial or other
aspects of a policy or a proposal for a policy of the
Company unless the same has been either furnished by the
Company or prepared from computer software or other material
furnished or approved by the Company. Any illustration or
proposal delivered by Career Agent will conform to standards
of completeness and accuracy established by the Company. If
the proposal or illustration was not furnished by the
Company, Career Agent will retain in his/her records for
availability to the Company a copy thereof or the means to
duplicate the same. Any computer software or materials
furnished by the Company will be and remain its property.
Return of Upon termination of this Agreement, Career Agent will return
Materials, etc. to the Company all manuals, computer software, policyholder
data cards, policyholder files, stationery and business
cards and other material which, by the terms of this Section
or otherwise, is the property of the Company.
Accounting for SECTION 10. In accordance with the rules of the Company,
Funds Collected Career Agent will account for and remit immediately through
General Agent all funds received or collected by him/her for
or on behalf of the Company without deduction for any
commissions, fees, or other claim he/she may have against
the Company and will make such reports and file such
substantiating documents and records as the Company or
General Agent may require.
Liability for SECTION 11. If the Company pays Career Agent commissions or
Refund of fees in advance of receipt of the premium on which the
Commissions payment is based, the amount by which the payment to Career
and Fees Agent exceeds, at any time, the amount attributable to the
premiums paid will constitute a personal debt of Career
Agent payable on demand. If the Company returns premiums on
a policy for any reason whatsoever (other than as a part of
claim settlement) or rescinds or cancels a policy for any
reason whatsoever or if a policyholder exercises a right to
surrender
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<PAGE>
the policy for return of all premiums paid, Career Agent
will pay on demand the amount of any commissions received on
the premiums returned.
Notwithstanding the foregoing, after this Agreement has been
in force for 10 complete years and prior to the date the
Agreement is terminated for cause, unearned commissions paid
in advance on policies the premiums for which are being paid
under the Company's Monthly Automatic Premium (MAP) Plan or
other annualized commission arrangement that are repayable
because of a lapse or surrender of the policy may only be
recovered by set-off from first year and renewal commissions
and fees otherwise payable by the Company or its affiliates
to Career Agents.
COMPENSATION
Basis of SECTION 12. Career Agent's compensation will be a
Compensation combination of commissions and fees payable on premiums for
individual and group life, health and annuity policies
placed with the Company. The amount of commissions and fees
payable for individual insurance and annuity policies will
be determined by the further provisions of this Agreement
and the published rules of the Company. The amount of
commissions and fees payable on group life and health
insurance and group annuity policies solicited by Career
Agent will be specified in separate agreements related
solely to that class of business.
Commissions payable on premiums on a policy resulting from
conversion, exchange, replacement or the exercise of an
option to purchase additional insurance will be determined
by Company rules in effect at the time of the conversion,
exchange, replacement or exercise of the option.
Published Rules The Company may, by published rule, limit the amount of
Affecting premium on which commissions or fees are payable and limit,
Compensation defer, or exclude commissions or fees because of the nature
of the transaction, discretionary nature of the premium or
other circumstances.
Payor All compensation due Career Agent under this Agreement will
be paid by First Allmerica Financial Life Insurance Company
(First Allmerica), an affiliate of the Company, as the
common paymaster.
Time of Payment SECTION 13. A premium will not be considered paid until it
of Commissions has been received by the Company at its Principal Office.
On premiums paid or allocated prior to the 15th day of the
month, commissions and fees will be paid on the last
business day of the month. On premiums paid or allocated
subsequent to the 15th day of the month, commissions and
fees will be paid on the 15th day of the following month, or
on the last business day preceding such pay date, if such
pay date is not a business day.
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<PAGE>
TERMINATION AND ITS EFFECT ON COMMISSIONS AND FEES
Termination SECTION 14. This Agreement may be terminated for cause and
for Cause without notice if Career Agent:
(a) misappropriates any funds belonging to or received on
behalf of the Company or any of its affiliates; or
(b) withholds any funds or other property belonging to the
Company or any of its affiliates after the same should
have been reported and transmitted to the Company or
its affiliate or after a demand has been made for the
same; or
(c) commits any willful or dishonest act which injures the
Company or any of its affiliates; or
(d) commits any intentional act which violates any
applicable Fair Trade Practices Act and thereby injures
the Company or any of its affiliates; or
(e) intentionally performs any act prohibited by law or
intentionally omits any act required by law with the
result that the Company or any of its affiliates is
subject to disciplinary action; or
(f) willfully violates any of the provisions of this
Agreement.
Forfeiture of SECTION 15. No commissions or fees will be paid following
Commissions termination of this Agreement, if it is terminated for
and Fees cause, nor will commissions or fees continue to be paid
after termination of this Agreement if Career Agent breaches
any of its terms or conditions by the commission of an act
prohibited by its terms.
Termination SECTION 16. Notwithstanding the foregoing, and whether or
Without Cause not there is a breach of this Agreement, either party may
terminate this Agreement during its first year by giving 10
days' notice in writing to the other party of the intention
to do so and thereafter by giving 30 days' notice in writing
to the other party of the intention to do so.
Effect of Certain SECTION 17. If this Agreement terminates without breach of
Terminations any of its provisions by Career Agent:
(a) by reason of the death of Career Agent; or
(b) by reason of the permanent Total Disability of Career
Agent; or
(c) by reason of retirement of Career Agent under the
Career Agents' Retirement Plan established and
maintained by the Company; or
(d) by reason of employment of Career Agent by the Company
or any of its affiliates in some capacity other than as
a Career Agent;
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<PAGE>
commissions will continue to be paid to Career Agent only as
provided in the Exhibits attached hereto.
After termination of this Agreement by reason of the
permanent Total Disability of Career Agent, if Career Agent
recovers from said disability, this Agreement may be
reinstated. If Career Agent recovers from disability and
this Agreement is not reinstated, commissions will be
payable on premiums paid thereafter only if they would have
been payable if Section 18 had applied on termination.
Effect of Other SECTION 18. If this Agreement terminates without breach of
Terminations any of its provisions by Career Agent for any reason other
Without Cause than asset forth in Section 17, commissions will continue to
be paid to Career Agent only as provided in the Exhibits
attached hereto.
GENERAL PROVISIONS
Right of SECTION 19. The Company, for its own benefit, for the
Set-Off benefit of its affiliates and for the benefit of the General
Agent, will have a lien on any commissions and fees payable
under this Agreement, whether or not the commissions are now
due or hereafter become due, and may apply any such monies
to the satisfaction of indebtedness to any of said persons
to the extent permitted by law.
Non-waiver SECTION 20. Waiver of any breach of any provision of this
of Breach Agreement will not be construed as a waiver of the provision
or of the right of the Company to enforce said provision
thereafter.
Assignability SECTION 21. This Agreement is not transferable. Without
the consent of the Company, no rights or interest in or to
commissions or fees will be subject to assignment, other
than a collateral assignment of commissions and fees, and
any attempted absolute assignment, sale or transfer of this
Agreement or of any commissions or fees without the written
consent of the Company will immediately make this Agreement
void and be a release to the Company in full of any and all
of its obligations hereunder.
Errors and SECTION 22. Career Agent agrees to maintain errors and
Omissions omissions insurance coverage meeting the Company's minimum
Coverage coverage requirements and to furnish the Company proof of
such coverage upon request. If any lawsuit is brought
against the Company as a result of any alleged action, error
or omission of Career Agent and if (1) Career Agent has
maintained errors and omissions coverage which complies with
the Company's minimum requirements, and (2) the alleged
action, error or omission of Career Agent was not committed
intentionally or with dishonest, fraudulent or criminal
intent, Career Agent agrees to reimburse the Company and its
affiliates for all costs of the lawsuit, including
attorney's fees, and all damages resulting therefrom up to
the Company's Career Agent liability limit. The minimum
coverage requirements and Career Agent liability limit will
be set forth in a bulletin or announcement published by the
Company and are subject to change at any time. Distribution
of the bulletin or announcement in the usual manner will
constitute notice to Career Agent. If any lawsuit is
brought against the Company as a result of any alleged
Career Agent action, error or omission and if Career Agent
(1) did not maintain at least the
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<PAGE>
required minimum errors and omissions coverage, or (2) did
maintain such coverage but Career Agent's action, error or
omission was committed intentionally or with dishonest,
fraudulent or criminal intent, Career Agent agrees to
reimburse the Company and its affiliates for all costs of
the lawsuit, including attorney's fees, and all damages
resulting therefrom unless the court determines the suit to
be groundless and without merit.
Reservation of SECTION 23. The Company reserves the right at any time to
Right to Change change the terms and conditions of this Agreement,
including but not limited to, the rates of commissions and
fees, or to discontinue the payment of any commissions and
fees described in the Exhibits attached hereto.
Effective Date SECTION 24. Any change will become effective on the date
of Change specified in a notice or, if later, 30 days after the notice
is given to Career Agent. However, the requirement to give
advance notice shall not apply if the change becomes
necessary or expedient by reason of legislation or the
requirements of any governmental body and, in the opinion of
the Company, it is not reasonably possible to meet the 30
day requirement. Changes will not be retroactive and will
apply only to units of coverage solicited on or after the
effective date of the change. Notice of any change may be
given by a Company bulletin or announcement and distribution
of the bulletin or announcement in the usual manner will
constitute notice to Career Agent.
Arbitration SECTION 25. By his/her execution of this Agreement, Career
Agent agrees to settle any dispute, claim or controversy
arising between Career Agent and the Company by arbitration
pursuant to the then current rules of the American
Arbitration Association. Judgment upon any award rendered
in the arbitration may be entered in any court of competent
jurisdiction.
All applicable disputes shall be referred to three
arbitrators, one to be chosen by each party, and the third
by the two so chosen. If either party refuses or neglects
to appoint an arbitrator within thirty days after the
receipt of written notice from the other party requesting it
to do so, the requesting party may nominate two arbitrators
who shall choose the third. In the event the two
arbitrators do not agree on the selection of the third
arbitrator within thirty days after both arbitrators have
been named, then the third arbitrator shall be selected
pursuant to the then current rules of the American
Arbitration Association. The decision of the majority of
the arbitrators shall be final and binding upon all parties.
The expenses of the arbitrators and of the arbitration shall
be equally divided between all parties. Arbitration is the
sole remedy for disputes arising under this Career Agent
Agreement.
General Agent SECTION 26. General Agent means the General Agent
identified on the face page or any other General Agent in
charge from time to time of a general agency office to which
Career Agent is assigned.
Definitions SECTION 27. As used in this Agreement, including the
Exhibits attached hereto:
"Replacement" means a transaction in which a new life or
disability insurance policy or a new annuity contract is to
be purchased, and by reason of the transaction, all or a
portion of
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<PAGE>
any existing life or disability insurance policy or any
existing annuity contract has been or is to be lapsed,
forfeited, reduced in face amount, surrendered, assigned to
the replacing insurer, placed on a reduced paid-up basis or
under another nonforfeiture provision or terminated, or
subjected to borrowing or withdrawals, whether in a single
sum or under a schedule of borrowing or withdrawals over a
period of time.
"Total Disability" means the inability of the Career Agent,
because of injury or sickness, to perform the duties of any
occupation for which he/she is reasonably fitted by
training, education or experience. During the first 24
months of total disability, Career Agent will be considered
to have met the foregoing requirement if he/she is unable to
perform the duties of his/her regular occupation and is not
performing the duties of any other occupation. Total
disability will be considered permanent after it has existed
6 months and thereafter while it continues.
"Flexible premium policy" means an individual insurance or
annuity policy under which the policyowner may unilaterally
vary the amount and timing of premium payments.
"Unit of Coverage" means all benefits of a policy which have
the same date of issue, except as modified by Company
published rules. Usually all the benefits specified in the
policy Schedule of Benefits and in each Supplementary
Schedule of Benefits constitute a unit of coverage.
"Policy Year," as to each unit of coverage, means a period
of 1 year commencing on its date of issue and each
anniversary thereof.
"Monthaversary," as to each unit of coverage, means its date
of issue and the corresponding day of each month thereafter.
"Basic premium," for each unit of coverage, means the sum of
the basic or target premiums for each benefit in the unit,
as determined from the Company's Rate Manual.
"Excess premium" means premium paid in any policy year in
excess of basic or target premium.
"Agreement" means this entire agreement, including all
Exhibits and commission and fee schedules attached thereto.
Other Exhibits issued hereafter will become a part of this
Agreement on their effective date.
Notice SECTION 28. Whenever this Agreement requires a notice to be
given, the requirement will be considered to have been met,
in the case of notice to the Company, if delivered or mailed
postage prepaid to General Agent at the agency office or to
a Vice President in the Company's Allmerica Financial
Services Operation and, in the case of notice to Career
Agent, if left at the usual place for him/her to pick up
mail within the agency office, or by mailing postage
prepaid, to Career Agent's last home address known to the
Company or to such other address as may be designated by
Career Agent.
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<PAGE>
Captions SECTION 29. Captions are used for informational purposes
only and no caption shall be construed to affect the
substance of any provision of this Agreement.
Effectiveness; SECTION 30. This Agreement contains the entire contract
Entire Contract; between the parties. Upon execution it will replace all
Prior Agreements previous agreements between Career Agent and the Company
relating to the solicitation of insurance and annuity
policies except as the previous agreement relates to the
payment of commissions and fees on policies solicited prior
to the effective date of this Agreement. For purposes of
determining vestings on termination, the date of the
earliest prior Career Agent Agreement executed by Career
Agent during his current period of continuous service with
the Company and its life insurance affiliate, Allmerica
Financial Life Insurance and Annuity Company, will be
considered the date of this Agreement. It is hereby
understood and agreed that any other agreement or
representation, commitment, promise or statement of any
nature, whether oral or written, relating to or purporting
to relate to the relationship of the parties is hereby
rendered null and void.
IT IS UNDERSTOOD THAT THIS IS AN "AT WILL" RELATIONSHIP WHICH MAY BE TERMINATED
BY EITHER PARTY WITHOUT CAUSE OR REASON AS PROVIDED FOR IN SECTION 16.
IN WITNESS WHEREOF, the parties have executed this Agreement in triplicate to
take effect on its effective date.
First Allmerica Financial Life Insurance Company
By:
--------------------------------------------------
Vice President
--------------------------------------------------
Career Agent
Approved:
--------------------------------------------------
General Agent
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Commission Schedule for Variable Annuity Policies:
--------------------------------------------------
Writing Agent 5% of all initial and subsequent payment amounts
General Agent 2.0% of all initial and subsequent payment amounts
Middle Management Overrides will be paid to fully-licensed and NASD
registered Middle Management in an amount of 10% of
commissions earned on policies written by career agents
in their first two contract years or trainee agents in
their first five contract years.
<PAGE>
Registered
[LOGO] ALLMERICA Allmerica 440 Lincoln Street Representative's
FINANCIAL(R) Investments, Inc. Worcester, MA 01653 Agreement
- --------------------------------------------------------------------------------
Allmerica Investments, Inc. ("Company") hereby appoints ________________________
("Registered Representative") for the purpose of selling and servicing variable
contracts offered by Allmerica Financial Life Insurance and Annuity Company,
mutual funds, limited partnerships and other investment products and services
(collectively "Investment Products and Services") offered and distributed by
Company. Registered Representative will submit Investment Products and Services
business through the office of _________________________________________________
("General Agent") or successor at ______________________________________________
("Agency") or successor. This appointment is effective as of the date accepted
by Registered Representative and acknowledged by General Agent.
1. DUTY OF COMPLIANCE/SUPERVISION: Registered Representative is assigned to
the above named Agency and General Agent for the purposes of training,
supervision and recordkeeping. Registered Representative agrees to comply
with all of the applicable laws, rules and regulations of the Securities
and Exchange Commission (SEC), National Association of Securities Dealers,
Inc. (NASD) and all other applicable federal and state insurance and
securities laws and regulations.
Registered Representative agrees to comply with all procedures and
requirements outlined in Company manuals, memoranda and other publications
as may be amended from time-to-time.
Registered Representative agrees to abide by Company's Compliance Program
including his/her mandatory attendance, on at least an annual basis, at
Agency's Compliance Meeting(s) and/or Interview(s). Failure to attend
Compliance Meeting and/or Interview is grounds for immediate termination
for cause.
2. LIMITATIONS OF AUTHORITY: Registered Representative may not delegate any
authority granted under this Agreement and shall not appoint any
solicitors or subagents to act on his/her behalf. Registered
Representative may not sign and/or submit any customer applications or
orders on behalf of any individual who is not fully qualified as a
Registered Representative of Company.
Registered Representative will only offer for sale those Investment
Products and Services for which he/she is properly NASD registered,
securities-licensed through Company and, if required by state law, state
insurance-licensed through Allmerica Financial Life Insurance and Annuity
Company, and for which Company has fully executed sales agreements with
the sponsor or issuer. To participate in the sale of Investment Products
and Services for which no agreement has been executed is to "sell-away"
from Company and is grounds for immediate termination of this Agreement
upon written notice to Registered Representative.
Registered Representative will maintain his/her NASD registration solely
through Company and will provide full disclosure to Company of his/her
background. Registered Representative agrees to notify Company immediately
of any matter requiring disclosure on the NASD Form U-4, Uniform
Application for Securities Industry Registration, including but not
limited to any income generating business activity, other than personal,
passive investment, which is outside the scope of Registered
Representative's Agreement with Company.
Customer accounts or applications may only be accepted on behalf of
Company based on approval by a Home Office principal. Registered
Representative has no authority to accept any risk on Company's behalf, to
incur any indebtedness or liability on behalf of Company and understands
and agrees to Company's prohibition against assuming discretionary
authority over client investments.
3. ASSIGNABILITY: No assignment, sale or transfer of this Agreement or any of
the rights, claims or interests under it may be made by Registered
Representative without the prior written consent of Company. Such
assignment, sale or transfer by Registered Representative without written
consent of Company will immediately make this Agreement void, and will be
a release in full to Company of any and all of its obligations hereunder.
4. SUBMISSION OF APPLICATIONS/ACCOUNTING FOR FUNDS COLLECTED: All
applications and/or payments collected by Registered Representative on
behalf of Company or any issuer or sponsor are to be delivered immediately
to Registered Representative's Agency no later than noon of the business
day following receipt by Registered Representative.
Investment Product and Services purchase checks are to be client personal
checks, cashier's checks or money orders made payable to either the
Company, appropriate issuer, sponsor or other designated agent. Such
checks may not be made payable to Registered Representative, General Agent
or any personal or Agency account.
5. SUITABILITY/RESPONSIBILITY TO EXPLAIN INVESTMENT PRODUCTS: Registered
Representative agrees to make Investment Product and Services
recommendations to clients only after obtaining sufficient information
regarding a client's financial background, goals and objectives so as to
make a reasonable determination that the proposed Investment Product
and/or Service is suitable based on such background, goals and
objectives. Registered Representative agrees to fully explain the risks,
terms and conditions of the purchase of an Investment Product or Service
and that he/she will not make untrue statements, interpretations,
misrepresentations nor omit or evade material facts concerning such
Investment Product or Service.
6. DISTRIBUTION AND USE OF ADVERTISING MATERIAL, CORRESPONDENCE: Registered
Representative agrees not to directly or indirectly use or distribute
any advertising or sales literature material (including but not limited
to prospectuses, illustrations, circulars, form letters or postal cards,
business cards, stationery, booklets, schedules, broadcasting and other
sales material of any kind) concerning Company and/or the offering of
Investment Products and Services of any kind until the material has been
approved by Company in writing.
Registered Representative also agrees to provide to General Agent copies
of all correspondence pertaining to the solicitation of execution of any
Investment Products and Services transaction, and to any other aspect of
his/her Investment Products and Services business in order to allow for
the review and endorsement of the correspondence in writing, on an
official internal record of Company by a registered principal located at
Home Office.
SMAE-050NS (11/95)
<PAGE>
7. RECORDKEEPING: Registered Representative agrees, in accordance with
Company guidelines and requirements, to cooperate in the maintenance of
complete customer account files and other records at the assigned Agency
which pertain to the conduct of Investment Products and Services business
through Company. Customer account files of Registered Representative are
to be considered the property of Company and are not to be taken from the
immediate Agency premises for any purpose.
8. COMMISSIONS: Commissions for the sale of Investment Products and Services
offered or effected by Registered Representative will be paid after
compensation for those sales is paid to Company. Commissions for
Investment Products and Services will be paid at the rates established and
published by Company.
Commissions may be changed by Company at any time without advance notice.
However, this policy shall not be applied retroactively to divest any
Registered Representative of specific commission amounts already due
him/her.
Registered Representative agrees not to share commissions with
non-qualified representatives or with clients.
Under certain circumstances, i.e., termination of agents subject to
variable contract commission vesting, retirement or death, Registered
Representative or his/her estate may be entitled to receive continuing
commissions from Company for transactions conducted prior to the cessation
of his/her service with Company. Continuing commissions will be paid based
on vesting schedules established and published by Company, as may be
amended from time-to-time.
If Company or any issuer or sponsor returns or waives payments on any
application or order, commissions will not be due or payable on the
payments. Registered Representative shall repay to Company on demand any
commissions already received by Registered Representative with respect to
such returned or waived payments.
Where cancellation of any Investment Products and Services order results
in expense or loss to Company, Registered Representative is liable for
reimbursement to Company of the expense or loss including but not limited
to any sales charge levied by an issuer and any decline in the price of an
Investment Product, as of the time of cancellation.
In the event Registered Representative becomes party to a Career Builder
Supplemental Agreement (Supplemental Agreement) with First Allmerica
Financial Life Insurance Company ("First Allmerica"), and its affiliate,
Allmerica Financial Life Insurance and Annuity Company, commissions
payable under this Registered Representative's Agreement will be credited
to the Reserve Account described in such Supplemental Agreement during the
period such Supplemental Agreement is in effect and will be paid to
Registered Representative only as provided therein.
Company reserves the right to pay commissions to the Registered
Representative for Investment Products and Services sold or performed by
utilizing one check issued by Allmerica Financial or one of its
wholly-owned subsidiaries. Such check may also contain compensation for
traditional life, health and disability policies as well as other products
and services sold by Registered Representatives through Allmerica
Financial.
9. RIGHT OF OFF-SET: Company, for its own benefit and/or the benefit of its
affiliates, will have a lien on any commissions and other compensation
payable under this Agreement, and may deduct any monies owed Company or
affiliates from such commissions or other compensation to the extent
permitted by law.
10. TERMINATION FOR CAUSE: If Registered Representative withholds or
misappropriates monies, securities, certificates, payments, receipts,
"sells-away," commits any willful or dishonest act which, in the sole
discretion of Company, is detrimental to Company, or fails to comply with
any of the conditions, duties or obligations of this Agreement, this
Agreement will immediately terminate without notice.
11. TERMINATIONS WITHOUT CAUSE: Registered Representative or company may
terminate this Agreement without cause during the first twelve (12) months
following the date this Agreement is executed by providing ten (10) days'
notice in writing to the other party of the intention to terminate. After
the first twelve (12) months, Registered Representative or Company may
terminate this Agreement without cause upon thirty (30) days' notice in
writing of the intention to terminate.
In the event Registered Representative terminates his/her Career Agent
Agreement with First Allmerica Financial Life Insurance Company, this
Agreement will be terminated upon written notice as described herein.
12. RELATIONSHIP OF PARTIES: Nothing contained in this Agreement is to be
construed to create the relationship of employer and employee between
Company and Registered Representative or between Company's General Agent
and Registered Representative. Registered Representative shall exercise
his/her own judgment concerning the individual(s) to whom he/she will
solicit Investment Products and Services as well as the time, place and
manner of the solicitations. Registered Representative, however, shall
comply with all applicable laws, rules and regulations of the SEC, NASD,
federal and state authorities as well as Company's rules, regulations
and procedures concerning the conduct of Investment Products and
Services business, as may be amended from time-to-time.
13. EFFECTIVENESS OF CONTRACT: This Agreement constitutes the entire contract
between Registered Representative and Company.
Registered Representative accepts the appointment, subject to all of the
conditions and provisions set forth in this Agreement. This Agreement
supersedes all previous agreements, whether oral or written between the
parties, and no modification, except to attached Compensation Schedules
(if any), will be valid unless made in writing and signed by both parties.
IN WITNESS WHEREOF, this Agreement has been executed by the undersigned on the
____________________________________ day of
_________________________ ,19 _______. Allmerica Investments, Inc.
By__________________________
__________________________________ ____________________________
Registered Representative General Agent
<PAGE>
INDEMNIFICATION AGREEMENT
INDEMNIFICATION AGREEMENT (the "Agreement") made by and between SCUDDER
KEMPER INVESTMENTS, INC., a Delaware corporation ("Scudder Kemper"), with a
principal place of business in Boston, Massachusetts and [NAME OF INSURANCE
COMPANY], a [STATE OF INCORPORATION] corporation (the "Company"), with a
principal place of business in [PRINCIPAL PLACE OF BUSINESS - CITY, STATE] on
behalf of the [SEPARATE ACCOUNT NAME], a separate account of the Company, and
any other separate account of the Company as designated by the Company from time
to time, upon written notice to the Fund in accordance with Section 8 herein
(the "Account").
WHEREAS, Scudder Kemper has caused to be organized Scudder Variable Life
Investment Fund (the "Fund"), a Massachusetts business trust created under a
Declaration of Trust dated March 15, 1985, as amended, the beneficial interest
in which is divided into several series, each designated a "Portfolio" and
representing the interest in a particular managed portfolio of securities, each
of which series (except Money Market Portfolio) is divided into two classes of
shares of beneficial interest; and
WHEREAS, the purpose of the Fund is to act as the investment vehicle for
the separate accounts established for variable life insurance policies and
variable annuity contracts to be offered by insurance companies which have
entered into indemnification agreements substantially identical to this
Agreement; and
WHEREAS, the parties desire to express their agreement as to certain other
matters;
NOW THEREFORE, in consideration of the foregoing and the mutual covenants
and agreements hereinafter contained, the parties hereto agree as follows:
1. ADDITIONAL DEFINITIONS.
For purposes of this Agreement, the following definitions shall apply:
(a) "Shares" means shares of beneficial interest, without par value,
of any class of any Portfolio, now or hereafter created, of the Fund.
<PAGE>
2. ACCESS TO OTHER PRODUCTS.
Scudder Kemper shall permit an Account to participate in any registered
investment company other than the Fund which is intended as the funding vehicle
for insurance products and for which Scudder Kemper or an affiliate of Scudder
Kemper acts as investment adviser, on the same basis as other insurance
companies are permitted to participate in such a registered investment company.
This provision shall not require Scudder Kemper to make available to the Company
shares of any investment company which is organized solely as the funding
vehicle for insurance products offered by a single insurance company or a group
of affiliated insurance companies.
3. RIGHT TO REVIEW AND APPROVE SALES MATERIALS.
The Company shall furnish, or shall cause to be furnished, to Scudder
Kemper or its designee, at least twenty days prior to its intended use, each
piece of promotional material in which Scudder Kemper or the Fund is named. No
such material shall be used unless Scudder Kemper or its designee shall have
approved such use in writing, or twenty days shall have elapsed without
approval, rejection or objection since receipt by Scudder Kemper or its designee
of such material.
Scudder Kemper shall furnish, or shall cause to be furnished, to the
Company or its designee, at least twenty days prior to its intended use, each
piece of promotional material in which the Company or its separate account(s) is
named. No such material shall be used unless the Company or its designee shall
have approved such use in writing, or twenty days shall have elapsed without
approval, rejection or objection since receipt by the Company or its designee of
such material.
4. SALES ORGANIZATION MEETINGS.
Representatives of Scudder Kemper or its designee shall meet with the sales
organizations of the Company at such reasonable times and places as may be
agreed upon by the Company and Scudder Kemper or its designee for the purpose of
educating sales personnel about the Fund.
5. DURATION.
This Agreement shall continue in effect for five (5) years from the date of
its execution, except that the obligation of each party hereto to indemnify the
other party hereto shall continue with respect to all losses, claims, damages,
liabilities or litigation based upon the acquisition of Shares
2
<PAGE>
purchased as the funding vehicle for any variable life insurance policy or
variable annuity contract issued by the Company or any affiliated insurance
company.
6. INDEMNIFICATION.
(a) The Company agrees to indemnify and hold harmless Scudder Kemper and
each of its directors and officers and each person, if any, who controls Scudder
Kemper within the meaning of Section 15 of the Securities Act of 1933 (the
"Act") or any person, controlled by or under common control with Scudder Kemper
("affiliate") against any and all losses, claims, damages, liabilities or
litigation (including legal and other expenses) to which Scudder Kemper or such
directors, officers or affiliate may become subject under the Act, under any
other statute, at common law or otherwise, arising out of the acquisition of any
Shares by any person which (i) may be based upon any wrongful act by the
Company, any of its employees or representatives, any affiliate of or any person
acting on behalf of the Company or a principal underwriter of its insurance
products, or (ii) may be based upon any untrue statement or alleged untrue
statement of a material fact contained in a registration statement or prospectus
covering Shares 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 information furnished to Scudder
Kemper or the Fund by the Company, provided, however, that in no case (i) is the
Company's indemnity in favor of a director or officer or any other person deemed
to protect such director or officer or other person against any liability to
which any such person would otherwise be subject by reason of willful
misfeasance, bad faith, or gross negligence in the performance of his duties or
by reason of his reckless disregard of obligations and duties under this
Agreement or (ii) is the Company to be liable under its indemnity agreement
contained in this Paragraph 6 with respect to any claim made against Scudder
Kemper or any person indemnified unless Scudder Kemper or such person, as the
case may be, shall have notified the Company in writing pursuant to Paragraph 8
within a reasonable time after the summons or other first legal process giving
information of the nature of the claims shall have been served upon Scudder
Kemper or upon such person (or after Scudder Kemper or such person shall have
received notice of such service on any designated agent), but failure to notify
the Company of any such claim shall not
3
<PAGE>
relieve the Company from any liability which it has to Scudder Kemper or any
person against whom such action is brought otherwise than on account of the
indemnity agreement contained in this Paragraph 6. The Company shall be
entitled to participate, at its own expense, in the defense, or, if it so
elects, to assume the defense of any suit brought to enforce any such liability,
but, if it elects to assume the defense, such defense shall be conducted by
counsel chosen by it and satisfactory to Scudder Kemper, to its officers and
directors, or to any affiliates, defendant or defendants in the suit. In the
event that the Company elects to assume the defense of any such suit and retain
such counsel, Scudder Kemper, such officers and directors or affiliates,
defendant or defendants in the suit, shall bear the fees and expenses of any
additional counsel retained by them, but, in case the Company does not elect to
assume the defense of any such suit, the Company will reimburse Scudder Kemper,
such officers and directors or affiliates, defendant or defendants in such suit,
for the reasonable fees and expenses of any counsel retained by them. The
Company agrees promptly to notify Scudder Kemper pursuant to Paragraph 8 of the
commencement of any litigation or proceedings against it in connection with the
issue and sale of any Shares.
(b) Scudder Kemper 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 Act against any and all losses,
claims, damages, liabilities or litigation (including legal and other expenses)
to which it or such directors, officers or controlling persons may become
subject under the Act, under any other statute, at common law or otherwise,
arising out of the acquisition of any Shares by any person which (i) may be
based upon any wrongful act by Scudder Kemper, any of its employees or
representatives or a principal underwriter of the Fund, or (ii) may be based
upon any untrue statement or alleged untrue statement of a material fact
contained in a registration statement or prospectus covering Shares 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 statement or omission was made in
reliance upon information furnished to the Fund or the Company by Scudder
Kemper; provided, however, that in no case (i) is Scudder Kemper's indemnity in
favor of a director or officer or any other person deemed to protect such
director or officer or other person against any liability to
4
<PAGE>
which any such person would otherwise be subject by reason of willful
misfeasance, bad faith, or gross negligence in the performance of his duties or
by reason of his reckless disregard of obligations and duties under this
Agreement or (ii) is Scudder Kemper to be liable under its indemnity agreement
contained in this Paragraph 6 with respect to any claims made against the
Company or any such director, officer or controlling person unless the Company
or such director, officer or controlling person, as the case may be, shall have
notified Scudder Kemper in writing pursuant to Paragraph 8 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 it or upon such director,
officer or controlling person (or after the Company or such director, officer or
controlling person shall have received notice of such service on any designated
agent), but failure to notify Scudder Kemper of any claim shall not relieve it
from any liability which it may have to the person against whom such action is
brought otherwise than on account of its indemnity agreement contained in this
Paragraph 6. Scudder Kemper will be entitled to participate at its own expense
in the defense, or, if it so elects, to assume the defense of any suit brought
to enforce any such liability, but if Scudder Kemper elects to assume the
defense, such defense shall be conducted by counsel chosen by it and
satisfactory to the Company, its directors, officers or controlling person or
persons, defendant or defendants, in the suit. In the event Scudder Kemper
elects to assume the defense of any such suit and retain such counsel, the
Company, its directors, officers or controlling person or persons, defendant or
defendants in the suit, shall bear the fees and expenses of any additional
counsel retained by them, but, in case Scudder Kemper does not elect to assume
the defense of any such suit, it will reimburse the Company or such directors,
officers or controlling person or persons, defendant or defendants in the suit,
for the reasonable fees and expenses of any counsel retained by them. Scudder
Kemper agrees promptly to notify the Company pursuant to Paragraph 8 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 any Shares.
(c) Scudder Kemper agrees to indemnify and hold harmless the Company and
each of its directors and officers against any and all losses, claims, damages,
liabilities or litigation arising from the imposition of additional federal
income taxes on the Company or any policyholder solely as a
5
<PAGE>
result of a Final Determination that any Portfolio has failed (x) to comply with
the diversification requirements of section 817(h) of the Internal Revenue Code
of 1986, as amended (the "Code"), relating to the diversification requirements
for variable annuity, endowment and life insurance contracts, or (y) to qualify
as a regulated investment company within the meaning of section 851 of the Code;
PROVIDED, HOWEVER, that (i) Scudder Kemper shall have no liability under this
Paragraph 6(c) if such failure is caused by a third party who is not an employee
or agent of Scudder Kemper (E.G., the Fund's custodian or another service
provider), and (ii) in no case is Scudder Kemper's indemnity under this
Paragraph 6(c) deemed to protect any person against any liability to which that
person would otherwise be subject by reason of willful misfeasance, bad faith or
gross negligence in the performance of that person's duties or by reason of
reckless disregard by that person of obligations under this Agreement.
The Company agrees that if the Internal Revenue Service asserts in
writing in connection with any governmental audit or review of the Company or,
to the Company's knowledge, of any policyholder, that any Portfolio has failed
to comply with the diversification requirements of section 817(h) of the Code or
the Company otherwise becomes aware of any facts that could give rise to any
claim against Scudder Kemper as a result of such a failure or alleged failure,
(i) the Company shall promptly notify Scudder Kemper of such assertion or
potential claim; (ii) the Company shall consult with Scudder Kemper as to how to
minimize any liability that may arise as a result of such failure or alleged
failure; (iii) the Company shall use its best efforts to minimize any liability
of Scudder Kemper for indemnification resulting from such failure, including,
without limitation, demonstrating, pursuant to Treasury Regulations Section
1.817-5(a) (2), to the Commissioner of the Internal Revenue Service that such
failure was inadvertent; (iv) the Company shall permit Scudder Kemper and its
legal and accounting advisors to participate in any conferences, settlement
discussions or other administrative or judicial proceedings or contests
(including judicial appeals thereof) with the Internal Revenue Service, any
policyholder or any other claimant regarding any claims that could give rise to
indemnification by Scudder Kemper as a result of such a failure or alleged
failure; (v) any written materials to be submitted by the Company to the
Internal Revenue Service, any policyholder or any other claimant in connection
with any of the foregoing proceedings
6
<PAGE>
or contests (including, without limitation, any such materials to be submitted
to the Internal Revenue Service pursuant to Treasury Regulations Section
1.817-5(a) (2)), (a) shall be provided by the Company to Scudder Kemper
(together with any supporting information or analysis) at least 10 business days
prior to the day on which such proposed materials are to be submitted and (b)
shall not be submitted by the Company to any such person without the express
written consent of Scudder Kemper, which shall not be unreasonably withheld;
(vi) the Company shall provide Scudder Kemper and its advisors with such
cooperation as Scudder Kemper shall reasonably request (including, without
limitation, by permitting Scudder Kemper and its accounting and legal advisors
to review the relevant books and records of the Company) in order to facilitate
Scudder Kemper's review of any written submissions provided to it pursuant to
the preceding clause or its assessment of the validity or amount of any claim
against it arising from such a failure or alleged failure; (vii) the Company
shall not with respect to any claim of the IRS or any policyholder that would
give rise to a claim for indemnification against Scudder Kemper (a) compromise
or settle any claim, (b) accept any adjustment on audit, or (c) forego any
allowable judicial appeals, without the express written consent of Scudder
Kemper, which shall not be unreasonably withheld, PROVIDED that the Company
shall not be required to appeal any adverse judicial decision unless Scudder
Kemper shall have provided an opinion of independent counsel to the effect that
a reasonable basis (consistent with Formal Opinion 85-352 of the American Bar
Association) exists for taking such appeal; and (viii) Scudder Kemper shall have
no liability as a result of such failure or alleged failure if the Company fails
to comply with any of the foregoing clauses (i) through (vii). Should Scudder
Kemper refuse to give its written consent to any compromise or settlement of any
claim or liability hereunder, the Company may, in its discretion, authorize
Scudder Kemper to act in the name of the Company in, and to control the conduct
of, such conferences, discussions, proceedings, contests or appeals and all
administrative or judicial appeals thereof, and in that event Scudder Kemper
shall bear the fees and expenses associated with the conduct of the proceedings
that it is so authorized to control.
For purposes of this Paragraph 6(c), "Final Determination" shall mean, with
respect to any claim, a settlement of such claim (including the acceptance of an
adjustment proposed by the Internal Revenue Service) or a decision of a court of
competent jurisdiction with respect to such claim that
7
<PAGE>
has become final after either the (i) exhaustion of allowable appeals or (2)
expiration of the time to take any such appeal with respect to the claim.
7. MASSACHUSETTS LAW TO APPLY.
This Agreement shall be construed and the provisions hereof interpreted
under and in accordance with the laws of The Commonwealth of Massachusetts.
8. 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 Scudder Kemper:
Scudder Kemper Investments, Inc.
Two International Place
Boston, Massachusetts 02110
(617) 295-2275
Attn: David B. Watts
If to the Company:
[PARTICIPATING INSURANCE COMPANY, ADDRESS AND ATTN:]
9. MISCELLANEOUS.
The captions in the 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. This Agreement may be executed
simultaneously in two or more counterparts, each of which taken together shall
constitute one and the same instrument.
8
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to
be executed in its name and behalf by its duly authorized representative and its
seal to be hereunder affixed hereto as of the ___ day of ________, 1998.
SEAL SCUDDER KEMPER INVESTMENTS, INC.
By:
---------------------------
Authorized Officer
SEAL [PARTICIPATING INSURANCE
COMPANY]
By:
---------------------------
Name:
Title:
9
<PAGE>
AGREEMENT FOR LOCKBOX SERVICES
This Agreement is entered into as of July 1, 1997, by and between Boston
Financial Data Services Inc. ("BFDS") and First Allmerica Financial Life
Insurance Company, its subsidiaries and affiliates ("Customer") for the
lockbox services provided in the Exhibit(s) attached hereto and hereby made a
part of this Agreement.
WHEREFORE the parties hereto in consideration of the mutual covenants
contained herein and intending to be legally bound, agree as follows:
A. SERVICES:
Upon Customer's authorization of the postmaster in Boston to permit employees
of BFDS to access the P.O. Box specified and subject to the terms and
conditions of this Agreement, BFDS hereby agrees to provide Customer with the
services described in the Exhibit(s) attached hereto.
B. INVOICES:
As compensation for services hereunder, Customer shall pay BFDS mutually
agreed upon fees and expenses as specified in Exhibit _A_. These fees will
remain in effect for a period of three years with an allowable increase in
year two and three no greater than the calculated Northeast CPI for the
previous period. In addition, BFDS will charge such account for all
reasonable out-of-pocket expenses, such as courier fees, incurred by BFDS in
connection with any rent paid by BFDS for the P.O. Box. Payment on all
invoices submitted by BFDS shall be due net thirty (30) days from receipt of
invoice.
C. TERMINATION:
This Agreement may be terminated by either party with material cause at any
time by 30 days prior written notice to the other, and without cause at any
time by 90 days prior written notice to the other. Either party may
terminate this Agreement at any time on notice to the other in the event of
dissolution or insolvency or the commencement of any proceedings under any
bankruptcy or insolvency law by or against the other.
D. LIABILITY AND INDEMNIFICATION:
Notwithstanding anything to the contrary contained herein, neither party, in
performing its duties under this Agreement, shall be liable to the other
except for gross negligence or willful misconduct. Neither party shall be
liable for special or consequential damages. BFDS shall maintain fidelity
bonding of at least $1,000,000.00 for claims arising from fraudulent or
dishonest acts on the part of any BFDS employee, which shall be underwritten
by reputable insurer(s) licensed to do business in the Commonwealth of
Massachusetts and having an A. M. Best rating of "A" or better. Within ten
(10) days from Customer's request therefor, BFDS shall provide to Customer
either (a) copies of all relevant insurance policies, or (b) Certificates of
Insurance reasonably specifying the policies required hereunder.
E. FORCE MAJEURE:
Neither party shall be responsible for delays or failure in performance
resulting from causes beyond its control, including, without limitation, acts
of God, riots, acts of war, governmental regulations, fire, communication
line failures, power failures, earthquakes, or other disasters.
F. NO ADVERTISEMENT:
BFDS shall not (a) make any mention of this Agreement in any advertisement or
promotional material; or (b) issue or release any publicity statement or
release concerning this Agreement or the services provided, or to be
provided,
<PAGE>
hereunder, without the written consent of Customer being first obtained.
G. SOLICITATION:
BFDS shall not solicit any of Customer's employees while said employees are
employed by Customer, and for one (1) year following the date that Customer's
employee has terminated employment with Customer, unless otherwise expressly
agreed in writing by Customer.
H. CONFIDENTIALITY:
As used herein, the term "confidential information" shall mean non-public
information that either party designates as confidential, or which, under the
circumstances, ought to be treated as confidential. Confidential information
may be in any tangible form, including without limitation written or printed
text or documents, audio or video tapes, CD's or disks and computer disks or
tapes, whether in machine readable or user readable form. Confidential
information shall include without limitation information relating directly or
indirectly to the marketing or promotion of either party's products, released
or unreleased software or other programs, trade secrets, business policies
and/or practices, and any information received by or about third parties,
including claimants, that either party is obligated to treat as confidential.
Customer and BFDS hereby acknowledge and agree that, in providing sufficient
information or access to BFDS to allow BFDS to perform in accordance with
this Agreement, or otherwise allowing BFDS to perform as required hereunder,
Customer and/or its agents, servants, customers or employees may disclose to
BFDS, or BFDS may otherwise obtain, certain information that is confidential
and/or proprietary to Customer and/or its agents, servants, employees,
customers or the dependents thereof. Customer and BFDS hereby also
acknowledge and agree that, in providing sufficient information or access to
Customer to allow Customer to perform in accordance with this Agreement, or
otherwise allowing Customer to perform as required hereunder, BFDS and/or its
agents, servants, customers or employees may disclose to Customer, or
Customer may otherwise obtain, certain information that is confidential
and/or proprietary to BFDS and/or its agents, servants, employees, customers
or the dependents thereof. Accordingly, the parties hereby agree to keep
such information confidential and prevent its unauthorized disclosure. Each
party shall: (a) not make any copies of the other's (and/or its agents'
servants' or employees', or customers') confidential information without
first obtaining the written consent of such other and/or the appropriate
individual(s) therefor; (b) not utilize any confidential information of the
other (and/or any confidential information of its agents, servants,
employees, or customers) except in the furtherance of the obligations and
responsibilities specified hereunder, and for no other purpose(s) whatsoever;
and (c) return any such confidential information in its possession to the
other immediately upon (i) the other's demand therefor, (ii) the
accomplishment of the purpose for which such confidential information is or
was held or obtained, or (iii) the expiration or other termination of this
Agreement. In the event of any breach or threatened breach by either party
(or any of either party's agents, servants, vendors, principles, owners,
affiliated persons or employees) of the covenants, agreements and/or
conditions contained in this section, the other party and/or the appropriate
agents, servants, employees, claimants, or customers shall be entitled to an
injunction prohibiting such breach in addition to any other legal and/or
equitable remedies available to them and/or the appropriate individual(s) in
connection with such breach. The parties acknowledge that any confidential
information disclosed to it is valuable, proprietary and unique and that any
disclosure thereof in breach of this Agreement shall result in irreparable
harm. The agreements, covenants and conditions contained in this section
shall survive the expiration or any earlier termination of this Agreement.
I. ASSIGNMENT:
II.
Notwithstanding the foregoing, Customer may, without the consent of BFDS,
assign or transfer this Agreement to any present or future affiliate or
<PAGE>
subsidiary of First Allmerica Financial Life Insurance Company. BFDS agrees
to release Customer from all obligations under this Agreement in the event
that such obligations are assumed under the preceding sentence by a
corporation or entity whose financial responsibility is equivalent to or
greater than that of Customer. As used herein, the term "Customer" shall
include First Allmerica Financial Life Insurance Company and all of its
present or future affiliates or subsidiaries, including without limitation
all corporate successors of any of the foregoing that may result from merger,
consolidation, reorganization, demutualization or conversion. As used
herein, the term "affiliate" shall include any entity controlling, controlled
by or under common control with, First Allmerica Financial Life Insurance
Company, or which following a merger, consolidation, demutualization or
reorganization involving First Allmerica Financial Life Insurance Company is
controlled by an entity that controlled First Allmerica Financial Life
Insurance Company or that First Allmerica Financial Life Insurance Company
controlled or that was under common control with First Allmerica Financial
Life Insurance Company, in each case, prior to such merger, consolidation,
demutualization or reorganization. BFDS may not, without the consent of
Customer, assign or transfer this Agreement to any present or future
affiliate or subsidiary of Boston Financial Data Services, Inc.
J. NOTICE:
Any notice under this Agreement shall be deemed to have been given if sent by
mail, postage prepaid, to the following addresses: if to Customer - First
Allmerica Financial Life Insurance Company, 440 Lincoln Street, Worcester, MA
01653, Attn: Manager, Cash Management, N479; or such other address as
Customer may designate by written notice to BFDS; if to BFDS - Boston
Financial Data Service, Inc., 2 Heritage Drive, No. Quincy, MA 02171,
Attention: Cash Management Services, 1st Floor.
K. SEVERABILITY:
Each and every covenant, provision, term and clause contained in this
Agreement is severable from the others, and each such covenant, provision,
term and clause shall be valid and effective notwithstanding the invalidity
or unenforceability of any other such covenant, provision, term or clause.
L. ENTIRE AGREEMENT:
This Agreement constitutes the entire Agreement between the parties hereto
and supersedes any prior agreement with respect to the subject matter hereof,
whether written or oral, and may not be changed or otherwise terminated,
orally or otherwise, except as expressly provided herein or by an instrument
in writing signed by a duly authorized representative of Customer and BFDS.
M. GOVERNING LAW:
This Agreement shall be governed by the laws of the Commonwealth of
Massachusetts.
The Exhibits attached hereto are hereby made a part of this Agreement.
Additional Exhibits may be added to this Agreement if set forth in a writing
signed by a duly authorized representative of both parties. If any terms are
inconsistent between this Agreement and any Exhibits attached hereto, the
terms of this Agreement shall prevail.
IN WITNESS WHEREOF, the parties hereto by their duly authorized
representatives have executed this Agreement effective as of the date first
written above.
BOSTON FINANCIAL DATA SERVICES, INC.
BY: /s/ STEPHEN HILL
<PAGE>
EXHIBIT A
(ALLMERICA FINANCIAL FEE PROPOSAL BOSTON FINANCIAL DATA SERVICES MAY 1997)
(REV. 7-14-97)
<PAGE>
Allmerica Financial
440 Lincoln Street
Worcester, MA 01653
Re: Retail Lockbox Agreement (Page 1 of 3)
Boston Financial Data Services Inc, ("BFDS") is pleased to establish a
lockbox service for your organization. The lockbox will be operated in
conjunction with Post Office Box No (the "P.O. Box") (See Attached) Boston,
MA, our unique zip code of 02266, and your deposit account(s) at Bank of
Boston entitled (the "Account").
We understand that you have authorized the postmaster in Boston to
permit employees of BFDS to access the P.O. Box. Subject to the terms of
this Agreement, BFDS hereby agrees to provide the following services:
1. BFDS will collect all mail received at the P.O. Box at
various times each day.
2. All checks removed by BFDS from the P.O. Box will be deposited
into the Account as instructed within the client's operating
procedures.
3. BFDS shall not have any responsibilities to read any letter
or other communication received in the P.O. Box, although
checks received with any letter or other communication will
be deposited in the Account. Likewise, any post-dated check
which BFDS determines will be received by the drawee bank by
the date of such check will be deposited in the Account.
BFDS is authorized to endorse checks deposited in the Account
with the endorsement "absence of endorsement guaranteed" or
other similar endorsements and you agree to indemnify BFDS
against any loss, cost or expense resulting from such
endorsement.
4. All processing, depositing and collection of checks shall be
subject to the established procedures followed from time to
time by BFDS in connection with any regular deposit received
by BFDS.
5. Checks returned unpaid because of insufficient funds will be
automatically forwarded for collection a second time; if
unpaid after the second presentation, such checks, together
with advice of debit, will be sent to you.
6. As compensation for services hereunder, you shall pay BFDS mutually
agreed upon fees and expenses.
These fees are to be applied to your account and will remain in effect
for a period of three years with an allowable increase in year two and
three no greater than the calculated Northeast CPI for the previous
period. In addition, BFDS will charge the Account for all out-of-pocket
expenses, such as courier fees, incurred by BFDS in connection with any
rent paid by BFDS for the P.O. Box.
7. This Agreement may be terminated by either party at any time by 90- days
prior written notice to the other, provided that BFDS may terminate this
Agreement at any time on notice to you in the event of your dissolution
or
<PAGE>
insolvency or the commencement of any proceedings under any bankruptcy or
insolvency law or by or against you.
8. BFDS, in performing its duties under this Agreement, shall not be liable
to you except for gross negligence or willful misconduct. BFDS shall
not be responsible for delays or failure in performance resulting from
causes beyond its control including, without limitation, acts of God,
strikes, lockouts, riots, acts of war, governmental regulations, fire,
communication line failures, power failures, earthquakes or other
disasters. BFDS shall also not be liable for special or consequential
damages.
9. Any notice under this Agreement shall be deemed to have been given if
sent by mail, postage prepaid, to the following addresses: If to you,
the address set forth on page one hereof, or to such other address as
you may designate by written notice to BFDS; if to BFDS, Boston
Financial Data Service, Inc., 2 Heritage Drive, No. Quincy, MA 02171,
Attention: Cash Management Services, 1st Floor.
10. This Agreement constitutes the entire Agreement between the parties
hereto and supersedes any prior agreement with respect to the subject
matter hereof, whether written or oral.
11. BFDS hereby agrees that all records which it maintains on behalf of
Allmerica are property of Allmerica, and further agrees to surrender
promptly to Allmerica such records upon Allmerica's request. However,
BFDS has the right to make copies of such records, in its discretion.
To the extent that any records maintained on behalf of Allmerica are
subject to section 31a-1 under the Investment Company Act of 1940 ("1940
Act"), BFDS agrees to preserve such records for the periods prescribed
by rule 31a-2 under the 1940 Act.
12. 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 conjunction
with any investigation or inquiry relating to the services to be
provided by BFDS. Notwithstanding the generality of the foregoing, each
party hereto further agrees to furnish the Insurance Commissioner of any
state with any information or reports in connection with services
provided under this Agreement which such Commissioner may reasonably
request in order to ascertain whether the variable contracts operations
of Allmerica are being conducted in a manner consistent with the state's
regulations concerning variable contracts and any other applicable law
or regulation.
13. This Agreement shall be governed by the laws of the Commonwealth of
Massachusetts.
BOSTON FINANCIAL DATA SERVICES INC.
BY: /s/ Stephen Hill
TITLE: Vice President
DATE: 11/4/97
ALLMERICA FINANCIAL
BY: /s/ Edward A. Ostrout
TITLE: Assistant Treasurer
DATE: 11/5/97
<PAGE>
Service Level Agreement
Boston Financial Data Services
First Allmerica Financial Life Insurance Company
and
Allmerica Financial Life Insurance and Annuity Company
THIS AGREEMENT is entered into as of this _____ day of January, 1998 by and
among First Allmerica Financial Life Company and Allmerica Financial Life
Insurance and Annuity Company (collectively, "Allmerica") and Boston Financial
Data Services, Inc., ("BFDS").
WHEREAS, Allmerica and BFDS have entered into a Retail Lockbox Agreement and
Allmerica wishes to obtain from BFDS additional mailroom services in connection
with said Retail Lockbox Agreement,
NOW, THEREFORE, in consideration of their mutual promises, Allmerica and BFDS
hereby agree as follows:
1. SERVICES
BFDS hereby agrees to provide Customer with Services ("Services")
according to the specifications ("Service Levels") described in the
following Exhibits(s), which are attached hereto and made a part of this
Agreement:
1. Exhibit B "Boston Financial Data Services--Operations Support Services--
Service
Level Agreement--Allmerica Financial"
2. Exhibit C "Allmerica Financial--Notes for BFDS on Allmerica's intended
Procedures"
Additional Exhibits may be added to this Agreement if set forth in a writing
signed by duly authorized representatives of both parties. If any terms are
inconsistent between this Agreement and any exhibits attached hereto, the
terms of this Agreement shall prevail.
Material failure to provide the Services and Service Levels set forth in the
Exhibits shall be considered a Default for the purposes of section 4.
TERMINATION.
2. COMPENSATION
As compensation for services hereunder, Customer shall pay BFDS mutually
agreed upon fees and expenses as specified in Exhibit A.
<PAGE>
3. LIMITATION OF LIABILITY
Notwithstanding anything to the contrary contained herein, neither party, in
performing its duties under this Agreement, shall be liable to the other
except for gross negligence or willful misconduct. Neither party shall be
liable for special or consequential damages. BFDS shall maintain fidelity
bonding of at least $1,000,000 for claims arising from fraudulent or
dishonest acts on the part of any BFDS employee, which shall be underwritten
by reputable insurers(s) licensed to do business in the Commonwealth of
Massachusetts and having an A.M. Best rating of "A" or better. Within ten
(10) days from Customer's request therefor, BFDS shall provide to Customer
either (a) copies of all relevant insurance Policies, or (b) Certificates of
Insurance reasonably specifying the policies required hereunder.
Neither party shall not responsible for delays or failure in performance
resulting from causes beyond its control including, without limitation,
acts, of God, strikes, lockouts, rots, acts of war, governmental
regulations, fire, communication line failures, power failures, earthquakes
or other disasters.
4. TERMINATION
This Agreement may be terminated: (a) by either party at any time by 90 days
prior written notice to the other; (b) at any time by mutual written consent
of the parties; or (c) by either party immediately, upon notice to the other
party that the other party is in Default. The occurrence of any one or more
of the following events shall constitute a Default under the Agreement by
the party to whom the event relates:
(a) Any failure or refusal by a party to substantially perform or satisfy
any material term or condition of the Agreement, if such failure or
refusal continues for more than 30 days after the earlier of (i) notice
thereof to such defaulting party by the other party, or (ii) actual
knowledge by the failing party that it is failing to perform or satisfy a
material term or condition of the Agreement.
(b) The voluntary or involuntary bankruptcy or insolvency of a party, the
voluntary or involuntary dissolution or liquidation of a party, the
admission in writing by a party of its inability to pay its debts as
they mature, or the assignment by a party for the benefit of creditors.
- 2 -
<PAGE>
5. 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:
Boston Financial Data Services, Inc.
2 Heritage Drive
North Quincy, MA 02171
If to Allmerica:
First Allmerica Financial Life Insurance Company
440 Lincoln Street
Worcester, MA 01653
Attention: William Hayward, Vice President
Allmerica Financial Life Insurance and Annuity Company
440 Lincoln Street
Worcester, MA 01653
Attention: William Hayward, Vice President
6. RECORDS
BFDS hereby agrees that all records which it maintains on behalf of
Allmerica are the property of Allmerica, and further agrees to surrender
promptly to Allmerica such records upon Allmerica's request. However, BFDS
has the right to make copies of such records, in its discretion. To the
extent that any records maintained on behalf of Allmerica are subject to
section 312a-1 under the Investment Company Act of 1940 ("1940 Act") BFDS
agrees to preserve such records for the periods prescribed by Rule 31a-2
under the 1940 Act.
7. COUNTERPARTS
This Agreement may be executed simultaneously in two or more counterparts,
each of which taken together shall constitute one and the same instrument.
8. SEVERABILITY
Each and every covenant, profession, term and clause contained in this
Agreement is severable from the others, and each such covenant, provision,
term and clause shall be valid and effective notwithstanding the invalidity
or unenforceability of any other such covenant, provision, term, or clause.
If any provision of the 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.
- 3 -
<PAGE>
9. ASSIGNMENT
Customer may, without the consent of BFDS, assign or transfer this Agreement
to any present or future affiliate or subsidiary of First Allmerica
Financial Life Insurance Company. As used herein, the term "affiliate"
shall include any entity controlling, controlled by or under common control
with, First Allmerica Financial Life Insurance Company. BFDS may not,
without the consent of Customer, assign or transfer this Agreement to any
present or future affiliate or subsidiary of BFDS. 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.
10. REGULATORY AUTHORITIES
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 Insurance Commissioner of any state 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 applicable laws and regulations.
11. CAPTIONS
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. CONTROLLING LAW
This Agreement shall be governed by and its provisions shall be construed in
accordance with the laws of the Commonwealth of Massachusetts.
- 4 -
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to
be executed in its name and on behalf by its duly authorized representative
and its seal to be hereunder affixed hereto as of the date specified below.
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
By: /s/ William Hayward
-----------------------------------------------------
Title: Vice President & Managing Director
-----------------------------------------------------
Date: 2/6/98
-----------------------------------------------------
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
By: /s/ William Hayward
-----------------------------------------------------
Title: Vice President & Managing Director
-----------------------------------------------------
Date: 2/6/98
-----------------------------------------------------
BOSTON FINANCIAL DATA SERVICES, INC.
By: /s/ John E. Ciardi
-----------------------------------------------------
Title: Vice President - Operations Support Services
-----------------------------------------------------
Date: 2/4/98
-----------------------------------------------------
- 5 -
<PAGE>
SERVICES AGREEMENT
The terms and conditions of this Services Agreement between Scudder Kemper
Investments, Inc. (the "Adviser") and Allmerica Financial Life Insurance and
Annuity Company and First Allmerica Financial Life Insurance Company
(collectively, the "Companies") are effective as of ______________, 1998.
WHEREAS, the Companies and Scudder Investor Services, Inc. ("Investor
Services") have entered into a Participating Contract and Policy Agreement dated
____________, 199__, as may be amended from time to time (the "Participation
Agreement"), pursuant to which the Companies, on behalf of certain of its
separate accounts (the "Separate Accounts"), purchases shares ("Shares") of
certain portfolios of Scudder Variable Life Investment Fund (the "Fund," the
portfolios of which are referred to herein as "Portfolios") to serve as an
investment vehicle under certain variable annuity and/or variable life insurance
contracts ("Variable Contracts") offered by the Companies, which Portfolios may
be one of several investment options available under the Variable Contracts; and
WHEREAS, the Adviser recognizes that in the course of soliciting
applications for its Variable Contracts and in servicing owners of the Variable
Contracts, the Companies and its agents that are registered representatives of
broker-dealers provide information about the Fund and its Portfolios from time
to time, answer questions concerning the Fund and its Portfolios, including
questions respecting Variable Contract owners' interests in one or more
Portfolios, and provide services respecting investments in the Portfolios; and
WHEREAS, the Adviser desires that the efforts of the Companies and its
agents in providing written and oral information and services regarding the Fund
to current and prospective Variable Contract owners shall continue; and
WHEREAS, the following represents the collective intention and
understanding of the service fee agreement between the Adviser and the
Companies.
NOW, THEREFORE, in consideration of their mutual promises, the COMPANIES
and THE ADVISER agree as follows:
1. SERVICES. The Companies and/or its affiliates agree to provide
services ("Services") to current and prospective owners of Variable Contracts
including, but limited to: teleservicing support in connection with the
Portfolios; delivery of reports, notices, proxies and proxy statements and other
informational materials; facilitation of the tabulation of Variable Contract
owners' votes in the event of a Fund shareholder vote; maintenance of Variable
Contract records reflecting Shares purchased and redeemed and Share balances;
provision of support services including providing information about the Fund and
its Portfolios and answering questions concerning the Fund and its Portfolios,
including questions respecting Variable Contract owners' interests in one or
more Portfolios; provision and administration of Variable Contract features for
the benefit of Variable Contract owners in connection with the Portfolios
including fund transfers, dollar cost averaging, asset allocation, portfolio
rebalancing, earnings sweep, and
<PAGE>
pre-authorized deposits and withdrawals; and provision of other services as may
be agreed upon from time to time.
2. COMPENSATION. In consideration of the Services, the Adviser agrees to
pay to the Companies a service fee at an annual rate equal to fifteen (15) basis
points (0.15%) (five (5) basis points for the Money Market Portfolio) of the
average daily value of the Shares held in Separate Accounts. Such payments will
be made monthly in arrears, PROVIDED HOWEVER, that such payments shall only be
payable for each calendar month during which time the total dollar value of
Shares held by the Separate Accounts purchased pursuant to the Participation
Agreement exceeds $15 million. For purposes of computing the payment to the
Companies under this paragraph 2, the average daily value of Shares held in
Separate Accounts over a monthly period shall be computed by totaling such
Separate Accounts' aggregate investment (Share net asset value multiplied by
total number of Shares held by such Separate Accounts) on each business day
during the calendar month, and dividing by the total number of business days
during such month. The payment to the Companies under this paragraph 2 shall be
calculated by the Companies at the end of each calendar month and the Companies
shall send a detailed statement of each such fee computation to the Advisor.
Payment shall be due and will be paid to the Companies within 30 days
thereafter.
3. TERM. This Services Agreement shall remain in full force and effect
for an initial term of one year, and shall automatically renew for successive
one year periods. This Services Agreement may be terminated by either party
hereto upon 60 days written notice to the other. This Services Agreement shall
terminate automatically upon the redemption of all Shares held in Separate
Accounts, upon termination of the Participation Agreement, or upon its
assignment by either party hereto. Notwithstanding the termination of this
Services Agreement, the Adviser will continue to pay the service fees in
accordance with paragraph 2 so long as net assets of the Companies or a Separate
Account remain in a Portfolio, provided such continued payment is permitted in
accordance with applicable law and regulation.
4. AMENDMENT. This Services Agreement may be amended only upon mutual
agreement of the parties hereto in writing.
5. EFFECT ON OTHER TERMS, OBLIGATIONS AND COVENANTS. Nothing herein shall
amend, modify or supersede any contractual terms, obligations or covenants among
or between any of the Companies, the Adviser or the Fund previously or currently
in effect, including those contractual terms, obligations or covenants contained
in the Participation Agreement.
2
<PAGE>
IN WITNESS WHEREOF, the parties have caused their duly authorized officers
to execute this Services Agreement.
SCUDDER KEMPER INVESTMENTS, INC. ALLMERICA FINANCIAL LIFE INSURANCE AND
ANNUITY COMPANY
- ----------------------------------- -----------------------------------
By: By:
Title: Title:
Date: Date:
FIRST ALLMERICA FINANCIAL LIFE
INSURANCE COMPANY
- -----------------------------------
By:
Title:
Date:
3
<PAGE>
Exhibit 9
April 15, 1998
First Allmerica Financial Life Insurance Company
440 Lincoln Street
Worcester, MA 01653
RE: SEPARATE ACCOUNT KG OF FIRST ALLMERICA
FINANCIAL LIFE INSURANCE COMPANY
FILE #'S: 333-10285 AND 811-7769
Gentlemen:
In my capacity as Counsel of First Allmerica Financial Life Insurance Company
(the "Company"), I have participated in the preparation of the Post-Effective
Amendment to the Registration Statement for Separate Account KG on Form N-4
under the Securities Act of 1933 and the Investment Company Act of 1940, with
respect to the Company's qualified and non-qualified contracts/certificates.
I am of the following opinion:
1. Separate Account KG is a separate account of the company validly existing
pursuant to the Massachusetts Insurance Code and the regulations issued
thereunder.
2. The assets held in Separate Account KG are not chargeable with liabilities
arising out of any other business the Company may conduct.
3. The individual and group variable annuity contracts/certificates, when
issued in accordance with the Prospectus contained in the Post-Effective
Amendment to the Registration Statement and upon compliance with applicable
local law, will be legal and binding obligations of the Company in
accordance with their terms and when sold will be legally issued, fully
paid and non-assessable.
In arriving at the foregoing opinion, I have made such examination of law and
examined such records and other documents as in my judgment are necessary or
appropriate.
I hereby consent to the filing of this opinion as an exhibit to this
Post-Effective Amendment to the Registration Statement of Separate Account KG
filed under the Securities Act of 1933.
Very truly yours,
/s/ Sylvia Kemp-Orino
Sylvia Kemp-Orino
Assistant Vice President and Counsel
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Statement of Additional Information
constituting part of this Post-Effective Amendment No. 2 to the Registration
Statement of the Separate Account KG of First Allmerica Financial Life
Insurance Company on Form N-4 of our report dated February 3, 1998, relating
to the financial statements of First Allmerica Financial Life Insurance
Company, and our report dated March 25, 1998, relating to the financial
statements of the Separate Account KG--Kemper Gateway Elite of First
Allmerica Financial Life Insurance Company, both of which appear in such
Statement of Additional Information. We also consent to the reference to us
under the heading "Experts" in such Statement of Additional Information.
/s/ Price Waterhouse LLP
Price Waterhouse LLP
Boston, Massachusetts
April 29, 1998
<PAGE>
PARTICIPATION AGREEMENT
AMONG
KEMPER INVESTORS FUND
ZURICH KEMPER INVESTMENTS, INC.
KEMPER DISTRIBUTORS, INC.
and
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
THIS AGREEMENT, made and entered into as of this 5th day of November, 1996 by
and among First Allmerica Financial Life Insurance Company (hereinafter, the
"Company"), a Massachusetts insurance company, on its own behalf and on behalf
of each separate account of the Company set forth on Schedule A hereto as may be
amended from time to time (each account hereinafter referred to as an
"Account"), Kemper Investors Fund, a business trust organized under the laws of
the Commonwealth of Massachusetts (hereinafter the "Fund"), Zurich Kemper
Investments, Inc. (hereinafter the "Adviser"), a Delaware corporation, and
Kemper Distributors, Inc. (hereinafter the "Underwriter"), a Delaware
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 and variable annuity contracts
(hereinafter the "Variable Insurance Products") offered by insurance companies
that have entered into participation agreements with the Fund (hereinafter
"Participating Insurance Companies");
WHEREAS, the beneficial interest in the Fund is divided into several series of
shares, each designated a "Portfolio" and representing the interest in a
particular managed portfolio of securities and other assets;
WHEREAS, the Fund has obtained an order from the Securities and Exchange
Commission ("SEC") 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, if and to the extent necessary to permit shares of
the Fund to be sold to and held by variable annuity and variable life insurance
separate accounts of both affiliated and unaffiliated life insurance companies
(hereinafter the "Shared Funding Exemption Order");
WHEREAS, the Fund is registered as an open-end management investment company
under the 1940 Act and shares of the Portfolios are registered under the
Securities Act of 1933, as amended (hereinafter the "1933 Act");
<PAGE>
WHEREAS, the Adviser is duly registered as an investment adviser under the
Investment Advisers Act of 1940, as amended, and any applicable state securities
laws;
WHEREAS, the Company has registered or will register certain variable life
insurance and variable annuity contracts supported wholly or partially by the
Accounts (the "Contracts") under the 1933 Act, and said Contracts are listed in
Schedule A hereto, as it may be amended from time to time by mutual written
agreement;
WHEREAS, each Account is duly established and maintained as a separate 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 Contracts;
WHEREAS, the Company has registered or will register each Account as a unit
investment trust under the 1940 Act;
WHEREAS, the Underwriter is registered as a broker-dealer with the SEC under the
Securities Exchange Act of 1934, as amended ("1934 Act"), and is a member in
good standing of the National Association of Securities Dealers, Inc. ("NASD");
WHEREAS, to the extent permitted by applicable insurance laws and regulations,
the Company intends to purchase shares of the Portfolios listed in Schedule A
hereto, as it may be amended from time to time at the request of the Fund,
Underwriter and Adviser and with the consent of the Company, which consent will
not be unreasonably withheld ("Designated Portfolios"), on behalf of the
Accounts to fund the aforesaid Contracts, and the Underwriter is authorized to
sell such shares to unit investment trusts such as the Accounts at net asset
value; and
WHEREAS, to the extent permitted by applicable insurance laws and regulations,
the Company also intends to purchase shares in other open-end investment
companies or series thereof not affiliated with the Fund ("Unaffiliated Funds")
on behalf of the Accounts to fund the Contracts if and to the extent that the
Underwriter and the Adviser so agree, in their sole discretion;
NOW, THEREFORE, in consideration of their mutual promises, the Company, the
Fund, the Adviser 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 Designated
Portfolios that the Accounts order, 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 Designated Portfolios.
1.2 The Fund agrees to make shares of each Designated Portfolio available for
purchase at the applicable net asset value per share by the Company and the
Accounts on those days on which the
2
<PAGE>
Fund calculates such Designated Portfolio's net asset value pursuant to rules of
the SEC, and the Fund shall use reasonable efforts to calculate such net asset
value on each day when the New York Stock Exchange is open for trading.
Notwithstanding the foregoing, the Board of Trustees of the Fund ("Board") may
refuse to sell shares of any Designated Portfolio to any person, or suspend or
terminate the offering of shares of any Designated 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 its fiduciary
duties under federal and any applicable state laws, necessary in the best
interest of the shareholders of such Designated Portfolio.
1.3 The Fund and the Underwriter agree that shares of the Fund will be sold only
to Participating Insurance Companies or their separate accounts. No shares of
any Designated Portfolios will be sold to the general public. The Fund and the
Underwriter will not sell shares of any Designated Portfolio to any insurance
company or separate account unless an agreement containing provisions
substantially the same as Sections 2.1, 3.4, 3.5 and 3.6 and Article VII of this
Agreement is in effect to govern such sales.
1.4 The Fund agrees to redeem, on the Company's request, any full or fractional
shares of the Designated Portfolios 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, except that the Fund reserves the
right to suspend the right of redemption or postpone the date of payment or
satisfaction upon redemption consistent with Section 22(e) of the 1940 Act and
any rules thereunder, and in accordance with the procedures and policies of the
Fund as described in the Fund's then current prospectus.
1.5 For purposes of Sections 1.1 and 1.4, the Company shall be the designee of
the Fund for receipt of purchase and redemption orders from the Accounts, and
receipt by such designee shall constitute receipt by the Fund; provided that the
Company receives the order prior to the determination of net asset value as set
forth in the Fund's then current prospectus and the Fund receives notice of such
order by 9:30 a.m. New York 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 SEC.
1.6 The Company agrees to purchase and redeem the shares of each Designated
Portfolio offered by the Fund's then current prospectus in accordance with the
provisions of such prospectus.
1.7 The Company shall pay for shares of a Designated Portfolio on the next
Business Day after receipt of an order to purchase shares of such Designated
Portfolio. Payment shall be in federal funds transmitted by wire by 11:00 a.m.
New York time. If payment in federal funds for any purchase is not received or
is received by the Fund after 11:00 a.m. New York time on such Business Day, the
Company shall promptly, upon the Fund's request, reimburse the Fund for any
charges, costs, fees, interest or other expenses incurred by the Fund in
connection with any advances to, or borrowing or overdrafts by, the Fund, or any
similar expenses incurred by the Fund, as a result of portfolio transactions
effected by the Fund based upon such purchase request. For purposes of Section
2.8 and
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2.9 hereof, 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 shares of a Designated Portfolio will be by
book entry only. Stock certificates will not be issued to the Company or any
Account. Shares of a Designated Portfolio 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 shares of the Designated Portfolios. The Company hereby
elects to receive all such income, dividends, and capital gain distributions as
are payable on shares of a Designated Portfolio in additional shares of that
Designated 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. The Fund shall use its best efforts to furnish
advance notice of the day such dividends and distributions are expected to be
paid.
1.10 The Fund shall make the net asset value per share for each Designated
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. New York time) and shall use its best efforts to make such net asset value
per share available by 7:00 p.m. New York time.
1.11 The Parties hereto acknowledge that the arrangement contemplated by this
Agreement is not exclusive; the shares of the Designated Portfolios (and other
Portfolios of the Fund) may be sold to other insurance companies (subject to
Section 1.3 and Article VII hereof) and the cash value of the Contracts may be
invested in other investment companies, provided, however, that the Adviser and
Underwriter consent to the use of such other investment company in their sole
discretion.
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 continually issued,
offered for sale 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
separate account under the Massachusetts insurance laws 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 separate account for the Contracts.
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2.2 The Fund represents and warrants that shares of the Designated Portfolios
sold pursuant to this Agreement shall be registered under the 1933 Act, duly
authorized for issuance and sold in compliance with all applicable federal
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 of the Designated Portfolios for sale in accordance with the laws of the
various states only if and to the extent deemed advisable by the Fund.
2.3 The Fund currently does not intend to make any payments to finance
distribution expenses pursuant to Rule 12b-1 under the 1940 Act, although it may
make such payments in the future subject to applicable law.
2.4 The Fund makes no representations as to whether any aspect of its operation,
including but not limited to, investments policies, fees and expenses, complies
with the insurance and other applicable laws of the various states, except that
the Fund represents that the investment policies, fees and expenses of the
Designated Portfolios are and shall at all times remain in compliance with the
insurance laws of the Commonwealth of Massachusetts to the extent required to
perform this Agreement. The Company will advise the Fund in writing as to any
requirements of Massachusetts insurance law that affect the Designated
Portfolios, and the Fund will be deemed to be in compliance with this Section
2.4 so long as the Fund complies with such advice of the Company.
2.5 The Fund represents that it is lawfully organized and validly existing as a
business trust under the laws of the Commonwealth of Massachusetts and that it
does and will comply in all material respects with the 1940 Act.
2.6 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 shares of the Designated
Portfolios in accordance with any applicable state and federal securities laws.
2.7 The Adviser represents and warrants that it is and shall remain duly
registered as an investment adviser 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 any applicable state and federal
securities laws.
2.8 The Fund, the Adviser and the Underwriter represent and warrant that all
their directors, officers, employees, investment advisers, and other individuals
or 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 minimum
coverage required currently by Rule 17g-1 of the 1940 Act or such 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.
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2.9 The Company represents and warrants that all its directors, officers,
employees, investment advisers, and other individuals or entities employed or
controlled by the Company 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
than $20 million. The aforesaid bond includes coverage for larceny and
embezzlement and is issued by a reputable bonding company. The Company agrees
that this bond or another bond containing these provisions will always be in
effect, and agrees to notify the Fund, the Adviser and the Underwriter in the
event that such coverage no longer applies.
2.10 The Company represents and warrants that all shares of the Designated
Portfolios purchased by the Company will be purchased on behalf of one or more
unmanaged separate accounts that offer interests therein that are registered
under the 1933 Act and upon which a registration fee has been or will be paid;
and the Company acknowledges that the Fund intends to rely upon this
representation and warranty for purposes of calculating SEC registration fees
payable with respect to such shares of the Designated Portfolios pursuant to
Instruction B.5 to Form 24F-2 or any similar form or SEC registration fee
calculation procedure that allows the Fund to exclude shares so sold for
purposes of calculating its SEC registration fee. The Company agrees to
cooperate with the Fund on no less than an annual basis to certify as to its
continuing compliance with this representation and warranty.
ARTICLE III
Prospectuses, Statements of Additional
Information, and Proxy Statements; Voting
3.1 The Fund shall provide the Company with as many copies of the Fund's current
prospectus for the Designated Portfolios as the Company may reasonably request.
If requested by the Company in lieu thereof, the Fund shall provide such
documentation (including a final copy of the new prospectus) and other
assistance as is reasonably necessary in order for the Company once each year
(or more frequently if the prospectus for a Designated Portfolio is amended) to
have the prospectus for the Contracts and the prospectus for the Designated
Portfolios printed together in one document. Expenses with respect to the
foregoing shall be borne as provided under Article V.
3.2 The Fund's prospectus shall disclose that (a) the Fund is intended to be a
funding vehicle for all types of variable annuity and variable life insurance
contracts offered by Participating Insurance Companies, (b) material
irreconcilable conflicts of interest may arise, and (c) the Fund's Board will
monitor events in order to identify the existence of any material irreconcilable
conflicts and determine what action, if any, should be taken in response to such
conflicts. The Fund hereby notifies the Company that disclosure in the
prospectus for the Contracts regarding the potential risks of mixed and shared
funding may be appropriate. Further, the Fund's prospectus shall state that the
current Statement of Additional Information ("SAI") for the Fund is available
from the Company (or, in the Fund's discretion, from the Fund), and the Fund
shall provide a copy of such SAI to any owner of a Contract who requests such
SAI and to the Company in such quantities as the Company may reasonably request.
Expenses with respect to the foregoing shall be borne as provided under Article
V.
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3.3 The Fund shall provide the Company with copies of its proxy material,
reports to shareholders, and other communications to shareholders for the
Designated Portfolios in such quantity as the Company shall reasonably require
for distributing to Contract owners. Expenses with respect to the foregoing
shall be borne as provided under Article V.
3.4 The Company shall:
(i) solicit voting instructions from Contract owners;
(ii) vote the shares of each Designated Portfolio in accordance with
instructions received from Contract owners; and
(iii) vote shares of each Designated Portfolio for which no instructions
have been received in the same proportion as shares of such
Designated Portfolio for which instructions have been received,
so long as and to the extent that the SEC continues to interpret the 1940 Act to
require pass-through voting privileges for variable contract owners or to the
extent otherwise required by law. The Company reserves the tight to vote shares
of each Designated Portfolio held in any separate account in its own right, to
the extent permitted by law.
3.5 The Company shall be responsible for assuring that each of its separate
accounts participating in a Designated Portfolio calculates voting privileges as
required by the Shared Funding Exemption Order and consistent with any
reasonable standards that the Fund has adopted or may adopt.
3.6 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, Section 16(b). Further, the Fund will act in
accordance with the SEC's interpretation of the requirements of Section 16(a)
with respect to periodic elections of directors or trustees and with whatever
rules the SEC may promulgate from time to time with respect thereto. The Fund
reserves the right, upon prior written notice to the Company, to take all
actions, including but not limited to, the dissolution, termination, merger and
sale of all assets of the Fund or any Designated Portfolio upon the sole
authorization of the Board, to the extent permitted by the laws of the
Commonwealth of Massachusetts and the 1940 Act.
3.7 It is understood and agreed that, except with respect to information
regarding the Fund, the Underwriter, the Adviser or Designated Portfolios
provided in writing by the Fund, the Underwriter or the Adviser, none of the
Fund, the Underwriter or the Adviser is responsible for the content of the
prospectus or statement of additional information for the Contracts.
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ARTICLE IV
Sales Material and Information
4.1 The Company shall furnish, or shall cause to be furnished, to the Fund or
the Underwriter, each piece of sales literature or other promotional material
("sales literature") that the Company develops or uses and in which the Fund (or
a Designated Portfolio thereof) or the Adviser or the Underwriter is named, at
least fifteen calendar days prior to its use. No such material shall be used if
the Fund or its designee reasonably objects to such use within fifteen calendar
days after receipt of such material. The Fund or its designee reserves the right
to reasonably object to the continued use of such material, and no such material
shall be used if the Fund or its designee so object.
4.2 The Company shall not give any information or make any representation or
statement 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, prospectus or SAI for the shares of the Designated
Portfolios, as such registration statement, prospectus or SAI may be amended or
supplemented from time to time, or in reports or proxy statements for the Fund,
or in sales literature 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 or the Underwriter shall furnish, or shall cause to be furnished,
to the Company, each piece of sales literature that the Fund or Underwriter
develops or uses in which the Company and/or its Account is named, at least
fifteen calendar days prior to its use. No such material shall be used if the
Company reasonably objects to such use within fifteen calendar days after
receipt of such material. The Company reserves the right to reasonably object to
the continued use of such material and no such material shall be used if the
Company so objects.
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, the Account,
or the Contracts other than the information or representations contained in a
registration statement, prospectus, or statement of additional information for
the Contracts, as such registration statement, prospectus or statement of
additional information may be amended or supplemented from time to time, or in
published reports for the Accounts which are the public domain or approved by
the Company for distribution to Contract owners, or in sales literature 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, SAIs, reports, proxy statements, sales
literature, applications for exemptions, requests for no-action letters, and all
amendments to any of the above, that relate to the Designated Portfolios,
contemporaneously with the filing of such document(s) with the SEC 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,
shareholder reports, solicitations for
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voting instructions, sales literature, applications for exemptions, request for
no-action letters, and all amendments to any of the above, that relate to the
Contracts or the Accounts, contemporaneously with the filing of such document(s)
with the SEC or other regulatory authorities.
4.7 For purposes of this Agreement, the phrase "sales literature" includes, but
is not limited to, any of the following: 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, reports, market letters, form
letters, seminar texts, reprints or excerpts of any other advertisement, sales
literature, or published article) and educational or training materials or other
communications distributed or made generally available to some or all agents or
employees.
4.8 At the request of any party to this Agreement, any other party will make
available to the requesting party's independent auditors all records, data and
access to operating procedures that may reasonably be requested in connection
with compliance and regulatory requirements related to this Agreement or any
party's obligations under this Agreement.
4.9 Without the written consent of the Fund and the Underwriter, the Company
shall not, and shall not permit any affiliate of the Company to, directly or
indirectly solicit, encourage or induce: (i) Contract owner transactions that
will result in the redemption of shares of a Designated Portfolio; (ii) Contract
owners to change the investment manager or sub-adviser of a Designated
Portfolio; or (iii) Contract owners to change, modify, substitute, add or delete
any investment option.
ARTICLE V
Fees and Expenses
5.1 All expenses incident to performance by the Fund under this Agreement shall
be paid by the Fund, except and as further provided in Schedule B. The Fund
shall see to it that all shares of the Designated Portfolios are registered,
duly authorized for issuance and sold in compliance with applicable federal
securities laws and, if and to the extent deemed advisable by the Fund, in
accordance with applicable state securities laws prior to their sale.
5.2 The parties hereto shall bear the expenses of typesetting, printing and
distributing the Fund's prospectus, SAI, proxy materials and reports as provided
in Schedule B.
5.3 Administrative services to variable Contract owners shall be the
responsibility of the Company and shall not be the responsibility of the Fund,
Underwriter or Adviser. The Fund recognizes the Company as the sole shareholder
of shares of the Designated Portfolios issued under the Agreement.
5.4 The Fund shall not pay and neither the Adviser nor the Underwriter shall pay
any fee or other compensation to the Company under this Agreement, although the
parties will bear certain expenses in accordance with Schedule B and other
provisions of this Agreement.
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ARTICLE VI
Diversification and Qualification
6.1 The Fund will invest the assets of each Designated Portfolio in such a
manner as to ensure that the Contracts will be treated as annuity or life
insurance contracts, whichever is appropriate, under the Internal Revenue Code
of 1986, as amended ("Code") and the regulations issued thereunder (or any
successor provisions). Without limiting the scope of the foregoing, the Fund
will, with respect to each Designated Portfolio, comply with Section 817(h) of
the Code and Treasury Regulation ss. 1.817-5, and any Treasury interpretations
thereof, relating to the diversification requirements for variable annuity,
endowment, or life insurance contracts, and any amendments or other
modifications or successor provisions to such Section or Regulations. In the
event of a breach of this Article VI, the Fund will take all reasonable steps
(a) to notify the Company of such breach and (b) to adequately diversify the
affected Designated Portfolio so as to achieve compliance within the grace
period afforded by Treasury Regulation ss. 1.817-5.
6.2 The Fund represents that each Designated Portfolio is currently qualified
(and for new Designated Portfolios, intends to qualify) as a Regulated
Investment Company under Subchapter M of the Code, and that it will make every
effort to maintain such qualification (under Subchapter M or any successor or
similar provisions) and that it will notify the Company immediately upon having
a reasonable basis for believing that a Designated Portfolio has ceased to so
qualify or that a Designated Portfolio might not so qualify in the future.
6.3 The Company represents that the Contracts are currently, and at the time of
issuance shall be, treated as life insurance or annuity insurance 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, the Adviser and the
Underwriter immediately upon having a reasonable basis for believing the
Contracts have ceased to be so treated or that they might not be so treated in
the future. The Company agrees that any prospectus offering a contract that is a
"modified endowment contract" as that term is defined in Section 7702A of the
Code (or any successor or similar provision), shall identify such contract as a
modified endowment contract.
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 Designated 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 a Participating Insurance Company
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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 and the Adviser will report any potential or existing conflicts
of which each is aware to the Board. The Company will assist the Board in
carrying out its responsibilities under the Shared Funding Exemption 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. At least annually, and more frequently if deemed appropriate by
the Board, the Company shall submit to the Adviser, and the Adviser shall at
least annually submit to the Board, such reports, materials and data as the
Board may reasonably request so that the Board may fully carry out the
obligations imposed upon it by the conditions contained in the Shared Funding
Exemption Order; and said reports, materials and data shall be submitted more
frequently if deemed appropriate by the Board. The responsibility to report such
information and conflicts to the Board will be carried out with a view only to
the interests of the contract owners.
7.3 If it is determined by a majority of the Board, or a majority of its
disinterested members, that a material irreconcilable conflict exists, the
Company and any other Participating Insurance Companies shall, at their expense
and to the extent reasonably practicable (as determined by a majority of the
disinterested Board members), take whatever steps are necessary to remedy or
eliminate the irreconcilable material conflict, up to and including: (a),
withdrawing the assets allocable to some or all of the separate accounts from
the Fund or any Designated Portfolio and reinvesting such assets in a different
investment medium, which may include another Designated Portfolio of the Fund,
or submitting to a vote of all affected contract owners the question whether
such segregation should be implemented 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 (b),
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 any Designated Portfolio 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. The
Company will bear the cost of any remedial action, including such withdrawal and
termination. No penalty will be imposed by the Fund upon the affected Account
for withdrawing assets from the Fund in the event of a material irreconcilable
conflict. 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 effective date of such termination the Fund shall
continue to accept and implement orders by the Company for the purchase (and
redemption) of shares of such Designated Portfolio.
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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 affected Designated Portfolio 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 effective date of such termination the Fund shall
continue to accept and implement orders by the Company for the purchase (and
redemption) of shares of such Designated Portfolios.
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 Contract 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 an Account's investment in any Designated Portfolio 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 the Shared Funding Exemption Order contains terms and
conditions different from Sections 3.4, 3.5, 3.6, 7.1, 7.2, 7.3, 7.4 and 7.5 of
this Agreement, then the Fund and/or the Participating Insurance Companies, as
appropriate, shall take such steps as may be necessary to comply with the Shared
Funding Exemption Order, and Sections 3.4, 3.5, 3.6, 7.1, 7.2, 7.3, 7.4 and 7.5
of the Agreement shall continue in effect only to the extent that terms and
conditions substantially identical to such Sections are contained in the Shared
Funding Exemption Order or any amendment thereto. 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 1940 Act or the rules promulgated thereunder
with respect to mixed or shared funding (as defined in the Shared Funding
Exemption Order) on terms and conditions materially different from those
contained in the Shared Funding Exemption 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,
3.6, 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.
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ARTICLE VIII
Indemnification
8.1 Indemnification by the Company.
(a) The Company agrees to indemnify and hold harmless the Fund, the
Adviser, the Underwriter and each of their officers, trustees and directors and
each person, if any, who controls the Fund, the Adviser or the Underwriter
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 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 the shares of the Designated Portfolios 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, prospectus, or statement of additional information 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 in writing to
the Company by or on behalf of the Fund for use in the Registration
Statement, prospectus or statement of additional information for the
Contracts or in the Contracts or sales literature for the Contracts (for
any amendment or supplement) or otherwise for use in connection with the
sale of the Contracts or shares of the Designated Portfolios; or
(ii) arise out of or as a result of statements or representations
(other than statements or representations contained in the Registration
Statement, prospectus, SAI or sales literature of the Fund not supplied by
the Company or persons under its control) or wrongful conduct of the
Company or persons under its authorization or control, with respect to the
sale or distribution of the Contracts or shares of the Designated
Portfolios; or
(iii) arise out of any untrue statement or alleged untrue statement
of a material fact contained in the Registration Statement, prospectus,
SAI 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 information furnished to the Fund by or on behalf of the
Company; or
13
<PAGE>
(iv) arise as a result of any material failure by the Company 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 qualification requirements specified in
Article VI of this Agreement); or
(v) arise out of or are based upon any untrue statements or alleged
untrue statements of any material fact contained in any Registration
Statement, prospectus, statement of additional information or sales
literature for any Unaffiliated Fund, or arise out of or are based upon
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, or otherwise pertain to or arise in connection with the
availability of any Unaffiliated Fund as an underlying funding vehicle in
respect of the Contracts; or
(vi) 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).
(b) The Company 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 its obligations or duties under this Agreement.
(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 that it may have to the Indemnified Party
against whom such action is brought otherwise than on account of this
indemnification provision, except to the extent that the Company has been
prejudiced by such failure to give notice. In case any such action is brought
against an Indemnified Party, 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 and to settle the claim at its own expense provided,
however, that no such settlement shall, without the Indemnified Parties' written
consent, include any factual stipulation referring to the Indemnified Parties or
their conduct. 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.
14
<PAGE>
(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 shares of the Designated Portfolios or the Contracts
or the operation of the Fund.
8.2 Indemnification by the Underwriter
(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
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 shares of the Designated Portfolios 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, prospectus or SAI of the Fund or sales literature of the Fund
developed by the Underwriter (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
Underwriter or Fund by or on behalf of the Company for use in the
Registration Statement or prospectus for the Fund or its sales literature
(or any amendment or supplement thereto) or otherwise for use in
connection with the sale of the Contracts or shares of the Designated
Portfolios; 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) or wrongful conduct of
the Fund or Underwriter or person under their control with respect to the
sale or distribution of the Contracts or shares of the Designated
Portfolios; 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 for 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
15
<PAGE>
(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 and other qualification 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
(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 or 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 or the Accounts, whichever is applicable.
(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, except to the extent that the
Underwriter has been prejudiced by such failure to give notice. In case any such
action is brought against the Indemnified Party, 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 and to settle the claim at is own
expense; provided, however, that no such settlement shall, without the
Indemnified Parties' written consent, include any factual stipulation referring
to the Indemnified Parties or their conduct. 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.
(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 the Account.
16
<PAGE>
8.3 Indemnification By the Fund
(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,
expenses, 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 be required to pay or may become subject
under any statute or regulation, at common law or otherwise, insofar as such
losses, claims, expenses, damages, liabilities or expenses (or actions in
respect thereof) or settlements, 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, whether unintentional or in good faith or otherwise,
to comply with the diversification and qualification 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.
(b) The Fund 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 the
Company, the Fund, the Underwriter, the Adviser or the Accounts, whichever is
applicable.
(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 that it may have to the Indemnified Party against whom
such action is brought otherwise than on account of this indemnification
provision, except to the extent that the Fund has been prejudiced by such
failure to give notice. 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 and
to settle the claim at its own expense; provided, however, that no such
settlement shall, without the Indemnified Parties' written consent, include any
factual stipulation referring to the Indemnified Parties or their conduct. After
notice from the Fund to such party of the Fund's election to assume
17
<PAGE>
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.
(d) The Company, the Adviser and the Underwriter agree to notify the Fund
promptly of the commencement of any litigation or proceeding against it or any
of its respective officers or directors in connection with the Agreement, the
issuance or sale of the Contracts, the operation of any Account, or the sale or
acquisition of shares of the Designated Portfolios.
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 the statutes, rules and regulations as the SEC may grant
(including, but not limited to, the Shared Funding Exemption Order) and the
terms hereof shall be interpreted and construed in accordance therewith.
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 with respect to any
Designated Portfolio, by twelve (12) months' advance written notice delivered to
the other parties; provided, however, that such notice shall not be given
earlier than six (6) years following the date of this Agreement; or
(b) termination by the Company by written notice to the Fund, the Adviser
and the Underwriter with respect to any Designated Portfolio based upon the
Company's reasonable and good faith determination that shares of such Designated
Portfolio are not reasonably available to meet the requirements of the
Contracts; or
(c) termination by the Company by written notice to the Fund, the Adviser
and the Underwriter with respect to any Designated Portfolio if the shares of
such Designated Portfolio are not registered, issued or sold in accordance with
applicable state and/or federal securities laws or such law precludes the use of
such shares to fund the Contracts issued or to be issued by the Company; or
(d) termination by the Fund, the Adviser or Underwriter in the event that
formal administrative proceedings are instituted against the Company or any
affiliate by the NASD, the SEC,
18
<PAGE>
or the Insurance Commissioner or like official of any state or any other
regulatory body regarding the Company's duties under this Agreement or related
to the sale of the Contracts, the operation of any Account, or the purchase of
the shares of a Designated Portfolio or the shares of any Unaffiliated Fund,
provided, however, that the Fund, the Adviser or Underwriter determines in its
sole judgement exercised in good faith, that any such administrative proceedings
will have a material adverse effect upon the ability of the Company to perform
its obligations under this Agreement; or
(e) termination by the Company in the event that formal administrative
proceedings are instituted against the Fund, the Adviser or Underwriter by the
NASD, the SEC, or any state securities or insurance department or any other
regulatory body, provided, however, that the Company determines in its sole
judgment exercised in good faith, that any such administrative proceedings will
have a material adverse effect upon the ability of the Fund or Underwriter to
perform its obligations under this Agreement; or
(f) termination by the Company by written notice to the Fund, the Adviser
and the Underwriter with respect to any Designated Portfolio in the event that
such Designated Portfolio ceases to qualify as a Regulated Investment Company
under Subchapter M or fails to comply with the Section 817(h) diversification
requirements specified in Article VI hereof, or if the Company reasonably
believes that such Designated Portfolio may fail to so qualify or comply; or
(g) termination by the Fund, the Adviser or Underwriter by written notice
to the Company in the event that the Contracts fail to meet the qualifications
specified in Article VI hereof; or
(h) termination by any of the Fund, the Adviser or the Underwriter by
written notice to the Company, if any of the Fund, the Adviser or the
Underwriter, respectively, shall determine, in their sole judgement exercised in
good faith, that the Company has suffered a material adverse change in its
business, operations, financial condition, insurance company rating or prospects
since the date of this Agreement or is the subject of material adverse
publicity; or
(i) termination by the Company by written notice to the Fund, the Adviser
and the Underwriter, if the Company shall determine, in its sole judgment
exercised in good faith, that the Fund, the Adviser 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 and that material adverse change or publicity will
have a material adverse effect on the Fund's or the Underwriter's ability to
perform its obligations under this Agreement; or
(j) at the option of Company, as one party, or the Fund, the Adviser and
the Underwriter, as one party, upon the other party's material breach of any
provision of this Agreement upon 30 days' notice and opportunity to cure.
10.2 Effect of Termination. Notwithstanding any termination of this
Agreement, the Fund and the Underwriter may, at their sole option, continue to
make available additional shares of a Designated Portfolio pursuant to the terms
and conditions of this Agreement, for all Contracts in effect on the
19
<PAGE>
effective date of termination of this Agreement (hereinafter referred to as
"Existing Contracts"). Specifically, the owners of the Existing Contracts may in
such event be permitted to reallocate investments in the Designated Portfolios,
redeem investments in the Designated Portfolios and/or invest in the Designated
Portfolios upon the making of additional purchase payments under the Existing
Contracts. The parties agree that this Section 10.2 shall not apply to any
termination under Article VII and the effect of such Article VII termination
shall be governed by Article VII of this Agreement. The parties further agree
that this Section 10.2 shall not apply to any termination under Section
10.1(g) of this Agreement.
10.3 Notwithstanding termination of this Agreement, the Company shall not redeem
shares of a Designated Portfolio attributable to the Contracts (as opposed to
shares of a Designated Portfolio attributable to the Company's assets held in an
Account) except (i) as necessary to implement Contract owner initiated or
approved transactions provided the Company shall not, and shall not permit any
affiliate of the Company to, directly or indirectly solicit, encourage or induce
any such Contract owner initiated or approved transaction so long as the Fund
and the Underwriter continue to make additional shares of the Designated
Portfolio available pursuant to Section 10.2 above, 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"). Upon request, the Company will promptly furnish to the Fund, the
Adviser and the Underwriter the opinion of counsel for the Company (which
counsel shall be reasonably satisfactory to the Fund, the Adviser and the
Underwriter) to the effect that any redemption pursuant to clause (ii) above is
a Legally Required Redemption. Furthermore, the Company shall not prevent
Contract owners from allocating payments to a Designated Portfolio that was
otherwise available under the Contracts.
10.4 Notwithstanding any termination of this Agreement, each party's obligation
under Article VIII to indemnify the other parties shall survive.
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:
Kemper Investors Fund
222 South Riverside Plaza
Chicago, Illinois 60606
Attention: Secretary
20
<PAGE>
If to the Company:
First Allmerica Financial Life Insurance Company
440 Lincoln Street
Worcester, Massachusetts 01653
Attention: Secretary
If to the Adviser:
Zurich Kemper Investments, Inc.
222 South Riverside Plaza
Chicago, Illinois 60606
Attention: Secretary
If to the Underwriter:
Kemper Distributors, Inc.
222 South Riverside Plaza
Chicago, Illinois 60606
Attention: Secretary
ARTICLE XII
Miscellaneous
12.1 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.
12.2 This Agreement may be executed simultaneously in two or more counterparts,
each of which taken together shall constitute one and the same instrument.
12.3 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.
12.4 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 Massachusetts Insurance Commissioner with any information
or reports in connection with services provided under this Agreement that such
Commissioner may request in order to ascertain whether the variable annuity
operations of the Company are being conducted in a manner consistent with the
Massachusetts variable annuity laws and regulations and any other applicable law
or regulations.
21
<PAGE>
12.5 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.
12.6 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.
12.7 All persons are expressly put on notice of the Fund's Agreement and
Declaration of Trust and all amendments thereto, all of which on file with the
Secretary of the Commonwealth of Massachusetts, and the limitation of
shareholder and trustee liability contained therein. This Agreement has been
executed by and on behalf of the Fund by its representatives as such
representatives and not individually, and the obligations of the Fund with
respect to a Designated Portfolio hereunder are not binding upon any of the
trustees, officers or shareholders of the Fund individually, but are binding
upon only the assets and property of such Designated Portfolio. All parties
dealing with the Fund with respect to a Designated Portfolio shall look solely
to the assets of such Designated Portfolio for the enforcement of any claims
against the Fund hereunder.
IN WITNESS WHEREOF, each of the parties has caused this Agreement to be executed
in its name and on behalf by its duly authorized representative and its seal to
be hereunder affixed hereto as of the date specified below.
COMPANY: First Allmerica Financial Life Insurance Company
By: /s/ Richard M. Reilly
----------------------------------
Title: Vice President
----------------------------------
Date: November 6, 1996
----------------------------------
FUND: Kemper Investors Fund
By: /s/ John E. Neal
----------------------------------
Title: Vice President
----------------------------------
Date: November 5, 1996
----------------------------------
22
<PAGE>
ADVISER Zurich Kemper Investments, Inc.
By: /s/ John E. Neal
----------------------------------
Title: President, Kemper Funds Group
----------------------------------
Date: November 5, 1996
----------------------------------
UNDERWRITER Kemper Distributors Inc.
By: /s/ James L. Greenwault
----------------------------------
Title: President
----------------------------------
Date: November 5, 1996
----------------------------------
23
<PAGE>
SCHEDULE A
Name of Separate Account and Date
Established by Board of Directors
- ---------------------------------
Separate Account KG (6/13/96)
Separate Account KGC (6/13/96)
Contracts Funded
by Separate Account
- -------------------
Kemper Gateway Elite
Kemper Gateway Custom
Designated Portfolios*
- ---------------------
Money Market Portfolio
Total Return Portfolio
High Yield Portfolio
Growth Portfolio
Government Securities Portfolio
International Portfolio
Small Cap Growth Portfolio
Investment Grade Bond Portfolio
Value Portfolio
Small Cap Value Portfolio
Value+Growth Portfolio
Horizon 20+ Portfolio
Horizon 10+ Portfolio
Horizon 5 Portfolio
- -------------
* Additional Designated Portfolios may be added at the request of the Fund,
Adviser and Underwriter and with the consent of the Company, which consent will
not be unreasonably withheld.
A-1
<PAGE>
SCHEDULE B
EXPENSES
1. In the event the prospectus, SAI, annual report or other communication of
the Fund is combined with a document of another party, the Fund will pay
the costs based upon the relative number of pages attributable to the
Fund.
2. Expenses allocated to the Company on this Schedule may be subject to
further allocation between the Company and Kemper Distributors, Inc.
("KDI") pursuant to a Wholesaling Agreement between the Company and KDI
related to the Contracts.
================================================================================
RESPONSIBLE
ITEM FUNCTION PARTY
================================================================================
PROSPECTUS
- --------------------------------------------------------------------------------
Update Typesetting Fund (1)
- --------------------------------------------------------------------------------
New Sales: Printing KDI/Company (2)
Distribution KDI/Company (2)
- --------------------------------------------------------------------------------
Existing Printing Fund (1)
Owners: Distribution Fund (1)
- --------------------------------------------------------------------------------
STATEMENTS OF Same as Prospectus Same
ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
PROXY MATERIALS OF THE Typesetting Fund
FUND Printing Fund
Distribution Fund
- --------------------------------------------------------------------------------
ANNUAL REPORTS & OTHER
COMMUNICATIONS
WITH SHAREHOLDERS
OF THE FUND
- --------------------------------------------------------------------------------
All Typesetting Fund (1)
- --------------------------------------------------------------------------------
Marketing: Printing KDI/Company (2)
Distribution KDI/Company (2)
- --------------------------------------------------------------------------------
Existing Owners: Printing Fund (1)
Distribution Fund (1)
- --------------------------------------------------------------------------------
OPERATIONS OF FUND All operations and related Fund
expenses, including 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, the preparation
of all statements and notices required
by any federal or state law and all
taxes on the issuance of the Fund's
shares, and all costs of management of
the business affairs of the Fund.
================================================================================
B-1
<PAGE>
PARTICIPATION AGREEMENT
PARTICIPATION AGREEMENT (the "Agreement") made by and between SCUDDER
VARIABLE LIFE INVESTMENT FUND (the "Fund"), a Massachusetts business trust
created under a Declaration of Trust dated March 15, 1985, as amended, with a
principal place of business in Boston, Massachusetts and [PARTICIPATING
INSURANCE COMPANY], a [STATE OF INCORPORATION] corporation (the "Company"),
with a principal place of business in [PRINCIPAL PLACE OF BUSINESS, CITY,
STATE] on behalf of [SEPARATE ACCOUNT NAME], a separate account of the
Company, and any other separate account of the Company as designated by the
Company from time to time, upon written notice to the Fund in accordance
with Section 9 herein (each, an "Account").
WHEREAS, the Fund acts as the investment vehicle for the separate
accounts established for variable life insurance policies and variable
annuity contracts (collectively referred to herein as "Variable Insurance
Products") to be offered by insurance companies which have entered into
participation agreements substantially identical to this Agreement
("Participating Insurance Companies") and their affiliated insurance
companies; and
WHEREAS, the beneficial interest in the Fund is divided into several
series of shares of beneficial interest without par value ("Shares"), and
additional series of Shares may be established, each designated a "Portfolio"
and representing the interest in a particular managed portfolio of
securities; and
WHEREAS, each Portfolio of the Fund, except the Money Market Portfolio,
is divided into two classes of Shares, and additional classes of Shares may
be established; and
WHEREAS, the Parties desire to evidence their agreement as to certain
other matters,
NOW THEREFORE, in consideration of the foregoing and the mutual
covenants and agreements hereinafter contained, the parties hereto agree as
follows:
1. DUTY OF FUND TO SELL.
The Fund shall make its Shares available for purchase at the applicable net
asset value per Share by Participating Insurance Companies and their affiliates
and separate accounts on those days
<PAGE>
on which the Fund calculates its net asset value pursuant to rules of the
Securities and Exchange Commission; provided, however, that the Trustees of
the Fund 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 Trustees, necessary in the best interest of the
shareholders of any Portfolio.
2. FUND MATERIALS.
The Fund, at its expense, shall provide the Company or its designee with
camera-ready copy or computer diskette versions of all prospectuses,
statements of additional information, annual and semi-annual reports and
proxy materials (collectively, "Fund Materials") to be printed and
distributed by the Company or its broker/dealer to the Company's existing or
prospective contract owners, as appropriate. The Company agrees to bear the
cost of printing and distributing such Fund Materials.
3. REQUIREMENT TO EXECUTE PARTICIPATION AGREEMENT; REQUESTS.
Each Participating Insurance Company shall, prior to purchasing Shares
in the Fund, execute and deliver a participation agreement in a form
substantially identical to this Agreement.
The Fund shall make available, upon written request from the
Participating Insurance Company given in accordance with Paragraph 9, to each
Participating Insurance Company which has executed an Agreement and which
Agreement has not been terminated pursuant to Paragraph 7 (i) a list of all
other Participating Insurance Companies, and (ii) a copy of the Agreement as
executed by any other Participating Insurance Company.
The Fund shall also make available upon request to each Participating
Insurance Company which has executed an Agreement and which Agreement has not
been terminated pursuant to Paragraph 7, the net asset value of any Portfolio
of the Fund as of any date upon which the Fund calculates the net asset value
of its Portfolios for the purpose of purchase and redemption of Shares.
4. INDEMNIFICATION.
(a) The Company agrees to indemnify and hold harmless the Fund and each
of its Trustees and officers and each person, if any, who controls the Fund
within the meaning of Section 15 of the Securities Act of 1933 (the "Act")
against any and all losses, claims, damages, liabilities or litigation
2
<PAGE>
(including legal and other expenses), arising out of the acquisition of any
Shares by any person, to which the Fund or such Trustees, officers or
controlling person may become subject under the Act, under any other statute,
at common law or otherwise, which (i) may be based upon any wrongful act by
the Company, any of its employees or representatives, any affiliate of or any
person acting on behalf of the Company or a principal underwriter of its
insurance products, or (ii) may be based upon any untrue statement or alleged
untrue statement of a material fact contained in a registration statement or
prospectus covering Shares 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 information
furnished to the Fund by the Company, or (iii) may be based on any untrue
statement or alleged untrue statement of a material fact contained in a
registration statement or prospectus covering insurance products sold by the
Company or any insurance company which is an affiliate thereof, or any
amendments 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, unless such
statement or omission was made in reliance upon information furnished to the
Company or such affiliate by or on behalf of the Fund; provided, however,
that in no case (i) is the Company's indemnity in favor of a Trustee or
officer or any other person deemed to protect such Trustee or officer or
other person against any liability to which any such person would otherwise
be subject by reason of willful misfeasance, bad faith, or gross negligence
in the performance of his duties or by reason of his reckless disregard of
obligations and duties under this Agreement or (ii) is the Company to be
liable under its indemnity agreement contained in this Paragraph 4 with
respect to any claim made against the Fund or any person indemnified unless
the Fund or such person, as the case may be, shall have notified the Company
in writing pursuant to Paragraph 9 within a reasonable time after the summons
or other first legal process giving information of the nature of the claims
shall have been served upon the Fund or upon such person (or after the Fund
or such person 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 has to the Fund or any person against
whom such action is brought
3
<PAGE>
otherwise than on account of its indemnity agreement contained in this
Paragraph 4. The Company shall be entitled to participate, at its own
expense, in the defense, or, if it so elects, to assume the defense of any
suit brought to enforce any such liability, but, if it elects to assume the
defense, such defense shall be conducted by counsel chosen by it and
satisfactory to the Fund, to its officers and Trustees, or to any controlling
person or persons, defendant or defendants in the suit. In the event that
the Company elects to assume the defense of any such suit and retain such
counsel, the Fund, such officers and Trustees or controlling person or
persons, defendant or defendants in the suit, shall bear the fees and
expenses of any additional counsel retained by them, but, in case the Company
does not elect to assume the defense of any such suit, the Company will
reimburse the Fund, such officers and Trustees or controlling person or
persons, defendant or defendants in such suit, for the reasonable fees and
expenses of any counsel retained by them. The Company agrees promptly to
notify the Fund pursuant to Paragraph 9 of the commencement of any litigation
or proceedings against it in connection with the issue and sale of any Shares.
(b) 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 Act against any and all
losses, claims, damages, liabilities or litigation (including legal and other
expenses) to which it or such directors, officers or controlling person may
become subject under the Act, under any other statute, at common law or
otherwise, arising out of the acquisition of any Shares by any person which
(i) may be based upon any wrongful act by the Fund, any of its employees or
representatives or a principal underwriter of the Fund, or (ii) may be based
upon any untrue statement or alleged untrue statement of a material fact
contained in a registration statement or prospectus covering Shares 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
4
<PAGE>
to make the statements therein not misleading unless such statement or
omission was made in reliance upon information furnished to the Fund by the
Company or (iii) may be based on any untrue statement or alleged untrue
statement of a material fact contained in a registration statement or
prospectus covering insurance products sold by the Company, or any amendment
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; provided, however, that in no case (i) is the Fund's
indemnity in favor of a director or officer or any other person deemed to
protect such director or officer or other person against any liability to
which any such person would otherwise be subject by reason of willful
misfeasance, bad faith, or gross negligence in the performance of his duties
or by reason of his reckless disregard of obligations and duties under this
Agreement or (ii) is the Fund to be liable under its indemnity agreement
contained in this Paragraph 4 with respect to any claims made against the
Company or any such director, officer or controlling person unless it or such
director, officer or controlling person, as the case may be, shall have
notified the Fund in writing pursuant to Paragraph 9 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 it or upon such director,
officer or controlling person (or after the Company or such director, officer
or controlling person shall have received notice of such service on any
designated agent), but failure to notify the Fund of any claim shall not
relieve it from any liability which it may have to the person against whom
such action is brought otherwise than on account of its indemnity agreement
contained in this Paragraph. The Fund will be entitled to participate at its
own expense in the defense, or, if it so elects, to assume the defense of any
suit brought to enforce any such liability, but if the Fund elects to assume
the defense, such defense shall be conducted by counsel chosen by it and
satisfactory to the Company, its directors, officers or controlling person or
persons, defendant or defendants, in the suit. In the event the Fund elects
to assume the defense of any such suit and retain such counsel, the Company,
its directors, officers or controlling person or persons, defendant or
defendants in the suit, shall bear the fees and expenses of any additional
counsel retained by them, but, in case the Fund does not elect to assume the
defense of any such suit, it will reimburse the Company or such directors,
officers or controlling person or persons, defendant or defendants in the
suit, for the reasonable fees and expenses of any counsel retained by them.
The Fund agrees promptly to notify the Company pursuant to Paragraph 9 of the
commencement of any litigation or proceedings against it or any of its
officers or Trustees in connection with the issuance or sale of any Shares.
5
<PAGE>
The provisions of this Section 4 shall survive the termination of the
Agreement.
5. PROCEDURE FOR RESOLVING IRRECONCILABLE CONFLICTS.
(a) The Trustees of the Fund will monitor the operations of the Fund
for the existence of any material irreconcilable conflict among the interests
of all the contract holders and policy owners of Variable Insurance Products
(the "Participants") of all separate accounts investing in the Fund. An
irreconcilable material conflict may arise, among other things, from: (a) an
action by any state insurance regulatory authority; (b) a change in
applicable insurance laws or regulations; (c) a tax ruling or provision of
the Internal Revenue Code or the regulations thereunder; (d) any other
development relating to the tax treatment of insurers, contract holders or
policy owners or beneficiaries of Variable Insurance Products; (e) the manner
in which the investments of any Portfolio are being managed; (f) a difference
in voting instructions given by variable annuity contract holders, on the one
hand, and variable life insurance policy owners, on the other hand, or by the
contract holders or policy owners of different participating insurance
companies; or (g) a decision by an insurer to override the voting
instructions of Participants.
(b) The Company will be responsible for reporting any potential or
existing conflicts to the Trustees of the Fund. The Company will be
responsible for assisting the Trustees in carrying out their responsibilities
under this Paragraph 5(b) and Paragraph 5(a), by providing the Trustees with
all information reasonably necessary for the Trustees to consider the issues
raised. The Fund will also request its investment adviser to report to the
Trustees any such conflict which comes to the attention of the adviser.
(c) If it is determined by a majority of the Trustees of the Fund, or a
majority of its disinterested Trustees, that a material irreconcilable
conflict exists involving the Company, the Company shall, at its expense, and
to the extent reasonably practicable (as determined by a majority of the
disinterested Trustees), take whatever steps are necessary to eliminate the
irreconcilable material conflict, including withdrawing the assets allocable
to some or all of the separate accounts from the Fund or any Portfolio or
class thereof and reinvesting such assets in a different investment medium,
including another Portfolio of the Fund or class thereof, offering to the
affected Participants
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the option of making such a change or establishing a new funding medium
including a registered investment company.
For purposes of this Paragraph 5(c), the Trustees, or the disinterested
Trustees, shall determine whether or not any proposed action adequately
remedies any irreconcilable material conflict. In the event of a
determination of the existence of an irreconcilable material conflict, the
Trustees shall cause the Fund to take such action, such as the establishment
of one or more additional Portfolios or classes, as they in their sole
discretion determine to be in the interest of all shareholders and
Participants in view of all applicable factors, such as cost, feasibility,
tax, regulatory and other considerations. In no event will the Fund be
required by this Paragraph 5(c) to establish a new funding medium for any
variable contract or policy.
The Company shall not be required by this Paragraph 5(c) to establish a
new funding medium for any variable contract or policy if an offer to do so
has been declined by a vote of a majority of the Participants materially
adversely affected by the material irreconcilable conflict. The Company will
recommend to its Participants that they decline an offer to establish a new
funding medium only if the Company believes it is in the best interest of the
Participants.
(d) The Trustees' determination of the existence of an irreconcilable
material conflict and its implications promptly shall be communicated to all
Participating Insurance Companies by written notice thereof delivered or
mailed, first class postage prepaid.
6. VOTING PRIVILEGES.
The Company shall be responsible for assuring that its separate account
or accounts participating in the Fund shall use a calculation method of
voting procedures substantially the same as the following: those
Participants permitted to give instructions and the number of Shares for
which instructions may be given will be determined as of the record date for
the Fund shareholders' meeting, which shall not be more than 60 days before
the date of the meeting. Whether or not voting instructions are actually
given by a particular Participant, all Fund shares held in any separate
account or sub-account thereof and attributable to policies will be voted
for, against, or withheld from voting on any proposition in the same
proportion as (i) the aggregate record date cash value held in such
sub-account for policies giving instructions, respectively, to vote for,
against, or
7
<PAGE>
withhold votes on such proposition, bears to (ii) the aggregate record date
cash value held in the sub-account for all policies for which voting
instructions are received. Participants continued in effect under lapse
options will not be permitted to give voting instructions. Shares held in any
other insurance company general or separate account or sub-account thereof
will be voted in the proportion specified in the second preceding sentence
for shares attributable to policies.
7. DURATION AND TERMINATION.
This Agreement shall continue in effect for five (5) years from the date
of its execution. This Agreement may be terminated at any time, at the
option of either of the Company or the Fund, when neither the Company, any
insurance company nor the separate account or accounts of such insurance
company which is an affiliate thereof which is not a Participating Insurance
Company own any Shares of the Fund or may be terminated by either party to
the Agreement upon a determination by a majority of the Trustees of the Fund,
or a majority of its disinterested Trustees, following certification thereof
by a Participating Insurance Company given in accordance with Paragraph 9
that an irreconcilable conflict exists among the interests of (i) all
contract holders and policy holders of Variable Insurance Products of all
separate accounts or (ii) the interests of the Participating Insurance
Companies investing in the Fund. If this Agreement is so terminated, the Fund
may, at any time thereafter, automatically redeem the Shares of any Portfolio
held by a Participating Shareholder.
8. COMPLIANCE.
The Fund will comply with the provisions of Section 4240(a) of the New
York Insurance Law.
Each Portfolio of the Fund will use its best efforts to comply with the
provisions of Section 817(h) of the Internal Revenue Code of 1986, as amended
(the "Code"), relating to diversification requirements for variable annuity,
endowment and life insurance contracts. Specifically, each Portfolio will
comply with either (i) the requirement of Section 817(h)(1) of the Code that
its assets be adequately diversified, or (ii) the "Safe Harbor for
Diversification" specified in Section 817(h)(2) of the Code, or (iii) in the
case of variable life insurance contracts only, the diversification
requirement of Section 817(h)(1) of the Code by having all or part of its
assets invested in U.S.
8
<PAGE>
Treasury securities which qualify for the "Special Rule for Investments in
United States Obligations" specified in Section 817(h)(3) of the Code. The
Fund will notify the Company immediately upon having a reasonable basis for
believing that a Portfolio has ceased to comply with the requirements of
Section 817(h) of the Code or that the Portfolio might not so comply in the
future.
The provisions of Paragraphs 5 and 6 of this Agreement shall be
interpreted in a manner consistent with any Rule or order of the Securities
and Exchange Commission under the Investment Company Act of 1940, as amended,
applicable to the parties hereto.
No Shares of any Portfolio of the Fund may be sold to the general public.
9. 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:
Scudder Variable Life Investment Fund
Two International Place
Boston, Massachusetts 02110
(617) 295-2275
Attn: David B. Watts
If to the Company:
10. MASSACHUSETTS LAW TO APPLY.
This Agreement shall be construed and the provisions hereof interpreted
under and in accordance with the laws of The Commonwealth of Massachusetts.
11. MISCELLANEOUS.
The name "Scudder Variable Life Investment Fund" is the designation of
the Trustees for the time being under a Declaration of Trust dated March 15,
1985, as amended, and 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 Trustees, officers, agents or shareholders assume any personal
liability for
9
<PAGE>
obligations entered into on behalf of the Fund. No Portfolio shall be liable
for any obligations properly attributable to any other Portfolio.
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. This Agreement may be executed
simultaneously in two or more counterparts, each of which taken together
shall constitute one and the same instrument.
12. ENTIRE AGREEMENT.
This Agreement incorporates the entire understanding and agreement among
the parties hereto, and supersedes any and all prior understandings and
agreements between the parties hereto with respect to the subject matter
hereof.
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement
to be executed in its name and behalf by its duly authorized representative
and its seal to be hereunder affixed hereto as of the ____ day of __________,
1998.
SEAL SCUDDER VARIABLE LIFE
INVESTMENT FUND
By:________________________________
David B. Watts
President
SEAL [PARTICIPATING INSURANCE
COMPANY]
By:________________________________
Its:_______________________________
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<PAGE>
Scudder Investor Services, Inc.
Two International Place
Boston, Massachusetts 02110
PARTICIPATING CONTRACT AND POLICY AGREEMENT
Ladies and Gentlemen:
We (sometimes hereinafter referred to as "Investor Services") are the
Principal Underwriter of shares of Scudder Variable Life Investment Fund (the
"Fund"), a no-load, open-end, diversified registered management investment
company established in 1985 as a Massachusetts business trust. The Fund is a
series fund consisting of the Balanced Portfolio, Bond Portfolio, Capital
Growth Portfolio, Global Discovery Portfolio, International Portfolio, Money
Market Portfolio, and Growth and Income Portfolio (individually or
collectively hereinafter referred to as the "Portfolio" or the "Portfolios").
In addition, each Portfolio, except the Money Market Portfolio, is divided
into two classes of shares of beneficial interest ("Shares"). Additional
Portfolios and classes may be created from time to time. The Fund is the
funding vehicle for variable annuity contracts and variable life insurance
policies ("Participating Contracts and Policies") to be offered to the
separate accounts (the "Accounts") of certain life insurance companies
("Participating Insurance Companies"). Owners of Participating Contracts and
Policies will designate a portion of their premium to be invested in
insurance company separate accounts or sub-accounts which invest in, or
represent an investment in, directly or indirectly, Shares the Portfolios of
the Fund. You are a registered broker-dealer which intends to offer and sell
Participating Contracts and Policies. In connection with such offer and sale
you will be obligated to deliver the prospectuses of such Participating
Contracts and Policies and, contemporaneously therewith, the prospectus of
the Fund. Sales of Shares to Participating Insurance Companies or their
affiliates or the separate accounts of either shall be effected solely by us
as principal underwriter of the Fund, and not by you; provided, however, that
you shall be our agent in connection with the receipt of purchase orders for
Fund Shares and not in connection with their offer and sale. The
relationship between us shall be further governed by the following terms and
conditions:
1. To the extent, if any, that your activities or the activities of the
Participating Insurance Companies in connection with the sale of
Participating Contracts and Policies may
<PAGE>
constitute the sale of Shares, you and we agree that (i) we are the
sole "principal underwriter" of the Fund and the sole "underwriter"
of the Shares as those terms are defined in the Investment Company
Act of 1940 (the "1940 Act") and the Securities Act of 1933 (the
"1933 Act"), respectively, and (ii) neither you nor the
Participating Insurance Companies or the Accounts shall be deemed
to be "principal underwriters" of the Fund or "underwriters" of the
Fund within the meaning of the 1940 Act and the 1933 Act,
respectively.
2. You hereby represent and warrant to us as follows:
(a) You are a corporation duly organized and validly existing in
good standing under the laws of the [STATE OF INCORPORATION]
and have full power and authority to enter into this Agreement.
(b) This Agreement has been duly authorized, executed and delivered
by you and is a valid and binding obligation enforceable
against you in accordance with its terms.
(c) Your compliance with the provisions of this Agreement will not
conflict with or result in a violation of the provisions of
your charter or by-laws, or any statute or any judgment, decree,
order, rule or regulation of any court or governmental agency or
body having jurisdiction.
3. We hereby represent and warrant to you as follows:
(a) A registration statement (File No. 2-96461) on Form N-1A with
respect to the Shares (x) has been prepared by the Fund in
conformity with the requirements of the 1940 Act and the 1933
Act and all applicable published instructions, rules and
regulations (the "Rules and Regulations") of the Securities
and Exchange Commission (the "Commission"), (y) has been filed
with the Commission, and (z) is currently effective. The
registration statement, including financial statements and
exhibits, and the final prospectus, including the statement of
additional information, as subsequently amended and
supplemented, are herein respectively referred to as the
"Registration Statement" and the "Prospectus".
(b) The Registration Statement and the Prospectus and any
amendment or supplement thereto will contain all statements
required to be stated therein and will comply in all material
respects with the requirements of the 1940 Act, the 1933 Act
and the Rules and Regulations, and the Registration Statement
and any post-effective amendment thereto will not contain or
incorporate by reference any untrue statement of a material
fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein, in light
of the circumstances under which they were made, not
misleading, and the Prospectus and any amendment or supplement
thereto will not contain or incorporate by reference any
untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary in
order to make
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<PAGE>
the statements therein, in light of the circumstances under
which they were made, not misleading.
(c) We are a corporation duly organized and validly existing in good
standing under the laws of The Commonwealth of Massachusetts and
have full power and authority to enter into this Agreement.
(d) This Agreement has been duly authorized, executed and delivered
by us and is a valid and binding obligation enforceable against
us in accordance with its terms.
(e) Our compliance with all of the provisions of this Agreement will
not conflict with or result in a violation of the provisions of
our charter or by-laws, or any statute or any judgment, decree,
order, rule or regulation of any court or governmental agency or
body having jurisdiction over us.
4. You hereby covenant and agree with us as follows:
(a) You shall be an independent contractor and neither you nor any
of your directors, partners, officers or employees as such, is
or shall be an employee of us or of the Fund. You are
responsible for your own conduct and the employment, control
and conduct of your agents and employees and for injury to such
agents or employees or to others through your agents or
employees.
(b) You or one or more Participating Insurance Companies will be
responsible for insuring compliance with all applicable laws and
regulations of any regulatory body having jurisdiction over you
or Participating Contracts and Policies.
(c) No person is authorized to make any representations concerning
Shares except those contained in the Prospectus relating thereto
and in such printed information as issued by us for use as
information supplemental to the prospectus. In offering
Participating Contracts and Policies you shall, with respect to
the Fund and the Shares, rely solely on the representations
contained in the Prospectus and in the above-mentioned
supplemental information.
(d) You are not entitled to any compensation whatsoever from us or
the Fund with respect to offers of Participating Contracts and
Policies.
(e) With respect to payments to be made to us pursuant to a Rule
12b-1 Plan for the Fund, you will not seek reimbursement for
administrative and recordkeeping services under the Fund's
Rule 12b-1 Plan that have been or will be paid for by any fees
or charges imposed on owners of Participating Contracts and
Policies by a Participating Insurance Company for such
services. This limitation does not, however, apply to profits
that you earn from fees and charges under Participating
Contracts and Policies for your nondistribution-related costs
and expenses, such as mortality and expense risk
3
<PAGE>
charges under Participating Contracts and Policies, which
profits may be available for your use to pay distribution and
other expense incurred by you. Further, this provision does
not restrict you from receiving sales charges on purchases and
redemptions, consistent with applicable law, made under or
redemption proceeds from a Participating Contract or Policy at
the same time that you are seeking reimbursement for expenses
under the Fund's Rule 12b-1 Plan.
5. We hereby covenant and agree with you as follows:
(a) If, at any time when a Prospectus relating to the Shares is
required to be delivered under the 1940 Act, the 1933 Act or
the Rules and Regulations, we become aware of the occurrence
of any event as a result of which the Prospectus as then
amended or supplemented would include any untrue statement of
a material fact, or omit to state a material fact necessary to
make the statements therein, in light of the circumstances
under which made, not misleading, or if we become aware that
it has become necessary at any time to amend or supplement the
Prospectus to comply with the 1940 Act, the 1933 Act or the
Rules and Regulations, we will promptly notify you and
promptly request the Fund to prepare and to file with the
Commission an amendment to the Registration Statement or
supplement to the Prospectus which will correct such statement
or omission or an amendment or supplement which will effect
such compliance, and deliver to you copies of any such
amendment or supplement.
(b) We will cooperate with you in taking such action as may be
necessary to qualify the Shares for offering and sale under
the securities or Blue Sky laws of any state or jurisdiction
as you may request and will continue such qualification in
effect so long as is required by applicable law in connection
with the distribution of Shares.
(c) We shall reimburse you, subject to the minimum amounts set
forth in the attached schedule, for those distribution and
shareholder servicing-related expenses that are permitted to
be paid for by the Fund under the Fund's Rule 12b-1 Plan and
for which (i) you submit documentation, as may be requested by
us or by the Fund's Board of Trustees, and (ii) we receive
payment for such expenses from the Fund under the Fund's Rule
12b-1 Plan. We shall remit to you as promptly as reasonably
practicable all payments received by us from the Fund for
remittance to you pursuant to the Fund's Rule 12b-1 Plan.
6. We reserve the right in our discretion, with 30 days' written
notice, to suspend sales or withdraw the offering of Shares
entirely, as to any person or generally, except that sales of
Shares may be suspended or the offering of Shares withdrawn without
notice (i) if the continued offering or sale of Shares would
violate any applicable statute or regulation, order or decree of
any court, governmental agency or self-regulatory organization
having jurisdiction, or (ii) if in the sole discretion of the
Trustees of the Fund, including a majority of those Trustees who
are not "interested persons" (as
4
<PAGE>
defined in the 1940 Act) of the Fund or of its investment adviser,
such action is determined to be necessary in the best interests of
the Shareholders of any Portfolio. We reserve the right to amend
this Agreement at any time, and you agree that the sale of
Participating Contracts and Policies, after notice of any such
amendment has been sent to you, including a written notice from
Investor Services stating that the amendment is necessary to
prevent the continued offering or sale of Shares from violating any
applicable statute or regulation, order or decree of any court,
governmental agency or self-regulatory organization having
jurisdiction, shall constitute your agreement to any such amendment.
7. If we elect to provide to you for the purpose of your offering
Participating Contracts and Policies copies of any Prospectus
relating to the Shares and printed information supplemental
thereto, we shall furnish you with such copies as you reasonably
request upon the payment of reasonable charges therefor by you or
one or more Participating Insurance Companies. If we elect not to
provide such copies of such documents, you or one or more
Participating Insurance Companies shall bear the entire cost of
printing copies for your use. You shall not use such copies of such
documents printed by you or one or more Participating Insurance
Companies until you shall have furnished us with a copy thereof and
we either have given you written approval for use or twenty days
shall have elapsed following our receipt thereof and we have not
objected thereto in writing.
8. (a) You will indemnify and hold harmless Investor Services and each
of its directors and officers and each person, if any, who
controls Investor Services within the meaning of Section 15 of
the 1933 Act, against any loss, liability, damages, claim or
expense (including the reasonable cost of investigating or
defending any alleged loss, liability, damages, claim or expense
and reasonable counsel fees incurred in connection therewith),
arising by reason of any person's acquiring any Shares, which may
be based upon the 1933 Act or any other statute or common law,
and which (i) may be based upon any wrongful act by you, any of
your employees or representatives, any affiliate of or any person
acting on behalf of you, or (ii) may be based upon any untrue
statement or alleged untrue statement of a material fact
contained in a registration statement or prospectus covering
Shares 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 information furnished to us or the Fund by you,
or (iii) may be based on any untrue statement or alleged untrue
statement of a material fact contained in a registration
statement or prospectus covering insurance products sold by you,
or any amendments 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, unless such statement or omission was
made in reliance upon information furnished to you or a
Participating Insurance Company by or on behalf of Investor
Services or the Fund; provided, however, that in no case (i) is
the indemnity by you in favor of any person indemnified to be
deemed to
5
<PAGE>
protect Investor Services or any such person against any
liability to which Investor Services or any such person would
otherwise be subject by reason of willful misfeasance, bad
faith or gross negligence in the performance of its or his
duties or by reason of its or his reckless disregard of its
obligations and duties under this Agreement, or (ii) are you
to be liable under your indemnity agreement contained in this
paragraph with respect to any claim made against Investor
Services or any person indemnified unless Investor Services or
such person, as the case may be, shall have notified you 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 Investor Services or upon
such person (or after Investor Services or such person shall
have received notice of such service on any designated agent),
but failure to notify you of any such claim shall not relieve
you from any liability which you may have to Investor Services
or any person against whom such action is brought otherwise
than on account of your indemnity agreement contained in this
paragraph. You shall be entitled to participate, at your own
expense, in the defense, or, if you so elect, to assume the
defense of any suit brought to enforce any such liability,
but, if you elect to assume the defense, such defense shall be
conducted by counsel chosen by you and satisfactory to
Investor Services, or to its officers or directors, or to any
controlling person or persons, defendant or defendants in the
suit. In the event that you assume the defense of any such
suit and retain such counsel, Investor Services or such
officers or directors or controlling person or persons,
defendant or defendants in the suit, shall bear the fees and
expenses of any additional counsel retained by them, but, in
case you do not elect to assume the defense or any such suit,
you shall reimburse Investor Services and such officers,
directors or controlling person or persons, defendant of
defendants in such suit, for the reasonable fees and expenses
of any counsel retained by them. You agree promptly to notify
Investor Services of the commencement of any litigation or
proceedings against it in connection with the offer, issue and
sale of any shares.
(b) Investor Services will indemnify and hold harmless you and
each of your directors and officers and each person, if any,
who controls you within the meaning of Section 15 of the 1933
Act, against any loss, liability, damages, claim or expense
(including the reasonable cost of investigating or defending
any alleged loss, liability, damages, claim or expense and
reasonable counsel fees incurred in connection therewith),
arising by reason of any person's acquiring any Shares, which
may be based upon the 1933 Act or any other statute or common
law, and which (i) may be based upon any wrongful act by
Investor Services, any of its employees or representatives, or
(ii) may be based upon any untrue
6
<PAGE>
statement or alleged untrue statement of a material fact
contained in a registration statement or prospectus covering
Shares 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 unless such statement or
omission was made in reliance upon information furnished to
Investor Services or the Fund by you or (iii) may be based on
any untrue statement or alleged untrue statement of a material
fact contained in a registration statement or prospectus
covering insurance products sold by you, or any amendment 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 you by or on behalf of Investor
Services or the Fund; provided, however, that in no case (i)
is the indemnity by Investor Services in favor of any person
indemnified to be deemed to protect you or any such person
against any liability to which you or any such person would
otherwise be subject by reason of willful misfeasance, bad
faith or gross negligence in the performance of your or his
duties by reason of your or his reckless disregard of your or
his obligations and duties under this Agreement, or (ii) is
Investor Services to be liable under its indemnity agreement
contained in this paragraph with respect to any claim made
against you or any person indemnified unless you or such
person, as the case may be, shall have notified Investor
Services 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 you or upon such
person (or after you or such person shall have received notice
of such service on any designated agent), but failure to
notify Investor Services of any such claim shall not relieve
Investor Services from any liability to which Investor
Services may have to you or any person against whom such
action is brought otherwise than on account of its indemnity
agreement contained in this paragraph. Investor Services
shall be entitled to participate, at its own expense, in the
defense, or, if it so elects, to assume the defense of any
suit brought to enforce any such liability, but, if it elects
to assume the defense, such defense shall be conducted by
counsel chosen by Investor Services and satisfactory to you,
or to your officers or directors, or to any controlling person
or persons, defendant or defendants in the suit. In the event
that Investor Services assumes the defense of any such suit
and retains such counsel, you or such officers or directors or
controlling person or persons, defendant or defendants in the
suit, shall bear the fees and expenses of any additional
counsel retained by you, but, in case Investor Services does
not elect to assume the defense of any such suit, Investor
Services shall reimburse you and such officers, directors or
controlling person or persons, defendant or defendants in such
suit, for the reasonable fees and expenses of any counsel
retained by you. Investor Services agrees promptly to notify
you of the commencement of any litigation or proceedings
against it in connection with the offer, issue and sale of any
Shares.
9. The indemnities, representations, warranties, covenants and
agreements of each party to this Agreement as set forth in this
Agreement will remain in full force and effect regardless of any
investigation made by or on behalf of either of such parties or any
of their respective officers, directors, partners or any
controlling person, and will survive delivery of and payment for
the Shares.
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10. Any provision of this Agreement which may be determined by
competent authority to be prohibited or unenforceable in any
jurisdiction shall, as to such jurisdiction, be ineffective to the
extent of such prohibition or unenforceability without invalidating
the remaining provisions hereof, and any such prohibition or
unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction. To the
extent permitted by applicable law, each party hereto waives any
provision of law which renders any provision hereof prohibited or
unenforceable in any respect.
11. This Agreement constitutes the entire agreement among the parties
concerning the subject matter hereof, and supersedes any and all
prior understandings.
12. This Agreement shall automatically terminate in the event of its
assignment. This Agreement may be terminated at any time by either
party by 30 days' written notice given to the other party, except
that the Agreement may be terminated by Investor Services without
notice (i) if the continued offering or sale of Shares would
violate any applicable statute or regulation, order or decree of
any court, governmental agency or self-regulatory organization
having jurisdiction, or (ii) if in the sole discretion of the
Trustees of the Fund, including a majority of those Trustees who
are not "interested persons" (as defined in the 1940 Act) of the
Fund or of its investment adviser, such action is determined to be
necessary in the best interests of the Shareholders of any
Portfolio. The obligation of each party to indemnify the other
party pursuant to paragraph 8 hereof shall apply with respect to
any Shares sold before or after such termination. To the extent we
receive payments under any provision of this Agreement pursuant to
a Rule 12b-1 Plan for the Fund, both you and we understand and
agree that this Agreement will be subject to the applicable
approval, reporting and termination requirements as set forth in
Rule 12b-1.
13. Any notice hereunder shall be duly given if mailed or telegraphed
to the other party hereto at the address specified below. This
Agreement shall be governed by and construed in accordance with the
laws of The Commonwealth of Massachusetts.
14. This Agreement may be executed in any number of counterparts which,
taken together shall constitute one and the same instrument. This
Agreement shall become effective upon receipt by us of your
acceptance hereof.
15. This Agreement may not be modified or amended except by a written
instrument duly executed by the parties hereto.
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SCUDDER INVESTOR SERVICES, INC.
By: ___________________________________
President
Two International Place
Boston, Massachusetts 02110
The undersigned hereby accepts the offer set forth
in the above letter.
[REGISTERED BROKER-DEALER]
Dated: ____________________ By:_____________________________________
Authorized Representative
Address:
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