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File Nos. 333-10283
811-7777
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
PRE-EFFECTIVE AMENDMENT NO. 1
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 1
SEPARATE ACCOUNT KGC OF ALLMERICA FINANCIAL LIFE
INSURANCE AND ANNUITY COMPANY
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
440 Lincoln Street
Worcester, MA 01653
(Address of Principal Executive Office)
Abigail M. Armstrong, Secretary and Counsel
Allmerica Financial Life Insurance and Annuity 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.
___On ________ pursuant to paragraph (b) of Rule 485
___60 days after filing pursuant to paragraph (a)(1) of Rule 485.
___On _____ pursuant to paragraph (a)(1) of Rule 485.
VARIABLE ANNUITY POLICIES
Pursuant to Reg. Section 270.24f-2 of the Investment Company Act of 1940,
Registrant hereby declares that an indefinite amount of its securities is being
registered under the Securities Act of 1933.
The Rule 24f-2 Notice for the issuer's fiscal year ended December 31, 1995
was not filed as the Separate Account had not begun operations.
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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
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1 . . . . . . . . . . . . . Cover Page
2 . . . . . . . . . . . . . "Special Terms"
3 . . . . . . . . . . . . . "Summary"; "Annual and Transaction Expenses"
4 . . . . . . . . . . . . . Condensed Financial Information
5 . . . . . . . . . . . . . "Description of the Company, the Variable Account
and the Kemper Investor Fund."
6 . . . . . . . . . . . . . "Charges and Deductions"
7 . . . . . . . . . . . . . "The Variable Annuity Policies"
8 . . . . . . . . . . . . . "The Variable Annuity Policies"
9 . . . . . . . . . . . . . "Death Benefit"
10. . . . . . . . . . . . . "Purchase Payments:; "Computation of Policy Values
and Annuity Payments"
11. . . . . . . . . . . . . "Surrender"; "Withdrawal"
12. . . . . . . . . . . . . "Federal Tax Considerations"
13. . . . . . . . . . . . . "Legal Matters"
14. . . . . . . . . . . . . "Table of Contents of the Statement of Additional
Information"
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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ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
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 Custom contract issued
either on a group basis or as individual contracts by Allmerica Financial Life
Insurance and Annuity 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 the tax status when used
with a particular type of plan, see "FEDERAL TAX CONSIDERATIONS.") 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 collectively referred to
herein as the "Contracts." The following is a summary of information about these
Contracts. More detailed information can be found under the referenced captions
in this Prospectus.
Contract values may accumulate on a variable basis in the Contract's
Separate Account known as Separate Account KGC (the "Variable Account"). The
assets of the Variable Account are divided into Sub-Accounts, each investing
exclusively in shares of one of the following Portfolios of Kemper Investors
Fund ("KINF"):
<TABLE>
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MONEY MARKET PORTFOLIO INVESTMENT GRADE BOND PORTFOLIO
TOTAL RETURN PORTFOLIO VALUE PORTFOLIO
HIGH YIELD PORTFOLIO SMALL CAP VALUE PORTFOLIO
GROWTH PORTFOLIO VALUE+GROWTH PORTFOLIO
GOVERNMENT SECURITIES PORTFOLIO HORIZON 20+ PORTFOLIO
INTERNATIONAL PORTFOLIO HORIZON 10+ PORTFOLIO
SMALL CAP GROWTH PORTFOLIO HORIZON 5 PORTFOLIO
</TABLE>
In most jurisdictions, values may also 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.
Additional information is contained in a Statement of Additional Information
dated December , 1996 ("SAI"), filed with the Securities and Exchange
Commission and incorporated herein by reference. The Table of Contents of the
SAI is on page 3 of this Prospectus. The SAI is available upon request and
without charge through Allmerica Investments, Inc., 440 Lincoln Street,
Worcester, Massachusetts 01653, 800-782-8380.
THIS PROSPECTUS IS VALID ONLY WHEN ACCOMPANIED BY A CURRENT PROSPECTUS OF
KINF. 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 OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE CONTRACTS ARE OBLIGATIONS OF ALLMERICA FINANCIAL LIFE INSURANCE AND
ANNUITY COMPANY AND ARE DISTRIBUTED BY ALLMERICA INVESTMENTS, INC. AND/OR KEMPER
DISTRIBUTORS, INC. AND ZKI AGENCY, 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.
DATED DECEMBER 13, 1996
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TABLE OF CONTENTS
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TABLE OF CONTENTS OF THE STATEMENT OF ADDITIONAL INFORMATION........... 3
SPECIAL TERMS.......................................................... 4
SUMMARY................................................................ 5
ANNUAL AND TRANSACTION EXPENSES........................................ 10
PERFORMANCE INFORMATION................................................ 13
WHAT IS AN ANNUITY?.................................................... 15
RIGHT TO REVOKE IRA.................................................... 16
RIGHT TO REVOKE OR SURRENDER IN SOME STATES............................ 16
DESCRIPTION OF THE COMPANY, THE VARIABLE ACCOUNT, AND KEMPER
INVESTORS FUND....................................................... 16
ADDITION, DELETION OR SUBSTITUTION OF INVESTMENTS...................... 19
VOTING RIGHTS.......................................................... 19
CHARGES AND DEDUCTIONS................................................. 20
A. Annual Charges Against Variable Account Assets................... 20
B. Contract Fee..................................................... 21
C. Optional Benefit Riders.......................................... 21
D. Premium Taxes.................................................... 22
E. Contingent Deferred Sales Charge................................. 22
F. Transfer Charge.................................................. 26
DESCRIPTION OF THE CONTRACT............................................ 26
A. Payments......................................................... 27
B. Transfer Privilege............................................... 27
C. Dollar Cost Averaging and Automatic Rebalancing Options.......... 28
D. Surrender........................................................ 28
E. Withdrawals...................................................... 29
F. Death Benefit.................................................... 29
G. The Spouse of the Contract Owner as Beneficiary.................. 31
H. Assignment....................................................... 31
I. Electing the Form of Annuity and the Annuity Date................ 31
J. Description of Variable Annuity Options.......................... 32
K. Norris Decision.................................................. 33
L. Computation of Values and Annuity Benefit Payments............... 33
GUARANTEE PERIOD ACCOUNTS.............................................. 35
FEDERAL TAX CONSIDERATIONS............................................. 37
A. Qualified and Non-Qualified Contracts............................ 38
B. Taxation of the Contracts in General............................. 38
C. Tax Withholding and Penalties.................................... 39
D. Provisions Applicable to Qualified Employer Plans................ 40
E. Qualified Employee Pension and Profit Sharing Trusts and
Qualified Annuity Plans......................................... 40
F. Self-Employed Individuals........................................ 40
G. Individual Retirement Account Plans.............................. 41
H. Simplified Employee Pensions..................................... 42
I. Public School Systems and Certain Tax-Exempt Organizations....... 42
J. Texas Optional Retirement Program................................ 42
K. Section 457 Plans for State Governments and Tax-Exempt
Entities........................................................ 42
L. Non-individual Owners............................................ 43
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TABLE OF CONTENTS (continued)
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PAGE
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REPORTS................................................................ 43
LOANS (QUALIFIED CONTRACTS ONLY)....................................... 43
CHANGES IN OPERATION OF THE VARIABLE ACCOUNT........................... 43
DISTRIBUTION........................................................... 44
LEGAL MATTERS.......................................................... 44
FURTHER INFORMATION.................................................... 44
APPENDIX A -- MORE INFORMATION ABOUT THE FIXED ACCOUNT................. 45
APPENDIX B -- SURRENDER CHARGES AND THE MARKET VALUE ADJUSTMENT........ 46
APPENDIX C -- THE DEATH BENEFIT........................................ 48
STATEMENT OF ADDITIONAL INFORMATION
TABLE OF CONTENTS
GENERAL INFORMATION AND HISTORY........................................ 2
TAXATION OF THE VARIABLE ACCOUNT AND THE COMPANY....................... 3
SERVICES............................................................... 3
UNDERWRITERS........................................................... 3
ANNUITY PAYMENTS....................................................... 4
PERFORMANCE INFORMATION................................................ 6
TAX DEFERRED ACCUMULATION.............................................. 8
FINANCIAL STATEMENTS................................................... 9
</TABLE>
THE CONTRACTS OFFERED BY THIS PROSPECTUS MAY NOT BE AVAILABLE IN ALL STATES.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN
OFFER TO BUY SECURITIES IN ANY STATE TO ANY PERSON TO WHOM IT IS UNLAWFUL TO
MAKE OR SOLICIT AN OFFER IN THAT STATE.
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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 then credited to the Contract, on any date before the
Annuity Date.
ACCUMULATION UNIT: a measure of the Contract 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 an amount throughout the annuity benefit
payment period selected.
GUARANTEED INTEREST RATE: the annual effective rate of interest after daily
compounding credited to a Guarantee Period 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.
GENERAL ACCOUNT: all the assets of the Company other than those held in a
separate 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.
SUB-ACCOUNT: a subdivision of the Variable Account. Each Sub-Account available
under the Contracts invests exclusively in the shares of a corresponding
portfolio of Kemper Investors Fund.
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: Money Market, Total Return, High Yield, Growth,
Government Securities, International, Small Cap Growth, Investment Grade Bond,
Value, Small Cap Value, Value+Growth, Horizon 20+, Horizon 10+, and Horizon 5
Portfolios of the Kemper Investors Fund.
VALUATION DATE: a day on which the net asset value of the shares of any of the
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 KGC, 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 CUSTOM VARIABLE ANNUITY?
The Kemper Gateway Custom Variable Annuity contract ("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 with experienced professional portfolio
managers
- 14 KINF Portfolios
- 1 Fixed Account
- 9 Guarantee Period Accounts
- Optional Enhanced Death Benefit Rider, Living Benefits Rider, and
Disability Rider
- Tax deferral on earnings
- Guarantees that can protect your beneficiaries family during the
accumulation phase
- Income that can be guaranteed for life
The Contract has two phases, an accumulation phase and 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 portfolios of
securities ("Portfolios") under your Contract, to the Guarantee Period Accounts,
and to the Fixed Account. Your Contract's Accumulated Value is based on the
investment performance of the Portfolios and accumulations in the Guarantee
Period Accounts and the Fixed Account. No income taxes are paid on any earnings
under the Contract unless and until accumulated values are withdrawn.
During the annuity payout phase, the Annuitant can receive income based on
several annuity options. These options include payment over a period of years or
for the rest of the Annuitant's life.
THE ACCUMULATION PHASE
During the accumulation phase, you select the investment options most
appropriate for your investment needs. The Contracts permit net payments to be
allocated among the Portfolios, the Guarantee Period Accounts, and the Fixed
Account. Each Portfolio is professionally managed by Zurich Kemper Investments,
Inc. and its affiliate, Dreman Value Advisors, Inc. All investment gains or
losses of the Portfolios will be reflected in the Accumulated Value under your
Contract.
The accumulation phase provides certain protection and guarantees for the
beneficiary if the Annuitant should die before the annuity phase begins. See
discussion below under "What happens upon death during the accumulation phase?"
THE ANNUITY PAYOUT PHASE
You choose the annuity option and the date for the annuity benefit payments
to begin. Annuity benefit payments may be on a variable basis (dependent upon
the performance of the Portfolios) on a fixed basis (with payment amounts
guaranteed), or on a combination variable and fixed basis. Among the income
options available during the annuity phase are:
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- Lump sum
- At regular intervals over a specified number of years; or
- At regular intervals for the rest of the Annuitant's life, regardless of
how long he or she lives.
WHO ARE THE KEY PERSONS UNDER THE CONTRACT?
The Contract is between you and us -- Allmerica Financial Life Insurance and
Annuity Company (the "Company"). Each Contract has a Contract Owner (or an Owner
and a Joint Owner, in which case one of the two must also be the Annuitant), an
Annuitant and a beneficiary. As Contract Owner, you make payments, choose
investment allocations and select the Annuitant and beneficiary. The Annuitant
is the individual who receives annuity benefit payments under the Contract. The
beneficiary is the person who receives any payment on death of the Contract
Owner or Annuitant.
CAN I EXAMINE THE CONTRACT?
Yes. Your Contract will be delivered to you after your purchase. If you
return the Contract to the Company during the first 10 days from the date you
received it, the Contract will be canceled. (There may be a longer period in
certain states; see the "Right to Examine" provision on the cover of your
Contract). If your Contract was issued as an IRA or provides for a full refund
of the initial payment under its "Right to Examine" provision, you will incur no
fees to cancel within the right-to-examine period and will receive the greater
of (1) your entire payment, or (2) the accumulated value of the Contract plus
any amounts deducted under the Contract or by the Portfolios for taxes, charges
or fees. If your Contract does not provide for a full refund of the initial
payment, you will receive upon cancellation the sum of (1) the difference
between the payment, including fees, and any amount allocated to the Variable
Account and (2) the Accumulated Value (on the date the cancellation request is
received by the Company) attributable to amounts allocated to the Variable
Account Sub-Accounts. See "RIGHT TO REVOKE CONTRACT."
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. The Fixed Account is part of the General Account of the Company and
provides a guarantee by the Company of principal and a fixed interest rate for
one year from the date amounts are allocated to the account. Payments allocated
to a Guarantee Period Account are held in a separate account and earn a
guaranteed interest rate if held for the full duration of the Guarantee Period.
THE FIXED ACCOUNT AND/OR THE GUARANTEE PERIOD ACCOUNTS MAY NOT BE AVAILABLE IN
ALL STATES.
VARIABLE ACCOUNT -- You have a choice of Sub-Accounts investing in the 14
Portfolios of the Kemper Investors Fund ("KINF"):
<TABLE>
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MONEY MARKET INVESTMENT GRADE BOND
TOTAL RETURN VALUE
HIGH YIELD SMALL CAP VALUE
GROWTH VALUE+GROWTH
GOVERNMENT SECURITIES HORIZON 20+
INTERNATIONAL HORIZON 10+
SMALL CAP GROWTH HORIZON 5
</TABLE>
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This range of investment choices enables you to allocate your money among
the Portfolios to meet your particular investment needs. If your Contract was
issued as an IRA or provides for a full refund of the initial payment under its
"Right to Examine" provision (see "RIGHT TO REVOKE CONTRACT"), for the first 15
days from the date of issue, all Portfolio investments and allocations to the
Guarantee Period Accounts will be allocated to the Money Market Portfolio.
Thereafter, all amounts will be allocated according to your investment choices.
For a more detailed description of the Portfolios, see the prospectus of KINF.
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. However, values and benefits calculated
on the basis of Guarantee Period Account allocations 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. 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
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."
WHO ARE THE PORTFOLIO MANAGERS?
Zurich Kemper Investments, Inc. ("ZKI"), is the investment manager of each
Portfolio of the KINF other than the Value and Small Cap Value Portfolios which
are managed by Dreman Value Advisors, Inc. ("DVA"), a wholly owned subsidiary of
ZKI. ZKI and DVA provide each portfolio with continuous professional investment
supervision. DVA is also the sub-adviser for the Value+Growth, Horizon 20+,
Horizon 10+, and Horizon 5 Portfolios. Under the terms of its Sub-Advisory
Agreement with ZKI, DVA will manage the value portion of each of these
Portfolios and will provide such other investment advice, research and
assistance as ZKI may, from time to time, reasonably request. Zurich Investment
Management, Inc. ("ZIM"), a wholly-owned subsidiary of ZKI, 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. However, transfers out of a Guarantee Period Account prior to
its maturity date will incur a Market Value Adjustment. You may also 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 "TRANSFER PRIVILEGE."
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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 "PAYMENTS."
WHAT IF I NEED MY MONEY BEFORE MY ANNUITY PAYOUT PHASE BEGINS?
You can withdraw 15% of the total Accumulated Value per calendar year
without a surrender charge. You may surrender your Contract or make withdrawals
any time before your annuity payout phase begins subject to the restrictions
discussed in "SURRENDER," "WITHDRAWALS," and "MARKET VALUE ADJUSTMENT." Certain
charges may apply, see "CHARGES AND DEDUCTIONS," and there may be a tax-penalty
assessed under the Internal Revenue Code (the "Code"). See "FEDERAL TAX
CONSIDERATIONS."
WHAT HAPPENS UPON DEATH DURING MY ACCUMULATION PHASE?
If the Annuitant, Contract Owner or Joint Owner should die before the
Annuity Date, a Death Benefit will be paid to the beneficiary. Unless the
Enhanced Death Benefit Rider is in effect at the death of the Annuitant (or a
Contract Owner who is also an Annuitant), a standard Annuitant Death Benefit
will be paid. The standard Annuitant Death Benefit is equal to the greater of:
- The Accumulated Value increased by any positive Market Value Adjustment;
or
- Gross payments reduced 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).
If the Contract Owner elects the Enhanced Death Benefit Rider, the Annuitant
Death Benefit will be the greatest of
- The Accumulated Value increased by any positive Market Value Adjustment;
- Gross payments, with interest accumulating daily at an annual rate of 5%
starting on the date each payment was applied, reduced 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
- The Death Benefit that would have been payable on the most recent Contract
Anniversary, increased for subsequent payments and reduced proportionately
to reflect withdrawals after that date.
A separate charge is made for the Enhanced Death Benefit Rider. See "Death
Benefit" under "DESCRIPTION OF THE CONTRACT."
Regardless of whether the Enhanced Death Benefit Rider is in effect, if a
Contract Owner who is not also the Annuitant dies during the Accumulation phase,
the Death Benefit will equal the Accumulated Value of the Contract increased by
any positive Market Value Adjustment. 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 "Death Benefit."
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WHAT ARE MY ANNUITY OPTIONS UNDER THE CONTRACT?
You may choose variable annuity benefit payments based on the investment
performance of certain Portfolios, fixed-amount annuity benefit payments, or a
combination of fixed-amount and variable annuity benefit payments. Fixed-amount
payments are guaranteed by the Company. See "DESCRIPTION OF THE CONTRACT" for
information about annuity benefit payment options, selecting the Annuity Date,
and how annuity benefit payments are calculated.
WHAT CHARGES WILL I INCUR UNDER MY CONTRACT?
At each Contract anniversary and upon surrender, if the Accumulated Value is
less than $50,000, the Company will deduct a $35 Contract Fee from your
Contract. There will be no Contract Fee if the Accumulated Value is $50,000 or
more. The Contract Fee is waived for Contracts issued to and maintained by a
Trustee of a 401(k) plan.
Should you decide to surrender your 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 you live in, a deduction for state and local
premium taxes, if any, may be made as described under "PREMIUM TAXES."
Currently, the Company makes no charge for processing transfers. The first
twelve (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 an annual charge of 0.95%
and 0.15%, respectively, of the average daily net assets invested in each
Portfolio. The Portfolios will incur certain management fees and expenses which
are more fully described in "OTHER CHARGES" and in the KINF prospectus, which
accompanies this Prospectus.
Three optional riders (Enhanced Death Benefit Rider, Living Benefits Rider,
and Disability Rider) are available for an additional charge of 0.25%, 0.05% and
0.05%, respectively, which is deducted in arrears on a monthly basis. For more
information, see "Living Benefits Rider" and "Disability Rider" under CHARGES
AND DEDUCTIONS, and "F. Death Benefit" under "DESCRIPTION OF THE 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 the allocation of payments, with no tax consequences under
current law.
- You may make transfers of Contract value among your current investments.
- You may cancel your Contract within 10 days of delivery, as discussed
above.
- You may select the form and timing of annuity benefit payments.
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ANNUAL AND TRANSACTION EXPENSES
The following tables show charges under your Contract, expenses of the
Sub-Accounts, and expenses of the Portfolios. In addition to the charges and
expenses described below, premium taxes are applicable in some states and
deducted as described under "PREMIUM TAXES."
<TABLE>
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YEARS FROM DATE
CONTRACT CHARGES OF PAYMENT CHARGE
- -------------------------------------------------------------------------------------------- ---------------- ---------
<S> <C> <C>
CONTINGENT DEFERRED SALES CHARGE: 0-1 7.0%
This charge may be assessed upon surrender, withdrawal or annuitization 2 6.0%
under any commutable period certain option or a noncommutable period 3 5.0%
certain option of less than 10 years. The charge is a percentage of 4 4.0%
payments applied to the amount surrendered (in excess of any amount 5 3.0%
that is free of charge) within the indicated time periods. 6 2.0%
Thereafter 0.0%
TRANSFER CHARGE: None
The Company currently makes no charge for processing transfers. The Company guarantees that
the first twelve 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: $ 35
The Fee is deducted annually and upon 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.
<CAPTION>
SUB-ACCOUNT EXPENSES
- --------------------------------------------------------------------------------------------
<S> <C> <C>
(on annual basis as percentage of average daily net assets)
Mortality and Expense Risk Charge: 0.95%
Administrative Expense Charge: 0.15%
---------
Total Asset Charge: 1.10%
</TABLE>
<TABLE>
<CAPTION>
PORTFOLIO EXPENSES
- -----------------------------------------------------------
<S> <C> <C> <C>
(annual basis as percentage of average daily net assets)
<CAPTION>
MANAGEMENT OTHER TOTAL
PORTFOLIO FEE EXPENSES EXPENSES
- ----------------------------------------------------------- --------------- ----------- -----------
<S> <C> <C> <C>
Money Market............................................... 0.50% 0.05% 0.55%
Total Return............................................... 0.55% 0.05% 0.60%
High Yield................................................. 0.60% 0.05% 0.65%
Growth..................................................... 0.60% 0.04% 0.64%
Government Securities...................................... 0.55% 0.10% 0.65%
International.............................................. 0.75% 0.17% 0.92%
Small Cap Growth........................................... 0.65% 0.22% 0.87%
Investment Grade Bond...................................... 0.60% 0.15%* 0.75%
Value...................................................... 0.75% 0.15%* 0.90%
Small Cap Value............................................ 0.75% 0.15%* 0.90%
Value+Growth............................................... 0.75% 0.15%* 0.90%
Horizon 20+................................................ 0.60% 0.15%* 0.75%
Horizon 10+................................................ 0.60% 0.15%* 0.75%
Horizon 5.................................................. 0.60% 0.15%* 0.75%
</TABLE>
*Estimated First-Year Expenses
10
<PAGE>
EXAMPLES. The following examples demonstrate the cumulative expenses which
would be paid by the Contract 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
Securities and Exchange Commission. Because the expenses of the Portfolios
differ, separate examples are used to illustrate the expenses incurred by a
Contract 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.
(a) If, at the end of the applicable period, you surrender your Contract or
annuitize* under a commutable period certain option or a noncommutable period
certain option of less than 10 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>
Money Market............................................... $ 79 $ 101 $ 123 $ 202
Total Return............................................... $ 79 $ 102 $ 125 $ 207
High Yield................................................. $ 80 $ 104 $ 128 $ 212
Growth..................................................... $ 80 $ 103 $ 127 $ 211
Government Securities...................................... $ 80 $ 104 $ 128 $ 212
International.............................................. $ 82 $ 111 $ 141 $ 240
Small Cap Growth........................................... $ 82 $ 110 $ 139 $ 235
Investment Grade Bond...................................... $ 81 $ 106 $ 133 $ 223
Value...................................................... $ 82 $ 111 $ 140 $ 238
Small Cap Value............................................ $ 82 $ 111 $ 140 $ 238
Value+Growth............................................... $ 82 $ 111 $ 140 $ 238
Horizon 20+................................................ $ 81 $ 106 $ 133 $ 223
Horizon 10+................................................ $ 81 $ 106 $ 133 $ 223
Horizon 5.................................................. $ 81 $ 106 $ 133 $ 223
</TABLE>
(b) If, at the end of the applicable time period, you annuitize* under a
life option or a noncommutable period certain option of 10 years or longer, or
if you do not surrender or annuitize your 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>
Money Market............................................... $ 17 $ 54 $ 93 $ 202
Total Return............................................... $ 18 $ 55 $ 95 $ 207
High Yield................................................. $ 18 $ 57 $ 98 $ 212
Growth..................................................... $ 18 $ 57 $ 97 $ 211
Government Securities...................................... $ 18 $ 57 $ 98 $ 212
International.............................................. $ 21 $ 65 $ 112 $ 240
Small Cap Growth........................................... $ 21 $ 64 $ 109 $ 235
Investment Grade Bond...................................... $ 19 $ 60 $ 103 $ 223
Value...................................................... $ 21 $ 64 $ 111 $ 238
Small Cap Value............................................ $ 21 $ 64 $ 111 $ 238
Value+Growth............................................... $ 21 $ 64 $ 111 $ 238
Horizon 20+................................................ $ 19 $ 60 $ 103 $ 223
Horizon 10+................................................ $ 19 $ 60 $ 103 $ 223
Horizon 5.................................................. $ 19 $ 60 $ 103 $ 223
</TABLE>
As required in rules promulgated under 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 Contracts. The
resulting percentage is 0.088%, and the amount of the Contract Fee is assumed to
be $0.88 in the examples.
*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 noncommutable period certain option of
ten years or longer.
11
<PAGE>
OPTIONAL BENEFIT RIDERS. Subject to state availability, the Company offers
three optional benefit riders that may be elected by the Contract Owner. A
separate monthly charge is made for each rider selected. The applicable charge
is assessed on the Accumulated Value on the last day of each month and on the
date a rider is terminated, multiplied by 1/12th of the following annual
percentage rates:
<TABLE>
<S> <C>
Enhanced Death Benefit Rider 0.25%
Disability Rider 0.05%
Living Benefits Rider 0.05%
</TABLE>
For a description of these riders, see "Living Benefits Rider" and
"Disability Rider" under "CHARGES AND DEDUCTIONS," and "Enhanced Death Benefit
Rider" under "DESCRIPTION OF THE CONTRACT."
12
<PAGE>
PERFORMANCE INFORMATION
The Contracts are first being offered to the public in 1996. However, the
Company and KINF may advertise "Total Return" and "Average Annual Total Return"
performance information based on the periods that the Portfolios have been in
existence. The results for any period prior to the Contracts being offered will
be calculated as if the Contracts had been offered during that period of time,
with all charges assumed to be those applicable to the Sub-Accounts, the
Portfolios, and (in Table I) assuming that the Contract is surrendered at the
end of the applicable period.
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 average 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 Money Market Portfolio
refers to the income generated by an investment in the Sub-Account over a
seven-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 Total Return, Yield, and Effective Yield figures are adjusted to reflect
the Sub-Account's asset charges. The total return figures also reflect the $35
annual Contract Fee and the contingent deferred sales charge which would be
assessed if the investment were completely surrendered at the end of the
specified period.
The Company and KINF may also advertise supplemental total return
performance information. Supplemental total return refers to the total of the
income generated by an investment in the Sub-Account and of the changes in value
of the principal invested (due to realized and unrealized capital gains or
losses), adjusted by the Sub-Account's annual asset charges, and expressed as a
percentage of the investment. Because it is assumed that the investment is NOT
surrendered at the end of the specified period, the contingent deferred sales
charge is NOT included in the calculation of supplemental total return.
Performance information for a Sub-Account may be compared, in reports and
promotional literature, to: (i) the Standard & Poor's 500 Stock 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; (ii) other
groups of variable annuity variable 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, such as Morningstar, Inc., who rank such investment
products on overall performance or other criteria; or (iii) 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.
13
<PAGE>
PERFORMANCE INFORMATION FOR ANY SUB-ACCOUNT REFLECTS ONLY THE PERFORMANCE OF
A HYPOTHETICAL INVESTMENT IN THE SUB-ACCOUNT DURING THE PARTICULAR TIME PERIOD
ON WHICH THE CALCULATIONS ARE BASED. PERFORMANCE INFORMATION SHOULD BE
CONSIDERED IN LIGHT OF THE INVESTMENT OBJECTIVES AND POLICIES, CHARACTERISTICS
AND QUALITY OF THE INVESTMENT PORTFOLIO OF THE PORTFOLIO IN WHICH THE
SUB-ACCOUNT 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.
TABLE I
AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDING DECEMBER 31, 1995
(ASSUMING COMPLETE SURRENDER OF INVESTMENT)
<TABLE>
<CAPTION>
10 YEARS
YEAR (OR SINCE
ENDED: 5 INCEPTION
UNDERLYING PORTFOLIO 12/31/95 YEARS IF LESS)*
- ------------------------------------------------------------------------------------ ---------- --------- ---------
<S> <C> <C> <C>
Money Market........................................................................ -1.88% 2.57% 4.71%
Total Return........................................................................ 17.51% 10.69% 10.51%
High Yield.......................................................................... 9.13% 18.08% 10.19%
Growth.............................................................................. 24.43% 17.62% 11.93%
Government Securities............................................................... 10.60% 6.80% 7.21%
International....................................................................... 4.88% N/A 7.41%
Small Cap Growth.................................................................... 21.56% N/A 15.38%
Investment Grade Bond............................................................... N/A N/A N/A
Value............................................................................... N/A N/A N/A
Small Cap Value..................................................................... N/A N/A N/A
Value+Growth........................................................................ N/A N/A N/A
Horizon 20+......................................................................... N/A N/A N/A
Horizon 10+......................................................................... N/A N/A N/A
Horizon 5........................................................................... N/A N/A N/A
</TABLE>
14
<PAGE>
TABLE II
AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDING DECEMBER 31, 1995
(ASSUMING NO SURRENDER OF INVESTMENT)
<TABLE>
<CAPTION>
10 YEARS
YEAR (OR SINCE
ENDED: 5 INCEPTION
UNDERLYING PORTFOLIO 12/31/95 YEARS IF LESS)*
- ------------------------------------------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Money Market......................................................................... 4.33% 3.10% 4.71%
Total Return......................................................................... 24.51% 11.09% 10.51%
High Yield........................................................................... 16.03% 18.39% 10.19%
Growth............................................................................... 31.43% 17.93% 11.93%
Government Securities................................................................ 17.59% 7.25% 7.21%
International........................................................................ 11.51% N/A 8.23%
Small Cap Growth..................................................................... 28.56% N/A 18.67%
Investment Grade Bond................................................................ N/A N/A N/A
Value................................................................................ N/A N/A N/A
Small Cap Value...................................................................... N/A N/A N/A
Value+Growth......................................................................... N/A N/A N/A
Horizon 20+.......................................................................... N/A N/A N/A
Horizon 10+.......................................................................... N/A N/A N/A
Horizon 5............................................................................ N/A N/A N/A
</TABLE>
*The inception dates for the Portfolios are: 3/5/82 for Money Market, Total
Return and High Yield; 12/9/83 for Growth; 9/3/87 for Government Securities;
1/6/92 for International; 5/2/94 for the Small Cap Growth; 5/1/96 for Investment
Grade Bond, Value, Small Cap Value, Value+Growth, Horizon 20+, Horizon 10+, and
Horizon 5.
WHAT IS AN ANNUITY?
In general, an annuity is an insurance contract designed to provide a
retirement income in the form of periodic payments for the lifetime of the
Contract Owner or an individual chosen by the Contract Owner. The retirement
income payments are called "annuity benefit payments" and the individual
receiving the payments is called the "Annuitant." Annuity benefit payments begin
on the annuity date.
The Contract has two phases, an accumulation phase and 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 portfolios of
securities ("Portfolios") under your Contract, to the Guarantee Period Accounts,
and to the Fixed Account.
During the annuity payout phase, the Annuitant can receive income based on
several annuity options. These options include payment over a period of years or
for the rest of the Annuitant's life.
Under an annuity contract, the insurance company assumes a mortality risk
and an expense risk. The mortality risk arises from the insurance company's
guarantee that annuity benefit payments will continue for the life of the
Annuitant, regardless of how long the Annuitant lives or how long all Annuitants
as a group live. The expense risk arises from the insurance company's guarantee
that charges will not be increased beyond the limits specified in the Contract,
regardless of actual costs of operations.
15
<PAGE>
The Contract Owner's payments, less any applicable deductions, are invested
by the insurance company. After retirement, annuity benefit payments are paid to
the Annuitant for life or for such other period chosen by the Contract Owner. In
the case of a "fixed" annuity, the value of these annuity benefit payments is
guaranteed by the insurance company, which assumes the risk of making the
investments to enable it to make the guaranteed payments. For more information
about fixed annuities see APPENDIX A, "MORE INFORMATION ABOUT THE FIXED
ACCOUNT." With a variable annuity, the value of the Contract and the annuity
benefit payments are not guaranteed but will vary depending on the investment
performance of a portfolio of securities. Any investment gains or losses are
reflected in the value of the Contract and in the annuity benefit payments. If
the portfolio increases in value, the value of the Contract increases. If the
portfolio decreases in value, the value of the Contract decreases.
RIGHT TO REVOKE IRA
An individual purchasing a Contract intended to qualify as an IRA may revoke
the Contract at any time within 10 days after receipt of the Contract and
receive a refund. In order to revoke the Contract, the Contract Owner must mail
or deliver the Contract to the agent through whom the Contract was purchased or
to the Principal Office of the Company at 440 Lincoln Street, Worcester,
Massachusetts 01653. Mailing or delivery must occur on or before 10 days after
receipt of the Contract for revocation to be effective.
Within seven days the Company will provide a refund equal to the greater of
(1) gross payments, or (2) the Accumulated Value plus any amounts deducted under
the Contract or by the Portfolios for taxes, charges or fees.
The liability of the Variable Account under this provision is limited to the
Contract Owner's Accumulated Value in the Sub-Accounts on the date of
cancellation. Any additional amounts refunded to the Contract Owner will be paid
by the Company.
RIGHT TO REVOKE OR SURRENDER IN SOME STATES
In Georgia, Idaho, Indiana, Michigan, Missouri, North Carolina, Oklahoma,
Oregon, South Carolina, Texas, Utah, Washington and West Virginia, any Contract
Owner may revoke the Contract at any time within 10 days (20 days in Idaho)
after receipt of the Contract and receive a refund as described under "RIGHT TO
REVOKE IRA," above.
In all other states, a Contract Owner may return the Contract at any time
within 10 days (or the number of days required by state law if more than 10)
after receipt of the Contract. The Company will pay to the Contract Owner an
amount equal to the sum of (i) the difference between the payment paid,
including fees, and any amount allocated to the Variable Account and (ii) the
Accumulated Value of amounts allocated to the Variable Account as of the date
the request is received. If the Contract was issued as an IRA, the IRA
revocation right described above may be utilized in lieu of the special
surrender right.
DESCRIPTION OF THE COMPANY, THE VARIABLE ACCOUNT,
AND KEMPER INVESTORS FUND
THE COMPANY -- The Company is a life insurance company organized under the
laws of Delaware in July, 1974. Its Principal Office is located at 440 Lincoln
Street, Worcester, Massachusetts 01653, Telephone 800-782-8380. The Company is
subject to the laws of the State of Delaware governing insurance companies and
16
<PAGE>
to regulation by the Commissioner of Insurance of Delaware. In addition, the
Company is subject to the insurance laws and regulations of other states and
jurisdictions in which it is licensed to operate. As of December 31, 1995, the
Company had over $5 billion in assets and over $18 billion of life insurance in
force.
Effective October 1, 1995, the Company changed its name from SMA Life
Assurance Company to Allmerica Financial Life Insurance and Annuity Company. The
Company is an indirect wholly-owned subsidiary of First Allmerica Financial Life
Insurance Company ("First Allmerica"), which in turn is a wholly-owned
subsidiary of Allmerica Financial Corporation ("AFC"). First Allmerica,
originally organized under the laws of Massachusetts in 1844 as a mutual life
insurance company and known as State Mutual Life Assurance Company of America,
converted to a stock life insurance company on October 16, 1995 and adopted its
present name. First Allmerica is the fifth oldest life insurance company in
America. As of December 31, 1995 First Allmerica and its subsidiaries (including
the Company) had over $11 billion in combined assets and over $35.2 billion in
life insurance in force.
VARIABLE ACCOUNT -- Separate Account KGC ("Variable Account") is a separate
investment account of the Company with 14 Sub-Accounts. The assets used to fund
the variable portions of the Contracts 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 Kemper Investors Fund ("KINF").
Each Sub-Account is administered and accounted for as part of the general
business of the Company. However, the income, capital gains, or capital losses
of each Sub-Account are allocated to each Sub-Account, without regard to any
other income, capital gains, or capital losses of the Company. Under Delaware
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 Securities and
Exchange Commission ("SEC") as a unit investment trust under the Investment
Company Act of 1940 ("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.
KEMPER INVESTORS FUND -- The Variable Account invests in shares of Kemper
Investors Fund ("KINF"), a series type mutual fund registered with the
Commission as an open-end, diversified, management investment company.
Registration of KINF does not involve supervision of its management, investment
practices or policies by the Commission. KINF is designed to provide an
investment vehicle for certain variable annuity contracts and variable life
insurance policies. Shares of the Portfolios of KINF are sold only to insurance
company separate accounts. The investment objectives of the fourteen Portfolios
of KINF are summarized below:
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 twelve months or less.
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.
HIGH YIELD PORTFOLIO seeks to provide a high level of current income by
investing in fixed-income securities.
GROWTH PORTFOLIO seeks maximum appreciation of capital through
diversification of investment securities having potential for capital
appreciation.
17
<PAGE>
GOVERNMENT SECURITIES PORTFOLIO seeks high current return consistent with
preservation of capital from a portfolio composed primarily of U.S. Government
securities.
INTERNATIONAL PORTFOLIO seeks total return, a combination of capital growth
and income, principally through an internationally diversified portfolio of
equity securities.
SMALL CAP GROWTH PORTFOLIO seeks maximum appreciation of investors' capital
from a portfolio primarily of growth stocks of smaller companies.
INVESTMENT GRADE BOND PORTFOLIO seeks high current income by investing
primarily in a diversified portfolio of investment grade debt securities.
VALUE PORTFOLIO seeks to achieve a high rate of total return from a
portfolio primarily of value stocks of larger companies.
SMALL CAP VALUE PORTFOLIO seeks long-term capital appreciation from a
portfolio primarily of value stocks of smaller companies.
VALUE+GROWTH PORTFOLIO seeks growth of capital through professional
management of a portfolio of growth and value stocks.
HORIZON 20+ PORTFOLIO, designed for investors with approximately a 20+ year
investment horizon, seeks growth of capital, with income as a secondary
objective.
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.
HORIZON 5 PORTFOLIO, designed for investors with approximately a 5 year
investment horizon, seeks income consistent with preservation of capital, with
growth of capital as a secondary objective.
There is no assurance that any of the Portfolios of KINF will achieve its
objective as stated in KINF's prospectus. More detailed information, including a
description of risks involved in investing in each of the Portfolios, may be
found in the prospectus for KINF, which must accompany or precede this
Prospectus, and KINF's Statement of Additional Information available upon
request from KINF, 222 South Riverside Plaza, Chicago, Illinois 60606. Please
read the prospectus of KINF carefully before investing.
INVESTMENT MANAGEMENT SERVICES TO KINF -- Responsibility for overall
management of KINF rests with the Board of Trustees and officers of KINF. ZKI is
the investment manager of each Portfolio other than the Value and Small Cap
Value Portfolios who are managed by DVA, a wholly owned subsidiary of ZKI. ZKI
and DVA provide each portfolio with continuous professional investment
supervision. DVA is also the sub-adviser for the Value+Growth, Horizon 20+,
Horizon 10+, and Horizon 5 Portfolios. Under the terms of its Sub-Advisory
Agreement with ZKI, DVA will manage the value portion of each of these
Portfolios and will provide such other investment advice, research and
assistance as ZKI may, from time to time reasonably request.
For its services, ZKI is paid a management fee based upon the average daily
net assets of such Portfolios, as follows: Money Market (.50 of 1%), Total
Return (.55 of 1%), High Yield (.60 of 1%), Growth (.60 of 1%), Government
Securities (.55 of 1%), International (.75 of 1%), Small Cap Growth (.65 of 1%),
Investment Grade Bond (.60 of 1%), Value+Growth (.75 of 1%), Horizon 20+ (.60 of
1%), Horizon 10+ (.60 of 1%), and Horizon 5 (.60 of 1%). DVA serves as the
investment manager for the Value and Small Cap Value Portfolios and is paid a
management fee at an annual rate of .75 of 1% of the average daily net assets of
these Portfolios. For more information, see the KINF Prospectus and SAI.
18
<PAGE>
ADDITION, DELETION OR SUBSTITUTION OF INVESTMENTS
The Company reserves the right, subject to applicable law and to provisions
of the Participation Agreement (the "Participation Agreement") among the
Company, KINF, ZKI and Kemper Distributors, Inc., 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 are no longer 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
Contract Owner and prior approval of the Commission 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 a
Contract 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 Commission
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 Contract Owners on a basis to be determined by the Company.
Shares of the Portfolios are also issued to variable accounts of other
insurance companies which issue variable life Contracts ("mixed funding").
Shares of the Portfolios are also 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 Contract
Owners or variable annuity Contract Owners. Although the Company and KINF do not
currently foresee any such disadvantages to either variable life insurance
Contract Owners or variable annuity Contract Owners, the Company and the
Trustees of KINF intend to monitor events in order to identify any material
conflicts between such Contract 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 are made, the Company may by
appropriate endorsement change the Contract to reflect the substitution or
change and will notify Contract Owners of all such changes. If the Company deems
it to be in the best interest of Contract Owners, and subject to any approvals
that may be required under applicable law, the Variable Account or any
Sub-Account(s) may be operated as a management company under the 1940 Act, may
be deregistered under the 1940 Act if registration is no longer required, or may
be combined with other Sub-Accounts or other separate accounts of the Company.
VOTING RIGHTS
The Company will vote Portfolio shares held by each Sub-Account in
accordance with instructions received from Contract 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 will also vote shares in a
Sub-Account that it owns and which are not attributable to Contracts in the same
proportion. If the 1940 Act or any rules thereunder
19
<PAGE>
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 a Contract Owner or Annuitant may cast will be
determined by the Company as of the record date established by the Portfolio.
During the accumulation period, the number of Portfolio shares attributable to
each Contract 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 period, 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.
CHARGES AND DEDUCTIONS
Deductions under the Contracts 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 Prospectus and SAI of KINF.
A. ANNUAL CHARGES AGAINST VARIABLE ACCOUNT ASSETS.
MORTALITY AND EXPENSE RISK CHARGE. The Company makes a charge of 0.95% on an
annual basis of the daily value of each Sub-Account's assets to cover the
mortality and expense risk which the Company assumes in relation to 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 0.55% 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 period and the
annuity payout period. The daily Administrative Expense Charge is assessed to
help defray administrative expenses actually incurred in the administration of
the Sub-Account, without profits. However, there is no direct relationship
between the amount of administrative expenses imposed on a given contract and
the amount of expenses actually attributable to that contract.
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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 Contracts 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.
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 Prospectus and SAI of
KINF contain additional information concerning expenses of the Portfolios.
B. CONTRACT FEE.
A $35 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 will also be waived for Contracts
where both the Contract Owner and the Annuitant on the date of issue are 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 Contracts; 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. OPTIONAL BENEFIT RIDERS.
Subject to state availability, the Company offers three optional benefit
riders that may be elected by the Contract Owner. A separate monthly charge is
made for each rider selected. On the last day of each month and on the date the
rider is terminated, a charge equal to 1/12th of an annual rate (see table
below) is made against the Accumulated Value of the Contract at that time. The
charge is made through a pro-rata reduction (based on relative values) in
Accumulation Units of the Sub-Accounts, of dollar amounts in the Fixed Account,
and of dollar amounts in the Guarantee Period Accounts.
The applicable charge is assessed on the Accumulated Value on the last day
of each month and on the date a rider is terminated, multiplied by 1/12th of the
following annual percentage rates:
<TABLE>
<S> <C>
Enhanced Death Benefit Rider............................... 0.25%
Living Benefits Rider...................................... 0.05%
Disability Rider........................................... 0.05%
</TABLE>
For a description of these riders, see "Living Benefits Rider" and
"Disability Rider" under "CHARGES AND DEDUCTIONS," below, and "E. Death Benefit"
under "DESCRIPTION OF THE CONTRACT," below.
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<PAGE>
D. 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
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.
E. CONTINGENT DEFERRED SALES CHARGE.
No charge for sales expense is deducted from payments at the time the
payments are made. However, a contingent deferred sales charge is deducted from
the Accumulated Value of the Contract 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) Earnings -- the amount of Contract Value in excess of all payments that
have not been previously surrendered. For purposes of determining the amount of
any contingent deferred sales charge, surrenders will be deemed to be taken
first from Old Payments, then from New Payments. 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 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 Accumulated Value in
any calendar year, the amount withdrawn in excess of 15% is subject to a
Withdrawal Charge.
CHARGES FOR SURRENDER AND WITHDRAWALS. If a 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 will never 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
first-in-first-out ("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>
CHARGE AS PERCENTAGE
YEARS FROM 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 Contract 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. From time to time where
permitted by law, the Company may allow a reduction in or elimination of the
contingent deferred sales charge, the period during which the charge applies, or
both, and/or 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: (a) the size and type
of group or class, and the persistency expected from that group or class; (b)
the total amount of payments to be received and the manner in which payments are
remitted; (c) the purpose for which the Contracts are being purchased and
whether that purpose makes it likely that costs and expenses will be reduced;
(d) other transactions where sales expenses are likely to be reduced; or (e) 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 may also
reduce or waive the contingent deferred sales charge, and/or credit additional
amounts on Contracts, where both the Contract Owner and the Annuitant on the
date of issue are 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;
officers, directors, trustees and employees of any of the Portfolios, investment
managers or sub-advisers; and the spouses of and immediate family members of
such eligible persons. "Immediate family members" means children, grandchildren,
parents and grandparents.
Any reduction or elimination in the amount or duration of the contingent
deferred sales charge will not discriminate unfairly between purchasers of this
Contract. The Company will not make any changes to this charge where prohibited
by law.
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 greater of (1) or (2):
Where (1) is:
15% of the Accumulated Value as of the Valuation Date coincident with or
next following the date of receipt of the request for withdrawal, reduced by
the total amount of any prior withdrawals made in the same calendar year to
which no contingent deferred sales charge was applied.
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<PAGE>
Where (2) is:
The amount calculated under the Company's life expectancy distribution (see
"LED Distributions," below) 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 would have a Free Withdrawal Amount of $2,250, which is equal to the
greater of:
(1) 15% of Accumulated Value ($2,250); or
(2) LED distribution of 10.2% of Accumulated Value ($1,530).
The Withdrawal Without Surrender Charge will first be deducted 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 last-in-first-out ("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
will be subject to a Market Value Adjustment.
LIVING BENEFITS RIDER. For a separate monthly charge, an optional Living
Benefits Rider may be elected at the time of application for the Contract. Under
this rider, the Surrender Charge will be waived if the Contract Owner (or the
Annuitant if the Contract Owner is not a person), is:
(a) admitted to a "medical care facility" after the issue date of the
Contract and remains confined there until the later of one year after
the issue date or 90 consecutive days;
(b) first diagnosed by a licensed "physician" as having a "fatal illness"
after the issue date of the Contract; or (c) commencing one year after
issue of the Contract, is confined to a hospice or receives home health
services, with certification from a licensed physician that the
confinement to the hospice or receipt of home health care services is
expected to continue until death.
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 inpatient
care which is prescribed by a licensed "physician" in writing 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 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 either of the
two situations discussed above, no additional payments under this Contract will
be accepted.
On the last day of each month and on the date the rider is terminated, a
charge equal to 1/12th of an annual rate of 0.05% is made against the
Accumulated Value of the Contract at that time. The charge is made through a
pro-rata reduction in Accumulation Units of the Subaccounts, of dollar amounts
in the Fixed Account, and of dollar amounts in the Guarantee Period Accounts,
based on relative values.
DISABILITY RIDER. For a separate monthly charge, an optional Disability
Rider may be elected at the time of application for the Contract. Under this
rider, the Surrender Charge will be waived if the Contract Owner (or the
Annuitant if the Contract Owner is not a person), is physically disabled after
the issue date of the Contract and
24
<PAGE>
before attaining age 65. The Company may require proof of 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.
Where contingent deferred sales charges have been waived under this rider,
no additional payments under this Contract will be accepted.
On the last day of each month and on the date the rider is terminated, a
charge equal to 1/12th of an annual rate of 0.05% is made against the
Accumulated Value of the Contract at that time. The charge is made through a
pro-rata reduction in Accumulation Units of the Subaccounts, of dollar amounts
in the Fixed Account, and of dollar amounts in the Guarantee Period Accounts,
based on relative values.
LED DISTRIBUTIONS. Prior to the Annuity Date a Contract Owner who is also
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 Company's Principal Office.
The LED option permits the Contract 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.
If a Contract Owner elects the LED option, in each calendar year a fraction
of the Accumulated Value is withdrawn based on the Contract 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 Contract 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 during the year. The Contract Owner may elect monthly,
bimonthly, quarterly, semiannual, or annual distributions, and may terminate the
LED option at any time. The Contract Owner may also elect to receive
distributions under an LED option which is determined on the joint life
expectancy of the Contract Owner and a beneficiary. The Company may also offer
other systematic withdrawal options.
If a Contract Owner makes withdrawals under the LED distribution prior to
age 59 1/2, the withdrawals may be treated by the IRS as premature distributions
from the Contract. The payments would then be taxed on an "income first" basis,
and be subject to a 10% federal tax penalty. For more information, see "FEDERAL
TAX CONSIDERATIONS," "B. Taxation of the Contracts in General." The LED will
cease on the Annuity Date.
SURRENDERS. In the case of a complete surrender, the amount received by the
Contract 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 greater of the Withdrawal Without Surrender Charge Amount, described above,
or the life expectancy distribution, if applicable.
Where a Contract 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 Company's
Principal Office.
25
<PAGE>
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 "Surrender" and
"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
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 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 10 years or more. However, a Market
Value Adjustment may apply. See "Guarantee Period Accounts."
If an owner of a fixed annuity Contract issued by the Company wishes to
elect a variable annuity 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.
F. TRANSFER CHARGE.
The Company currently makes no charge for processing transfers. The Company
guarantees that the first twelve 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.
The Contract Owner may have automatic transfers of at least $100 a month
made on a periodic basis (a) to one or more of the Sub-Accounts from the Fixed
Account or from the Sub-Accounts which invest in the Money Market Portfolio or
the Government Securities Portfolio or (b) in order to reallocate or rebalance
Contract Value among the Sub-Accounts. The first automatic transfer and all
subsequent transfers of that request in the same contract year count as one
transfer towards the twelve transfers which are guaranteed to be free of a
transfer charge in each contract year. For more information, see "The Contract
Transfer Privilege."
DESCRIPTION OF THE CONTRACT
The Contracts are designed for use in connection with several types of
retirement plans as well as for sale to individuals. Participants under such
plans, as well as Contract Owners, Annuitants, and beneficiaries, are cautioned
that the rights of any person to any benefits under such Contracts may be
subject to the terms and conditions of the plans themselves, regardless of the
terms and conditions of the Contracts.
The Contracts 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").
Contract Owners may direct any inquiries to Annuity Customer Services,
Allmerica Financial Life Insurance and Annuity Company, 440 Lincoln Street,
Worcester, Massachusetts 01653 800-782-8380.
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<PAGE>
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
premium tax.
The initial net payment will be credited to the Contract 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 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. However, to the extent permitted by state law, if the contract is
issued as an IRA or is issued in Georgia, Idaho, Indiana, Michigan, Missouri,
North Carolina, Oklahoma, Oregon, South Carolina, Texas, Utah, Washington and
West Virginia, any portion of the initial net payment and of additional net
payments received during the contracts's first 15 days measured from the date of
issue, allocated to any Sub-Account and/or any Guarantee Period Account, will be
held in the Money Market Portfolio until the end of the fifteen day period.
Thereafter, these amounts will be allocated as requested.
The Contract Owner may change allocation instructions for new payments
pursuant to a written or telephone request. If telephone requests are elected by
the Contract 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 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 a Contract 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. TRANSFER PRIVILEGE.
At any time prior to the Annuity Date a Contract Owner may have amounts
transferred among all accounts. Transfer values will be effected at the
Accumulation Value next computed after receipt of the transfer order. The
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<PAGE>
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. In Oregon and Massachusetts,
payments and transfers to the Fixed Account are subject to certain restrictions.
See Appendix A.
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 Money
Market Portfolio.
C. DOLLAR COST AVERAGING AND AUTOMATIC REBALANCING OPTIONS.
The Contract Owner may have automatic transfers of at least $100 a month
made on a periodic basis (a) from the Sub-Accounts which invest in the Money
Market Portfolio or the Government Securities Portfolio or from the Fixed
Account to one or more of the other Sub-Accounts ("Dollar Cost Averaging") or
(b) in order to reallocate or rebalance Contract Value among the Sub-Accounts
("Automatic Rebalancing Option"). The first automatic transfer and all
subsequent transfers of that request in the same contract year count as one
transfer towards the twelve transfers which are guaranteed to be free of a
transfer in each contract year.
Currently, the Company makes no charge for transfers. The first twelve (12)
transfers in a Contract year are guaranteed to be free of any charge. For each
subsequent transfer in a Contract year the Company reserves the right to assess
a charge, guaranteed never to exceed $25, to reimburse it for the expense of
processing transfers. The Dollar Cost Averaging Option and the Automatic
Rebalancing Option may not be in effect at the same time.
D. SURRENDER.
At any time prior to the Annuity Date, a Contract Owner may surrender the
Contract and receive its Accumulated Value, less applicable charges and adjusted
for any Market Value Adjustment ("Surrender Amount"). The Contract Owner must
return the Contract and a signed, written request for surrender, satisfactory to
the Company, to the Company's Principal Office. The amount payable to the
Contract 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 Company's 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 Contracts 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 is normally 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.
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.
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The surrender rights of Contract 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," "I. Public School
Systems and Certain Tax Exempt Organizations" and "J. 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, a Contract Owner may withdraw a
portion of the Accumulated Value of his or her Contract, subject to the limits
stated below. The Contract Owner must file a signed, written request for
withdrawals, satisfactory to the Company, at the Company's Principal Office. The
written request must indicate the dollar amount the Contract 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 Contract 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 Company's 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 "Surrender."
After the Annuity Date, only Contracts 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 Contract
Owners who are participants under Section 403(b) plans or under the Texas ORP,
see "FEDERAL TAX CONSIDERATIONS," "I. Public School Systems and Certain Tax
Exempt Organizations" and "J. Texas Optional Retirement Program."
For important tax consequences which may result from withdrawals, see
"FEDERAL TAX CONSIDERATIONS."
F. DEATH BENEFIT.
If the Annuitant dies (or a Contract Owner predeceases the Annuitant) prior
to the Annuity Date while the Contract is in force, the Company will pay the
Beneficiary a Death Benefit, except where the Contract continues as provided in
"F. THE SPOUSE OF THE CONTRACT OWNER AS BENEFICIARY."
STANDARD DEATH BENEFIT. Upon death of the Annuitant (including an Owner who
is also the Annuitant), the standard Death Benefit is equal to the greater of
(a) the Accumulated Value under the Contract increased for any positive
Market Value Adjustment, or
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(b) the sum of the gross payments reduced 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.
ENHANCED DEATH BENEFIT RIDER. At the time of application for the Contract,
the Contract Owner may elect an optional Enhanced Death Benefit Rider. Under the
Enhanced Death Benefit Rider, if the annuitant dies before the Annuity Date, the
Death Benefit will be the greatest of
(a) the Accumulated Value increased by any positive Market Value Adjustment;
or
(b) gross payments accumulated daily at an annual rate of 5%, starting on
the Valuation Date of each payment, reduced 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
(c) the Death Benefit that would have been payable on the most recent
contract anniversary, increased for subsequent payments, and decreased
proportionately for subsequent withdrawals.
A separate charge is made for an optional Enhanced Death Benefit Rider. On
the last day of each month and on the date the Rider is terminated, a charge
equal to 1/12th of an annual rate of 0.25% is made against the Accumulated Value
of the Contract at that time. The charge is made through a pro-rata reduction
(based on relative values) of Accumulation Units in the Sub-Accounts, of dollar
amounts in the Fixed Account, and of dollar amounts in the Guarantee Period
Accounts.
Under either Death Benefit, 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 will never
be reduced by a negative Market Value Adjustment.
PAYMENT OF DEATH BENEFIT. The Death Benefit will generally be paid to the
Beneficiary in one sum within 7 days of the receipt of due proof of death unless
the Owner has specified a Death Benefit annuity option. Instead, the Beneficiary
may, by Written Request, elect to:
(a) defer distribution of the Death Benefit for a period no more than 5
years from the date of death; or
(b) receive a life annuity or an annuity for a period certain not extending
beyond the Beneficiary's life expectancy. Annuity benefit payments must
begin within one year from the date of death.
If distribution of the Death Benefit is deferred under (a) or (b), any value
in the Guarantee Period Accounts will be transferred to the Sub-Account
investing in the Money Market Portfolio. The excess, if any, of the Death
Benefit over the Accumulated Value will also be added to the Money Market
Portfolio. The Beneficiary may, by Written Request, effect transfers and
withdrawals during the deferral period and prior to annuitization under (b), but
may not make additional payments. If there are multiple Beneficiaries, the
consent of all is required.
If the Annuitant's death occurs on or after the Annuity Date but before the
completion of all guaranteed annuity benefit payments, any unpaid amounts or
installments will be paid to the Beneficiary. The Company must pay the remaining
payments at least as rapidly as under the payment option in effect on the date
of the Annuitant's death.
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With respect to any Death Benefit, the Accumulated Value under the Contract
will be based on the unit values next computed after due proof of the
Annuitant's death has been received at the Company's Principal Office. If the
beneficiary elects to receive the Death Benefit in one sum, the Death Benefit
will be paid within seven business days. If the beneficiary has not elected an
annuity option within one year from the date notice of death is received by the
Company, the Company will pay the Death Benefit in one sum. The Death Benefit
will reflect any earnings or losses experienced during the period and any
withdrawals.
G. THE SPOUSE OF THE CONTRACT OWNER AS BENEFICIARY.
The Contract Owner's spouse, if named as the sole primary beneficiary, may
by written request continue the Contract in lieu of receiving the amount payable
upon death of the Contract Owner. Upon such election, the spouse will become the
Owner and Annuitant subject to the following: (a) any value in the Guarantee
Period Accounts will be transferred to the Money Market Sub-Account; (b) the
excess, if any, of the Death Benefit over the Contract's Accumulated Value will
also be added to the Money Market Sub-Account. Additional payments may be made;
however, a surrender charge will apply to these amounts. All other rights and
benefits provided in the Contract will continue, except that any subsequent
spouse of such new Contract Owner will not be entitled to continue the Contract
upon such new Owner's death.
H. ASSIGNMENT.
The Contracts, other than those sold in connection with certain qualified
plans, may be assigned by the Contract 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 Contract Owner in full settlement of all
liability under the Contract. The interest of the Contract Owner and of any
beneficiary will be subject to any assignment.
I. ELECTING THE FORM OF ANNUITY AND THE ANNUITY DATE.
Subject to certain restrictions described below, the Contract Owner has the
right (1) to select the annuity 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
Account(s) selected.
To the extent a fixed annuity payout is selected, Accumulated Value will be
transferred to the Fixed Account of the Company, and the annuity benefit
payments will be fixed in amount. See APPENDIX A, "MORE INFORMATION ABOUT THE
FIXED ACCOUNT."
Under a variable annuity, a payment equal to the value of the fixed number
of Annuity Units in the Sub-Account(s) is made monthly, quarterly, semiannually
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 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 option(s) selected does not
produce an initial payment which meet this minimum, a single payment will be
made. Once the
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Company begins making annuity benefit payments, the Annuitant cannot make
withdrawals or surrender the annuity benefit, except in the case where future
annuity benefit payments are limited to a "period certain." Only beneficiaries
entitled to receive remaining payments for a "'period certain" may elect to
instead receive a lump sum settlement.
The Annuity Date is selected by the Contract Owner. To the extent permitted
in your state, the Annuity Date may be the first day of any month (a) before the
Annuitant's 85th birthday, if the Annuitant's age at the date of issue of the
Contract is 75 or under, or (b) within 10 years from the date of issue of the
Contract and before the Annuitant's 90th birthday, if the Annuitant's age at the
date of issue is between 76 and 90. The Contract Owner may elect to change the
Annuity Date by sending a request to the Company's Principal Office at least one
month before the new 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 Internal
Revenue 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.
If the Contract Owner does not elect otherwise, a variable life annuity with
periodic payments for 10 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.
J. DESCRIPTION OF VARIABLE ANNUITY OPTIONS.
The Company provides the variable annuity options described below.
Currently, Variable annuity options may be funded through the Sub-Accounts
investing in the Investment Grade Bond, Value+Growth, Horizon 10+ and 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.
VARIABLE LIFE ANNUITY WITH PAYMENTS GUARANTEED FOR 10 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 PAYEE
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.
However, payments will continue during the lifetime of the payee, no matter how
long the payee lives.
UNIT REFUND 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
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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.
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. However, the amount of each
periodic payment to the survivor 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 in the Contract or the
beneficiary. 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 thirty. 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. 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.
L. COMPUTATION OF VALUES AND ANNUITY BENEFIT PAYMENTS.
THE ACCUMULATION UNIT. Each net payment is allocated to the account(s)
selected by the Contract 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 Appendix B.
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 (a) by (b)
and subtracting (c) and (d) where:
(a) 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;
(b) is the value of that Sub-Account's assets at the beginning of the
Valuation Period;
(c) is a charge for mortality and expense risks equal to 0.95% on an
annual basis of the daily value of the Sub-Account's assets, and
(d) is an administrative charge of 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 "ANNUITY PAYMENTS" in the SAI.
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 are currently based on unit values as of the 15th day of the preceding
month.
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 Option and Noncommutable Period Certain Options of 10 or more
years, 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 less than 10 years, 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.
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The amount of the first monthly payment depends upon the form of annuity
selected, the sex (however, see "K. 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 1/2% 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-Account(s) 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 10 years or more 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 10 years, 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 is then divided by the value of an Annuity Unit of the
selected Sub-Account(s) 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
Annuity Unit of the selected Sub-Account(s). 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.
The Company may from time to time offer its Contract Owners both fixed and
variable annuity rates more favorable than those contained in the Contract. Any
such rates will be applied uniformly to all Contract Owners of the same class.
For an illustration of variable annuity benefit payment calculation using a
hypothetical example, see "ANNUITY PAYMENTS" in the SAI.
GUARANTEE PERIOD ACCOUNTS
Due to certain exemptive and exclusionary provisions in the securities laws,
interests in the Guarantee Period Accounts and the Company's Fixed Account are
not registered as an investment company under the provisions of the Securities
Act of 1933 or the Investment Company Act of 1940. Accordingly, the staff of the
Commission 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 this annuity
Contract or any benefits offered under these accounts may be subject to the
provisions of the Securities Act of 1933 relating to the accuracy and
completeness of statements made in the Prospectus.
INVESTMENT OPTIONS. In most jurisdictions, there are currently nine
Guarantee Periods available under this Contract with durations of two, three,
four, five, six, seven, eight, nine and ten years. Each Guarantee Period Account
established for the Contract 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
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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 was initially issued and to stop accepting new
allocations, transfers or renewals to a particular Guarantee Period.
Contract 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.
(In Oregon and Massachusetts, payments and transfers to the Fixed Account are
subject to certain restrictions. See Appendix A.) 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 Contract 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 Money Market Portfolio. The Contract 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 Contract 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 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 will be
automatically 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) unless 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 Money Market Portfolio. Where amounts
have been automatically renewed in a new Guarantee Period, it is the Company's
current practice to give the Owner an additional 30 days to transfer out of the
Guarantee Period Account without application of a Market Value Adjustment.
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 "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;
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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.
If the Guaranteed Interest Rate being credited is lower than the new
Guaranteed Interest Rate, the Market Value Adjustment will decrease the
Guarantee Period Account value. Similarly, if the Guaranteed Interest Rate being
credited is higher than the new Guaranteed Interest Rate, the Market Value
Adjustment will increase the Guarantee Period Account value. The Market Value
Adjustment will never result in a change to the value more than the interest
earned in excess of the Minimum Guarantee Period Account Interest Rate (see
Specifications page) compounded annually from the beginning of the current
Guarantee Period. 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 will then 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 will
then be allocated to the pre-selected Guarantee Period Account and the balance
of the initial payment will be allocated among the other investment options
selected by the Owner as described in "A. Payments."
WITHDRAWALS. Prior to the Annuity Date, the Contract 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 "Withdrawals" and "Surrender." In addition, the following
provisions also apply to withdrawals from a Guarantee Period Account: a) a
Market Value Adjustment will apply to all withdrawals, including Withdrawals
without Surrender Charge, unless made at the end of the Guarantee Period; and b)
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
"Contingent Deferred Sales Charge" after application of the Market Value
Adjustment.
FEDERAL TAX CONSIDERATIONS
The effect of federal income taxes on the value of a Contract, on
withdrawals or surrenders, on annuity benefit payments, and on the economic
benefit to the Contract 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 Internal Revenue Service (IRS).
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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 SHOULD ALWAYS 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 Contracts, 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
Contract 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 Internal Revenue Code (the "Code"). The Company files a
consolidated tax return with its affiliates.
The Internal Revenue Service 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 a
contract, for any taxable year of the Contract Owner, would be treated as
ordinary income received or accrued by the Contract 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 that is purchased in connection with a retirement plan which
meets the requirements of Sections 401, 403, 408, or 457 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 Sections D through J, below.
B. TAXATION OF THE CONTRACTS IN GENERAL.
The Company believes that the Contracts described in this Prospectus will,
with certain exceptions (see K below), be considered annuity contracts under
Section 72 of the Code. This section provides for the taxation of annuities. The
following discussion concerns annuities subject to Section 72. Section
72(e)(11)(A)(ii) requires that all non-qualified deferred annuity contracts
issued by the same insurance company to the same Contract Owner during the same
calendar year be treated as a single contract in determining taxable
distributions under Section 72(e).
With certain exceptions, any increase in the Accumulated Value of the
Contract is not taxable to the Contract Owner until it is withdrawn from the
Contract. If the Contract is surrendered or amounts are withdrawn prior to the
Annuity Date, withdrawal of any investment gain in value over the cost basis of
the Contract would be taxed as ordinary income. Under the current provisions of
the Code, amounts received under a non-qualified Contract prior to the Annuity
Date (including payments made upon the death of the Annuitant or Contract
Owner), or as
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non-periodic payments after the Annuity Date, are generally first attributable
to any investment gains credited to the Contract over the taxpayer's basis (if
any) in the Contract. Such amounts will be treated as income subject to federal
income taxation.
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
after age 59 1/2, or if the withdrawal follows the death of the Contract Owner
(or, if the Contract Owner is not an individual, the death of the primary
Annuitant, as defined in the Code), or in the case of the "total disability" (as
defined in the Code) of the Owner. 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 Contract Owner elects to have distributions made over the Contract
Owner's life expectancy, or over the joint life expectancy of the Contract 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.
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 life expectancy distribution ("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 were therefore subject to
the 10% federal penalty tax. This Private Letter Ruling may be applicable to a
Contract 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.
If the Contract Owner transfers (assigns) the Contract to another individual
as a gift prior to the Annuity Date, the Code provides that the Contract 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 the excess, if any, of the Surrender Value of the
Contract over the Contract Owner's cost basis at the time of the transfer. The
transfer is also subject to federal gift tax provisions. Where the Contract
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 Contract Owner as such; however, the
Contract Owner will not incur taxable income. Instead, the Annuitant will incur
taxable income upon receipt of annuity benefit payments as discussed below.
When annuity benefit payments are commenced under the Contract, generally a
portion of each payment may be excluded from gross income. The excludable
portion is generally determined by a formula that establishes the ratio that the
cost basis of 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 cost basis in the Contract is recovered, the entire
payment is taxable. If the Annuitant dies before cost basis is recovered, a
deduction for the difference is allowed on the Annuitant's final tax return.
C. TAX WITHHOLDING AND PENALTIES.
The Code requires withholding with respect to payments or distributions from
nonqualified 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.
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<PAGE>
In certain situations, the Code provides for a tax penalty if, prior to
death, disability or attainment of age 59 1/2, a Contract Owner makes a
withdrawal or receives any amount under the Contract, unless the distribution is
in the form of a life annuity (including life expectancy distributions). The
penalty is 10% of the amount includible in income by the Contract Owner.
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, vary according to the type of plan and the terms and conditions of the
plan itself. Therefore, the following is general information about the use of
the Contracts with various types of qualified plans. The rights of any person to
any benefits under such qualified plans will be subject to the terms and
conditions of the qualified plans themselves regardless of the terms and
conditions of the Contract.
A loan to a participant or beneficiary from plans qualified under Sections
401 and 403 or an assignment or pledge of an interest in such a plan is
generally treated as a distribution. This general rule does not apply to loans
which contain certain repayment terms and do not exceed a specified maximum
amount, as required under Section 72(p).
E. QUALIFIED EMPLOYEE PENSION AND PROFIT SHARING TRUSTS AND QUALIFIED ANNUITY
PLANS.
When an employee (including a self-employed individual) or one or more of
the employee's beneficiaries receives a "lump sum" distribution (a distribution
from a qualified plan described in Code Section 401(a) within one taxable year
equal to the total amount payable with respect to such an employee) the taxable
portion of such distribution may qualify for special treatment under a special
five-year income averaging provision of the Code. The employee must have had at
least 5 years of participation under the plan, and the lump sum distribution
must be made after the employee has attained age 59 1/2 or on account of his or
her death, separation from the employer's service (in the case of a common-law
employee) or disability (in the case of a self-employed individual). Such
treatment can be elected for only one taxable year once the individual has
reached age 59 1/2. An employee who attained age 50 before January 1, 1986 may
elect to treat part of the taxable portion of a lump-sum distribution as
long-term capital gains and may also elect 10-year averaging instead of
five-year averaging.
The Company can provide prototype plans for certain of the pension or profit
sharing plans for review by your legal counsel. For information, ask your
financial representative.
F. SELF-EMPLOYED INDIVIDUALS
The Self-Employed Individuals Tax Retirement Act of 1962, as amended,
frequently referred to as "H.R. 10", allows self-employed individuals and
partners to establish qualified pension and profit sharing trusts and annuity
plans to provide benefits for themselves and their employees.
These plans generally are subject to the same rules and requirements
applicable to corporate qualified plans, with some special restrictions imposed
on "owner-employees." An "owner-employee" is an employee who (1) owns the entire
interest in an unincorporated trade or business, or (2) owns more than 10% of
either the capital interest or profits interest in a partnership.
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<PAGE>
G. INDIVIDUAL RETIREMENT ACCOUNT PLANS
Any individual who earns "compensation" (as defined in the Code and
including alimony payable under a court decree) from employment or
self-employment, whether or not he or she is covered by another qualified plan,
may establish an Individual Retirement Account or Annuity plan ("IRA") for the
accumulation of retirement savings on a tax-deferred basis. Income from
investments is not included in "compensation." The assets of an IRA may be
invested in, among other things, annuity Contracts including the Contracts
offered by this Prospectus.
Contributions to the IRA may be made by the individual or on behalf of the
individual by an employer. IRA contributions may be deductible up to the lesser
of (1) $2,000 or (2) 100% of compensation. The deduction is reduced
proportionately for adjusted gross income between $40,000 and $50,000 (between
$25,000 and $35,000 for unmarried taxpayers and between $0 and $10,000 for a
married taxpayer filing separately) if the taxpayer and his or her spouse file a
joint return and either is an active participant in an employer sponsored
retirement plan.
An individual and a working spouse each may have an IRA with the
above-described limit on each. For the 1996 tax year an individual with an IRA
may establish an additional IRA for a non-working spouse if they file a joint
return. Contributions to the two IRAs together are deductible up to the lesser
of $2,250 or 100% of compensation. Effective for the 1997 tax year and
thereafter, an individual may establish a spousal IRA if the spouse's
compensation is less than the individual's and they file a joint return. The
maximum contributions to the two IRA's is the lesser of $4,000 or 100% of
combined income.
No deduction is allowed for contributions made for the year in which the
individual attains age 70 1/2 and years thereafter. Contributions for that year
and for years thereafter will result in certain adverse tax consequences.
Non-deductible contributions may be made to IRAs until the year in which the
individual attains age 70 1/2. Although these contributions may not be deducted,
taxes on their earnings are deferred until the earnings are distributed. The
maximum permissible non-deductible contribution is $2,000 for an individual
taxpayer and $2,250 for a taxpayer and non-working spouse. These limits are
reduced by the amount of any deductible contributions made by the taxpayer.
Contributions may be made with respect to a particular year until the due
date of the individual's federal income tax return for that year, not including
extensions. However, for reporting purposes, the Company will regard
contributions as being applicable to the year made unless it receives notice to
the contrary.
All annuity benefit payments and other distributions under an IRA will be
taxed as ordinary income unless the owner has made non-deductible contributions.
In addition, a minimum level of distributions must begin no later than April 1
following the year in which the individual attains age 70 1/2, and failure to
make adequate distributions at this time may result in certain adverse tax
consequences to the individual.
Distributions from all of an individual's IRAs are treated as if they were a
distribution from one IRA and all distributions during the same taxable year are
treated as if they were one distribution. An individual who makes a
non-deductible contribution to an IRA or receives a distribution from an IRA
during the taxable year must provide certain information on the individual's tax
return to enable the IRS to determine the proportion of the IRA balance which
represents non-deductible contributions. If the required information is
provided, that part of the amount withdrawn which is proportionate to the
individual's aggregate non-deductible contributions over the aggregate balance
of all of the individual's IRAs, is excludable from income.
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Distributions which are a return of a non-deductible contribution are
non-taxable, as they represent a return of basis. If the required information is
not provided to the IRS, distributions from an IRA to which both deductible and
non-deductible contributions have been made are presumed to be fully taxable.
H. SIMPLIFIED EMPLOYEE PENSIONS.
Employers may establish Simplified Employee Pensions ("SEPs") under Code
Section 408(k) if certain requirements are met. A SEP is an IRA to which the
employer contributes under a written formula. Currently, a SEP may accept
employer contributions each year up to $30,000 or 15% of compensation (as
defined), whichever is less. To establish SEPs the employer must make a
contribution for every employee age 21 and over who has performed services for
the employer for at least three of the five immediately preceding calendar years
and who has earned at least $300 for the year. SEP contributions for employees
over age 70 1/2 are permissible.
The employer's contribution is excluded from the employee's gross income for
the taxable year for which it was made up to the $30,000/15% limit. In addition
to the employer's contribution, the employee may contribute 100% of the
employee's earned income, up to $2,000, to the SEP, but such contributions will
be subject to the rules described above in "G. Individual Retirement Account
Plans."
These plans are subject to the general employer's deduction limitations
applicable to all corporate qualified plans.
I. PUBLIC SCHOOL SYSTEMS AND CERTAIN TAX-EXEMPT ORGANIZATIONS.
Under the provisions of Section 403(b) of the Code, payments made for
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 the aggregate payments for such annuity Contracts in any year do
not exceed the maximum contribution permitted under the Code.
A Contract qualifying under Section 403(b) of the Code must provide that
withdrawals or other distributions attributable to salary reduction
contributions (including earnings thereon) may not begin before the employee
attains age 59 1/2, separates from service, dies, or becomes disabled. In the
case of hardship a Contract 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 nonetheless be subject to a 10% penalty tax as a premature
distribution, in addition to income tax. The distribution restrictions are
effective for years beginning after December 31, 1988, but only with respect to
amounts that were not held under the Contract as of that date.
J. TEXAS OPTIONAL RETIREMENT PROGRAM.
Under a Code Section 403(b) annuity contract issued as a result of
participation in the Texas Optional Retirement Program, distributions 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 restrictions are imposed by reason of an opinion of the Texas Attorney
General interpreting the Texas laws governing the Optional Retirement Program.
K. SECTION 457 PLANS FOR STATE GOVERNMENTS AND TAX-EXEMPT ENTITIES.
Code Section 457 allows employees of a state, one of its political
subdivisions, or certain tax-exempt entities to participate in eligible
government deferred compensation plans. An eligible plan, by its terms, must not
allow deferral of more than $7,500 or 33 1/3% of a participant's includible
compensation for the taxable year, whichever is less. Includible compensation
does not include amounts excludable under the eligible deferred compensation
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<PAGE>
plan or amounts paid into a Code Section 403(b) annuity. The amount a
participant may defer must be reduced dollar-for-dollar by elective deferrals
under a SEP, 401(k) plan or a deductible employee contribution to a 501(c)(18)
plan. Under eligible deferred compensation plans the state, political
subdivision, or tax-exempt entity will be owner of the Contract.
If an employee also participates in another eligible plan or contributes to
a Code Section 403(b) annuity, a single limit of $7,500 will be applied for all
plans. Additionally, the employee must designate how much of the $7,500 or
33 1/3% limitation will be allocated among the various plans. Contributions to
an eligible plan will serve to reduce the maximum exclusion allowance for a Code
Section 403(b) annuity. Amounts received by employees under such plans generally
are includible in gross income in the year of receipt.
L. NON-INDIVIDUAL OWNERS.
Non-individual Owners (e.g., a corporation) of deferred annuity contracts
generally will be currently taxed on any increase in the cash surrender value of
the deferred annuity attributable to contributions made after February 28, 1986.
This rule does not apply to immediate annuities or to deferred annuities held by
a qualified pension plan, an IRA, a 403(b) plan, estates, employers with respect
to terminated pension plans, or a nominee or agent holding a contract for the
benefit of an individual. Corporate-owned annuities may result in exposure to
the alternative minimum tax, to the extent that income on the annuities
increases the corporation's adjusted current earnings.
REPORTS
A Contract Owner is sent a report semi-annually which states certain
financial information about the Portfolios. The Company will also furnish an
annual report to the Contract 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 Internal Revenue 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 first be withdrawn 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 (last-in, first-out) 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 instead be allocated to the Money
Market Portfolio.
CHANGES IN OPERATION OF THE VARIABLE ACCOUNT
The Company reserves the right, subject to compliance with applicable law
and to the provisions of the Participation Agreements to (1) transfer assets
from any Separate Account or Sub-Account to another of the
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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 above be made without notice to Contract Owners in accordance
with the 1940 Act.
DISTRIBUTION
The Contracts offered by the 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 Contracts. 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 may also 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 Contracts, 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 Contracts, including
additional incentives or payments, do not result in any additional charge to
Contract Owners or to the Variable Account. Any contingent deferred sales
charges assessed on a Contract will be retained by the Company.
Contract Owners may direct any inquiries to their financial representative
or to Allmerica Investments, Inc., 440 Lincoln Street, Worcester, Massachusetts
01653, 800-782-8380.
LEGAL MATTERS
There are no legal proceedings pending to which the Variable Account is a
party.
FURTHER INFORMATION
A Registration Statement under the Securities Act of 1933 relating to this
offering has been filed with the Securities and Exchange Commission. Certain
portions of the Registration Statement and amendments have been omitted in this
Prospectus pursuant to the rules and regulations of the Commission. The omitted
information may be obtained from the Commission's principal office in
Washington, D.C., upon payment of the Commission'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 are not generally subject to regulation under the
provisions of the Securities Act of 1933 or the Investment Company Act of 1940.
Disclosures regarding the fixed portion of the annuity contract and the Fixed
Account may be subject to the provisions of the Securities Act of 1933
concerning the accuracy and completeness of statements made in the Prospectus.
The disclosures in this APPENDIX A have not been reviewed by the Securities and
Exchange Commission.
The Fixed Account is made up of all of the general assets of the Company
other than those allocated to the separate account. 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 Contracts, 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 a Contract is surrendered, or if an Excess 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 less than six full
contract years.
In Massachusetts, payments and transfers to the Fixed Account are subject to
the following restrictions:
If a Contract issued prior to the Annuitant's 60th birthday, allocations to
the Fixed Account will be permitted until the Annuitant's 61st birthday. On
and after the Annuitant's 61st birthday, no additional Fixed Account
allocations will be accepted. If a Contract is issued on or after the
Annuitant's 60th birthday, up through and including the Annuitant's 81st
birthday, Fixed Account allocations will be permitted during the first
Contract year. If a Contract is issued on or after the Annuitant's 81st
birthday, Fixed Account allocations will be permitted during the first
Contract year. On and after the first Contract anniversary, no additional
allocations to the Fixed Account will be permitted. If a Contract is issued
after the Annuitant's 81st birthday, no payments to the Fixed Account will
be permitted at any time.
If an allocation designated as a Fixed Account allocation is received at the
Principal Office during a period when the Fixed Account is not available due
to the limitations outlined above, the monies will be allocated to the Money
Market Portfolio.
In Oregon, no payments to the Fixed Account will be permitted if a Contract
is issued after the Annuitant's 81st birthday.
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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 Date of Issue
and no additional Payments are made. Assume there are no withdrawals and that
the free withdrawal amount is equal to 15% of the current Account Value. The
table below presents examples of the surrender charge resulting from a full
surrender of the Contract Owner's Account, 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 9,447.84 5% 2,500.00
4 68,024.45 10,203.67 4% 2,000.00
5 73,466.40 11,019.96 3% 1,500.00
6 79,343.72 11,901.56 2% 1,000.00
7 85,691.21 12,853.68 0% 0.00
</TABLE>
WITHDRAWAL -- Assume a Payment of $50,000 is made on the Date of Issue and
no additional Payments are made. Assume that the free withdrawal amount is equal
to 15% of the current Account Value and there are withdrawals as detailed below.
The table below presents examples of the surrender charge resulting from
withdrawals from the Contract Owner's Account, 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 9,447.84 5% 0.00
4 68,024.45 30,000.00 10,203.67 4% 791.85
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>
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 (2555 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.
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NEGATIVE MARKET VALUE ADJUSTMENT (UNCAPPED)
Assume that on the date of surrender, the current rate (j) is 10.00% or 0.10
<TABLE>
<S> <C>
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 = the market value factor multiplied by the withdrawal
adjustment
= -.12054X$62,985.60
= -$7,592.11
</TABLE>
POSITIVE MARKET VALUE ADJUSTMENT (UNCAPPED)
Assume that on the date of surrender, the current rate (j) is 7.00% or 0.07
<TABLE>
<S> <C>
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 = the market value factor multiplied by the withdrawal
adjustment
= .06694X$62,985.60
= $4,216.26
</TABLE>
NEGATIVE MARKET VALUE ADJUSTMENT (CAPPED)
Assume that on the date of surrender, the current rate (j) is 11.00% or 0.11
<TABLE>
<S> <C>
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 = Minimum of the market value factor multiplied by the
adjustment withdrawal or the negative of the excess interest earned
over 3%
= Minimum of (-.17454X$62,985.60 or -$8,349.25)
= Minimum of (-$10,993.51 or -$8,349.25)
= -$8,349.25
</TABLE>
POSITIVE MARKET VALUE ADJUSTMENT (CAPPED)
Assume that on the date of surrender, the current rate (j) is 6.00% or 0.06
<TABLE>
<S> <C>
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 = Minimum of the market value factor multiplied by the
adjustment withdrawal or the excess interest earned over 3%
= Minimum of (.13981X$62,985.60 or $8,349.25)
= Minimum of ($8,806.02 or $8,349.25)
= $8,349.25
</TABLE>
47
<PAGE>
APPENDIX C
THE DEATH BENEFIT
PART 1 : DEATH OF THE ANNUITANT -- WITHOUT ENHANCED DEATH BENEFIT RIDER
DEATH BENEFIT ASSUMING NO WITHDRAWALS
Assume a Payment of $50,000 is made on the Date of Issue and no additional
Payments are made. Assume there are no withdrawals. The table below presents
examples of the Death Benefit based on the hypothetical Accumulated Values.
<TABLE>
<CAPTION>
HYPOTHETICAL
HYPOTHETICAL MARKET HYPOTHETICAL
ACCUMULATED VALUE DEATH DEATH DEATH
YEAR VALUE ADJUSTMENT BENEFIT (A) BENEFIT (B) BENEFIT
- --------- ------------- ------------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
1 53,000.00 0.00 53,000.00 50,000.00 53,000.00
2 53,530.00 500.00 54,030.00 50,000.00 54,030.00
3 58,883.00 0.00 58,883.00 50,000.00 58,883.00
4 52,994.70 500.00 53,494.70 50,000.00 53,494.70
5 58,294.17 0.00 58,294.17 50,000.00 58,294.17
6 64,123.59 500.00 64,623.59 50,000.00 64,623.59
7 70,535.95 0.00 70,535.95 50,000.00 70,535.95
8 77,589.54 500.00 78,089.54 50,000.00 78,089.54
9 85,348.49 0.00 85,348.49 50,000.00 85,348.49
10 93,883.34 0.00 93,883.34 50,000.00 93,883.34
</TABLE>
Death Benefit (a) is the Accumulated Value increased by any positive Market
Value Adjustment.
Death Benefit (b) is the gross payments reduced proportionately to reflect
withdrawals.
The Hypothetical Death Benefit is equal to the greatest of Death Benefits (a) or
(b).
DEATH BENEFIT ASSUMING WITHDRAWALS
Assume a Payment of $50,000 is made on the Date of Issue and no additional
Payments are made. Assume there are withdrawals as detailed in the table below.
The table below presents examples of the Death Benefit based on the hypothetical
Accumulated Values.
<TABLE>
<CAPTION>
HYPOTHETICAL
HYPOTHETICAL MARKET HYPOTHETICAL
ACCUMULATED VALUE DEATH DEATH DEATH
YEAR VALUE WITHDRAWAL ADJUSTMENT BENEFIT (A) BENEFIT (B) BENEFIT
- --------- ------------- ------------ ------------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
1 53,000.00 0.00 0.00 53,000.00 50,000.00 53,000.00
2 53,530.00 0.00 500.00 54,030.00 50,000.00 55,125.00
3 3,883.00 50,000.00 0.00 3,883.00 3,297.21 3,883.00
4 3,494.70 0.00 500.00 3,994.70 3,297.21 3,297.21
5 3,844.17 0.00 0.00 3,844.17 3,297.21 3,297.21
6 4,228.59 0.00 500.00 4,728.59 3,297.21 4,728.59
7 4,651.45 0.00 0.00 4,651.45 3,297.21 3,297.21
8 5,116.59 0.00 500.00 5,616.59 3,297.21 5,616.59
9 5,628.25 0.00 0.00 5,628.25 3,297.21 5,628.25
10 691.07 5,000.00 0.00 691.07 368.05 691.07
</TABLE>
Death Benefit (a) is the Accumulated Value increased by any positive Market
Value Adjustment.
Death Benefit (b) is the gross payments reduced proportionately to reflect
withdrawals.
The Hypothetical Death Benefit is equal to the greatest of Death Benefits (a) or
(b).
48
<PAGE>
PART 2: DEATH OF THE ANNUITANT -- WITH ENHANCED DEATH BENEFIT RIDER
DEATH BENEFIT ASSUMING NO WITHDRAWALS
Assume a Payment of $50,000 is made on the Date of Issue and no additional
Payments are made. Assume there are no withdrawals. The table below presents
examples of the Death Benefit based on the hypothetical Accumulated Values.
<TABLE>
<CAPTION>
HYPOTHETICAL
HYPOTHETICAL MARKET HYPOTHETICAL
ACCUMULATED VALUE DEATH DEATH DEATH DEATH
YEAR VALUE ADJUSTMENT BENEFIT (A) BENEFIT (B) BENEFIT (C) BENEFIT
- --------- ------------- ------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
1 53,000.00 0.00 53,000.00 52,500.00 50,000.00 53,000.00
2 53,530.00 500.00 54,030.00 55,125.00 53,000.00 55,125.00
3 58,883.00 0.00 58,883.00 57,881.25 55,125.00 58,883.00
4 52,994.70 500.00 53,494.70 60,775.31 58,883.00 60,775.31
5 58,294.17 0.00 58,294.17 63,814.08 60,775.31 63,814.08
6 64,123.59 500.00 64,623.59 67,004.78 63,814.08 67,004.78
7 70,535.95 0.00 70,535.95 70,355.02 67,004.78 70,535.95
8 77,589.54 500.00 78,089.54 73,872.77 70,535.95 78,089.54
9 85,348.49 0.00 85,348.49 77,566.41 78,089.54 85,348.49
10 93,883.34 0.00 93,883.34 81,444.73 85,348.49 93,883.34
</TABLE>
Death Benefit (a) is the Accumulated Value increased by any positive Market
Value Adjustment.
Death Benefit (b) is the gross payments accumulated daily at 5%, reduced
proportionately to reflect withdrawals.
Death Benefit (c) is the Death Benefit that would have been payable on the most
recent contract anniversary, increased for subsequent payments, and decreased
proportionately for subsequent withdrawals.
The Hypothetical Death Benefit is equal to the greatest of Death Benefits (a),
(b), or (c).
DEATH BENEFIT ASSUMING WITHDRAWALS
Assume a Payment of $50,000 is made on the Date of Issue and no additional
Payments are made. Assume there are withdrawals as detailed in the table below.
The table below presents examples of the Death Benefit based on the hypothetical
Accumulated Values.
<TABLE>
<CAPTION>
HYPOTHETICAL
HYPOTHETICAL MARKET HYPOTHETICAL
ACCUMULATED VALUE DEATH DEATH DEATH DEATH
YEAR VALUE WITHDRAWAL ADJUSTMENT BENEFIT (A) BENEFIT (B) BENEFIT (C) BENEFIT
- --------- ------------- ------------ ------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
1 53,000.00 0.00 0.00 53,000.00 52,500.00 50,000.00 53,000.00
2 53,530.00 0.00 500.00 54,030.00 55,125.00 53,000.00 55,125.00
3 3,883.00 50,000.00 0.00 3,883.00 3,816.94 3,635.18 3,883.00
4 3,494.70 0.00 500.00 3,994.70 4,007.79 3,883.00 4,007.79
5 3,844.17 0.00 0.00 3,844.17 4,208.18 4,007.79 4,208.18
6 4,228.59 0.00 500.00 4,728.59 4,418.59 4,208.18 4,728.59
7 4,651.45 0.00 0.00 4,651.45 4,639.51 4,728.59 4,728.59
8 5,116.59 0.00 500.00 5,616.59 4,871.49 4,728.59 5,616.59
9 5,628.25 0.00 0.00 5,628.25 5,115.07 5,616.59 5,628.25
10 691.07 5,000.00 0.00 691.07 599.51 628.25 691.07
</TABLE>
Death Benefit (a) is the Accumulated Value increased by any positive Market
Value Adjustment.
Death Benefit (b) is the gross payments accumulated daily at 5%, reduced
proportionately to reflect withdrawals.
Death Benefit (c) is the Death Benefit that would have been payable on the most
recent contract anniversary, increased for subsequent payments, and decreased
proportionately for subsequent withdrawals.
The Hypothetical Death Benefit is equal to the greatest of Death Benefits (a),
(b), or (c).
49
<PAGE>
PART 3: DEATH OF THE OWNER WHO IS NOT THE ANNUITANT
Assume a Payment of $50,000 is made on the Date of Issue and no additional
Payments are made. Assume there are no withdrawals and that the Death Benefit
Effective Annual Yield is equal to 5%. The table below presents examples of the
Death Benefit based on the hypothetical Accumulated Values.
<TABLE>
<CAPTION>
HYPOTHETICAL
HYPOTHETICAL MARKET HYPOTHETICAL
ACCUMULATED VALUE DEATH
YEAR VALUE ADJUSTMENT BENEFIT
- --------- ------------- ------------- ------------
<S> <C> <C> <C>
1 53,000.00 0.00 53,000.00
2 53,530.00 500.00 54,030.00
3 58,883.00 0.00 58,883.00
4 52,994.70 500.00 53,494.70
5 58,294.17 0.00 58,294.17
6 64,123.59 500.00 64,623.59
7 70,535.95 0.00 70,535.95
8 77,589.54 500.00 78,089.54
9 85,348.49 0.00 85,348.49
10 93,883.34 0.00 93,883.34
</TABLE>
The hypothetical Death Benefit is the Accumulated Value increased by any
positive Market Value Adjustment.
PART 2: DEATH OF THE OWNER WHO IS NOT THE ANNUITANT
Assume a Payment of $50,000 is made on the Date of Issue and no additional
Payments are made. Assume there are no withdrawals and that the Death Benefit
Effective Annual Yield is equal to 5%. The table below presents examples of the
Death Benefit based on the hypothetical Accumulated Values.
<TABLE>
<CAPTION>
HYPOTHETICAL
HYPOTHETICAL MARKET HYPOTHETICAL
ACCUMULATED VALUE DEATH
YEAR VALUE ADJUSTMENT BENEFIT
- --------- ------------- ------------- ------------
<S> <C> <C> <C>
1 53,000.00 0.00 53,000.00
2 53,530.00 500.00 54,030.00
3 58,883.00 0.00 58,883.00
4 52,994.70 500.00 53,494.70
5 58,294.17 0.00 58,294.17
6 64,123.59 500.00 64,623.59
7 70,535.95 0.00 70,535.95
8 77,589.54 500.00 78,089.54
9 85,348.49 0.00 85,348.49
10 93,883.34 0.00 93,883.34
</TABLE>
The hypothetical Death Benefit is the Accumulated Value increased by any
positive Market Value Adjustment.
50
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
STATEMENT OF ADDITIONAL INFORMATION
FOR
FLEXIBLE PAYMENT DEFERRED VARIABLE AND FIXED ANNUITY CONTRACTS FUNDED THROUGH
SUB-ACCOUNTS OF
SEPARATE ACCOUNT KGC
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS. IT SHOULD BE
READ IN CONJUNCTION WITH THE PROSPECTUS FOR THE VARIABLE ACCOUNT DATED
DECEMBER, 1996, ("THE PROSPECTUS"). THE PROSPECTUS MAY BE OBTAINED FROM
ALLMERICA INVESTMENTS, INC., 440 LINCOLN STREET, WORCESTER, MASSACHUSETTS
01653, (800) 782-8380.
DATED: DECEMBER, 1996
--------------
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
TABLE OF CONTENTS
GENERAL INFORMATION AND HISTORY . . . . . . . . . . . . . . . . . . . 2
TAXATION OF THE CONTRACT, THE VARIABLE ACCOUNT AND THE
COMPANY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
SERVICES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
UNDERWRITERS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
ANNUITY PAYMENTS. . . . . . . . . . . . . . . . . . . . . . . . . . . 4
PERFORMANCE INFORMATION . . . . . . . . . . . . . . . . . . . . . . . 5
TAX DEFERRED ACCUMULATION . . . . . . . . . . . . . . . . . . . . . . 7
FINANCIAL STATEMENTS. . . . . . . . . . . . . . . . . . . . . . . . . 8
GENERAL INFORMATION AND HISTORY
Separate Account KGC ("Variable Account") is a separate investment account of
Allmerica Financial Life Insurance and Annuity Company ("Company") authorized
by vote of the Board of Directors on June 13, 1996. The Company is a life
insurance company organized under the laws of Delaware in July, 1974. Its
Principal Office is located at 440 Lincoln Street, Worcester, Massachusetts
01653, Telephone 508-855-1000. The Company is subject to the laws of the
state of Delaware governing insurance companies and to regulation by the
Commissioner of Insurance of Delaware. In addition, the Company is subject to
the insurance laws and regulations of other states and jurisdictions in which
it is licensed to operate. As of December 31, 1995, the Company had over $5
billion in assets and over $18 billion of life insurance in force.
Effective October 1, 1995, the Company changed its name from SMA Life Assurance
Company to Allmerica Financial Life Insurance and Annuity Company. The Company
is an indirectly wholly-owned subsidiary of First Allmerica Financial Life
Insurance Company ("First Allmerica"), which in turn is a wholly-owned
subsidiary of Allmerica Financial Corporation ("AFC"). First Allmerica,
originally organized under the laws of Massachusetts in 1844 as a mutual life
insurance company and known as State Mutual Life Assurance Company of America,
converted to a stock life insurance company on October 16, 1995 and adopted its
present name. First Allmerica is the fifth oldest life insurance company in
America. As of December 31, 1995 First Allmerica and its subsidiaries
(including the Company) had over $11 billion in combined assets and over $35.2
billion in life insurance in force.
Each Sub-Account invests in a corresponding investment portfolio of Kemper
Investors Fund ("the Fund"), a series type mutual fund registered with the
Securities and Exchange Commission (the "SEC") as an open-end, diversified,
management investment company. Currently, 14 Sub-Accounts of the Variable
Account are available under the Contracts. The 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, and Horizon 5 Portfolio.
Each Portfolio available under the Contracts has its own investment objectives
and certain attendant risks.
TAXATION OF THE CONTRACT, 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
-2-
<PAGE>
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 Contracts 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 Code and files a consolidated tax return with its parent and
affiliated companies.
The Company reserves the right to make a charge for any effect which the income,
assets, or existence of Contracts 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. 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. Trust shares owned by the Sub-Accounts are held on an open
account basis. A Sub-Account's ownership of Trust shares is reflected on the
records of the Trust and not represented by any transferable stock certificates.
EXPERTS. The financial statements of the Company as of December 31, 1995 and
1994 and for each of the three years in the period ended December 31, 1995,
included in this Statement of Additional Information constituting part of the
Registration Statement, have been so included in reliance on the report 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
Contracts.
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 for the Contracts pursuant to a contract with the Company and the
Variable Account. Allmerica Investments distributes the Contracts on a best
efforts basis. Allmerica Investments, 440 Lincoln Street, Worcester,
Massachusetts 01653 was organized in 1969 as a wholly-owned subsidiary of
First Allmerica and is an indirect wholly-owned subsidiary of First
Allmerica.
The Contracts offered by this Prospectus are 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 contracts 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 Contracts. To the extent permitted by NASD rules, promotional
incentives or payments may also 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 Contracts, including the recruitment and training of
personnel, production of promotional literature, and similar services.
Commissions paid on the Contracts, including additional incentives or payments,
do not result in any additional charge to Contract Owners or to the Variable
Account.
-3-
<PAGE>
Commissions are paid by The Company and do not result in any charge to Contract
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.
ANNUITY PAYMENTS
The method by which the Accumulated Value under the Contract is determined is
described in detail under "COMPUTATION OF CONTRACT VALUES AND ANNUITY PAYMENTS"
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 Net Asset Value of a
portfolio share held in a Sub-Account at the end of a one-day Valuation
Period were $1.135000; that the Net Asset Value on the previous date was
$1.132000; that the value of an Accumulation Unit on the previous date was
$1.117500; and that during the Valuation Period, the dividends and capital
gain distributions were $0.000335 per share. The Accumulation Unit Value at
the end of the current Valuation Period would be calculated as follows:
(1) Accumulation Unit Value - Previous Valuation Period. . . . . . .$1.117500
(2) Net Asset Value - Previous Valuation Period. . . . . . . . . . .$1.132000
(3) Net Asset Value - Current Valuation Period . . . . . . . . . . .$1.135000
(4) Dividends and capital gain distributions . . . . . . . . . . . .$0.000335
(5) Annual Charge (one day equivalent of 1.10% per annum). . . . . . 0.000030
(6) Net Investment Factor {[(3)+(4)] DIVIDED BY (2)}-(5) . . . . . . 1.002917
(8) Accumulation Unit Value - Current Period (1)x(6) . . . . . . . .$1.120760
The method for determining the amount of annuity payments is described in detail
under "COMPUTATION OF CONTRACT VALUES AND ANNUITY PAYMENTS" in the Prospectus.
ILLUSTRATION OF VARIABLE ANNUITY PAYMENT CALCULATION USING HYPOTHETICAL EXAMPLE.
The determination of the Annuity Unit value and the variable annuity payment may
be illustrated by the following hypothetical example: Assume an Annuitant has
40,000 Accumulation Units in a Separate Account, and that the value of an
Accumulation Unit on the Valuation Date used to determine the amount of the
first variable annuity payment is $1.120000. Therefore, the Accumulation Value
of the Contract is $44,800 (40,000 x $1.120000). Assume also that the Contract
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 3-1/2% 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
-4-
<PAGE>
the former reflect the 3-1/2% 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
payment is 1.000190. Multiplying this factor by .999906 (the one-day adjustment
factor for the assumed interest rate of 3-1/2% per annum) produces a factor of
1.000096. This is then 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 is then 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 Variable Annuity Option V Redemption and Illustration
Using Hypothetical Example. As discussed in the Prospectus under "DESCRIPTION
OF VARIABLE ANNUITY OPTIONS," the Annuitant, or the beneficiary if the Annuitant
has died, may choose at any time to withdraw the Contract and receive its
commuted value. Commuted value is the present value of remaining payments
commuted at 3 1/2% interest. However, if the annuitant elects the withdrawal,
the remaining payments are deemed to be the remaining payments that would have
been payable had the Surrender Value, rather than the Accumulation Value, been
applied at the Annuity Date. The determination of the commuted value upon
redemption by an Annuitant may be illustrated by the following hypothetical
example.
Assume an annuity period of 10 years or longer is elected. The number of
Annuity Units each payment is based on would be calculated using the Accumulated
Value. Assume this results in 267.5818 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 $321.10 a month for 60 months. If the commuted value was
requested by a beneficiary, the value would be based on the present value at 3
1/2% interest of this stream of annuity payments. The commuted value would be
$17,725.49. However, if the commuted value is requested by an Annuitant, the
value is calculated as if the Surrender Value, not the Accumulated Value, had
been used to calculate the number of Annuity units. Assume this results in 250
Annuity units. Based on these assumptions, the dollar amount of remaining
payments would be $300 a month for 60 months. The present value at 3 1/2% of
all remaining payments would be $16,560.72.
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 materials information on
various topics of interest to Contract owners and prospective Contract 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 Contracts and the characteristics of and
market for such financial instruments.
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-Accounts asset charge and any applicable contingent deferred sales
charge which would be assessed upon complete redemption of the investment.
Total Return figures are calculated by standardized methods prescribed by rules
of the Securities and Exchange Commission. 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
-5-
<PAGE>
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 1.10% on an annual basis. The calculation of
ending redeemable value assumes (1) the policy was issued at the beginning of
the period and (2) a complete surrender of the policy 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:
Years from date of Charge as Percentage of
Payment New Payments Withdrawn*
------------------ -----------------------
Less than 1 7%
2 6%
3 5%
4 4%
5 3%
6 2%
7 0%
Thereafter 0%
*Subject to the maximum limit described in the prospectus.
No contingent deferred sales charge is deducted upon expiration of the periods
specified above. In all calendar years, an amount equal to (a) 15% of the
Accumulated Value; or (b) cumulative earnings (Accumulated Value less total
gross payments not previously withdrawn) is not subject to the contingent
deferred sales charge.
The calculations of Total Return reflect the deduction of an 0.88 Annual
Contract fee, representing a pro-rata portion of the $35 Annual Contract fee
based on a mean contract size of $40,000.
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
-6-
<PAGE>
The calculation of Supplemental Total Return reflects the 1.10% annual charge
against the assets of the Sub-Accounts. The ending value assumes that the
policy is NOT withdrawn at the end of the specified period, and there is
therefore no adjustment for the contingent deferred sales charge that would be
applicable if the policy was withdrawn at the end of the period.
The calculations of Supplemental Total Return include the deduction of an
0.88 Annual Contract Fee, representing a pro-rata portion of the $35 Annual
Contract fee based on a mean contract size of $40,000.
YIELD AND EFFECTIVE YIELD - 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, 1995:
Yield 4.22%
Effective Yield 4.31%
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 1.10% 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 do NOT reflect the $35 Annual
Contract fee.
TAX-DEFERRED ACCUMULATION
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
-------------- -------------- -----------------------
10 Years. . . . $107,946 $ 86,448 $ 81,693
20 Years. . . . 233,048 165,137 133,476
30 Years. . . . 503,133 335,021 218,082
This chart compares the accumulation of a $50,000 initial investment into a
non-qualified annuity contract and 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 Contracts. 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: 0.95% for mortality and expense risk; 0.15% administration charges;
7% maximum deferred withdrawal charge; and $35 annual records maintenance
charge. 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 Contracts.
[IMPORTANT - THIS IS NOT AN ILLUSTRATION OF YIELD OR RETURN.]
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 Allmerica Financial Life Insurance and
Annuity Company. Financial Statements for the Variable Account KGC are not
included as the Variable Account has not begun operations.
-7-
<PAGE>
ALLMERICA FINANCIAL
LIFE INSURANCE AND
ANNUITY COMPANY
(formerly SMA Life Assurance Company)
STATUTORY FINANCIAL STATEMENTS
DECEMBER 31, 1995
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
December 31, 1995
Statutory Financial Statements
Report of Independent Accountants . . . . . . . . . . . . . . . . . 1
Statement of Assets, Liabilities, Surplus and Other Funds . . . . . 3
Statement of Operations and Changes in Capital and Surplus. . . . . 4
Statement of Cash Flows . . . . . . . . . . . . . . . . . . . . . . 5
Notes to Statutory Financial Statements . . . . . . . . . . . . . . 6
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholder of
Allmerica Financial Life Insurance and Annuity Company
(formerly known as SMA Life Assurance Company)
We have audited the accompanying statutory basis statement of assets,
liabilities, surplus and other funds of Allmerica Financial Life Insurance and
Annuity Company as of December 31, 1995 and 1994, and the related statutory
basis statements of operations and changes in capital and surplus, and of cash
flows for each of the three years ended December 31, 1995. 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 in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As described more fully in Note 1 to the financial statements, the Company
prepared these financial statements using accounting practices prescribed or
permitted by the Insurance Department of the State of Delaware, which practices
differ from generally accepted accounting principles. The effects on the
financial statements of the variances between the statutory basis of accounting
and generally accepted accounting principles, although not reasonably
determinable, are presumed to be material.
In our opinion, because of the effects of the matter discussed in the preceding
paragraph, the financial statements referred to above do not present fairly, in
conformity with generally accepted accounting principles, the financial position
of Allmerica Financial Life Insurance and Annuity Company as of December 31,
1995 and 1994, or the results of its operations or its cash flows for each of
the three years ended December 31, 1995.
<PAGE>
To the Board of Directors and Stockholder of
Allmerica Financial Life Insurance and Annuity Company
(formerly known as SMA Life Assurance Company)
Page 2
In our opinion, the financial statements referred to above present fairly, in
all material respects, the assets, liabilities, surplus and other funds of
Allmerica Financial Life Insurance and Annuity Company as of December 31, 1995
and 1994, and the results of its operations and its cash flows for each of the
three years ended December 31, 1995, on the basis of accounting described in
Note 1.
As discussed in Note 1 to the financial statements, the Company's parent, State
Mutual Life Assurance Company of America, converted from a Massachusetts mutual
life insurance company to a Massachusetts stock life insurance company on
October 16, 1995. In connection with this transaction, the Company changed its
name to Allmerica Financial Life Insurance and Annuity Company and its parent
became a wholly-owned subsidiary of Allmerica Financial Corporation.
/s/Price Waterhouse LLP
- ------------------------
Price Waterhouse LLP
Boston, MA
February 5, 1996
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(a wholly owned subsidiary of First Allmerica Financial Life Insurance Company)
STATEMENT OF ASSETS, LIABILITIES, SURPLUS AND
OTHER FUNDS
as of December 31,
(In thousands)
<TABLE>
<CAPTION>
ASSETS 1995 1994
---- ----
<S> <C> <C>
Cash $ 7,791 $ 7,248
Investments:
Bonds 1,659,575 1,595,275
Stocks 18,132 12,283
Mortgage loans 239,522 295,532
Policy loans 122,696 116,600
Real estate 40,967 51,288
Short term investments 3,500 45,239
Other invested assets 40,196 27,443
----------- -----------
Total cash and investments 2,132,379 2,150,908
Premiums deferred and uncollected (1,231) 5,452
Investment income due and accrued 38,413 39,442
Other assets 6,060 10,569
Assets held in separate accounts 2,978,409 1,869,695
----------- -----------
$ 5,154,030 $ 4,076,066
----------- -----------
----------- -----------
LIABILITIES, SURPLUS AND OTHER FUNDS
Liabilities:
Policy liabilities:
Life reserves $ 856,239 $ 890,880
Annuity and other fund reserves 865,216 928,325
Accident and health reserves 167,246 121,580
Claims payable 11,047 11,720
----------- -----------
Total policy liabilities 1,899,748 1,952,505
Expenses and taxes payable 20,824 17,484
Other liabilities 27,499 36,466
Asset valuation reserve 31,556 20,786
Obligations related to separate account business 2,967,547 1,859,502
----------- -----------
Total liabilities 4,947,174 3,886,743
----------- -----------
Surplus and Other Funds:
Common stock, $1,000 par value
Authorized - 10,000 shares
Issued and outstanding - 2,517 shares 2,517 2,517
Paid-in surplus 199,307 199,307
Unassigned surplus (deficit) 4,282 (13,621)
Special contingency reserves 750 1,120
----------- -----------
Total surplus and other funds 206,856 189,323
----------- -----------
$ 5,154,030 $ 4,076,066
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(a wholly owned subsidiary of First Allmerica Financial Life Insurance Company)
STATEMENT OF OPERATIONS AND
CHANGES IN CAPITAL AND SURPLUS
for the year ended December 31,
(In thousands)
<TABLE>
<CAPTION>
REVENUE 1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Premiums and other considerations:
Life $ 156,864 $ 195,633 $ 189,285
Annuities 729,222 707,172 660,143
Accident and health 31,790 31,927 35,718
Reinsurance commissions and reserve adjustments 20,198 4,195 2,309
---------- ---------- ----------
Total premiums and other considerations 938,074 938,927 887,455
Net investment income 167,470 170,430 177,612
Realized capital losses, net of tax (2,295) (17,172) (7,225)
Other revenue 37,466 26,065 19,055
---------- ---------- ----------
Total revenue 1,140,715 1,118,250 1,076,897
---------- ---------- ----------
POLICY BENEFITS AND OPERATING EXPENSES
Policy benefits:
Claims, surrenders and other benefits 391,254 331,418 275,290
Increase (decrease) in policy reserves (22,669) 40,113 15,292
---------- ---------- ----------
Total policy benefits 368,585 371,531 290,582
Operating and selling expenses 150,215 164,175 160,928
Taxes, except capital gains tax 26,536 22,846 19,066
Net transfers to separate accounts 556,856 553,295 586,539
---------- ---------- ----------
Total policy benefits and operating expenses 1,102,192 1,111,847 1,057,115
---------- ---------- ----------
NET INCOME 38,523 6,403 19,782
CAPITAL AND SURPLUS, BEGINNING OF YEAR 189,323 182,216 171,941
Unrealized capital gains (losses) on investments 8,279 12,170 (9,052)
Transfer from (to) asset valuation reserve (10,770) (9,822) 1,974
Other adjustments (18,499) (1,644) (2,429)
---------- ---------- ----------
CAPITAL AND SURPLUS, END OF YEAR $ 206,856 $ 189,323 $ 182,216
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(a wholly owned subsidiary of First Allmerica Financial Life Insurance Company)
STATEMENT OF CASH FLOWS
for the year ended December 31,
(In thousands)
<TABLE>
<CAPTION>
CASH FLOW FROM OPERATING ACTIVITIES 1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Premiums, deposits and other income $ 964,129 $ 962,147 $ 902,725
Allowances and reserve adjustments on
reinsurance ceded 20,693 3,279 22,185
Net investment income 170,949 173,294 182,843
Net increase in policy loans (6,096) (7,585) (7,812)
Benefits to policyholders and beneficiaries (393,472) (330,900) (298,612)
Operating and selling expenses and taxes (153,504) (193,796) (171,533)
Net transfers to separate accounts (608,480) (600,760) (634,021)
Federal income tax (excluding tax on capital gains) (6,771) (19,603) (4828)
Other sources (applications) (13,642) 19,868 7,757
---------- ---------- ----------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES (26,194) 5,944 (1,296)
---------- ---------- ----------
CASH FLOW FROM INVESTING ACTIVITIES
Sales and maturities of long term investments:
Bonds 572,640 478,512 386,414
Stocks 481 63 64
Real estate and other invested assets 13,008 3,008 11,094
Repayment of mortgage principal 55,202 65,334 79,844
Capital gains tax (400) (968) (3,296)
Acquisition of long term investments:
Bonds (640,339) (508,603) (466,086)
Stocks (44) - -
Real estate and other invested assets (11,929) (24,544) (2,392)
Mortgage loans (415) (364) (2,266)
Other investing activities (3,206) 18,934 (27,254)
---------- ---------- ----------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES (15,002) 31,372 (23,878)
---------- ---------- ----------
Net change in cash and short term investments (41,196) 37,316 (25,174)
CASH AND SHORT TERM INVESTMENTS
Beginning of the year 52,487 15,171 40,345
---------- ---------- ----------
End of the year $ 11,291 $ 52,487 $ 15,171
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(a wholly owned subsidiary of First Allmerica Financial Life Insurance Company)
NOTES TO STATUTORY FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BASIS OF PRESENTATION - Allmerica Financial Life Insurance and
Annuity Company ("Allmerica Financial" or the "Company", formerly SMA Life
Assurance Company) is a wholly owned subsidiary of SMA Financial Corp., which is
wholly owned by First Allmerica Financial Life Insurance Company ("First
Allmerica", formerly, State Mutual Life Assurance Company of America), a stock
life insurance company. On October 16, 1995, First Allmerica converted from a
mutual life insurance company to a stock life insurance company. Concurrent
with this transaction, First Allmerica became a wholly owned subsidiary of
Allmerica Financial Corporation ("AFC").
The stockholder's equity of the Company is being maintained at a minimum level
of 5% of general account assets by First Allmerica in accordance with a policy
established by vote of First Allmerica's Board of Directors.
The Company's financial statements have been prepared on the basis of accounting
practices prescribed or permitted by the Insurance Department of the State of
Delaware and in conformity with practices prescribed by the National Association
of Insurance Commissioners (NAIC), which while common in the industry, vary in
some respects from generally accepted accounting principles. Significant
differences include:
- Bonds considered to be "available-for-sale" or "trading" are not
carried at fair value and changes in fair value are not recognized
through surplus or the statement of operations, respectively;
- The Asset Valuation Reserve, represents a reserve against possible
losses on investments and is recorded as a liability through a charge
to surplus. The Interest Maintenance Reserve is designed to include
deferred realized gains and losses (net of applicable federal income
taxes) due to interest rate changes and is also recorded as a
liability, however, the deferred net realized investment gains and
losses are amortized into future income generally over the original
period to maturity of the assets sold. These liabilities are not
required under generally accepted accounting principles;
- Total premiums, deposits and benefits on certain investment-type
contracts are reflected in the statement of operations, instead of
using the deposit method of accounting;
- Policy acquisition costs, such as commissions, premium taxes and other
items, are not deferred and amortized in relation to the revenue/gross
profit streams from the related contracts;
- Benefit reserves are determined using statutorily prescribed interest,
morbidity and mortality assumptions instead of using more realistic
expense, interest, morbidity, mortality and voluntary withdrawal
assumptions with provision made for adverse deviation;
- Amounts recoverable from reinsurers for unpaid losses are not recorded
as assets, but as offsets against the respective liabilities;
- Deferred federal income taxes are not provided for temporary
differences between amounts reported in the financial statements and
those included in the tax returns;
- Certain adjustments related to prior years are recorded as direct
charges or credits to surplus;
- Certain assets, designated as "non-admitted" assets (principally
agents' balances), are not recorded as assets, but are charged to
surplus; and,
- Costs related to other postretirement benefits are recognized only for
employees that are fully vested.
6
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(a wholly owned subsidiary of First Allmerica Financial Life Insurance Company)
The preparation of financial statements in accordance with practices prescribed
or permitted by the Insurance Department of the State of Delaware and in
conformity with practices prescribed by the NAIC 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.
Certain reclassifications have been made to prior year amounts to conform with
the current year presentation.
VALUATION OF INVESTMENTS - Investments in bonds are carried principally at
amortized cost, in accordance with NAIC guidelines. Preferred stocks are
carried generally at cost and common stocks are carried at market value. Policy
loans are carried principally at unpaid principal balances.
Mortgage loans on real estate are stated at unpaid principal balances, net of
unamortized discounts. Mortgage loans are reduced for losses expected by
management to be realized on transfers of mortgage loans to real estate (upon
foreclosure), on the disposition or settlement of mortgage loans and on mortgage
loans which management believes may not be collectible in full. In determining
the amount of the loss, management considers, among other things, the estimated
fair value of the underlying collateral. Investment real estate and real estate
acquired through foreclosure are carried at the lower of depreciated cost or
market value. Depreciation is generally calculated using the straight-line
method.
An asset valuation reserve (AVR) for bonds, mortgage loans, stocks, real estate,
and other invested assets is maintained by appropriations from surplus in
accordance with a formula specified by the NAIC and is classified as a
liability.
FINANCIAL INSTRUMENTS - In the normal course of business, the Company enters
into transactions involving various types of financial instruments including
investments such as bonds, stocks and mortgage loans and investment and loan
commitments. These instruments involve credit risk and also may be subject to
risk of loss due to interest rate fluctuations. The Company evaluates and
monitors each financial instrument individually and, when appropriate, obtains
collateral or other security to minimize losses.
RECOGNITION OF PREMIUM INCOME AND ACQUISITION COSTS - In general, premiums are
recognized as revenue over the premium paying period of the policies;
commissions and other costs of acquiring the policies are charged to operations
when incurred.
SEPARATE ACCOUNTS - Separate account assets and liabilities represent segregated
funds administered and invested by the Company for the benefit of certain
variable annuity and variable life contract holders. 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 contract holders 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 capital and surplus.
INSURANCE RESERVES AND ANNUITY AND OTHER FUND RESERVES - Reserves for life
insurance, annuities, and accident and health insurance are established in
amounts adequate to meet the estimated future obligations of policies in
force. These liabilities are computed based upon mortality, morbidity and
interest rate assumptions applicable to these coverages, including provision
for adverse deviation. Reserves are computed using interest rates ranging
from 3% to 6% for individual life insurance policies, 3% to 5 1/2% for
accident and health policies and 3 1/2% to 9 1/2% for annuity contracts.
Mortality, morbidity and withdrawal assumptions for all policies are based on
the Company's own experience and industry standards. The assumptions vary by
plan, age at issue, year of issue and duration. Claims reserves are computed
based on historical experience modified for expected trends in frequency and
severity. Withdrawal characteristics of annuity and other fund reserves vary
by contract. At December 31, 1995 and 1994, approximately 84% and 77%,
respectively, of the contracts (included in both the general account and
separate accounts of the Company) were not subject to discretionary
withdrawal or were subject to withdrawal at book value less surrender charge.
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.
7
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(a wholly owned subsidiary of First Allmerica Financial Life Insurance Company)
FEDERAL INCOME TAXES - AFC, its life insurance subsidiaries, First Allmerica and
Allmerica Financial and its non-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 taxable operating losses that can be applied to offset life
company taxable income. Allmerica P&C and its subsidiaries file a separate
United States Federal income tax return.
The federal income tax allocation policies and procedures 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.
CAPITAL GAINS AND LOSSES - Realized capital gains and losses, net of applicable
capital gains tax or benefit, exclusive of those transferred to the interest
maintenance reserve ("IMR"), are included in the statement of operations.
Unrealized capital gains and losses are reflected as direct credits or charges
to capital and surplus. The IMR, which is included in other liabilities,
establishes a reserve for realized gains and losses, net of tax, resulting from
changes in interest rates on short and long term fixed income investments. Net
realized gains and losses charged to the IMR are amortized into net investment
income over the remaining life of the investment sold. The Company uses the
seriatim method of amortization for interest related gains and losses arising
from the sale of mortgages, and uses the group method to amortize interest
related gains and losses arising from all other fixed income investments.
NOTE 2 - INVESTMENTS
BONDS - The carrying value and fair value of investments in bonds are as
follows:
<TABLE>
<CAPTION>
December 31, 1995
Gross Gross
Carrying Unrealized Unrealized Fair
(In thousands) Value Appreciation Depreciation Value
----- ------------ ------------ -----
<S> <C> <C> <C> <C>
Federal government bonds $ 67,039 $ 3,063 $ - $ 70,102
State, local and government agency bonds 13,607 2,290 23 15,874
Foreign government bonds 12,121 772 249 12,644
Corporate securities 1,471,422 55,836 6,275 1,520,983
Mortgage-backed securities 95,385 951 - 96,336
---------- ---------- ---------- ----------
Total $1,659,574 $ 62,912 $ 6,457 $1,715,939
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
December 31, 1995
Gross Gross
Carrying Unrealized Unrealized Fair
(In thousands) Value Appreciation Depreciation Value
----- ------------ ------------ -----
Federal government bonds $ 17,651 $ 8 $ 762 $ 16,897
State, local and government agency bonds 1,110 54 - 1,164
Foreign government bonds 31,863 83 3,735 28,211
Corporate securities 1,462,871 8,145 56,011 1,415,005
Mortgage-backed securities 81,780 268 1,737 80,311
---------- ---------- ---------- ----------
Total $1,595,275 $ 8,558 $ 62,245 $1,541,588
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
8
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(a wholly owned subsidiary of First Allmerica Financial Life Insurance Company)
The carrying value and fair value by contractual maturity at December 31, 1995,
are shown below. Actual maturities will 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 obligation back to the issuer. Mortgage-backed securities are
classified based on expected maturities.
<TABLE>
<CAPTION>
Carrying Fair
(In thousands) Value Value
----- -----
<S> <C> <C>
Due in one year or less $ 250,578 $ 258,436
Due after one year through five years 736,003 763,179
Due after five years through ten years 538,897 558,445
Due after ten years 134,097 135,880
---------- ----------
Total $1,659,575 $1,715,940
---------- ----------
---------- ----------
</TABLE>
MORTGAGE LOANS AND REAL ESTATE - Mortgage loans and real estate investments, 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 are generally no more than 75% of the property value
at the time the original loan is made. At December 31, 1995 and 1994, mortgage
loan and real estate investments were distributed by the following types and
geographic regions:
<TABLE>
<CAPTION>
(In thousands)
Property Type 1995 1994
- ------------- ---- ----
<S> <C> <C>
Office buildings $ 127,149 $ 140,292
Residential 59,934 57,061
Retail 29,578 72,787
Industrial/Warehouse 38,192 39,424
Other 25,636 37,256
----------- -----------
Total $ 280,489 $ 346,820
----------- -----------
----------- -----------
Geographic Region 1995 1994
- ----------------- ---- ----
South Atlantic $ 86,410 $ 92,934
East North Central 55,991 72,704
Middle Atlantic 38,666 48,688
Pacific 32,803 39,892
West North Central 21,486 27,377
Mountain 9,939 12,211
New England 24,886 26,613
East South Central 5,487 6,224
West South Central 4,821 20,177
---------- ----------
Total $ 280,489 $ 346,820
---------- ----------
---------- ----------
</TABLE>
Reserves for mortgage loans and real estate reflected in the above amounts were
$18.9 million and $21.0 million at December 31, 1995 and 1994, respectively.
9
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(a wholly owned subsidiary of First Allmerica Financial Life Insurance Company)
NET INVESTMENT INCOME - The components of net investment income for the year
ended December 31 were as follows:
<TABLE>
<CAPTION>
(In thousands) 1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Bonds $ 122,318 $ 123,495 $ 126,729
Stocks 1,653 1,799 953
Mortgage loans 26,356 31,945 40,823
Real estate 9,139 8,425 9,493
Policy loans 9,486 8,797 8,215
Other investments 3,951 1,651 674
Short term investments 2,252 1,378 840
---------- ---------- ----------
175,155 177,490 187,727
Less investment expenses 9,703 9,138 11,026
---------- ---------- ----------
Net investment income, before IMR amortization 165,452 168,352 176,701
IMR amortization 2,018 2,078 911
---------- ---------- ----------
Net investment income $ 167,470 $ 170,430 $ 177,612
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
REALIZED CAPITAL GAINS AND LOSSES - Realized capital gains (losses) on
investments for the years ended December 31 were as follows:
<TABLE>
<CAPTION>
(In thousands) 1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Bonds $ 727 $ 645 $ 10,133
Stocks (263) (62) 16
Mortgage loans (1,083) (17,142) (83)
Real estate (1,892) 605 (2,044)
--------- --------- ---------
(2,511) (15,954) 8,022
Less income tax 400 968 3,296
--------- --------- ---------
Net realized capital gains (losses) before transfer to IMR (2,911) (16,922) 4,726
Net realized capital gains transferred to IMR 616 (250) (11,951)
--------- --------- ---------
Net realized capital gains (losses) $ (2,295) $(17,172) $ (7,225)
--------- --------- ---------
--------- --------- ---------
</TABLE>
Proceeds from voluntary sales of investments in bonds during 1995, 1994 and 1993
were $22.4 million, $17.9 million, and $13.2 million, respectively. Gross gains
of $4.3 million, $3.0 million, and $4.5 million and gross losses of $5.2
million, $4.6 million, and $ .5 million, respectively, were realized on those
sales.
NOTE 3 - FAIR VALUE DISCLOSURES OF FINANCIAL INFORMATION
Statement of Financial Accounting Standards 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 recognized 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.
10
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(a wholly owned subsidiary of First Allmerica Financial Life Insurance Company)
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments:
FINANCIAL ASSETS:
CASH AND SHORT TERM INVESTMENTS - The carrying amounts reported in the statement
of assets, liabilities, surplus and other funds approximate fair value.
BONDS - 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.
STOCKS - 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.
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 is limited to the lesser of the present value of the cash flows
or book value.
POLICY LOANS - The carrying amount reported in the statement of assets,
liabilities, surplus and other funds approximates fair value since policy loans
have no defined maturity dates and are inseparable from the insurance contracts.
FINANCIAL LIABILITIES:
ANNUITY AND OTHER FUND RESERVES (WITHOUT MORTALITY/MORBIDITY FEATURES) - Fair
values for the Company's liabilities under individual annuity contracts are
estimated based on current surrender values.
The estimated fair values of the financial instruments as of December 31 were as
follows:
<TABLE>
<CAPTION>
1995 1996
---- ----
Carrying Fair Carrying Fair
(In thousands) Value Value Value Value
----- ----- ----- -----
<S> <C> <C> <C> <C>
Financial Assets:
Cash $ 7,791 $ 7,791 $ 7,248 $ 7,248
Short term investments 3,500 3,500 45,239 45,239
Bonds 1,659,575 1,715,940 1,595,275 1,541,588
Stocks 18,132 18,414 12,283 12,590
Mortgage loans 239,522 250,196 295,532 291,704
Policy loans 122,696 122,696 116,600 116,600
Financial Liabilities:
Individual annuity contracts 803,099 797,024 869,230 862,662
Supplemental contracts without life
contingencies 16,796 16,796 16,673 16,673
Other contract deposit funds 632 632 1,105 1,105
</TABLE>
11
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(a wholly owned subsidiary of First Allmerica Financial Life Insurance Company)
NOTE 4 - FEDERAL INCOME TAXES
The federal income tax provisions for 1995, 1994 and 1993 were $17.4 million,
$13.1 million and $8.6 million, respectively, which include taxes applicable to
realized capital gains of $.4 million, $1.0 million and $3.3 million.
The effective federal income tax rates were 27%, 67% and 30% in 1995, 1994 and
1993, respectively. The differences between the federal statutory rate and the
Company's effective tax rates are primarily related to decreases in taxable
income for the write-offs of mortgage loans; and increases in taxable income for
differences in policyholder liabilities for federal income tax purposes and
financial reporting purposes and the deferral of policy acquisition costs for
federal tax purposes.
The consolidated federal income tax returns are routinely audited by the
Internal Revenue Service (IRS) and provisions are routinely made in the
financial statements in anticipation of the results of these audits. The IRS
has completed its examination of all of the consolidated federal income tax
returns through 1988. In management's opinion, adequate tax liabilities have
been established for all years. However, the amount of these liabilities could
be revised in the near term if estimates of the Company's ultimate liability are
revised.
NOTE 5 - REINSURANCE
The Company participates in reinsurance to reduce overall risks, including
exposure to large losses and to permit recovery of a portion of direct losses.
Reinsurance contracts do not relieve the Company from its obligation to its
policyholders. Reinsurance financial data for the years ended December 31, is
as follows:
<TABLE>
<CAPTION>
(In thousands) 1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Reinsurance premiums assumed $ 3,442 $ 3,788 $ 4,190
Reinsurance premiums ceded
42,914 17,430 14,798
Deduction from insurance
liability including
reinsurance recoverable on
unpaid claims 82,227 46,734 42,805
</TABLE>
Individual life premiums ceded to First Allmerica aggregated $6.8 million, $7.8
million and $9.0 million in 1995, 1994 and 1993, respectively. The Company has
also entered into various reinsurance agreements with First Allmerica under
which certain insurance risks related to individual accident and health
business, premium income and related expenses are assumed by the Company from
First Allmerica. Premiums assumed pursuant to these agreements aggregated $3.4
million, $3.8 million and $4.2 million in 1995, 1994 and 1993, respectively .
During the year Allmerica Financial entered into a coinsurance agreement to
reinsure substantially all of its yearly renewable term life insurance.
Premiums ceded and reinsurance credits taken under this agreement amounted to
$25.4 million and $20.7 million, respectively. At December 31, 1995, the
deduction from insurance liability, including reinsurance recoverable on unpaid
claims under this agreement was $12.7 million.
NOTE 6 - ACCIDENT AND HEALTH POLICY AND CLAIM LIABILITIES
The Company regularly updates its estimates of policy and claims liabilities as
new information becomes available and further events occur which may impact the
resolution of unsettled claims for its accident and health line of business.
Changes in prior estimates are generally reflected in results of operations in
the year such changes are determined to be needed and recorded.
The policy and claims liabilities related to the Company's accident and health
business were $169.7 million and $123.5 million at December 31, 1995 and 1994,
respectively. Accident and health policy and claims liabilities have been
re-estimated for all prior years and were increased by $42.5 million, $10.9
million and $13.2 million, in 1995, 1994 and 1993, respectively, including $21.9
million and $2.8 million recorded as an adjustment to surplus in 1995 and 1993,
respectively. The unfavorable development is primarily due to reserve
strengthening and adverse experience in the Company's individual accident and
health line of business.
12
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(a wholly owned subsidiary of First Allmerica Financial Life Insurance Company)
NOTE 7 - DIVIDEND RESTRICTIONS
Delaware has enacted laws governing the payment of dividends to stockholders by
insurers. These laws affect the dividend paying ability of the Company.
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 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 (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. At January 1, 1996, the Company could pay
dividends of $4.3 million to First Allmerica, without prior approval.
NOTE 8 - OTHER RELATED PARTY TRANSACTIONS
First Allmerica provides management, operating personnel and facilities on a
cost reimbursement basis to the Company. Expenses for services received from
First Allmerica were $ 85.8 million, $102.5 million and $98.9 million in 1995,
1994 and 1993, respectively. The net amounts payable to First Allmerica and
affiliates for accrued expenses and various other liabilities and receivables
were $12.6 million and $8.3 million at December 31, 1995 and 1994, respectively.
NOTE 9 - FUNDS ON DEPOSIT
In March 1994, the Company voluntarily withdrew from being licensed in New York.
In connection with the withdrawal First Allmerica, which is licensed in New
York, became qualified to sell the products previously sold by Allmerica
Financial in New York. The Company 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 the Company for New York
policyholders, claimants and creditors. As of December 31, 1995, the carrying
value and fair value of the assets or deposit was $295.0 million and $303.6
million, respectively, which is in excess of the required amount.
Additional securities with a carrying value of $4.2 million and $3.9 million
were on deposit with various other state and governmental authorities as of
December 31, 1995 and 1994, respectively.
NOTE 10 - LITIGATION
The Company has been named a defendant in various 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 financial statements.
13
<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 Allmerica Financial Life Insurance and Annuity
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 in Initial
Registration Statement on August 16, 1996 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) Wholesaling Agreement is filed herewith
(b) Form of Sales Agreement was previously filed in Initial
Registration Statement on August 16, 1996 and is
incorporated by reference herein.
(c) Broker's Agreement and Specimen Schedule of Sales
Commissions for Variable Annuity Policies were previously
filed on November 3, 1994 in Registration Statement
No. 33-85916, and are incorporated by reference herein.
Exhibit 4 - Policy Form was previously filed in Initial
Registration Statement on August 16, 1996 and is incorporated
by reference herein.
Exhibit 5 - Application Form was previously filed in Initial Registration
Statement on August 16, 1996 and is incorporated by reference
herein.
Exhibit 6 - The Depositor's Articles of Incorporation, as amended effective
October 1, 1995 to reflect its new name, and Bylaws were
previously filed in Initial Registration Statement on August
16, 1996 and is incorporated by reference herein.
Exhibit 7 - Not Applicable.
Exhibit 8 - None
Exhibit 9 - Consent and Opinion of Counsel is filed herewith
Exhibit 10 - Consent and Opinion of Independent Accountants is filed herewith
Exhibit 11 - None.
Exhibit 12 - None.
Exhibit 13 - None.
Exhibit 15- Participation Agreement is filed herewith
<PAGE>
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
<TABLE>
<CAPTION>
Name and Position Principal Occupation
----------------- --------------------
<S> <C>
Barry Z. Aframe Vice President and Counsel, First Allmerica
Vice President and Counsel Financial Life Insurance Company
Abigail M. Armstrong Secretary and Counsel, First Allmerica Financial
Secretary and Counsel Life Insurance Company
Richard J. Baker Vice President and Assistant Secretary, First
Vice President Allmerica Financial Life Insurance Company
Whitworth F. Bird, Jr., M.D. Vice President and Medical Director, First
Vice President and Allmerica Financial Life Insurance Company
Medical Director
Alan R. Boyer Vice President, First Allmerica Financial
Vice President Life Insurance Company
Mark R. Colborn Vice President, First Allmerica
Vice President Financial Life Insurance Company
Lisa M. Coleman Vice President, First Allmerica Financial Life
Vice President Insurance Company
Dix F. Davis Vice President, First Allmerica Financial Life
Vice President Insurance Company
Bruce A. Emond Vice President, First Allmerica Financial Life
Vice President Insurance Company
John P. Kavanaugh Director and Vice President, First Allmerica
Director and Financial Life Insurance Company
Vice President
John F. Kelly Senior Vice President, General Counsel and Director,
Director First Allmerica Financial Life Insurance Company
Joseph W. MacDougall, Jr. Vice President, Associate General Counsel, and
Vice President, Associate Assistant Secretary, First Allmerica Financial Life Insurance
General Counsel Company
and Assistant Secretary
J. Barry May Director, First Allmerica Financial Life Insurance
Director Company
William H. Mawdsley Vice President and Actuary, First Allmerica Financial Life
Vice President and Actuary Insurance Company
James R. McAuliffe Director and President, Citizens Insurance Company
Director of America
<PAGE>
Roderick A. McGarry, II Vice President, First Allmerica Financial Life Insurance
Vice President Company
John W. Nunley Vice President, First Allmerica Financial Life Insurance
Vice President Company
John F. O'Brien Director, President and Chief Executive Officer, First
Director and Chairman of Allmerica Financial Life Insurance Company
the Board
Edward J. Parry, III Director, Vice President and Treasurer, First Allmerica
Director, Vice President Financial Life Insurance Company
and Treasurer
Richard M. Reilly Director and Vice President, First Allmerica Financial
Director, President and CEO Life Insurance Company
Eric A. Simonsen Director, Vice President and Chief Financial Officer,
Director, Vice President and First Allmerica Financial Life Insurance Company
Chief Financial Officer
Ann K. Tripp Vice President, First Allmerica Financial Life Insurance
Vice President Company
Jerome F. Weihs Vice President, First Allmerica Financial Life Insurance
Vice President Company
</TABLE>
Item 26. PERSONS UNDER COMMON CONTROL WITH REGISTRANT. See attached
organization chart.
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
<TABLE>
<CAPTION>
NAME ADDRESS TYPE OF BUSINESS
---- ------- ----------------
<S> <C> <C>
AAM Equity Fund 440 Lincoln Street Massachusetts Grantor
Worcester MA 01653 Trust
Allmerica Asset Management, Inc. 440 Lincoln Street Investment advisory
Worcester MA 01653 services
Allmerica Employees Insurance 440 Lincoln Street Insurance Agency
Agency, Inc. Worcester MA 01653
Allmerica Financial Life Insurance 440 Lincoln Street Life insurance, accident
and Annuity Company Worcester MA 01653 & health insurance,
annuities, variable
annuities and variable
life insurance
Allmerica Financial Services 440 Lincoln Street Insurance Agency
Insurance Agency, Inc. Worcester, MA 01653
Allmerica Funds 440 Lincoln Street Investment Company
Worcester MA 01653
Allmerica Institutional Services, Inc. 440 Lincoln Street Accounting, marketing
Worcester MA 01653 and shareholder
<PAGE>
services for investment
companies
Allmerica Investment Services, Inc. 440 Lincoln Street Holding Company
(formerly Allmerica Financial Worcester, MA 01653
Services, Inc.)
Allmerica Investment Management 440 Lincoln Street Investment Advisory
Company, Inc. Worcester MA 01653 Services
Allmerica Investments, Inc. 440 Lincoln Street Securities, retail broker-
Worcester MA 01653 dealer
Allmerica Investment Trust 440 Lincoln Street Investment Company
(formerly SMA Investment Trust) Worcester MA 01653
Allmerica Property and Casualty 440 Lincoln Street Holding Company
Companies, Inc. Worcester MA 01653
Allmerica Realty Advisors, Inc. 440 Lincoln Street Investment Advisory
Worcester MA 01653 services
Allmerica Securities Trust 440 Lincoln Street Investment Company
Worcester MA 01653
Allmerica Services, Inc. 440 Lincoln Street Service Company
Worcester MA 01653
Allmerica Trust Company, N.A. 440 Lincoln Street Limited purpose national
Worcester MA 01653 trust company
AMGRO, Inc. 472 Lincoln Street Premium financing
Worcester MA 01653
APC Funding Corp. 440 Lincoln Street Special purpose funding
Worcester MA 01653 vehicle for commercial
paper
Beltsville Drive Limited 440 Lincoln Street Real estate partnership
Partnership Worcester MA 01653
Citizens Corporation 440 Lincoln Street Holding Company
Worcester MA 01653
Citizens Insurance Company of America 645 West Grand River Multi-line fire &
Howell MI 48843 casualty insurance
Citizens Insurance Company of Ohio 645 West Grand River Multi-line fire &
Howell MI 48843 casualty insurance
Citizens Management, Inc. 645 West Grand River Services management
Howell MI 48843 company
Greendale Special Placements Fund 440 Lincoln Street Massachusetts Grantor
Worcester MA 01653 Trust
The Hanover American Insurance 100 North Parkway Multi-line fire &
Company Worcester MA 01653 casualty insurance
The Hanover Insurance Company 100 North Parkway Multi-line fire &
Worcester MA 01605 casualty insurance
Hanover Texas Insurance 801 East Campbell Road Incorporated Branch
Management Company, Inc. Richardson TX 75081 Office of The Hanover
Insurance Company
Hanover Lloyd's Insurance Company 801 East Campbell Road Multi-line fire &
Richardson TX 75081 casualty insurance
<PAGE>
Hollywood Center, Inc. 440 Lincoln Street General business
Worcester MA 01653 corporation
Linder Skokie Real Estate 440 Lincoln Street General business
Corporation Worcester MA 01653 corporation
Lloyds Credit Corporation 440 Lincoln Street Premium financing
Worcester MA 01653 service franchises
Logan Wells Water Company, Inc. 603 Heron Drive Water Company, serving
Bridgeport NJ 08014 land development
investment
Massachusetts Bay Insurance 100 North Parkway Multi-line fire &
Company Worcester MA 01653 casualty
SMA Financial Corp. 440 Lincoln Street Holding Company
Worcester MA 01653
Somerset Square, Inc. 440 Lincoln Street General business
Worcester MA 01653 corporation
Sterling Risk Management Services, Inc. 100 North Parkway Risk management
Worcester MA 01605 services
</TABLE>
Item 27. NUMBER OF CONTRACT OWNERS.
The Variable Account has no Policyholders because operations have not
yet begun.
Item 28. INDEMNIFICATION.
Article VIII of the Bylaws of the Depositor state: 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, Group Vel, Separate Accounts VA-A, VA-B,
VA-C, VA-G, VA-H, VA-K, VA-P, Allmerica Select Separate Account
Inheiritage Account, Separate Account KG, and Fulcrum Separate
Account of Allmerica Financial Life Insurance and Annuity
Company
- Separate Accounts I, VA-K, VA-P, VEL II Account, Inheiritage Account
Group VEL Account, Allmerica Select Separate Account, Fulcrum Variable
Life Separate Account, Fulcrum Separate Account, Separate
Account KG and KGC 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
---- -----------------------------------
Emil J. Aberizk Vice President
Abigail M. Armstrong Secretary and Counsel
Phillip J. Coffey Vice President
Thomas J. Cunningham Vice President, Chief Financial Officer
and Controller
<PAGE>
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 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 Investment Company Act of 1940 and Rules 31a-1 to 31a-3 thereunder are
maintained by the Company at 440 Lincoln Street, Worcester, Massachusetts or on
behalf of the Company by The First Data Investor Services, Inc. at 4400 Computer
Drive, Westboro, Massachusetts 01581.
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 such supplementary and periodic
information, documents, and reports as may be prescribed by any rule or
regulation of the Commission 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 Securities and Exchange Commission, 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) Rule 26(e) Representations
The Company hereby undertakes that the aggregate fees and charges under the
contract are reasonable in relation to the services rendered, the expenses
expected to be incurred, and the risks assumed by the Insurance Company.
Item 33. REPRESENTATIONS CONCERNING WITHDRAWAL RESTRICTIONS ON SECTION 403(b)
PLANS AND UNDER THE TEXAS OPTIONAL RETIREMENT PROGRAM.
Registrant, a separate account of Allmerica Financial Life Insurance and Annuity
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:
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
<PAGE>
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 has duly caused this Pre-Effective
Amendment No. 1 to the Registration Statement to be signed on its behalf by the
undersigned thereunto duly authorized, in the City of Worcester, and
Commonwealth of Massachusetts, on the 10th day of December, 1996.
SEPARATE ACCOUNT KGC OF
ALLMERICA FINANCIAL LIFE INSURANCE
AND ANNUITY COMPANY
By: /s/ Abigail M. Armstrong
---------------------------------
Abigail M. Armstrong, Secretary
SIGNATURES TITLE DATE
- ---------- ----- ----
/s/ John F. O'Brien Director and
John F. O'Brien Chairman of the Board
/s/ Bruce C. Anderson Director
Bruce C. Anderson
/s/ John P. Kavanaugh Director and December 10, 1996
John P. Kavanaugh Vice President
/s/ John F. Kelly Director
John F. Kelly
/s/ James R. McAuliffe Director
James R. McAuliffe
/s/ Edward J. Parry III Vice President and Treasurer
Edward J. Parry III (Chief Accounting Officer)
/s/ Richard M. Reilly Director, President and
Richard M. Reilly Chief Executive Officer
/s/ Larry C. Renfro Director
Larry C. Renfro
/s/ Eric A. Simonsen Director, Vice President and Chief
Eric A. Simonsen Financial Officer
/s/ Phillip E. Soule Director
Phillip E. Soule
<PAGE>
EXHIBIT TABLE
Exhibit 3(a) - Wholesaling Agreement
Exhibit 9 - Consent and Opinion of Counsel.
Exhibit 10 - Consent of Independent Accountants
Exhibit 15 - Participation Agreement
<PAGE>
WHOLESALING AGREEMENT
AGREEMENT dated as of November 5, 1996 by and between ALLMERICA FINANCIAL
LIFE INSURANCE AND ANNUITY COMPANY, a Delaware insurance company (the
"Company"), ALLMERICA INVESTMENTS, INC., a Massachusetts corporation (the
"Underwriter"), Kemper Distributors, Inc., a Delaware corporation ("KDI"),
ZKI Agency, Inc., a Delaware corporation ("ZKIA" and , together with KDI,
collectively, the "Wholesaler"), and the insurance agency affiliates of the
Wholesaler listed on Schedule 1 to this Agreement (hereinafter referred to as
the "Wholesaler Agency Affiliates").
WITNESSETH:
WHEREAS, the Company has registered or proposes to register with the
Securities and Exchange Commission interests in certain variable annuity
contracts and variable life insurance contracts under the Securities Act of
1933 and proposes to issue and sell such contracts through the Underwriter
acting as the principal underwriter for such contracts; and
WHEREAS, the Company, the Underwriter and the Wholesaler desire to establish
an arrangement whereby the Wholesaler will act as the wholesaler for such
variable annuity contracts and variable life insurance contracts and, as
such, will recruit business firms to distribute such contracts;
NOW, THEREFORE, in consideration of their mutual promises, the Company, the
Underwriter and the Wholesaler hereby agree as follows:
<PAGE>
1. DEFINITIONS
a. ACCOUNT -- Each and any separate account established by the Company
and listed on Schedule 2 to this Agreement, as amended from time to
time. The phrase "Account supporting the Contracts" or "Account
supporting a class of Contracts" shall mean the separate account
identified in such Contracts as the separate account to which the
Purchase Payments made under such Contracts are allocated and as to
which income, gains and losses, whether or not realized, from assets
allocated to such separate account, are, in accordance with such
Contracts, credited to or charged against such separate account without
regard to other income, gains, or losses of the Company or any other
separate account established by the Company.
b. CONTRACTS -- The variable annuity contracts and variable life
insurance contracts described more specifically on Schedule 3 to this
Agreement, as amended from time to time. The term "Contracts" shall
include various Account sub-account investment options, investment
options in the Company's general account and Guarantee Period Accounts,
if available, any riders to such contracts and any other contracts
offered in connection therewith or any contracts for which such
Contracts may be exchanged or converted. The phrase "a class of
Contracts" shall mean those variable annuity contracts or variable life
insurance contracts, as the case may be, issued on the same policy form
or forms and covered by the same Registration Statement, as shown on
Schedule 3 to this Agreement.
c. REGISTRATION STATEMENT -- At any time while this Agreement is in
effect, the currently effective registration statement filed with the
SEC under the 1933 Act, or currently effective post-effective amendment
thereto, relating to a class of Contracts, including financial
statements included in, and all exhibits to, such registration statement
or post-effective amendment. (For purposes of Sections 5.a. and 11 of
this Agreement, however, the term "Registration Statement" means any
document that is or at any time was a Registration Statement within the
meaning of this Section 1.c.).
2
<PAGE>
d. PROSPECTUS -- The prospectus and any statement of additional
information included within a Registration Statement, except that, if
the prospectus and statement of additional information most recently
filed with the SEC pursuant to Rule 497 under the 1933 Act after the
date on which the Registration Statement became effective differs from
the prospectus and statement of additional information included within
the Registration Statement at the time it became effective, the term
"Prospectus" shall refer to the most recently filed prospectus and
statement of additional information filed under Rule 497 under the 1933
Act from and after the date on which they each shall have been filed.
(For purposes of Sections 5.a. and 11 of this Agreement, however, the
term "any Prospectus" means any document that is or at any time was a
Prospectus within the meaning of this Section l.d.).
e. FUND --Kemper Investors Fund.
f. FUND REGISTRATION STATEMENT -- At any time while this Agreement is
in effect, the currently effective registration statement filed with the
SEC under the 1933 Act, or currently effective post-effective amendment
thereto, for shares of the Fund. (For purposes of Section 11 of this
Agreement, however, the term "Fund Registration Statement" means any
document that is or at any time was a Fund Registration Statement within
the meaning of this Section l.f.).
g. FUND PROSPECTUS -- At any time while this Agreement is in effect,
the prospectus and statement of additional information for the Fund most
recently filed with the SEC pursuant to Rule 497 under the 1933 Act.
(For purposes of Section 11 of this Agreement, however, the term "Fund
Prospectus" means any document that is or at any time was a Fund
Prospectus within the meaning of this Section l.g.).
h. 1933 ACT -- The Securities Act of 1933, as amended.
i. 1934 ACT -- The Securities Exchange Act of 1934, as amended.
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j. 1940 ACT -- The Investment Company Act of 1940, as amended.
k. SEC -- The Securities and Exchange Commission.
l. NASD -- The National Association of Securities Dealers, Inc.
m. REGULATIONS -- The rules and regulations promulgated by the SEC
under the 1933 Act, the 1934 Act and the 1940 Act as in effect at
the time this Agreement is executed or thereafter promulgated, and
as they may be amended from time to time.
n. TERRITORY -- The fifty states of the United States, the District of
Columbia, and all other territories of the United States.
o. STATE -- Any state or commonwealth of the United States, the
District of Columbia or any other territory of the United States.
Provided, however, that the term "State" shall not include the states of
New York and Hawaii.
p. BROKER-DEALER -- An entity registered as a broker-dealer and
licensed as a life insurance agent or affiliated with an entity so
licensed, and recruited by the Wholesaler and subsequently authorized by
the Company and the Underwriter to distribute the Contracts pursuant to
a sales agreement with the Company and the Underwriter entered into in
accordance with Section 3 of this Agreement.
q. ASSOCIATED PERSON -- This term as used in this Agreement shall have
the meaning assigned to it in the 1934 Act.
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r. REPRESENTATIVE -- An Associated Person of the Wholesaler or a
Broker-Dealer registered with the NASD as a registered representative or
principal of the Wholesaler or Broker-Dealer, as the case may be.
s. PURCHASE PAYMENT -- A payment made under a Contract by an applicant
or purchaser to purchase benefits under the Contract.
t. PROCEDURES -- The administrative procedures prepared and distributed
by the Company, as such may be amended or supplemented from time to
time, relating to the solicitation, sale and delivery of the Contracts.
Provided, however, that Broker-Dealers shall only be responsible for
compliance with those Procedures which have been furnished to them in
writing.
u. PARTICIPATION AGREEMENT -- The agreement dated as of November 5,
1996, among the Company, KDI, Zurich Kemper Investments and the Fund
relating to the investment of assets of the separate accounts of the
Company in the Fund.
2. APPOINTMENT AND WHOLESALING RIGHTS
a. The Company hereby authorizes the Wholesaler to represent the
Company in the wholesaling activities contemplated by this Agreement.
Where required by relevant state insurance law, the Company hereby
appoints the Wholesaler as an agent under such state insurance laws to
represent the Company in the wholesaling activities contemplated by this
Agreement. In those states in which the Wholesaler is not licensed as an
insurance agent and the relevant state insurance law requires that the
Wholesaler be licensed as an insurance agent, the Company hereby
appoints the appropriate entity or individual ("Wholesaler Agency
Affiliate") affiliated with the Wholesaler (as set forth on Schedule 1
to this Agreement, as such Schedule may be amended from time to time by
the Wholesaler to reflect changes in the licensing status, if any, as
required by relevant state insurance law of the Wholesaler or Wholesaler
Agency
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Affiliates) as its agent under the insurance laws to engage in such
wholesaling activities. The Underwriter hereby authorizes the
Wholesaler under applicable securities laws to engage in the activities
contemplated in this Agreement relating to the wholesaling of the
Contracts for which the Underwriter acts or may act as principal
underwriter.
In jurisdictions where neither the Wholesaler nor any Wholesaler Agency
Affiliate is licensed as contemplated by the first paragraph of this
Section 2.a., when requested in writing by the Wholesaler, the Company
will perform such wholesaling activities related to the Contracts
contemplated by this Agreement as are mutually agreed upon by the
Company and the Wholesaler. Any such wholesaling activities will be
performed by the Company as agent and for the benefit of the Wholesaler,
until such time as the Wholesaler notifies the Company and the
Underwriter that the Wholesaler or its Wholesaler Agency Affiliate is so
licensed. The Company shall be compensated by the Wholesaler for its
performance of such wholesaling activities on such basis as is mutually
agreed upon by the Company and the Wholesaler.
b. The Wholesaler (both on its own behalf and on behalf of Wholesaler
Agency Affiliates) undertakes to use its best efforts to recruit
Broker-Dealers in accordance with Section 3 of this Agreement,
consistent with market conditions and in compliance with its
responsibilities under the federal securities laws and NASD rules and
regulations. The obligations of the Wholesaler and Wholesaler Agency
Affiliates hereunder are further subject to the accuracy of the
representations and warranties of the Company and the Underwriter
contained in this Agreement and to the performance by the Company of its
obligations hereunder.
c. The appointment and authorization of the Wholesaler and Wholesaler
Agency Affiliates to engage in wholesaling activities pursuant to this
Agreement is exclusive as to the Contracts listed on Schedule 3, as
amended from time to time in accordance with Section 2.e. of this
Agreement. Neither the Company nor the Underwriter shall authorize any
other person (as principal underwriter or otherwise) to engage in
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wholesaling or distribution activities with respect to the Contracts or
to recruit business firms to engage in wholesaling or distribution
activities with respect to the Contracts (other than business firms
recommended by the Wholesaler pursuant to Section 3 of this Agreement)
without the Wholesaler's prior written consent, nor shall the Company or
the Underwriter, without the Wholesaler's prior written consent,
separately engage in wholesaling or distribution activities relating to
the Contracts.
The Company shall design the Contracts, and any amendments or riders
thereto, subject to approval by the Wholesaler. Throughout the term of
this Agreement, the Contracts shall be issued and offered for sale by
the Company and the variable portion thereof shall be supported by the
Accounts. The Company alone shall be responsible for filing the initial
Registration Statements and any amendments thereto with the SEC in
accordance with the 1933 Act, 1934 Act, 1940 Act and the Regulations to
register interests in each class of Contracts. The Company will not
make any amendment or rider to the Contracts or a class of Contracts, or
file a Registration Statement, or make an amendment to a Registration
Statement or supplement to a Prospectus, without the Wholesaler having
been given the opportunity to review any such filing, amendment, rider
or supplement. However, such opportunity to review shall not make the
Wholesaler responsible for the content of any such filing, amendment,
rider or supplement; the Company alone shall be responsible for such
content.
The Company shall register its Accounts with the SEC. All amounts
available under the Contracts shall be invested only in the Fund
(through the Account(s) supporting the Contracts) and/or allocated to
the Company's general account, or to one or more of the Guarantee Period
Accounts referred to in the Prospectus, provided that such amounts may
also be invested in an investment company or investment vehicle other
than the Fund if: (1) such other investment company is advised by the
Fund's investment adviser; (2) the Fund and/or Wholesaler, in their sole
discretion, consents to the use of such other investment company or
investment vehicle; (3) there is a substitution of the Fund made in
accordance with Section 10.1(e) of the Participation Agreement; or (4)
the Participation Agreement is terminated pursuant to Article X of the
Participation Agreement. The Company will not take action to operate
any Account or
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any subaccount(s) of an Account, as a management investment company
under the 1940 Act without the Fund's and Wholesaler's prior written
consent.
All assets in the Guarantee Period Accounts referred to in the
Prospectus shall be managed by Zurich Investment Management, Inc.
("ZIM") pursuant to the Investment Management Agreement being executed
contemporaneously herewith by the Company and ZIM for so long as such
Investment Management Agreement is in effect.
d. The Company shall obtain appropriate authorizations, to the extent
necessary, whether by registration, qualification, approval or
otherwise, for the issuance and sale of the Contracts (including all
investment options) in each State in the Territory (provided, however,
that it shall be within the Company's discretion whether to obtain such
authorization in Guam). The Company shall also use its best efforts to
obtain any additional state regulatory approvals necessary for the sale
and issuance of the Contracts including, without limitation, approvals
required under California Insurance Bulletin 95-2. From time to time,
the Company shall notify the Wholesaler in writing of all States in the
Territory in which the Contracts can then lawfully be offered. To the
extent that the Company is not authorized to issue the Contracts in any
State in the Territory, the Company shall employ all reasonable efforts
to obtain such authorization in such State (provided, however, that it
shall be within the Company's discretion whether to obtain such
authorization in Guam).
e. The Wholesaler may unilaterally amend Schedule 1 from time to time
pursuant to Section 2.a. of this Agreement. The parties to this
Agreement may amend Schedules 2 and 3 to this Agreement from time to
time by mutual agreement to reflect changes in or relating to the
Contracts and the Accounts and to add new classes of variable annuity
contracts and variable life insurance contracts to be issued by the
Company or for which the Wholesaler will act as wholesaler. Schedule 2
to this Agreement will be automatically amended by the Company from time
to time to reflect the addition and deletion of
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subaccounts and Fund portfolios. The provisions of this Agreement shall
be equally applicable to each such class of Contracts, unless the
context otherwise requires. Schedule 4 to this Agreement may be amended
only by mutual agreement of the parties to this Agreement pursuant to
Section 9 of this Agreement.
3. RECRUITMENT OF BROKER-DEALERS AND RELATED RESPONSIBILITIES
a. The Company and the Underwriter hereby authorize the Wholesaler and
any Wholesaler Agency Affiliates to contact and recommend business firms
to act as Broker-Dealers for the sale of the Contracts. The Company
shall have the right to reject any such recommendation, but shall not do
so arbitrarily or unreasonably, and any such rejection shall be in
writing and state the reasons therefor.
b. The Company and the Underwriter shall have the responsibility for:
(i) executing appropriate sales agreements with the business firms
recommended by the Wholesaler or Wholesaler Agency Affiliates and (ii)
appointing such business firms, and/or Associated Persons of such firms,
as insurance agents of the Company in those States where such business
firms and/or Associated Persons possess insurance agent licenses. None
of the Wholesaler, the Wholesaler Agency Affiliates, the Company or the
Underwriter shall have responsibility for, or bear the cost of, any
registration or licensing of Broker-Dealers or any of their Associated
Persons with the SEC, NASD or any state insurance, governmental or
regulatory agency. The costs of appointment shall be borne as provided
in Section 9.c. hereof. The Company shall maintain the appointment
records of all agents appointed by the Company to distribute the
Contracts or, if required by relevant state law, to engage in the
wholesaling activities contemplated by this Agreement. The Company
shall provide KDI with a complete listing of all agents appointed by the
Company to distribute the Contracts and shall provide KDI with an
updated listing at least monthly.
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<PAGE>
c. Any sales agreement entered into by the Company and/or the
Underwriter with a Broker-Dealer shall provide that:
(i) The Broker-Dealer (or an affiliated person duly registered as a
broker-dealer with the SEC) shall train, supervise, and be solely
responsible for the conduct of all of its Associated Persons in the
proper method of solicitation, sale and delivery of the Contracts
for the purpose of complying on a continuous basis with the NASD
Rules of Fair Practice and with federal and state securities and
insurance law requirements applicable in connection with the
offering and sale of the Contracts;
(ii) Purchase Payments for the Contracts shall be made payable to
the Company and shall be delivered together with all applications
and related information in accordance with the Procedures;
(iii) The Broker-Dealer and/or its duly licensed insurance agency
affiliates shall be solely responsible for all compensation paid to
its Representatives and all related tax reporting that may be
required under applicable law;
(iv) The Broker-Dealer and its Representatives shall not use,
develop or distribute any promotional, sales or advertising material
that has not been approved in writing by the Company, the
Underwriter and the Wholesaler and filed with the appropriate
governmental or regulatory agencies; and
(v) The Broker-Dealer shall not have authority, on behalf of the
Company, the Underwriter, the Wholesaler or the Wholesaler Agency
Affiliates, to make, alter or discharge any Contract or other
contract entered into pursuant to a Contract; to waive any Contract
forfeiture provision; to extend the time of paying any Purchase
Payment; to receive any monies or Purchase Payments (except for the
sole purpose of forwarding monies or Purchase Payments to the
Company); or to expend, or contract
10
<PAGE>
for the expenditure of, funds of the Company, the Underwriter, the
Wholesaler or the Wholesaler Agency Affiliates.
d. The Wholesaler and Wholesaler Agency Affiliates shall provide such
assistance to the Company in the appointment procedure applicable to
Broker-Dealers and their Representatives as may be reasonably requested
by the Company.
e. The Wholesaler shall train, supervise, and be solely responsible for
the conduct of all of its Associated Persons (including Wholesaler
Agency Affiliates, but not Broker-Dealers or their Representatives
unaffiliated with the Wholesaler or the Wholesaler Agency Affiliates),
for the purpose of complying on a continuous basis with the NASD Rules
of Fair Practice and with federal and state securities and insurance
laws applicable to the wholesaling activities contemplated in this
Agreement. The Wholesaler and the Wholesaler Agency Affiliates shall be
responsible for the maintenance of licenses, certifications or permits
that they determine to be necessary for themselves and/or their
Associated Persons pursuant to any federal or state securities law or
state insurance law.
f. None of the Wholesaler, the Wholesaler Agency Affiliates, the
Company or the Underwriter will have any supervisory responsibility (as
such supervision is contemplated by the 1934 Act or the NASD's Rules of
Fair Practice) with respect to Broker-Dealers or their Representatives.
Under no circumstances will the Wholesaler or the Wholesaler Agency
Affiliates be responsible for Broker-Dealers' or their Representatives'
failure to comply with applicable law or the Procedures.
g. The Wholesaler shall not have authority on behalf of the Company to
make, alter or discharge any Contract or other contract entered into
pursuant to a Contract; to waive any Contract forfeiture provision; to
extend the time of paying any Purchase Payment; or to receive any monies
or Purchase Payments. The Wholesaler shall not expend, nor contract for
the expenditure of, funds of the Company; nor shall the
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Wholesaler possess or exercise any authority on behalf of the Company
other than that expressly conferred on the Wholesaler by this Agreement.
h. The Wholesaler and the Wholesaler Agency Affiliates shall act as
independent contractors in the performance of their duties and
obligations under this Agreement and nothing contained in this Agreement
shall constitute the Wholesaler or any Wholesaler Agency Affiliate or
their respective Associated Persons as employees of the Company or the
Underwriter in connection with the wholesaling activities contemplated
by this Agreement or otherwise.
i. It is the intention of the parties hereto that the wholesaling
activities contemplated by this Agreement shall not involve the
solicitation of any insurance business from the public, or any act or
activity which would require registration as a life insurance or
variable annuity agent dealing with the public, including without
limitation, activities or conduct involving the solicitation,
negotiation, procurement, collection or transmittal of any premium or
other consideration on any insurance policy or annuity contract, or any
other act involving the consummation or delivery of any insurance policy
or annuity contract to a policy holder or the general public.
4. MARKETING AND SALES
a. Except as otherwise agreed to by the Company and the Wholesaler, the
Wholesaler shall be responsible for the design and cost of all
promotional, sales and advertising material relating to the Contracts,
which include the marketing brochure, application, broker-dealer guide
book, asset allocator worksheet and Prospectus covers.
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Prior to use with any member of the public, the Wholesaler shall provide
to the Company copies of all promotional, sales and advertising material
developed by the Wholesaler for the Company's review and written
approval. Upon receipt of such material from the Wholesaler, the
Company shall be given a reasonable amount of time to complete its
review. The Company will respond on a prompt and timely basis in
approving any such material. Failure to respond shall not relieve the
Wholesaler of the obligation to obtain the prior written approval of the
Company.
In the event that the Company shall design any promotional, sales or
advertising material relating to the Contracts, the Company shall
provide to the Wholesaler copies of such material for the Wholesaler's
review and written approval. Upon receipt of such material from the
Company, the Wholesaler shall be given a reasonable amount of time to
complete its review. The Wholesaler will respond on a prompt and timely
basis in approving any such material. Failure to respond shall not
relieve the Company of the obligation to obtain the prior written
approval of the Wholesaler.
The Underwriter shall be responsible for filing, as required, all
promotional, sales or advertising material, whether developed by the
Company, the Underwriter or the Wholesaler, with the NASD and any
federal and state securities, governmental or regulatory agencies. The
Company shall be responsible for filing, as required, such material,
whether developed by the Company, the Underwriter or the Wholesaler,
with any state insurance, governmental or regulatory agencies. Neither
the Wholesaler nor the Wholesaler Agency Affiliates shall have any
responsibility for any of the filings referred to in this paragraph.
If any such promotional, sales or advertising material names the Fund or
the Fund's investment adviser, the Company shall furnish such material
to the Fund or the Fund's distributor (if other than the Wholesaler)
prior to its use. Such material shall not be used unless written
approval has been obtained from the Fund or the Fund's distributor.
Failure of the Fund or the Fund's distributor to respond shall not
relieve the
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Company or the Underwriter of the obligation to obtain the
prior written approval of the Fund or the Fund's distributor.
b. The Wholesaler acknowledges that the Company shall have the right to
reject, in whole or in part, any application for a Contract, provided
(i) that there must be a reasonable basis (as determined by the Company)
for any such rejection, which basis shall be specified in writing by the
Company upon request by the Wholesaler and (ii) that the projected
profitability or lack of profitability of a Contract shall not be a
basis for rejection. In the event an application is rejected, any
Purchase Payment submitted will be returned by or on behalf of the
Company to the applicant. The Company will notify the Wholesaler and
the Broker-Dealer who submitted the Purchase Payment of such action. In
the event that a purchaser exercises his/her free look right under
his/her Contract, any amount to be refunded as provided in such Contract
will be so refunded to the purchaser by or on behalf of the Company.
The Company will notify the Wholesaler and the Broker-Dealer who
solicited the sale of the Contract of such action.
c. The Company and the Wholesaler shall equally share the costs (other
than those borne by the Fund pursuant to the Participation Agreement)
for printing any preliminary and all definitive Prospectuses for the
Contracts and Fund Prospectuses and any supplements thereto.
d. The Wholesaler will pay the following expenses (other than those
borne by the fund pursuant to the Participating Agreement ) related to
its wholesaling activities contemplated by this Agreement:
(i) the compensation, if any, of its Associated Persons;
(ii) expenses associated with the initial licensing, if any, and
training of its Associated Persons involved in the wholesaling
activities;
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(iii) the development, printing and mailing of any promotional,
sales or advertising material for use in connection with the
distribution of the Contracts;
(iv) the printing, mailing, and all other activities associated with
proxy solicitations;
(v) expenses associated with telecommunications with the Company at
the sites of the Wholesaler or its Associated Persons, including
site installations and purchases, leases or rentals of modems,
terminals and other hardware, and lease line telephone charges; and
(vi) any other expenses incurred by the Wholesaler or its Associated
Persons for the purpose of carrying out the obligations of the
Wholesaler hereunder.
Except for such expenses and the expenses described in Section 4.c.
of this Agreement, the Wholesaler shall not be responsible for any
expenses relating to the Contracts or distribution of the Contracts
or the processing of Contracts or applications, including without
limitation any expenses incurred in connection with the return of
Purchase Payments solicited by Broker-Dealers for applications
rejected or not timely received by the Company.
e. The Company will pay all expenses in connection with:
(i) the preparation and filing with appropriate governmental or
regulatory agencies of the Registration Statements and each
preliminary Prospectus and definitive Prospectus;
(ii) the preparation and issuance of the Contracts;
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(iii) any authorization, registration, qualification or approval of
the Contracts required under the securities, blue-sky laws or
insurance laws of the States in the Territory;
(iv) registration fees for the Contracts payable to the SEC, the
NASD or any other governmental or regulatory agency;
(v) the mailing of Prospectuses for the Contracts and Fund
Prospectuses, any supplements thereto, as required by federal
securities laws, and periodic reports relating to the Fund or the
Accounts to Contract owners;
(vi) the preparation of administrative forms utilized in connection
with the distribution of the Contracts;
(vii) the preparation of Contract owner lists for the purposes of
proxy solicitations; and
(viii) compensation as provided in Section 9 hereof.
f. The Company alone shall be responsible for and bear the cost of
administration of the Contracts following their issuance, including
all Contract owner service and communication activities, but the
Wholesaler shall be responsible for answering inquiries from
Broker-Dealers or Representatives regarding the investment performance
of the Contracts, as permitted by applicable law. The Company agrees
that its service standards for the Contracts shall be always equal to or
better than its current service standards for the other variable annuity
and variable life insurance contracts that it is actively marketing on
the effective date of this Agreement.
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g. The Company, as agent for the Underwriter, will confirm to each
applicant for and owner of a Contract in accordance with Rule l0b-10
under the 1934 Act its acceptance of Purchase Payments and such other
transactions as are required by Rule l0b-10 or administrative
interpretations thereunder and in accordance with Release 8389 under the
1934 Act.
h. At the end of 15 months from the later of the date (a) on which the
Company and its affiliate, First Allmerica Financial Life Insurance
Company ("FAFLIC") notify the Underwriter and the Wholesaler that they
have received approval of (i) "Kemper Gateway Elite" variable annuity
contracts and (ii) "Kemper Gateway Custom" variable annuity contracts
(collectively, the "Contracts") from at least thirty (30) states or
(b) on which the Company and FAFLIC version of the Contracts may be
legally distributed under the Federal Securities Laws, reimbursement (if
any) from the Wholesaler for development and administrative costs of the
Contracts shall be computed and paid based on the following schedule:
AGGREGATE SALES REIMBURSEMENT
$150,000,000 and over $ 0
$140,000,001 - $150,000,000 $ 70,000
$130,000,001 - $140,000,000 $140,000
$120,000,001 - $130,000,000 $210,000
$110,000,001 - $120,000,000 $280,000
$100,000,001 - $110,000,000 $350,000
$ 90,000,001 - $100,000,000 $420,000
$ 80,000,001 - $ 90,000,000 $490,000
$ 70,000,001 - $ 80,000,000 $560,000
$ 60,000,001 - $ 70,000,000 $630,000
$ 0 - $ 60,000,000 $700,000
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Aggregate Sales shall be determined in accordance with Section 21.a. Any
amount payable pursuant to this Section 4.h. shall be paid within thirty
(30) days after confirmation by the Wholesaler and the Company of the
amount owed.
For purposes of calculating the above reimbursement, Aggregate Sales
shall include all sales of the Contracts from the inception of public
distribution to the end of the applicable fifteen-month computation
period.
5. REPRESENTATIONS AND WARRANTIES
a. The Company and the Underwriter each represent and warrant to the
Wholesaler and each Wholesaler Agency Affiliate, on the effective date
of each Registration Statement for the Contracts (or class of Contracts)
and at each time that a Contract is sold and, with respect to Clauses
(vi), (vii), (x), and (xi) below, also on the date of this Agreement, as
follows:
(i) The Registration Statement has been declared effective by the
SEC or has become effective in accordance with the Regulations.
(ii) The Registration Statements and the Prospectuses each comply in
all material respects with the provisions of the 1933 Act and the
1940 Act and the Regulations, and neither the Registration
Statements nor the Prospectuses contain an untrue statement of a
material fact or omits to state a material fact required to be
stated therein or necessary to make the statements therein not
misleading, in light of the circumstances in which they were made;
provided, however, that none of the representations and warranties
in this Clause (ii) shall apply to statements in or omissions from
the Registration Statements or Prospectuses made in reliance upon
and in conformity with information furnished to the Company in
writing by the Wholesaler expressly for use in the Registration
Statements.
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(iii) Neither the Company nor the Underwriter has received any
notice from the SEC with respect to the Registration Statement or
the Account supporting the Contracts described in the Registration
Statements pursuant to Section 8(e) of the 1940 Act and no stop
order under the 1933 Act has been issued and no proceeding therefor
has been instituted or threatened by the SEC.
(iv) The accountants who certified the financial statements included
in the Registration Statements and Prospectuses are independent
public accountants as required by the 1933 Act and the Regulations
and such independent public accountants shall have certified that
the financial statements included in the Registration Statements
present fairly the respective financial positions of the Company and
the Account supporting the Contracts described in the Registration
Statements as of the dates indicated; and such financial statements
have been prepared in conformity with generally accepted accounting
principles in the United States applied on a consistent basis.
(v) Subsequent to the respective dates as of which information is
given in the Registration Statement or the Prospectus, there has not
been any material adverse change in the condition, financial or
otherwise, of the Company, the Underwriter or the Account supporting
the Contracts described in the Registration Statements that would
cause such information to be materially misleading.
(vi) The Company has been duly organized and is validly existing as
a corporation in good standing under the laws of the State of
Delaware with full power and authority to own, lease and operate its
properties and conduct its business in the manner described in the
Prospectus; is duly qualified to transact the business of a life
insurance company; and is in good standing, in each State in the
Territory in which the Contracts are or will be offered.
(vii) The Underwriter has been duly organized and is validly
existing as a corporation in good standing under the laws of the
Commonwealth of Massachusetts with full power and authority to own,
lease and
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operate its properties and conduct its business in the manner described
in the Prospectuses; is duly registered as a broker-dealer with the
SEC and with the securities commission of every State in the
Territory with which such registration is required; and is a member
in good standing with the NASD.
(viii) Each Account supporting the Contracts described in the
Registration Statements has been duly authorized and established and
is validly existing as a separate account under the insurance code
of the State of Delaware, and is duly registered with the SEC as a
unit investment trust under the 1940 Act.
(ix) The form of the Contracts has been approved to the extent
required by the Insurance Commissioner of the State of Delaware and
by the governmental agency responsible for regulating insurance
companies in each other State in the Territory in which the
contracts are to be offered.
(x) The execution and delivery of this Agreement and the
consummation of the transactions contemplated in this Agreement have
been duly authorized by all necessary corporate action by the
Company and the Underwriter and when so executed and delivered this
Agreement will be the valid and binding obligation of the Company
and the Underwriter, enforceable in accordance with its terms.
(xi) The consummation of the transactions contemplated by this
Agreement, and the fulfillment of the terms of this Agreement, will
not conflict with, result in any breach of any of the terms and
provisions of, or constitute (with or without notice or lapse of
time) a default under, the charter or bylaws of the Company or the
Underwriter, or any indenture, agreement, mortgage, deed of trust,
or other instrument to which the Company or the Underwriter is a
party or by which either is bound, or violate any law, or, to the
best of the Company's or the Underwriter's knowledge, any order,
rule or regulation applicable to the Company or the Underwriter of
any court or of any federal or state regulatory body, administrative
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agency or any other governmental instrumentality having jurisdiction
over the Company or the Underwriter or any of their respective
properties.
(xii) No consent, approval, authorization or order of any court or
governmental authority or agency is required for the issuance or
sale of the Contracts or for the consummation of the transactions
contemplated by this Agreement, that has not been obtained.
(xiii) The Company has filed with the SEC all statements and other
documents required for registration under the provisions of the 1940
Act and the Regulations thereunder of the Account supporting the
Contracts described in the Registration Statement, and such
registration has been effected; there are no agreements or documents
required by the 1933 Act, the 1940 Act, or the Regulations to be
filed with the SEC as exhibits to the Registration Statement, that
have not been so filed; and the Company has obtained all exemptive
or other orders of the SEC necessary to make the public offering and
consummate the sale of the Contracts pursuant to this Agreement and
to permit the operation of the Accounts supporting the Contracts
described in the Registration Statements, as contemplated in the
Prospectuses.
(xiv) The Contracts have been duly authorized by the Company and
conform to the descriptions thereof in the Registration Statements
and the Prospectuses and, when issued as contemplated by the
Registration Statements, will constitute legal, validly issued and
binding obligations of the Company in accordance with their terms.
b. KDI and ZKIA represent and warrant to the Company on the date hereof as
follows:
(i) KDI and ZKIA have taken all action including, without
limitation, those necessary under their respective certificates of
incorporation, by-laws and applicable state corporate law, necessary to
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authorize the execution, delivery and performance of this
Agreement, and have taken or will take all requisite action to
enable them to perform all transactions contemplated hereunder in
accordance with the terms hereof; and
(ii) KDI is and during the term of this Agreement shall remain duly
registered as a broker-dealer under the 1934 Act, a member in good
standing with the NASD, and duly registered as a broker-dealer under
applicable state securities laws.
6. ADDITIONAL RESPONSIBILITIES OF THE COMPANY
a. The Company shall use its best efforts:
(i) to maintain the registration of the Contracts with the SEC and
any state securities commissions of any State in the Territory where
the securities or blue-sky laws of such State require registration
of the Contracts, including without limitation using its best
efforts to prevent a stop order from being issued or if a stop order
has been issued to cause such stop order to be withdrawn;
(ii) to gain approval or other authorization of the Contract forms
where required under the insurance laws and regulations of each
State in the Territory (provided, however, that it shall be within
the Company's discretion whether to obtain such approval or
authorization in Guam); and
(iii) to keep such registration, approval and authorization in
effect thereafter so long as the Contracts are outstanding.
b. During the term of this Agreement the Company shall take all action
required to cause each class of Contracts to comply, and to continue to
comply, as annuity contracts or life insurance contracts, as the
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<PAGE>
case may be, and to cause the Registration Statements and the Prospectus
for each class of Contracts to comply, and to continue to comply, with
all applicable federal laws and regulations and all applicable laws and
regulations of each State in the Territory.
c. The Company, during the term of this Agreement, shall notify the
Wholesaler immediately:
(i) when each Registration Statement has become effective or any
post-effective amendment with respect to the Registration Statement
thereafter becomes effective;
(ii) of any request by the SEC for any amendment to a Registration
Statement or supplement to a Prospectus or for additional information;
(iii) of any event that makes any material statement made in a
Registration Statement or a Prospectus untrue in any material respect or
results in a material omission in a Registration Statement or a
Prospectus;
(iv) of the issuance by the SEC of any stop order with respect to a
Registration Statement or any amendment thereto, or the initiation of
any proceedings for that purpose, or for any other purpose relating to
the registration and/or offering of the Contracts (or a class of
Contracts);
(v) in which States in the Territory registration of the Contracts (or a
class of Contracts) is required under the securities or blue-sky laws,
and when such registrations have become effective.
d. The Company shall furnish to the Wholesaler without charge promptly
after filing five (5) copies of each Registration Statement as
originally filed and any pre-effective or post-effective amendment
thereto, including financial statements and all exhibits, including
exhibits incorporated therein by reference.
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e. The Company shall timely file all reports, statements and amendments
required to be filed by or for each Account or class of Contracts under
the 1933 Act and/or the 1940 Act or the Regulations.
f. The Company shall deliver to the Wholesaler, as soon as practicable
after it becomes available, the Annual Statements for the Company and
for each Account in the form filed with their respective state of
domicile, and any quarterly reports upon the Wholesaler's request.
g. The Company and the Underwriter will provide the Wholesaler access
to such records, officers and employees of the Company, the Underwriter
and each Account at reasonable times as is necessary to enable the
Wholesaler to fulfill its obligations under the federal securities laws
and NASD rules. The Wholesaler will provide the Company and the
Underwriter access to such of its records, officers and employees at
reasonable times as is necessary to enable the Company and the
Underwriter to fulfill their obligations under the federal securities
laws and NASD rules.
h. The Company shall provide the Wholesaler at least monthly with a
sales report or reports and an assets under management report in such
form as shall be acceptable to both the Company and the Wholesaler. Any
such sales report shall include, among other items, a break-down of
sales by Representative, Broker-Dealer, product type and Contract state
of issue.
7. CONFIDENTIALITY
a. The Company and the Underwriter acknowledge that the names and
addresses of all customers and prospective customers (for purposes of
this Section 7.a., the terms "customers" and "prospective customers"
shall not mean Broker-Dealers) of the Wholesaler, of its parent company
and of any affiliated person of the Wholesaler, the Wholesaler Agency
Affiliates and the names and addresses of all customers and prospective
customers of any Broker-Dealer that may come to the attention of the
Company, the Underwriter or any person affiliated with the Company or
the Underwriter solely as a result of their relationship with the
Wholesaler, its parent company or any affiliated person of the
Wholesaler, the Wholesaler Agency Affiliates or any Broker-Dealer and
not from any independent source, are confidential and shall not be used
by the Company, the
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Underwriter or any person affiliated with the Company or the Underwriter
for any purpose whatsoever except as may be necessary in connection with
the administration of the Contracts sold by the Broker-Dealers,
including responses to specific requests made to the Company for service
by Contract owners, efforts to prevent the replacement of such Contracts
or communications with customers concerning option rights available
under the terms of the Contracts. The restrictions set forth in the
previous sentence do not apply if and to the extent a Broker-Dealer
knowingly discloses the names and addresses of its customers or
prospective customers to the Company or the Underwriter outside the
operation of this Agreement. In no event shall the names and addresses
of such customers and prospective customers, whether disclosed to the
Company or the Underwriter by the Wholesaler or by any Broker-Dealer, be
furnished by the Company, the Underwriter or any of their affiliated
persons to any other person. The intent of this paragraph is that
neither the Company nor the Underwriter, nor persons affiliated with the
Company or the Underwriter, shall utilize, or permit to be utilized, for
any purpose other than for the sale and administration of the Contracts
or for the sale and administration of other financial products
distributed or managed by the Wholesaler and/or its affiliates, their
knowledge of the Wholesaler, of its parent company or of any affiliated
person of the Wholesaler, the Wholesaler Agency Affiliates or the
identity of all customers and prospective customers, derived solely as a
result of the relationship created through the funding and sale of the
Contracts. This paragraph shall remain operative and in full force and
effect regardless of the termination of this Agreement, and shall
survive any such termination.
In addition to the foregoing, the Company and the Underwriter agree that
neither during the term of this Agreement nor after its termination
shall the names and addresses of Broker-Dealers and their
Representatives recruited by the Wholesaler to solicit the Contracts be
furnished by the Company, the
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Underwriter or any of their affiliated persons to any other person, or
be utilized by the Company, the Underwriter or their affiliated persons
for any purpose except as the Company deems necessary or appropriate for
the sale and administration of the Contracts subject to this Agreement.
8. RECORDS
The Company, the Underwriter, the Wholesaler and the Wholesaler Agency
Affiliates shall each maintain such accounts, books and other documents
as are required to be maintained by each of them by applicable laws and
regulations and shall preserve such accounts, books and other documents
for the periods prescribed by such laws and regulations. The accounts,
books and records of the Company, the Underwriter, the Account, the
Wholesaler and the Wholesaler Agency Affiliates as to all transactions
hereunder shall be maintained so as to clearly and accurately disclose
the nature and details of the transactions, including such accounting
information as is necessary to support the reasonableness of the amounts
paid by the Company hereunder. Each party shall have the right to
inspect and audit such accounts, books and records of the other party
during normal business hours upon reasonable written notice to the other
party. Each party shall keep confidential all information obtained
pursuant to such an inspection or audit, and shall disclose such
information to third parties only upon receipt of written authorization
from the other party, except as required by law.
9. BROKER-DEALER COMPENSATION AND WHOLESALER PROMOTIONAL ALLOWANCES
a. The Company shall compensate Broker-Dealers and/or their duly
licensed insurance affiliates for sales of the Contracts by their
Representatives pursuant to Schedule 4 to this Agreement, as such
Schedule may be amended from time to time upon mutual agreement of the
parties to this Agreement. As of the effective date of this Agreement,
Schedule 4 governs only compensation and Promotional Allowances related
to sales of Kemper Gateway Elite and Custom annuity Contracts. When
additional Contracts are developed
26
<PAGE>
and offered for sale, Schedule 4 will be appropriately amended to
reflect the compensation and Promotional Allowances payable as a result
of sales of such additional Contracts. Such compensation shall be based
in part on Purchase Payments received and accepted by the Company for
all Contracts issued on applications obtained by the Broker-Dealers or
any of their respective Representatives. Additional "trail"
compensation shall be paid, as described in Schedule 4. The Company
will pay compensation due Broker-Dealers and/or their insurance
affiliates in accordance with the procedures set forth in Schedule 4.
The compensation provided for in this Section 9 shall be payable to the
Broker-Dealer and/or its duly licensed insurance affiliate in accordance
with the sales agreement between the Underwriter and the Broker-Dealer
for so long as the Contracts are outstanding, regardless of whether
this Agreement is still in effect. If trail commissions are no longer
payable to a Broker-Dealer because the sales agreement between the
Company and the Broker-Dealer is no longer in effect, one-half of the
trail commissions that would have been payable to the Broker-Dealer had
the sales agreement remained in effect shall be paid instead to ZKIA for
so long as the Contracts on which the trail commissions are payable
remain in effect, regardless of whether this Agreement is still in
effect. In addition to the compensation payable to the Broker-Dealers
and their insurance affiliates, the Company shall pay the Wholesaler a
Promotional Allowance as a reimbursement for its expenses incurred
relating to its wholesaling activities contemplated by this Agreement.
Promotional Allowances shall be payable to the Wholesaler in such amount
and in accordance with the procedures as set forth in Schedule 4, as
such Schedule may be amended from time to time upon mutual agreement of
the parties to this Agreement. Promotional Allowances shall be payable
to the Wholesaler for so long as the Contracts are outstanding,
regardless of whether this Agreement and the Participation Agreement are
still in effect. Nothing herein or in any sales agreement shall be
construed to create any obligation on the part of the Wholesaler to
compensate any Broker-Dealer for sales of the Contracts.
If any State in the Territory by insurance rule, regulation or statute,
prohibits payment of Promotional Allowances to the Wholesaler, the
Wholesaler shall designate in writing a business entity or natural
person,
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<PAGE>
including Wholesaler Agency Affiliates, meeting the requirements of such
State to receive any amounts that may otherwise be payable to the
Wholesaler hereunder. The Wholesaler may change such designation from
time to time upon written notice to the Company. Any payments made by
the Company to any person or entity so designated by the Wholesaler
shall discharge the Company's liability to the Wholesaler hereunder.
If a purchaser rescinds a Contract or exercises a right to surrender a
contract for return of all Purchase Payments, the Wholesaler will pay to
the Company on demand the amount of any Promotional Allowances it
received on the Purchase Payments returned. Promotional Allowance
chargebacks will be calculated by the Company on the same basis, as
described in Schedule 4 hereto, as was utilized in calculating the
Contract Promotional Allowances received.
b. INDEBTEDNESS. Nothing in this Agreement shall be construed as
giving the Wholesaler the right to incur any indebtedness on behalf of
the Company.
c. APPOINTMENT FEES. The Company will pay the initial and renewal fees
for agent appointments by the Company of duly licensed Wholesaler Agency
Affiliates and Broker-Dealers and their respective Associated Persons;
provided, however, (a) that if total Aggregate Annual Sales of the
Contracts, as described in Section 21.a., do not exceed $60 million
during any calendar year beginning after December 31, 1997, the
Wholesaler will reimburse the Company for the total amount of initial or
renewal fees paid by the Company during such calendar year(s), and (b)
that the Company reserves the right to refuse to pay renewal fees for
Representatives not meeting such minimal sales as may be agreed upon
from time to time. For purposes of (b) above, the minimal sales target
for Representatives shall be $25,000 per calendar year, unless the
parties hereto mutually agree on a different sales target for a calendar
year.
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Notwithstanding Clause (a) above, in calculating the amount of agent fee
reimbursements, if an agent solicited products of the Company in
addition to the Contracts described in this Agreement, the reimbursement
otherwise required under Clause (a) will be pro-rated, as described
below:
The otherwise reimbursable amount shall be multiplied by a fraction,
the numerator of which is the number of Kemper products covered by
this Agreement on the date of determination (two as of the effective
date of this Agreement) and the denominator of which is the
aggregate number of products of the Company and its insurance
affiliates being solicited by the agent on the date of determination.
d. REPORTING. The Wholesaler shall be responsible for all tax
reporting information, if any, that the Wholesaler is required to
provide under applicable tax law to its Associated Persons with respect
to the Contracts. Nothing contained in this Agreement or any sales
agreement with a Broker-Dealer is to be construed to require the
Wholesaler to provide any tax reporting information directly or
indirectly to any Broker-Dealer or its Representatives.
e. SURVIVAL. Except for Section 9.c.(a), this Section 9 shall remain
operative and in full force and effect regardless of the termination of
this Agreement, and shall survive any such termination.
10. INVESTIGATION AND PROCEEDINGS
a. The Company, the Underwriter and the Wholesaler will cooperate
fully in any securities, insurance, governmental or regulatory
investigation or proceeding or judicial proceeding arising out of or
in connection with the offering, sale or distribution of the Contracts
for which the Wholesaler acts as wholesaler pursuant to this Agreement.
Without limiting the foregoing, the Company, the Underwriter and
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<PAGE>
the Wholesaler agree to notify one another promptly of any customer
complaint or notice of any governmental, judicial or regulatory
investigation or proceeding described in this Section 10.
b. In the case of a substantive customer complaint, the Company, the
Underwriter, the Wholesaler and the Wholesaler Agency Affiliates will
cooperate in investigating such complaint and any response by the
Company or Underwriter, as one party, or the Wholesaler or Wholesaler
Agency Affiliates, as another party, to such complaint will be sent to
the other party for approval not less than five business days prior to
its being sent to the customer or to any governmental or regulatory
agency, except that if a more prompt response is required, the proposed
response shall be communicated by telephone, telegraph or facsimile.
Neither such party will release any such response without the other
party's prior written approval, unless otherwise required by applicable
law. Failure of any party to object to a proposed response within four
business days shall be deemed to constitute approval of a proposed
response by the non-objecting party.
11. INDEMNIFICATION
a. The Company and the Underwriter, jointly and severally, shall
indemnify and hold harmless the Wholesaler and the Wholesaler Agency
Affiliates and each person who controls or is associated with the
Wholesaler or the Wholesaler Agency Affiliates within the meaning of
such terms under the federal securities laws, and any officer,
director, employee or agent of the foregoing, against any and all
losses, claims, damages or liabilities, joint or several (including any
investigative, legal and other expenses reasonably incurred in
connection with, and any amounts paid in settlement of, any action,
suit or proceeding or any claim asserted), to which the Wholesaler, the
Wholesaler Agency Affiliates and/or such person may become subject,
under any statute or regulation, at common law or otherwise, insofar as
such losses, claims, damages or liabilities:
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(i) arise out of or are based upon any untrue statement or alleged
untrue statement of a material fact contained in any Registration
Statement, Prospectus, blue sky application or other document
executed by the Company specifically for the purpose of qualifying
any or all of the Contracts for sale under the securities laws of
any State, promotional, sales or advertising material for the
Contracts prepared by the Company, or the Contracts themselves (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 in light of the
circumstances in which they were made; provided that this
obligation to indemnify shall not apply if such untrue statement or
omission or such alleged untrue statement or alleged omission was
made in reliance upon and in conformity with information furnished
in writing to the Company or the Underwriter by the Wholesaler
specifically for use in the preparation of any such Registration
Statement, Prospectus or blue-sky application or other document,
material or Contract (or any such amendment or supplement thereto);
or
(ii) arise out of or are based upon any untrue statement or alleged
untrue statement of a material fact contained in any Fund
Registration Statement, Fund Prospectus, blue sky application or
other document executed by the Fund specifically for the purpose of
qualifying any or all of the shares of the Fund for sale under the
securities laws of any State, or in any promotional, sales or
advertising material or written information relating to the shares
of the Fund authorized by the Fund (or any amendment or supplement
to any of the foregoing), or arise out of or are based upon the
omission or the alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements
therein not misleading in light of the circumstances in which they
were made, in each case to the extent, but only to the extent, that
such untrue statement or alleged untrue statement or omission or
alleged omission was made in reliance upon and in conformity with
information furnished in writing to the Wholesaler or the Fund by
the Company specifically for use
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in the preparation of any such Fund Registration Statement, Fund
Prospectus, blue-sky application or other document (or any such
amendment or supplement thereto); or
(iii) arise out of or are based upon any untrue statement or
alleged untrue statement or omission or alleged omission of a
material fact by or on behalf of the Company or the Underwriter
(other than statements or representations contained in the Fund
Registration Statement, Fund Prospectus or promotional, sales or
advertising material of the Fund that were not supplied by the
Company, the Underwriter or persons under their control) or
wrongful conduct of the Company or the Underwriter or persons under
their control with respect to the sale or distribution of the
Contracts; or
(iv) result because of the terms of any Contract or because of any
material breach by the Company or the Underwriter of any terms of
this Agreement or of any Contract or that proximately result from
any activities of the Company's or Underwriter's officers,
directors, employees or agents or their failure to take action in
connection with the sale of a Contract, to the extent of the
Company's or the Underwriter's obligations under this Agreement or
otherwise, or the processing or administration of the Contracts.
This indemnification obligation will be in addition to any
liability that the Company or Underwriter may otherwise have;
provided, however, that no person shall be entitled to
indemnification pursuant to this Section 11.a. if such loss, claim,
damage or liability is due to the willful misfeasance, bad faith,
gross negligence or reckless disregard of duty by the person
seeking indemnification.
b. The Wholesaler shall indemnify and hold harmless the Company and
the Underwriter and each person who controls or is associated with the
Company or the Underwriter within the meaning of such terms under the
federal securities laws and any officer, director, employee or agent of
the foregoing, against any and all losses, claims, damages or liabilities,
joint or several (including any investigative, legal and other
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expenses reasonably incurred in connection with, and any amounts
paid in settlement of, any action, suit or proceeding or any claim
asserted), to which the Company, the Underwriter and/or any such person
may become subject under any statute or regulation, at common law or
otherwise, insofar as such losses, claims, damages or liabilities arise
out of or are based upon:
(i) any untrue statement or alleged untrue statement of a material
fact contained in any Registration Statement, Prospectus or
blue-sky application or other document executed by the Company
specifically for the purpose of qualifying any or all of the
Contracts for sale under the securities laws of any State (or any
amendment or supplement to the foregoing), or omission or alleged
omission to state therein a material fact required to be stated
therein or necessary in order to make the statements therein not
misleading, in light of the circumstances in which they were made,
in each case to the extent, but only to the extent, that such
untrue statement or alleged untrue statement or omission or alleged
omission was made in reliance upon and in conformity with
information furnished in writing to the Company or the Underwriter
by the Wholesaler specifically for use in the preparation of any
such Registration Statement, Prospectus, such blue-sky application
or other document (or any such amendment or supplement thereto),
the parties hereby confirming that the only such information is the
information which appears in the Prospectus under the sub-caption
"Kemper Investors Fund" and in the Statement of Additional
Information filed with the Prospectus under the caption
"Performance Information;" or
(ii) any use of promotional, sales or advertising material for the
Contracts not approved in writing by the Company or any verbal or
written misrepresentations or any unlawful sales practices
concerning the Contracts by the Wholesaler or the Wholesaler Agency
Affiliates under federal securities laws or NASD regulations (but
not including state insurance laws, compliance with which is a
responsibility of the Company or the Underwriter under this
Agreement or otherwise); or
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(iii) claims by agents, representatives or employees of the
Wholesaler for compensation or other remuneration of any type other
than claims by any Broker-Dealer relating to compensation described
or referred to in Schedule 4 hereto; or
(iv) any material breach by the Wholesaler or the Wholesaler Agency
Affiliates of any provision of this Agreement.
This indemnification obligation will be in addition to any
liability that the Wholesaler may otherwise have; provided,
however, that no person shall be entitled to indemnification
pursuant to this Section 11.b. if such loss, claim, damage or
liability is due to the willful misfeasance, bad faith, gross
negligence or reckless disregard of duty by the person seeking
indemnification.
c. If the indemnification provided for in this Section is unavailable
to an indemnified party under paragraphs (a) or (b) hereof in respect
to any losses, claims, damages or liabilities referred to therein, then
each applicable indemnifying party, in lieu of indemnifying such
indemnified party, shall contribute to the amount paid or payable by
such indemnified party as a result of such losses, claims, damages or
liabilities in such proportion as is appropriate to reflect the
relative fault of the Company and the Underwriter, on the one hand, and
the Wholesaler, on the other, as well as any other relevant equitable
considerations. The relative fault of the Company and the Underwriter,
on the one hand, and the Wholesaler, on the other, with respect to
untrue or alleged untrue statements of material fact or omissions or
alleged omissions of material facts shall be determined by reference
to, among other things, whether the untrue or alleged untrue statement
of a material fact or the omission to state a material fact relates to
information supplied by the Company or by the Underwriter, on the one
hand, and by the Wholesaler, on the other, and the parties' relative
intent, knowledge, access to information and opportunity to correct or
prevent such statement or omission. The amount paid or payable by a
party as a result of the losses, claims, damages
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and liabilities referred to above shall be deemed to include any legal
or other fees or expenses reasonably incurred by such party in
connection with investigating or defending any action or claim.
The Company, the Underwriter and the Wholesaler agree that it would not
be just and equitable if contribution pursuant to this Section were
determined by pro rata allocation or by any other method of allocation
which does not take account of the equitable considerations referred to
in the immediately preceding paragraph.
If the Company and the Underwriter, as one party, and the Wholesaler,
as the other party, cannot agree on the appropriate amount of any
contribution payable pursuant to this Section, the matter shall be
settled by arbitration pursuant to Section 16 hereof. The costs of any
such arbitration shall be divided equally between the Company and the
Underwriter, as one party, and the Wholesaler, as the other party.
d. After receipt by a party entitled to indemnification ("indemnified
party") under this Section 11 of notice of the commencement of any
action, if a claim in respect thereof is to be made by the indemnified
party against any person obligated to provide indemnification under
this Section 11 ("indemnifying party"), such indemnified party will
notify the indemnifying party in writing of the commencement thereof as
soon as practicable thereafter, provided that the omission to so notify
the indemnifying party will not relieve it from any liability under
this Section 11, except to the extent that the omission results in a
failure of actual notice to the indemnifying party and such
indemnifying party is damaged as a result of the failure to give such
notice. The indemnifying party, upon the request of the indemnified
party, shall retain counsel reasonably satisfactory to the indemnified
party to represent the indemnified party and any others the
indemnifying party may designate in such proceeding and shall pay the
fees and disbursements of such counsel related to such proceeding. In
any such proceeding, any indemnified party shall have the right to
retain its own counsel, but the fees and expenses of such counsel shall
be at the expense of such indemnified party unless (i) the indemnifying
party and the indemnified party shall have mutually agreed to the
retention of
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such counsel or (ii) the named parties to any such proceeding
(including any impleaded parties) include both the indemnifying party
and the indemnified party and representation of both parties by the
same counsel would be inappropriate due to actual or potential
differing interests between them. The indemnifying party shall not be
liable for any settlement of any proceeding effected without its
written consent but if settled with such consent or if there be a final
judgment for the plaintiff, the indemnified party shall indemnify the
indemnified party from and against any loss or liability by reason of
such settlement or judgment.
e. The indemnification provisions contained in this Section 11 shall
remain operative in full force and effect, regardless of (i) any
investigation made by or on behalf of the Company or by or on behalf of
any controlling person thereof, (ii) delivery of any Contracts and
Purchase Payments therefor, or (iii) any termination of this Agreement.
A successor by law of the Wholesaler or the Company, as the case may
be, shall be entitled to the benefits of the indemnification provisions
contained in this Section 11.
12. TERMINATION
a. This Agreement may be terminated at the option of any party upon
twelve months advance written notice to the other parties, such
termination to be effective no earlier than six years following the
date on which the first Contract is issued to the public.
Notwithstanding the foregoing, this Agreement shall terminate
automatically on the termination date of the Participation Agreement
among the Fund, Zurich Kemper Investments Inc., KDI and the Company
entered into contemporaneously herewith.
b. This Agreement may not be assigned without the express written
consent of the other parties hereto. This Agreement may be terminated
at the option of the Company and the Underwriter, as one party, or the
Wholesaler and the Wholesaler Agency Affiliates, as one party, upon the
other party's material breach of
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<PAGE>
any provision of this Agreement, if any such breach is not cured within
ninety days after notice thereof to the breaching party and all other
parties.
c. Upon termination of this Agreement all authorizations, rights and
obligations shall cease except: (i) the obligation to continue to pay
compensation to Broker-Dealers and compensation and Promotional
Allowances to the Wholesaler, as set forth in Section 9.a. and Schedule
4; (ii) the provisions contained in Sections 7, 9 and 11 of this
Agreement; and (iii) the indemnification provisions set forth in
Section 11 of this Agreement, or as otherwise specifically noted in
this Agreement.
13. RIGHTS, REMEDIES, ETC, ARE CUMULATIVE
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 to this Agreement
are entitled to under state and federal laws. Failure of the
Wholesaler or the Wholesaler Agency Affiliates, as one party, or the
Company or the Underwriter, as another party, to insist upon strict
compliance by the other party with any of the conditions of this
Agreement shall not be construed as a waiver of any of the conditions,
but the same shall remain in full force and effect. No waiver of any
of the provisions of this Agreement shall be deemed, or shall
constitute, a waiver of any other provisions, whether or not similar,
nor shall any waiver constitute a continuing waiver.
14. NOTICES
All notices hereunder are to be made in writing and shall be given:
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if to the Company to:
Lila M. Weihs, Vice President
Allmerica Financial Life Insurance and Annuity Company
440 Lincoln Street
Worcester, MA 01653
if to the Underwriter to:
Stephen Parker, President
Allmerica Investments, Inc.
440 Lincoln Street
Worcester, MA 01653
if to the Wholesaler or Wholesaler Agency Affiliates, to any such party at:
[Name of Party]
222 South Riverside Plaza
Chicago, IL 60606
Attention: President
or such other address as such party may hereafter specify in writing.
Each such notice to a party shall be either hand delivered or
transmitted by registered or certified United States mail with return
receipt requested, and shall be effective upon delivery.
15. INTERPRETATION, JURISDICTION, ETC.
This Agreement constitutes the whole agreement between the parties to
this Agreement relating to the wholesaling activities contemplated in
this Agreement, and supersedes all prior oral or written negotiations
between the parties to this Agreement with respect to the subject
matter of this Agreement. The parties acknowledge that the Company,
the Wholesaler and the Fund have entered into the Participation
38
<PAGE>
Agreement in contemplation of entering into this Agreement. This
Agreement shall be construed and the provisions of this Agreement
interpreted under and in accordance with the internal laws of the
Commonwealth of Massachusetts without giving effect to principles of
conflict of laws.
16. ARBITRATION
Any controversy or claim arising out of or relating to this Agreement,
or the breach of this Agreement, shall be settled by arbitration in
accordance with the Commercial Arbitration Rules of the American
Arbitration Association, and judgment upon the award rendered by the
arbitrator(s) may be entered in any court having jurisdiction thereof.
17. HEADINGS
The headings in this Agreement are included for convenience of
reference only and in no way define or delineate any of the provisions
of this Agreement or otherwise affect their construction or effect.
18. COUNTERPARTS
This Agreement may be executed in two or more counterparts, each of
which taken together shall constitute one and the same instrument.
19. SEVERABILITY
This is a severable agreement and in the event that any part or parts
of this Agreement shall be held to be unenforceable to its or their
full extent, then it is the intention of the parties to this Agreement
that such part or parts shall be enforced to the extent permitted under
the law, and, in any event, that all other parts
39
<PAGE>
of this Agreement shall remain valid and duly enforceable as if the
unenforceable part or parts had never been a part of this Agreement.
20. REGULATION
This Agreement shall be subject to the provisions of the 1933 Act, 1934
Act and 1940 Act and the Regulations and the rules and regulations of
the NASD, from time to time in effect, including such exemptions from
the 1940 Act as the SEC may grant, and the terms of this Agreement
shall be interpreted and construed in accordance therewith.
21. MISCELLANEOUS
a. For the purposes of Section 4.h., "Aggregate Sales" shall refer to
the aggregate sales of the Contracts pursuant both to this Agreement
and to the Wholesaling Agreement with First Allmerica Financial Life
Insurance Company ("FAFLIC") related to contracts offered for sale in
the States of New York and Hawaii being executed contemporaneously
herewith (the "FAFLIC Agreement"). Based on such Aggregate Sales,
Wholesaler shall be responsible for only a single reimbursement amount,
and such reimbursement shall be divided between the Company and FAFLIC
as they may mutually agree. For the purposes of Section 9.c.(a),
"Aggregate Annual Sales" shall refer to the total annual sales through
the Wholesaler pursuant both to this Agreement and to the FAFLIC
Agreement, and "total amount of initial or renewal fees" shall refer to
the aggregate amount of such fees incurred by the Company and FAFLIC.
b. The Company and the Underwriter acknowledge that the names "Gateway
Elite," "Gateway Custom," "Kemper Gateway Elite" and "Kemper Gateway
Custom," and any and all variations thereof, are the exclusive property
of the Wholesaler and their respective affiliates, and that any use of
any such names or any variation thereof during or after the term of
this Agreement are and will be subject to the express
40
<PAGE>
prior written consent of KDI and/or ZKIA thereto. Notwithstanding the
foregoing, KDI and ZKIA hereby specifically permit the Company to use
the above names as the Company deems necessary or appropriate in its
administration of the Contracts subject to this Agreement. The Company
and the Wholesaler agree that in the event of any breach of this
Section 21.b, as a remedy therefor and in addition to all other
remedies, the Wholesaler shall be entitled to specific performance and
injunctive or other equitable relief without proof of actual damages,
and that the Company and the Underwriter will not oppose or impede the
granting of such relief.
41
<PAGE>
IN WITNESS WHEREOF, each party hereto represents that the officer signing
this Agreement on the party's behalf is duly authorized to execute this
Agreement; and each party has caused this Agreement to be duly executed by
such authorized officer on the date specified below.
ALLMERICA FINANCIAL LIFE INSURANCE
AND ANNUITY COMPANY
Date: 11/6/96 By: /s/ Richard M. Reilly
----------------- ----------------------------
Name: Richard M. Reilly
----------------------------
Title: President
----------------------------
ALLMERICA INVESTMENTS, INC.
Date: 11/6/96 By: /s/ Richard M. Reilly
----------------- ----------------------------
Name: Richard M. Reilly
----------------------------
Title: Director
----------------------------
KEMPER DISTRIBUTORS, INC.
(on its own behalf and on behalf of
the Wholesaler Agency Affiliates)
Date: 11/5/96 By: /s/ James L. Greenawalt
----------------- ----------------------------
Name: James L. Greenawalt
----------------------------
Title: President
----------------------------
ZKI AGENCY, INC.
Date: 11/5/96 By: /s/ James L. Greenawalt
----------------- ----------------------------
Name: James L. Greenawalt
----------------------------
Title: President
----------------------------
42
<PAGE>
43
<PAGE>
SCHEDULE 1
Wholesaler Agency Affiliates
Effective November 5, 1996
NAME OF STATE(S) IN
WHOLESALER AGENCY AFFILIATE WHICH LICENSED
None
<PAGE>
Schedule 2
Separate Accounts
Available under the Contracts
Effective November 5, 1996
SEPARATE ACCOUNT SUBACCOUNTS ARE INVESTED
IN THE FOLLOWING KEMPER INVESTORS FUND
NAME OF SEPARATE ACCOUNT PORTFOLIOS
Separate Accounts KG (Kemper MM
Gateway Elite) and KGC (Kemper Gov Sec
Gateway Custom) of Allmerica Inv Grade
Financial Life Insurance and Annuity High Yield
Company Horizon 5
Horizon 10+
Horizon 20+
Total Return
Growth
Value
Value and Growth
Small Cap Value
Small Cap Growth
International
<PAGE>
Schedule 3
Contracts Subject to Wholesaling Agreement
Effective November 5, 1996
SEC
Marketing Policy Registration
Name Form No. No.
------------- -------------- ---------------
Kemper Gateway Elite A3025-96 333-9965
Kemper Gateway Custom A3026-96 333-10283
<PAGE>
SCHEDULE 4
Broker-Dealer Compensation and
Wholesaler Promotional Allowance Schedule
The Broker-Dealer Compensation payable by the Company with respect to the
sale and distribution of the Contracts, based on initial and subsequent
Purchase Payments received and accepted by the Company, shall be computed
under one of the options shown below:
For non-401(k) contracts:
Option A: 6.00% and no trail
Option B: 5.00% and .25% lifetime trail
Option C: 4.00% and .50% lifetime trail
Option D: 2.00% and 1.00% lifetime trail
For 401(k) contracts:
Option A: 5% and no trail
Option B: 4.00% and .25% lifetime trail
Option C: 3.00% and .50% lifetime trail
Option D: 1.00% and 1.00% lifetime trail
These amounts shall be payable to Broker-Dealers as sales commissions. Such
amounts will be paid according to the then current practice of the Company,
but no less frequently than twice each calendar month. One quarter of the
trail rate is paid on the non-loaned contract value at the end of each
calendar quarter after the first contract year. Alternative sales commission
options involving a combination of both up-front amounts and asset based
trails may be made available by mutual agreement.
Promotional Allowances shall be payable to the Wholesaler as reimbursement
for its expenses incurred with respect to the distribution of the Contracts
("Support Services"); provided, however, that the Company shall pay such
amounts from Promotional Allowances to Broker-Dealers who provide Support
Services, as the Wholesaler may from time to time direct.
<PAGE>
Promotional Allowances shall be determined as follows:
- .15% on an annual basis of the average daily assets in the Elite
separate accounts (excluding the GPA accounts); plus
- .15% on an annual basis of the average monthly account balance in the
GPA and fixed accounts for both the Elite and Custom Contracts; plus
- .25% of initial and subsequent Purchase Payments received and accepted
by the Company on any Contract for which commission Option B was chosen;
plus
- 1.00% of initial and subsequent Purchase Payments received and
accepted by the Company for 401(k) Contracts.
Promotional allowances will be reduced by the following amounts:
- .50% of initial and subsequent Purchase Payments for Contracts issued
in Maine and South Dakota and any other states which levy an upfront
premium tax; plus
- $35 each contract anniversary and on surrender for Contracts issued to
fund 401(k) plans with Contract values of $50,000 or less; plus
- $5 each contract anniversary and on surrender for non-401(k) contracts
with contact values of $50,000 or less issued in North Dakota or any
other state that caps the contract charge at $30.
The net Promotional Allowance will be paid to the Wholesaler according to the
then current practice of the Company, but no less frequently than monthly.
<PAGE>
December 10, 1996
Allmerica Financial Life Insurance and Annuity Company
440 Lincoln Street
Worcester, MA 01653
Gentlemen:
In my capacity as Counsel of Allmerica Financial Life Insurance and Annuity
Company (the "Company"), I have participated in the preparation of the
Pre-Effective Amendment No. 1 to the Registration Statement for the Separate
Account KGC on Form N-4 under the Securities Act of 1933 and the Investment
Company Act of 1940, with respect to the Company's individual and group
variable annuity policies.
I am of the following opinion:
1. Separate Account KGC is a separate account of the company validly existing
pursuant to the Delaware Insurance Code and the regulations issued
thereunder.
2. The assets held in Separate Account KGC are not chargeable with
liabilities arising out of any other business the Company may conduct.
3. The individual and group variable annuity policies, when issued in
accordance with the Prospectus contained in the Pre-Effective Amendment
No. 1 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 the
Pre-Effective Amendment No. 1 to the Registration Statement of Separate
Account KGC filed under the Securities Act of 1933.
Very truly yours,
/s/Sheila B. St. Hilaire
Sheila B. St. Hilaire
Counsel
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Statement of Additional Information
constituting part of this Pre-Effective Amendment No. 1 to the Registration
Statement for Separate Account KGC of Allmerica Financial Life Insurance and
Annuity Company on Form N-4 of our report dated February 5, 1996, relating to
the financial statements of Allmerica Financial Life Insurance and Annuity
Company which appears 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
Boston, Massachusetts
December 10, 1996
<PAGE>
PARTICIPATION AGREEMENT
AMONG
KEMPER INVESTORS FUND
ZURICH KEMPER INVESTMENTS, INC.
KEMPER DISTRIBUTORS, INC.
and
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
THIS AGREEMENT, made and entered into as of this 5th day of November,
1996 by and among Allmerica Financial Life Insurance and Annuity Company
(hereinafter, the "Company"), a Delaware 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.
2
<PAGE>
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 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
3
<PAGE>
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 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
4
<PAGE>
to any issuance or sale thereof as a separate account under the Delaware
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.
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 State of Delaware to the
extent required to perform this Agreement. The Company will advise the Fund
in writing as to any requirements of Delaware 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
5
<PAGE>
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.
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
6
<PAGE>
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.
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 right 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,
7
<PAGE>
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.
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
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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 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.
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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.
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 Section 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 Section
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.
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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 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
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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.
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
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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.
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
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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
(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
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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.
(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
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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
(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
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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.
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;
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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 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
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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, 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
19
<PAGE>
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
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
20
<PAGE>
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
If to the Company:
Allmerica Financial Life Insurance and Annuity 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
21
<PAGE>
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 Delaware 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 Delaware variable annuity laws and regulations
and any other applicable law or regulations.
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
22
<PAGE>
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: Allmerica Financial Life Insurance and Annuity Company
By: /s/ Richard M. Reilly
_______________________________________
Title: President
_______________________________________
Date: November 6, 1996
_______________________________________
FUND: Kemper Investors Fund
By: /s/ John E. Neal
_______________________________________
Title: Vice President
_______________________________________
Date: November 5, 1996
_______________________________________
ADVISER Zurich Kemper Investments, Inc.
By: /s/ John E. Neal
_______________________________________
Title: President
_______________________________________
Date: November 5, 1996
_______________________________________
UNDERWRITER Kemper Distributors, Inc.
By: /s/ James L. Greenawalt
_______________________________________
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)
- --------------------------------------------------------------------------------
B-1
<PAGE>
- --------------------------------------------------------------------------------
OPERATIONS OF FUND All operations and related expenses, Fund
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-2
