<PAGE>
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
Post-Effective Amendment No. 2
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 3
SEPARATE ACCOUNT KGC OF
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(Exact Name of Registrant)
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(Name of Depositor)
440 Lincoln Street
Worcester, MA 01653
(Address of Depositor's Principal Executive Offices)
(508) 855-1000
(Depositor's Telephone Number, including Area Code)
Abigail M. Armstrong, Secretary and Counsel
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.
_X_ on May 1, 1998 pursuant to paragraph (b) of Rule 485
___ 60 days after filing pursuant to paragraph (a)(1) of Rule 485.
___ on (date) pursuant to paragraph (a)(1) of Rule 485.
___ this post-effective amendment designates a new effective date
for a previously filed post-effective amendment.
VARIABLE ANNUITY POLICIES
Pursuant to Reg. Section 270.24f-2 of the Investment Company Act of 1940 ("the
1940 Act"), Registrant hereby declares that an indefinite amount of its
securities is being registered under the Securities Act of 1933 ("the 1933
Act"). The Rule 24f-2 Notice for the issuer's fiscal year ended December 31,
1997 was filed on or before March 30, 1998.
<PAGE>
CROSS REFERENCE SHEET SHOWING LOCATION IN PROSPECTUS OF
ITEMS CALLED FOR BY FORM N-4
FORM N-4 ITEM NO. CAPTION IN PROSPECTUS
- ----------------- ---------------------
1...................Cover Page
2...................Special Terms
3...................Summary; Annual and Transaction Expenses
4...................Condensed Financial Information; Performance Information
5...................Description of the Company, the Variable Account, Investors
Fund Series and Scudder Variable Life Investment Fund
6...................Charges and Deductions
7...................Description of the Contract
8...................Electing the Form of Annuity and the Annuity Date;
Description of Variable Annuity Option; Annuity Benefit
Payments
9...................Death Benefit
10..................Payments; Computation of Values; Distribution and Annuity
Payments
11..................Surrender; Withdrawal; Charge for Surrender and Withdrawal;
Withdrawal Without Surrender Charge; Texas Optional
Retirement Program
12..................Federal Tax Considerations
13..................Legal Matters
14..................Statement of Additional Information - Table of Contents
FORM N-4 ITEM NO. CAPTION IN STATEMENT OF ADDITIONAL INFORMATION
- ----------------- ----------------------------------------------
15..................Cover Page
16..................Table of Contents
17..................General Information and History
18..................Services
19..................Underwriters
21..................Performance Information
22..................Annuity Payments
23..................Financial Statements
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE
AND ANNUITY COMPANY
KEMPER GATEWAY CUSTOM
A VARIABLE ANNUITY
THIS PROFILE IS A SUMMARY OF SOME OF THE MORE IMPORTANT
POINTS THAT YOU SHOULD KNOW AND CONSIDER BEFORE PURCHASING A
KEMPER GATEWAY CUSTOM VARIABLE ANNUITY CONTRACT. THE
PROFILE CONTRACT IS MORE FULLY DESCRIBED LATER IN THIS PROSPECTUS.
MAY 1, 1998 PLEASE READ THE PROSPECTUS CAREFULLY.
1. KEMPER GATEWAY CUSTOM VARIABLE ANNUITY CONTRACT
The Kemper GATEWAY Custom variable annuity contract is a contract between you,
the contract owner, and Allmerica Financial Life Insurance and Annuity Company.
It is designed to help you accumulate assets for your retirement or other
important financial goals on a tax-deferred basis. The Kemper GATEWAY Custom
contract combines the concept of professional money management with the
attributes of an annuity contract.
Kemper GATEWAY Custom offers a customized investment portfolio with experienced
professional portfolio managers. You may allocate your payments among the 20
Kemper investment portfolios of the Investors Fund Series, the four investment
portfolios of the Scudder Variable Life Investment Fund, the Guarantee Period
Accounts and the Fixed Account (the Guaranteed Period Accounts and/or the Fixed
Account may not be available in certain jurisdictions). This range of investment
choices enables you to allocate your money to meet your particular investment
needs.
Like all annuities, the contract has an ACCUMULATION PHASE and an ANNUITY PAYOUT
PHASE. During the ACCUMULATION PHASE you can make payments into the contract on
any frequency. Investment and interest gains accumulate tax deferred. You may
also withdraw money from your contract during the ACCUMULATION PHASE. However,
as with other tax-deferred investments, you pay taxes on earnings and any
untaxed payments to the contract when you withdraw them. A federal tax penalty
may apply if you withdraw prior to age 59 1/2.
During the ANNUITY PAYOUT PHASE you will receive regular payments from your
contract, provided you annuitize. Annuitization involves beginning a series of
payments from the capital that has built up in your contract. The amount of your
payments during the annuity payout phase will, in part, be determined by your
contract's growth during the accumulation phase.
P-1
<PAGE>
2. ANNUITY BENEFIT PAYMENTS
If you choose to annuitize your contract, you may select one of six annuity
options: (1) monthly payments guaranteed for your lifetime; (2) monthly payments
guaranteed for your lifetime, but for not less than 10 years; (3) monthly
payments for your lifetime with the guarantee that if payments to you are less
than the accumulated value a refund of the remaining value will be paid; (4)
monthly payments guaranteed for your lifetime and your survivor's lifetime; (5)
monthly payments guaranteed for your lifetime and your survivor's lifetime with
the payment to the survivor being reduced to 2/3; and (6) monthly payments
guaranteed for a specified period of 1 to 30 years.
You also need to decide if you want your annuity payments on a variable basis
(i.e., subject to fluctuation based on investment performance), on a fixed basis
(with benefit payments guaranteed at a fixed amount), or on a combination
variable and fixed basis. Once payments begin, the annuity option cannot be
changed.
3. PURCHASING THIS CONTRACT
You can buy a contract through your financial representative, who can also help
you complete the proper forms. There is no fixed schedule for making additional
payments into this contract. There are no limits to the frequency of additional
payments, but there are certain limitations as to amount. Generally, the initial
payment must be at least $2,000 and additional payments must be at least $100.
However, minimums may be reduced for certain employer-sponsored plans.
P-2
<PAGE>
4. INVESTMENT OPTIONS
You have full investment control over the contract. You may allocate money to
the following portfolios:
<TABLE>
<S> <C>
KEMPER IFS PORTFOLIOS:
- --------------------------------------
Kemper-Dreman Financial Services Kemper Value+Growth
Kemper Small Cap Growth Kemper Horizon 20+
Kemper Small Cap Value Kemper Total Return
Kemper-Dreman High Return Equity Kemper Horizon 10+
Kemper International Kemper High Yield
Kemper International Growth and Kemper Horizon 5
Income
Kemper Global Blue Chip Kemper Global Income
Kemper Growth Kemper Investment Grade Bond
Kemper Contrarian Value Kemper Government Securities
Kemper Blue Chip Kemper Money Market
SCUDDER VLIF PORTFOLIOS:
- --------------------------------------
Scudder International Scudder Capital Growth
Scudder Global Discovery Scudder Growth and Income
</TABLE>
You may also allocate money to the Guarantee Period Accounts and the Fixed
Account. The Guarantee Period Accounts let you choose from among nine different
Guarantee Periods (ranging in maturity from 2 to 10 years) during which
principal and interest rates are guaranteed. The Fixed Account guarantees
principal and a minimum rate of interest (never less than 3% compounded
annually).
5. EXPENSES
Each year and upon surrender, a $35 contract fee is deducted from your contract.
The contract fee is waived if the value of the contract is $50,000 or more or if
the contract is issued to and maintained by the Trustees of a 401(k) plan. We
also deduct insurance charges which amount to 1.10% annually of the daily value
of your contract value allocated to the variable investment options. The
insurance charges include a mortality and expense risk charge of 0.95% and an
administrative expense charge of 0.15%. There are also investment management
fees and other portfolio operating expenses that vary by portfolio.
If you decide to surrender your contract, make withdrawals or receive payments
under certain annuity options, we may impose a surrender charge between 2% and
7% of the payment withdrawn, based on when your payments were made. In states
where premium taxes are imposed, a premium tax charge will be deducted either
when withdrawals are made or annuity payments commence.
P-3
<PAGE>
There is currently no charge for processing investment option transfers. We
reserve the right to assess a charge, not to exceed $25, for transfers in excess
of 12 per contract year.
The following chart is designed to help you understand the charges in your
contract. Column C labeled "Total Annual Charges" shows the total of the $35
contract fee (which is represented as 0.04%) and the 1.10% insurance charges
(Column A) plus the investment charges for each portfolio (Column B.) Columns D
and E show you two examples of the charges, in dollar amounts, you would pay
under a contract. The examples assume that you invest $1,000 in a portfolio
earning 5% annually and that you withdraw your money: at the end of year 1
(Column D), and at the end of year 10 (Column E). In Column D, the Total Annual
Charges are assessed as well as the surrender charges. In Column E, the example
shows the aggregate of all the annual charges assessed for 10 years, but there
is no surrender charge. The premium tax is assumed to be 0% in both examples.
<TABLE>
<CAPTION>
A B C D E
TOTAL ANNUAL
EXPENSES AT
TOTAL TOTAL END OF
ANNUAL ANNUAL TOTAL ------------
INSURANCE PORTFOLIO ANNUAL 1 10
PORTFOLIO CHARGES CHARGES CHARGES YEAR YEARS
- -------------------------------------------------- --------- -------- ------- ---- -----
<S> <C> <C> <C> <C> <C>
Kemper-Dreman Financial Services* 1.14% 0.99% 2.13% $83 $243
Kemper Small Cap Growth 1.14% 0.71% 1.85% $80 $214
Kemper Small Cap Value 1.14% 0.84% 1.98% $81 $227
Kemper-Dreman High Return Equity* 1.14% 0.87% 2.01% $81 $227
Kemper International 1.14% 0.91% 2.05% $82 $234
Kemper International Growth and Income* 1.14% 1.12% 2.26% $84 $256
Kemper Global Blue Chip* 1.14% 1.56% 2.70% $88 $300
Kemper Growth 1.14% 0.65% 1.79% $79 $207
Kemper Contrarian Value 1.14% 0.80% 1.94% $81 $223
Kemper Blue Chip 1.14% 0.95% 2.09% $82 $239
Kemper Value+Growth 1.14% 0.84% 1.98% $81 $227
Kemper Horizon 20+ 1.14% 0.93% 2.07% $82 $237
Kemper Total Return 1.14% 0.60% 1.74% $79 $202
Kemper Horizon 10+ 1.14% 0.83% 1.97% $81 $226
Kemper High Yield 1.14% 0.65% 1.79% $79 $207
Kemper Horizon 5 1.14% 0.97% 2.11% $82 $241
Kemper Global Income 1.14% 1.05% 2.19% $83 $249
Kemper Investment Grade Bond 1.14% 0.80% 1.94% $81 $223
Kemper Government Securities 1.14% 0.64% 1.78% $79 $206
Kemper Money Market 1.14% 0.55% 1.69% $78 $197
Scudder International* 1.14% 1.00% 2.14% $83 $244
Scudder Global Discovery* 1.14% 1.50% 2.64% $87 $294
Scudder Capital Growth* 1.14% 0.51% 1.65% $78 $192
Scudder Growth and Income* 1.14% 0.58% 1.72% $79 $200
</TABLE>
* For newly formed Portfolios, the charges have been estimated. For more
detailed information, see the Fee Table in the Prospectus.
P-4
<PAGE>
6. TAXES
You will not pay taxes until you withdraw money from your contract. During the
accumulation phase, earnings are withdrawn first and are taxed as ordinary
income. If you make a withdrawal prior to age 59 1/2, you may be subject to a
10% federal tax penalty on the earnings. Payments during the annuity payout
phase are considered partly a return of your investment and partly earnings. You
will be subject to income taxes on the earnings portion of each payment.
However, if your contract is funded with pre-tax or tax deductible dollars (such
as a pension or profit sharing plan contribution), then the entire payment will
be taxable.
7. WITHDRAWALS
You can make withdrawals from your contract any time during the accumulation
phase. The minimum withdrawal amount is $100. Any payment invested in the
contract for more than six years can be withdrawn without a surrender charge.
For amounts invested six years or less, you will not be assessed a surrender
charge on the greatest of: (1) 15% or less of the contract value in any calendar
year; or (2), if you are also the Annuitant, an amount calculated under the Life
Expectancy Distribution option. (Similarly, no surrender charge will apply if an
amount is withdrawn based on the Annuitant's life expectancy and the Owner is a
trust or other non-natural person.)
You may also purchase riders that enhance your liquidity in times of need (see
"Optional Benefit Riders" below).
Any withdrawal from a Guarantee Period Account ("GPA") prior to the end of the
Guarantee Period will be subject to a market value adjustment which may increase
or decrease the value in that account. This adjustment will never impact your
original investment, nor will earnings in the GPA amount to less than an
effective annual rate of 3%.
8. PERFORMANCE
The value of your contract will vary depending on the investment performance of
the portfolios you choose. From time to time, we may advertise "Total Return"
and "Average Annual Total Return" based upon the periods that the portfolios
have been in existence. These returns are based upon historical data and are not
intended to indicate future performance.
The contract was first offered in 1997. Therefore, performance for a complete
year is not available and is not shown here.
P-5
<PAGE>
9. DEATH BENEFIT
If the annuitant dies during the accumulation phase, we will pay the beneficiary
a death benefit. The death benefit is equal to the GREATER of: (a) the
accumulated value increased for any positive market value adjustment; or (b)
gross payments, decreased proportionately to reflect any prior withdrawals.
You may also purchase a rider that will enhance the death benefit (see "Optional
Benefit Riders" below).
10. OTHER INFORMATION
FREE-LOOK PERIOD: If you cancel your contract within 10 days after receiving it
(or whatever period is required by your state), you will receive a refund in
accordance with the terms of the contract's "Right to Examine Contract"
provision.
OPTIONAL BENEFIT RIDERS: Where permitted by state law, three optional riders
are available for separate monthly charges.
ENHANCED DEATH BENEFIT RIDER:
Under this rider, the death benefit is equal to the GREATEST of:
(a) the accumulated value increased for any positive market value adjustment;
(b) gross payments compounding daily at an annual rate of 5%, decreased
proportionately to reflect any prior withdrawals; or
(c) the death benefit that would have been payable on the most recent contract
anniversary date, increased for subsequent payments and decreased
proportionately for subsequent withdrawals.
This enhanced guaranteed death benefit works in the following way assuming no
withdrawals are made. On the first anniversary, the death benefit will be equal
to the greater of (a) the Accumulated Value (increased by any positive Market
Value Adjustment) or (b) gross payments compounded at the annual rate of 5%. The
higher of (a) or (b) will then be locked in until the second anniversary, at
which time the death benefit will be equal to the greatest of (a) the Contract's
then current Accumulated Value increased by any positive Market Value
Adjustment; (b) gross payments compounded at the annual rate of 5% or (c) the
locked-in value of the death benefit at the first anniversary. The greatest of
(a), (b) or (c) will be locked in until the next Contract anniversary. This
calculation will then be repeated on each anniversary date while the Contract
remains in force and prior to the Annuity Date. As noted above, the values of
(b) and (c) will be decreased proportionately if withdrawals are taken.
P-6
<PAGE>
LIVING BENEFITS RIDER:
Under this rider, you may receive your money without a surrender charge if,
after issue, you are:
1. confined to a medical care facility for the later of one year after the
issue date or 90 days; or
2. diagnosed as having a fatal illness.
DISABILITY RIDER:
Under this rider, you may receive your money without a surrender charge if you
become physically disabled after issue and before attaining age 65.
DOLLAR COST AVERAGING: You may elect to automatically transfer money on a
periodic basis from the Kemper Money Market Portfolio, the Kemper Government
Securities Portfolio or the Fixed Account to one or more of the variable
investment options.
AUTOMATIC ACCOUNT REBALANCING: You may elect to automatically have your
contract's accumulated value periodically reallocated ("rebalanced") among your
chosen investment options to maintain your designated percentage allocation mix.
11. INQUIRIES
If you need more information you may contact us at 1-800-782-8380 or send
correspondence to:
Kemper Gateway Annuities
Allmerica Financial
P.O. Box 8632
Boston, Massachusetts 02266-8632
P-7
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
WORCESTER, MASSACHUSETTS
FLEXIBLE PAYMENT DEFERRED VARIABLE AND FIXED ANNUITY CONTRACTS
This Prospectus describes interests under flexible payment deferred variable and
fixed annuity contracts, known as Kemper Gateway Custom Variable Annuity
Contracts, 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 a
contract's tax status when used with a particular type of plan, see "FEDERAL TAX
CONSIDERATIONS".)
Additional information is contained in a Statement of Additional Information
("SAI") dated May 1, 1998, filed with the Securities and Exchange Commission
(the "SEC") and incorporated herein by reference. The Table of Contents of the
SAI is on page 5 of this Prospectus. The SAI is available upon request and
without charge through Allmerica Investments, Inc., telephone 800-782-8380.
Contract values may accumulate on a variable basis in the separate account known
as Separate Account 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 Kemper Portfolios of Investors Fund Series ("Kemper IFS")
or Portfolios of Scudder Variable Life Investment Fund ("Scudder VLIF"):
<TABLE>
<CAPTION>
KEMPER IFS PORTFOLIOS:
- ----------------------------------------
<S> <C>
KEMPER-DREMAN FINANCIAL SERVICES KEMPER VALUE+GROWTH
KEMPER SMALL CAP GROWTH KEMPER HORIZON 20+
KEMPER SMALL CAP VALUE KEMPER TOTAL RETURN
KEMPER-DREMAN HIGH RETURN EQUITY KEMPER HORIZON 10+
KEMPER INTERNATIONAL KEMPER HIGH YIELD
KEMPER INTERNATIONAL GROWTH AND INCOME KEMPER HORIZON 5
KEMPER GLOBAL BLUE CHIP KEMPER GLOBAL INCOME
KEMPER GROWTH KEMPER INVESTMENT GRADE BOND
KEMPER CONTRARIAN VALUE KEMPER GOVERNMENT SECURITIES
KEMPER BLUE CHIP KEMPER MONEY MARKET
SCUDDER VLIF PORTFOLIOS:
- ----------------------------------------
SCUDDER INTERNATIONAL SCUDDER CAPITAL GROWTH
SCUDDER GLOBAL DISCOVERY SCUDDER GROWTH AND INCOME
</TABLE>
THIS PROSPECTUS IS VALID ONLY WHEN ACCOMPANIED BY CURRENT PROSPECTUSES OF
INVESTORS FUND SERIES AND SCUDDER VARIABLE LIFE INVESTMENT FUND. INVESTORS
SHOULD RETAIN A COPY OF THIS PROSPECTUS FOR FUTURE REFERENCE.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
DATED MAY 1, 1998
<PAGE>
In most jurisdictions, values also may be allocated on a fixed basis to the
Fixed Account, which is part of the Company's General Account and, during the
accumulation period, to one or more of the Guarantee Period Accounts. Amounts
allocated to the Fixed Account earn interest at a guaranteed rate for one year
from the date allocated. Amounts allocated to a Guarantee Period Account earn a
fixed rate of interest for the duration of the applicable Guarantee Period if
held for the entire Guarantee Period. If removed prior to the end of the
Guarantee Period the value may be increased or decreased by a Market Value
Adjustment. Amounts allocated to the Guarantee Period Accounts in the
accumulation phase are held in the Company's Separate Account GPA.
Participation in a group contract will be accounted for by the issuance of a
certificate describing the individual's interest under the group contract.
Participation in an individual contract will be evidenced by the issuance of an
individual contract. Certificates and individual contracts are referred to
collectively herein as the "Contract(s)." The following is a summary of
information about these Contracts. More detailed information can be found under
the referenced captions in this Prospectus.
THE CONTRACTS ARE OBLIGATIONS OF ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY
COMPANY, AND ARE DISTRIBUTED BY ALLMERICA INVESTMENTS, INC. THE CONTRACTS ARE
NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY BANK OR CREDIT
UNION. THE CONTRACTS ARE NOT INSURED BY THE U.S. GOVERNMENT, THE FEDERAL DEPOSIT
INSURANCE CORPORATION (FDIC), OR ANY OTHER FEDERAL AGENCY. INVESTMENTS IN THE
CONTRACTS ARE SUBJECT TO VARIOUS RISKS, INCLUDING THE FLUCTUATION OF VALUE AND
POSSIBLE LOSS OF PRINCIPAL.
THE CONTRACTS OFFERED BY THIS PROSPECTUS MAY NOT BE AVAILABLE IN ALL STATES.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY JURISDICTION IN WHICH
SUCH OFFERING MAY NOT LAWFULLY BE MADE. NO PERSON IS AUTHORIZED TO MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS.
2
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
STATEMENT OF ADDITIONAL INFORMATION
TABLE OF CONTENTS 5
SPECIAL TERMS 6
SUMMARY 8
ANNUAL AND TRANSACTION EXPENSES 15
CONDENSED FINANCIAL INFORMATION 21
PERFORMANCE INFORMATION 24
DESCRIPTION OF THE COMPANY, THE VARIABLE ACCOUNT,
INVESTORS FUND SERIES AND SCUDDER
VARIABLE LIFE INVESTMENT FUND 31
INVESTMENT OBJECTIVES AND POLICIES 32
INVESTMENT MANAGEMENT SERVICES 35
DESCRIPTION OF THE CONTRACT 36
A. Payments 36
B. Right to Revoke Individual Retirement Annuity 37
C. Right to Revoke All Other Contracts 38
D. Transfer Privilege 38
Automatic Transfers and Automatic Account Rebalancing
Options 39
E. Surrender 40
F. Withdrawals 41
Systematic Withdrawals 42
Life Expectancy Distributions 42
G. Death Benefit 43
Death of the Annuitant Prior to the Annuity Date 43
Death of an Owner Who is Not Also the Annuitant Prior to
the Annuity Date 44
Payment of the Death Benefit Prior to the Annuity Date 44
Death of the Annuitant On or After the Annuity Date 45
H. The Spouse of the Owner as Beneficiary 45
I. Assignment 45
J. Electing the Form of Annuity and Annuity Date 46
K. Description of Variable Annuity Payout Options 47
L. Annuity Benefit Payments 48
The Annuity Unit 48
Determination of the First and Subsequent Annuity
Benefit Payments 49
</TABLE>
3
<PAGE>
<TABLE>
<S> <C> <C>
M. NORRIS Decision 50
N. Computation of Values 50
The Accumulation Unit 50
Net Investment Factor 51
CHARGES AND DEDUCTIONS 52
A. Variable Account Deductions 52
Mortality and Expense Risk Charge 52
Administrative Expense Charge 52
Other Charges 53
B. Contract Fee 53
C. Optional Benefit Riders 54
D. Premium Taxes 54
E. Contingent Deferred Sales Charge 55
Charges for Surrender and Withdrawal 55
Reduction or Elimination of Surrender Charge 56
Withdrawal Without Surrender Charge 57
Living Benefits Rider 58
Disability Rider 58
Surrenders 59
Charge at the Time Annuity Benefit Payments Begin 59
F. Transfer Charge 60
GUARANTEE PERIOD ACCOUNTS 60
FEDERAL TAX CONSIDERATIONS 63
A. Qualified and Non-Qualified Contracts 64
B. Taxation of the Contracts in General 64
Withdrawals Prior to Annuitization 64
Annuity Payouts After Annuitization 65
Penalty on Distribution 65
Assignments or Transfers 66
Non-Natural Owners 66
Deferred Compensation Plans of State and Local
Government and Tax-Exempt Organizations 66
C. Tax Withholding 66
D. Provisions Applicable to Qualified Employer Plans 67
Corporate and Self-Employed Pension and Profit Sharing
Plans 67
Individual Retirement Annuities 67
Tax-Sheltered Annuities 68
Texas Optional Retirement Program 68
</TABLE>
4
<PAGE>
<TABLE>
<S> <C> <C>
REPORTS 68
LOANS (QUALIFIED CONTRACTS ONLY) 69
ADDITION, DELETION OR SUBSTITUTION OF INVESTMENTS 69
CHANGES TO COMPLY WITH LAW AND AMENDMENTS 71
VOTING RIGHTS 71
DISTRIBUTION 71
SERVICES 72
LEGAL MATTERS 72
FURTHER INFORMATION 72
APPENDIX A -- MORE INFORMATION ABOUT THE FIXED
ACCOUNT A-1
APPENDIX B -- SURRENDER CHARGES AND THE MARKET
VALUE ADJUSTMENT B-1
APPENDIX C -- THE DEATH BENEFIT C-1
</TABLE>
STATEMENT OF ADDITIONAL INFORMATION
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
GENERAL INFORMATION AND HISTORY 2
TAXATION OF THE CONTRACT, THE VARIABLE ACCOUNT AND THE COMPANY
3
SERVICES 3
UNDERWRITERS 3
ANNUITY BENEFIT PAYMENTS 4
EXCHANGE OFFER 6
PERFORMANCE INFORMATION 7
TAX-DEFERRED ACCUMULATION 10
FINANCIAL STATEMENTS F-1
</TABLE>
5
<PAGE>
SPECIAL TERMS
ACCUMULATED VALUE: the sum of the value of all Accumulation Units in the Sub-
Accounts and of the value of all accumulations in the Fixed Account and
Guarantee Period Accounts credited to the Contract on any date before the
Annuity Date.
ACCUMULATION UNIT: a measure of the Owner's interest in a Sub-Account before
annuity benefit payments begin.
ANNUITANT: the person designated in the Contract upon whose life annuity benefit
payments are to be made.
ANNUITY DATE: the date on which annuity benefit payments begin as specified
pursuant to the Contract.
ANNUITY UNIT: a measure of the value of the periodic annuity benefit payments
under the Contract.
FIXED ACCOUNT: the part of the Company's General Account that guarantees
principal and a fixed minimum interest rate and to which all or a portion of a
payment or transfer under this Contract may be allocated.
FIXED ANNUITY PAYOUT: an Annuity in the payout phase providing for annuity
benefit payments which remain fixed in amount throughout the annuity benefit
payment period selected.
GENERAL ACCOUNT: all the assets of the Company other than those held in a
separate account.
GUARANTEE PERIOD: the number of years that a Guaranteed Interest Rate is
credited.
GUARANTEE PERIOD ACCOUNT: an account which corresponds to a Guaranteed Interest
Rate for a specified Guarantee Period and is supported by assets in a
non-unitized separate account.
GUARANTEED INTEREST RATE: the annual effective rate of interest, after daily
compounding, credited to a Guarantee Period Account.
MARKET VALUE ADJUSTMENT: a positive or negative adjustment assessed if any
portion of a Guarantee Period Account is withdrawn or transferred prior to the
end of its Guarantee Period.
OWNER: the person, persons or entity entitled to exercise the rights and
privileges under this Contract. Joint Owners are permitted if one of the two is
the Annuitant.
6
<PAGE>
SUB-ACCOUNT: a subdivision of the Variable Account. Each Sub-Account available
under the Contract invests exclusively in the shares of a corresponding Kemper
portfolio of Investors Fund Series (Kemper IFS) or a corresponding portfolio of
Scudder Variable Life Investment Fund (Scudder VLIF).
SURRENDER VALUE: the Accumulated Value of the Contract on full surrender after
application of any Contract fee, contingent deferred sales charge, and Market
Value Adjustment.
UNDERLYING PORTFOLIOS (OR PORTFOLIOS): currently, the twenty Portfolios of
Kemper IFS and the four Portfolios of Scudder VLIF in which the Sub-Accounts
invest.
VALUATION DATE: a day on which the net asset value of the shares of any of the
Underlying Portfolios is determined and unit values of the Sub-Accounts are
determined. Valuation Dates currently occur on each day on which the New York
Stock Exchange is open for trading, as well as each day otherwise required.
VARIABLE ACCOUNT: Separate Account 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.
7
<PAGE>
SUMMARY
WHAT IS THE KEMPER GATEWAY CUSTOM VARIABLE ANNUITY?
The Kemper Gateway Custom variable annuity contract is an insurance contract
designed to help you accumulate assets for your retirement or other important
financial goals on a tax-deferred basis. The Contract combines the concept of
professional money management with the attributes of an annuity contract.
Features available through the Contract include:
- - A customized investment portfolio;
- - 20 Kemper IFS Portfolios and 4 Scudder VLIF Portfolios;
- - 1 Fixed Account;
- - 9 Guarantee Period Accounts;
- - Experienced professional portfolio managers;
- - Tax deferral on earnings;
- - Guarantees that can protect your beneficiaries during the accumulation phase;
- - Income that can be guaranteed for life.
The Contract has two phases, an accumulation phase and, if you choose to
annuitize, an annuity payout phase. During the accumulation phase, your initial
payment and any additional payments you choose to make may be allocated to the
combination of portfolio of securities ("Portfolios") under your Contract, to
the Guarantee Period Accounts, and to the Fixed Account. You select the
investment options most appropriate for your investment needs. As those needs
change, you may also change your allocation without incurring any tax
consequences. Your Contract's Accumulated Value is based on the investment
performance of the Portfolios and any accumulations in the Guarantee Period and
Fixed Accounts. No income taxes are paid on any earnings under the Contract
unless and until Accumulated Values are withdrawn. In addition, during the
accumulation phase, your beneficiaries receive certain protections and
guarantees in the event of the Annuitant's death. See discussion below, "WHAT
HAPPENS UPON DEATH DURING THE ACCUMULATION PHASE?"
8
<PAGE>
WHAT HAPPENS IN THE ANNUITY PAYOUT PHASE?
During the annuity payout phase, the Annuitant can receive income based on
several annuity payout options. You choose the annuity payout option and the
date for annuity benefit payments to begin. You also decide whether you want
variable annuity benefit payments based on the investment performance of certain
Portfolios, fixed annuity benefit payments with payment amounts guaranteed by
the Company, or a combination of fixed and variable annuity benefit payments.
Among the payout options available during the annuity payout phase are:
- - periodic payments for your lifetime (assuming you are the Annuitant);
- - periodic payments for your life and the life of another person selected by
you;
- - periodic payments for your lifetime with guaranteed payments continuing to
your beneficiary for ten years in the event that you die before the end of ten
years;
- - periodic payments over a specified number of years (1 to 30); under this
option you may reserve the right to convert remaining payments to a lump-sum
payout by electing a "commutable" option.
WHO ARE THE KEY PERSONS UNDER THE CONTRACT?
The Contract is between you, (the "Owner") and us, Allmerica Financial Life
Insurance and Annuity Company (the "Company"). Each Contract has an Owner (or an
Owner and a Joint Owner, in which case one of the two also must be the
Annuitant), an Annuitant and one or more beneficiaries. As Owner, you make
payments, choose investment allocations and select the Annuitant and
beneficiary. The Annuitant is the individual to receive annuity benefit payments
under the Contract. The beneficiary is the person who receives any payment on
the death of the Owner or Annuitant.
HOW MUCH CAN I INVEST AND HOW OFTEN?
The number and frequency of your payments are flexible, subject to the minimum
and maximum payments stated in "A. Payments."
WHAT ARE MY INVESTMENT CHOICES?
The Contract permits net payments to be allocated among the Sub-Accounts
investing in the Portfolios, the Guarantee Period Accounts, and the Fixed
Account.
9
<PAGE>
VARIABLE ACCOUNT. You have a choice of Sub-Accounts investing in the following
Portfolios:
<TABLE>
<S> <C>
KEMPER IFS PORTFOLIOS:
- --------------------------------------
Kemper-Dreman Financial Services Kemper Value+Growth
Kemper Small Cap Growth Kemper Horizon 20+
Kemper Small Cap Value Kemper Total Return
Kemper-Dreman High Return Equity Kemper Horizon 10+
Kemper International Kemper High Yield
Kemper International Growth and Kemper Horizon 5
Income
Kemper Global Blue Chip Kemper Global Income
Kemper Growth Kemper Investment Grade Bond
Kemper Contrarian Value Kemper Government Securities
Kemper Blue Chip Kemper Money Market
SCUDDER VLIF PORTFOLIOS:
- --------------------------------------
Scudder International Scudder Capital Growth
Scudder Global Discovery Scudder Growth and Income
</TABLE>
For a more detailed description of the Portfolios, see "INVESTMENT OBJECTIVES
AND POLICIES."
GUARANTEE PERIOD ACCOUNTS. Assets supporting the guarantees under the Guarantee
Period Accounts are held in the Company's Separate Account GPA, a non-unitized
insulated separate account. Values and benefits calculated on the basis of
Guarantee Period Account allocations, however, are obligations of the Company's
General Account. Amounts allocated to a Guarantee Period Account earn a
Guaranteed Interest Rate declared by the Company. The level of the Guaranteed
Interest Rate depends on the number of years of the Guarantee Period selected.
The Company currently makes available nine Guarantee Periods ranging from two to
ten years in duration. Once declared, the Guaranteed Interest Rate will not
change during the duration of the Guarantee Period. If amounts allocated to a
Guarantee Period Account are transferred, surrendered or applied to any annuity
option at any time other than the day following the last day of the applicable
Guarantee Period, a Market Value Adjustment will apply that may increase or
decrease the Account's value; however, this adjustment will never be applied
against your principal. In addition, earnings in the GPA after application of
the Market Value Adjustment will not be less than an effective annual rate of
3%. For more information about the Guarantee Period Accounts and the Market
Value Adjustment, see "GUARANTEE PERIOD ACCOUNTS."
FIXED ACCOUNT. The Fixed Account is part of the General Account, which consists
of all the Company's assets other than those allocated to the Variable
10
<PAGE>
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."
THE GUARANTEE PERIOD ACCOUNTS AND/OR SOME OF THE SUB-ACCOUNTS MAY NOT BE
AVAILABLE IN ALL STATES.
WHO ARE THE PORTFOLIO MANAGERS?
Scudder Kemper Investments, Inc. ("SKI") is the investment manager of each
Portfolio of Kemper IFS and each Portfolio of Scudder VLIF. Zurich Investment
Management Limited ("ZIML"), an affiliate of SKI, is the sub-adviser for the
Kemper International Portfolio and the Kemper Global Income Portfolio. Dreman
Value Management, L.L.C. is the sub-advisor for the Kemper-Dreman Financial
Services Portfolio and Kemper-Dreman High Return Equity Portfolio. Zurich
Investment Management, Inc. ("ZIM"), an affiliate of SKI, is the investment
manager of the Guarantee Period Accounts pursuant to an investment advisory
agreement between the Company and ZIM.
CAN I MAKE TRANSFERS AMONG THE ACCOUNTS?
Yes. Prior to the Annuity Date, you may transfer among the Sub-Accounts
investing in the Portfolios, the Guarantee Period Accounts, and the Fixed
Account. You will incur no current taxes on transfers while your money remains
in the Contract. You also may elect Automatic Account Rebalancing to ensure
assets remain allocated according to a desired mix or choose automatic dollar
cost averaging to gradually move money into one or more Portfolios. See "D.
Transfer Privilege."
WHAT IF I NEED MY MONEY BEFORE MY ANNUITY PAYOUT PHASE BEGINS?
You may surrender your Contract or make withdrawals any time before the annuity
payout phase begins. Each year you can take without a surrender charge, 15% of
the Contract's Accumulated Value or, if you are both an Owner and the Annuitant,
an amount based on your life expectancy. (Similarly, no surrender charge will
apply if an amount is withdrawn based on the Annuitant's life expectancy if the
Owner is a trust or other non-natural person.) A 10% tax penalty may apply on
all amounts deemed to be income if you are under age 59 1/2. Additional amounts
may be withdrawn at anytime but may be subject to the surrender charge for
payments that have not been invested in the Contract
11
<PAGE>
for more than six years. (A Market Value Adjustment, which may increase or
decrease the value of the account, may apply to any withdrawal made from a
Guarantee Period Account prior to the expiration of the Guarantee Period.)
WHAT HAPPENS UPON DEATH DURING THE ACCUMULATION PHASE?
If the Annuitant, Owner or Joint Owner should die before the Annuity Date, a
death benefit will be paid to the beneficiary. Upon the death of the Annuitant
(or an Owner who is also an Annuitant), 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, decreased proportionately to reflect withdrawals (for each
withdrawal, the proportionate reduction is calculated as the death benefit
under this option immediately prior to the withdrawal, multiplied by the
withdrawal amount, and divided by the Accumulated Value immediately prior to
the withdrawal).
If the 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, compounded daily at an annual rate of 5% starting on the date
each payment was applied, decreased proportionately to reflect withdrawals; or
- - The death benefit that would have been payable on the most recent Contract
anniversary date, increased for subsequent payments and decreased
proportionately for subsequent withdrawals.
This enhanced guaranteed death benefit works in the following way assuming no
withdrawals are made. On the first anniversary, the death benefit will be equal
to the greater of (a) the Accumulated Value (increased by any positive Market
Value Adjustment) or (b) gross payments compounded at the annual rate of 5%. The
higher of (a) or (b) will then be locked in until the second anniversary, at
which time the death benefit will be equal to the greatest of (a) the Contract's
then current Accumulated Value increased by any positive Market Value
Adjustment; (b) gross payments compounded at the annual rate of 5% or (c) the
locked-in value of the death benefit at the first anniversary. The greatest of
(a), (b) or (c) will be locked in until the next Contract anniversary. This
calculation will then be repeated on each anniversary date while the Contract
remains in force and prior to the Annuity Date. As noted above, the values of
(b) and (c) will be decreased proportionately if withdrawals are taken.
12
<PAGE>
A separate charge is made for the Enhanced Death Benefit Rider. See "G. Death
Benefit" under "DESCRIPTION OF THE CONTRACT."
Regardless of whether the Enhanced Death Benefit Rider is in effect, if an 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 "G.
Death Benefit.")
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 the Contract.
There will be no Contract fee if the Accumulated Value is $50,000 or more. The
Contract fee is waived for a Contract issued to and maintained by a trustee of a
401(k) plan.
Should you decide to surrender the Contract, make withdrawals, or receive
payments under certain annuity options, you may be subject to a contingent
deferred sales charge. If applicable, this charge will be between 2% and 7% of
payments withdrawn, based on when the payments were made.
Depending upon the state in which you live, a deduction for state and local
premium taxes, if any, may be made as described under "C. Premium Taxes."
Currently, the Company makes no charge for processing transfers. The first 12
transfers in a Contract year are guaranteed to be free of a transfer charge. For
each subsequent transfer in a Contract year, the Company reserves the right to
assess a charge which is guaranteed never to exceed $25.
The Company will deduct, on a daily basis, an annual mortality and expense risk
charge and administrative expense charge equal to 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 described more fully in "Other
Charges" under "A. Variable Account Deductions" and in the Kemper IFS and
Scudder VLIF prospectuses which accompany 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
13
<PAGE>
"CHARGES AND DEDUCTIONS," and "G. Death Benefit" under "DESCRIPTION OF THE
CONTRACT." For more information, see "CHARGES AND DEDUCTIONS."
CAN I EXAMINE THE CONTRACT?
Yes. Your Contract will be delivered to you after your purchase. If you return
the Contract to the Company within ten days of receipt, the Contract will be
canceled. (There may be a longer period in certain states; see the "Right to
Examine" provision on the cover of your Contract.) If you cancel the Contract,
you will receive a refund of any amounts allocated to the Fixed and Guarantee
Period Accounts and the Accumulated Value of any amounts allocated to the Sub-
Accounts (plus any fees or charges that may have been deducted). However, if
state law requires or if your Contract was issued as an Individual Retirement
Annuity (IRA), you will generally receive a refund of your entire payment. (In
certain states this refund may be the greater of (1) your entire payment or (2)
the amounts allocated to the Fixed and Guarantee Period Accounts plus the
Accumulated Value of amounts in the Sub-Accounts, plus any fees or charges
previously deducted.) See "B. Right to Revoke Individual Retirement Annuity" and
"C. Right to Revoke All Other Contracts."
CAN I MAKE FUTURE CHANGES UNDER MY CONTRACT?
There are several changes you can make after receiving your Contract:
- - You may assign your ownership to someone else, except under certain qualified
plans.
- - You may change the beneficiary, unless you have designated a beneficiary
irrevocably.
- - You may change your allocation of payments.
- - You may make transfers of Contract value among your current investments
without any tax consequences.
- - You may cancel the Contract within ten days of delivery (or longer if required
by law).
14
<PAGE>
ANNUAL AND TRANSACTION EXPENSES
The following tables show charges under the Contract, expenses of the Sub-
Accounts, and expenses of the Underlying Portfolios. In addition to the charges
and expenses described below, premium taxes are applicable in some states and
are deducted as described under "C. Premium Taxes."
CONTRACT CHARGES:
<TABLE>
<CAPTION>
YEARS FROM
DATE OF
PAYMENT CHARGE
------------ ---------
<S> <C> <C>
CONTINGENT DEFERRED SALES CHARGE:
This charge may be assessed upon 0-1 7.0%
surrender, withdrawal or annuitization 2 6.0%
under any commutable period certain option 3 5.0%
or a noncommutable period certain option 4 4.0%
of less than ten years. The charge is a 5 3.0%
percentage of payments applied to the 6 2.0%
amount surrendered (in excess of any Thereafter 0%
amount that is free of surrender charge)
within the indicated time period.
TRANSFER CHARGE:
The Company currently makes no charge for None
processing transfers and guarantees that
the first 12 transfers in a Contract year
will not be subject to a transfer charge.
For each subsequent transfer, the Company
reserves the right to assess a charge,
guaranteed never to exceed $25, to
reimburse the Company for the costs of
processing the transfer.
CONTRACT FEE:
The fee is deducted annually and upon $35
surrender prior to the Annuity Date when
Accumulated Value is less than $50,000.
The fee is waived for Contracts issued to
and maintained by the trustee of a 401(k)
plan.
SUB-ACCOUNT EXPENSES:
(on annual basis as percentage of average
daily net assets)
Mortality and Expense Risk Charge: 0.95%
Administrative Expense Charge: 0.15%
---------
Total Asset Charge 1.10%
</TABLE>
15
<PAGE>
PORTFOLIO EXPENSES: The following table shows the expenses of the Underlying
Portfolios as a percentage of average net assets for the year ended December 31,
1997. For more information concerning fees and expenses, see the prospectuses
for the Underlying Portfolios.
<TABLE>
<CAPTION>
MANAGEMENT FEE
(AFTER APPLICABLE OTHER TOTAL
PORTFOLIO WAIVERS) EXPENSES EXPENSES
- ----------------------------------- ----------------------- -------------- --------------
<S> <C> <C> <C>
Kemper-Dreman Financial
Services*......................... 0.75% 0.24% 0.99%
Kemper Small Cap Growth............ 0.65% 0.06% 0.71%
Kemper Small Cap Value............. 0.75% 0.09% 0.84%
Kemper-Dreman High Return
Equity*........................... 0.75% 0.12% 0.87%
Kemper International............... 0.75% 0.16% 0.91%
Kemper International Growth and
Income*........................... 0.70%(1) 0.42% 1.12% (1)
Kemper Global Blue Chip*........... 0.85%(1) 0.71% 1.56% (1)
Kemper Growth...................... 0.60% 0.05% 0.65%
Kemper Contrarian Value............ 0.75% 0.05% 0.80%
Kemper Blue Chip**................. 0.65% 0.30% 0.95%
Kemper Value+Growth................ 0.75% 0.09% 0.84%
Kemper Horizon 20+................. 0.60% 0.33% 0.93%
Kemper Total Return................ 0.55% 0.05% 0.60%
Kemper Horizon 10+................. 0.60% 0.23% 0.83%
Kemper High Yield.................. 0.60% 0.05% 0.65%
Kemper Horizon 5................... 0.60% 0.37% 0.97%
Kemper Global Income**............. 0.75% 0.30% 1.05%
Kemper Investment Grade Bond....... 0.60% 0.20% 0.80%
Kemper Government Securities....... 0.55% 0.09% 0.64%
Kemper Money Market................ 0.50% 0.05% 0.55%
Scudder International.............. 0.83% 0.17% 1.00%
Scudder Global Discovery........... 0.67%(2) 0.83% 1.50% (2)
Scudder Capital Growth............. 0.47% 0.04% 0.51%
Scudder Growth and Income.......... 0.48% 0.10% 0.58%
</TABLE>
* These Portfolios commenced operations on 5/1/98, therefore "other expenses"
are estimated and annualized and should not be considered representative of
future expenses. Actual expenses may be greater or less than shown.
** These Portfolios commenced operations on 5/1/97, therefore "other expenses"
are estimated and annualized and should not be considered representative of
future expenses. Actual expenses may be greater or less than shown.
16
<PAGE>
(1) Until further notice, the Adviser has agreed to voluntarily waive its
management fee for the Kemper International Growth and Income Portfolio by
0.30% of the average daily net assets and for the Kemper Global Blue Chip
Portfolio by 0.15% of the average daily net assets. Without such a waiver,
the management fee and total expenses would be as follows: Kemper
International Growth and Income -1.00% and 1.42% and Kemper Global Blue Chip
-1.00% and 1.71%. The declaration of a voluntary waiver does not bind the
Manager to declare future waivers with respect to these funds. These
limitations may be terminated at any time.
(2) The Adviser has agreed to waive all or a portion of its management fee to
limit the expense of the Scudder Global Discovery Portfolio to 1.50% of
average daily net assets. Without such a waiver, the management fee would
have been 0.98% and total operating expenses would been 1.79%.
EXAMPLES. The following examples demonstrate the cumulative expenses which
would be paid by the Owner at 1-year, 3-year, 5-year and 10-year intervals under
certain contingencies. Each example assumes a $1,000 investment in a Sub-Account
and a 5% annual return on assets, as required by rules of the SEC. Because the
expenses of the Underlying Portfolios differ, separate examples are used to
illustrate the expenses incurred by an Owner on an investment in the various
Sub-Accounts.
THE INFORMATION GIVEN UNDER THE FOLLOWING EXAMPLES SHOULD NOT BE CONSIDERED A
REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR
LESSER THAN THOSE SHOWN.
17
<PAGE>
(1) If, at the end of the applicable time period, you surrender the Contract or
annuitize* under a commutable variable period certain option or a non-commutable
period certain option of less than ten years, you would pay the following
expenses on a $1,000 investment, assuming a 5% annual return on assets:
<TABLE>
<CAPTION>
UNDERLYING PORTFOLIO 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- -------------------------------------------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Kemper-Dreman Financial Services.................. $ 83 $ 112 $ 142 $ 243
Kemper Small Cap Growth........................... $ 80 $ 104 $ 128 $ 214
Kemper Small Cap Value............................ $ 81 $ 108 $ 135 $ 227
Kemper-Dreman High Return Equity.................. $ 81 $ 109 $ 135 $ 227
Kemper International.............................. $ 82 $ 110 $ 138 $ 234
Kemper International Growth and Income............ $ 84 $ 116 $ 149 $ 256
Kemper Global Blue Chip........................... $ 88 $ 128 $ 170 $ 300
Kemper Growth..................................... $ 79 $ 102 $ 125 $ 207
Kemper Contrarian Value........................... $ 81 $ 107 $ 133 $ 223
Kemper Blue Chip.................................. $ 82 $ 111 $ 140 $ 239
Kemper Value+Growth............................... $ 81 $ 108 $ 135 $ 227
Kemper Horizon 20+................................ $ 82 $ 110 $ 139 $ 237
Kemper Total Return............................... $ 79 $ 101 $ 123 $ 202
Kemper Horizon 10+................................ $ 81 $ 107 $ 134 $ 226
Kemper High Yield................................. $ 79 $ 102 $ 125 $ 207
Kemper Horizon 5.................................. $ 82 $ 111 $ 141 $ 241
Kemper Global Income.............................. $ 83 $ 114 $ 145 $ 249
Kemper Investment Grade Bond...................... $ 81 $ 107 $ 133 $ 223
Kemper Government Securities...................... $ 79 $ 102 $ 125 $ 206
Kemper Money Market............................... $ 78 $ 99 $ 120 $ 197
Scudder International............................. $ 83 $ 112 $ 143 $ 244
Scudder Global Discovery.......................... $ 87 $ 127 $ 167 $ 294
Scudder Capital Growth............................ $ 78 $ 98 $ 118 $ 192
Scudder Growth and Income......................... $ 79 $ 100 $ 122 $ 200
</TABLE>
18
<PAGE>
(2) If, at the end of the applicable time period, you annuitize* under a life
option or a non-commutable period certain option of ten years or longer, or if
you do not surrender or annuitize the Contract, you would pay the following
expenses on a $1,000 investment, assuming a 5% annual return on assets:
<TABLE>
<CAPTION>
UNDERLYING PORTFOLIO 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- -------------------------------------------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Kemper-Dreman Financial Services.................. $ 21 $ 66 $ 113 $ 243
Kemper Small Cap Growth........................... $ 19 $ 57 $ 99 $ 214
Kemper Small Cap Value............................ $ 20 $ 61 $ 105 $ 227
Kemper-Dreman High Return Equity.................. $ 20 $ 62 $ 107 $ 230
Kemper International.............................. $ 21 $ 63 $ 109 $ 234
Kemper International Growth and Income............ $ 23 $ 70 $ 119 $ 256
Kemper Global Blue Chip........................... $ 27 $ 83 $ 141 $ 300
Kemper Growth..................................... $ 18 $ 55 $ 95 $ 207
Kemper Contrarian Value........................... $ 19 $ 60 $ 103 $ 223
Kemper Blue Chip.................................. $ 21 $ 65 $ 111 $ 239
Kemper Value+Growth............................... $ 20 $ 61 $ 105 $ 227
Kemper Horizon 20+................................ $ 21 $ 64 $ 110 $ 237
Kemper Total Return............................... $ 17 $ 54 $ 93 $ 202
Kemper Horizon 10+................................ $ 20 $ 61 $ 105 $ 226
Kemper High Yield................................. $ 18 $ 55 $ 95 $ 207
Kemper Horizon 5.................................. $ 21 $ 65 $ 112 $ 241
Kemper Global Income.............................. $ 22 $ 68 $ 116 $ 249
Kemper Investment Grade Bond...................... $ 19 $ 60 $ 103 $ 223
Kemper Government Securities...................... $ 18 $ 55 $ 95 $ 206
Kemper Money Market............................... $ 17 $ 52 $ 90 $ 197
Scudder International............................. $ 21 $ 66 $ 113 $ 244
Scudder Global Discovery.......................... $ 26 $ 81 $ 138 $ 294
Scudder Capital Growth............................ $ 17 $ 51 $ 88 $ 192
Scudder Growth and Income......................... $ 17 $ 53 $ 92 $ 200
</TABLE>
As required in rules promulgated under the Investment Company Act of 1940 Act
(the "1940 Act"), the Contract fee is reflected in the examples by a method to
show the "average" impact on an investment in the Variable Account. The total
Contract fees collected are divided by the total average net assets attributable
to the Contract. The resulting percentage is 0.04%, and the amount of the
Contract fee is assumed to be $0.40 in the examples. The Contract fee is
deducted only when the accumulated value is less than $50,000. Lower costs apply
to Contracts owned and maintained under a 401(k) plan.
* The Contract fee is not deducted after annuitization. No contingent deferred
sales charge is assessed at the time of annuitization under an option including
a life contingency or under a non-commutable period certain option of ten years
or longer.
19
<PAGE>
OPTIONAL BENEFIT RIDERS. Subject to state availability, the Company offers
three optional benefit riders that may be elected by the Owner. A separate
monthly charge is made for each rider selected. The applicable charge is
assessed by multiplying the Accumulated Value on the last day of each month and
on the date a rider is terminated 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
"G. Death Benefit."
20
<PAGE>
CONDENSED FINANCIAL INFORMATION
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
SEPARATE ACCOUNT KGC
<TABLE>
<CAPTION>
SUB-ACCOUNT 1997
- --------------------------------------------------------------------------- ---------
<S> <C>
KEMPER SMALL CAP GROWTH PORTFOLIO
Unit Value:
Beginning of Period.................................................... 0
End of Period.......................................................... 1.339
Number of Units Outstanding at End of Period (in thousands)................ 2,090
KEMPER SMALL CAP VALUE PORTFOLIO
Unit Value:
Beginning of Period.................................................... 0
End of Period.......................................................... 1.214
Number of Units Outstanding at End of Period (in thousands)................ 5,115
KEMPER INTERNATIONAL PORTFOLIO
Unit Value:
Beginning of Period.................................................... 0
End of Period.......................................................... 1.096
Number of Units Outstanding at End of Period (in thousands)................ 4,609
KEMPER GROWTH PORTFOLIO
Unit Value:
Beginning of Period.................................................... 0
End of Period.......................................................... 1.184
Number of Units Outstanding at End of Period (in thousands)................ 3,144
KEMPER CONTRARIAN VALUE PORTFOLIO
Unit Value:
Beginning of Period.................................................... 0
End of Period.......................................................... 1.264
Number of Units Outstanding at End of Period (in thousands)................ 9,815
KEMPER BLUE CHIP PORTFOLIO
Unit Value:
Beginning of Period.................................................... 0
End of Period.......................................................... 1.107
Number of Units Outstanding at End of Period (in thousands)................ 1,560
KEMPER VALUE+GROWTH PORTFOLIO
Unit Value:
Beginning of Period.................................................... 0
End of Period.......................................................... 1.217
Number of Units Outstanding at End of Period (in thousands)................ 2,845
</TABLE>
21
<PAGE>
CONDENSED FINANCIAL INFORMATION
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
SEPARATE ACCOUNT KGC
<TABLE>
<CAPTION>
SUB-ACCOUNT 1997
- --------------------------------------------------------------------------- ---------
<S> <C>
KEMPER HORIZON 20+ PORTFOLIO
Unit Value:
Beginning of Period.................................................... 0
End of Period.......................................................... 1.173
Number of Units Outstanding at End of Period (in thousands)................ 846
KEMPER TOTAL RETURN PORTFOLIO
Unit Value:
Beginning of Period.................................................... 0
End of Period.......................................................... 1.171
Number of Units Outstanding at End of Period (in thousands)................ 3,260
KEMPER HORIZON 10+ PORTFOLIO
Unit Value:
Beginning of Period.................................................... 0
End of Period.......................................................... 1.115
Number of Units Outstanding at End of Period (in thousands)................ 1,431
KEMPER HIGH YIELD PORTFOLIO
Unit Value:
Beginning of Period.................................................... 0
End of Period.......................................................... 1.104
Number of Units Outstanding at End of Period (in thousands)................ 9,516
KEMPER HORIZON 5 PORTFOLIO
Unit Value:
Beginning of Period.................................................... 0
End of Period.......................................................... 1.111
Number of Units Outstanding at End of Period (in thousands)................ 439
KEMPER GLOBAL INCOME PORTFOLIO
Unit Value:
Beginning of Period.................................................... 0
End of Period.......................................................... 1.021
Number of Units Outstanding at End of Period (in thousands)................ 457
KEMPER INVESTMENT GRADE BOND PORTFOLIO
Unit Value:
Beginning of Period.................................................... 0
End of Period.......................................................... 1.068
Number of Units Outstanding at End of Period (in thousands)................ 1,032
</TABLE>
22
<PAGE>
CONDENSED FINANCIAL INFORMATION
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
SEPARATE ACCOUNT KGC
<TABLE>
<CAPTION>
SUB-ACCOUNT 1997
- --------------------------------------------------------------------------- ---------
<S> <C>
KEMPER GOVERNMENT SECURITIES PORTFOLIO
Unit Value:
Beginning of Period.................................................... 0
End of Period.......................................................... 1.074
Number of Units Outstanding at End of Period (in thousands)................ 659
KEMPER MONEY MARKET PORTFOLIO
Unit Value:
Beginning of Period.................................................... 0
End of Period.......................................................... 1.042
Number of Units Outstanding at End of Period (in thousands)................ 2,329
</TABLE>
No information is shown above for Sub-Accounts that commenced operations after
December 31, 1997.
23
<PAGE>
PERFORMANCE INFORMATION
The Contract was first offered to the public in 1997. The Company, however, may
advertise "total return" and "average annual total return" performance
information based on the periods that the Sub-Accounts have been in existence
and the periods that the Underlying Portfolios have been in existence.
Performance results for all periods shown below are calculated with all charges
assumed to be those applicable to the Sub-Accounts, the Underlying Portfolios,
and, in Tables 1A and 2A, assuming that the Contract is surrendered at the end
of the applicable period and, alternatively, in Tables 1B and 2B, assuming that
it is not surrendered at the end of the applicable period. Both the total return
and yield figures are based on historical earnings and are not intended to
indicate future performance.
The total return of a Sub-Account refers to the total of the income generated by
an investment in the Sub-Account and of the changes in the value of the
principal (due to realized and unrealized capital gains or losses) for a
specified period, reduced by certain charges, and expressed as a percentage of
the investment.
The average annual total return represents the average annual percentage change
in the value of an investment in a Sub-Account over a given period of time.
Average annual total return represents averaged figures as opposed to the actual
performance of a Sub-Account, which will vary from year to year.
The yield of the Sub-Account investing in the Kemper Money Market Portfolio
refers to the income generated by an investment in the Sub-Account over a seven-
day period (which period will be specified in the advertisement). This income is
then "annualized" by assuming that the income generated in the specific week is
generated over a 52-week period. This annualized yield is shown as a percentage
of the investment. The effective yield calculation is similar but, when
annualized, the income earned by an investment in the Sub-Account is assumed to
be reinvested. Thus the effective yield will be slightly higher than the yield
because of the compounding effect of this assumed reinvestment.
The yield of a Sub-Account investing in a Portfolio other than the Kemper Money
Market Portfolio refers to the annualized income generated by an investment in
the Sub-Account over a specified 30-day or one-month period. The yield is
calculated by assuming that the income generated by the investment during that
30-day or one-month period is generated each period over a 12-month period and
is shown as a percentage of the investment.
Quotations of average annual total return as shown in Table 1A are calculated in
the manner prescribed by the SEC and show the percentage rate of return of a
hypothetical initial investment of $1,000 for the most recent one, five and ten
year period or for a period covering the time the Sub-Account has been in
existence, if less than the prescribed periods. The calculation is adjusted to
reflect
24
<PAGE>
the deduction of the annual Sub-Account asset charge of 1.10%, the Underlying
Portfolio charges, the $35 annual Contract fee and the contingent deferred sales
charge which would be assessed if the investment were completely withdrawn at
the end of the specified period. Quotations of supplemental average total
returns, as shown in Table 1B, are calculated in exactly the same manner and for
the same periods of time except that it does not reflect the contingent deferred
sales charge but assumes that the Contract is not surrendered at the end of the
periods shown.
The performance shown in Tables 2A and 2B is calculated in exactly the same
manner as those in Tables 1A and 1B respectively; however, the period of time is
based on the Underlying Portfolios' lifetime, which may predate the
Sub-Account's inception date. These performance calculations are based on the
assumption that the Sub-Account corresponding to the applicable Underlying
Portfolio was actually in existence throughout the stated period and that the
contractual charges and expenses during that period were equal to those
currently assessed under the Contract.
For more detailed information about these performance calculations, including
actual formulas, see the SAI.
PERFORMANCE INFORMATION FOR ANY SUB-ACCOUNT REFLECTS ONLY THE PERFORMANCE OF A
HYPOTHETICAL INVESTMENT IN THE SUB-ACCOUNT DURING THE TIME PERIOD ON WHICH THE
CALCULATIONS ARE BASED. PERFORMANCE INFORMATION SHOULD BE CONSIDERED IN LIGHT OF
THE INVESTMENT OBJECTIVES AND POLICIES AND RISK CHARACTERISTICS OF THE
UNDERLYING PORTFOLIO IN WHICH THE SUB-ACCOUNT INVESTS AND THE MARKET CONDITIONS
DURING THE GIVEN TIME PERIOD, AND SHOULD NOT BE CONSIDERED AS A REPRESENTATION
OF WHAT MAY BE ACHIEVED IN THE FUTURE.
Performance information for a Sub-Account may be compared, in reports and
promotional literature, to: (1) the Standard & Poor's 500 Composite Stock Price
Index ("S&P 500"), Dow Jones Industrial Average ("DJIA"), Shearson Lehman
Aggregate Bond Index or other unmanaged indices so that investors may compare
the Sub-Account results with those of a group of unmanaged securities widely
regarded by investors as representative of the securities markets in general;
(2) other groups of variable annuity separate accounts or other investment
products tracked by Lipper Analytical Services, a widely used independent
research firm which ranks mutual funds and other investment products by overall
performance, investment objectives, and assets, or tracked by other services,
companies, publications, or persons, who rank such investment products on
overall performance or other criteria; or (3) the Consumer Price Index (a
measure for inflation) to assess the real rate of return from an investment in
the Sub-
25
<PAGE>
Account. Unmanaged indices may assume the reinvestment of dividends but
generally do not reflect deductions for administrative and management costs and
expenses.
At times, the Company may also advertise the ratings and other information
assigned to it by independent rating organizations such as A.M. Best Company
("A.M. Best"), Moody's Investors Service ("Moody's"), Standard & Poor's
Insurance Rating Services ("S&P") and Duff & Phelps. A.M. Best's and Moody's
ratings reflect their current opinion of the Company's relative financial
strength and operating performance in comparison to the norms of the life/health
insurance industry. S&P's and Duff & Phelps' ratings measure the ability of an
insurance company to meet its obligations under insurance policies it issues and
do not measure the ability of such companies to meet other non-policy
obligations. The ratings also do not relate to the performance of the Underlying
Portfolios.
26
<PAGE>
TABLE 1A
AVERAGE ANNUAL TOTAL RETURNS OF SUB-ACCOUNT
FOR PERIODS ENDING DECEMBER 31, 1997
SINCE INCEPTION OF SUB-ACCOUNT
(ASSUMING COMPLETE WITHDRAWAL OF THE INVESTMENT)
<TABLE>
<CAPTION>
SINCE
INCEPTION OF
SUB-ACCOUNT INVESTING IN UNDERLYING PORTFOLIO SUB-ACCOUNT*
- ------------------------------------------------------------------- -----------------
<S> <C>
Kemper-Dreman Financial Services................................... N/A
Kemper Small Cap Growth............................................ 26.86%
Kemper Small Cap Value............................................. 14.34%
Kemper-Dreman High Return Equity................................... N/A
Kemper International............................................... 3.08 %
Kemper International Growth and Income............................. N/A
Kemper Global Blue Chip............................................ N/A
Kemper Growth...................................................... 11.40 %
Kemper Contrarian Value............................................ 19.32 %
Kemper Blue Chip................................................... 4.10 %
Kemper Value+Growth................................................ 14.67 %
Kemper Horizon 20+................................................. 10.30 %
Kemper Total Return................................................ 10.11 %
Kemper Horizon 10+................................................. 4.84 %
Kemper High Yield.................................................. 3.77 %
Kemper Horizon 5................................................... 4.46 %
Kemper Global Income............................................... -4.00 %
Kemper Investment Grade Bond....................................... 0.42 %
Kemper Government Securities....................................... 0.94 %
Kemper Money Market................................................ -2.04 %
Scudder International.............................................. N/A
Scudder Global Discovery........................................... N/A
Scudder Capital Growth............................................. N/A
Scudder Growth and Income.......................................... N/A
</TABLE>
27
<PAGE>
TABLE 1B
SUPPLEMENTAL AVERAGE ANNUAL TOTAL RETURNS OF SUB-ACCOUNT
FOR PERIODS ENDING DECEMBER 31, 1997
SINCE INCEPTION OF SUB-ACCOUNT
(ASSUMING NO WITHDRAWAL OF THE INVESTMENT)
<TABLE>
<CAPTION>
SINCE
INCEPTION OF
SUB-ACCOUNT INVESTING IN UNDERLYING PORTFOLIO SUB-ACCOUNT*
- ------------------------------------------------------------------- ------------------
<S> <C>
Kemper-Dreman Financial Services................................... N/A
Kemper Small Cap Growth............................................ 33.86%
Kemper Small Cap Value............................................. 21.34%
Kemper-Dreman High Return Equity................................... N/A
Kemper International............................................... 9.60 %
Kemper International Growth and Income............................. N/A
Kemper Global Blue Chip............................................ N/A
Kemper Growth...................................................... 18.40 %
Kemper Contrarian Value............................................ 26.32 %
Kemper Blue Chip................................................... 10.69 %
Kemper Value+Growth................................................ 21.67 %
Kemper Horizon 20+................................................. 17.28 %
Kemper Total Return................................................ 17.08 %
Kemper Horizon 10+................................................. 11.47 %
Kemper High Yield.................................................. 10.34 %
Kemper Horizon 5................................................... 11.07 %
Kemper Global Income............................................... 2.08 %
Kemper Investment Grade Bond....................................... 6.78 %
Kemper Government Securities....................................... 7.33 %
Kemper Money Market................................................ 4.16 %
Scudder International.............................................. N/A
Scudder Global Discovery........................................... N/A
Scudder Capital Growth............................................. N/A
Scudder Growth and Income.......................................... N/A
</TABLE>
28
<PAGE>
TABLE 2A
AVERAGE ANNUAL TOTAL RETURNS OF SUB-ACCOUNT
FOR PERIODS ENDING DECEMBER 31, 1997
SINCE INCEPTION OF UNDERLYING PORTFOLIO
(ASSUMING COMPLETE WITHDRAWAL OF INVESTMENT)
<TABLE>
<CAPTION>
10 YEARS
YEAR (OR SINCE
ENDED INCEPTION IF
UNDERLYING PORTFOLIO 12/31/97 5 YEARS LESS)*
- ---------------------------------------- ------------ ----------- -----------------
<S> <C> <C> <C>
Kemper-Dreman Financial Services........ N/A N/A N/A
Kemper Small Cap Growth................. 25.68 % N/A 23.79 %
Kemper Small Cap Value.................. 13.35 % N/A 9.09 %
Kemper-Dreman High Return Equity........ N/A N/A N/A
Kemper International.................... 1.77 % 11.33 % 9.14 %
Kemper International Growth and
Income................................. N/A N/A N/A
Kemper Global Blue Chip................. N/A N/A N/A
Kemper Growth........................... 12.96 % 14.97 % 15.18 %
Kemper Contrarian Value................. 21.90 % N/A 24.46 %
Kemper Blue Chip........................ N/A N/A 4.10 %
Kemper Value+Growth..................... 17.05 % N/A 19.72 %
Kemper Horizon 20+...................... 12.11 % N/A 17.20 %
Kemper Total Return..................... 11.60 % 10.68 % 12.57 %
Kemper Horizon 10+...................... 8.57 % N/A 12.41 %
Kemper High Yield....................... 3.77 % 10.20 % 10.44 %
Kemper Horizon 5........................ 4.79 % N/A 8.82 %
Kemper Global Income.................... N/A N/A -4.00 %
Kemper Investment Grade Bond............ 1.38 % N/A 3.04 %
Kemper Government Securities............ 1.31 % 4.90 % 6.75 %
Kemper Money Market..................... -2.14 % 2.82 % 4.44 %
Scudder International................... 1.42 % 12.05 % 10.54 %
Scudder Global Discovery................ 4.51 % N/A 6.12 %
Scudder Capital Growth.................. 27.24 % 16.38 % 15.47 %
Scudder Growth and Income............... 22.01 % N/A 22.01 %
</TABLE>
29
<PAGE>
TABLE 2B
SUPPLEMENTAL AVERAGE ANNUAL TOTAL RETURNS OF SUB-ACCOUNT
FOR PERIODS ENDING DECEMBER 31, 1997
SINCE INCEPTION OF UNDERLYING PORTFOLIO
(ASSUMING NO WITHDRAWAL OF INVESTMENT)
<TABLE>
<CAPTION>
YEAR 10 YEARS
ENDED (OR SINCE
UNDERLYING PORTFOLIO 12/31/97 5 YEARS INCEPTION IF LESS)*
- ------------------------------------ ------------ ----------- ----------------------
<S> <C> <C> <C>
Kemper-Dreman Financial Services.... N/A N/A N/A
Kemper Small Cap Growth............. 32.68 % N/A 24.40 %
Kemper Small Cap Value.............. 20.35 % N/A 12.45 %
Kemper-Dreman High Return Equity.... N/A N/A N/A
Kemper International................ 8.21 % 11.71 % 9.35 %
Kemper International Growth and
Income............................. N/A N/A N/A
Kemper Global Blue Chip............. N/A N/A N/A
Kemper Growth....................... 19.96 % 15.31 % 15.18 %
Kemper Contrarian Value............. 28.90 % N/A 27.55 %
Kemper Blue Chip.................... N/A N/A 10.69 %
Kemper Value+Growth................. 24.05 % N/A 22.88 %
Kemper Horizon 20+.................. 19.11 % N/A 20.41 %
Kemper Total Return................. 18.60 % 11.08 % 12.57 %
Kemper Horizon 10+.................. 15.44 % N/A 15.71 %
Kemper High Yield................... 10.34 % 10.61 % 10.44 %
Kemper Horizon 5.................... 11.42 % N/A 12.19 %
Kemper Global Income................ N/A N/A 2.08 %
Kemper Investment Grade Bond........ 7.80 % N/A 6.32 %
Kemper Government Securities........ 7.72 % 5.39 % 6.75 %
Kemper Money Market................. 4.05 % 3.35 % 4.44 %
Scudder International............... 7.84 % 12.43 % 10.54 %
Scudder Global Discovery............ 11.12 % N/A 9.51 %
Scudder Capital Growth.............. 34.24 % 16.71 % 15.47 %
Scudder Growth and Income........... 29.01 % N/A 22.65 %
</TABLE>
* The inception dates for the Underlying Portfolios are: 4/6/82 for Kemper Money
Market, Kemper Total Return and Kemper High Yield; 12/9/83 for Kemper Growth;
9/3/87 for Kemper Government Securities; 1/6/92 for Kemper International; 5/2/94
for Kemper Small Cap Growth and Scudder Growth and Income; 5/1/96 for Kemper
Investment Grade Bond, Kemper Contrarian Value, Kemper Small Cap Value, Kemper
Value+Growth, Kemper Horizon 20+, Kemper Horizon 10+, Kemper Horizon 5 and
Scudder Global Discovery; 5/1/97 for Kemper Global Income and Kemper Blue Chip;
5/1/87 for Scudder International; and 7/16/85 for Scudder Capital Growth.
30
<PAGE>
DESCRIPTION OF THE COMPANY, THE VARIABLE ACCOUNT,
INVESTORS FUND SERIES AND SCUDDER VARIABLE
LIFE INVESTMENT FUND
THE COMPANY. The Company is a life insurance company organized under the laws
of Delaware in July 1974. Its principal office ("Principal Office") is located
at 440 Lincoln Street, Worcester, MA 01653, Telephone 1-800-782-8380. 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,
1997, the Company had over $9.4 billion in assets and over $26.6 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 and adopted its present name on
October 16, 1995. First Allmerica is the fifth oldest life insurance company in
America. As of December 31, 1997, First Allmerica and its subsidiaries
(including the Company) had over $16.3 billion in combined assets and over $43.8
billion in life insurance in force.
The Company is a charter member of the Insurance Marketplace Standards
Association ("IMSA"). Companies that belong to IMSA subscribe to a rigorous set
of standards that cover the various aspects of sales and service for
individually sold life insurance and annuities. IMSA members have adopted
policies and procedures that demonstrate a commitment to honesty, fairness and
integrity in all customer contacts involving sales and service of individual
life insurance and annuity products.
THE VARIABLE ACCOUNT. Separate Account KGC ("Variable Account") is a separate
investment account of the Company with 24 Sub-Accounts. The assets used to fund
the variable portions of the Contract are set aside in Sub-Accounts kept
separate from the general assets of the Company. Each Sub-Account invests in a
corresponding investment series ("Portfolio") of Investors Fund Series and
Scudder Variable Life Investment Fund. Each Sub-Account is administered and
accounted for as part of the general business of the Company. The income,
capital gains, or capital losses of each Sub-Account, however, are allocated to
each Sub-
31
<PAGE>
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 SEC as a unit
investment trust under the 1940 Act. This registration does not involve the
supervision of management or investment practices or policies of the Variable
Account by the SEC.
The Company reserves the right, subject to compliance with applicable law, to
change the names of the Variable Account and the Sub-Accounts.
INVESTORS FUND SERIES. Investors Fund Series ("Kemper IFS"), is a series-type
mutual fund registered with the SEC as an open-end, management investment
company. Registration of Kemper IFS does not involve supervision of its
management, investment practices or policies by the SEC. Kemper IFS is designed
to provide an investment vehicle for certain variable annuity contracts and
variable life insurance policies. Shares of the Portfolios of Kemper IFS are
sold only to insurance company separate accounts. Scudder Kemper Investments,
Inc. serves as the investment adviser of Kemper IFS.
SCUDDER VARIABLE LIFE INVESTMENT FUND. Scudder Variable Life Investment Fund
("Scudder VLIF") is an open-end, diversified management investment company
established as a Massachusetts business trust on March 15, 1985, and registered
with the SEC under the 1940 Act. Scudder Kemper Investments, Inc. serves as the
investment adviser of Scudder VLIF.
INVESTMENT OBJECTIVES AND POLICIES
A summary of investment objectives of each of the Underlying Portfolios is set
forth below. More detailed information regarding the investment objectives,
restrictions and risks, expenses paid by the Underlying Portfolios and other
relevant information regarding Kemper IFS and Scudder VLIF may be found in their
respective prospectuses, which accompany this Prospectus. Please read them
carefully before investing. The Statements of Additional Information of the
Underlying Portfolios are available upon request.
KEMPER IFS PORTFOLIOS:
KEMPER-DREMAN FINANCIAL SERVICES PORTFOLIO -- seeks long-term capital
appreciation by investing primarily in common stocks and other equity securities
of companies in the financial services industry believed by the Portfolio's
investment manager to be undervalued.
32
<PAGE>
KEMPER SMALL CAP GROWTH PORTFOLIO -- seeks maximum appreciation of investors'
capital from a portfolio primarily of growth stocks of smaller companies.
KEMPER SMALL CAP VALUE PORTFOLIO -- seeks long-term capital appreciation from a
portfolio primarily of value stocks of smaller companies.
KEMPER-DREMAN HIGH RETURN EQUITY PORTFOLIO -- seeks to achieve a high rate of
total return.
KEMPER INTERNATIONAL PORTFOLIO -- seeks total return, a combination of capital
growth and income, principally through an internationally diversified portfolio
of equity securities.
KEMPER INTERNATIONAL GROWTH AND INCOME PORTFOLIO -- seeks long-term growth of
capital and current income primarily from foreign equity securities.
KEMPER GLOBAL BLUE CHIP PORTFOLIO -- seeks long-term growth of capital through a
diversified worldwide portfolio of marketable securities, primarily equity
securities, including common stocks, preferred stocks and debt securities
convertible into common stocks.
KEMPER GROWTH PORTFOLIO -- seeks maximum appreciation of capital through
diversification of investment securities having potential for capital
appreciation.
KEMPER CONTRARIAN VALUE PORTFOLIO -- seeks to achieve a high rate of total
return from a portfolio primarily of value stocks of larger companies. This
Portfolio was formerly known as the Kemper Value Portfolio.
KEMPER BLUE CHIP PORTFOLIO -- seeks growth of capital and of income by investing
primarily in common stocks of well capitalized, established companies having
potential for growth of capital, earnings and dividends.
KEMPER VALUE+GROWTH PORTFOLIO -- seeks growth of capital through professional
management of a portfolio of growth and value stocks.
KEMPER HORIZON 20+ PORTFOLIO -- designed for investors with approximately a 20+
year investment horizon, seeks growth of capital, with income as a secondary
objective.
KEMPER TOTAL RETURN PORTFOLIO -- seeks a high total return, a combination of
income and capital appreciation, by investing in a combination of debt
securities and common stocks.
KEMPER HORIZON 10+ PORTFOLIO -- designed for investors with approximately a 10+
year investment horizon, seeks a balance between growth of capital and income,
consistent with moderate risk.
33
<PAGE>
KEMPER HIGH YIELD PORTFOLIO -- seeks to provide a high level of current income
by investing in fixed-income securities.
KEMPER HORIZON 5 PORTFOLIO -- designed for investors with approximately a
five-year investment horizon, seeks income consistent with preservation of
capital, with growth of capital as a secondary objective.
KEMPER GLOBAL INCOME PORTFOLIO -- seeks to provide high current income
consistent with prudent total return asset management.
KEMPER INVESTMENT GRADE BOND PORTFOLIO -- seeks high current income by investing
primarily in a diversified portfolio of investment grade debt securities
KEMPER GOVERNMENT SECURITIES PORTFOLIO -- seeks high current return consistent
with preservation of capital from a portfolio composed primarily of U.S.
Government securities.
KEMPER MONEY MARKET PORTFOLIO -- seeks maximum current income to the extent
consistent with stability of principal from a portfolio of high quality money
market instruments that mature in 12 months or less.
SCUDDER VLIF PORTFOLIOS:
SCUDDER INTERNATIONAL PORTFOLIO -- seeks long term growth of capital principally
from a diversified portfolio of foreign equity securities.
SCUDDER GLOBAL DISCOVERY PORTFOLIO -- seeks above average capital appreciation
over the long term by investing primarily in the equity securities of small
companies located throughout the world.
SCUDDER CAPITAL GROWTH PORTFOLIO -- seeks to maximize long-term capital growth
from a portfolio consisting primarily of equity securities.
SCUDDER GROWTH AND INCOME PORTFOLIO -- seeks long-term growth of capital,
current income and growth of income from a portfolio consisting primarily of
common stocks and securities convertible into common stocks.
Certain Underlying Portfolios have investment objectives and/or policies similar
to those of other Underlying Portfolios. To choose the Sub-Accounts which best
meet individual needs and objectives, carefully read the Underlying Portfolio
prospectuses. In some states, insurance regulations may restrict the
availability of particular Sub-Accounts.
34
<PAGE>
INVESTMENT MANAGEMENT SERVICES
Responsibility for overall management of Kemper IFS rests with the Board of
Trustees and officers of Kemper IFS. Responsibility for overall management of
Scudder VLIF rests with its Board of Trustees and officers. SKI is the
investment manager of all the Portfolios available under this Contract. Zurich
Investment Management Limited ("ZIML"), an affiliate of SKI, is a sub-adviser
for the Kemper International Portfolio and the Kemper Global Income Portfolio.
Dreman Value Management, L.L.C. serves as the sub-advisor for the Kemper-Dreman
Financial Services Portfolio and Kemper-Dreman High Return Equity Portfolio.
For its services, SKI receives a management fee, payable monthly at 1/12 of the
following annual rates based on the average daily net assets of each Portfolio:
Money Market (.50%), Total Return (.55%), High Yield (.60%), Growth (.60%),
Government Securities (.55%), International (.75%), Small Cap Growth (.65%),
Investment Grade Bond (.60%), Contrarian Value (.75%), Small Cap Value (.75%),
Value+Growth (.75%), Horizon 20+ (.60%), Horizon 10+ (.60%), Horizon 5 (.60%),
Blue Chip (.65%), Global Income (.75%) and International Growth and Income
(1.00%).
The High Return Equity, Financial Services and Global Blue Chip Portfolios each
pay Scudder Kemper Investments, Inc. an investment management fee, payable
monthly, at 1/12 of the annual rates shown below.
<TABLE>
<S> <C>
High Return Equity
Portfolio and
Financial Services
Portfolio............. .75% for the first $250 million, .72% for the
next $750 million, .70% for the next $1.5
billion, .68% for the next $2.5 billion, .65%
for the next $2.5 billion, .64% for the next
$2.5 billion, .63% for the next $2.5 billion
and .62% over $12.5 billion.
Global Blue Chip
Portfolio............. 1.00% for the first $250 million, .95% for
the next $750 million and .90% over $1
billion.
</TABLE>
SKI pays ZIML for its services as sub-adviser for the Kemper International
Portfolio and the Kemper Global Income Portfolio a sub-advisory fee, payable
monthly, at 1/12 of the annual rate of 0.35% of average daily net assets of the
Kemper International Portfolio and 0.30% of average daily net assets of the
Kemper Global Income Portfolio. SKI also pays Dreman Value Management, L.L.C. a
fee for its services to the Kemper-Dreman Financial Services Portfolio and
Kemper-Dreman High Return Equity Portfolio. A sub-advisory fee, payable monthly
at the annual rate of .24% of the first $250 million of each Portfolio's average
daily net assets, .23% of average daily net assets between $250 million and $1
billion, .224% of average daily net assets between $1 billion and $2.5
35
<PAGE>
billion, .218% of average daily net assets between $2.5 billion and $5 billion,
.208% of average daily net assets between $5 billion and $7.5 billion, .205% of
average daily net assets between $7.5 billion and $10 billion, .202% of average
daily net assets between $10 billion and $12.5 billion and .198% of each
Portfolio's average daily net assets over $12 billion.
For its investment management services to the Scudder VLIF Portfolios, SKI
receives compensation monthly at the following annual rates for each Portfolio:
Scudder International Portfolio (0.875% for the first $500,000,000 and 0.775%
for amounts in excess of $500,000,000); Scudder Global Discovery Portfolio
(0.975%); Scudder Capital Growth Portfolio (0.475%) and Scudder Growth and
Income Portfolio (0.475%).
For more information, see the Kemper IFS and Scudder VLIF prospectuses and SAIs.
DESCRIPTION OF THE CONTRACT
A. PAYMENTS
The Company's underwriting requirements, which include receipt of the initial
payment and allocation instructions by the Company at its Principal Office, must
be met before a Contract can be issued. These requirements may also include the
proper completion of an application; however, where permitted, the Company may
issue a Contract without completion of an application for certain classes of
annuity contracts.
Payments are to be made payable to the Company. A net payment is equal to the
payment received less the amount of any applicable tax. The initial net payment
will be credited to the Contract and allocated among the requested accounts as
of the date that all issue requirements are properly met. If all issue
requirements are not complied with within five business days of the Company's
receipt of the initial payment, the payment will be returned unless the Owner
specifically consents to the holding of the initial payment until completion of
any outstanding issue requirements. Subsequent payments will be credited as of
the Valuation Date received at the Principal Office.
Payments are not limited as to frequency and number, but there are certain
limitations as to amount. Currently, the initial payment must be at least
$2,000. Under a salary deduction or monthly automatic payment plan, the minimum
initial payment is $167. In all cases, each subsequent payment must be at least
$100. Where the contribution on behalf of an employee under an employer-
sponsored retirement plan is less than $600 but more than $300 annually, the
Company may issue a Contract on the employee if the plan's average annual
36
<PAGE>
contribution per eligible plan participant is at least $600. The minimum
allocation to a Guarantee Period Account is $1,000. If less than $1,000 is
allocated to a Guarantee Period Account, the Company reserves the right to apply
that amount to the Kemper Money Market Portfolio.
Generally, unless otherwise requested, all payments will be allocated among the
accounts in the same proportion that the initial net payment is allocated or, if
subsequently changed, according to the most recent allocation instructions. As
of the date of this Prospectus, payments may be allocated to a maximum of
seventeen variable Sub-Accounts during the life of the Contract in addition to
the Kemper Money Market Portfolio. There are no restrictions on the number of
times the Fixed Account and the Guarantee Period Accounts may be used over the
life of the Contract.
The Owner may change allocation instructions for new payments pursuant to a
written or telephone request. If telephone requests are elected by the Owner, a
properly completed authorization must be on file before telephone requests will
be honored. The Company will not be responsible for losses resulting from acting
upon telephone requests reasonably believed to be genuine. The Company will
employ reasonable procedures to confirm that instructions communicated by
telephone are genuine; otherwise, the Company may be liable for any losses due
to unauthorized or fraudulent instructions. The procedures the Company follows
for transactions initiated by telephone include requirements that callers on
behalf of an Owner identify themselves by name and identify the Annuitant by
name, date of birth and social security number. All transfer instructions by
telephone are tape recorded.
B. RIGHT TO REVOKE INDIVIDUAL RETIREMENT ANNUITY
An individual purchasing a Contract intended to qualify as an IRA may revoke the
Contract at any time within ten days after receipt of the Contract and receive a
refund. In order to revoke the Contract, the Owner must mail or deliver the
Contract to the agent through whom the Contract was purchased or to the
Company's Principal Office at 440 Lincoln Street, Worcester, MA 01653. Mailing
or delivery must occur on or before ten days after receipt of the Contract for
revocation to be effective.
Within seven days the Company will provide a refund equal to the gross
payment(s) received. In some states, however, the refund may equal the greater
of (a) gross payments or (b) any amounts allocated to the Fixed Account and the
Guarantee Period Accounts plus the Accumulated Value of amounts allocated to the
Variable Account plus any amounts deducted under the Contract or by the
Underlying Portfolios for taxes, charges or fees. At the time the Contract is
37
<PAGE>
issued, the "Right to Examine Contract" provision on the cover page of the
Contract will specifically indicate whether the refund will be equal to gross
payments or equal to the greater of (a) or (b) as set forth above.
The liability of the Variable Account under this provision is limited to the
Owner's Accumulated Value in the Sub-Accounts on the date of cancellation. Any
additional amounts refunded to the Owner will be paid by the Company.
C. RIGHT TO REVOKE ALL OTHER CONTRACTS
In Georgia, Idaho, Indiana, Michigan, Missouri, Nebraska, North Carolina,
Oklahoma, Oregon, South Carolina, Texas, Utah, Washington and West Virginia, an
Owner may revoke the Contract at any time within ten days (20 days in Idaho)
after receipt of the Contract and receive a refund as described under "Right to
Revoke Individual Retirement Annuity," above.
In all other states, an Owner may return the Contract at any time within ten
days (or the number of days required by state law if more than ten) after
receipt of the Contract. The Company will pay to the Owner an amount equal to
the sum of (1) the difference between the payment paid, including fees, and any
amount allocated to the Variable Account, and (2) the Accumulated Value of
amounts allocated to the Variable Account as of the date the request is
received. If the Contract was purchased as an IRA, the IRA revocation right
described above may be utilized in lieu of the special surrender right.
D. TRANSFER PRIVILEGE
At any time prior to the Annuity Date, an Owner may have amounts transferred
among accounts subject to the seventeen variable Sub-Account restriction
discussed in "A. Payments." Transfer values will be effected at the Accumulation
Value next computed after receipt of the transfer order. The Company will make
transfers pursuant to written or telephone requests. As discussed in "A.
Payments," a properly completed authorization form must be on file before
telephone requests will be honored. In Oregon and Massachusetts, payments and
transfers to the Fixed Account are subject to certain restrictions. See APPENDIX
A, "MORE INFORMATION ABOUT THE FIXED ACCOUNT."
Transfers to a Guarantee Period Account must be at least $1,000. If the amount
to be transferred to a Guarantee Period Account is less than $1,000, the Company
may transfer that amount to the Sub-Account which invests in the Kemper Money
Market Portfolio.
The Owner may authorize an independent third party to transact allocations and
transfers in accordance with an asset allocation strategy or other investment
strategy. The Company may provide administrative or other support services to
these independent third parties, however, the Company does not engage any
38
<PAGE>
third parties to offer allocation or other investment services under this
Contract, does not endorse or review any allocation or transfer recommendations
and is not responsible for the investment results of such allocations or
transfers transacted on the Owner's behalf. In addition, the Company reserves
the right to discontinue services or limit the number of Portfolios that it may
provide such services for. The Company does not charge the Owner for providing
additional support services.
AUTOMATIC TRANSFERS (DOLLAR COST AVERAGING) AND AUTOMATIC ACCOUNT REBALANCING
OPTIONS. The Owner may elect automatic transfers of a predetermined dollar
amount, not less than $100, on a periodic basis (monthly, bi-monthly, quarterly,
semi-annually or annually) from the Sub-Account investing in the Kemper Money
Market Portfolio or the Kemper Government Securities Portfolio, or from the
Fixed Account (the source account) to one or more of the Sub-Accounts. Automatic
transfers may not be made into the Fixed Account, the Guarantee Period Accounts
or, if applicable, the Portfolio being used as the source account. If an
automatic transfer would reduce the balance in the source account to less than
$100, the entire balance will be transferred proportionately to the chosen
Portfolios. Automatic transfers will continue until the amount in the source
account on a transfer date is zero or the Owner's request to terminate the
option is received by the Company. If additional amounts are allocated to the
source account after its balance has fallen to zero, this option will not
restart automatically, and the Owner must provide a new request to the Company.
To the extent permitted by state law, the Company reserves the right, from time
to time, to credit an enhanced interest rate to certain initial and/or
subsequent payments which are deposited into the Fixed Account and which utilize
the Fixed Account as the source account for the payment from which to process
automatic transfers. For more information see APPENDIX A, "MORE INFORMATION
ABOUT THE FIXED ACCOUNT."
The Owner may request automatic rebalancing of Sub-Account allocations on a
monthly, bi-monthly, quarterly, semi-annual or annual basis in accordance with
specified percentage allocations. As frequently as requested, the Company will
review the percentage allocations in the Portfolios and, if necessary, transfer
amounts to ensure conformity with the designated percentage allocation mix. If
the amount necessary to re-establish the mix on any scheduled date is less than
$100, no transfer will be made. Automatic Account Rebalancing will continue
until the Owner's request to terminate or change the option is received by the
Company. As such, subsequent payments allocated in a manner different from the
percentage allocation mix in effect on the date the payment is received will be
reallocated in accordance with the existing mix on the next scheduled date
unless the Owner's timely request to change the mix or terminate the option is
received by the Company.
39
<PAGE>
The Company reserves the right to limit the number of Portfolios that may be
utilized for automatic transfers and rebalancing, and to discontinue either
option upon advance written notice. The first automatic transfer and all
subsequent transfers of that request in the same Contract year count as one
transfer towards the 12 transfers which are guaranteed to be free of a transfer
charge in each Contract year. Currently, Dollar Cost Averaging and Automatic
Account Rebalancing may not be in effect simultaneously. Either option may be
elected when the Contract is purchased or at a later date.
E. SURRENDER
At any time prior to the Annuity Date, an Owner may surrender the Contract and
receive its Accumulated Value, less applicable surrender charges and adjusted
for any Market Value Adjustment ("Surrender Value"). The Owner must return the
Contract and a signed, written request for surrender, satisfactory to the
Company, to the Principal Office. The amount payable to the Owner upon surrender
will be based on the Contract's Accumulated Value as of the Valuation Date on
which the request and the Contract are received at the Principal Office.
Before the Annuity Date, a contingent deferred sales charge may be deducted when
a Contract is surrendered if payments have been credited to the Contract during
the last six full Contract years. See "CHARGES AND DEDUCTIONS." The Contract fee
will be deducted upon surrender of the Contract.
After the Annuity Date, only a Contract under which future annuity benefit
payments are limited to a specified period (as specified in the Period Certain
Annuity Option) may be surrendered. The Surrender Amount is the commuted value
of any unpaid installments, computed on the basis of the assumed interest rate
incorporated in such annuity benefit payments. No contingent deferred sales
charge is imposed after the Annuity Date.
Any amount surrendered normally is payable within seven days following the
Company's receipt of the surrender request. The Company reserves the right to
defer surrenders and withdrawals of amounts in each Sub-Account in any period
during which (1) trading on the New York Stock Exchange is restricted as
determined by the SEC or such Exchange is closed for other than weekends and
holidays, (2) the SEC has, by order, permitted such suspension, or (3) an
emergency, as determined by the SEC, exists such that disposal of Portfolio
securities or valuation of assets of each separate account is not reasonably
practicable.
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.
40
<PAGE>
The surrender rights of Owners who are participants under Section 403(b) plans
or who are participants in the Texas Optional Retirement Program ("Texas ORP")
are restricted; see "FEDERAL TAX CONSIDERATIONS," "Tax-Sheltered Annuities" and
"Texas Optional Retirement Program."
For important tax consequences which may result from surrender, see "FEDERAL TAX
CONSIDERATIONS."
F. WITHDRAWALS
At any time prior to the Annuity Date, an Owner may withdraw a portion of the
Accumulated Value of his or her Contract, subject to the limits stated below.
The Owner must file a signed, written request for withdrawals, satisfactory to
the Company, at the Principal Office. The written request must indicate the
dollar amount the Owner wishes to receive and the accounts from which such
amount is to be withdrawn. The Contract value following the withdrawal will
reflect an amount withdrawn equal to the amount requested by the Owner plus any
applicable contingent deferred sales charge, as described under "CHARGES AND
DEDUCTIONS." In addition, amounts withdrawn from a Guarantee Period Account
prior to the end of the applicable Guarantee Period will be subject to a Market
Value Adjustment, as described under "GUARANTEE PERIOD ACCOUNTS."
Where allocations have been made to more than one account, a percentage of the
withdrawal may be allocated to each such account. A withdrawal from a Sub-
Account will result in cancellation of a number of units equivalent in value to
the amount withdrawn, computed as of the Valuation Date that the request is
received at the Principal Office.
Each withdrawal must be in a minimum amount of $100. No withdrawal will be
permitted if the Accumulated Value remaining under the Contract would be reduced
to less than $1,000. Withdrawals will be paid in accordance with the time
limitations described under "E. Surrender."
After the Annuity Date, only a Contract under which future variable annuity
benefit payments are limited to a specified period may be withdrawn. A
withdrawal after the Annuity Date will result in cancellation of a number of
Annuity Units equivalent in value to the amount withdrawn.
For important restrictions on withdrawals which are applicable to Owners who are
participants under Section 403(b) plans or under the Texas ORP, see "FEDERAL TAX
CONSIDERATIONS," "Tax-Sheltered Annuities" and "Texas Optional Retirement
Program."
For important tax consequences which may result from withdrawals, see "FEDERAL
TAX CONSIDERATIONS."
41
<PAGE>
SYSTEMATIC WITHDRAWALS. The Owner may elect an automatic schedule of
withdrawals (systematic withdrawals) from amounts in the Sub-Accounts and/or the
Fixed Account on a monthly, bi-monthly, quarterly, semi-annual or annual basis.
Systematic withdrawals from Guarantee Period Accounts are not available. The
minimum amount of each automatic withdrawal is $100, and will be subject to any
applicable withdrawal charges. If elected at the time of purchase, the Owner
must designate in writing the specific dollar amount of each withdrawal and the
percentage of this amount which should be taken from each designated Sub-Account
and/or the Fixed Account. Systematic withdrawals then will begin on the date
indicated on the application. If elected after the issue date, the Owner may
elect, by written request, a specific dollar amount and the percentage of this
amount to be taken from each designated Sub-Account and/or the Fixed Account, or
the Owner may elect to withdraw a specific percentage of the Accumulated Value
calculated as of the withdrawal dates, and may designate the percentage of this
amount which should be taken from each account. The first withdrawal will take
place on the date the written request is received at the Principal Office or, if
later, on a date specified by the Owner.
If a withdrawal would cause the remaining Accumulated Value to be less than
$1,000, systematic withdrawals will be discontinued. Systematic withdrawals will
cease automatically on the Annuity Date. The Owner may change or terminate
systematic withdrawals by written request to the Principal Office only.
LIFE EXPECTANCY DISTRIBUTIONS. Prior to the Annuity Date an Owner who also is
the Annuitant may elect to make a series of systematic withdrawals from the
Contract according to a life expectancy distribution ("LED") option by returning
a properly signed LED request form to the Principal Office. The LED option
permits the Owner to make systematic withdrawals from the Contract over his or
her lifetime. The amount withdrawn from the Contract changes each year, because
life expectancy changes each year that a person lives. For example, actuarial
tables indicate that a person age 70 has a life expectancy of 16 years, but a
person who attains age 86 has a life expectancy of another 6.5 years.
Where the Owner is a trust or other non-natural person, the Owner may elect the
LED option based on the Annuitant's life expectancy.
If an Owner elects the LED option, in each calendar year a fraction of the
Accumulated Value is withdrawn based on the Owner's then life expectancy. The
numerator of the fraction is 1 (one) and the denominator of the fraction is the
remaining life expectancy of the Owner, as determined annually by the Company.
The resulting fraction, expressed as a percentage, is applied to the Accumulated
Value at the beginning of the year to determine the amount to be distributed
during the year. The Owner may elect monthly, bi-monthly, quarterly, semi-
annual, or annual distributions, and may terminate the LED option at any time.
42
<PAGE>
The Owner also may elect to receive distributions under a LED option which is
determined on the joint life expectancy of the Owner and a beneficiary. The
Company also may offer other systematic withdrawal options.
If an Owner makes withdrawals under the LED option prior to age 59 1/2, the
withdrawals may be treated by the Internal Revenue Service ("IRS") as premature
distributions from the Contract. The payments then would be taxed on an "income
first" basis and be subject to a 10% federal tax penalty. For more information,
see "FEDERAL TAX CONSIDERATIONS" and "B. Taxation of the Contracts in General."
G. DEATH BENEFIT
If the Annuitant dies (or an 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
"H. The Spouse of the Owner as Beneficiary."
DEATH OF THE ANNUITANT PRIOR TO THE ANNUITY DATE.
STANDARD DEATH BENEFIT. Upon the 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 by any positive Market
Value Adjustment, or
(b) gross payments decreased proportionately to reflect withdrawals. For each
withdrawal, the proportionate reduction is calculated as the death benefit
under this option immediately prior to the withdrawal multiplied by the
withdrawal amount and divided by the Accumulated Value immediately prior
to the withdrawal.
ENHANCED DEATH BENEFIT RIDER. At the time of application for the Contract, the
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,
(b) gross payments compounded daily at an annual rate of 5%, starting on the
date each payment is applied, decreased proportionately to reflect
withdrawals (for each withdrawal, the proportionate reduction is
calculated as the death benefit under this option immediately prior to the
withdrawal multiplied by the withdrawal amount and divided by the
Accumulated Value immediately prior to the withdrawal), or
43
<PAGE>
(c) the death benefit that would have been payable on the most recent Contract
anniversary date, increased for subsequent payments and decreased
proportionately for subsequent withdrawals.
This enhanced guaranteed death benefit works in the following way assuming no
withdrawals are made. On the first anniversary, the death benefit will be equal
to the greater of (a) the Accumulated Value (increased by any positive Market
Value Adjustment) or (b) gross payments compounded at the annual rate of 5%. The
higher of (a) or (b) will then be locked in until the second anniversary, at
which time the death benefit will be equal to the greatest of (a) the Contract's
then current Accumulated Value increased by any positive Market Value
Adjustment; (b) gross payments compounded at the annual rate of 5% or (c) the
locked-in value of the death benefit at the first anniversary. The greatest of
(a), (b) or (c) will be locked in until the next Contract anniversary. This
calculation will then be repeated on each anniversary date while the Contract
remains in force and prior to the Annuity Date. As noted above, the values of
(b) and (c) will be decreased proportionately if withdrawals are taken. See
APPENDIX C, "THE DEATH BENEFIT" for specific examples of death benefit
calculations.
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.
DEATH OF AN OWNER WHO IS NOT ALSO THE ANNUITANT PRIOR TO THE ANNUITY
DATE. 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 never will
be reduced by a negative Market Value Adjustment.
PAYMENT OF THE DEATH BENEFIT PRIOR TO THE ANNUITY DATE. The death benefit
generally will be paid to the beneficiary in one sum within seven business days
of the receipt of due proof of death at the Principal Office unless the Owner
has specified a death benefit annuity option. Instead of payment in one sum, the
beneficiary may, by written request, elect to:
(1) defer distribution of the death benefit for a period no more than five
years from the date of death; or
(2) receive a life annuity or an annuity for a period certain not extending
beyond the beneficiary's life expectancy, with annuity benefit payments
beginning one year from the date of death.
44
<PAGE>
If distribution of the death benefit is deferred under (1) or (2), any value in
the Guarantee Period Accounts will be transferred to the Sub-Account investing
in the Kemper Money Market Portfolio. The excess, if any, of the enhanced death
benefit over the Accumulated Value also will be added to the Kemper Money Market
Portfolio. The beneficiary may, by written request, effect transfers and
withdrawals during the deferral period and prior to annuitization under (2), but
may not make additional payments. The death benefit will reflect any earnings or
losses experienced during the deferral period. If there are multiple
beneficiaries, the consent of all is required.
With respect to the death benefit, the Accumulated Value under the Contract will
be based on the unit values next computed after due proof of the death has been
received.
DEATH OF THE ANNUITANT ON OR AFTER THE ANNUITY DATE. If the Annuitant's death
occurs on or after the Annuity Date but before completion of all guaranteed
annuity benefit payments, any unpaid amounts or installments will be paid to the
beneficiary. The Company must pay out the remaining payments at least as rapidly
as under the payment option in effect on the date of the Annuitant's death.
H. THE SPOUSE OF THE OWNER AS BENEFICIARY
The Owner's spouse, if named as the sole beneficiary, may by written request
continue the Contract in lieu of receiving the amount payable upon death of the
Owner. Upon such election, the spouse will become the Owner and Annuitant
subject to the following: (1) any value in the Guarantee Period Accounts will be
transferred to the Kemper Money Market Portfolio; and (2) the excess, if any, of
the death benefit over the Contract's Accumulated Value also will be added to
the Kemper Money Market Portfolio. This value never will be subject to a
surrender charge when withdrawn. Additional payments may be made; however, a
surrender charge will apply to these amounts if they have not been invested in
the Contract for more than six years. All other rights and benefits provided in
the Contract will continue, except that any subsequent spouse of such new Owner
will not be entitled to continue the Contract upon such new Owner's death.
I. ASSIGNMENT
The Contract, other than those sold in connection with certain qualified plans,
may be assigned by the Owner at any time prior to the Annuity Date and while the
Annuitant is alive (see "FEDERAL TAX CONSIDERATIONS"). The Company will not be
deemed to have knowledge of an assignment unless it is made in writing and filed
at the Principal Office. The Company will not assume responsibility for
determining the validity of any assignment. If an assignment of the Contract is
in effect on the Annuity Date, the Company reserves the right to pay
45
<PAGE>
to the assignee, in one sum, that portion of the Surrender Value of the Contract
to which the assignee appears to be entitled. The Company will pay the balance,
if any, in one sum to the Owner in full settlement of all liability under the
Contract. The interest of the Owner and of any beneficiary will be subject to
any assignment.
J. ELECTING THE FORM OF ANNUITY AND ANNUITY DATE
The Annuity Date is selected by the Owner. To the extent permitted in your
state, the Annuity Date may be the first day of any month: (1) before the
Annuitant's 85th birthday, if the Annuitant's age on the issue date of the
Contract is 75 or under, or (2) within ten years from the issue date of the
Contract and before the Annuitant's 90th birthday, if the Annuitant's age on the
issue date is between 76 and 90. The Owner may elect to change the Annuity Date
by sending a request to the Principal Office at least one month before the
Annuity Date. The new Annuity Date must be the first day of any month occurring
before the Annuitant's 90th birthday, and must be within the life expectancy of
the Annuitant. The Company shall determine such life expectancy at the time a
change in Annuity Date is requested. The Code and the terms of qualified plans
impose limitations on the age at which annuity benefit payments may commence and
the type of annuity option selected. See "FEDERAL TAX CONSIDERATIONS" for
further information.
Subject to certain restrictions described below, the Owner has the right (1) to
select the annuity payout option under which annuity benefit payments are to be
made, and (2) to determine whether payments are to be made on a fixed basis, a
variable basis, or a combination fixed and variable basis. Annuity benefit
payments are determined according to the annuity tables in the Contract, by the
annuity option selected, and by the investment performance of the Accounts
selected.
To the extent a fixed annuity payout is selected, Accumulated Value will be
transferred to the Fixed Account, and the annuity benefit payments will be fixed
in amount. See APPENDIX A, "MORE INFORMATION ABOUT THE FIXED ACCOUNT."
Under a variable annuity payout, a payment equal to the value of the fixed
number of Annuity Units in the Sub-Accounts is made monthly, quarterly, semi-
annually or annually. Since the value of an Annuity Unit in a Sub-Account will
reflect the investment performance of the Sub-Account, the amount of each
annuity benefit payment will vary.
The annuity payout option selected must produce an initial payment of at least
$50 (a lower amount may be required in some states). The Company reserves the
right to increase this minimum amount. If the annuity payout option selected
46
<PAGE>
does not produce an initial payment which meets this minimum, a single payment
will be made. Once the Company begins making annuity benefit payments, the
Annuitant cannot make withdrawals or surrender the annuity benefit, except where
the Annuitant has elected a commutable period certain option. Beneficiaries
entitled to receive remaining payments under either a commutable or non-
commutable "period certain" may elect instead to receive a lump sum settlement.
See "K. Description of Variable Annuity Payout Options."
If the Owner does not elect otherwise, a variable life annuity with periodic
payments for ten years guaranteed will be purchased. Changes in either the
Annuity Date or annuity option can be made up to one month prior to the Annuity
Date.
K. DESCRIPTION OF VARIABLE ANNUITY PAYOUT OPTIONS
The Company provides the variable annuity payout options described below.
Currently, variable annuity payout options may be funded through the Sub-
Accounts investing in the Kemper Investment Grade Bond, Kemper Value+Growth,
Kemper Horizon 10+ and Kemper Horizon 5 Portfolios. The Company also provides
these same options funded through the Fixed Account (fixed-amount annuity
option). Regardless of how payments were allocated during the accumulation
period, any of the variable annuity options or the fixed-amount options may be
selected, or any of the variable annuity options may be selected in combination
with any of the fixed-amount annuity options. Other annuity options may be
offered by the Company. IRS regulations may not permit certain of the available
annuity options when used in connection with certain qualified Contracts.
VARIABLE LIFE ANNUITY WITH PAYMENTS GUARANTEED FOR TEN YEARS. This variable
annuity is payable periodically during the lifetime of the payee with the
guarantee that if the payee should die before all payments have been made, the
remaining annuity benefit payments will continue to the beneficiary.
VARIABLE LIFE ANNUITY PAYABLE PERIODICALLY DURING THE LIFETIME OF THE ANNUITANT
ONLY. It would be possible under this option for the Annuitant to receive only
one annuity benefit payment if the Annuitant dies prior to the due date of the
second annuity benefit payment, two annuity benefit payments if the Annuitant
dies before the due date of the third annuity benefit payment, and so on.
Payments will continue, however, during the lifetime of the Annuitant, no matter
how long he or she lives.
UNIT FUND VARIABLE LIFE ANNUITY. This is an annuity payable periodically during
the lifetime of the payee with the guarantee that if (1) exceeds (2) then
periodic variable annuity benefit payments will continue to the beneficiary
until the number of such payments equals the number determined in (1).
47
<PAGE>
Where: (1) is the dollar amount of the Accumulated Value divided by the dollar
amount of the first payment, and
(2) is the number of payments paid prior to the death of the payee.
JOINT AND SURVIVOR VARIABLE LIFE ANNUITY. This variable annuity is payable
jointly to two payees during their joint lifetime, and then continues thereafter
during the lifetime of the survivor. The amount of each payment to the survivor
is based on the same number of Annuity Units which applied during the joint
lifetime of the two payees. One of the payees must be either the person
designated as the Annuitant in the Contract or the beneficiary. There is no
minimum number of payments under this option.
JOINT AND TWO-THIRDS SURVIVOR VARIABLE LIFE ANNUITY. This variable annuity is
payable jointly to two payees during their joint lifetime, and then continues
thereafter during the lifetime of the survivor. The amount of each periodic
payment to the survivor, however, is based upon two-thirds of the number of
Annuity Units which applied during the joint lifetime of the two payees. One of
the payees must be the person designated as the Annuitant or the beneficiary in
the Contract. There is no minimum number of payments under this option.
PERIOD CERTAIN VARIABLE ANNUITY. This variable annuity has periodic payments
for a stipulated number of years ranging from one to 30. This option may be
commutable, that is, the payee reserves the right to receive a lump sum in place
of installments, or it becomes non-commutable. The payee must reserve this right
at the time benefits begin.
It should be noted that the period certain option does not involve a life
contingency. In the computation of the payments under this option, the charge
for annuity rate guarantees, which includes a factor for mortality risks, is
made. Although not contractually required to do so, the Company currently
follows a practice of permitting persons receiving payments under the period
certain option to elect to convert to a variable annuity involving a life
contingency. The Company may discontinue or change this practice at any time,
but not with respect to election of the option made prior to the date of any
change in this practice. See "FEDERAL TAX CONSIDERATIONS" for a discussion of
the possible adverse tax consequences of selecting a period certain option.
L. ANNUITY BENEFIT PAYMENTS
THE ANNUITY UNIT. On and after the Annuity Date, the Annuity Unit is a measure
of the value of the Annuitant's monthly annuity benefit payments under a
variable annuity option. The value of an Annuity Unit in each Sub-Account
initially was set at $1.00. The value of an Annuity Unit under a Sub-Account on
48
<PAGE>
any Valuation Date thereafter is equal to the value of such unit on the
immediately preceding Valuation Date, multiplied by the product of (1) the net
investment factor of the Sub-Account for the current Valuation Period, and (2) a
factor to adjust benefits to neutralize the assumed interest rate. The assumed
interest rate, discussed below, is incorporated in the variable annuity options
offered in the Contract.
DETERMINATION OF THE FIRST AND SUBSEQUENT ANNUITY BENEFIT PAYMENTS. The first
periodic annuity benefit payment is based upon the Accumulated Value as of a
date not more than four weeks preceding the date that the first annuity benefit
payment is due. Variable annuity benefit payments are due on the first of a
month, which is the date the payment is to be received by the Annuitant, and
currently are based on unit values as of the 15th day of the preceding month.
The Contract provides annuity rates which determine the dollar amount of the
first periodic payment under each form of annuity for each $1,000 of applied
value. For life contingency options and non-commutable period certain options of
ten or more years, 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 ten 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 on rates.
The amount of the first monthly payment depends upon the form of annuity
selected, the sex (however, see "M. NORRIS Decision") and age of the Annuitant
and the value of the amount applied under the annuity option. The variable
annuity options offered by the Company are based on a 3.5% assumed interest
rate. Variable payments are affected by the assumed interest rate used in
calculating the annuity option rates. Variable annuity benefit payments will
increase over periods when the actual net investment result of the Sub-Accounts
funding the annuity exceeds the equivalent of the assumed interest rate for the
period. Variable annuity benefit payments will decrease over periods when the
actual net investment result of the respective Sub-Account is less than the
equivalent of the assumed interest rate for the period.
The dollar amount of the first periodic annuity benefit payment under life
annuity options and non-commutable period certain options of ten years or more
is determined by multiplying (1) the Accumulated Value applied under that option
(after application of any Market Value Adjustment and less premium tax, if any)
divided by $1,000, by (2) the applicable amount of the first monthly payment per
$1,000 of value. For commutable period certain options and any period certain
option of less than ten years, the Surrender Value less premium taxes, if any,
is used rather than the Accumulated Value. The dollar amount of the first
variable annuity benefit payment then is divided by the value of an
49
<PAGE>
Annuity Unit of the selected Sub-Accounts to determine the number of Annuity
Units represented by the first payment. This number of Annuity Units remains
fixed under all annuity options except the joint and two-thirds survivor annuity
option. For each subsequent payment, the dollar amount of the variable annuity
benefit payment is determined by multiplying this fixed number of Annuity Units
by the value of an Annuity Unit on the applicable Valuation Date.
After the first benefit payment, the dollar amount of each periodic variable
annuity benefit payment will vary with subsequent variations in the value of the
Annuity Unit of the selected Sub-Accounts. The dollar amount of each fixed
amount annuity benefit payment is fixed and will not change, except under the
joint and two-thirds survivor annuity option.
From time to time, the Company may offer Owners both fixed and variable annuity
rates more favorable than those contained in the Contract. Any such rates will
be applied uniformly to all Owners of the same class.
For an illustration of variable annuity benefit payment calculation using a
hypothetical example, see "ANNUITY BENEFIT PAYMENTS" in the SAI.
M. 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.
N. COMPUTATION OF VALUES
THE ACCUMULATION UNIT. Each net payment is allocated to the accounts selected
by the Owner. Allocations to the Sub-Accounts are credited to the Contract in
the form of Accumulation Units. Accumulation Units are credited separately for
each Sub-Account. The number of Accumulation Units of each Sub-Account credited
to the Contract is equal to the portion of the net payment allocated to the
Sub-Account, divided by the dollar value of the applicable Accumulation Unit as
of the Valuation Date the payment is received in good order at the Company's
Principal Office. The number of Accumulation Units resulting from each payment
will remain fixed unless changed by a subsequent
50
<PAGE>
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.
Allocations to Guarantee Period Accounts and the Fixed Account are not converted
into Accumulation Units, but are credited interest at a rate periodically set by
the Company. See "GUARANTEE PERIOD ACCOUNTS" and APPENDIX A, "MORE INFORMATION
ABOUT THE FIXED ACCOUNTS."
The Accumulated Value under the Contract is determined by (1) multiplying the
number of Accumulation Units in each Sub-Account by the value of an Accumulation
Unit of that Sub-Account on the Valuation Date, (2) adding the products, and (3)
adding the amount of the accumulations in the Fixed Account and Guarantee Period
Accounts, if any.
NET INVESTMENT FACTOR. The Net Investment Factor is an index that measures the
investment performance of a Sub-Account from one Valuation Period to the next.
This factor is equal to 1.000000 plus the result from dividing (1) by (2) and
subtracting (3) and (4) where:
(1) is the investment income of a Sub-Account for the Valuation Period,
including realized or unrealized capital gains and losses during the
Valuation Period, adjusted for provisions made for taxes, if any;
(2) is the value of that Sub-Account's assets at the beginning of the
Valuation Period;
(3) is a charge for mortality and expense risks equal to 0.95% on an annual
basis of the daily value of the Sub-Account's assets; and
(4) is an administrative charge equal to 0.15% on an annual basis of the daily
value of the Sub-Account's assets.
The dollar value of an Accumulation Unit as of a given Valuation Date is
determined by multiplying the dollar value of the corresponding Accumulation
Unit as of the immediately preceding Valuation Date by the appropriate net
investment factor. For an illustration of Accumulation Unit calculation using a
hypothetical example see the SAI.
51
<PAGE>
CHARGES AND DEDUCTIONS
Deductions under the Contract and charges against the assets of the Sub-Accounts
are described below. Other deductions and expenses paid out of the assets of the
Portfolios are described in the prospectuses and SAIs of Kemper IFS and Scudder
VLIF.
A. VARIABLE ACCOUNT DEDUCTIONS
MORTALITY AND EXPENSE RISK CHARGE. The Company makes a daily charge equal to an
annual rate of 0.95% of the 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 phase
52
<PAGE>
and the annuity payout phase. The daily administrative expense charge is
assessed to help defray administrative expenses actually incurred in the
administration of the Sub-Account, without profits. There is no direct
relationship, however, between the amount of administrative expenses imposed on
a given Contract and the amount of expenses actually attributable to that
Contract.
Deductions for the Contract fee (described under "B. Contract Fee") and for the
administrative expense charge are designed to reimburse the Company for the cost
of administration and related expenses and are not expected to be a source of
profit. The administrative functions and expense assumed by the Company in
connection with the Variable Account and the Contract include, but are not
limited to, clerical, accounting, actuarial and legal services, rent, postage,
telephone, office equipment and supplies, expenses of preparing and printing
registration statements, expense of preparing and typesetting prospectuses and
the cost of printing prospectuses not allocable to sales expense, filing and
other fees.
OTHER CHARGES. Because the Sub-Accounts hold shares of the Portfolios, the
value of the net assets of the Sub-Accounts will reflect the investment advisory
fee and other expenses incurred by the Portfolios. The prospectuses and SAIs of
the Underlying Portfolios contain additional information concerning expenses of
the Portfolios.
B. CONTRACT FEE
A $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 also may be waived for Contracts where,
on the issue date, either the Owner or the Annuitant is within the following
classes of individuals: employees and registered representatives of any
broker-dealer which has entered into a sales agreement with the Company to sell
the Contract; employees of the Company, its affiliates and subsidiaries;
officers, directors, trustees and employees of any of the Portfolios; investment
managers or Sub-Advisers; and the spouses of and immediate family members
residing in the same household with such eligible persons. "Immediate family
members" means children, siblings, parents and grandparents.
53
<PAGE>
C. OPTIONAL BENEFIT RIDERS
Subject to state availability, the Company offers three optional benefit riders
that may be elected by the 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 "E. Contingent Deferred Sales Charge," below, and "G. Death
Benefit" under "DESCRIPTION OF THE CONTRACT," above.
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.
54
<PAGE>
E. CONTINGENT DEFERRED SALES CHARGE
No charge for sales expense is deducted from payments at the time the payments
are made. A contingent deferred sales charge is deducted from the Accumulated
Value of the Contract, however, in the case of surrender and/or withdrawals or
at the time annuity benefit payments begin, within certain time limits described
below.
For purposes of determining the contingent deferred sales charge, the
Accumulated Value is divided into three categories: (1) New Payments - payments
received by the Company during the six years preceding the date of the
surrender; (2) Old Payments - accumulated payments not defined as New Payments;
and (3) Earnings - the amount of Contract Value in excess of all payments that
have not been surrendered previously. See "Withdrawal Without Surrender Charge"
below. For purposes of determining the amount of any contingent deferred sales
charge, surrenders will be deemed to be taken first from amounts available as a
Withdrawal Without Surrender Charge, if any; then from Old Payments, and then
from New Payments. Amounts available as a Withdrawal Without Surrender Charge,
followed by Old Payments, may be withdrawn from the Contract at any time without
the imposition of a contingent deferred sales charge. If a withdrawal is
attributable all or in part to New Payments, a contingent deferred sales charge
may apply.
An Owner may withdraw 15% of the Accumulated Value in any calendar year, without
assessment of a Withdrawal Charge. If the Owner withdraws an amount in excess of
the Withdrawal Without Surrender Charge amount in any calendar year, the excess
is subject to a Withdrawal Charge.
CHARGES FOR SURRENDER AND WITHDRAWAL. If the Contract is surrendered or if New
Payments are withdrawn while the Contract is in force and before the Annuity
Date, a contingent deferred sales charge may be imposed. This surrender charge
never will be applied to earnings. The amount of the charge will depend upon the
number of years that the New Payments, if any, to which the withdrawal is
attributed have remained credited under the Contract. Amounts withdrawn are
deducted first from Old Payments. Then, for the purpose of calculating surrender
charges for New Payments, all amounts withdrawn are assumed to be deducted first
from the earliest New Payment and then from the next earliest New Payment and so
on, until all New Payments have been exhausted pursuant to the FIFO method of
accounting. (See "FEDERAL TAX CONSIDERATIONS" for a discussion of how
withdrawals are treated for income tax purposes.)
55
<PAGE>
The Contingent Deferred Sales Charges are as follows:
<TABLE>
<CAPTION>
YEARS FROM CHARGE AS PERCENTAGE OF
DATE OF NEW
PAYMENT PAYMENTS WITHDRAWN
- -------------- ------------------------------
<S> <C>
Less than 1 7%
2 6%
3 5%
4 4%
5 3%
6 2%
Thereafter 0%
</TABLE>
The amount withdrawn equals the amount requested by the Owner plus the charge,
if any. The charge is applied as a percentage of the New Payments withdrawn, but
in no event will the total contingent deferred sales charge exceed a maximum
limit of 7% of total gross New Payments. Such total charge equals the aggregate
of all applicable contingent deferred sales charges for surrender, withdrawals
and annuitization.
REDUCTION OR ELIMINATION OF SURRENDER CHARGE. From time to time, where
permitted by state law, the Company may allow a reduction in or elimination of
the contingent deferred sales charges, the period during which the charges
apply, or both, and/or credit additional amounts on Contracts, when Contracts
are sold to individuals or groups of individuals in a manner that reduces sales
expenses. The Company will consider factors such as the following: (1) the size
and type of group or class, and the persistency expected from that group or
class; (2) the total amount of payments to be received and the manner in which
payments are remitted; (3) the purpose for which the Contracts are being
purchased and whether that purpose makes it likely that costs and expenses will
be reduced; (4) other transactions where sales expenses are likely to be
reduced; or (5) the level of commissions paid to selling broker-dealers or
certain financial institutions with respect to Contracts within the same group
or class (for example, broker-dealers who offer this Contract in connection with
financial planning services offered on a fee-for-service basis). The Company
also may reduce or waive the contingent deferred sales charge, and/or credit
additional amounts on the Contract where either the Owner or the Annuitant on
the issue date is within the following class of individuals ("eligible
persons"): employees and registered representatives of any broker-dealer which
has entered into a Sales Agreement with the Company to sell the Contract;
employees of the Company, its affiliates or subsidiaries; officers, directors,
trustees and employees of any of the Portfolios, investment managers or
sub-advisers; and the spouses of and immediate family members residing in the
same household with such eligible persons. "Immediate family members" means
children, siblings, parents and grandparents. Finally, if permitted by state
law, contingent deferred sales charges may be
56
<PAGE>
waived under Section 403(b) Contracts where the amount withdrawn is being
contributed to a life insurance policy issued by the Company as part of the
individual's Section 403(b) plan.
Any reduction or elimination in the amount or duration of the contingent
deferred sales charge will not discriminate unfairly among purchasers of the
Contract. The Company will not make any changes to this charge where prohibited
by law.
Pursuant to Section 11 of the 1940 Act and Rule 11a-2 thereunder, the contingent
deferred sales charge is modified to effect certain exchanges of existing
contracts issued by the Company for this Contract. See "EXCHANGE OFFER" in the
SAI.
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 the Company
receives the withdrawal request, or the following day, reduced by the
total amount of any prior withdrawals made in the same calendar year
to which no contingent deferred sales charge was applied; and
(2) is: the amount calculated under the Company's life expectancy distribution
("LED") option (see "Life Expectancy Distributions," above) whether or
not the withdrawal was part of such distribution (applies only if
Annuitant is also an Owner).
For example, an 81-year-old Owner/Annuitant with an Accumulated Value of
$15,000, would have a Withdrawal Without Surrender Charge 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 be deducted first from Cumulative
Earnings. If the Withdrawal Without Surrender Charge exceeds Cumulative
Earnings, the excess amount will be deemed withdrawn from payments not
previously withdrawn on a LIFO basis. If more than one withdrawal is made during
the year, on each subsequent withdrawal the Company will waive the contingent
deferred sales load, if any, until the entire Withdrawal Without Surrender
Charge has been withdrawn. Amounts withdrawn from a Guarantee Period Account
prior to the end of the applicable Guarantee Period may be subject to a Market
Value Adjustment.
57
<PAGE>
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 Owner (or the Annuitant
if the Owner is not a person):
(1) is 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;
(2) is first diagnosed by a licensed "physician" as having a "fatal illness"
after the issue date of the Contract; or
(3) commencing one year after issue of the Contract, is confined to a hospice
or receives home health care 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
in-patient care which is prescribed in writing by a licensed "physician" and
based on physical limitations which prohibit daily living in a non-institutional
setting; "fatal illness" means a condition diagnosed by a licensed physician
which is expected to result in death within two years of the diagnosis; and
"physician" means a person 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 this rider, no
additional payments under the 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 Sub-Accounts, 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 Owner (or the Annuitant if the Owner
is not a person) is physically disabled after the issue date of the Contract and
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, at its expense,
an examination by a licensed physician of its choice.
58
<PAGE>
Where contingent deferred sales charges have been waived under this rider, no
additional payments under the 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 Sub-Accounts, of dollar amounts in the Fixed Account,
and of dollar amounts in the Guarantee Period Accounts, based on relative
values.
SURRENDERS. In the case of a complete surrender, the amount received by the
Owner is equal to the entire Accumulated Value under the Contract, net of the
applicable contingent deferred sales charge on New Payments, the Contract fee
and any applicable tax withholding and adjusted for any applicable Market Value
Adjustment. Subject to the same rules applicable to withdrawals, the Company
will not assess a contingent deferred sales charge on an amount equal to the
highest Withdrawal Without Surrender Charge Amount, described above.
Where an Owner who is a trustee under a pension plan surrenders, in whole or in
part, a Contract on a terminating employee, the trustee will be permitted to
reallocate all or a part of the total Accumulated Value under the Contract to
other contracts issued by the Company and owned by the trustee, with no
deduction for any otherwise applicable contingent deferred sales charge. Any
such reallocation will be at the unit values for the Sub-Accounts as of the
Valuation Date on which a written, signed request is received at the Principal
Office.
For further information on surrender and withdrawals, including minimum limits
on amount withdrawn and amount remaining under the Contract in the case of
withdrawals, and important tax considerations, see "E. Surrender" and "F.
Withdrawals" under "DESCRIPTION OF THE 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 "K.
Description of Variable Annuity Payout Options.")
No contingent deferred sales charge is imposed at the time of annuitization in
any Contract year under an option involving a life contingency or for any non-
commutable period certain option for ten years or more. A Market Value
Adjustment, however, may apply. See "GUARANTEE PERIOD ACCOUNTS."
59
<PAGE>
If an owner of a fixed annuity contract issued by the Company wishes to elect a
variable annuity payout option, the Company may permit such owner to exchange,
at the time of annuitization, the fixed contract for a Contract offered in this
Prospectus. The proceeds of the fixed contract, minus any contingent deferred
sales charge applicable under the fixed contract if a period certain option is
chosen, will be applied towards the variable annuity option desired by the
owner. The number of Annuity Units under the option will be calculated using the
Annuity Unit values as of the 15th of the month preceding the Annuity Date.
F. TRANSFER CHARGE
The Company currently makes no charge for processing transfers. The Company
guarantees that the first 12 transfers in a Contract year will be free of
transfer charge, but reserves the right to assess a charge, guaranteed never to
exceed $25, for each subsequent transfer in a Contract year. For more
information, see "D. Transfer Privilege" under "DESCRIPTION OF THE CONTRACT."
GUARANTEE PERIOD ACCOUNTS
Due to certain exemptive and exclusionary provisions in the securities laws,
interests in the Guarantee Period Accounts and the Fixed Account are not
registered as an investment company under the provisions of the Securities Act
of 1933 (the "1933 Act") or the 1940 Act. Accordingly, the staff of the SEC has
not reviewed the disclosures in this Prospectus relating to the Guarantee Period
Accounts or the Fixed Account. Nevertheless, disclosures regarding the Guarantee
Period Accounts and the Fixed Account of the Contract or any benefits offered
under these accounts may be subject to the provisions of the 1933 Act relating
to the accuracy and completeness of statements made in the Prospectus.
INVESTMENT OPTIONS. In most jurisdictions, there currently are nine Guarantee
Periods available under the Contract with durations of two, three, four, five,
six, seven, eight, nine and ten years. Each Guarantee Period Account established
for the Owner is accounted for separately in a non-unitized segregated account.
Each Guarantee Period Account provides for the accumulation of interest at a
Guaranteed Interest Rate. The Guaranteed Interest Rate on amounts allocated or
transferred to a Guarantee Period Account is determined from time to time by the
Company in accordance with market conditions; however, once an interest rate is
in effect for a Guarantee Period Account, the Company may not change it during
the duration of the Guarantee Period. In no event will the Guaranteed Interest
Rate be less than 3%.
To the extent permitted by law, the Company reserves the right at any time to
offer Guarantee Periods with durations that differ from those which were
available when a Contract initially was issued and to stop accepting new
allocations, transfers or renewals to a particular Guarantee Period. Owners may
allocate net
60
<PAGE>
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 Owner allocates or transfers amounts to a Guarantee Period Account
except that amounts allocated to the same Guarantee Period on the same day will
be treated as one Guarantee Period Account. The minimum that may be allocated to
establish a Guarantee Period Account is $1,000. If less than $1,000 is
allocated, the Company reserves the right to apply that amount to the Kemper
Money Market Portfolio. The Owner may allocate amounts to any of the Guarantee
Periods available.
At least 45 days, but not more than 75 days, prior to the end of a Guarantee
Period, the Company will notify the Owner in writing of the expiration of that
Guarantee Period. At the end of a Guarantee Period the Owner may transfer
amounts to the Sub-Accounts, the Fixed Account or establish a new Guarantee
Period Account of any duration then offered by the Company without a Market
Value Adjustment. If reallocation instructions are not received at the Principal
Office before the end of a Guarantee Period, the account value automatically
will be applied to a new Guarantee Period Account with the same duration unless
(1) less than $1,000 would remain in the Guarantee Period Account on the
expiration date, or (2) the Guarantee Period would extend beyond the Annuity
Date or is no longer available. In such cases, the Guarantee Period Account
value will be transferred to the Kemper Money Market Portfolio. Where amounts
have been renewed automatically in a new Guarantee Period, 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 "G. 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
61
<PAGE>
determined by multiplying the amount taken from each Guarantee Period Account
before deduction of any surrender charge by the market value factor. The market
value factor for each Guarantee Period Account is equal to:
[(1+i)/(1+j)](n/365)-1
where: i is the Guaranteed Interest Rate expressed as a decimal (for example:
3% = 0.03) being credited to the current Guarantee Period;
j is the new Guaranteed Interest Rate, expressed as a decimal, for a
Guarantee Period with a duration equal to the number of years remaining
in the current Guarantee Period, rounded to the next higher number of
whole years. If that rate is not available, the Company will use a
suitable rate or index allowed by the Department of Insurance; and
n is the number of days remaining from the effective Valuation Date to
the end of the current Guarantee Period.
Based on the application of this formula, the value of a Guarantee Period
Account will increase after the Market Value Adjustment is applied if the then
current market rates are lower than the rate being credited to the Guarantee
Period Account. Similarly, the value of a Guarantee Period Account will decrease
after the Market Value Adjustment is applied if the then current market rates
are higher than the rate being credited to the Guarantee Period Account. The
Market Value Adjustment is limited, however, so that even if the account value
is decreased after application of a Market Value Adjustment, it will equal or
exceed the Owner's principal plus 3% earnings per year less applicable Contract
fees. Conversely, if the then current market rates are lower and the account
value is increased after the Market Value Adjustment is applied, the increase in
value also is affected by the minimum guaranteed rate of 3% such that the amount
that will be added to the Guarantee Period Account is limited to the difference
between the amount earned and the 3% minimum guaranteed earnings. For examples
of how the Market Value Adjustment works, see APPENDIX B.
PROGRAM TO PROTECT PRINCIPAL AND PROVIDE GROWTH POTENTIAL. Under this feature,
the Owner elects a Guarantee Period and one or more Sub-Accounts. The Company
then will compute the proportion of the initial payment that must be allocated
to the Guarantee Period selected, assuming no transfers or withdrawals, in order
to ensure that on the last day of the Guarantee Period it will equal the amount
of the entire initial payment. The required amount then will be allocated to the
pre-selected Guarantee Period Account and the remaining balance to the other
investment options selected by the Owner in accordance with the procedures
described in "A. Payments."
WITHDRAWALS. Prior to the Annuity Date, the Owner may make withdrawals of
amounts held in the Guarantee Period Accounts. Withdrawals from these accounts
will be made in the same manner and be subject to the same rules as set
62
<PAGE>
forth under "E. Surrender" and "F. Withdrawals." In addition, the following
provisions also apply to withdrawals from a Guarantee Period Account: (1) a
Market Value Adjustment will apply to all withdrawals, including Withdrawals
without Surrender Charge, unless made at the end of the Guarantee Period; and
(2) the Company reserves the right to defer payments of amounts withdrawn from a
Guarantee Period Account for up to six months from the date it receives the
withdrawal request. If deferred for 30 days or more, the Company will pay
interest on the amount deferred at a rate of at least 3%.
In the event that a Market Value Adjustment applies to a withdrawal of a portion
of the value of a Guarantee Period Account, it will be calculated on the amount
requested and deducted or added to the amount remaining in the Guarantee Period
Account. If the entire amount in a Guarantee Period Account is requested, the
adjustment will be made to the amount payable. If a contingent deferred sales
charge applies to the withdrawal, it will be calculated as set forth under "D.
Contingent Deferred Sales Charge" after application of the Market Value
Adjustment.
FEDERAL TAX CONSIDERATIONS
The effect of federal income taxes on the value of the Contract, on withdrawals
or surrenders, on annuity benefit payments, and on the economic benefit to the
Owner, Annuitant, or beneficiary depends upon a variety of factors. The
following discussion is based upon the Company's understanding of current
federal income tax laws as they are interpreted as of the date of this
Prospectus. No representation is made regarding the likelihood of continuation
of current federal income tax laws or of current interpretations by the IRS.
IT SHOULD BE RECOGNIZED THAT THE FOLLOWING DISCUSSION OF FEDERAL INCOME TAX
ASPECTS OF AMOUNTS RECEIVED UNDER VARIABLE ANNUITY CONTRACTS IS NOT EXHAUSTIVE,
DOES NOT PURPORT TO COVER ALL SITUATIONS AND IS NOT INTENDED AS TAX ADVICE. A
QUALIFIED TAX ADVISER ALWAYS SHOULD BE CONSULTED WITH REGARD TO THE APPLICATION
OF LAW TO INDIVIDUAL CIRCUMSTANCES.
The Company intends to make a charge for any effect which the income, assets or
existence of the Contract, the Variable Account or the Sub-Accounts may have
upon its tax. The Variable Account presently is not subject to tax, but the
Company reserves the right to assess a charge for taxes should the Variable
Account at any time become subject to tax. Any charge for taxes will be assessed
on a fair and equitable basis in order to preserve equity among classes of
Owners and with respect to each separate account as though that separate account
were a separate taxable entity.
The Variable Account is considered a part of and taxed with the operations of
the Company. The Company is taxed as a life insurance company under Subchapter L
of the Code. The Company files a consolidated tax return with its affiliates.
63
<PAGE>
The IRS has issued regulations relating to the diversification requirements for
variable annuity and variable life insurance contracts under Section 817(h) of
the Code. The regulations provide that the investments of a segregated asset
account underlying a variable annuity contract are adequately diversified if no
more than 55% of the value of its assets is represented by any one investment,
no more than 70% by any two investments, no more than 80% by any three
investments, and no more than 90% by any four investments. If the investments
are not adequately diversified, the income on the Contract, for any taxable year
of the Owner, would be treated as ordinary income received or accrued by the
Owner. It is anticipated that the Portfolios will comply with the
diversification requirements.
A. QUALIFIED AND NON-QUALIFIED CONTRACTS
From a federal tax viewpoint there are two types of variable annuity contracts:
"qualified" contracts and "non-qualified" contracts. A qualified contract is one
that is purchased in connection with a retirement plan which meets the
requirements of Sections 401, 403, or 408 of the Code, while a non-qualified
contract is one that is not purchased in connection with one of the indicated
retirement plans. The tax treatment for certain withdrawals or surrenders will
vary according to whether they are made from a qualified contract or a
non-qualified contract. For more information on the tax provisions applicable to
qualified Contracts, see "D. Provisions Applicable to Qualified Employer Plans."
B. TAXATION OF THE CONTRACTS IN GENERAL
The Company believes that the Contract described in this Prospectus will, with
certain exceptions (see "Non-Natural Owners" below), be considered an annuity
contract under Section 72 of the Code. This section governs the taxation of
annuities. The following discussion concerns annuities subject to Section 72.
WITHDRAWALS PRIOR TO ANNUITIZATION. With certain exceptions, any increase in
the Contract's Accumulated Value is not taxable to the Owner until it is
withdrawn from the Contract. If the Contract is surrendered or amounts are
withdrawn prior to the Annuity Date, any withdrawal of investment gain in value
over the cost basis of the Contract will be taxed as ordinary income. Under the
current provisions of the Code, amounts received under an annuity contract prior
to annuitization (including payments made upon the death of the annuitant or
owner), generally are first attributable to any investment gains credited to the
contract over the taxpayer's "investment in the contract." Such amounts will be
treated as gross income subject to federal income taxation. "Investment in the
contract" is the total of all payments to the Contract which were not excluded
from the Owner's gross income less any amounts previously withdrawn which were
not included in income. Section 72(e)(11)(A)(ii) requires that all non-
64
<PAGE>
qualified deferred annuity contracts issued by the same insurance company to the
same owner during a single calendar year be treated as one contract in
determining taxable distributions.
ANNUITY PAYOUTS AFTER ANNUITIZATION. When annuity benefit payments are
commenced under the Contract, generally a portion of each payment may be
excluded from gross income. The excludable portion generally is determined by a
formula that establishes the ratio that the investment in the Contract bears to
the expected return under the Contract. The portion of the payment in excess of
this excludable amount is taxable as ordinary income. Once all the investment in
the Contract is recovered, the entire payment is taxable. If the Annuitant dies
before the total investment in the Contract is recovered, a deduction for the
difference is allowed on the Annuitant's final tax return.
PENALTY ON DISTRIBUTION. A 10% penalty tax may be imposed on the withdrawal of
investment gains if the withdrawal is made prior to age 59 1/2. The penalty tax
will not be imposed on withdrawals taken on or after age 59 1/2, or if the
withdrawal follows the death of the owner (or, if the owner is not an
individual, the death of the primary annuitant, as defined in the Code) or, in
the case of the owner's "total disability" (as defined in the Code).
Furthermore, under Section 72 of the Code, this penalty tax will not be imposed,
irrespective of age, if the amount received is one of a series of "substantially
equal" periodic payments made at least annually for the life or life expectancy
of the payee. This requirement is met when the owner elects to have
distributions made over the owner's life expectancy, or over the joint life
expectancy of the owner and beneficiary. The requirement that the amount be paid
out as one of a series of "substantially equal" periodic payments is met when
the number of units withdrawn to make each distribution is substantially the
same. Any modification, other than by reason of death or disability, of
distributions which are part of a series of substantially equal periodic
payments that occurs before the owner's age 59 1/2 or five years, will subject
the owner to the 10% penalty tax on the prior distributions. In addition to the
exceptions above, the penalty tax will not apply to withdrawals from a qualified
contract made to an employee who has terminated employment after reaching age
55.
In a Private Letter Ruling, the IRS took the position that where distributions
from a variable annuity contract were determined by amortizing the accumulated
value of the contract over the taxpayer's remaining life expectancy (such as
under the Contract's LED option), and the option could be changed or terminated
at any time, the distributions failed to qualify as part of a "series of
substantially equal payments" within the meaning of Section 72 of the Code. The
distributions, therefore, were subject to the 10% federal penalty tax. This
Private Letter Ruling may be applicable to an Owner who receives distributions
under
65
<PAGE>
the LED option prior to age 59 1/2. Subsequent Private Letter Rulings, however,
have treated LED-type withdrawal programs as effectively avoiding the 10%
penalty tax. The position of the IRS on this issue is unclear.
ASSIGNMENTS OR TRANSFERS. If the Owner transfers (assigns) the Contract to
another individual as a gift prior to the Annuity Date, the Code provides that
the Owner will incur taxable income at the time of the transfer. An exception is
provided for certain transfers between spouses. The amount of taxable income
upon such taxable transfer is equal to any investment gain in value over the
Owner's cost basis at the time of the transfer. The transfer also is subject to
federal gift tax provisions. Where the Owner and Annuitant are different
persons, the change of ownership of the Contract to the Annuitant on the Annuity
Date, as required under the Contract, is a gift and will be taxable to the Owner
as such; however, the Owner will not incur taxable income. Instead, the
Annuitant will incur taxable income upon receipt of annuity benefit payments as
discussed above.
NON-NATURAL OWNERS. As a general rule, deferred annuity contracts owned by
"non-natural persons" (e.g., a corporation) are not treated as annuity contracts
for federal tax purposes, and the investment income attributable to
contributions made after February 28, 1986 is taxed as ordinary income that is
received or accrued by the owner during the taxable year. This rule does not
apply to annuity contracts purchased with a single payment when the annuity date
is no later than a year from the issue date or to deferred annuities owned by
qualified employer plans, estates, employers with respect to a terminated
pension plan, and entities other than employers, such as a trust, holding an
annuity as an agent for a natural person. This exception, however, will not
apply in cases of any employer who is the owner of an annuity contract under a
non-qualified deferred compensation plan.
DEFERRED COMPENSATION PLANS OF STATE AND LOCAL GOVERNMENTS AND TAX-EXEMPT
ORGANIZATIONS. Under Section 457 of the Code, deferred compensation plans
established by governmental and certain other tax-exempt employers for their
employees may invest in annuity contracts. Contributions and investment earnings
are not taxable to employees until distributed; however, with respect to
payments made after February 28, 1986, a contract owned by a state or local
government or a tax-exempt organization will not be treated as an annuity under
Section 72 as well. In addition, plan assets are treated as property of the
employer and are subject to the claims of the employer's general creditors.
C. TAX WITHHOLDING
The Code requires withholding with respect to payments or distributions from
non-qualified contracts and IRAs, unless a taxpayer elects not to have
withholding. A 20% withholding requirement applies to distributions from most
other
66
<PAGE>
qualified contracts. In addition, the Code requires reporting to the IRS of the
amount of income received with respect to payment or distributions from
annuities.
The tax treatment of certain withdrawals or surrenders of the non-qualified
Contracts offered by this Prospectus will vary according to whether the amount
withdrawn or surrendered is allocable to an investment in the Contract made
before or after certain dates.
D. PROVISIONS APPLICABLE TO QUALIFIED EMPLOYER PLANS
The tax rules applicable to qualified employer plans, as defined by the Code,
are complex and vary according to the type of plan. Benefits under a qualified
plan may be subject to that plan's terms and conditions irrespective of the
terms and conditions of any annuity contract used to fund such benefits. As
such, the following is simply a general description of various types of
qualified plans that may use the Contract. Before purchasing any annuity
contract for use in funding a qualified plan, more specific information should
be obtained.
A qualified Contract may include special provisions (endorsements) changing or
restricting rights and benefits otherwise available to the Owner of a
non-qualified Contract. Individuals purchasing a qualified Contract should
carefully review any such changes or limitations which may include restrictions
to ownership, transferability, assignability, contributions and distributions.
CORPORATE AND SELF-EMPLOYED ("H.R. 10" AND "KEOGH") PENSION AND PROFIT SHARING
PLANS. Sections 401(a), 401(k) and 403(a) of the Code permit business employers
and certain associations to establish various types of tax-favored retirement
plans for employees. The Self-Employed Individuals' Tax Retirement Act of 1962,
as amended, permits self-employed individuals to establish similar plans for
themselves and their employees. Employers intending to use qualified Contracts
in connection with such plans should seek competent advice as to the suitability
of the Contract to their specific needs and as to applicable Code limitations
and tax consequences.
The Company can provide prototype plans for certain pension or profit sharing
plans for review by the plan's legal counsel. For information, ask your
financial representative.
INDIVIDUAL RETIREMENT ANNUITIES. Section 408 of the Code permits eligible
individuals to contribute to an individual retirement program known as an
Individual Retirement Annuity ("IRA"). Note: this term covers all IRAs permitted
under Section 485(b) of the Code, including Roth IRAs. IRAs are subject to
limits on the amounts that may be contributed, the persons who may be eligible,
and on the time when distributions may commence. In addition, certain
distributions from other types of retirement plans may be "rolled over," on a
tax-deferred
67
<PAGE>
basis, to an IRA. Purchasers of an IRA Contract will be provided with
supplementary information as may be required by the IRS or other appropriate
agency, and will have the right to revoke the Contract as described in this
Prospectus. See "B. Right to Revoke Individual Retirement Annuity." Eligible
employers that meet specified criteria may establish simplified employee pension
plans (SEP-IRAs) or SIMPLE IRA plans for their employees using IRAs. Employer
contributions that may be made to such plans are larger than the amounts that
may be contributed to regular IRAs, and may be deductible to the employer.
TAX-SHELTERED ANNUITIES ("TSAS"). Under the provisions of Section 403(b) of the
Code, payments made to annuity contracts purchased for employees under annuity
plans adopted by public school systems and certain organizations which are tax
exempt under Section 501(c)(3) of the Code are excludable from the gross income
of such employees to the extent that total annual payments do not exceed the
maximum contribution permitted under the Code. Purchasers of TSA Contracts
should seek competent advice as to eligibility, limitations on permissible
payments and other tax consequences associated with the Contracts.
Withdrawals or other distributions attributable to salary reduction
contributions (including earnings thereon) made to a TSA Contract after December
31, 1988, may not begin before the employee attains age 59 1/2, separates from
service, dies or becomes disabled. In the case of hardship, an Owner may
withdraw amounts contributed by salary reduction, but not the earnings on such
amounts. Even though a distribution may be permitted under these rules (e.g.,
for hardship or after separation from service), it may be subject to a 10%
penalty tax as a premature distribution, in addition to income tax.
TEXAS OPTIONAL RETIREMENT PROGRAM. Distributions under a TSA Contract issued to
participants in the Texas Optional Retirement Program may not be received except
in the case of the participant's death, retirement or termination of employment
in the Texas public institutions of higher education. These additional
restrictions are imposed under the Texas Government Code and a prior opinion of
the Texas Attorney General.
REPORTS
An Owner is sent a report semi-annually which states certain financial
information about the Portfolios. The Company also will furnish an annual report
to the Owner containing a statement of his or her account, including unit values
and other information as required by applicable law, rules and regulations.
68
<PAGE>
LOANS (QUALIFIED CONTRACTS ONLY)
Loans are available to owners of TSA Contracts (i.e., contracts issued under
Section 403(b) of the Code) and to Contracts issued to plans qualified under
Sections 401(a) and 401(k) of the Code. Loans are subject to provisions of the
Code and to applicable qualified retirement plan rules. Tax advisors and plan
fiduciaries should be consulted prior to exercising loan privileges.
Loaned amounts will be withdrawn first from Sub-Account and Fixed Account values
on a pro-rata basis until exhausted. Thereafter, any additional amounts will be
withdrawn from the Guarantee Period Accounts (pro-rata by duration and LIFO
within each duration), subject to any applicable Market Value Adjustments. The
maximum loan amount will be determined under the Company's maximum loan formula.
The minimum loan amount is $1,000. Loans will be secured by a security interest
in the Contract and the amount borrowed will be transferred to a loan asset
account within the Company's General Account, where it will accrue interest at a
specified rate below the then current loan rate. Generally, loans must be repaid
within five years or less, and repayments must be made quarterly and in
substantially equal amounts. Repayments will be allocated pro rata in accordance
with the most recent payment allocation, except that any allocations to a
Guarantee Period Account will be allocated to the Kemper Money Market Portfolio
instead.
ADDITION, DELETION OR SUBSTITUTION OF INVESTMENTS
The Company reserves the right, subject to applicable law to make additions to,
deletions from, or substitutions for the shares that are held in the
Sub-Accounts or that the Sub-Accounts may purchase. If the shares of any
Portfolio no longer are available for investment or if in the Company's judgment
further investment in any Portfolio should become inappropriate in view of the
purposes of the Variable Account or the affected Sub-Account, the Company may
redeem the shares of that Portfolio and substitute shares of another registered
open-end management company. The Company will not substitute any shares
attributable to a Contract interest in a Sub-Account without notice to the Owner
and prior approval of the SEC and state insurance authorities, to the extent
required by the 1940 Act or other applicable law. The Variable Account may, to
the extent permitted by law, purchase other securities for other contracts or
permit a conversion between contracts upon request by an Owner.
The Company also reserves the right to establish additional sub-accounts of the
Variable Account, each of which would invest in shares corresponding to a new
portfolio or in shares of another investment company having a specified
investment objective. Subject to applicable law and any required SEC approval,
the Company may, in its sole discretion, establish new sub-accounts or eliminate
one
69
<PAGE>
or more Sub-Accounts if marketing needs, tax considerations or investment
conditions warrant. Any new sub-accounts may be made available to existing
Owners on a basis to be determined by the Company.
Shares of the Portfolios also are issued to separate accounts of other insurance
companies which issue variable life contracts ("mixed funding"). Shares of the
Portfolios also are issued to other unaffiliated insurance companies ("shared
funding"). It is conceivable that in the future such mixed funding or shared
funding may be disadvantageous for variable life owners or variable annuity
owners. Although the Company, Kemper IFS and Scudder VLIF do not currently
foresee any such disadvantages to either variable life insurance owners or
variable annuity owners, the Company and the trustees of Kemper IFS and Scudder
VLIF intend to monitor events in order to identify any material conflicts
between such Owners and to determine what action, if any, should be taken in
response thereto. If the trustees were to conclude that separate portfolios
should be established for variable life and variable annuity separate accounts,
the Company will bear the attendant expenses.
If any of these substitutions or changes is made, the Company may, by
appropriate endorsement, change the Contract to reflect the substitution or
change, and will notify Owners of all such changes. If the Company deems it to
be in the best interest of Owners, and subject to any approvals that may be
required under applicable law, the Variable Account or any Sub-Accounts may be
operated as a management company under the 1940 Act, may be deregistered under
the 1940 Act if registration no longer is required, or may be combined with
other sub-accounts or other separate accounts of the Company.
The Company reserves the right, subject to compliance with applicable law and to
the provisions of the Participation Agreements, to (1) transfer assets from the
Variable Account or Sub-Account to another of the Company's variable accounts or
sub-accounts having assets of the same class, (2) to operate the Variable
Account or any Sub-Account as a management investment company under the 1940 Act
or in any other form permitted by law, (3) to deregister the Variable Account
under the 1940 Act in accordance with the requirements of the 1940 Act, (4) to
substitute the shares of any other registered investment company for the
Portfolio shares held by a Sub-Account, in the event that Portfolio shares are
unavailable for investment, or if the Company determines that further investment
in such Portfolio shares is inappropriate in view of the purpose of the Sub-
Account, (5) to change the methodology for determining the net investment
factor, and (6) to change the names of the Variable Account or of the Sub-
Accounts. In no event will the changes described be made without notice to
Owners in accordance with the 1940 Act.
70
<PAGE>
CHANGES TO COMPLY WITH LAW AND AMENDMENTS
The Company reserves the right, without the consent of Owners, to suspend sales
of the Contract as presently offered, and to make any change to provisions of
the Contract to comply with, or give Owners the benefit of, any federal or state
statute, rule or regulation, including but not limited to requirements for
annuity contracts and retirement plans under the Code and pertinent regulations
or any state statute or regulation.
VOTING RIGHTS
The Company will vote Portfolio shares held by each Sub-Account in accordance
with instructions received from Owners and, after the Annuity Date, from the
Annuitants. Each person having a voting interest in a Sub-Account will be
provided with proxy materials of the Portfolio, together with a form with which
to give voting instructions to the Company. Shares for which no timely
instructions are received will be voted in proportion to the instructions which
are received. The Company also will vote shares in a Sub-Account that it owns
and which are not attributable to the Contract in the same proportion. If the
1940 Act or any rules thereunder should be amended, or if the present
interpretation of the 1940 Act or such rules should change, and as a result the
Company determines that it is permitted to vote shares in its own right, whether
or not such shares are attributable to the Contract, the Company reserves the
right to do so.
The number of votes which an Owner or Annuitant may cast will be determined by
the Company as of the record date established by the Portfolio. During the
accumulation phase, the number of Portfolio shares attributable to each Owner
will be determined by dividing the dollar value of the Accumulation Units of the
Sub-Account credited to the Contract by the net asset value of one Portfolio
share. During the annuity payout phase, the number of Portfolio shares
attributable to each Annuitant will be determined by dividing the reserve held
in each Sub-Account for the Annuitant's variable annuity by the net asset value
of one Portfolio share. Ordinarily, the Annuitant's voting interest in the
Portfolio will decrease as the reserve for the variable annuity is depleted.
DISTRIBUTION
The Contract offered by this Prospectus may be purchased from certain
independent broker-dealers, including representatives of Allmerica Investments,
Inc. (the Principal Underwriter) which are registered under the Securities
Exchange Act of 1934 and are members of the National Association of Securities
Dealers, Inc. ("NASD").
The Company pays commissions, not to exceed 6.0% of payments, to broker-dealers
which sell the Contract. Alternative commission schedules are available
71
<PAGE>
with lower initial commission amounts based on payments, plus ongoing annual
compensation of up to 1% of Contract value. To the extent permitted by NASD
rules, promotional incentives or payments also may be provided to such broker-
dealers based on sales volumes, the assumption of wholesaling functions, or
other sales-related criteria. Additional payments may be made for other services
not directly related to the sale of the Contract, including the recruitment and
training of personnel, production of promotional literature, and similar
services.
The Company intends to recoup commissions and other sales expenses through a
combination of anticipated contingent deferred sales charges and profits from
the Company's General Account. Commissions paid on the Contract, including
additional incentives or payments, do not result in any additional charge to
Owners or to the Variable Account. Any contingent deferred sales charges
assessed on a Contract will be retained by the Company.
Owners may direct any inquiries to their financial representative or to
Allmerica Investments, Inc., 440 Lincoln Street, Worcester, MA 01653, Telephone
1-800-782-8380.
SERVICES
The Company receives fees from the investment advisers or other service
providers of certain Underlying Portfolios in return for providing certain
services to Owners. Currently, the Company receives service fees with respect to
the Scudder International Portfolio, Scudder Global Discovery Portfolio, Scudder
Capital Growth Portfolio and Scudder Growth and Income Portfolio. The Company
receives service fees at an annual rate of 0.15% per annum of the aggregate net
asset value of shares held by the Variable Account. The Company may in the
future render services for which it will receive compensation from the
investment advisers or other service providers of other Underlying Portfolios.
LEGAL MATTERS
There are no legal proceedings pending to which the Variable Account is a party.
FURTHER INFORMATION
A Registration Statement under the 1933 Act relating to this offering has been
filed with the SEC. Certain portions of the Registration Statement and
amendments have been omitted in this Prospectus pursuant to the rules and
regulations of the SEC. The omitted information may be obtained from the SEC's
principal office in Washington, DC, upon payment of the SEC's prescribed fees.
72
<PAGE>
APPENDIX A
MORE INFORMATION ABOUT THE FIXED ACCOUNT
Because of exemption and exclusionary provisions in the securities laws,
interests in the Fixed Account generally are not subject to regulation under the
provisions of the 1933 Act or the 1940 Act. Disclosures regarding the fixed
portion of the Contract and the Fixed Account may be subject to the provisions
of the 1933 Act concerning the accuracy and completeness of statements made in
this Prospectus. The disclosures in this APPENDIX A have not been reviewed by
the SEC.
The Fixed Account is part of the Company's General Account which is made up of
all of the general assets of the Company other than those allocated to separate
accounts. Allocations to the Fixed Account become part of the assets of the
Company, and are used to support insurance and annuity obligations. A portion or
all of net payments may be allocated to accumulate at a fixed rate of interest
in the Fixed Account. Such net amounts are guaranteed by the Company as to
principal and a minimum rate of interest. Under the Contract, the minimum
interest which may be credited on amounts allocated to the Fixed Account is 3%
compounded annually. Additional "Excess Interest" may or may not be credited at
the sole discretion of the Company.
If the Contract is surrendered, or if an 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 for at least six full
Contract years.
In Massachusetts, payments and transfers to the Fixed Account are subject to the
following restrictions:
If the Contract is 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 the 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. 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.
In Oregon, no payments to the Fixed Account will be permitted if the Contract is
issued after the Annuitant's 81st birthday.
A-1
<PAGE>
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 Kemper Money
Market Portfolio.
To the extent permitted by state law, the Company reserves the right, from time
to time, to credit an enhanced interest rate to certain initial and/or
subsequent payments ("eligible payments") which are deposited into the Fixed
Account under an Automatic Transfer Option (dollar cost averaging election) that
uses the Fixed Account as the source account from which automatic transfers are
then processed. The following are not considered eligible payments: amounts
transferred into the Fixed Account from the Variable Account and/or the
Guarantee Period Accounts; amounts already in the Fixed Account at the time an
eligible payment is deposited and amounts transferred to the Contract from
another annuity contract issued by the Company.
An eligible payment must be automatically transferred out of the Fixed Account
over a continuous six month period. The enhanced rate will apply during the six
month period to any portion of the eligible payment remaining in the Fixed
Account. Amounts automatically transferred out of the Fixed Account will no
longer earn the enhanced rate of interest and, as of the date of transfer, will
be subject to the variable investment performance of the sub-account(s)
transferred into. If the automatic transfer option is terminated prior to the
end of the six month period, the enhanced rate will no longer apply. The Company
reserves the right to extend the period of time that the enhanced rate will
apply.
A-2
<PAGE>
APPENDIX B
SURRENDER CHARGES AND THE MARKET VALUE ADJUSTMENT
PART 1: SURRENDER CHARGES
FULL SURRENDER
Assume a Payment of $50,000 is made on the issue date and no additional payments
are made. Assume there are no withdrawals and that the Withdrawal Without
Surrender Charge amount is equal to 15% of the current Accumulated Value. The
table below presents examples of the surrender charge resulting from a full
surrender of the Owner's Contract, based on hypothetical Accumulated Values.
<TABLE>
<CAPTION>
HYPOTHETICAL FREE SURRENDER
ACCOUNT ACCUMULATED WITHDRAWAL CHARGE SURRENDER
YEAR VALUE AMOUNT PERCENTAGE CHARGE
- --------- ------------- ------------- --------------- ------------
<S> <C> <C> <C> <C>
1 $ 54,000.00 $ 8,100.00 7% $ 3,213.00
2 58,320.00 8,748.00 6% 2,974.32
3 62,985.60 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 issue date and no additional payments
are made. Assume that the Withdrawal Without Surrender Charge amount is equal to
the greater of 15% of the current Accumulated Value and there are withdrawals as
detailed below. The table below presents examples of the surrender charge
resulting from withdrawals from the Owner's Contract, based on hypothetical
Accumulated Values.
<TABLE>
<CAPTION>
HYPOTHETICAL FREE SURRENDER
ACCOUNT ACCUMULATED WITHDRAWAL CHARGE SURRENDER
YEAR VALUE WITHDRAWAL AMOUNT PERCENTAGE CHARGE
- --------- ------------- ------------- ------------- ------------- -----------
<S> <C> <C> <C> <C> <C>
1 $ 54,000.00 $ 0.00 $ 8,100.00 7% $ 0.00
2 58,320.00 0.00 8,748.00 6% 0.00
3 62,985.60 0.00 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>
B-1
<PAGE>
PART 2: MARKET VALUE ADJUSTMENT
The market value factor is: [(1+i)/(1+j)](n/365)-1
The following examples assume:
1. The payment was allocated to a ten-year Guarantee Period Account with a
Guaranteed Interest Rate of 8%.
2. The date of surrender is seven years (2,555 days) from the expiration
date.
3. The value of the Guarantee Period Account is equal to $62,985.60 at the
end of three years.
4. No transfers or withdrawals affecting this Guarantee Period Account have
been made.
5. Surrender charges, if any, are calculated in the same manner as shown in
the examples in Part 1.
NEGATIVE MARKET VALUE ADJUSTMENT (UNCAPPED)
Assume that on the date of surrender, the current rate (j) is 10.00% or 0.10
The market value factor = [(1+i)/(1+j)](356/n)-1
= [(1+.08)/(1+.10)](2555/365)-1
= (.98182)(7)-1
= -.12054
The market value adjustment= the market value factor multiplied by the
withdrawal
= -.12054 X $62,985.60
= -$7,592.11
POSITIVE MARKET VALUE ADJUSTMENT (UNCAPPED)
Assume that on the date of surrender, the current rate (j) is 7.00% or 0.07
The market value factor = [(1+i)/(1+j)](n/365)-1
= [(1+.08)/(1+.07)](2555/365)-1
= (1.0093)(7)-1
= .06694
The market value adjustment = the market value factor multiplied by the
withdrawal
= .06694 X $62,985.60
= $4,216.26
B-2
<PAGE>
NEGATIVE MARKET VALUE ADJUSTMENT (CAPPED)
Assume that on the date of surrender, the current rate (j) is 11.00% or 0.11
The market value factor = [(1+i)/(1-j)](n/365)-1
= [(1+.08)/(1+.11)](2555/365)-1
= (.97297)(7)-1
= -.17454
The market value adjustment = Minimum of the market value factor multiplied by
the withdrawal or the negative of the excess interest earned over 3%
= Minimum of (-.17454 X $62,985.60 or -$8,349.25)
= Minimum of (-$10,993.51 or -$8,349.25)
= -$8,349.25
POSITIVE MARKET VALUE ADJUSTMENT (CAPPED)
Assume that on the date of surrender, the current rate (j) is 6.00% or 0.06
The market value factor = [(1+i)/(1+j)](n/35)-1
= [(1+.08)/(1+.06)](2555/365)-1
= (1.01887)(7)-1
= .13981
The market value adjustment = Minimum of the market value factor multiplied by
the withdrawal or the excess interest earned over
3%
The market value factor = Minimum of (.13981 X $62,985.60 or $8,349.25)
= Minimum of ($8,806.02 or $8,349.25)
= $8,349.25
B-3
<PAGE>
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 issue date 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
ACCUMULATED MARKET VALUE DEATH DEATH HYPOTHETICAL
YEAR VALUE ADJUSTMENT BENEFIT (A) BENEFIT (B) DEATH 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).
C-1
<PAGE>
DEATH BENEFIT ASSUMING WITHDRAWALS
Assume a payment of $50,000 is made on the issue date 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
ACCUMULATED MARKET VALUE DEATH DEATH HYPOTHETICAL
YEAR VALUE WITHDRAWAL ADJUSTMENT BENEFIT (A) BENEFIT (B) DEATH 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 3,603.18 3,883.00
4 3,494.70 0.00 500.00 3,994.70 3,603.18 3,994.70
5 3,844.17 0.00 0.00 3,844.17 3,603.18 3,844.17
6 4,228.59 0.00 500.00 4,728.59 3,603.18 4,728.59
7 4,651.45 0.00 0.00 4,651.45 3,603.18 4,651.45
8 5,116.59 0.00 500.00 5,616.59 3,603.18 5,616.59
9 5,628.25 0.00 0.00 5,628.25 3,603.18 5,628.25
10 691.07 5,000.00 0.00 691.07 437.54 691.07
</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).
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 issue date 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
ACCUMULATED MARKET VALUE DEATH DEATH DEATH HYPOTHETICAL
YEAR VALUE ADJUSTMENT BENEFIT (A) BENEFIT (B) BENEFIT (C) DEATH 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>
C-2
<PAGE>
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 issue date 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
ACCUMULATED MARKET VALUE DEATH
YEAR VALUE WITHDRAWAL ADJUSTMENT BENEFIT (A)
- --------- ------------- ----------- ------------- --------------
<S> <C> <C> <C> <C>
1 $ 53,000.00 $ 0.00 $ 0.00 $ 53,000.00
2 53,530.00 0.00 500.00 54,030.00
3 3,883.00 50,000.00 0.00 3,883.00
4 3,494.70 0.00 500.00 3,994.70
5 3,844.17 0.00 0.00 3,844.17
6 4,228.59 0.00 500.00 4,728.59
7 4,651.45 0.00 0.00 4,651.45
8 5,116.59 0.00 500.00 5,616.59
9 5,628.25 0.00 0.00 5,628.25
10 691.07 5,000.00 0.00 691.07
</TABLE>
<TABLE>
<CAPTION>
DEATH DEATH HYPOTHETICAL
YEAR BENEFIT (B) BENEFIT (C) DEATH BENEFIT
- --------- ----------- ------------- --------------
<S> <C> <C> <C> <C>
1 $52,500.00 $ 50,000.00 $ 53,000.00
2 55,125.00 53,000.00 55,125.00
3 4,171.13 3,972.50 4,171.13
4 4,379.68 4,171.13 4,379.68
5 4,598.67 4,379.68 4,598.67
6 4,828.60 4,598.67 4,828.60
7 5,070.03 4,828.60 5,070.03
8 5,323.53 5,070.03 5,616.59
9 5,589.71 5,616.59 5,628.25
10 712.70 683.44 712.70
</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.
C-3
<PAGE>
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).
PART 3: DEATH OF THE OWNER WHO IS NOT THE ANNUITANT (WITH OR WITHOUT ENHANCED
DEATH BENEFIT)
Assume a payment of $50,000 is made on the issue date 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
ACCUMULATED MARKET VALUE HYPOTHETICAL
YEAR VALUE ADJUSTMENT DEATH 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.
C-4
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
STATEMENT OF ADDITIONAL INFORMATION
OF
FLEXIBLE PAYMENT DEFERRED VARIABLE AND FIXED ANNUITY CONTRACTS FUNDED THROUGH
SUB-ACCOUNTS OF
SEPARATE ACCOUNT KGC
INVESTING IN SHARES OF INVESTORS FUND SERIES AND
SCUDDER VARIABLE LIFE INVESTMENT FUND
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS. IT SHOULD BE READ
IN CONJUNCTION WITH THE PROSPECTUS FOR THE ABOVE SUB-ACCOUNTS OF SEPARATE
ACCOUNT KGC DATED MAY 1, 1998 ("THE PROSPECTUS"). THE PROSPECTUS MAY BE
OBTAINED FROM ANNUITY CLIENT SERVICES, ALLMERICA FINANCIAL LIFE INSURANCE AND
ANNUITY COMPANY, 440 LINCOLN STREET, WORCESTER, MASSACHUSETTS 01653, TELEPHONE
1-800-782-8380.
DATED MAY 1, 1998
1
<PAGE>
TABLE OF CONTENTS
GENERAL INFORMATION AND HISTORY. . . . . . . . . . . . . . . . . . . . . . . 2
TAXATION OF THE CONTRACT, THE VARIABLE ACCOUNT AND THE
COMPANY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
SERVICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
UNDERWRITERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
ANNUITY BENEFIT PAYMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . 4
EXCHANGE OFFER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
PERFORMANCE INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . . . . 7
TAX-DEFERRED ACCUMULATION. . . . . . . . . . . . . . . . . . . . . . . . . .10
FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . F-1
GENERAL INFORMATION AND HISTORY
Separate Account KGC (the "Variable Account") is a separate investment account
of Allmerica Financial Life Insurance and Annuity Company (the "Company")
authorized by vote of its 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, 1997, the Company had over $9.4 billion in
assets and over $26.6 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 and adopted its present name on
October 16, 1995. First Allmerica is the fifth oldest life insurance company in
America. As of December 31, 1997, First Allmerica and its subsidiaries
(including the Company) had over $16.3 billion in combined assets and over $43.8
billion in life insurance in force.
Currently, 24 Sub-Accounts of the Variable Account are available under the
Contract. Each Sub-Account invests in a corresponding Kemper investment
portfolio of Investors Fund Series ("Kemper IFS") or a corresponding
portfolio of Scudder Variable Life Investment Fund ("Scudder VLIF"),
open-end, registered management investment companies. Twenty different
portfolios of Kemper IFS are available under the Contract: the Kemper-Dreman
Financial Services Portfolio, Kemper Small Cap Growth Portfolio, Kemper Small
Cap Value Portfolio, Kemper-Dreman
2
<PAGE>
High Return Equity Portfolio, Kemper International Portfolio, Kemper
International Growth and Income Portfolio, Kemper Global Blue Chip Portfolio,
Kemper Growth Portfolio, Kemper Contrarian Value Portfolio, Kemper Blue Chip
Portfolio, Kemper Value + Growth Portfolio, Kemper Horizon 20+ Portfolio, Kemper
Total Return Portfolio, Kemper Horizon 10+ Portfolio, Kemper High Yield
Portfolio, Kemper Horizon 5 Portfolio, Kemper Global Income Portfolio, Kemper
Investment Grade Bond Portfolio, Kemper Government Securities Portfolio, and
Kemper Money Market Portfolio. Four portfolios of Scudder VLIF are available
under the Contract: the Scudder International Portfolio, Scudder Global
Discovery Portfolio, Scudder Capital Growth Portfolio, and Scudder Growth and
Income Portfolio (together, the "Underlying Portfolios"). Each Underlying
Portfolio available under the Contract has its own investment objectives and
certain attendant risks.
TAXATION OF THE CONTRACT, THE VARIABLE
ACCOUNT AND THE COMPANY
The Company currently imposes no charge for taxes payable in connection with the
Contract, other than for state and local premium taxes and similar assessments
when applicable. The Company reserves the right to impose a charge for any
other taxes that may become payable in the future in connection with the
Contract or the Variable Account.
The Variable Account is considered to be a part of and taxed with the operations
of the Company. The Company is taxed as a life insurance company under
subchapter L of the Internal Revenue Code (the "Code"), and files a consolidated
tax return with its parent and affiliated companies.
The Company reserves the right to make a charge for any effect which the income,
assets or existence of the Contract or the Variable Account may have upon its
tax. Such charge for taxes, if any, will be assessed on a fair and equitable
basis in order to preserve equity among classes of Contract Owners ("Owners").
The Variable Account presently is not subject to tax.
SERVICES
CUSTODIAN OF SECURITIES. The Company serves as custodian of the assets of the
Variable Account. Underlying Portfolio shares owned by the Sub-Accounts are
held on an open account basis. A Sub-Account's ownership of Underlying
Portfolio shares is reflected on the records of the Underlying Portfolio, and is
not represented by any transferable stock certificates.
EXPERTS. The financial statements of the Company as of December 31, 1997 and
1996 and for each of the two years in the period ended December 31, 1997, and
the financial statements of the Separate Account KGC -- Kemper Gateway Custom
of the Company as of December 31, 1997 and for the periods indicated,
included in this Statement of Additional Information constituting part of
this Registration Statement, have been so included in reliance on the reports
of Price Waterhouse LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
The financial statements of the Company included herein should be considered
only as bearing on the ability of the Company to meet its obligations under
the Contract.
UNDERWRITERS
Allmerica Investments, Inc. ("Allmerica Investments"), a registered
broker-dealer under the Securities Exchange Act of 1934 and a member of the
National Association of Securities Dealers, Inc. ("NASD"), serves as principal
underwriter and general distributor for the Contract pursuant to a contract with
Allmerica
3
<PAGE>
Investments, the Company and the Variable Account. Allmerica Investments
distributes the Contract on a best-efforts basis. Allmerica Investments, Inc.,
440 Lincoln Street, Worcester, Massachusetts 01653, was organized in 1969 as a
wholly owned subsidiary of First Allmerica, and is an indirectly wholly owned
subsidiary of First Allmerica.
The Contract offered by this Prospectus is offered continuously, and may be
purchased from certain independent broker-dealers which are NASD members and
whose representatives are authorized by applicable law to sell variable annuity
contracts.
All persons selling the Contract are required to be licensed by their respective
state insurance authorities for the sale of variable annuity contracts. The
Company pays commissions, not to exceed 6.0% of purchase payments, to entities
which sell the Contract. To the extent permitted by NASD rules, promotional
incentives or payments also may be provided to such entities based on sales
volumes, the assumption of wholesaling functions or other sales-related
criteria. Additional payments may be made for other services not directly
related to the sale of the Contract, including the recruitment and training of
personnel, production of promotional literature and similar services. A
Promotional Allowance of 1.0% of total payments is paid to Kemper Distributors,
Inc. for administrative and support services with respect to the distribution of
the contracts; however, Kemper Distributors, Inc. may direct the Company to pay
a portion of said allowance to broker-dealers who provide support services
directly.
Commissions paid by the Company do not result in any charge to Owners or to the
Variable Account in addition to the charges described under "CHARGES AND
DEDUCTIONS" in the Prospectus. The Company intends to recoup the commission and
other sales expense through a combination of anticipated surrender, withdrawal
and/or annuitization charges, profits from the Company's general account,
including the investment earnings on amounts allocated to accumulate on a fixed
basis in excess of the interest credited on fixed accumulations by the Company,
and the profit, if any, from the mortality and expense risk charge.
The aggregate amounts of commissions paid to Zurich Kemper, Inc. and to
independent broker-dealers, respectively, for sales of contracts funded by
Separate Account KGC were $26,926.56 and $2,956,208.72 in 1997. Sales of these
contracts began in 1997.
ANNUITY BENEFIT PAYMENTS
The method by which the Accumulated Value under the Contract is determined is
described in detail under "Computation of Values" in the Prospectus.
ILLUSTRATION OF ACCUMULATION UNIT CALCULATION USING HYPOTHETICAL EXAMPLE. The
Accumulation Unit calculation for a daily Valuation Period may be illustrated by
the following hypothetical example: Assume that the assets of a Sub-Account at
the beginning of a one-day Valuation Period were $5,000,000; that the value of
an Accumulation Unit on the previous date was $1.135000; and that during the
Valuation Period, the investment income and net realized and unrealized capital
gains exceed net realized and unrealized capital losses by $1,675. The
Accumulation Unit Value at the end of the current Valuation Period would be
calculated as follows:
<TABLE>
<S> <C>
(1) Accumulation Unit Value -- Previous Valuation Period. . . . . . . . . . . . . . . . .$ 1.135000
(2) Value of Assets -- Beginning of Valuation Period. . . . . . . . . . . . . . . . . . .$5,000,000
(3) Excess of Investment Income and Net Gains Over Capital Losses . . . . . . . . . . . . . .$1,675
(4) Adjusted Gross Investment Rate for the Valuation Period (3) divided by (2). . . . . . .0.000335
4
<PAGE>
(5) Annual Charge (one-day equivalent of 1.10% per annum) . . . . . . . . . . . . . . . . 0.000030
(6) Net Investment Rate (4) - (5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .0.000305
(7) Net Investment Factor 1.000000 + (6). . . . . . . . . . . . . . . . . . . . . . . . . .1.000305
(8) Accumulation Unit Value -- Current Period (1) x (7) . . . . . . . . . . . . . . . . . $1.135346
</TABLE>
Conversely, if unrealized capital losses and charges for expenses and taxes
exceeded investment income and net realized capital gains by $1,675, the
Accumulation Unit Value at the end of the Valuation Period would have been
$1.134586.
The method for determining the amount of annuity benefit payments is described
in detail under "Determination of the First and Subsequent Annuity Benefit
Payments" in the Prospectus.
ILLUSTRATION OF VARIABLE ANNUITY BENEFIT PAYMENT CALCULATION USING HYPOTHETICAL
EXAMPLE. The determination of the Annuity Unit value and the variable annuity
benefit payment may be illustrated by the following hypothetical example:
Assume an Annuitant has 40,000 Accumulation Units in a Separate Account, and
that the value of an Accumulation Unit on the Valuation Date used to determine
the amount of the first variable annuity benefit payment is $1.120000.
Therefore, the Accumulation Value of the Contract is $44,800 (40,000 x
$1.120000). Assume also that the Owner elects an option for which the first
monthly payment is $6.57 per $1,000 of Accumulated Value applied. Assuming no
premium tax or contingent deferred sales charge, the first monthly payment would
be 44.800 multiplied by $6.57, or $294.34.
Next, assume that the Annuity Unit value for the assumed rate of 3.5% per annum,
for the Valuation Date as of which the first payment was calculated, was
$1.100000. Annuity Unit values will not be the same as Accumulation Unit Values
because the former reflect the 3.5% assumed interest rate used in the annuity
rate calculations. When the Annuity Unit value of $1.100000 is divided into the
first monthly payment, the number of Annuity Units represented by that payment
is determined to be 267.5818. The value of this same number of Annuity Units
will be paid in each subsequent month under most options. Assume further that
the net investment factor for the Valuation Period applicable to the next
annuity benefit payment is 1.000190. Multiplying this factor by .999906 (the
one-day adjustment factor for the assumed interest rate of 3.5% per annum)
produces a factor of 1.000096. This then is multiplied by the Annuity Unit
value on the immediately preceding Valuation Date (assumed here to be
$1.105000). The result is an Annuity Unit value of $1.105106 for the current
monthly payment. The current monthly payment then is determined by multiplying
the number of Annuity Units by the current Annuity Unit value, or 267.5818 times
$1.105106, which produces a current monthly payment of $295.71.
METHOD FOR DETERMINING COMMUTED VALUE ON VARIABLE ANNUITY PERIOD CERTAIN OPTIONS
AND ILLUSTRATION USING HYPOTHETICAL EXAMPLE. The Contract offers both
commutable and non-commutable period certain annuity options. A commutable
option gives the Annuitant the right to exchange any remaining payments for a
lump sum payment based on the commuted value. The commuted value is the present
value of remaining payments calculated at 3.5% interest. The determination of
the commuted value may be illustrated by the following hypothetical example.
Assume a commutable period certain option is elected. The number of Annuity
Units upon which each payment is based would be calculated using the Surrender
Value less any premium tax rather than the Accumulated Value. Assume this
results in 250.0000 Annuity Units. Assume the commuted value is requested with
60 monthly payments remaining and a current Annuity Unit Value of $1.200000.
Based on these assumptions, the dollar amount of remaining payments would be
$300 a month for 60 months. The present value at 3.5% of all remaining payments
would be $16.560.72.
5
<PAGE>
EXCHANGE OFFER
A. VARIABLE ANNUITY CONTRACT EXCHANGE OFFER
The Company will permit Owners of certain variable annuity contracts, described
below, to exchange their contracts at net asset value for the variable annuity
Contract described in the Prospectus, which is issued on Form No. A3025-96 or a
state variation thereof ("new Contract"). The Company reserves the right to
suspend this exchange offer at any time.
This offer applies to the exchange of the Company's Elective Payment Variable
Annuity contracts issued on Forms A3012-79 and A3013-79 ("Elective Payment
Exchanged Contract," all such contracts having numbers with a "JQ" or "JN"
prefix), and Single Payment Variable Annuity contracts issued on Forms A3014-79
and A3015-79 ("Single Payment Exchanged Contract," all such contracts having
numbers with a "KQ" or "KN" prefix). These contracts are referred to
collectively as the "Exchanged Contract." To effect an exchange, the Company
should receive (1) a completed application for the new Contract, (2) the
contract being exchanged, and (3) a signed Letter of Awareness.
CONTINGENT DEFERRED SALES CHARGE COMPUTATION. No surrender charge otherwise
applicable to the Exchanged Contract will be assessed as a result of the
exchange. Instead, the contingent deferred sales charge under the new Contract
will be computed as if the payments that had been made to the Exchanged Contract
were made to the new Contract as of the date of issue of the Exchanged Contract.
Any additional payments to the new Contract after the exchange will be subject
to the contingent deferred sales charge computation outlined in the new Contract
and the Prospectus; i.e., the charge will be computed based on the number of
years that the additional payment (or portion of that payment) that is being
withdrawn has been credited to the new Contract.
SUMMARY OF DIFFERENCES BETWEEN THE EXCHANGED CONTRACT AND THE NEW CONTRACT. The
new Contract and the Exchanged Contract differ substantially as summarized
below. There may be additional differences important to a person considering an
exchange, and the Prospectuses for the new Contract and the Exchanged Contract
should be reviewed carefully before the exchange request is submitted to the
Company.
CONTINGENT DEFERRED SALES CHARGE. The contingent deferred sales charge under
the new Contract, as described in the Prospectus, imposes higher charge
percentages against the excess amount redeemed than the Single Payment Exchanged
Contract. In addition, if an Elective Payment Exchanged Contract was issued
more than nine years before the date of an exchange under this offer, additional
payments to the Exchanged Contract would not be subject to a surrender charge.
New payments to the new Contract may be subject to a charge if withdrawn prior
to the surrender charge period described in the Prospectus.
CONTRACT FEE. Under the new Contract, the Company deducts a $35 fee on each
Contract anniversary and at surrender if the Accumulated Value is less than
$50,000. This fee is waived if the new Contract is part of a 401(k) plan. No
Contract fees are charged on the Single Payment Exchanged Contract. A $9
semi-annual fee is charged on the Elective Payment Exchanged Contract if the
Accumulated Value is $10,000 or less.
VARIABLE ACCOUNT ADMINISTRATIVE EXPENSE CHARGE. Under the new Contract, the
Company assesses each Sub-Account a daily administrative expense charge at an
annual rate of 0.15% of the average daily net assets of the Sub-Account. No
administrative expense charge based on a percentage of Sub-Account assets is
imposed under the Exchanged Contract.
TRANSFER CHARGE. No charge for transfers is imposed under the Exchanged
Contract. Currently, no transfer charge is imposed under the new Contract;
however, the Company reserves the right to assess a charge, not to exceed $25,
for each transfer after the twelfth in any Contract year.
6
<PAGE>
DEATH BENEFIT. The Exchanged Contract offers a death benefit that is guaranteed
to be the greater of a Contract's Accumulated Value or gross payments made (less
withdrawals). At the time an exchange is processed, the Accumulated Value of
the Exchanged Contract becomes the "payment" for the new Contract. Therefore,
prior purchase payments made under the Exchanged Contract (if higher than the
Exchanged Contract's Accumulated Value) no longer are a basis for determining
the death benefit under the new Contract. Consequently, whether the initial
minimum death benefit under the new Contract is greater than, equal to, or less
than, the death benefit of the Exchanged Contract depends on whether the
Accumulated Value transferred to the new Contract is greater than, equal to, or
less than, the gross payments under the Exchanged Contract. In addition, under
the Exchanged Contract, the amount of any prior withdrawals is subtracted from
the value of the death benefit. Under the new Contract, where there is a
reduction in the death benefit amount due to a prior withdrawal, the value of
the death benefit is reduced in the same proportion that the new Contract's
Accumulated Value was reduced on the date of the withdrawal.
ANNUITY TABLES. The Exchanged Contract contains higher guaranteed annuity
rates.
INVESTMENTS. Accumulated Values and payments under the new Contract may be
allocated to significantly more investment options than are available under the
Exchanged Contract.
B. FIXED ANNUITY EXCHANGE OFFER.
This exchange offer also applies to all fixed annuity contracts issued by the
Company. A fixed annuity contract to which this exchange offer applies may be
exchanged at net asset value for the Contract described in this Prospectus,
subject to the same provisions for effecting the exchange and for applying the
new Contract's contingent deferred sales charge as described above for variable
annuity contracts. This Prospectus should be read carefully before making such
exchange. Unlike a fixed annuity, the new Contract's value is not guaranteed,
and will vary depending on the investment performance of the Underlying
Portfolios to which it is allocated. The new Contract has a different charge
structure than a fixed annuity contract, which includes not only a contingent
deferred sales charge that may vary from that of the class of contracts to which
the exchanged fixed contract belongs, but also Contract fees, mortality and
expense risk charges (for the Company's assumption of certain mortality and
expense risks), administrative expense charges, transfer charges (for transfers
permitted among Sub-Accounts and the Fixed Account), and expenses incurred by
the Underlying Portfolios. Additionally, the interest rates offered under the
Fixed Account of the new Contract and the Annuity Tables for determining minimum
annuity benefit payments may be different from those offered under the exchanged
fixed contract.
C. EXERCISE OF "FREE-LOOK PROVISION" AFTER ANY EXCHANGE
Persons who, under the terms of this exchange offer, exchange their contract for
the new Contract and subsequently revoke the new Contract within the time
permitted, as described in the sections of this Prospectus captioned "Right to
Revoke Individual Retirement Annuity" and "Right to Revoke All Other Contracts,"
will have their exchanged contract automatically reinstated as of the date of
revocation. The refunded amount will be applied as the new current Accumulated
Value under the reinstated contract, which may be more or less than it would
have been had no exchange and reinstatement occurred. The refunded amount will
be allocated initially among the Fixed Account and Sub-Accounts of the
reinstated contract in the same proportion that the value in the Fixed Account
and the value in each Sub-Account bore to the transferred Accumulated Value on
the date of the exchange of the contract for the new Contract. For purposes of
calculating any contingent deferred sales charge under the reinstated contract,
the reinstated contract will be deemed to have been issued and to have received
past purchase payments as if there had been no exchange.
PERFORMANCE INFORMATION
Performance information for a Sub-Account may be compared, in reports and
promotional literature, to certain
7
<PAGE>
indices described in the Prospectus under "PERFORMANCE INFORMATION." In
addition, the Company may provide advertising, sales literature, periodic
publications or other material information on various topics of interest to
Owners and prospective Owners. These topics may include the relationship
between sectors of the economy and the economy as a whole and its effect on
various securities markets, investment strategies and techniques (such as
value investing, market timing, dollar cost averaging, asset allocation,
constant ratio transfer and account rebalancing), the advantages and
disadvantages of investing in tax-deferred and taxable investments, customer
profiles and hypothetical purchase and investment scenarios, financial
management tax and retirement planning, investment alternatives to
certificates of deposit and other financial instruments, including
comparisons between the Contract, and the characteristics of and market for
such financial instruments. Total return data and supplemental total return
information may be advertised based on a period of time that an Underlying
Portfolio and an underlying Sub-Account have been in existence, even if
longer than the period of time that the Contract has been offered. The
results for any period prior to a Contract being offered will be calculated
as if the Contract had been offered during that period, with all charges
assumed to be those applicable to the Contract.
TOTAL RETURN
"Total Return" refers to the total of the income generated by an investment in a
Sub-Account and of the changes of value of the principal invested (due to
realized and unrealized capital gains or losses) for a specified period, reduced
by the Sub-Account's asset charge and any applicable contingent deferred sales
charge which would be assessed upon complete withdrawal of the investment.
Total Return figures are calculated by standardized methods prescribed by rules
of the Securities and Exchange Commission (the "SEC"). The quotations are
computed by finding the average annual compounded rates of return over the
specified periods that would equate the initial amount invested to the ending
redeemable values, according to the following formula:
(n)
P(1 + T) = ERV
Where: P = a hypothetical initial payment to the Variable Account
of $1,000
T = average annual total return
n = number of years
ERV = the ending redeemable value of the $1,000 payment at
the end of the specified period
The calculation of Total Return includes the annual charges against the assets
of the Sub-Account. This charge is 1.10% on an annual basis. The calculation
of ending redeemable value assumes (1) the Contract was issued at the beginning
of the period, and (2) a complete surrender of the Contract at the end of the
period. The deduction of the contingent deferred sales charge, if any,
applicable at the end of the period is included in the calculation, according to
the following schedule:
<TABLE>
<CAPTION>
YEARS FROM DATE OF CHARGE AS PERCENTAGE OF
PAYMENT TO DATE OF NEW PURCHASE PAYMENTS
WITHDRAWAL WITHDRAWN*
---------- ----------
<S> <C>
0-1 7%
2 6%
3 5%
4 4%
5 3%
8
<PAGE>
6 2%
Thereafter 0%
</TABLE>
* Subject to the maximum limit described in the Prospectus.
No contingent deferred sales charge is deducted upon expiration of the periods
specified above. In each calendar year, a certain amount (withdrawal without
surrender charge amount, as described in the Prospectus) is not subject to the
contingent deferred sales charge.
The calculations of Total Return reflect the deduction of the $35 annual
Contract fee.
SUPPLEMENTAL TOTAL RETURN INFORMATION
The Supplemental Total Return Information in this section refers to the total of
the income generated by an investment in a Sub-Account and of the changes of
value of the principal invested (due to realized and unrealized capital gains or
losses) for a specified period reduced by the Sub-Account's asset charges. It
is assumed, however, that the investment is NOT withdrawn at the end of each
period.
The quotations of Supplemental Total Return are computed by finding the average
annual compounded rates of return over the specified periods that would equate
the initial amount invested to the ending values, according to the following
formula:
(n)
P(1 + T) = EV
Where: P = a hypothetical initial payment to the Variable Account
of $1,000
T = average annual total return
n = number of years
EV = the ending value of the $1,000 payment at the end of
the specified period
The calculation of Supplemental Total Return reflects the 1.10% annual charge
against the assets of the Sub-Accounts. The ending value assumes that the
contract is NOT withdrawn at the end of the specified period, and therefore
there is no adjustment for the contingent deferred sales charge that would be
applicable if the Contract was surrendered at the end of the period.
The calculations of Supplemental Total Return include the deduction of the $35
annual Contract fee.
YIELD AND EFFECTIVE YIELD - THE MONEY MARKET SUB-ACCOUNT
Set forth below is yield and effective yield information for the Money Market
Sub-Account for the seven-day period ended December 31, 1997:
Yield 4.42%
Effective Yield 4.52%
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-
9
<PAGE>
day base period by (365/7), with the resulting yield carried to the nearest
hundredth of one percent.
The Money Market Sub-Account computes effective yield by compounding the
unannualized base period return by using the formula:
(365/7)
Effective Yield = [(base period return + 1) ] - 1
The calculations of yield and effective yield reflect the $35 annual Contract
fee.
<TABLE>
<CAPTION>
TAX-DEFERRED ACCUMULATION
NON-QUALIFIED CONVENTIONAL
ANNUITY CONTRACT SAVINGS PLAN
AFTER-TAX CONTRIBUTIONS
AND TAX-DEFERRED EARNINGS
--------------------------
--------------------------
AFTER-TAX
TAXABLE LUMP CONTRIBUTIONS
NO WITHDRAWALS SUM WITHDRAWAL AND TAXABLE EARNINGS
-------------- -------------- --------------------
<S> <C> <C> <C>
10 Years $ 107,946 $ 86,448 $ 81,693
20 Years 233,048 165,137 133,476
30 Years 503,133 335,021 218,082
</TABLE>
This chart compares the accumulation of a $50,000 initial investment into a
non-qualified annuity contract with a conventional savings plan. Contributions
to the non-qualified annuity contract and the conventional savings plan are made
after tax. Only the gain in the non-qualified annuity contract will be subject
to income tax in a taxable lump sum withdrawal. The chart assumes a 37.1%
federal marginal tax rate and an 8% annual return. The 37.1% federal marginal
tax is based on a marginal tax rate of 36%, representative of the target market,
adjusted to reflect a decrease of $3 of itemized deductions for each $100 of
income over $117,950. Tax rates are subject to change as is the tax-deferred
treatment of the Contract. Income on non-qualified annuity contracts is taxed
as ordinary income upon withdrawal. A 10% tax penalty may apply to early
withdrawals. See "FEDERAL TAX CONSIDERATIONS" 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 sales charge; and $35 annual Contract fee. The tax-deferred
accumulation would be reduced if these charges were reflected. No implication
is intended by the use of these assumptions that the return shown is guaranteed
in any way or that the return shown represents an average or expected rate of
return over the period of the Contract. (IMPORTANT -- THIS IS NOT AN
ILLUSTRATION OF YIELD OR RETURN.)
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 and for its Separate Account KGC.
10
<PAGE>
ALLMERICA FINANCIAL
LIFE INSURANCE AND
ANNUITY COMPANY
FINANCIAL STATEMENTS
DECEMBER 31, 1997
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholder of
Allmerica Financial Life Insurance and Annuity Company
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, of shareholder's equity, and of cash
flows present fairly, in all material respects, the financial position of
Allmerica Financial Life Insurance and Annuity Company at December 31, 1997 and
1996, and the results of their operations and their cash flows for the years
then ended in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ Price Waterhouse LLP
Price Waterhouse LLP
Boston, Massachusetts
February 3, 1998
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1997 1996
----------------------------------------------- --------- ---------
<S> <C> <C>
REVENUES
Premiums..................................... $ 22.8 $ 32.7
Universal life and investment product
policy fees.............................. 212.2 176.2
Net investment income...................... 164.2 171.7
Net realized investment gains (losses)..... 2.9 (3.6 )
Other income............................... 1.4 0.9
--------- ---------
Total revenues......................... 403.5 377.9
--------- ---------
BENEFITS, LOSSES AND EXPENSES
Policy benefits, claims, losses and loss
adjustment expenses...................... 187.8 192.6
Policy acquisition expenses................ 2.8 49.9
Loss from cession of disability income
business................................. 53.9 --
Other operating expenses................... 101.3 86.6
--------- ---------
Total benefits, losses and expenses.... 345.8 329.1
--------- ---------
Income before federal income taxes............. 57.7 48.8
--------- ---------
FEDERAL INCOME TAX EXPENSE (BENEFIT)
Current.................................... 13.9 26.9
Deferred................................... 7.1 (9.8 )
--------- ---------
Total federal income tax expense....... 21.0 17.1
--------- ---------
Net income..................................... $ 36.7 $ 31.7
--------- ---------
--------- ---------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-1
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
(IN MILLIONS) 1997 1996
-------------------------------------------------------- ---------- ----------
<S> <C> <C>
ASSETS
Investments:
Fixed maturities at fair value (amortized cost of
$1,340.5 and $1,660.2)............................ $1,402.5 $1,698.0
Equity securities at fair value (cost of $34.4 and
$33.0)............................................ 54.0 41.5
Mortgage loans...................................... 228.2 221.6
Real estate......................................... 12.0 26.1
Policy loans........................................ 140.1 131.7
Other long term investments......................... 20.3 7.9
---------- ----------
Total investments............................... 1,857.1 2,126.8
---------- ----------
Cash and cash equivalents............................. 31.1 18.8
Accrued investment income............................. 34.2 37.7
Deferred policy acquisition costs..................... 765.3 632.7
Reinsurance receivables on paid and unpaid losses,
benefits and unearned premiums...................... 251.1 81.5
Other assets.......................................... 10.7 8.2
Separate account assets............................... 7,567.3 4,524.0
---------- ----------
Total assets.................................... $10,516.8 $7,429.7
---------- ----------
---------- ----------
LIABILITIES
Policy liabilities and accruals:
Future policy benefits.............................. $2,097.3 $2,171.3
Outstanding claims, losses and loss adjustment
expenses.......................................... 18.5 16.1
Unearned premiums................................... 1.8 2.7
Contractholder deposit funds and other policy
liabilities....................................... 32.5 32.8
---------- ----------
Total policy liabilities and accruals........... 2,150.1 2,222.9
---------- ----------
Expenses and taxes payable............................ 77.6 77.3
Reinsurance premiums payable.......................... 4.9 --
Deferred federal income taxes......................... 75.9 60.2
Separate account liabilities.......................... 7,567.3 4,523.6
---------- ----------
Total liabilities............................... 9,875.8 6,884.0
---------- ----------
Commitments and contingencies (Note 13)
SHAREHOLDER'S EQUITY
Common stock, $1,000 par value, 10,000 shares
authorized, 2,521 and 2,518 shares issued and
outstanding......................................... 2.5 2.5
Additional paid in capital............................ 386.9 346.3
Unrealized appreciation on investments, net........... 38.5 20.5
Retained earnings..................................... 213.1 176.4
---------- ----------
Total shareholder's equity...................... 641.0 545.7
---------- ----------
Total liabilities and shareholder's equity...... $10,516.8 $7,429.7
---------- ----------
---------- ----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-2
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1997 1996
----------------------------------------------- --------- ---------
<S> <C> <C>
COMMON STOCK
Balance at beginning of period............. $ 2.5 $ 2.5
Issued during year......................... -- --
--------- ---------
Balance at end of period................... 2.5 2.5
--------- ---------
ADDITIONAL PAID IN CAPITAL
Balance at beginning of period............. 346.3 324.3
Contribution from Parent................... 40.6 22.0
--------- ---------
Balance at end of period................... 386.9 346.3
--------- ---------
RETAINED EARNINGS
Balance at beginning of period............. 176.4 144.7
Net income................................. 36.7 31.7
--------- ---------
Balance at end of period................... 213.1 176.4
--------- ---------
NET UNREALIZED APPRECIATION ON INVESTMENTS
Balance at beginning of period............. 20.5 23.8
Net appreciation (depreciation) on
available for sale securities............ 27.0 (5.1 )
(Provision) benefit for deferred federal
income taxes............................. (9.0 ) 1.8
--------- ---------
Balance at end of period................... 38.5 20.5
--------- ---------
Total shareholder's equity............. $641.0 $545.7
--------- ---------
--------- ---------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-3
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1997 1996
-------------------------------------------- ---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.............................. $ 36.7 $ 31.7
Adjustments to reconcile net income to
net cash used in operating activities:
Net realized gains.................. (2.9 ) 3.6
Net amortization and depreciation... -- 3.5
Loss from cession of disability
income business................... 53.9 --
Deferred federal income taxes....... 7.1 (9.8 )
Payment related to cession of
disability income business........ (207.0 ) --
Change in deferred acquisition
costs............................. (181.3 ) (66.8 )
Change in premiums and notes
receivable, net of reinsurance
payable........................... 3.9 (0.2 )
Change in accrued investment
income............................ 3.5 1.2
Change in policy liabilities and
accruals, net..................... (72.4 ) (39.9 )
Change in reinsurance receivable.... 22.1 (1.5 )
Change in expenses and taxes
payable........................... 0.2 32.3
Separate account activity, net...... 0.4 10.5
Other, net.......................... (7.5 ) (0.2 )
---------- ----------
Net used in operating
activities.................... (343.3 ) (35.6 )
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from disposals and maturities
of available-for-sale fixed
maturities............................ 909.7 809.4
Proceeds from disposals of equity
securities............................ 2.4 1.5
Proceeds from disposals of other
investments........................... 23.7 17.4
Proceeds from mortgages matured or
collected............................. 62.9 34.0
Purchase of available-for-sale fixed
maturities............................ (579.7 ) (795.8 )
Purchase of equity securities........... (3.2 ) (13.2 )
Purchase of other investments........... (79.4 ) (36.2 )
Other investing activities, net......... -- (2.0 )
---------- ----------
Net cash provided by investing
activities........................ 336.4 15.1
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of stock and
capital paid in....................... 19.2 22.0
---------- ----------
Net cash provided by financing
activities........................ 19.2 22.0
---------- ----------
Net change in cash and cash equivalents..... 12.3 1.5
Cash and cash equivalents, beginning of
period..................................... 18.8 17.3
---------- ----------
Cash and cash equivalents, end of period.... $ 31.1 $ 18.8
---------- ----------
---------- ----------
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid........................... $ -- $ 3.4
Income taxes paid....................... $ 5.4 $ 16.5
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-4
<PAGE>
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
Allmerica Financial Life Insurance and Annuity Company ("AFLIAC" or the
"Company") is organized as a stock life insurance company, and is a wholly-owned
subsidiary of SMA Financial Corporation ("SMAFCO"), which is wholly owned by
First Allmerica Financial Life Insurance Company ("FAFLIC"). FAFLIC is a
wholly-owned subsidiary of Allmerica Financial Corporation ("AFC").
The consolidated financial statements of AFLIAC include the accounts of Somerset
Square, Inc., a wholly-owned non-insurance company and its results of operations
for the month of December, 1997. Somerset Square, Inc. was transferred from
SMAFCO effective November 30, 1997. (See Significant Transactions.)
The Statutory stockholder's equity of the Company is being maintained at a
minimum level of 5% of general account assets by FAFLIC in accordance with a
policy established by vote of FAFLIC's Board of Directors.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amount of revenues and expenses during the reporting period. Actual
results could differ from those estimates. Certain reclassifications have been
made to the 1996 financial statements in order to conform to the 1997
presentation.
B. VALUATION OF INVESTMENTS
In accordance with the provisions of Statement of Financial Accounting Standards
No. 115 ("Statement No. 115"), "ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND
EQUITY SECURITIES", the Company is required to classify its investments into one
of three categories: held-to-maturity, available-for-sale or trading. The
Company determines the appropriate classification of debt securities at the time
of purchase and reevaluates such designation as of each balance sheet date.
Mortgage loans on real estate are stated at unpaid principal balances, net of
unamortized discounts and reserves. Reserves on mortgage loans are based on
losses expected by 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 establishing reserves, management considers, among other things, the
estimated fair value of the underlying collateral.
Fixed maturities and mortgage loans that are delinquent are placed on
non-accrual status, and thereafter interest income is recognized only when cash
payments are received.
Policy loans are carried principally at unpaid principal balances.
During 1997, the Company committed to a plan to dispose of all real estate
assets by the end of 1998. As a result of this decision real estate held by the
Company and real estate joint ventures were written down to the estimated fair
value less cost to sell. Depreciation is not recorded on these assets while they
are held for disposal.
Realized investment gains and losses, other than those related to separate
accounts for which the Company does not bear the investment risk, are reported
as a component of revenues based upon specific identification of the investment
assets sold. When an other-than-temporary impairment of the value of a specific
investment
F-5
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
or a group of investments is determined, a realized investment loss is recorded.
Changes in the valuation allowance for mortgage loans and real estate are
included in realized investment gains or losses.
C. FINANCIAL INSTRUMENTS
In the normal course of business, the Company enters into transactions involving
various types of financial instruments, including debt, investments such as
fixed maturities, mortgage loans and equity securities, and investment and loan
commitments. These instruments involve credit risk and also may be subject to
risk of loss due to interest rate fluctuation. The Company evaluates and
monitors each financial instrument individually and, when appropriate, obtains
collateral or other security to minimize losses.
D. CASH AND CASH EQUIVALENTS
Cash and cash equivalents includes cash on hand, amounts due from banks and
highly liquid debt instruments purchased with an original maturity of three
months or less.
E. DEFERRED POLICY ACQUISITION COSTS
Acquisition costs consist of commissions, underwriting costs and other costs,
which vary with, and are primarily related to, the production of revenues.
Acquisition costs related to universal life products, variable annuities and
contractholder deposit funds are deferred and amortized in proportion to total
estimated gross profits from investment yields, mortality, surrender charges and
expense margins over the expected life of the contracts. This amortization is
reviewed annually and adjusted retrospectively when the Company revises its
estimate of current or future gross profits to be realized from this group of
products, including realized and unrealized gains and losses from investments.
Acquisition costs related to fixed annuities and other life insurance products
are deferred and amortized, generally in proportion to the ratio of annual
revenue to the estimated total revenues over the contract periods based upon the
same assumptions used in estimating the liability for future policy benefits.
Deferred acquisition costs for each product are reviewed to determine if they
are recoverable from future income, including investment income. If such costs
are determined to be unrecoverable, they are expensed at the time of
determination. Although realization of deferred policy acquisition costs is not
assured, management believes it is more likely than not that all of these costs
will be realized. The amount of deferred policy acquisition costs considered
realizable, however, could be reduced in the near term if the estimates of gross
profits or total revenues discussed above are reduced. The amount of
amortization of deferred policy acquisition costs could be revised in the near
term if any of the estimates discussed above are revised.
F. SEPARATE ACCOUNTS
Separate account assets and liabilities represent segregated funds administered
and invested by the Company for the benefit of certain pension, variable annuity
and variable life insurance contractholders. Assets consist principally of
bonds, common stocks, mutual funds, and short-term obligations at market value.
The investment income, gains, and losses of these accounts generally accrue to
the contractholders and, therefore, are not included in the Company's net
income. Appreciation and depreciation of the Company's interest in the separate
accounts, including undistributed net investment income, is reflected in
shareholder's equity or net investment income.
G. POLICY LIABILITIES AND ACCRUALS
Future policy benefits are liabilities for life, health and annuity products.
Such liabilities are established in amounts adequate to meet the estimated
future obligations of policies in force. The liabilities associated with
traditional life insurance products are computed using the net level premium
method for individual life and annuity policies, and are based upon estimates as
to future investment yield, mortality and withdrawals that include provisions
for adverse deviation. Future policy benefits for individual life insurance and
annuity policies are computed using interest rates ranging from 2 1/2% to 6% for
life insurance and 2% to 9 1/2% for
F-6
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
annuities. Mortality, morbidity and withdrawal assumptions for all policies are
based on the Company's own experience and industry standards. Liabilities for
universal life include deposits received from customers and investment earnings
on their fund balances, less administrative charges. Universal life fund
balances are also assessed mortality and surrender charges. Individual health
benefit liabilities for active lives are estimated using the net level premium
method, and assumptions as to future morbidity, withdrawals and interest which
provide a margin for adverse deviation. Benefit liabilities for disabled lives
are estimated using the present value of benefits method and experience
assumptions as to claim terminations, expenses and interest.
Liabilities for outstanding claims, losses and loss adjustment expenses are
estimates of payments to be made for reported claims and estimates of claims
incurred but not reported. These liabilities are determined using case basis
evaluations and statistical analyses and represent estimates of the ultimate
cost of all claims incurred but not paid. These estimates are continually
reviewed and adjusted as necessary; such adjustments are reflected in current
operations.
Premiums for individual accident and health insurance are reported as earned on
a pro-rata basis over the contract period.
The unexpired portion of these premiums is recorded as unearned premiums.
Contractholder deposit funds and other policy liabilities include
investment-related products and consist of deposits received from customers and
investment earnings on their fund balances.
All policy liabilities and accruals are based on the various estimates discussed
above. Although the adequacy of these amounts cannot be assured, management
believes that it is more likely than not that policy liabilities and accruals
will be sufficient to meet future obligations of policies in force. The amount
of liabilities and accruals, however, could be revised in the near term if the
estimates discussed above are revised.
H. PREMIUM AND FEE REVENUE AND RELATED EXPENSES
Premiums for individual life and health insurance and individual annuity
products, excluding universal life and investment-related products, are
considered revenue when due. Individual accident and health insurance premiums
are recognized as revenue over the related contract periods. Benefits, losses
and related expenses are matched with premiums, resulting in their recognition
over the lives of the contracts. This matching is accomplished through the
provision for future benefits, estimated and unpaid losses and amortization of
deferred policy acquisition costs. Revenues for investment-related products
consist of net investment income and contract charges assessed against the fund
values. Related benefit expenses primarily consist of net investment income
credited to the fund values after deduction for investment and risk charges.
Revenues for universal life and group variable universal life products consist
of net investment income, and mortality, administration and surrender charges
assessed against the fund values. Related benefit expenses include universal
life benefits in excess of fund values and net investment income credited to
universal life fund values. Certain policy charges that represent compensation
for services to be provided in future periods are deferred and amortized over
the period benefited using the same assumptions used to amortize capitalized
acquisition costs.
I. FEDERAL INCOME TAXES
AFC, its life insurance subsidiaries, FAFLIC and AFLIAC, and its non-life
insurance domestic subsidiaries file a life-nonlife consolidated United States
Federal income tax return. Entities included within the consolidated group are
segregated into either a life insurance or non-life insurance company subgroup.
The consolidation of these subgroups is subject to certain statutory
restrictions on the percentage of eligible non-life insurance company taxable
operating losses that can be applied to offset life insurance company taxable
income. Allmerica P&C and its subsidiaries will be included in the AFC
consolidated return as part of the
F-7
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
non-life insurance company subgroup for the period July 17, 1997 through
December 31, 1997. For the period January 1, 1997 through July 16, 1997,
Allmerica P&C and its subsidiaries will file a separate consolidated United
States Federal income tax return.
The Board of Directors has delegated to AFC management, the development and
maintenance of appropriate Federal Income Tax allocation policies and
procedures, which are subject to written agreement between the companies. The
Federal income tax for all subsidiaries in the consolidated return of AFC is
calculated on a separate return basis. Any current tax liability is paid to AFC.
Tax benefits resulting from taxable operating losses or credits of AFC's
subsidiaries are not reimbursed to the subsidiary until such losses or credits
can be utilized by the subsidiary on a separate return basis.
Deferred income taxes are generally recognized when assets and liabilities have
different values for financial statement and tax reporting purposes, and for
other temporary taxable and deductible differences as defined by Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS No.
109). These differences result primarily from loss reserves, policy acquisition
expenses, and unrealized appreciation/depreciation on investments.
J. NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued Statement No. 131, DISCLOSURES ABOUT SEGMENTS OF
AN ENTERPRISE AND RELATED INFORMATION. This statement establishes standards for
the way that public enterprises report information about operating segments in
annual financial statements and requires that selected information about those
operating segments be reported in interim financial statements. This statement
supersedes Statement No. 14, FINANCIAL REPORTING FOR SEGMENTS OF A BUSINESS
ENTERPRISE. Statement No. 131 requires that all public enterprises report
financial and descriptive information about their reportable operating segments.
Operating segments are defined as components of an enterprise about which
separate financial information is available that is evaluated regularly by the
chief operating decision maker in deciding how to allocate resources and in
assessing performance. This statement is effective for fiscal years beginning
after December 15, 1997. The Company anticipates no impact from the adoption of
Statement No. 131.
In June 1997, the FASB also issued Statement No. 130, REPORTING COMPREHENSIVE
INCOME, which established standards for the reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements. All items that are required to be recognized under
accounting standards as components of comprehensive income are to be reported in
a financial statement that is displayed with the same prominence as other
financial statements. This statement stipulates that comprehensive income
reflect the change in equity of an enterprise during a period from transactions
and other events and circumstances from non-owner sources. This statement is
effective for fiscal years beginning after December 15, 1997. The Company
anticipates that the adoption of Statement No. 130 will result primarily in
reporting the changes in unrealized gains and losses on investments in debt and
equity securities in comprehensive income.
2. SIGNIFICANT TRANSACTIONS
On April 14, 1997, the Company entered into an agreement in principle to
transfer the Company's individual disability income under a 100% coinsurance
agreement to Metropolitan Life Insurance Company. The coinsurance agreement
became effective October 1, 1997. The transaction has resulted in the
recognition of a $53.9 million pre-tax loss in the first quarter of 1997.
During the 4th quarter of 1997, SMAFCO contributed $40.6 million of additional
paid in capital to the Company. The nature of the contribution was $19.2 million
in cash and $21.4 million in other assets including Somerset Square, Inc.
F-8
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Effective January 1, 1998, the Company entered into an agreement with
Reinsurance Group of America, Inc. to reinsure the mortality risk on the
universal life and variable universal life blocks of business. Management
believes that this agreement will not have a material effect on the results of
operations or financial position of the Company.
3. INVESTMENTS
A. SUMMARY OF INVESTMENTS
The Company accounts for its investments, all of which are classified as
available-for-sale, in accordance with the provisions of SFAS No. 115.
The amortized cost and fair value of available-for-sale fixed maturities and
equity securities were as follows:
<TABLE>
<CAPTION>
1997
--------------------------------------------
GROSS GROSS
DECEMBER 31, AMORTIZED UNREALIZED UNREALIZED FAIR
(IN MILLIONS) COST (1) GAINS LOSSES VALUE
- ---------------------------------------- ---------- -------- --------- --------
<S> <C> <C> <C> <C>
U.S. Treasury securities and U.S.
government and agency securities....... $ 6.3 $ .5 $-- $ 6.8
States and political subdivisions....... 2.8 .2 -- 3.0
Foreign governments..................... 50.1 2.0 -- 52.1
Corporate fixed maturities.............. 1,147.5 58.7 3.3 1,202.9
Mortgage-backed securities.............. 133.8 5.2 1.3 137.7
---------- -------- --------- --------
Total fixed maturities
available-for-sale..................... $1,340.5 $66.6 $ 4.6 $1,402.5
---------- -------- --------- --------
Equity securities....................... $ 34.4 $19.9 $ 0.3 $ 54.0
---------- -------- --------- --------
---------- -------- --------- --------
1996
--------------------------------------------
U.S. Treasury securities and U.S.
government and agency securities....... $ 15.7 $ 0.5 $ 0.2 $ 16.0
States and political subdivisions....... 8.9 1.6 -- 10.5
Foreign governments..................... 53.2 2.9 -- 56.1
Corporate fixed maturities.............. 1,437.2 38.6 6.1 1,469.7
Mortgage-backed securities.............. 145.2 2.2 1.7 145.7
---------- -------- --------- --------
Total fixed maturities
available-for-sale..................... $1,660.2 $45.8 $ 8.0 $1,698.0
---------- -------- --------- --------
Equity securities....................... $ 33.0 $10.2 $ 1.7 $ 41.5
---------- -------- --------- --------
---------- -------- --------- --------
</TABLE>
(1) Amortized cost for fixed maturities and cost for equity securities.
In connection with AFLIAC's voluntary withdrawal of its license in New York,
AFLIAC agreed with the New York Department of Insurance to maintain, through a
custodial account in New York, a security deposit, the market value of which
will at all times equal 102% of all outstanding liabilities of AFLIAC for New
York policyholders, claimants and creditors. At December 31, 1997, the amortized
cost and market value of these assets on deposit were $276.8 million and $291.7
million, respectively. At December 31, 1996, the amortized cost and market value
of these assets on deposit were $284.9 million and $292.2 million, respectively.
In addition, fixed maturities, excluding those securities on deposit in New
York, with an amortized cost of $4.2 million were on deposit with various state
and governmental authorities at December 31, 1997 and 1996.
There were no contractual fixed maturity investment commitments at December 31,
1997 and 1996, respectively.
F-9
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The amortized cost and fair value by maturity periods for fixed maturities are
shown below. Actual maturities may differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without call
or prepayment penalties, or the Company may have the right to put or sell the
obligations back to the issuers. Mortgage backed securities are included in the
category representing their ultimate maturity.
<TABLE>
<CAPTION>
1997
--------------------
DECEMBER 31, AMORTIZED FAIR
(IN MILLIONS) COST VALUE
- ------------------------------------------------------------ --------- ---------
<S> <C> <C>
Due in one year or less..................................... $ 63.0 $ 63.5
Due after one year through five years....................... 328.8 343.9
Due after five years through ten years...................... 649.5 679.9
Due after ten years......................................... 299.2 315.2
--------- ---------
Total....................................................... $1,340.5 $1,402.5
--------- ---------
--------- ---------
</TABLE>
The proceeds from voluntary sales of available-for-sale securities and the gross
realized gains and gross realized losses on those sales were as follows:
<TABLE>
<CAPTION>
PROCEEDS
FROM
FOR THE YEARS ENDED DECEMBER 31, VOLUNTARY GROSS GROSS
(IN MILLIONS) SALES GAINS LOSSES
- ------------------------------------------------------------ ---------- ------ ------
<S> <C> <C> <C>
1997
Fixed maturities............................................ $702.9 $ 11.4 $ 5.0
Equity securities........................................... $ 1.3 $ 0.5 $ --
1996
Fixed maturities............................................ $496.6 $ 4.3 $ 8.3
Equity securities........................................... $ 1.5 $ 0.4 $ 0.1
</TABLE>
Unrealized gains and losses on available-for-sale and other securities, are
summarized as follows:
<TABLE>
<CAPTION>
EQUITY
FOR THE YEAR ENDED DECEMBER 31, FIXED SECURITIES
(IN MILLIONS) MATURITIES AND OTHER (1) TOTAL
- ------------------------------------------------------------ ---------- ------------- ------
<S> <C> <C> <C>
1997
Net appreciation, beginning of year......................... $ 12.7 $ 7.8 $ 20.5
Net appreciation on available-for-sale securities........... 24.3 12.5 36.8
Net depreciation from the effect on deferred policy
acquisition costs and on policy liabilities................ (9.8) -- (9.8)
Provision for deferred federal income taxes................. (5.1) (3.9) (9.0)
---------- ----- ------
9.4 8.6 18.0
---------- ----- ------
Net appreciation, end of year............................... $ 22.1 $ 16.4 $ 38.5
---------- ----- ------
---------- ----- ------
</TABLE>
(1) Includes net appreciation on other investments of $11.1 million in 1997, and
$2.2 million in 1996.
F-10
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1996 FIXED SECURITIES
(IN MILLIONS) MATURITIES AND OTHER (1) TOTAL
- ------------------------------------------------------------ ---------- ------------- ------
<S> <C> <C> <C>
Net appreciation, beginning of year......................... $ 20.4 $ 3.4 $ 23.8
Net (depreciation) appreciation on available-for-sale
securities................................................. (20.8) 6.7 (14.1)
Net appreciation from the effect on deferred policy
acquisition costs and on policy liabilities................ 9.0 -- 9.0
Benefit (provision) for deferred federal income taxes....... 4.1 (2.3) 1.8
---------- ----- ------
(7.7) 4.4 (3.3)
---------- ----- ------
Net appreciation, end of year............................... $ 12.7 $ 7.8 $ 20.5
---------- ----- ------
---------- ----- ------
</TABLE>
(1) Includes net appreciation on other investments of $11.1 million in 1997, and
$2.2 million in 1996.
B. MORTGAGE LOANS AND REAL ESTATE
AFLIAC's mortgage loans and real estate are diversified by property type and
location. Real estate investments have been obtained primarily through
foreclosure. Mortgage loans are collateralized by the related properties and
generally are no more than 75% of the property's value at the time the original
loan is made.
The carrying values of mortgage loans and real estate investments net of
applicable reserves were as follows:
<TABLE>
<CAPTION>
DECEMBER 31
(IN MILLIONS) 1997 1996
- ------------------------------------------------------------ ---------- -------------
<S> <C> <C>
Mortgage loans.............................................. $228.2 $221.6
Real estate:
Held for sale............................................. 12.0 26.1
Held for production of income............................. -- --
---------- ------
Total real estate....................................... $ 12.0 $ 26.1
---------- ------
Total mortgage loans and real estate........................ $240.2 $247.7
---------- ------
---------- ------
</TABLE>
Reserves for mortgage loans were $9.4 million and $9.5 million at December 31,
1997 and 1996, respectively.
During 1997, the Company committed to a plan to dispose of all real estate
assets by the end of 1998. As a result, real estate assets with a carrying
amount of $15.7 million were written down to the estimated fair value less cost
to sell of $12.0 million, and a net realized investment loss of $3.7 million was
recognized. Depreciation is not recorded on these assets while they are held for
disposal.
There were no non-cash investing activities, including real estate acquired
through foreclosure of mortgage loans, in 1997. During 1996, non-cash investing
activities included real estate acquired through foreclosure of mortgage loans,
which had a fair value of $0.9 million.
At December 31, 1997, contractual commitments to extend credit under commercial
mortgage loan agreements amounted to approximately $18.7 million. These
commitments generally expire within one year.
F-11
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Mortgage loans and real estate investments comprised the following property
types and geographic regions:
<TABLE>
<CAPTION>
DECEMBER 31,
(IN MILLIONS) 1997 1996
- ------------------------------------------------------------ ---------- -------------
<S> <C> <C>
Property type:
Office building........................................... $101.7 $ 86.1
Residential............................................... 19.3 39.0
Retail.................................................... 42.2 55.9
Industrial/warehouse...................................... 61.9 52.6
Other..................................................... 24.5 25.3
Valuation allowances...................................... (9.4) (11.2)
---------- ------
Total....................................................... $240.2 $247.7
---------- ------
---------- ------
Geographic region:
South Atlantic............................................ $ 68.7 $ 72.9
Pacific................................................... 56.6 37.0
East North Central........................................ 61.4 58.3
Middle Atlantic........................................... 29.8 35.0
West South Central........................................ 6.9 5.7
New England............................................... 12.4 21.9
Other..................................................... 13.8 28.1
Valuation allowances...................................... (9.4) (11.2)
---------- ------
Total....................................................... $240.2 $247.7
---------- ------
---------- ------
</TABLE>
At December 31, 1997, scheduled mortgage loan maturities were as follows: 1998
- -- $52.0 million; 1999 -- $17.1 million; 2000 -- $46.3 million; 2001 -- $7.0
million; 2002 -- $11.7 million; and $94.1 million thereafter. Actual maturities
could differ from contractual maturities because borrowers may have the right to
prepay obligations with or without prepayment penalties and loans may be
refinanced. During 1997, the Company did not refinance any mortgage loans based
on terms which differed from those granted to new borrowers.
C. INVESTMENT VALUATION ALLOWANCES
Investment valuation allowances which have been deducted in arriving at
investment carrying values as presented in the balance sheet and changes thereto
are shown below.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, BALANCE AT BALANCE AT
(IN MILLIONS) JANUARY 1 ADDITIONS DEDUCTIONS DECEMBER 31
- ------------------------------------------------------------ ---------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
1997
Mortgage loans.............................................. $ 9.5 $ 1.1 $ 1.2 $ 9.4
Real estate................................................. 1.7 3.7 5.4 --
----- --- --- -----
Total................................................... $ 11.2 $ 4.8 $ 6.6 $ 9.4
----- --- --- -----
----- --- --- -----
1996
Mortgage loans.............................................. $ 12.5 $ 4.5 $ 7.5 $ 9.5
Real estate................................................. 2.1 -- 0.4 1.7
----- --- --- -----
Total................................................... $ 14.6 $ 4.5 $ 7.9 $ 11.2
----- --- --- -----
----- --- --- -----
</TABLE>
F-12
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Deductions of $5.4 million to the investment valuation allowance related to real
estate in 1997 primarily reflect writedowns to the estimated fair value less
cost to sell pursuant to the aforementioned 1997 plan of disposal.
The carrying value of impaired loans was $20.6 million and $21.5 million, with
related reserves of $7.1 million and $7.3 million as of December 31, 1997 and
1996, respectively. All impaired loans were reserved as of December 31, 1997 and
1996.
The average carrying value of impaired loans was $19.8 million and $26.3
million, with related interest income while such loans were impaired of $2.2
million and $3.4 million as of December 31, 1997 and 1996, respectively.
D. OTHER
At December 31, 1997, AFLIAC had no concentration of investments in a single
investee exceeding 10% of shareholder's equity.
4. INVESTMENT INCOME AND GAINS AND LOSSES
A. NET INVESTMENT INCOME
The components of net investment income were as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31
(IN MILLIONS) 1997 1996
- ------------------------------------------------------------ ---------- -------------
<S> <C> <C>
Fixed maturities............................................ $130.0 $137.2
Mortgage loans.............................................. 20.4 22.0
Equity securities........................................... 1.3 0.7
Policy loans................................................ 10.8 10.2
Real estate................................................. 3.9 6.2
Other long-term investments................................. 1.0 0.8
Short-term investments...................................... 1.4 1.4
---------- ------
Gross investment income..................................... 168.8 178.5
Less investment expenses.................................... (4.6) (6.8)
---------- ------
Net investment income....................................... $164.2 $171.7
---------- ------
---------- ------
</TABLE>
At December 31, 1997, mortgage loans on non-accrual status were $2.8 million,
which were all restructured loans. There were no fixed maturities on non-accrual
status at December 31, 1997. The effect of non-accruals, compared with amounts
that would have been recognized in accordance with the original terms of the
investment, had no impact in 1997, and reduced net income by $0.1 million in
1996.
The payment terms of mortgage loans may from time to time be restructured or
modified. The investment in restructured mortgage loans, based on amortized
cost, amounted to $21.1 million and $25.4 million at December 31, 1997 and 1996,
respectively. Interest income on restructured mortgage loans that would have
been recorded in accordance with the original terms of such loans amounted to
$1.9 million and $3.6 million in 1997 and 1996, respectively. Actual interest
income on these loans included in net investment income aggregated $2.1 million
and $2.2 million in 1997 and 1996, respectively.
There were no fixed maturities or mortgage loans which were non-income producing
for the twelve months ended December 31, 1997.
F-13
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
B. REALIZED INVESTMENT GAINS AND LOSSES
Realized gains (losses) on investments were as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31
(IN MILLIONS) 1997 1996
- ------------------------------------------------------------ ---------- -------------
<S> <C> <C>
Fixed maturities............................................ $ 3.0 $ (3.3)
Mortgage loans.............................................. (1.1) (3.2)
Equity securities........................................... 0.5 0.3
Real estate................................................. (1.5) 2.5
Other....................................................... 2.0 0.1
---------- ------
Net realized investment losses.............................. $ 2.9 $ (3.6)
---------- ------
---------- ------
</TABLE>
5. FAIR VALUE DISCLOSURES OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments", requires
disclosure of fair value information about certain financial instruments
(insurance contracts, real estate, goodwill and taxes are excluded) for which it
is practicable to estimate such values, whether or not these instruments are
included in the balance sheet. The fair values presented for certain financial
instruments are estimates which, in many cases, may differ significantly from
the amounts which could be realized upon immediate liquidation. In cases where
market prices are not available, estimates of fair value are based on discounted
cash flow analyses which utilize current interest rates for similar financial
instruments which have comparable terms and credit quality.
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments:
CASH AND CASH EQUIVALENTS
For these short-term investments, the carrying amount approximates fair value.
FIXED MATURITIES
Fair values are based on quoted market prices, if available. If a quoted market
price is not available, fair values are estimated using independent pricing
sources or internally developed pricing models using discounted cash flow
analyses.
EQUITY SECURITIES
Fair values are based on quoted market prices, if available. If a quoted market
price is not available, fair values are estimated using independent pricing
sources or internally developed pricing models.
MORTGAGE LOANS
Fair values are estimated by discounting the future contractual cash flows using
the current rates at which similar loans would be made to borrowers with similar
credit ratings. The fair value of below investment grade mortgage loans are
limited to the lesser of the present value of the cash flows or book value.
F-14
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
REINSURANCE RECEIVABLES
The carrying amount of the reinsurance receivable for outstanding claims, losses
and loss adjustment expenses reported in the balance sheet approximates fair
value.
POLICY LOANS
The carrying amount reported in the balance sheet approximates fair value since
policy loans have no defined maturity dates and are inseparable from the
insurance contracts.
INVESTMENT CONTRACTS (WITHOUT MORTALITY FEATURES)
Fair values for the Company's liabilities under investment type contracts are
estimated based on current surrender values.
The estimated fair values of the financial instruments were as follows:
<TABLE>
<CAPTION>
1997 1996
-------------------------- -----------------------------
DECEMBER 31, CARRYING FAIR CARRYING FAIR
(IN MILLIONS) VALUE VALUE VALUE VALUE
- ------------------------------------------------------------ ---------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
FINANCIAL ASSETS
Cash and cash equivalents................................. $ 31.1 $ 31.1 $ 18.8 $ 18.8
Fixed maturities.......................................... 1,402.5 1,402.5 1,698.0 1,698.0
Equity securities......................................... 54.0 54.0 41.5 41.5
Mortgage loans............................................ 228.2 239.8 221.6 229.3
Policy loans.............................................. 140.1 140.1 131.7 131.7
Reinsurance receivables................................... 251.1 251.1 72.5 72.5
---------- ------------- ------------- -------------
2$,107.0 2$,118.6 2$,184.1 2$,191.8
---------- ------------- ------------- -------------
---------- ------------- ------------- -------------
FINANCIAL LIABILITIES
Individual annuity contracts.............................. 876.0 850.6 910.2 885.9
Supplemental contracts without life contingencies......... 15.3 15.3 15.9 15.9
Other individual contract deposit funds................... 0.3 0.3 0.3 0.3
---------- ------------- ------------- -------------
$891.6 $866.2 $926.4 $902.1
---------- ------------- ------------- -------------
---------- ------------- ------------- -------------
</TABLE>
6. DEBT
In 1997 the Company incurred no debt. During 1996, the Company utilized
repurchase agreements to finance certain investments.
Interest expense was $3.4 million in 1996, relating to the repurchase
agreements, and is recorded in other operating expenses.
F-15
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. FEDERAL INCOME TAXES
Provisions for federal income taxes have been calculated in accordance with the
provisions of SFAS No. 109. A summary of the federal income tax expense
(benefit) in the statement of income is shown below:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
(IN MILLIONS) 1997 1996
- ------------------------------------------------------------ ---------- ------
<S> <C> <C>
Federal income tax expense (benefit)
Current................................................... $ 13.9 $ 26.9
Deferred.................................................. 7.1 (9.8)
----- -----
Total....................................................... $ 21.0 $ 17.1
----- -----
----- -----
</TABLE>
The provision for federal income taxes does not materially differ from the
amount of federal income tax determined by applying the appropriate U.S.
statutory income tax rate to income before federal income taxes. The deferred
tax (assets) liabilities are comprised of the following at December 31, 1997:
<TABLE>
<CAPTION>
DECEMBER 31,
(IN MILLIONS) 1997 1996
- ------------------------------------------------------------ ---------- -------------
<S> <C> <C>
Deferred tax (assets) liabilitie
Loss reserves............................................. $(175.8) $(137.0)
Deferred acquisition costs................................ 226.4 186.9
Investments, net.......................................... 27.0 14.2
Bad debt reserve.......................................... (2.0) (1.1)
Other, net................................................ 0.3 (2.8)
---------- -------------
Deferred tax liability, net............................... $ 75.9 $ 60.2
---------- -------------
---------- -------------
</TABLE>
Gross deferred income tax liabilities totaled $253.7 million and $201.1 million
at December 31, 1997 and 1996. Gross deferred income tax assets totaled $177.8
million and $140.9 at December 31, 1997 and 1996.
Management believes, based on the Company's recent earnings history and its
future expectations, that the Company's taxable income in future years will be
sufficient to realize all deferred tax assets. In determining the adequacy of
future income, management considered the future reversal of its existing
temporary differences and available tax planning strategies that could be
implemented, if necessary.
The Company's federal income tax returns are routinely audited by the IRS, and
provisions are routinely made in the financial statements in anticipation of the
results of these audits. The IRS has examined the life-nonlife consolidated
group's federal income tax returns through 1991. The Company is currently
considering its response to certain adjustments proposed by the IRS with respect
to the life-nonlife consolidated group's federal income tax returns for 1989,
1990, and 1991. In management's opinion, adequate tax liabilities have been
established for all years. However, the amount of these tax liabilities could be
revised in the near term if estimates of the Company's ultimate liability are
revised.
8. RELATED PARTY TRANSACTIONS
The Company has no employees of its own, but has agreements under which FAFLIC
provides management, space and other services, including accounting, electronic
data processing, human resources, legal and other staff functions. Charges for
these services are based on full cost including all direct and indirect overhead
costs, and amounted to $124.1 million and $112.4 million in 1997 and 1996. The
net amounts payable to FAFLIC and affiliates for accrued expenses and various
other liabilities and receivables were $15.0 million and $13.3 million at
December 31, 1997 and 1996.
F-16
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. 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 policyholders' surplus as of the preceding December 31
or (ii) the individual company's statutory net gain from operations for the
preceding calendar year (if such insurer is a life company) or its net income
(not including realized capital gains) for the preceding calendar year (if such
insurer is not a life company). Any dividends to be paid by an insurer, whether
or not in excess of the aforementioned threshold, from a source other than
statutory earned surplus would also require the prior approval of the Delaware
Commissioner of Insurance.
At January 1, 1998, AFLIAC could pay dividends of $33.9 million to FAFLIC
without prior approval.
10. REINSURANCE
In the normal course of business, the Company seeks to reduce the loss that may
arise from events that cause unfavorable underwriting results by reinsuring
certain levels of risk in various areas of exposure with other insurance
enterprises or reinsurers. Reinsurance transactions are accounted for in
accordance with the provisions of SFAS No. 113.
Amounts recoverable from reinsurers are estimated in a manner consistent with
the claim liability associated with the reinsured policy. Reinsurance contracts
do not relieve the Company from its obligations to policyholders. Failure of
reinsurers to honor their obligations could result in losses to the Company;
consequently, allowances are established for amounts deemed uncollectible. The
Company determines the appropriate amount of reinsurance based on evaluation of
the risks accepted and analyses prepared by consultants and reinsurers and on
market conditions (including the availability and pricing of reinsurance). The
Company also believes that the terms of its reinsurance contracts are consistent
with industry practice in that they contain standard terms with respect to lines
of business covered, limit and retention, arbitration and occurrence. Based on
its review of its reinsurers' financial statements and reputations in the
reinsurance marketplace, the Company believes that its reinsurers are
financially sound.
The effects of reinsurance were as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31
(IN MILLIONS) 1997 1996
- ------------------------------------------------------------ ---------- -------------
<S> <C> <C>
Insurance premiums:
Direct.................................................... $ 48.8 $ 53.3
Assumed................................................... 2.6 3.1
Ceded..................................................... (28.6) (23.7)
---------- ------
Net premiums................................................ $ 22.8 $ 32.7
---------- ------
---------- ------
Insurance and other individual policy benefits, claims,
losses and loss adjustment expenses:
Direct.................................................... $226.0 $206.4
Assumed................................................... 4.2 4.5
Ceded..................................................... (42.4) (18.3)
---------- ------
Net policy benefits, claims, losses and loss adjustment
expenses................................................... $187.8 $192.6
---------- ------
---------- ------
</TABLE>
F-17
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
11. DEFERRED POLICY ACQUISITION EXPENSES
The following reflects the changes to the deferred policy acquisition asset:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31
(IN MILLIONS) 1997 1996
- ------------------------------------------------------------ ---------- -------------
<S> <C> <C>
Balance at beginning of year................................ $632.7 $555.7
Acquisition expenses deferred............................. 184.1 116.6
Amortized to expense during the year...................... (53.0) (49.9)
Adjustment to equity during the year...................... (10.2) 10.3
Adjustment for cession of disability income insurance..... (38.6) --
Adjustment for revision of universal life and variable
universal life insurance mortality assumptions.......... 50.3 --
---------- ------
Balance at end of year...................................... $765.3 $632.7
---------- ------
---------- ------
</TABLE>
On October 1, 1997, the Company revised the mortality assumptions for universal
life and variable universal life product lines. These revisions resulted in a
$50.3 million recapitalization of deferred policy acquisition costs.
12. LIABILITIES FOR INDIVIDUAL ACCIDENT AND HEALTH BENEFITS
The Company regularly updates its estimates of liabilities for future policy
benefits and outstanding claims, losses and loss adjustment expenses as new
information becomes available and further events occur which may impact the
resolution of unsettled claims. Changes in prior estimates are reflected in
results of operations in the year such changes are determined to be needed and
recorded.
The liability for future policy benefits and outstanding claims, losses and loss
adjustment expenses related to the Company's accident and health business was
$219.9 million and $226.2 million at December 31, 1997 and 1996. Accident and
health claim liabilities have been re-estimated for all prior years and were
increased by $-0- million in 1997 and $3.2 million in 1996. Due to the
reinsurance agreement whereby the Company has ceded substantially all of its
accident and health business to the Metropolitan, management believes that no
material adverse development of losses will occur. However, the amount of the
liabilities could be revised in the near term if the estimates are revised.
13. CONTINGENCIES
REGULATORY AND INDUSTRY DEVELOPMENTS
Unfavorable economic conditions may contribute to an increase in the number of
insurance companies that are under regulatory supervision. This may result in an
increase in mandatory assessments by state guaranty funds, or voluntary payments
by solvent insurance companies to cover losses to policyholders of insolvent or
rehabilitated companies. Mandatory assessments, which are subject to statutory
limits, can be partially recovered through a reduction in future premium taxes
in some states. The Company is not able to reasonably estimate the potential
effect on it of any such future assessments or voluntary payments.
LITIGATION
In July 1997, a lawsuit was instituted in Louisiana against Allmerica Financial
Corp. and certain of its subsidiaries by individual plaintiffs alleging fraud,
unfair or deceptive acts, breach of contract, misrepresentation and related
claims in the sale of life insurance policies. In October 1997, plaintiffs
voluntarily dismissed the Louisiana suit and refiled the action in Federal
District Court in Worcester, Massachusetts. The plaintiffs
F-18
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
seek to be certified as a class. The case is in the early stages of discovery
and the Company is evaluating the claims. Although the Company believes it has
meritorious defenses to plaintiffs' claims, there can be no assurance that the
claims will be resolved on a basis which is satisfactory to the Company.
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. However, liabilities
related to these proceedings could be established in the near term if estimates
of the ultimate resolution of these proceedings are revised.
YEAR 2000
The Year 2000 Issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
computer programs that have date-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities. Although the Company does not
believe that there is a material contingency associated with the Year 2000
project, there can be no assurance that exposure for material contingencies will
not arise.
14. STATUTORY FINANCIAL INFORMATION
The Company is required to file annual statements with state regulatory
authorities prepared on an accounting basis prescribed or permitted by such
authorities (statutory basis). Statutory surplus differs from shareholder's
equity reported in accordance with generally accepted accounting principles for
stock life insurance companies primarily because policy acquisition costs are
expensed when incurred, investment reserves are based on different assumptions,
life insurance reserves are based on different assumptions and income tax
expense reflects only taxes paid or currently payable. Statutory net income and
surplus are as follows:
<TABLE>
<CAPTION>
(IN MILLIONS) 1997 1996
- ------------------------------------------------------------ ---------- -------------
<S> <C> <C>
Statutory net income........................................ $ 31.5 $ 5.4
Statutory Surplus........................................... $307.1 $234.0
---------- ------
---------- ------
</TABLE>
F-19
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of Allmerica Financial Life Insurance and Annuity
Company and Policyowners of the Separate Account KGC - Kemper Gateway Custom of
Allmerica Financial Life Insurance and Annuity Company
In our opinion, the accompanying statements of assets and liabilities and the
related statements of operations and of changes in net assets present fairly,
in all material respects, the financial position of each of the Sub-Accounts
(Small Cap Value, Small Cap Growth, Value, International, Growth,
Value+Growth, Horizon 20+, Total Return, Horizon 10+, Horizon 5, High Yield,
Investment Grade Bond, Government Securities, Money Market, Global Income,
and Blue Chip) constituting the Separate Account KGC - Kemper Gateway Custom of
Allmerica Financial Life Insurance and Annuity Company at December 31, 1997,
the results of each of their operations and the changes in each of their net
assets for the periods indicated, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of
Allmerica Financial Life Insurance and Annuity Company's management; our
responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these financial statements in
accordance with generally accepted auditing standards which require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of investments at December 31, 1997 by correspondence with the
Fund, provide a reasonable basis for the opinion expressed above.
/s/ Price Waterhouse LLP
PRICE WATERHOUSE LLP
Boston, Massachusetts
March 25, 1998
<PAGE>
SEPARATE ACCOUNT KGC -- KEMPER GATEWAY CUSTOM
STATEMENTS OF ASSETS AND LIABILITIES
DECEMBER 31, 1997
<TABLE>
<CAPTION>
SMALL CAP SMALL CAP
VALUE GROWTH VALUE INTERNATIONAL GROWTH
----------- ------------- ------------- ------------- ----------------
<S> <C> <C> <C> <C> <C>
ASSETS (NOTES 3 AND 7):
Investments in shares of Investors Fund
Series.................................... $6,208,438 $2,798,268 $ 12,401,877 $5,052,945 $ 3,723,332
Dividend receivable......................... -- -- -- -- --
----------- ------------- ------------- ------------- ----------------
Total assets.............................. 6,208,438 2,798,268 12,401,877 5,052,945 3,723,332
LIABILITIES:
Payable to Allmerica Financial Life
Insurance and Annuity Company (Sponsor)... -- -- -- -- --
----------- ------------- ------------- ------------- ----------------
Net assets................................ $6,208,438 $2,798,268 $ 12,401,877 $5,052,945 $ 3,723,332
----------- ------------- ------------- ------------- ----------------
----------- ------------- ------------- ------------- ----------------
Net asset distribution by category:
Qualified variable annuity policies....... $1,207,677 $ 541,186 $ 1,941,413 $ 872,453 $ 456,298
Non-qualified variable annuity policies... 5,000,761 2,257,082 10,460,464 4,180,492 3,267,034
----------- ------------- ------------- ------------- ----------------
$6,208,438 $2,798,268 $ 12,401,877 $5,052,945 $ 3,723,332
----------- ------------- ------------- ------------- ----------------
----------- ------------- ------------- ------------- ----------------
Qualified units outstanding, December 31,
1997...................................... 994,933 404,157 1,536,392 795,735 385,258
Net asset value per qualified unit, December
31, 1997.................................. $ 1.213827 $ 1.339049 $ 1.263618 $ 1.096411 $ 1.184396
Non-qualified units outstanding, December
31, 1997.................................. 4,119,830 1,685,586 8,278,185 3,812,889 2,758,397
Net asset value per non-qualified unit,
December 31, 1997......................... $ 1.213827 $ 1.339049 $ 1.263618 $ 1.096411 $ 1.184396
<CAPTION>
VALUE+GROWTH HORIZON 20+ TOTAL RETURN
----------------- ------------- -----------------
<S> <C> <C> <C>
ASSETS (NOTES 3 AND 7):
Investments in shares of Investors Fund
Series.................................... $3,462,135 $ 992,001 $3,818,041
Dividend receivable......................... -- -- --
----------------- ------------- -----------------
Total assets.............................. 3,462,135 992,001 3,818,041
LIABILITIES:
Payable to Allmerica Financial Life
Insurance and Annuity Company (Sponsor)... 200 -- --
----------------- ------------- -----------------
Net assets................................ $3,461,935 $ 992,001 $3,818,041
----------------- ------------- -----------------
----------------- ------------- -----------------
Net asset distribution by category:
Qualified variable annuity policies....... $ 820,753 $ 197,906 $ 774,058
Non-qualified variable annuity policies... 2,641,182 794,095 3,043,983
----------------- ------------- -----------------
$3,461,935 $ 992,001 $3,818,041
----------------- ------------- -----------------
----------------- ------------- -----------------
Qualified units outstanding, December 31,
1997...................................... 674,377 168,686 660,910
Net asset value per qualified unit, December
31, 1997.................................. $ 1.217054 $ 1.173222 $ 1.171201
Non-qualified units outstanding, December
31, 1997.................................. 2,170,144 676,850 2,599,027
Net asset value per non-qualified unit,
December 31, 1997......................... $ 1.217054 $ 1.173222 $ 1.171201
</TABLE>
The accompanying notes are an integral part of these financial statements.
SA-1
<PAGE>
SEPARATE ACCOUNT KGC -- KEMPER GATEWAY CUSTOM
STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED)
DECEMBER 31, 1997
<TABLE>
<CAPTION>
INVESTMENT GOVERNMENT
HORIZON 10+ HORIZON 5 HIGH YIELD GRADE BOND SECURITIES
------------- ------------ --------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
ASSETS (NOTES 3 AND 7):
Investments in shares of Investors Fund
Series.................................... $1,595,975 $ 487,703 $ 10,504,030 $1,101,847 $ 707,212
Dividend receivable......................... -- -- -- -- --
------------- ------------ --------------- -------------- -------------
Total assets.............................. 1,595,975 487,703 10,504,030 1,101,847 707,212
LIABILITIES:
Payable to Allmerica Financial Life
Insurance and Annuity Company (Sponsor)... 156 -- -- 55 --
------------- ------------ --------------- -------------- -------------
Net assets................................ $1,595,819 $ 487,703 $ 10,504,030 $1,101,792 $ 707,212
------------- ------------ --------------- -------------- -------------
------------- ------------ --------------- -------------- -------------
Net asset distribution by category:
Qualified variable annuity policies....... $ 622,613 $ 78,787 $ 2,258,113 $ 152,189 $ 115,402
Non-qualified variable annuity policies... 973,206 408,916 8,245,917 949,603 591,810
------------- ------------ --------------- -------------- -------------
$1,595,819 $ 487,703 $ 10,504,030 $1,101,792 $ 707,212
------------- ------------ --------------- -------------- -------------
------------- ------------ --------------- -------------- -------------
Qualified units outstanding, December 31,
1997...................................... 558,335 70,909 2,045,785 142,479 107,482
Net asset value per qualified unit, December
31, 1997.................................. $ 1.115125 $1.111103 $ 1.103788 $ 1.068152 $1.073689
Non-qualified units outstanding, December
31, 1997.................................. 872,733 368,027 7,470,562 889,014 551,193
Net asset value per non-qualified unit,
December 31, 1997......................... $ 1.115125 $1.111103 $ 1.103788 $ 1.068152 $1.073689
<CAPTION>
GLOBAL
MONEY MARKET INCOME BLUE CHIP
-------------- ------------- --------------
<S> <C> <C> <C>
ASSETS (NOTES 3 AND 7):
Investments in shares of Investors Fund
Series.................................... $2,420,790 $ 466,279 $ 1,727,882
Dividend receivable......................... 5,781 -- --
-------------- ------------- --------------
Total assets.............................. 2,426,571 466,279 1,727,882
LIABILITIES:
Payable to Allmerica Financial Life
Insurance and Annuity Company (Sponsor)... -- -- --
-------------- ------------- --------------
Net assets................................ $2,426,571 $ 466,279 $ 1,727,882
-------------- ------------- --------------
-------------- ------------- --------------
Net asset distribution by category:
Qualified variable annuity policies....... $ 568,914 $ 32,543 $ 367,767
Non-qualified variable annuity policies... 1,857,657 433,736 1,360,115
-------------- ------------- --------------
$2,426,571 $ 466,279 $ 1,727,882
-------------- ------------- --------------
-------------- ------------- --------------
Qualified units outstanding, December 31,
1997...................................... 545,960 31,867 332,138
Net asset value per qualified unit, December
31, 1997.................................. $ 1.042043 $ 1.021204 $ 1.107271
Non-qualified units outstanding, December
31, 1997.................................. 1,782,706 424,730 1,228,349
Net asset value per non-qualified unit,
December 31, 1997......................... $ 1.042043 $ 1.021204 $ 1.107271
</TABLE>
The accompanying notes are an integral part of these financial statements.
SA-2
<PAGE>
SEPARATE ACCOUNT KGC -- KEMPER GATEWAY CUSTOM
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SMALL CAP
VALUE SMALL CAP
FOR THE GROWTH VALUE INTERNATIONAL
PERIOD FOR THE FOR THE FOR THE GROWTH
1/8/97* PERIOD PERIOD PERIOD FOR THE
TO 1/8/97* 1/29/97* 1/14/97* PERIOD 1/29/97*
12/31/97 TO 12/31/97 TO 12/31/97 TO 12/31/97 TO 12/31/97
---------- ------------ ----------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends................................. $ 7,250 $ 2,747 $ 11,117 $ 15,244 $ 5,361
---------- ------------ ----------- ------------ ---------------
EXPENSES (NOTE 4):
Mortality and expense risk fees........... 21,386 10,210 44,066 23,726 15,229
Administrative expense fees............... 3,377 1,612 6,958 3,746 2,405
---------- ------------ ----------- ------------ ---------------
Total expenses.......................... 24,763 11,822 51,024 27,472 17,634
---------- ------------ ----------- ------------ ---------------
Net investment income (loss)............ (17,513) (9,075) (39,907) (12,228) (12,273)
---------- ------------ ----------- ------------ ---------------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
Realized gain distributions from portfolio
sponsor................................. -- 52,207 -- 53,355 217,082
Net realized gain (loss) from sales of
investments............................. 20,005 27,173 29,263 3,822 (11,011)
---------- ------------ ----------- ------------ ---------------
Net realized gain (loss)................ 20,005 79,380 29,263 57,177 206,071
Net unrealized gain (loss)................ 260,916 234,181 1,051,631 (26,678) 59,773
---------- ------------ ----------- ------------ ---------------
Net realized and unrealized gain........ 280,921 313,561 1,080,894 30,499 265,844
---------- ------------ ----------- ------------ ---------------
Net increase in net assets from
operations............................ $ 263,408 $ 304,486 $1,040,987 $ 18,271 $ 253,571
---------- ------------ ----------- ------------ ---------------
---------- ------------ ----------- ------------ ---------------
<CAPTION>
HORIZON 20+
VALUE+GROWTH FOR THE TOTAL RETURN
FOR THE PERIOD FOR THE
PERIOD 1/28/97* 2/6/97* PERIOD 1/28/97*
TO 12/31/97 TO 12/31/97 TO 12/31/97
----------------- ------------- -----------------
<S> <C> <C> <C>
INVESTMENT INCOME:
Dividends................................. $ 3,341 $ 1,252 $ 10,971
-------- ------------- --------
EXPENSES (NOTE 4):
Mortality and expense risk fees........... 11,563 3,918 12,115
Administrative expense fees............... 1,826 618 1,913
-------- ------------- --------
Total expenses.......................... 13,389 4,536 14,028
-------- ------------- --------
Net investment income (loss)............ (10,048) (3,284) (3,057)
-------- ------------- --------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
Realized gain distributions from portfolio
sponsor................................. -- -- 45,100
Net realized gain (loss) from sales of
investments............................. 1,947 735 881
-------- ------------- --------
Net realized gain (loss)................ 1,947 735 45,981
Net unrealized gain (loss)................ 149,515 62,301 105,655
-------- ------------- --------
Net realized and unrealized gain........ 151,462 63,036 151,636
-------- ------------- --------
Net increase in net assets from
operations............................ $ 141,414 $ 59,752 $ 148,579
-------- ------------- --------
-------- ------------- --------
</TABLE>
* Date of initial investment.
The accompanying notes are an integral part of these financial statements.
SA-3
<PAGE>
SEPARATE ACCOUNT KGC -- KEMPER GATEWAY CUSTOM
STATEMENTS OF OPERATIONS (CONTINUED)
<TABLE>
<CAPTION>
HORIZON
10+ INVESTMENT
FOR THE HORIZON 5 HIGH YIELD GRADE BOND GOVERNMENT
PERIOD FOR THE FOR THE FOR THE SECURITIES
2/18/97* PERIOD PERIOD PERIOD FOR THE
TO 3/19/97* 1/14/97* 2/12/97* PERIOD 3/14/97*
12/31/97 TO 12/31/97 TO 12/31/97 TO 12/31/97 TO 12/31/97
---------- ------------ ----------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends................................. $ 725 $ 124 $ 237,876 $ 316 $ 8,852
---------- ------------ ----------- ------------ -------
EXPENSES (NOTE 4):
Mortality and expense risk fees........... 4,929 1,544 43,521 3,967 3,060
Administrative expense fees............... 778 243 6,872 626 483
---------- ------------ ----------- ------------ -------
Total expenses.......................... 5,707 1,787 50,393 4,593 3,543
---------- ------------ ----------- ------------ -------
Net investment income (loss).............. (4,982) (1,663) 187,483 (4,277) 5,309
---------- ------------ ----------- ------------ -------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
Realized gain distributions from portfolio
sponsor................................. -- -- -- -- --
Net realized gain (loss) from sales of
investments............................. 460 323 (41,923) 545 1,415
---------- ------------ ----------- ------------ -------
Net realized gain (loss)................ 460 323 (41,923) 545 1,415
Net unrealized gain (loss)................ 34,241 14,509 289,722 45,392 21,511
---------- ------------ ----------- ------------ -------
Net realized and unrealized gain........ 34,701 14,832 247,799 45,937 22,926
---------- ------------ ----------- ------------ -------
Net increase in net assets from
operations............................ $ 29,719 $ 13,169 $ 435,282 $ 41,660 $ 28,235
---------- ------------ ----------- ------------ -------
---------- ------------ ----------- ------------ -------
<CAPTION>
GLOBAL INCOME
MONEY MARKET FOR THE BLUE CHIP
FOR THE PERIOD FOR THE
PERIOD 1/3/97* 5/1/97* PERIOD 5/1/97*
TO 12/31/97 TO 12/31/97 TO 12/31/97
----------------- ------------- -----------------
<S> <C> <C> <C>
INVESTMENT INCOME:
Dividends................................. $ 83,140 $ -- $ --
------- ------------- -------
EXPENSES (NOTE 4):
Mortality and expense risk fees........... 15,242 2,351 3,507
Administrative expense fees............... 2,407 371 553
------- ------------- -------
Total expenses.......................... 17,649 2,722 4,060
------- ------------- -------
Net investment income (loss).............. 65,491 (2,722) (4,060)
------- ------------- -------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
Realized gain distributions from portfolio
sponsor................................. -- -- --
Net realized gain (loss) from sales of
investments............................. -- 352 173
------- ------------- -------
Net realized gain (loss)................ -- 352 173
Net unrealized gain (loss)................ -- 10,823 40,124
------- ------------- -------
Net realized and unrealized gain........ -- 11,175 40,297
------- ------------- -------
Net increase in net assets from
operations............................ $ 65,491 $ 8,453 $ 36,237
------- ------------- -------
------- ------------- -------
</TABLE>
* Date of initial investment.
The accompanying notes are an integral part of these financial statements.
SA-4
<PAGE>
SEPARATE ACCOUNT KGC -- KEMPER GATEWAY CUSTOM
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
SMALL CAP
SMALL CAP VALUE GROWTH VALUE INTERNATIONAL GROWTH VALUE+GROWTH HORIZON 20+
PERIOD FROM PERIOD FROM PERIOD FROM PERIOD FROM PERIOD FROM PERIOD FROM PERIOD FROM
1/8/97* TO 1/8/97* TO 1/29/97* TO 1/14/97* TO 1/29/97* TO 1/28/97* TO 2/6/97* TO
12/31/97 12/31/97 12/31/97 12/31/97 12/31/97 12/31/97 12/31/97
--------------- --------------- ------------ ------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
INCREASE IN NET ASSETS:
FROM OPERATIONS:
Net investment income
(loss)................ $ (17,513) $ (9,075) $ (39,907) $ (12,228) $ (12,273) $ (10,048) $ (3,284)
Net realized gain
(loss)................ 20,005 79,380 29,263 57,177 206,071 1,947 735
Net unrealized gain
(loss)................ 260,916 234,181 1,051,631 (26,678) 59,773 149,515 62,301
--------------- --------------- ------------ ------------- ----------- ----------- -----------
Net increase in net
assets from
operations............ 263,408 304,486 1,040,987 18,271 253,571 141,414 59,752
--------------- --------------- ------------ ------------- ----------- ----------- -----------
FROM CAPITAL TRANSACTIONS
(NOTE 5):
Net purchase payments... 4,298,210 1,605,412 9,736,086 3,632,970 2,591,907 2,236,756 681,458
Withdrawals............. (34,319) (14,065) (167,287) (60,352) (36,134) (23,766) (3,335)
Annuity benefits........ (653) -- (633) (594) (636) -- --
Other transfers from
(to) the General
Account of Allmerica
Financial Life
Insurance and Annuity
Company (Sponsor)..... 1,681,792 902,435 1,792,724 1,462,650 914,624 1,107,531 254,126
--------------- --------------- ------------ ------------- ----------- ----------- -----------
Net increase in net
assets from capital
transactions.......... 5,945,030 2,493,782 11,360,890 5,034,674 3,469,761 3,320,521 932,249
--------------- --------------- ------------ ------------- ----------- ----------- -----------
Net increase in net
assets................ 6,208,438 2,798,268 12,401,877 5,052,945 3,723,332 3,461,935 992,001
NET ASSETS:
Beginning of period....... -- -- -- -- -- -- --
--------------- --------------- ------------ ------------- ----------- ----------- -----------
End of period............. $6,208,438 $2,798,268 $12,401,877 $5,052,945 $3,723,332 $3,461,935 $992,001
--------------- --------------- ------------ ------------- ----------- ----------- -----------
--------------- --------------- ------------ ------------- ----------- ----------- -----------
<CAPTION>
TOTAL RETURN
PERIOD FROM
1/28/97* TO
12/31/97
------------
<S> <C>
INCREASE IN NET ASSETS:
FROM OPERATIONS:
Net investment income
(loss)................ $ (3,057)
Net realized gain
(loss)................ 45,981
Net unrealized gain
(loss)................ 105,655
------------
Net increase in net
assets from
operations............ 148,579
------------
FROM CAPITAL TRANSACTIONS
(NOTE 5):
Net purchase payments... 3,061,459
Withdrawals............. (72,837)
Annuity benefits........ --
Other transfers from
(to) the General
Account of Allmerica
Financial Life
Insurance and Annuity
Company (Sponsor)..... 680,840
------------
Net increase in net
assets from capital
transactions.......... 3,669,462
------------
Net increase in net
assets................ 3,818,041
NET ASSETS:
Beginning of period....... --
------------
End of period............. $3,818,041
------------
------------
</TABLE>
* Date of initial investment.
The accompanying notes are an integral part of these financial statements.
SA-5
<PAGE>
SEPARATE ACCOUNT KGC -- KEMPER GATEWAY CUSTOM
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
INVESTMENT GOVERNMENT
HORIZON 10+ HORIZON 5 HIGH YIELD GRADE BOND SECURITIES MONEY MARKET GLOBAL INCOME
PERIOD FROM PERIOD FROM PERIOD FROM PERIOD FROM PERIOD FROM PERIOD FROM PERIOD FROM
2/18/97* TO 3/19/97* TO 1/14/97* TO 2/12/97* TO 3/14/97* TO 1/3/97* TO 5/1/97* TO
12/31/97 12/31/97 12/31/97 12/31/97 12/31/97 12/31/97 12/31/97
----------- ----------- ------------ ----------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
INCREASE IN NET ASSETS:
FROM OPERATIONS:
Net investment income
(loss)................ $ (4,982) $ (1,663) $ 187,483 $ (4,277) $ 5,309 $ 65,491 $ (2,722)
Net realized gain
(loss)................ 460 323 (41,923) 545 1,415 -- 352
Net unrealized gain
(loss)................ 34,241 14,509 289,722 45,392 21,511 -- 10,823
----------- ----------- ------------ ----------- ----------- ------------- -------------
Net increase in net
assets from
operations............ 29,719 13,169 435,282 41,660 28,235 65,491 8,453
----------- ----------- ------------ ----------- ----------- ------------- -------------
FROM CAPITAL TRANSACTIONS
(NOTE 5):
Net purchase payments... 1,197,888 360,924 7,758,912 519,540 735,891 13,000,534 116,467
Withdrawals............. (11,716) (7,676) (146,765) (18,861) (14,545) (97,554) (250)
Annuity benefits........ -- -- (73,073) -- -- (1,774) --
Other transfers from
(to) the General
Account of Allmerica
Financial Life
Insurance and Annuity
Company (Sponsor)..... 379,928 121,286 2,529,674 559,453 (42,369) (10,540,126) 341,609
----------- ----------- ------------ ----------- ----------- ------------- -------------
Net increase in net
assets from capital
transactions.......... 1,566,100 474,534 10,068,748 1,060,132 678,977 2,361,080 457,826
----------- ----------- ------------ ----------- ----------- ------------- -------------
Net increase in net
assets................ 1,595,819 487,703 10,504,030 1,101,792 707,212 2,426,571 466,279
NET ASSETS:
Beginning of period....... -- -- -- -- -- -- --
----------- ----------- ------------ ----------- ----------- ------------- -------------
End of period............. $1,595,819 $487,703 $10,504,030 $1,101,792 $707,212 $ 2,426,571 $466,279
----------- ----------- ------------ ----------- ----------- ------------- -------------
----------- ----------- ------------ ----------- ----------- ------------- -------------
<CAPTION>
BLUE CHIP
PERIOD FROM
5/1/97* TO
12/31/97
-----------
<S> <C>
INCREASE IN NET ASSETS:
FROM OPERATIONS:
Net investment income
(loss)................ $ (4,060)
Net realized gain
(loss)................ 173
Net unrealized gain
(loss)................ 40,124
-----------
Net increase in net
assets from
operations............ 36,237
-----------
FROM CAPITAL TRANSACTIONS
(NOTE 5):
Net purchase payments... 1,177,338
Withdrawals............. (8,665)
Annuity benefits........ --
Other transfers from
(to) the General
Account of Allmerica
Financial Life
Insurance and Annuity
Company (Sponsor)..... 522,972
-----------
Net increase in net
assets from capital
transactions.......... 1,691,645
-----------
Net increase in net
assets................ 1,727,882
NET ASSETS:
Beginning of period....... --
-----------
End of period............. $1,727,882
-----------
-----------
</TABLE>
* Date of initial investment.
The accompanying notes are an integral part of these financial statements.
SA-6
<PAGE>
SEPARATE ACCOUNT KGC -- KEMPER GATEWAY CUSTOM
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- ORGANIZATION
Separate Account KGC Kemper Gateway Custom (Separate Account KGC) is a
separate investment account of Allmerica Financial Life Insurance and Annuity
Company (the Company), established on December 20, 1996 for the purpose of
separating from the general assets of the Company those assets used to fund
certain variable annuity contracts issued by the Company. The Company is a
wholly-owned subsidiary of First Allmerica Financial Life Insurance Company
(First Allmerica). First Allmerica is a wholly-owned subsidiary of Allmerica
Financial Corporation (AFC). Under applicable insurance law, the assets and
liabilities of Separate Account KGC are clearly identified and distinguished
from the other assets and liabilities of the Company. Separate Account KGC
cannot be charged with liabilities arising out of any other business of the
Company.
Separate Account KGC is registered as a unit investment trust under the
Investment Company Act of 1940, as amended (the 1940 Act). Separate Account KGC
currently offers sixteen Sub-Accounts under the Kemper Gateway Custom contracts.
Each Sub-Account invests exclusively in a corresponding investment portfolio of
Investors Fund Series (IFS). All investment portfolios, other than the Value and
Small Cap Value Portfolios, are managed by Zurich Kemper Investments, Inc.
(ZKI). The Value and Small Cap Value Portfolios are managed by Dreman Value
Advisors, Inc. (DVA), a wholly-owned subsidiary of ZKI. IFS (the "Fund") is an
open-end management investment company registered under the 1940 Act.
Separate Account KGC funds two types of variable annuity contracts,
"qualified" contracts and "non-qualified" contracts. A qualified contract is one
that is purchased in connection with a retirement plan which meets the
requirements of Section 401, 403, or 408 of the Internal Revenue Code, while a
non-qualified contract is one that is not purchased in connection with one of
the indicated retirement plans. The tax treatment for certain withdrawals or
surrenders will vary according to whether they are made from a qualified
contract or a non-qualified contract.
NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES
INVESTMENTS -- Security transactions are recorded on the trade date.
Investments held by the Sub-Accounts are stated at the net asset value per share
of the respective investment portfolio of IFS. Net realized gains and losses on
securities sold are determined using the average cost method. Dividends and
capital gain distributions are recorded on the ex-dividend date and are
reinvested in additional shares of the respective investment portfolio of IFS at
net asset value.
FEDERAL INCOME TAXES -- The Company is taxed as a "life insurance company"
under Subchapter L of the Internal Revenue Code (The Code) and files a
consolidated federal income tax return with First Allmerica. The Company
anticipates no tax liability resulting from the operations of Separate Account
KGC. Therefore, no provision for income taxes has been charged against Separate
Account KGC.
SA-7
<PAGE>
SEPARATE ACCOUNT KGC -- KEMPER GATEWAY CUSTOM
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 3 -- INVESTMENTS
The number of shares owned, aggregate cost, and net asset value per share of
each Sub-Account's investment in IFS at December 31, 1997 were as follows:
<TABLE>
<CAPTION>
PORTFOLIO INFORMATION
---------------------------------------
NET ASSET
NUMBER OF AGGREGATE VALUE
INVESTMENT PORTFOLIO SHARES COST PER SHARE
- ------------------------------------------------------- ------------ ------------ ---------
<S> <C> <C> <C>
Small Cap Value........................................ 5,057,873 $ 5,947,522 $ 1.227
Small Cap Growth....................................... 1,421,162 2,564,087 1.969
Value.................................................. 8,172,410 11,350,246 1.518
International.......................................... 3,129,165 5,079,623 1.615
Growth................................................. 1,240,747 3,663,559 3.001
Value+Growth........................................... 2,429,586 3,312,622 1.425
Horizon 20+............................................ 720,135 929,700 1.378
Total Return........................................... 1,352,860 3,712,386 2.822
Horizon 10+............................................ 1,238,506 1,561,736 1.289
Horizon 5.............................................. 398,548 473,194 1.224
High Yield............................................. 8,104,461 10,214,308 1.296
Investment Grade Bond.................................. 985,208 1,056,455 1.118
Government Securities.................................. 585,780 685,701 1.207
Money Market........................................... 2,420,790 2,420,790 1.000
Global Income.......................................... 453,261 455,456 1.029
Blue Chip.............................................. 1,549,059 1,687,758 1.115
</TABLE>
NOTE 4 -- RELATED PARTY TRANSACTIONS
The Company makes a charge of .95% per annum based on the average daily net
assets of each Sub-Account at each valuation date for mortality and expense
risks. The Company also charges each Sub-Account .15% per annum based on the
average daily net assets of each Sub-Account for administrative expenses. These
charges are deducted from the daily value of each Sub-Account and are paid to
the Company on a daily basis.
A contract fee of $35 is currently deducted on the Contract anniversary date
and upon full surrender of the contract when the accumulated value is less than
$50,000. The contract fee is waived for contracts issued to and maintained by
the Trustee of a 401(k) plan. For the period ended December 31, 1997, there were
no contract fees deducted from Separate Account KGC.
Allmerica Investments, Inc. (Allmerica Investments), a wholly-owned
subsidiary of First Allmerica, is principal underwriter and general distributor
of Separate Account KGC, and does not receive any compensation for sales of the
contracts. Commissions are paid to registered representatives of Allmerica
Investments by the Company. As the current series of contracts have a contingent
deferred sales charge, no deduction is made for sales charges at the time of the
sale. For the period ended December 31, 1997, the Company received $2,979 for
contingent deferred sales charges applicable to Separate Account KGC.
SA-8
<PAGE>
SEPARATE ACCOUNT KGC -- KEMPER GATEWAY CUSTOM
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 5 -- CONTRACTOWNERS AND SPONSOR TRANSACTIONS
Transactions from contractowners and sponsor were as follows:
<TABLE>
<CAPTION>
PERIOD ENDED
DECEMBER 31, 1997
UNITS AMOUNT
-------------- ----------------
<S> <C> <C>
Small Cap Value
Issuance of Units............................................................ 5,853,683 $ 6,610,275
Redemption of Units.......................................................... (738,920) (665,245)
-------------- ----------------
Net increase............................................................... 5,114,763 $ 5,945,030
-------------- ----------------
-------------- ----------------
Small Cap Growth
Issuance of Units............................................................ 2,717,366 $ 3,067,415
Redemption of Units.......................................................... (627,623) (573,633)
-------------- ----------------
Net increase............................................................... 2,089,743 $ 2,493,782
-------------- ----------------
-------------- ----------------
Value
Issuance of Units............................................................ 10,902,499 $ 12,448,838
Redemption of Units.......................................................... (1,087,922) (1,087,948)
-------------- ----------------
Net increase............................................................... 9,814,577 $ 11,360,890
-------------- ----------------
-------------- ----------------
International
Issuance of Units............................................................ 5,297,587 $ 5,672,472
Redemption of Units.......................................................... (688,963) (637,798)
-------------- ----------------
Net increase............................................................... 4,608,624 $ 5,034,674
-------------- ----------------
-------------- ----------------
Growth
Issuance of Units............................................................ 3,424,040 $ 3,764,264
Redemption of Units.......................................................... (280,385) (294,503)
-------------- ----------------
Net increase............................................................... 3,143,655 $ 3,469,761
-------------- ----------------
-------------- ----------------
Value+Growth
Issuance of Units............................................................ 3,039,321 $ 3,487,336
Redemption of Units.......................................................... (194,800) (166,815)
-------------- ----------------
Net increase............................................................... 2,844,521 $ 3,320,521
-------------- ----------------
-------------- ----------------
Horizon 20+
Issuance of Units............................................................ 853,250 $ 941,138
Redemption of Units.......................................................... (7,714) (8,889)
-------------- ----------------
Net increase............................................................... 845,536 $ 932,249
-------------- ----------------
-------------- ----------------
Total Return
Issuance of Units............................................................ 3,413,894 $ 3,824,453
Redemption of Units.......................................................... (153,957) (154,991)
-------------- ----------------
Net increase............................................................... 3,259,937 $ 3,669,462
-------------- ----------------
-------------- ----------------
</TABLE>
SA-9
<PAGE>
SEPARATE ACCOUNT KGC -- KEMPER GATEWAY CUSTOM
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 5 -- CONTRACTOWNERS AND SPONSOR TRANSACTIONS (CONTINUED)
<TABLE>
<CAPTION>
PERIOD ENDED
DECEMBER 31, 1997
UNITS AMOUNT
-------------- ----------------
<S> <C> <C>
Horizon 10+
Issuance of Units............................................................ 1,457,494 $ 1,578,933
Redemption of Units.......................................................... (26,426) (12,833)
-------------- ----------------
Net increase............................................................... 1,431,068 $ 1,566,100
-------------- ----------------
-------------- ----------------
Horizon 5
Issuance of Units............................................................ 455,035 $ 492,277
Redemption of Units.......................................................... (16,099) (17,743)
-------------- ----------------
Net increase............................................................... 438,936 $ 474,534
-------------- ----------------
-------------- ----------------
High Yield
Issuance of Units............................................................ 12,655,413 $ 13,157,969
Redemption of Units.......................................................... (3,139,066) (3,089,221)
-------------- ----------------
Net increase............................................................... 9,516,347 $ 10,068,748
-------------- ----------------
-------------- ----------------
Investment Grade Bond
Issuance of Units............................................................ 1,066,645 $ 1,088,022
Redemption of Units.......................................................... (35,152) (27,890)
-------------- ----------------
Net increase............................................................... 1,031,493 $ 1,060,132
-------------- ----------------
-------------- ----------------
Government Securities
Issuance of Units............................................................ 865,882 $ 870,049
Redemption of Units.......................................................... (207,207) (191,072)
-------------- ----------------
Net increase............................................................... 658,675 $ 678,977
-------------- ----------------
-------------- ----------------
Money Market
Issuance of Units............................................................ 16,927,453 $ 16,642,678
Redemption of Units.......................................................... (14,598,787) (14,281,598)
-------------- ----------------
Net increase............................................................... 2,328,666 $ 2,361,080
-------------- ----------------
-------------- ----------------
Global Income
Issuance of Units............................................................ 471,806 $ 462,949
Redemption of Units.......................................................... (15,209) (5,123)
-------------- ----------------
Net increase............................................................... 456,597 $ 457,826
-------------- ----------------
-------------- ----------------
Blue Chip
Issuance of Units............................................................ 1,594,645 $ 1,713,314
Redemption of Units.......................................................... (34,158) (21,669)
-------------- ----------------
Net increase............................................................... 1,560,487 $ 1,691,645
-------------- ----------------
-------------- ----------------
</TABLE>
SA-10
<PAGE>
SEPARATE ACCOUNT KGC -- KEMPER GATEWAY CUSTOM
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 6 -- DIVERSIFICATION REQUIREMENTS
Under the provisions of Section 817(h) of the Internal Revenue Code, a
variable annuity contract, other than a contract issued in connection with
certain types of employee benefit plans, will not be treated as an annuity
contract for federal income tax purposes for any period for which the
investments of the segregated asset account on which the contract is based are
not adequately diversified. The Code provides that the "adequately diversified"
requirement may be met if the underlying investments satisfy either a statutory
safe harbor test or diversification requirements set forth in regulations issued
by the Secretary of The Treasury.
The Internal Revenue Service has issued regulations under Section 817(h) of
the Code. The Company believes that Separate Account KGC satisfies the current
requirements of the regulations, and it intends that Separate Account KGC will
continue to meet such requirements.
NOTE 7 -- PURCHASES AND SALES OF SECURITIES
Cost of purchases and proceeds from sales of IFS shares by Separate Account
KGC during the period ended December 31, 1997 were as follows:
<TABLE>
<CAPTION>
INVESTMENT PORTFOLIO PURCHASES SALES
- ---------------------------------------------------------------- ------------ ------------
<S> <C> <C>
Small Cap Value................................................. $ 6,313,351 $ 385,834
Small Cap Growth................................................ 3,027,170 490,256
Value........................................................... 11,831,353 510,370
International................................................... 5,566,626 490,825
Growth.......................................................... 3,850,549 175,979
Value+Growth.................................................... 3,351,055 40,382
Horizon 20+..................................................... 938,625 9,660
Total Return.................................................... 3,752,385 40,880
Horizon 10+..................................................... 1,574,919 13,645
Horizon 5....................................................... 481,615 8,744
High Yield...................................................... 12,373,845 2,117,614
Investment Grade Bond........................................... 1,074,718 18,808
Government Securities........................................... 845,477 161,191
Money Market.................................................... 12,298,036 9,927,246
Global Income................................................... 472,752 17,648
Blue Chip....................................................... 1,695,605 8,020
------------ ------------
Totals.......................................................... $ 69,448,081 $ 14,417,102
------------ ------------
------------ ------------
</TABLE>
SA-11
<PAGE>
PART C. OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(a) FINANCIAL STATEMENTS
Financial Statements Included in Part A
None
Financial Statements Included in Part B
Financial Statements for Allmerica Financial Life Insurance and Annuity
Company and for Separate Account KGC of 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 on
August 16, 1996 in Registrant's initial Registration
Statement and is incorporated by reference herein.
EXHIBIT 2 Not Applicable. Pursuant to Rule 26a-2, the Insurance Company
may hold the assets of the Registrant NOT pursuant to a
trust indenture or other such instrument.
EXHIBIT 3 (a) Underwriting and Administrative Services Agreement is filed
herewith.
(b) Wholesaling Agreement was previously filed on December 10,
1996 in Pre-Effective Amendment No. 1 and is
incorporated by reference herein.
(c) Sales Agreements with Commission Schedule is filed
herewith.
(d) Sales Agreement with Chase is filed herewith.
(e) General Agent's Agreement is filed herewith.
(f) Career Agent Agreement is filed herewith.
(g) Registered Representative's Agreement is filed herewith.
(h) Form of Indemnification Agreement with Scudder Kemper is
filed herewith.
EXHIBIT 4 Policy Form was previously filed on August 16, 1996 in
Registrant's initial Registration Statement and is
incorporated by reference herein.
EXHIBIT 5 Application Form was previously filed on August 16, 1996 in
Registrant's initial Registration Statement and is
incorporated by reference herein.
<PAGE>
EXHIBIT 6 The Depositor's Articles of Incorporation and Bylaws, effective
October 1, 1995 as amended to reflect its name change, were
previously filed on August 16, 1996 in Registrant's initial
Registration Statement and are incorporated by reference
herein.
EXHIBIT 7 Not Applicable.
EXHIBIT 8 (a) BFDS Agreements for lockbox and mailroom services are
filed herewith.
(b) Form of Scudder Services Agreement is filed herewith.
EXHIBIT 9 Opinion of Counsel is filed herewith.
EXHIBIT 10 Consent of Independent Accountants is filed herewith.
EXHIBIT 11 None.
EXHIBIT 12 None.
EXHIBIT 13 Not Applicable.
EXHIBIT 14 Not Applicable.
EXHIBIT 15 (a) Participation Agreement with Kemper was previously filed
on December 10, 1996 in Pre-Effective Amendment No. 1 and is
incorporated by reference herein.
(b) Form of Participation Agreement with Scudder Kemper is
filed herewith.
ITEM 25. DIRECTORS AND OFFICERS OF THE DEPOSITOR
The principal business address of all the following Directors and Officers is:
440 Lincoln Street
Worcester, Massachusetts 01653
DIRECTORS AND PRINCIPAL OFFICERS OF THE COMPANY
NAME AND POSITION PRINCIPAL OCCUPATION(S) DURING
WITH COMPANY PAST FIVE YEARS
------------ ---------------
Bruce C. Anderson Director of First Allmerica since
Director 1996; Vice President, First Allmerica
since 1984
Abigail M. Armstrong Secretary of First Allmerica since
Secretary and Counsel 1996; Counsel, First Allmerica since
1991
Robert E. Bruce Director and Chief Information Officer
Director and Chief Information Officer of First Allmerica since 1997; Vice
President of First Allmerica since
1995; Corporate Manager, Digital
Equipment Corporation 1979 to 1995
John P. Kavanaugh Director and Chief Investment Officer
Director, Vice President and of First Allmerica since 1996; Vice
Chief Investment Officer President, First Allmerica since 1991
John F. Kelly Director of First Allmerica since
Director, Vice President and 1996; Senior Vice President, First
General Counsel Allmerica since 1986; General Counsel,
First Allmerica since 1981; Assistant
Secretary, First Allmerica since 1991
<PAGE>
J. Barry May Director of First Allmerica since
Director 1996; Director and President, The
Hanover Insurance Company since 1996;
Vice President, The Hanover Insurance
Company, 1993 to 1996; General
Manager, The Hanover Insurance Company
1989 to 1993
James R. McAuliffe Director of First Allmerica since
Director 1996; Director of Citizens Insurance
Company of America since 1992,
President since 1994, and CEO since
1996; Vice President, First Allmerica
1982 to 1994; Chief Investment
Officer, First Allmerica 1986 to 1994
John F. O'Brien Director, Chairman of the Board,
Director, Chairman of the Board, President and Chief Executive Officer,
President and Chief Executive Officer First Allmerica since 1989
Edward J. Parry, III Director and Chief Financial Officer
Director, Vice President, of First Allmerica since 1996; Vice
Chief Financial Officer and Treasurer President and Treasurer, First
Allmerica since 1993; Assistant Vice
President 1992 to 1993
Richard M. Reilly Director of First Allmerica since
Director and Vice President 1996; Vice President, First Allmerica
since 1990; Director, Allmerica
Investments, Inc. since 1990; Director
and President, Allmerica Financial
Investment Management Services, Inc.
since 1990
Eric A. Simonsen Director of First Allmerica since
Director and Vice President 1996; Vice President, First Allmerica
since 1990; Chief Financial Officer,
First Allmerica 1990 to 1996
Phillip E. Soule Director of First Allmerica since
Director and Vice President 1996; Vice President, First Allmerica
since 1987
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 Trust
Worcester MA 01653
AFC Capital Trust I 440 Lincoln Street
Worcester MA 01653 Statutory Business Trust
Allmerica Asset Management Limited 440 Lincoln Street Investment advisory services
Worcester MA 01653
Allmerica Asset Management, Inc. 440 Lincoln Street Investment advisory services
Worcester MA 01653
Allmerica Benefits, Inc. 440 Lincoln Street Non-insurance medical services
Worcester MA 01653
Allmerica Equity Index Pool 440 Lincoln Street Massachusetts Grantor Trust
Worcester MA 01653
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
Allmerica Financial Alliance Insurance 100 North Parkway Multi-line property and Casulaty
Company Worcester MA 01605 insurance
Allmerica Financial Benefit Insurance 100 North Parkway Multi-line property and casualty
Company Worcester MA 01605 insurance
Allmerica Financial Corporation 440 Lincoln Street Holding Company
Worcester MA 01653
Allmerica Financial Insurance Brokers, 440 Lincoln Street Insurance Broker
Inc. Worcester MA 01653
Allmerica Financial Life Insurance and 440 Lincoln Street Life insurance, accident and
Annuity Company (formerly known as Worcester MA 01653 health insurance, annuities,
SMA Life Assurance Company) variable annuities and variable life
insurance
Allmerica Financial Services Insurance 440 Lincoln Street Insurance Agency
Agency, Inc. Worcester MA 01653
Allmerica Funding Corp. 440 Lincoln Street Special purpose funding vehicle
Worcester MA 01653 for commercial paper
Allmerica Funds 440 Lincoln Street Investment Company
Worcester MA 01653
Allmerica, Inc. 440 Lincoln Street Common employer for Allmerica
Worcester MA 01653 Financial Corporation entities
Allmerica Institutional Services, Inc. 440 Lincoln Street Accounting, marketing and
(formerly known as 440 Financial Worcester MA 01653 shareholder services for
Group of Worcester, Inc.) investment companies
Allmerica Investment Management 440 Lincoln Street Investment advisory services
Company, Inc. Worcester MA 01653
Allmerica Investments, Inc. 440 Lincoln Street Securities, retail broker-dealer
Worcester MA 01653
Allmerica Investment Trust 440 Lincoln Street Investment Company
Worcester MA 01653
Allmerica Plus Insurance Agency, Inc. 440 Lincoln Street Insurance Agency
Worcester MA 01653
Allmerica Property & Casualty 440 Lincoln Street Holding Company
Companies, Inc. Worcester MA 01653
Allmerica Securities Trust 440 Lincoln Street Investment Company
Worcester MA 01653
Allmerica Services Corporation 440 Lincoln Street Internal administrative services
Worcester MA 01653 provider to Allmerica Financial
Corporation entities
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
Allmerica Trust Company, N.A. 440 Lincoln Street Limited purpose national trust
Worcester MA 01653 company
AMGRO, Inc. 100 North Parkway Premium financing
Worcester MA 01605
APC Funding Corp. 440 Lincoln Street Special purpose funding vehicle
Worcester MA 01653 for commercial paper
Beltsville Drive Limited Partnership 440 Lincoln Street Real estate 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 property
Howell MI 48843 and casualty insurance
Citizens Insurance Company of Illinois 333 Pierce Road Multi-line property
Itasca IL 60143 and casualty insurance
Citizens Insurance Company 3950 Priority Way Multi-line property
of the Midwest South Drive, Suite 200 and casualty insurance
Indianapolis IN 46280
Citizens Insurance Company of Ohio 8101 N. High Street Multi-line property
P.O. Box 342250 and casualty insurance
Columbus OH 43234
Citizens Management, Inc. 645 West Grand River Services management company
Howell MI 48843
First Allmerica Financial Life 440 Lincoln Street Life, pension, annuity,
Insurance Company (formerly State Worcester MA 01653 accident and health
Mutual Life Assurance Company insurance company
of America)
First Sterling Limited 440 Lincoln Street Holding Company
Worcester MA 01653
First Sterling Reinsurance 440 Lincoln Street Reinsurance Company
Company Limited Worcester MA 01653
Greendale Special Placements Fund 440 Lincoln Street Massachusetts Grantor Trust
Worcester MA 01653
The Hanover American 100 North Parkway Multi-line property
Insurance Company Worcester MA 01605 and casualty insurance
The Hanover Insurance Company 100 North Parkway Multi-line property
Worcester MA 01605 and casualty insurance
Hanover Texas Insurance 801 East Campbell Road Attorney-in-fact for Hanover
Management Company, Inc. Richardson TX 75081 Lloyd's Insurance Company
Hanover Lloyd's Insurance Company 801 East Campbell Road Multi-line property
Richardson TX 75081 and casualty insurance
Linder Skokie Real Estate Corporation 440 Lincoln Street Real estate holding company
Worcester MA 01653
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
Lloyds Credit Corporation 440 Lincoln Street Premium financing service
Worcester MA 01653 franchises
Logan Wells Water Company, Inc. 603 Heron Drive Water Company serving land
Bridgeport NJ 08014 development investment
Massachusetts Bay Insurance Company 100 North Parkway Multi-line property
Worcester MA 01605 and casualty insurance
SMA Financial Corp. 440 Lincoln Street Holding Company
Worcester MA 01653
Somerset Square, Inc. 440 Lincoln Street Real estate holding company
Worcester MA 01653
Sterling Risk Management Services, Inc. 440 Lincoln Street Risk management services
Worcester MA 01653
</TABLE>
ITEM 27. NUMBER OF CONTRACT OWNERS
As of February 27, 1998, there were 339 Contact Owners of qualified
Contracts and 929 Contract Owners of non-qualified Contracts.
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 judgment, except in relation to matters as to which he shall be
finally adjudged in such action, suit or proceeding to be liable for
negligence or misconduct in the performance of his duties as such Director
or Officer; and the foregoing right of indemnification or reimbursement
shall not affect any other rights to which he may be entitled under the
Articles of Incorporation, any statute, bylaw, agreement, vote of
stockholders, or otherwise.
ITEM 29. PRINCIPAL UNDERWRITERS
(a) Allmerica Investments, Inc. also acts as principal underwriter for the
following:
- VEL Account, VEL II Account, Inheiritage Account,
Separate Accounts VA-A, VA-B, VA-C, VA-G, VA-H, VA-K,
Allmerica Select Separate Account II, Group VEL Account,
Separate Account KG, Separate Account KGC, Fulcrum
Separate Account, Fulcrum Variable Life Separate Account,
Allmerica Select Separate Account of Allmerica Financial
Life Insurance and Annuity Company
<PAGE>
- Inheiritage Account, VEL II Account, Separate Account I,
Separate Account VA-K, Separate Account VA-P, Group VEL
Account, Separate Account KG, Separate Account KGC,
Fulcrum Separate Account, Fulcrum Variable Life Separate
Account, and Allmerica Select Separate Account of First
Allmerica Financial Life Insurance Company.
- Allmerica Investment Trust
(b) The Principal Business Address of each of the following Directors and
Officers of Allmerica Investments, Inc. is:
440 Lincoln Street
Worcester, Massachusetts 01653
<TABLE>
<CAPTION>
NAME POSITION OR OFFICE WITH UNDERWRITER
---- -----------------------------------
<S> <C>
Abigail M. Armstrong Secretary and Counsel
Emil J. Aberizk, Jr. Vice President
Edward T. Berger Vice President and Chief Compliance Officer
Richard F. Betzler, Jr. Vice President
Philip J. Coffey Vice President
Thomas P. Cunningham Vice President, Chief Financial Officer and
Controller
John F. Kelly Director
William F. Monroe, Jr. Vice President
David J. Mueller Vice President
John F. O'Brien Director
Stephen Parker President, Director and Chief Executive Officer
Edward J. Parry, III Treasurer
Richard M. Reilly Director
Eric A. Simonsen Director
Mark G. Steinberg Senior Vice President
</TABLE>
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
Each account, book or other document required to be maintained by Section
31(a) of the 1940 Act and Rules 31a-1 to 31a-3 thereunder are maintained by
the Company at 440 Lincoln Street, Worcester, Massachusetts 01653.
<PAGE>
ITEM 31. MANAGEMENT SERVICES
The Company provides daily unit value calculations and related services for
the Company's separate accounts.
ITEM 32. UNDERTAKINGS
(a) Subject to the terms and conditions of Section 15(d) of the Securities
Exchange Act of 1934, the undersigned registrant hereby undertakes to
file with the Securities and Exchange Commission ("SEC") such
supplementary and periodic information, documents, and reports as may
be prescribed by any rule or regulation of the SEC heretofore or
hereafter duly adopted pursuant to authority conferred in that
section.
(b) The Registrant hereby undertakes to include in the prospectus a
postcard that the applicant can remove to send for a Statement of
Additional Information.
(c) The Registrant hereby undertakes to deliver a Statement of Additional
Information promptly upon written or oral request, according to the
requirements of Form N-4.
(d) Insofar as indemnification for liability arising under the 1933 Act
may be permitted to Directors, Officers and Controlling Persons of
Registrant under any registration statement, underwriting agreement or
otherwise, Registrant has been advised that, in the opinion of the
SEC, such indemnification is against public policy as expressed in the
1933 Act and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment
by Registrant of expenses incurred or paid by a Director, Officer or
Controlling Person of Registrant in the successful defense of any
action, suit or proceeding) is asserted by such Director, Officer or
Controlling Person in connection with the securities being registered,
Registrant will, unless in the opinion of its counsel the matter has
been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the 1933 Act and will be
governed by the final adjudication of such issue.
(e) The Company 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 Company's variable contracts.
<PAGE>
2. Appropriate disclosures regarding the redemption restrictions imposed
by the Program and by Section 403(b)(11) have been included in sales
literature used in connection with the offer of the Company's variable
contracts.
3. Sales Representatives who solicit participants to purchase the
variable contracts have been instructed to specifically bring the
redemption restrictions imposed by the Program and by Section
403(b)(11) to the attention of potential participants.
4. A signed statement acknowledging the participant's understanding of
(I) the restrictions on redemption imposed by the Program and by
Section 403(b)(11) and (ii) the investment alternatives available
under the employer's arrangement will be obtained from each
participant who purchases a variable annuity contract prior to or at
the time of purchase.
Registrant hereby represents that it will not act to deny or limit a
transfer request except to the extent that a Service-Ruling or written
opinion of counsel, specifically addressing the fact pattern involved and
taking into account the terms of the applicable employer plan, determines
that denial or limitation is necessary for the variable annuity contracts
to meet the requirements of the Program or of Section 403(b). Any transfer
request not so denied or limited will be effected as expeditiously as
possible.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940 the Registrant certifies that it meets all the requirements
for effectiveness of this Registration Statement pursuant to Rule 485(b) under
the Securities Act of 1933 and has duly caused this Registration Statement to be
signed on its behalf by the undersigned, thereto duly authorized, in the City of
Worcester, and Commonwealth of Massachusetts, on the 15th day of April, 1998.
SEPARATE ACCOUNT KGC OF
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
By: /S/ ABIGAIL M. ARMSTRONG
------------------------------------
Abigail M. Armstrong, Secretary
Pursuant to the requirements of the Securities Act of 1933, this Amendment to
the Registration Statement has been signed by the following persons in the
capacities and on the date indicated.
SIGNATURES TITLE DATE
- ---------- ----- ----
/S/ JOHN F. O'BRIEN Director and Chairman of April 15, 1998
- ---------------------------- the Board
John F. O'Brien
/S/ BRUCE C. ANDERSON Director
- ----------------------------
Bruce C. Anderson
/S/ ROBERT E. BRUCE Director and Chief
- ---------------------------- Information Officer
Robert E. Bruce
/S/ JOHN P. KAVANAUGH Director, Vice President
- ---------------------------- and Chief Investment
John P. Kavanaugh Officer
/S/ JOHN F. KELLY Director, Vice President and
- ---------------------------- General Counsel
John F. Kelly
/S/ J. BARRY MAY Director
- ----------------------------
J. Barry May
/S/ JAMES R. MCAULIFFE Director
- ----------------------------
James R. McAuliffe
/S/ EDWARD J. PARRY III Director, Vice President,
- ---------------------------- Chief Financial Officer
Edward J. Parry III and Treasurer
/S/ RICHARD M. REILLY Director, President and
- ---------------------------- Chief Executive Officer
Richard M. Reilly
/S/ ERIC A. SIMONSEN Director and Vice President
- ----------------------------
Eric A. Simonsen
/S/ PHILLIP E. SOULE Director
- ----------------------------
Phillip E. Soule
<PAGE>
EXHIBIT TABLE
Exhibit 3(a) Underwriting and Administrative Services Agreement
Exhibit 3(c) Sales Agreements with Commission Schedule
Exhibit 3(d) Sales Agreement with Chase
Exhibit 3(e) General Agent's Agreement
Exhibit 3(f) Career Agent Agreement
Exhibit 3(g) Registered Representative's Agreement
Exhibit 3(h) Form of Indemnification Agreement with Scudder Kemper
Exhibit 8(a) BFDS Agreements
Exhibit 8(b) Form of Scudder Services Agreement
Exhibit 9 Opinion of Counsel
Exhibit 10 Consent of Independent Accountants
Exhibit 15(b) Form of Participation Agreement with Scudder Kemper
<PAGE>
UNDERWRITING AND
ADMINISTRATIVE SERVICES AGREEMENT
AGREEMENT made this 26th day of November, 1997 between and among Allmerica
Financial Life Insurance and Annuity Company, a Delaware corporation (the
"Company"), each of its separate investment accounts (the "Accounts") which is a
registered investment company under the Investment Company Act of 1940 (the
"1940 Act"), as may be established by the Company from time-to-time, and
Allmerica Investments, Inc., a Massachusetts corporation (the "Distributor").
WITNESSETH:
WHEREAS, the Company and the respective Accounts issue certain variable annuity
contracts or variable insurance policies (the "contracts") which may be deemed
to be securities under the Securities Act of 1933 (the "1933 Act"), and the laws
of some states;
WHEREAS, the Distributor, an affiliate of the Company, is registered as a
broker-dealer with the Securities and Exchange Commission ("SEC") under the
Securities Exchange Act of 1934 (the "1934 Act") and is a member of the National
Association of Securities Dealers, Inc. ("NASD");
WHEREAS, the parties desire to have the Distributor act as principal underwriter
for the Accounts set forth in Exhibit A, as may be amended from time-to-time by
mutual consent of the parties, and to assume full responsibility for the
securities activities of all "persons associated" (as that term is defined in
Section 3(a)(18) of the 1934 Act) with the Distributor and engaged directly or
indirectly in the variable contract operation (the "associated persons");
WHEREAS, the parties desire to have the Company perform certain administrative
services in connection with the sale and servicing of the contracts.
NOW, THEREFORE, in consideration of the covenants and mutual promises of the
parties made to each other, it is hereby covenanted and agreed as follows:
1. The Distributor will act as the exclusive principal underwriter for the
Accounts and as such will assume full responsibility for the securities
activities of all the associated persons in connection with the sale of the
contracts. The Distributor will train the associated persons, use its best
efforts to prepare them to complete satisfactorily the applicable NASD and
state examinations so that they may be qualified, register the associated
persons as its registered representatives before they engage in the sale of
the contracts, and supervise and control them in the performance of such
activities. Notwithstanding anything in this Agreement to the contrary,
the Distributor may enter into sales agreements with independent
broker-dealers for the sale of the contracts. All such sales agreements
entered into by the Distributor with independent broker-dealers shall
provide that each independent broker-dealer will assume full responsibility
for continued compliance by itself and its associated persons with the NASD
Rules of Fair Practice and Federal and state securities laws.
2. The Distributor will assume full responsibility for the continued
compliance by itself and its associated persons with the NASD Rules of Fair
Practice and Federal and state securities laws, to the extent applicable in
connection with the sale of the contracts. The Distributor, directly or
through the Company as its agent, will make timely filings with the SEC,
NASD, and any other securities regulatory authorities of all reports and
any sales literature relating to the Accounts required by law to be filed
by the Distributor.
3. The Company will prepare and submit to the Accounts (a) all registration
statements and prospectuses (including amendments) and all reports required
by law to be filed by the Accounts with Federal and state securities
regulatory authorities, and (b) all notices, proxies, proxy statements, and
periodic reports that are to be transmitted to persons having voting rights
with respect to the Accounts.
- 1 -
<PAGE>
4. The Company will, except as otherwise provided in this Agreement, bear the
cost of all services and expenses, including legal services and expenses,
filing fees, and other fees incurred in connection with (a) registering and
qualifying the Accounts and the contracts, and (b) preparing, printing, and
distributing all registration statements and prospectuses (including
amendments), contracts, notices, periodic reports, proxy solicitation
material, sales literature, and advertising filed or distributed in
connection with the sale of the contracts.
All cost associated with the variable contract compliance function
including, but not limited to, fees and expenses associated with qualifying
and licensing associated persons with Federal and state regulatory
authorities and the NASD and with performing compliance-related
administrative services, shall be allocated to the Company. To the extent
that the Distributor incurs out-of-pocket expenses in connection with the
variable contracts compliance function, the Company shall reimburse the
Distributor for such expenses. To the extent that such costs are in
connection with services provided by employees of the Company, they shall
be charged to the Company. The determination and allocation of all such
costs shall be pursuant to the Cost Distribution Policy as stated in the
Consolidated Service Agreement (effective January 1, 1993) among the
Allmerica Financial group of affiliated companies, as may be amended from
time.
5. All purchase payments made under the contracts will be forwarded by or on
behalf of Contract Owners directly to the Company and shall become the
exclusive property of the Company. The Company agrees to pay on behalf of
Distributor all sales commissions and any other remuneration due in
connection with the sale of the contracts by associated persons of the
Distributor and any independent broker-dealers having a sales agreement
with the Distributor. The Distributor or the Company as agent for the
Distributor shall pay all other remuneration due any other person for
activities relating to the sale of the contracts. The Company shall
reimburse the Distributor fully and completely for all amounts paid by the
Distributor to any person pursuant to this Section.
6. The Company will, as the Distributor's agent, (a) maintain and preserve in
accordance with Rules 17a-3 and 17a-4 under the 1934 Act all books and
records required to be maintained by the Distributor in connection with the
offer and sale of the contracts being offered for sale pursuant to this
Agreement, which books and records shall remain the property of the
Distributor, and shall at all times be subject to inspection by the SEC in
accordance with Section 17(a) of the 1934 Act, and all other regulatory
bodies having jurisdiction, and (b) send a written confirmation for each
such transaction reflecting the facts of the transaction and showing that
it is being sent on behalf of the Distributor acting in the capacity of
agent for the Accounts, in conformance with the requirements of Rule 10b-10
of the 1934 Act.
7. Each party hereto shall advise the others promptly of (a) any action of the
SEC or any authorities of any state or territory of which it has knowledge,
affecting registration or qualification of the Accounts or the contracts,
or the right to offer the contracts for sale, and (b) the happening of any
event which makes untrue any statement, or which requires the making of any
change in the registration statement or prospectus in order to make the
statements therein not misleading.
8. The Company agrees to be responsible to the Accounts for all sales and
administrative expenses incurred in connection with the administration of
the contracts and the Accounts other than applicable taxes arising from
income and capital gains of the Accounts and any other taxes arising from
the existence and operation of the Accounts.
9. As compensation for services performed and expenses incurred under this
Agreement, the Company will receive the charges and deductions as provided
in each outstanding series of the Company's contracts. Distributor will
receive the compensation provided for in Section 4, and may receive such
additional compensation, if any, as may be agreed upon by the parties from
time-to-time.
- 2 -
<PAGE>
10. Each party hereto agrees to furnish any other state insurance commissioner
or regulatory authority with jurisdiction over the contracts with any
information or reports in connection with services provided under this
Agreement which may be requested in order to ascertain whether the variable
insurance product operations of the Company are being conducted in a manner
consistent with applicable statutes, rules and regulations.
11. This Agreement shall upon execution become effective as of the date first
above written, and
(a) Unless otherwise terminated, this Agreement shall continue in effect
from year-to-year;
(b) This Agreement may be terminated by any party at any time upon giving
60 days' written notice to the other parties hereto; and
(c) This Agreement shall automatically terminate in the event of its
assignment.
12. The initial Accounts covered by this Agreement are set forth in Appendix A.
This Agreement, including Appendix A, may be amended at any time by mutual
consent of the parties.
13. This Agreement shall be governed by and construed in accordance with the
laws of Massachusetts.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the day
and year first above written.
ALLMERICA FINANCIAL LIFE INSURANCE
AND ANNUITY COMPANY
By: /s/ David J. Mueller
-------------------------------------
Title: Vice President
ALLMERICA INVESTMENTS, INC.
By: /s/ Thomas P. Cunningham
-------------------------------------
Title: Vice President
- 3 -
<PAGE>
Appendix A
SEPARATE ACCOUNTS OF ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
AS OF SEPTEMBER 1, 1997
VEL Account
VEL II Account
Inheiritage Account
Allmerica Select Separate Account II
Group VEL Account
Fulcrum Variable Life Separate Account
Separate Account VA-K
Separate Account VA-P
Allmerica Select Separate Account
Separate Account KG
Separate Account KGC
Fulcrum Separate Account
- 4 -
<PAGE>
SALES
AGREEMENT ALLMERICA INVESTMENTS, INC.
440 Lincoln Street
Worcester, Massachusetts 01653
- ------------------------------------------------------------------------------
Agreement, effective as of _________________, 19___, by and between Allmerica
Investments, Inc., a Massachusetts corporation (herein "Allmerica") and
_________________________________________________________________, a
________________________ corporation (herein "Broker-Dealer").
Allmerica, subject to the terms and conditions set forth in this Agreement,
authorizes and appoints Broker-Dealer to solicit applications for the sale of
Contracts. Broker-Dealer accepts this appointment and agrees to the terms
and conditions set forth below.
DEFINITIONS
INSURANCE COMPANIES - All Contracts will be issued by First Allmerica
Financial Life Insurance Company (herein "First Allmerica") or by Allmerica
Financial Life Insurance and Annuity Company (herein "Allmerica Financial
Life"), a subsidiary of First Allmerica. The Principal Office of First
Allmerica and Allmerica Financial Life (herein collectively referred to as
"the Insurance Companies") is located at 440 Lincoln Street, Worcester,
Massachusetts 01653.
CONTRACTS - The variable annuity and variable life insurance contracts of the
Insurance Companies listed on the attached Commission Schedule(s), for which
Allmerica Investments, Inc., an affiliate of First Allmerica, has been
appointed the exclusive distributor and principal underwriter.
REGISTERED REPRESENTATIVES - Individuals affiliated with Broker-Dealer who
are licensed as life insurance agents in those jurisdictions in which
applications for the sale of Contracts are to be solicited and who are also
duly registered with the National Association of Securities Dealers, Inc.
(herein "NASD") in compliance with the '34 Act.
'33 ACT - The Securities Act of 1933, as amended.
'34 ACT - The Securities Exchange Act of 1934, as amended.
RELATIONSHIP OF PARTIES
SECTION 1. Nothing in this Agreement will be construed to create the
relationship of employer and employee between Allmerica or either Insurance
Company and any Broker-Dealer or Registered Representative. Broker-Dealer
and each Registered Representative will be free to exercise their independent
judgment as to the time, place and manner of solicitation and servicing of
business underwritten by the Insurance Companies. However, neither
Broker-Dealer nor any Registered Representative shall have authority to act
on behalf of Allmerica or the Insurance
1
<PAGE>
Companies in a manner which does not conform to applicable statutes,
ordinances, or governmental regulations or to reasonable rules adopted from
time to time by Allmerica or the Insurance Companies.
LIMITATIONS OF AUTHORITY
SECTION 2. Neither Broker-Dealer nor any Registered Representative will have
authority to accept risks of any kind; to make, alter or discharge Contracts;
to waive forfeitures or exclusions; to alter or amend any papers received
from either Insurance Company; to deliver any life insurance Contract or any
document, agreement or endorsement changing the amount of insurance coverage
if Broker-Dealer or the soliciting Registered Representative knows or has
reason to believe that the insured is uninsurable; or to accept any payment
unless the payment meets the minimum payment requirement for the Contract
established by the Insurance Company.
LICENSING AND REGISTRATION
SECTION 3. Broker-Dealer is hereby authorized to recommend Registered
Representatives for appointment by the Insurance Companies and only
individuals so recommended by Broker-Dealer shall become Registered
Representatives hereunder. Allmerica shall arrange for the Insurance
Companies to apply for life insurance agent appointments in the appropriate
jurisdictions for such recommended Registered Representatives of
Broker-Dealer.
Notwithstanding the foregoing, the Insurance Companies and Allmerica reserve
the right to refuse to appoint any proposed Registered Representative and/or
to terminate any Registered Representative or firm who has been appointed by
the Insurance Companies.
AGREEMENTS BY BROKER-DEALER
SECTION 4. Broker-Dealer agrees that at all times when performing its duties
under this Agreement it shall be duly registered as a securities
broker-dealer under the '34 Act, be a member in good standing of the NASD,
and be duly licensed or registered as a securities broker-dealer in each
jurisdiction where such licensing or registration is required in connection
with the sale of the Contracts or the supervision of Registered
Representatives who solicit applications for the Contracts.
Broker-Dealer agrees that at all times when performing its duties under this
Agreement it shall be duly licensed to sell Contracts in each jurisdiction in
which Broker-Dealer intends to perform hereunder.
Broker-Dealer shall be responsible for carrying out its sales and
administrative obligations under this Agreement in continued compliance with
the NASD Rules of Fair Practice, federal and state securities laws and
regulations, and state insurance laws and regulations. Broker-Dealer agrees
to offer the Contracts for sale through its Registered Representatives and to
offer such Contracts only in accordance with the prospectus. Broker-Dealer
and Registered Representative(s) are not authorized to give any information
or make any representations concerning such Contracts other than
2
<PAGE>
those contained in the prospectus or in such sales literature or advertising
as may be authorized by Allmerica.
Broker-Dealer agrees that it shall take reasonable steps to ensure that no
person shall offer or sell Contracts on its behalf until such person is
appropriately licensed, registered or otherwise qualified to offer and sell
such Contracts under the state and federal securities laws and the insurance
laws of each jurisdiction in which such person intends to solicit.
Broker-Dealer agrees to train, supervise and be solely responsible for the
conduct of its Registered Representatives in the solicitation and sale of the
Contracts and for the supervision as to their strict compliance with
Allmerica's rules and procedures, the NASD rules of Fair Practice, and
applicable rules and regulations of any other governmental or other agency
that has jurisdiction over the offering for sale of the Contracts.
Broker-Dealer shall take reasonable steps to ensure that its Registered
Representatives shall not make recommendations to an applicant to purchase a
Contract in the absence of reasonable grounds to believe that the purchase of
such Contract is suitable for such applicant. Such determination will be
based upon, but will not be limited to, information furnished to a Registered
Representative after reasonable inquiry of such applicant concerning the
applicant's insurance and investment objectives, financial situation and
needs.
Broker-Dealer shall take reasonable steps to ensure that Registered
Representatives of Broker-Dealer shall conduct their business with respect to
the Contracts at all times in compliance with all applicable federal and
state laws and regulations and shall be subject to a standard of conduct
including, but not limited to, the following:
(a) A Registered Representative shall not solicit or participate in the sale
of the Contracts in any jurisdiction until such Registered Representative
is trained and licensed.
(b) A Registered Representative shall not solicit applications for the sale of
the Contracts without delivering the then currently effective prospectus
for such Contracts and any then applicable amendments or supplements
thereto, including the current prospectus(es) for any fund(s) in which
Contract separate account(s) invest.
(c) A Registered Representative shall have no authority to advertise for or
on behalf of the Insurance Companies or Allmerica without express written
authorization from Allmerica.
3
<PAGE>
AGREEMENTS BY ALLMERICA
SECTION 5. Allmerica agrees that at all times while this Agreement remains
in force that it shall be a registered Broker-Dealer under the '34 Act and be
a member in good standing of the NASD.
During the term of this Agreement, Allmerica will provide Broker-Dealer,
without charge, with as many copies of the prospectus(es) for the Contracts
(and any amendments, or supplements thereto), the current prospectus(es) for
any underlying fund(s) and applications for the Contracts as Broker-Dealer
may reasonably request. Upon termination of the Agreement, any prospectuses,
applications, and other materials and supplies furnished by Allmerica to
Broker-Dealer shall be promptly returned to Allmerica by Broker-Dealer.
Allmerica agrees to promptly notify Broker-Dealer of newly declared effective
prospectus(es) for the Contracts and any amendments or supplements thereto.
Allmerica agrees to keep Broker-Dealer informed of all jurisdictions in which
the Insurance Companies are licensed to sell the Contracts and in which the
Contracts may be offered for sale.
SUBMISSION OF APPLICATIONS; DELIVERY OF CONTRACTS; REJECTED BUSINESS
SECTION 6. Broker-Dealer will submit, or cause to be submitted, directly to
the Principal Office of the Insurance Companies all Contract applications
solicited by Registered Representatives of the Broker-Dealer. Broker-Dealer
will deliver, or cause to be delivered, within 10 days of its receipt by
Broker-Dealer all Contracts issued on applications submitted by Broker-Dealer
or its Registered Representatives and will ensure that any Contract
endorsement, amendment or other agreement is properly executed by the
Contract owner at the time of Contract delivery. Broker-Dealer will promptly
return, or cause to be returned, to the Insurance Companies any Contract
which is declined by the applicant or which cannot be delivered within the
time permitted by the Insurance Company's rules.
ILLUSTRATIONS AND PROPOSALS
SECTION 7. Neither Broker-Dealer nor any Registered Representative of
Broker-Dealer will furnish any prospective Contract owner with an
illustration of the financial or other aspects of a Contract or a proposal
for a Contract unless the same has been either furnished by the Insurance
Companies or prepared from computer software or other material furnished or
approved by the Insurance Companies. Any illustration or proposal will
conform to standards of completeness and accuracy established by the
Insurance Companies. If the proposal or illustration was not furnished by
the Insurance Companies, Broker-Dealer will retain in its records for
availability to the Insurance Companies a copy thereof or the means to
duplicate the same. Any computer software or materials furnished by either
Insurance Company will be and remain its property.
4
<PAGE>
ACCOUNTING FOR FUNDS COLLECTED
SECTION 8. In accordance with the rules of the Insurance Companies,
Broker-Dealer will account for and remit immediately to the Principal Office
of the Insurance Companies all funds received or collected by Broker-Dealer
or by Registered Representatives of Broker-Dealer for or on behalf of either
Insurance Company without deduction for any commissions, or other claim
Broker-Dealer or the Registered Representative may have against either
Insurance Company or Allmerica and will make such reports and file such
substantiating documents and records as the Insurance Companies may
reasonably require.
INDEMNIFICATION
SECTION 9. Broker-Dealer shall indemnify and hold Allmerica and the
Insurance Companies and their officers, directors and employees harmless from
any liability arising from any act or omission of Broker-Dealer or of any
affiliate of Broker-Dealer, or any officer, director, employee of
Broker-Dealer or of its Registered Representatives, including but not limited
to, any fines, penalties, attorney's fees, costs of settlement, damages or
financial loss. Broker-Dealer expressly authorizes Allmerica and the
Insurance Companies, without precluding them from exercising any other remedy
they may have, to charge against all compensation due or to become due to
Broker-Dealer under this Agreement, any monies paid on any liability incurred
by Allmerica or the Insurance Companies by reason of any such act or omission
of Broker-Dealer, or any affiliate of Broker-Dealer, or of any officer,
director, employee of Broker-Dealer or of its Registered Representatives.
Allmerica shall indemnify and hold Broker-Dealer, its affiliates and their
officers, directors and employees harmless from any liability arising from
any act or omission of Allmerica, the Insurance Companies or any affiliate of
Allmerica or any of the Insurance Companies (collectively the "Allmerica
Companies"), or any officer, director or employee of the Allmerica Companies,
including but not limited to, any fines, penalties, reasonable attorney's
fees, costs of settlement damages or financial loss.
The indemnifications provided by this Section shall survive termination of this
Agreement.
If a Contract is not delivered to the Contract owner within 10 days of its
receipt by the Broker-Dealer and if after delivery the owner returns the
Contract to the Insurance Company and receives a full refund of all payments
made, in any situation where the failure to deliver in a timely manner was due
to the inaction or negligence of the Broker-Dealer or a Registered
Representative of Broker-Dealer, the difference between the payments refunded
and the cash value of the Contract on the date the Contract is received by the
Insurance Company at its Principal Office shall be reimbursed to the Insurance
Company by the Broker-Dealer in any case where the cash value is less than the
payments refunded. Any such reimbursement shall be paid by the Broker-Dealer to
the affected Insurance Company within 30 days of Broker-Dealer's receipt of a
written request for payment.
5
<PAGE>
If Broker-Dealer utilizes delivery receipts as part of its Contract delivery
rules and procedures, the date of execution of the delivery receipt by the
Contract owner shall be deemed to be the date of Contract delivery for
purposes of this Agreement.
COMMISSION REFUNDS
SECTION 10. If a Contract owner rescinds a Contract or exercises the
Contract's Right to Examine privilege (i.e., free-look), then Broker-Dealer
will repay the appropriate Insurance Company the amount of any commissions
received on the payments returned within 10 days of Broker-Dealer's receipt
of a written request for repayment.
BASIS OF COMPENSATION
SECTION 11. While this Agreement remains in force, the Insurance Companies
agree to pay Broker-Dealer commissions in accordance with the Commission
Schedule(s) attached hereto and incorporated herein, from which amounts
Broker-Dealer agrees to pay its Registered Representatives. Commission
payments will be made to Broker-Dealer for each Contract issued pursuant to
an application solicited by duly appointed Registered Representatives of
Broker-Dealer.
TIME OF PAYMENT OF COMMISSIONS
SECTION 12. A payment will not be considered made until it has been received
by the Insurance Company at its Principal Office. On payments made,
commissions will be paid at regular intervals in accordance with the rules of
the Insurance Companies.
TERMINATION
SECTION 13. This Agreement shall automatically terminate immediately and
without notice upon Broker-Dealer's or Allmerica's ceasing to comply with any
of the terms and conditions of this Agreement or upon the dissolution,
bankruptcy or insolvency of Broker-Dealer or Allmerica.
Whether or not there is a breach of this Agreement, Broker-Dealer or
Allmerica may terminate this Agreement by giving ten (10) days' written
notice to the other party at any time during the first year hereof, and by
giving thirty (30) days' written notice after the expiration of the first
year hereof.
Upon termination of this Agreement all authorizations, rights and obligations
shall cease except the obligation to pay commissions due on payments received
prior to termination for Contracts in effect on the date of termination, or
for Contracts to be issued pursuant to applications received by the Insurance
Companies prior to termination. Except as provided in the preceding
sentence, no further commissions shall be paid after termination of this
Agreement.
RIGHT TO SET-OFF
SECTION 14. Allmerica and the Insurance Companies will have a lien on any
commissions payable under this Agreement, whether or not such payments are
now due or hereafter become due, and may apply any such monies to the
satisfaction of indebtedness to Allmerica or to either Insurance Company to
the extent permitted by law.
6
<PAGE>
NON-WAIVER OF BREACH
SECTION 15. Waiver of any breach of any provision of this Agreement will not
be construed as a waiver of the provision or of the right of Allmerica or
Broker-Dealer to enforce said provision thereafter.
ASSIGNABILITY
SECTION 16. This Agreement is not transferable. Without the written consent
of Allmerica and the Insurance Companies, no rights or interest in or to
commissions will be subject to assignment, and any attempted assignment, sale
or transfer of any commissions without such written consents will be void and
of no effect hereunder.
RESERVATION OF RIGHT TO CHANGE
SECTION 17. Allmerica reserves the right at any time, and from time to time,
to change prospectively the terms and conditions of this Agreement, including
but not limited to, the rates of commissions. Any change will become
effective on the date specified in a notice or, if later, 30 days after the
notice is given to Broker-Dealer. However, the requirement to give advance
notice shall not apply if the change becomes necessary or expedient by reason
of legislation or the requirements of any governmental body and, in the
opinion of Allmerica, it is not reasonably possible to meet the 30 day
requirement. Changes will not be retroactive and will apply only to life
insurance coverage solicited or annuity payments made on or after the
effective date of the change.
COMPLAINTS AND INVESTIGATIONS
SECTION 18. Broker-Dealer and Allmerica agree to cooperate fully in any
customer complaint, insurance or securities regulatory proceeding or judicial
proceeding with respect to Broker-Dealer, Allmerica, the Insurance Companies,
their affiliates or their Registered Representatives to the extent that such
customer complaint or proceeding is in connection with Contracts marketed
under this Agreement. To the extent required, Allmerica will arrange for the
Insurance Companies to cooperate in any such complaint or proceeding.
Without limiting the foregoing:
(a) Broker-Dealer will be notified promptly by Allmerica or the Insurance
Companies of any written customer complaint or notice of any regulatory
proceeding or judicial proceeding of which they become aware including
Broker-Dealer or any Registered Representative of Broker-Dealer which may
be related to the issuance of any Contract marketed under this Agreement.
Broker-Dealer will promptly notify Allmerica of any written customer
complaint, or notice of any regulatory proceeding or judicial proceeding
received by Broker-Dealer, with respect to Broker-Dealer or any of its
Registered Representatives in connection with any Contract marketed under
this Agreement or any activity in connection with any such Contract(s).
(b) In the case of a customer complaint specified above, Broker-Dealer,
Allmerica and the Insurance Companies will cooperate in investigating
such complaint and any proposed response to such complaint will be sent
to the other party of this Agreement for approval not less than five
business days prior to its being sent to the customer or regulatory
authority, except that if a more prompt
7
<PAGE>
response is required, the proposed response shall be communicated by
telephone or facsimile transmission.
CONFIDENTIALITY
SECTION 19. Allmerica agrees that the names and addresses of all customers
and prospective customers of Broker-Dealer and of any company or person
affiliated with Broker-Dealer, and the names and addresses of any Registered
Representatives of Broker-Dealer which may come to the attention of Allmerica
exclusively as a result of its relationship with Broker-Dealer or any
affiliated company and not from any independent source, are confidential and
shall not be used by Allmerica, the Insurance Companies, or any company or
person affiliated with Allmerica or the Insurance Companies, nor divulged to
any party for any purpose whatsoever, except as may be necessary in
connection with the administration and marketing of the Contracts sold by or
through Broker-Dealer, including responses to specified requests to the
Insurance Companies for service by Contract owners or efforts to prevent the
replacement of such Contracts or to encourage the exercise of options under
the terms of the Contracts. In no event shall the names and addresses of
such customers, prospective customers and Registered Representatives be
furnished by Allmerica to any other company or person, including but not
limited to, any of their managers, registered representatives, or brokers who
are not Registered Representatives of Broker-Dealer, any company affiliated
with Allmerica or any manager, agency, or broker of such company, or any
securities broker-dealer or any insurance agent affiliated with such
broker-dealer. The intent of this section is that Allmerica, the Insurance
Companies or companies or persons affiliated with them shall not utilize, or
permit to be utilized, their knowledge of Broker-Dealer or of any affiliated
companies which is derived exclusively as a result of the relationships
created through the sale of the Contracts.
Notwithstanding the foregoing provisions of this Section 19, nothing herein
shall prohibit Allmerica, the Insurance Companies or any company or person
affiliated with Allmerica or the Insurance Companies from (i) seeking
business relationships and entering into separate sales agreements with
Registered Representatives of Broker-Dealer if the names of said Registered
Representatives were obtained from independent sources and not exclusively as
a result of Allmerica's relationship with Broker-Dealer; (ii) from entering
into separate sales agreements with Registered Representatives of
Broker-Dealer upon the request and at the initiation of said Registered
Representatives; or (iii) divulging the names and addresses of any such
customers, prospective customers, Registered Representatives, or other
companies or persons described in the preceding paragraph in connection with
any customer complaint or insurance or securities regulatory proceeding
described in Section 18. PROVIDED, HOWEVER, that Allmerica shall not enter
into separate sales agreements with Registered Representatives of
Broker-Dealer while such Registered Representatives are affiliated with
Broker-Dealer.
8
<PAGE>
BONDING
SECTION 20. Broker-Dealer represents that it shall maintain bonding in the
form, type, and amount required under the NASD Rules of Fair Practice.
NOTICE
SECTION 21. Whenever this Agreement requires a notice to be given, the
requirement will be considered to have been met, in the case of notice to the
Insurance Companies or to Allmerica, if delivered or mailed postage prepaid
to the address specified on page 1 of this Agreement and, in the case of
notice to Broker-Dealer, if delivered or mailed postage prepaid to the
intended recipient's principal place of business.
CAPTIONS
SECTION 22. Captions are used for informational purposes only and no caption
shall be construed to affect the substance of any provision of this Agreement.
EFFECTIVENESS; ENTIRE CONTRACT; PRIOR AGREEMENTS
SECTION 23. This Agreement contains the entire contract between the parties.
Upon execution it will replace all previous agreements between Broker-Dealer
and Allmerica and the Insurance Companies, or any of them, relating to the
solicitation of Contracts. It is hereby understood and agreed that any other
agreement or representation, commitment, promise or statement of any nature,
whether oral or written, relating to or purporting to relate to the
relationship of the parties is hereby rendered null and void.
IN WITNESS WHEREOF, the parties have executed this Agreement in duplicate to
take effect on its effective date.
*For: _________________________________ For: Allmerica Investments, Inc.
Name of Broker-Dealer
By:__________________________________ By:________________________________
Name:________________________________ Name:______________________________
Title:_______________________________ Title:_____________________________
Date:________________________________ Date:______________________________
9
<PAGE>
SALES
AGREEMENT ALLMERICA INVESTMENTS, INC.
440 Lincoln Street
Worcester, Massachusetts 01653
- ------------------------------------------------------------------------------
Agreement, effective as of _________________, 19___, by and between Allmerica
Investments, Inc., a Massachusetts corporation (herein "Allmerica"), ________
__________________________________________________________________________, a
_____________________________ corporation (herein the "Broker-Dealer") and the
affiliates of Broker-Dealer listed on Exhibit "A" attached hereto, each
affiliate being referred to herein as a "General Agent".
Allmerica, subject to the terms and conditions set forth in this Agreement,
authorizes and appoints each General Agent to solicit applications for the
sale of Contracts. Each General Agent accepts this appointment and each
General Agent and the Broker-Dealer agree to the terms and conditions set
forth below.
DEFINITIONS
INSURANCE COMPANIES - All Contracts will be issued by First Allmerica
Financial Life Insurance Company (herein "First Allmerica") or by Allmerica
Financial Life Insurance and Annuity Company (herein "Allmerica Financial
Life"), a subsidiary of First Allmerica. The Principal Office of First
Allmerica and Allmerica Financial Life (herein collectively referred to as
"the Insurance Companies") is located at 440 Lincoln Street, Worcester,
Massachusetts 01653.
CONTRACTS - The variable annuity and variable life insurance contracts of the
Insurance Companies listed on the attached Commission Schedule(s), for which
Allmerica Investments, Inc., an affiliate of First Allmerica, has been
appointed the exclusive distributor and principal underwriter.
REGISTERED REPRESENTATIVES - Individuals affiliated with each General Agent
and the Broker-Dealer who are licensed as life insurance agents in those
jurisdictions in which applications for the sale of Contracts are to be
solicited and who are also duly registered with the National Association of
Securities Dealers, Inc. (herein "NASD") in compliance with the '34 Act.
'33 ACT - The Securities Act of 1933, as amended.
'34 ACT - The Securities Exchange Act of 1934, as amended.
RELATIONSHIP OF PARTIES
SECTION 1. Nothing in this Agreement will be construed to create the
relationship of employer and employee between Allmerica or either Insurance
Company and any General Agent, the Broker-Dealer or any Registered
Representative. General Agents and Registered Representatives will be free
to exercise their independent judgment as to the time, place and manner of
solicitation and servicing of business underwritten by the Insurance
Companies. However, General Agents, the Broker-Dealer and Registered
Representatives shall have no authority to act on behalf of Allmerica or the
1
<PAGE>
Insurance Companies in a manner which does not conform to applicable
statutes, ordinances, or governmental regulations or to reasonable rules
adopted from time to time by Allmerica or the Insurance Companies.
LIMITATIONS ON AUTHORITY
SECTION 2. General Agents, the Broker-Dealer and Registered Representatives
will have no authority to accept risks of any kind; to make, alter or
discharge Contracts; to waive forfeitures or exclusions; to alter or amend
any papers received from either Insurance Company; to deliver any life
insurance Contract or any document, agreement or endorsement changing the
amount of insurance coverage if the General Agent, the Broker-Dealer or the
soliciting Registered Representative know or have reason to believe that the
insured is uninsurable; or to accept any payment unless the payment meets the
minimum payment requirement for the Contract established by the Insurance
Company.
LICENSING AND REGISTRATION
SECTION 3. Each General Agent is hereby authorized to recommend Registered
Representatives for appointment by the Insurance Companies and only
individuals so recommended by a General Agent shall become Registered
Representatives hereunder. Allmerica shall arrange for the Insurance
Companies to apply for life insurance agent appointments in the appropriate
jurisdictions for such recommended Registered Representatives. Until
Contracts of First Allmerica are offered for sale, applications for
appointments shall only be made on behalf of Allmerica Financial Life.
Notwithstanding the foregoing, the Insurance Companies and Allmerica reserve
the right to refuse to appoint any proposed Registered Representative and/or
to terminate any Registered Representative who has been appointed by the
Insurance Companies.
AGREEMENTS BY GENERAL AGENT AND BROKER-DEALER
SECTION 4. The Broker-Dealer agrees that at all times when performing its
duties under this Agreement it shall be duly registered as a securities
broker-dealer under the '34 Act, be a member in good standing of the NASD,
and be duly licensed or registered as a securities broker-dealer in each
jurisdiction where such licensing or registration is required in connection
with the sale of the Contracts or the supervision of Registered
Representatives who solicit applications for the Contracts.
Each General Agent agrees that at all times when performing its duties under
this Agreement it shall be duly licensed to sell Contracts in each
jurisdiction in which General Agent intends to perform hereunder.
Each General Agent and the Broker-Dealer shall be responsible for carrying
out their sales and administrative obligations under this Agreement in
continued compliance with the NASD Rules of Fair Practice, federal and state
securities laws and regulations, and state insurance laws and regulations.
Each General Agent and the Broker-Dealer agree to offer the Contracts for
sale through their Registered Representatives and to offer such Contracts
only in accordance with the prospectus. General Agents, the Broker-Dealer
and Registered Representatives are not authorized to give any information or
make any representations concerning such Contracts other
2
<PAGE>
than those contained in the prospectus or in such sales literature or
advertising as may be authorized by Allmerica.
Each General Agent and the Broker-Dealer agree that they shall be fully
responsible for ensuring that no person shall offer or sell Contracts on
their behalf until such person is appropriately licensed, registered or
otherwise qualified to offer and sell such Contracts under the state and
federal securities laws and the insurance laws of each jurisdiction in which
such person intends to solicit.
Each General Agent and the Broker-Dealer agree to train, supervise and be
solely responsible for the conduct of their Registered Representatives in the
solicitation and sale of the Contracts and for the supervision as to their
strict compliance with Allmerica's rules and procedures, the NASD rules of
Fair Practice, and applicable rules and regulations of any other governmental
or other agency that has jurisdiction over the offering for sale of the
Contracts.
Each General Agent and the Broker-Dealer shall take reasonable steps to
ensure that their Registered Representatives shall not make recommendations
to an applicant to purchase a Contract in the absence of reasonable grounds
to believe that the purchase of such Contract is suitable for such applicant.
Such determination will be based upon, but will not be limited to,
information furnished to a Registered Representative after reasonable inquiry
of such applicant concerning the applicant's insurance and investment
objectives, financial situation and needs.
Each General Agent and the Broker-Dealer agree that Registered
Representatives shall conduct their business with respect to the Contracts at
all times in compliance with all applicable federal and state laws and
regulations and shall be subject to a standard of conduct including, but not
limited to, the following:
(a) A Registered Representative shall not solicit or participate in the sale
of the Contracts in any jurisdiction until such Registered Representative
is trained and licensed.
(b) A Registered Representative shall not solicit for the sale of Contracts
without delivering the then currently effective prospectus for such
Contracts and any then applicable amendments or supplements thereto,
including the current prospectus(es) for any fund(s) in which Contract
separate account(s) invest.
(c) A Registered Representative shall have no authority to advertise for or
on behalf of the Insurance Companies or Allmerica without express written
authorization from Allmerica.
AGREEMENTS BY ALLMERICA
SECTION 5. Allmerica agrees that at all times while this Agreement remains
in force that it shall be a registered broker-dealer under the '34 Act and be
a member in good standing of the NASD.
3
<PAGE>
During the term of this Agreement, Allmerica will provide to, or cause to be
provided to, each General Agent and the Broker-Dealer, without charge, as
many copies of the prospectus(es) for the Contracts (and any amendments, or
supplements thereto), the current prospectus(es) for any underlying fund(s)
and applications for the Contracts as each General Agent and the
Broker-Dealer may reasonably request. Upon termination of the Agreement, any
prospectuses, applications, and other materials and supplies furnished by
Allmerica to General Agents and the Broker-Dealer shall be promptly returned
to Allmerica.
Allmerica agrees to promptly notify each General Agent and the Broker-Dealer
of newly declared effective prospectus(es) for the Contracts and any
amendments or supplements thereto.
Allmerica agrees to keep each General Agent and the Broker-Dealer informed of
all jurisdictions in which the Insurance Companies are licensed to sell the
Contracts and in which the Contracts may be offered for sale.
SUBMISSION OF APPLICATIONS; DELIVERY OF CONTRACTS; REJECTED BUSINESS
SECTION 6. Each General Agent or the Broker-Dealer will submit, or cause to
be submitted, directly to the Principal Office of the Insurance Companies all
Contract applications solicited by their Registered Representatives. Each
General Agent or the Broker-Dealer will deliver, or cause to be delivered,
within 10 days of the date of issue all Contracts issued on applications
submitted by the General Agent, the Broker-Dealer or their Registered
Representatives. Each General Agent or the Broker-Dealer will promptly
return, or cause to be returned, to the Insurance Companies any Contract
which is declined by the applicant or which cannot be delivered within the
time permitted by the Insurance Company's rules.
ILLUSTRATIONS AND PROPOSALS
SECTION 7. General Agents, the Broker-Dealer and Registered Representatives
will not furnish any prospective Contract owner with an illustration of the
financial or other aspects of a Contract or a proposal for a Contract unless
the same has been either furnished by the Insurance Companies or prepared
from computer software or other material furnished or approved by the
Insurance Companies. Any illustration or proposal will conform to standards
of completeness and accuracy established by the Insurance Companies. If the
proposal or illustration was not furnished by the Insurance Companies, each
General Agent or the Broker-Dealer will retain in its records for
availability to the Insurance Companies a copy thereof or the means to
duplicate the same. Any computer software or materials furnished by either
Insurance Company will be and remain its property.
ACCOUNTING FOR FUNDS COLLECTED
SECTION 8. In accordance with the rules of the Insurance Companies, each
General Agent and the Broker-Dealer will account for and remit immediately to
the Principal Office of the Insurance Companies all funds received or
collected for or on behalf of either Insurance Company without deduction for
any commissions, or other claim the General Agent, the Broker-Dealer or any
Registered Representative may have against either Insurance Company or
Allmerica and will make such reports and file such
4
<PAGE>
substantiating documents and records as the Insurance Companies may
reasonably require.
INDEMNIFICATION
SECTION 9. Each General Agent and the Broker-Dealer, jointly and severally,
shall indemnify and hold Allmerica and the Insurance Companies and their
officers, directors and employees harmless from any liability arising from
any act or omission of the General Agent, the Broker-Dealer or of any
affiliate of the Broker-Dealer, or any officer, director, employee of the
General Agent or the Broker-Dealer or of their Registered Representatives,
including but not limited to, any fines, penalties, attorney's fees, costs of
settlement, damages or financial loss. Each General Agent and the
Broker-Dealer expressly authorize Allmerica and the Insurance Companies,
without precluding them from exercising any other remedy they may have, to
charge against all compensation due or to become due to the General Agent or
the Broker-Dealer under this Agreement, any monies paid on any liability
incurred by Allmerica or the Insurance Companies by reason of any such act or
omission of any General Agent, the Broker-Dealer, any affiliate of the
Broker-Dealer, or of any officer, director, employee of a General Agent or
the Broker-Dealer or of their Registered Representatives.
Allmerica shall indemnify and hold each General Agent and the Broker-Dealer
and their officers, directors, employees and registered representatives
harmless from any liability arising from any act or omission of Allmerica,
the Insurance Companies or any affiliate of Allmerica or any of the Insurance
Companies (collectively the "Allmerica Companies"), or any officer, director
or employee of the Allmerica Companies, including but not limited to, any
fines, penalties, reasonable attorney's fees, costs of settlement, damages or
financial loss.
The indemnifications provided by this Section shall survive termination of
this Agreement.
If a Contract is not delivered to the Contract owner within 10 days of the
date of issue of the Contract and if after delivery the owner returns the
Contract to the Insurance Company and receives a full refund of all payments
made, in any situation where the failure to deliver in a timely manner was
due to the inaction or negligence of a General Agent, the Broker-Dealer or a
Registered Representative, the difference between the payments refunded and
the cash value of the Contract on the date the Contract is received by the
Insurance Company at its Principal Office shall be reimbursed to the
Insurance Company by the offending General Agent or the Broker-Dealer in any
case where the cash value is less than the payments refunded. Any such
reimbursement shall be paid to the affected Insurance Company within 30 days
of receipt of a written request for payment.
COMMISSION REFUNDS
SECTION 10. If a Contract owner rescinds a Contract or exercises a right to
surrender a Contract for return of all payments made, the soliciting General
Agent or the Broker-Dealer will repay the appropriate Insurance Company the
amount of any
5
<PAGE>
commissions received on the payments returned within 10 days of receipt of a
written request for repayment.
BASIS OF COMPENSATION
SECTION 11. While this Agreement remains in force, the Insurance Companies
agree to pay each General Agent commissions in accordance with the Commission
Schedule(s) attached hereto and incorporated herein, from which amounts the
General Agent agrees to pay its Registered Representatives. Commission
payments will be made for each Contract issued pursuant to an application
solicited by duly appointed Registered Representatives.
TIME OF PAYMENT OF COMMISSIONS
SECTION 12. A payment will not be considered made until it has been received
by the Insurance Company at its Principal Office. On payments made,
commissions will be paid at regular intervals in accordance with the rules of
the Insurance Companies.
TERMINATION
SECTION 13. This Agreement shall automatically terminate immediately and
without notice upon any General Agent's or the Broker-Dealer's ceasing to
comply with any of the terms and conditions of this Agreement or upon the
dissolution, bankruptcy or insolvency of a General Agent or the Broker-Dealer.
Whether or not there is a breach of this Agreement, the Broker-Dealer or
Allmerica may terminate this Agreement by giving ten (10) days' written
notice to the other party at any time during the first year hereof, and by
giving thirty (30) days' written notice after the expiration of the first
year hereof.
Upon termination of this Agreement all authorizations, rights and obligations
shall cease except the obligation to pay commissions due on payments received
prior to termination for Contracts in effect on the date of termination, or
for Contracts to be issued pursuant to applications received by the Insurance
Companies prior to termination. Except as provided in the preceding
sentence, no further commissions shall be paid after termination of this
Agreement.
RIGHT OF SET-OFF
SECTION 14. Allmerica and the Insurance Companies will have a lien on any
commissions payable under this Agreement, whether or not such payments are
now due or hereafter become due, and may apply any such monies to the
satisfaction of indebtedness to Allmerica or to either Insurance Company to
the extent permitted by law.
NON-WAIVER OF BREACH
SECTION 15. Waiver of any breach of any provision of this Agreement will not
be construed as a waiver of the provision or of the right of Allmerica to
enforce said provision thereafter.
ASSIGNABILITY
SECTION 16. This Agreement is not transferable. Without the written consent
of Allmerica and the Insurance Companies, no rights or interest in or to
commissions will be subject to assignment, and any attempted assignment, sale
or transfer of any commissions without such written consents will immediately
make this Agreement
6
<PAGE>
void and be a release to Allmerica and to the Insurance Companies in full of
any and all of their obligations hereunder.
RESERVATION OF RIGHT TO CHANGE
SECTION 17. Allmerica reserves the right at any time, and from time to time,
to change prospectively the terms and conditions of this Agreement, including
but not limited to, the rates of commissions. Any change will become
effective on the date specified in a notice or, if later, 10 days after the
notice is given to each General Agent and the Broker-Dealer. However, the
requirement to give advance notice shall not apply if the change becomes
necessary or expedient by reason of legislation or the requirements of any
governmental body and, in the opinion of Allmerica, it is not reasonably
possible to meet the 10 day requirement. Changes will not be retroactive and
will apply only to life insurance coverage solicited or annuity payments made
on or after the effective date of the change.
COMPLAINTS AND INVESTIGATIONS
SECTION 18. Each General Agent, the Broker-Dealer and Allmerica agree to
cooperate fully in any customer complaint, insurance or securities regulatory
proceeding or judicial proceeding with respect to the General Agent, the
Broker-Dealer, Allmerica, the Insurance Companies, their affiliates or their
Registered Representatives to the extent that such customer complaint or
proceeding is in connection with Contracts marketed under this Agreement. To
the extent required, Allmerica will arrange for the Insurance Companies to
cooperate in any such complaint or proceeding. Without limiting the
foregoing:
(a) General Agents and the Broker-Dealer will be notified promptly by
Allmerica or the Insurance Companies of any written customer complaint or
notice of any regulatory proceeding or judicial proceeding of which they
become aware including the General Agent, the Broker-Dealer or any
Registered Representative which may be related to the issuance of any
Contract marketed under this Agreement. Each General Agent or the
Broker-Dealer will promptly notify Allmerica of any written customer
complaint or notice of any regulatory proceeding or judicial proceeding
received by the General Agent or the Broker-Dealer including the General
Agent, the Broker-Dealer or any of their Registered Representatives which
may be related to the issuance of any Contract marketed under this
Agreement or any activity in connection with any such Contract(s).
(b) In the case of a customer complaint, each General Agent, the
Broker-Dealer, Allmerica and the Insurance Companies will cooperate in
investigating such complaint and any proposed response to such complaint
will be sent to the other parties to this Agreement for approval not less
than five business days prior to its being sent to the customer or
regulatory authority, except that if a more prompt response is required,
the proposed response shall be communicated by telephone or facsimile
transmission.
7
<PAGE>
CONFIDENTIALITY
SECTION 19. Allmerica agrees that the names and addresses of all customers
and prospective customers of each General Agent and the Broker-Dealer and of
any company or person affiliated with a General Agent or the Broker-Dealer,
and the names and addresses of any Registered Representatives of the
Broker-Dealer which may come to the attention of Allmerica exclusively as a
result of its relationship with a General Agent and the Broker-Dealer or any
affiliated company and not from any independent source, are confidential and
shall not be used by Allmerica, the Insurance Companies, or any company or
person affiliated with Allmerica or the Insurance Companies, nor divulged to
any party for any purpose whatsoever, except as may be necessary in
connection with the administration and marketing of the Contracts sold by or
through General Agents, including responses to specified requests to the
Insurance Companies for service by Contract owners or efforts to prevent the
replacement of such Contracts or to encourage the exercise of options under
the terms of the Contracts. In no event shall the names and addresses of
such customers, prospective customers and Registered Representatives be
furnished by Allmerica to any other company or person, including but not
limited to, any of their managers, registered representatives, or brokers who
are not Registered Representatives of the Broker-Dealer, any company
affiliated with Allmerica or any manager, agency, or broker of such company,
or any securities broker-dealer or any insurance agent affiliated with such
broker-dealer. The intent of this section is that Allmerica, the Insurance
Companies or companies or persons affiliated with them shall not utilize, or
permit to be utilized, their knowledge of each General Agent, the
Broker-Dealer or of any affiliated companies which is derived exclusively as
a result of the relationships created through the sale of the Contracts.
Notwithstanding the foregoing provisions of this Section 19, nothing herein
shall prohibit Allmerica, the Insurance Companies or any company or person
affiliated with Allmerica or the Insurance Companies from (i) seeking
business relationships and entering into separate sales agreements with
Registered Representatives of the Broker-Dealer if the names of said
Registered Representatives were obtained from independent sources and not
exclusively as a result of Allmerica's relationship with a General Agent and
the Broker-Dealer; (ii) from entering into separate sales agreements with
Registered Representatives of the Broker-Dealer upon the request and at the
initiation of said Registered Representatives; or (iii) divulging the names
and addresses of any such customers, prospective customers, Registered
Representatives, or other companies or persons described in the preceding
paragraph in connection with any customer complaint or insurance or
securities regulatory proceeding described in Section 18.
BONDING
SECTION 20. Each General Agent and the Broker-Dealer agree to furnish such
bond or bonds as Allmerica may require. Upon failure or inability of a
General Agent or the Broker-Dealer to obtain or renew any such bonds, this
Agreement shall terminate at Allmerica's discretion upon notice by Allmerica.
8
<PAGE>
NOTICE
SECTION 21. Whenever this Agreement requires a notice to be given, the
requirement will be considered to have been met, in the case of notice to the
Insurance Companies or to Allmerica, if delivered or mailed postage prepaid
to the address specified on page 1 of this Agreement and, in the case of
notice to a General Agent or the Broker-Dealer, if delivered or mailed
postage prepaid to the intended recipient's principal place of business.
CAPTIONS
SECTION 22. Captions are used for informational purposes only and no caption
shall be construed to affect the substance of any provision of this Agreement.
EFFECTIVENESS; ENTIRE CONTRACT; PRIOR AGREEMENTS
SECTION 23. This Agreement contains the entire contract between the parties.
Upon execution it will replace all previous agreements between each General
Agent or the Broker-Dealer and Allmerica and the Insurance Companies, or any
of them, relating to the solicitation of Contracts. It is hereby understood
and agreed that any other agreement or representation, commitment, promise or
statement of any nature, whether oral or written, relating to or purporting
to relate to the relationship of the parties is hereby rendered null and
void.
IN WITNESS WHEREOF, the parties have executed this Agreement in duplicate to
take effect on its effective date.
*For: _________________________________ For: Allmerica Investments, Inc.
Name of General Agent
By:__________________________________ By:________________________________
Name:________________________________ Name:______________________________
Title:_______________________________ Title:_____________________________
Date:________________________________ Date:______________________________
For: __________________________________
Name of Broker-Dealer
By:__________________________________
Name:________________________________
Title:_______________________________
Date:________________________________
* A separate signature line is required for each General Agent affiliate of the
Broker-Dealer.
9
<PAGE>
KEMPER GATEWAY FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
VARIABLE ANNUITIES ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY CO.
PRINCIPAL OFFICE: 440 LINCOLN ST.; WORCESTER, MA 01653
BROKER COMMISSION SCHEDULE
(PERCENT OF PREMIUM)
INDIVIDUAL ANNUITIES
COMMISSION SCHEDULE KG - 1 (Rev. 1/98) (Applicable to Individual
Annuities Issued on or after January 1, 1998)
FLEXIBLE PREMIUM VARIABLE ANNUITY CONTRACTS
Issued by Allmerica Financial Life Insurance and Annuity Company
(First Allmerica Financial Life Insurance Company in New York and
Hawaii).
COMMISSION PERCENTAGE
1. All contracts EXCEPT contracts issued to 401(k) plans or
contracts where the owner or annuitant is beyond age 85-1/2 at date
of contract issue.
THE FOLLOWING CHOICES ARE AVAILABLE:
(a) 6.00% of each premium paid, no trail commission
(b) 5.00% of each premium paid, .25% annual trail commission
(c) 4.00% of each premium paid, .50% annual trail commission
(d) 2.00% of each premium paid, 1.00% annual trail commission.
2. CONTRACTS ISSUED TO 401(k) PLANS
All upfront commissions on 401(k) contracts are reduced by 1.00%.
3. Contracts issued where the owner or annuitant is beyond age 85-1/2 at
date of issue.
NO CHOICE AVAILABLE
2.00% of each premium paid, 1.00% annual trail commission
RULES FOR TRAIL COMMISSION PAYMENTS
A Commission Option must be selected for each eligible contract on the
back of the contract application unless the Broker has pre-selected a
particular option for all contracts. If no commission selection is
made, the commission will be payable under the default commission
option pre-selected by the Broker. If the Broker has not pre-selected
a default option and no commission selection is made, the commission
will be payable under option (a) above.
Trail commissions will be paid quarterly in January, April, July and
October. The first trail commission for a contract will be paid on
the first quarterly payment date following the first anniversary of
the date of issue (e.g., if a contract is issued on July 5, 1997, the
first trail commission will be payable in October, 1998). Trail
commissions will continue to be paid while the Sales Agreement remains
in force and will be paid on a particular contract until the contract
is surrendered or annuity benefits begin to be paid under an annuity
option. Quarterly trail commissions will be a percentage of the
unloanded account value of each eligible contract. For purposes of
trail commission calculations, "unloaned account value" means the cash
value of the contract on the last day of the calendar quarter
immediately preceding the payment date less the principal of any
contract loan and accrued interest thereon. The quarterly trail
commission percentage will be 25% of the applicable annual rate (e.g.,
.0625% if the annual rate is .25%, .125% if the annual rate is .50%).
If a First Allmerica or Allmerica Financial Life annuity contract is
exchanged for another First Allmerica or Allmerica Financial Life
annuity contract, the commission rate, including any applicable trail
commission rate, will be applicable to the exchanged contract. No
commissions other than continuing trail commissions are payable on the
rollover amount allocated to the new contract. Trails will be paid as
described above based on the issue date of the new contract.
NOTE: NO TRAIL COMMISSIONS WILL BE PAYABLE AFTER THE DATE THE SALES AGREEMENT
IS TERMINATED FOR ANY REASON.
<PAGE>
SALES ALLMERICA INVESTMENTS, INC.
AGREEMENT 440 Lincoln Street
Worcester, Massachusetts 01653
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Agreement, effective as of February 13, 1998, by and
between Allmerica Investments, Inc., a Massachusetts
corporation (herein "Allmerica"), First Allmerica Financial
Life Insurance Company, a Massachusetts corporation (herein
"First Allmerica"), Allmerica Financial Life Insurance and
Annuity Company, a Delaware corporation (herein "Allmerica
Financial Life"), Chase Investment Services Corp., a
Delaware corporation (herein "Broker-Dealer") and Chase
Insurance Agency, Inc., an affiliate of Broker-Dealer
(herein "General Agent").
Allmerica, First Allmerica and Allmerica Financial Life,
subject to the terms and conditions set forth in this
Agreement, authorize and appoint General Agent to solicit
applications for the sale of Contracts. General Agent
accepts this appointment and General Agent and Broker-Dealer
agree to the terms and conditions set forth below.
DEFINITIONS
INSURANCE COMPANIES - All Contracts will be issued by First
Allmerica or by Allmerica Financial Life, a subsidiary of
First Allmerica. The Principal Office of First Allmerica
and Allmerica Financial Life (herein collectively referred
to as "the Insurance Companies") is located at 440 Lincoln
Street, Worcester, Massachusetts 01653.
CONTRACTS - The variable annuity and variable life insurance
contracts of the Insurance Companies listed on the attached
Commission Schedule(s) and, in the case of group variable
life insurance contracts, the individual certificates of
insurance issued thereunder, for which Allmerica
Investments, Inc., an affiliate of First Allmerica, has been
appointed the exclusive distributor and principal
underwriter.
REGISTERED REPRESENTATIVES - Individuals affiliated with
General Agent and Broker-Dealer who are licensed as life
insurance agents in those jurisdictions in which
applications for the sale of Contracts are to be solicited
and who are also duly registered with the National
Association of Security Dealers, Inc. (herein "NASD") in
compliance with the '34 Act.
'33 ACT - The Securities Act of 1933, as amended.
INDEPENDENT '34 ACT - The Securities Exchange Act of 1934, as amended.
CONTRACTOR
STATUS SECTION 1. Nothing in this Agreement will be construed to
create the relationship of employer and employee between
Allmerica or either Insurance Company and General Agent,
Broker-Dealer or any Registered Representative. General
Agent and Registered Representatives will be free to
exercise their independent judgment
1
<PAGE>
as to the time, place and manner of solicitation and
servicing of business underwritten by the Insurance
Companies. However, General Agent, Broker-Dealer and
Registered Representatives shall have no authority to
act on behalf of Allmerica or the Insurance Companies
in a manner which does not conform to applicable statutes,
ordinances, or governmental regulations or to reasonable
rules adopted from time to time by Allmerica or the
LIMITATIONS Insurance Companies, which said reasonable rules shall have
ON AUTHORITY been provided in writing to Broker-Dealer and General Agent.
SECTION 2. General Agent, Broker-Dealer and Registered
Representatives will have no authority to accept risks of
any kind; to make, alter or discharge Contracts; to waive
forfeitures or exclusions; to alter or amend any papers
received from either Insurance Company; to deliver any life
insurance Contract or any document, agreement or endorsement
changing the amount of insurance coverage if General Agent,
Broker-Dealer or the soliciting Registered Representative
knows or has reason to believe that the insured is
uninsurable; or to accept any payment unless the payment
LICENSING AND meets the minimum payment requirement for the Contract
REGISTRATION established by the Insurance Company.
SECTION 3. General Agent and Broker-Dealer are hereby
authorized to recommend Registered Representatives for
appointment by the Insurance Companies and only individuals
so recommended by General Agent or Broker-Dealer shall
become Registered Representatives hereunder. The Insurance
Companies agree to apply for life insurance agent
appointments in the appropriate jurisdictions for such
recommended Registered Representatives.
Notwithstanding the foregoing, the Insurance Companies and
Allmerica reserve the right to refuse to appoint any
proposed Registered Representative and/or to terminate any
Registered Representative who has been appointed by the
Insurance Companies. The Insurance Companies shall promptly
notify General Agent and Broker-Dealer in writing if the
AGREEMENTS BY Insurance Companies or Allmerica terminate the appointment
GENERAL AGENT of a Registered Representative.
AND BROKER-
DEALER SECTION 4. Broker-Dealer agrees that at all times when
performing its duties under this Agreement it shall be duly
registered as a securities broker-dealer under the '34 Act,
be a member in good standing of the NASD, and be duly
licensed or registered as a securities broker-dealer in each
jurisdiction where such licensing or registration is
required in connection with the sale of the Contracts or the
supervision of Registered Representatives who solicit
applications for the Contracts.
General Agent agrees that at all times when performing its
duties under this Agreement it shall be duly licensed to
sell Contracts in each jurisdiction in which General Agent
intends to perform hereunder.
General Agent and Broker-Dealer shall be responsible for
carrying out their sales and administrative obligations
under this Agreement in continued compliance with the NASD
Rules of Fair Practice, federal and state securities laws
and regulations,
2
<PAGE>
and state insurance laws and regulations. General Agent and
Broker-Dealer agree to offer the Contracts for sale through
their Registered Representatives and, in the case of
Contracts which require registration, to offer such
Contracts only in accordance with the prospectus. General
Agent, Broker-Dealer and Registered Representatives are not
authorized to give any information or make any
representations concerning such Contracts other than those
contained in the prospectus or in such sales literature or
advertising as may be authorized by Allmerica.
General Agent and Broker-Dealer agree that they shall be
responsible for ensuring that no person shall offer or sell
Contracts requiring registration on their behalf until such
person is appropriately licensed, registered or otherwise
qualified to offer and sell such Contracts under the state
and federal securities laws and the insurance laws of each
jurisdiction in which such person intends to solicit.
General Agent and Broker-Dealer agree to train, supervise
and be responsible for the conduct of their Registered
Representatives in the solicitation and sale of the
Contracts and for the supervision as to their strict
compliance with Allmerica's written rules and procedures,
the NASD Rules of Fair Practice, and applicable rules and
regulations of any other governmental or other agency that
has jurisdiction over the offering for sale of the
Contracts.
General Agent and Broker-Dealer shall take reasonable steps
to ensure that their Registered Representatives shall not
make recommendations to an applicant to purchase a Contract
subject to registration under the '33 Act in the absence of
reasonable grounds to believe that the purchase of such
Contract is suitable for such applicant. Such
determination will be based upon, but will not be limited
to, information furnished to the Broker-Dealer by a
Registered Representative after reasonable inquiry of such
applicant concerning the applicant's insurance and
investment objectives, financial situation and needs.
General Agent and Broker-Dealer agree that Registered
Representatives shall conduct their business with respect to
the Contracts at all times in compliance with all applicable
federal and state laws and regulations and shall be subject
to a standard of conduct including, but not limited to, the
following:
(a) A Registered Representative shall not solicit or
participate in the sale of the Contracts in any
jurisdiction until such Registered Representative is
trained and licensed.
(b) A Registered Representative shall not solicit for the
sale of registered Contracts without delivering the
then currently effective prospectus for such Contracts
and any then applicable amendments or supplements
thereto, including the current prospectus(es) for any
fund(s) in which Contract separate account(s) invest.
3
<PAGE>
AGREEMENTS
BY ALLMERICA (c) A Registered Representative shall have no authority to
advertise for or on behalf of the Insurance Companies
or Allmerica without express written authorization from
Allmerica.
SECTION 5. Allmerica agrees that at all times while this
Agreement remains in force that it shall be a registered
broker-dealer under the '34 Act and be a member in good
standing of the NASD.
During the term of this Agreement, Allmerica will provide
to, or cause to be provided to, General Agent and
Broker-Dealer, without charge, with as many copies of the
prospectus(es) for the Contracts (and any amendments, or
supplements thereto), the current prospectus(es) for any
underlying fund(s) and applications for the Contracts as
General Agent and Broker-Dealer may reasonably request.
Upon termination of the Agreement, any prospectuses,
applications, and other materials and supplies furnished by
Allmerica to General Agent and Broker-Dealer shall be
promptly returned to Allmerica. Alternatively, at the
option of the General Agent and Broker-Dealer, such
materials may be destroyed by the General Agent or
Broker-Dealer rather than returned to Allmerica.
Allmerica agrees to promptly notify and supply (or caused to
be supplied) General Agent and Broker-Dealer with a
reasonable number of all newly declared effective
prospectus(es) for the Contracts and any amendments or
supplements thereto.
SUBMISSION OF Allmerica agrees to keep General Agent and Broker-Dealer
APPLICATIONS; informed of all jurisdictions in which the Insurance
DELIVERY OF Companies are licensed to sell the Contracts and in which
CONTRACTS; the Contracts may be offered for sale.
REJECTED
BUSINESS SECTION 6. Broker-Dealer will advise Insurance Companies of
any and all instances, based upon information provided to
Broker-Dealer by Registered Representatives, of an
applicant's purchase appearing to not meet the suitability
standards of the Broker- Dealer. Applications will be
returned within five days of receipt by Insurance Companies
unless Broker-Dealer is provided additional information by
Registered Representative relative to adequate suitability.
General Agent or Broker-Dealer will submit, or cause to be
submitted, directly to the Principal Office of the Insurance
Companies all Contract applications solicited by Registered
Representatives. General Agent or Broker-Dealer will
deliver, or cause to be delivered, within 10 days of the
date of issue all Contracts issued on applications submitted
by General Agent, Broker-Dealer or their Registered
Representatives. General Agent or Broker-Dealer will
ILLUSTRATIONS promptly return, or cause to be returned, to the Insurance
AND PROPOSALS Companies any Contract which is declined by the applicant or
which cannot be delivered within the time permitted by the
issuing Insurance Company's rules.
SECTION 7. General Agent, Broker-Dealer and Registered
Representatives will not furnish any prospective Contract
owner with an illustration of the financial or other aspects
of a Contract or a proposal for a Contract unless the same
has been either furnished by the Insurance Companies or
prepared from computer software or other
4
<PAGE>
material furnished or approved by the Insurance Companies.
Any illustration or proposal will conform to standards of
completeness and accuracy established by the Insurance
Companies. If the proposal or illustration was not furnished
by the Insurance Companies, General Agent or Broker-Dealer
ACCOUNTING will retain in its records for availability to the Insurance
FOR FUNDS Companies a copy thereof or the means to duplicate the
COLLECTED same. Any computer software or materials furnished by either
Insurance Company will be and remain its property.
SECTION 8. In accordance with the rules of the Insurance
Companies, General Agent and Broker-Dealer will account for
and remit promptly to the Principal Office of the Insurance
Companies all funds received or collected for or on behalf
of either Insurance Company without deduction for any
commissions, or other claim General Agent, Broker-Dealer or
INDEMNIFICATION any Registered Representative may have against either
Insurance Company or Allmerica and will make such reports
and file such substantiating documents and records as the
Insurance Companies may reasonably require.
SECTION 9. General Agent and Broker-Dealer, jointly and
severally, shall indemnify and hold Allmerica and the
Insurance Companies and their officers, directors and
employees harmless from any liability arising from any act
or omission of General Agent, Broker-Dealer or of any
affiliate of General Agent or Broker-Dealer, or any officer,
director, employee of General Agent or Broker-Dealer or of
their Registered Representatives, including but not limited
to, any fines, penalties, reasonable attorney's fees, costs
of settlement, damages or financial loss.
Allmerica and Insurance Companies, jointly and severally,
shall indemnify and hold harmless the General Agent and
Broker-Dealer and their directors, officers, employees and
agents from and against any damages, losses, liabilities,
claims, charges, reasonable attorney's fees, or other
expenses or costs arising from or in connection with any
claim, action, or proceeding relating to or arising from (i)
any act or omission or any negligent or intentional
misconduct by Allmerica and/or Insurance Companies relating
to the subject matter of this Agreement; (ii) the failure of
Allmerica and/or Insurance Companies to comply with the
terms of this Agreement; or (iii) Allmerica's and/or the
Insurance Companies' breach of any warranty, representation
or covenant of this Agreement.
With respect to any demand or proceeding involving a matter
("Indemnification Matter") against which a party(ies) to
this Agreement ("Indemnitee") is indemnified by Allmerica
and the Insurance Companies or the General Agent and
Broker-Dealer, whichever is appropriate ("Indemnitors")
under this Section 9, the Indemnitors shall be solely
responsible, at their sole expense, for litigating,
defending or otherwise attempting to resolve such demand or
proceeding, and the Indemnitee shall fully cooperate with
the Indemnitors and counsel in their efforts to litigate,
defend or otherwise attempt to resolve such demand or
proceeding, and the Indemnitee shall have the right to
participate therein at its sole expense, to the extent
permitted by law, through counsel of its own choice. The
Indemnitors shall
5
<PAGE>
not agree to any settlement without the Indemnitee's prior
written consent, which consent shall not be unreasonably
withheld.
With respect to each Indemnification Matter:
Within 10 days after the Indemnitee receives documents
pertaining to any demand or proceeding constituting
such Indemnification Matter, or within such shorter
period of time as may be necessary under the
circumstances to avoid prejudice to the Indemnitors'
rights, the Indemnitee shall give notice to the
Indemnitors of the nature of such indemnification
Matter and shall deliver to the Indemnitors copies of
all such documents.
Within 10 days after a final agreement is reached or a
final judgment is rendered with respect to such
Indemnification Matter, the Indemnitors shall pay to
the Indemnitee any amounts to which the Indemnitee is
entitled under this Section 9.
If a Contract is not delivered to the Contract owner within
10 days of the date of issue of the Contract and if after
delivery the owner returns the Contract to the Insurance
Company and receives a full refund of all payments made, in
any situation where the failure to deliver in a timely
manner was due to the inaction or negligence of the General
Agent, the Broker-Dealer or a Registered Representative, the
difference between the payments refunded and the cash value
of the Contract on the date the Contract is received by the
Insurance Company at its Principal Office shall be
reimbursed to the Insurance Company by the General Agent or
Broker-Dealer in any case where the cash value is less than
the payments refunded. Any such reimbursement shall be paid
COMMISSION to the affected Insurance Company within 30 days of receipt
REFUNDS of a written request for payment.
The provisions of this Section 9 shall survive termination
of this Agreement.
BASIS OF SECTION 10. If a Contract owner rescinds a Contract or
COMPENSATION exercises a right to surrender a Contract for return of all
payments made, General Agent or Broker-Dealer will repay the
appropriate Insurance Company the amount of any commissions
received on the payments returned within 30 days of receipt
of a written request for repayment.
SECTION 11. While this Agreement remains in force, the
TIME OF PAYMENT Insurance Companies agree to pay General Agent and/or
OF COMMISSIONS Broker-Dealer commissions in accordance with the Commission
Schedule(s) attached hereto and incorporated herein, from
which amounts General Agent and Broker-Dealer agree to pay
their Registered Representatives. Commission payments will
be made for each Contract issued pursuant to an application
solicited by duly appointed Registered Representatives.
6
<PAGE>
TERMINATION
SECTION 12. A payment will not be considered made until it
has been received by the Insurance Company at its Principal
Office. On payments made, commissions will be paid at
regular intervals in accordance with the written rules of
the Insurance Companies.
SECTION 13. This Agreement shall automatically terminate
immediately and without notice upon General Agent's or
Broker-Dealer's ceasing to comply with any of the terms and
conditions of this Agreement or upon the dissolution,
bankruptcy or insolvency of General Agent or Broker-Dealer.
Whether or not there is a breach of this Agreement, General
Agent, Broker-Dealer or Allmerica may terminate this
Agreement by giving thirty (30) days' advance written notice
to the other parties of such termination. PROVIDED,
HOWEVER, that any such termination by Allmerica shall
require the written consent of Broker-Dealer and General
Agent.
In the event of termination, Allmerica, the Insurance
Companies, Broker-Dealer and General Agent shall agree on
the wording of any notices to be sent to any person or
Contractholder, subject to the requirements of applicable
laws and regulations concerning any matter within the scope
of this Agreement, including replacement of the General
Agent.
Upon termination of this Agreement all authorizations,
RIGHT OF SET-OFF rights and obligations shall cease except the obligation to
pay commissions due on payments received prior to
termination for Contracts in effect on the date of
termination, or for Contracts to be issued pursuant to
applications received by the Insurance Companies prior to
termination. Except as provided in the preceding sentence,
no further commissions shall be paid after termination of
this Agreement.
SECTION 14. Allmerica and the Insurance Companies will have
a lien on any commissions payable under this Agreement,
whether or not such payments are now due or hereafter become
due, and may apply any such monies to the satisfaction of
any indebtedness to Allmerica or either Insurance Company
WAIVER AND arising under this Agreement, to the extent permitted by law.
MODIFICATION
Allmerica and the Insurance Companies can only exercise this
lien upon thirty (30) days' advance written notice to the
General Agent and Broker-Dealer and such written notice
shall set forth the basis of the exercise of any such lien.
SECTION 15. No waiver by any party of any default by
another in the performance of any promise, term or condition
of this Agreement shall be construed to be a waiver by such
party of any other or subsequent default in performance of
the same or any other covenant, promise, term or condition
hereof. No prior transactions or dealings between the
parties shall be deemed to establish any custom or usage
waiving or modifying any provision hereof. Except as
otherwise provided within the Agreement, this Agreement may
be modified only by a written agreement duly
7
<PAGE>
ASSIGNMENT signed by the persons authorized to sign agreements on
behalf of the parties. This Agreement and the attached
Schedules constitutes the entire agreement between the
parties with regard to this subject matter. The word
"Agreement" shall be understood to include any and all
Addenda attached in accordance with the terms and conditions
herein provided.
SECTION 16. This Agreement and the rights, duties and
obligations of the parties hereto shall not be assignable by
either without prior written consent of the other parties,
and any purported assignment shall be void, EXCEPT that the
General Agent or the Broker-Dealer shall be permitted to
RESERVATION OF assign the Agreement or any interest they may have in the
RIGHT TO CHANGE Agreement to their ultimate parent holding company and any
affiliate or subsidiary of the General Agent, the
Broker-Dealer, or their ultimate parent holding company,
upon notice to but without obtaining the consent of
Allmerica and the Insurance Companies. Any assignee shall
be appropriately licensed and shall comply with all
applicable insurance laws and regulations.
SECTION 17. Allmerica reserves the right at any time, and
from time to time, to change prospectively the terms and
conditions of this Agreement. PROVIDED, HOWEVER, that
Allmerica agrees that any such unilateral changes shall be
limited to the following: (i) changes which Allmerica
determines are reasonably necessary to comply with any
federal or state legislative or regulatory requirements,
(ii) amendments related to changes in Allmerica's and/or the
Insurance Companies' product line, contracts or distribution
structure affecting all broker-dealers and general agents
involved in the solicitation and servicing of variable life
insurance or variable annuity contracts substantially the
same as the Contracts described in this Agreement or (iii)
changes in Contract commission rates. Any change will
become effective on the date specified in a notice or, if
later, thirty (30) days after the notice is given to General
Agent and Broker-Dealer. However, the requirement to give
COMPLAINTS AND advance notice shall not apply if the change becomes
INVESTIGATIONS necessary or expedient by reason of legislation or the
requirements of any governmental body and, in the opinion of
Allmerica, it is not reasonably possible to meet the thirty
day requirement. Changes will not be retroactive and will
apply only to life insurance coverage solicited or annuity
payments made on or after the effective date of the change.
SECTION 18. General Agent, Broker-Dealer, Allmerica and the
Insurance Companies agree to cooperate fully in any customer
complaint, insurance or securities regulatory proceeding or
judicial proceeding with respect to General Agent,
Broker-Dealer, Allmerica, the Insurance Companies, their
affiliates or their Registered Representatives to the extent
that such customer complaint or proceeding is in connection
with Contracts marketed under this Agreement. Without
limiting the foregoing:
(a) General Agent and Broker-Dealer will be notified
promptly by Allmerica or the Insurance Companies of any
written customer complaint or notice of any regulatory
proceeding or judicial proceeding of which they become
aware
8
<PAGE>
including General Agent, Broker-Dealer or any Registered
Representative which may be related to the issuance of
any Contract marketed under this Agreement. General
Agent or Broker-Dealer will promptly notify Allmerica
and the Insurance Companies of any written customer
complaint, or notice of any regulatory proceeding or
judicial proceeding received by General Agent or
Broker-Dealer related to any Contract marketed under
this Agreement or any activity in connection with any
such Contract(s).
(b) In the case of a customer complaint, General Agent,
Broker-Dealer, Allmerica and the Insurance Companies
CONFIDENTIALITY will cooperate in investigating such complaint and any
proposed response to such complaint will be sent to the
other parties of this Agreement for approval not less
than five (5) business days prior to its being sent to
the customer or regulatory authority, except that if a
more prompt response is required, the proposed response
shall be communicated by telephone or facsimile
transmission.
SECTION 19. Allmerica and the Insurance Companies agree
that the names and addresses of all customers and
prospective customers of General Agent and Broker-Dealer and
of any company or person affiliated with General Agent or
Broker-Dealer, and the names and addresses of any Registered
Representatives of General Agent and Broker-Dealer which may
come to the attention of Allmerica or the Insurance
Companies exclusively as a result of its relationship with
General Agent and Broker-Dealer or any affiliated company
and not from any independent source, are confidential and
shall not be used by Allmerica, the Insurance Companies, or
any company or person affiliated with Allmerica or the
Insurance Companies, nor divulged to any party for any
purpose whatsoever, except as may be necessary in connection
with the administration and marketing of the Contracts sold
by or through General Agent, including responses to
specified requests to the Insurance Companies for service by
Contract owners or efforts to prevent the replacement of
such Contracts or to encourage the exercise of options under
the terms of the Contracts. In no event shall the names and
addresses of such customers, prospective customers and
Registered Representatives be furnished by Allmerica or the
Insurance Companies to any other company or person,
including but not limited to, any of their managers,
registered representatives, or brokers who are not
Registered Representatives of Broker-Dealer, any company
affiliated with Allmerica or the Insurance Companies or any
manager, agency, or broker of such company, or any
securities broker-dealer or any insurance agent affiliated
with such broker-dealer. The intent of this section is that
Allmerica, the Insurance Companies or companies or persons
affiliated with them shall not utilize, or permit to be
utilized, their knowledge of General Agent, Broker-Dealer or
of any affiliated companies which is derived exclusively as
a result of the relationships created through the sale of
the Contracts.
Should General Agent and/or Broker-Dealer or any affiliate or
subsidiary thereof make available customer information of any
type to Allmerica and Insurance Companies for purposes
contemplated pursuant to this Agreement, Allmerica and
9
<PAGE>
Insurance Companies acknowledge that General Agent and
Broker-Dealer, their affiliates or subsidiaries, as the case
may be, are the owners and have the exclusive right to all
such customer lists, records (in writing or in other form)
or other information (including originals, copies or any
derivative material of any of the foregoing documents)
relating to customers or clients of General Agent and/or
Broker-Dealer, their affiliates or subsidiaries
("Customers"). Allmerica and Insurance Companies agree that
they will not knowingly solicit Customers for any other
products or services offered by Allmerica and Insurance
Companies, their subsidiaries, affiliates or any third party
without the prior written consent of General Agent and
Broker-Dealer, their subsidiaries or affiliates, which
consent may be unreasonably withheld.
Information obtained by Allmerica and/or Insurance Companies
in regard to Contracts issued by Allmerica and/or Insurance
Companies shall remain the property of Allmerica and/or
Insurance Companies.
Notwithstanding the foregoing provisions of this Section 19,
nothing herein shall prohibit Allmerica, the Insurance
Companies or any company or person affiliated with Allmerica
or the Insurance Companies from (i) seeking business
relationships and entering into separate sales agreements
with Registered Representatives of Broker-Dealer if the
names of said Registered Representatives were obtained from
independent sources and not exclusively as a result of
Allmerica's relationship with General Agent and
Broker-Dealer; (ii) from entering into separate sales
agreements with Registered Representatives of Broker-Dealer
upon the request and at the initiation of said Registered
Representatives; or (iii) divulging the names and addresses
of any Customers, prospective customers, Registered
BONDING Representatives, or other companies or persons described in
the preceding paragraph in connection with any customer
complaint or insurance or securities regulatory proceeding
described in Section 18.
The terms of this Section 19 shall survive termination of
this Agreement.
NOTICES
SECTION 20. General Agent and Broker-Dealer represent that
all of their directors, officers, employees and Registered
Representatives are and shall be continuously covered by a
blanket fidelity bond, including coverage for larceny and
embezzlement, issued by a reputable bonding company. This
bond shall be, at least, of the form, type and amount
required under the NASD Conduct Rules.
SECTION 21. All notices which are required to be given or
submitted pursuant to this Agreement shall be in writing and
shall be deemed given when deposited with the United States
Postal Service, postage prepaid, registered or certified
mail, return receipt requested, to the last address of
record of the party being notified which is maintained by
the other party in the ordinary course of business. Each
party agrees to notify the others immediately in writing of
any claims, demands or actions having any bearing on this
Agreement. Until further notice, all notices to Insurance
Companies and Allmerica shall be sent to the address
specified on page 1 of this
10
<PAGE>
Agreement. Until further notice, all notices to the
Broker-Dealer shall be addressed to Chase Investment
Services Corp., 55 Water Street, New York, NY 10041,
Attention: Gary Johnson, Vice President, and all notices
to the General Agent shall be addressed to Chase Insurance
Agency, Inc., 802 Delaware Avenue, 12th Floor, Wilmington,
DE 19801, Attention: Thomas Molitor, Vice President.
AUDIT
Notwithstanding the foregoing, proper notice shall also be
effective and deemed given when sent if given by facsimile
transmission, provided that such transmission is followed by
an original of the notice mailed within three (3) business
days of the date of the sending of the facsimile
transmission postage prepaid, registered or certified mail,
return receipt requested, as described above.
SECTION 22. General Agent and Broker-Dealer shall have the
right upon reasonable written notice to Allmerica and the
Insurance Companies during regular business hours, to audit
all the records and practices of Allmerica and the Insurance
Companies relating to the business contemplated hereunder in
order to determine if Allmerica and the Insurance Companies
are complying with the terms of this Agreement, including
USE OF NAME the payment of compensation. General Agent and
Broker-Dealer will have the right to inspect and copy all
such records at their own expense. At General Agent's and
Broker-Dealer's option, such audit may be conducted by
designated personnel or an independent auditor selected by
General Agent and Broker-Dealer. Any such audit shall be
conducted in a manner that avoids any material disruption of
Allmerica's or the Insurance Companies' business.
REPRESENTATIONS
AND WARRANTIES SECTION 23. Neither Allmerica nor the Insurance Companies
shall use the name "Chase Manhattan Bank", "Chase Investment
Services Corp.", "Chase Insurance Agency, Inc.", "Chase" or
any derivative thereof, in any manner whatsoever without the
express prior written consent of Broker-Dealer, General
Agent and The Chase Manhattan Bank, which consent may be
withheld in their sole and absolute discretion.
SECTION 24. In order to induce Broker-Dealer and General
Agent to enter into and to perform their obligations under
this Agreement, Allmerica and Insurance Companies represent
and warrant to Broker-Dealer and General Agent that:
(a) Allmerica and First Allmerica are corporations duly
incorporated, validly existing and in good standing
under the laws of the Commonwealth of Massachusetts.
Allmerica Financial Life is a corporation duly
incorporated, validly existing and in good standing
under the laws of the State of Delaware. Allmerica and
the Insurance Companies are qualified and licensed to
do business and are in good standing in each state
where the nature of their business requires such
qualification; have all requisite corporate right,
power and authority to own and lease their properties,
to carry on their business in the manner in which it is
now conducted and to enter into, execute and deliver
this Agreement and to perform their obligations
hereunder; and have completed all corporate proceedings
11
<PAGE>
necessary to authorize the execution and delivery of
this Agreement and the performance of their obligations
hereunder;
(b) The execution and delivery by Allmerica and Insurance
Companies of this Agreement and the performance of all
of their obligations hereunder will not violate any
provisions of their Articles of Incorporation or
By-laws;
(c) This Agreement will constitute a valid and binding
obligation of Allmerica and Insurance Companies, fully
enforceable in accordance with its terms, except as
such enforceability may be limited by applicable
bankruptcy, insolvency, reorganization or similar laws
affecting the rights of creditors generally and by
general equity principles;
(d) The execution and delivery by Allmerica and Insurance
Companies of this Agreement and the performance by
Allmerica and Insurance Companies of all of their
obligations hereunder will not violate or result in the
breach of any material term or provision of, constitute
a material default under or permit the acceleration of
maturity under, any material governmental or judicial
order, judgment or decree, or any material loan
agreement, debenture, mortgage, deed of trust or other
agreement or instrument, to which Allmerica and/or
Insurance Companies is a party or by which it is bound;
(e) There is no material threatened or pending legal
proceeding or government action to which Allmerica
and/or Insurance Companies is a party or to which any
of their property is subject which could materially and
adversely affect the ability of Allmerica and Insurance
Companies to enter into this Agreement and/or to
perform all of their obligations hereunder;
(f) Allmerica and Insurance Companies have complied with
and are not in default in any material respect under
any laws, ordinances, requirements, regulations, orders
or decrees of any court, commission, board or other
administrative body or governmental agency having
jurisdiction in respect of the conduct of their
business which could materially and adversely affect
their ability to enter into this Agreement and to
perform all of their obligations hereunder;
(g) All (i) insurance products issued by Insurance
Companies hereunder, and (ii) all compensation payable
hereunder to Broker-Dealer or General Agent, comply
CHANGE OF with all applicable laws, regulations and rulings, and
CONTROL - are or shall be filed with and approved by all
RIGHT OF administrative agencies as required by law; and
TERMINATION
(h) All materials, including but not limited to
advertising, promotional, software, sales
illustrations, and prospectuses, whether electronic,
written or otherwise, provided by Allmerica and/or
Insurance Companies, are current,
12
<PAGE>
free from any known defects and comply with all
applicable laws, regulations and rulings, and are
or shall be filed with and approved by all
administrative agencies as required by law.
CHOICE SECTION 25. The Broker-Dealer and General Agent may
OF LAWS terminate this Agreement if: there is a transfer (i) of
stock or assets of the Insurance Companies which would
effect a change in control of such insurers, or (ii) by
reinsurance or otherwise of ten percent or more of the
CAPTIONS Insurance Companies' insurance in force. The term "control"
means the possession, direct or indirect of the power to
direct or cause the direction of the management and policies
of the Insurers, whether through the ownership of voting
securities, by contract or otherwise. Control shall
conclusively be deemed to exist if any person directly or
EFFECTIVENESS; indirectly owns, controls or holds with the power to vote
ENTIRE ten percent or more of the voting securities of the
CONTRACT; Insurance Companies or any person(s) controlling such
PRIOR insurers.
AGREEMENTS
SECTION 26. The laws of the State of New York shall govern
all matters concerning the validity, performance and
integration of this Agreement.
SECTION 27. Captions are used for informational purposes
only and no caption shall be construed to affect the
substance of any provision of this Agreement.
SECTION 28. This Agreement contains the entire contract
between the parties. Upon execution it will replace all
previous agreements between General Agent or Broker-Dealer
and Allmerica and the Insurance Companies, or any of them,
relating to the solicitation of Contracts. It is hereby
understood and agreed that any other agreement or
representation, commitment, promise or statement of any
nature, whether oral or written, relating to or purporting
to relate to the relationship of the parties is hereby
rendered null and void.
IN WITNESS WHEREOF, the parties have executed this Agreement in duplicate to
take effect on its effective date.
For: CHASE INSURANCE AGENCY, INC. For: ALLMERICA INVESTMENTS, INC.
By: /s/ Joseph D. Picarello By: /s/ Emil J. Aberizk Jr.
-------------------------------- ----------------------------------
Name: Joseph D. Picarello Name: Emil J. Aberizk Jr.
-------------------------------- ----------------------------------
Title: Vice President Title: Compliance Officer
-------------------------------- ----------------------------------
Date: 1/28/98 Date: 2/19/98
-------------------------------- ----------------------------------
13
<PAGE>
For: CHASE INVESTMENT SERVICES CORP. For: FIRST ALLMERICA FINANCIAL LIFE
INSURANCE COMPANY AND ALLMERICA
FINANCIAL LIFE INSURANCE AND
ANNUITY COMPANY
By: /s/ Arden D. Down By: /s/ Emil J. Aberizk Jr.
-------------------------------- ----------------------------------
Name: Arden D. Down Name: Emil J. Aberizk Jr.
-------------------------------- ----------------------------------
Title: Vice President Title: Compliance Officer
-------------------------------- ----------------------------------
Date: 2/5/98 Date: 2/19/98
-------------------------------- ----------------------------------
14
<PAGE>
ALLMERICA ALLMERICA 440 Lincoln Street GENERAL AGENT'S
FINANCIAL INVESTMENTS, INC. Worcester, MA 01653 AGREEMENT
- --------------------------------------------------------------------------------
Allmerica Investments, Inc. ("Company") hereby appoints
__________________________________________________
("General Agent") as local supervisor for the purpose of training and
supervising all associated persons and registered representatives of Company
assigned to _________________________________________________________
("Agency") engaged in the solicitation, sale or service of variable life
insurance and variable annuity contracts offered by Allmerica Financial Life
Insurance and Annuity Company and/or First Allmerica Financial Life Insurance
Company, mutual funds, limited partnerships and general securities (collectively
"Investment Products and Services") offered and/or distributed by Company. This
appointment is effective as of the date accepted by General Agent and
acknowledged by Company.
1. SUPERVISION: General Agent agrees to supervise all registered
representatives assigned to Agency, both those operating from Agency and
those operating from detached locations, consistent with the standards of
conduct outlined in Company's Business Conduct Guide, Company's Statement
of Compliance for the Office of Supervisory Jurisdiction and Branch
Offices, the Program for Allmerica Financial Life/Allmerica Investments
Office Examinations, and the procedures and requirements outlined in other
Company manuals, memoranda and other publications, as may be amended from
time to time.
General Agent agrees to be responsible for Investment Products and Services
activity conducted through Agency by monitoring Investment Products and
Services activity in order to ensure that the business is processed in
accordance with regulatory and Company standards and to notify Company of
any irregularities and/or deficiencies.
General Agent agrees to be responsible for the maintenance and periodic
review of the books and records of Agency, as required by Company.
On at least an annual basis, General Agent agrees to conduct and/or
participate, in coordination with Company's compliance personnel, an agency
compliance meeting which all registered representatives assigned to Agency
shall attend. If for any reason a registered representative does not
attend agency compliance meeting, General Agent will schedule a personal
interview, on at least an annual basis, for the purpose of reviewing
activity of registered representative with respect to Investment Products
and Services and to discuss the compliance topics reviewed at agency
compliance meeting.
General Agent agrees to acquire and/or comply with all of the applicable
laws, rules and regulations (General Securities Principal Registration) of
the Securities and Exchange Commission (SEC), National Association of
Securities Dealers, Inc. (NASD) and all other federal and state laws and
regulations.
General Agent agrees to maintain all NASD registrations required to
supervise the solicitation and sale of Investment Products and Services
offered through Agency. General Agent will maintain all state securities
licenses and state insurance licenses as may be required to offer and
solicit Investment Products and Services.
2. LIMITATIONS OF AUTHORITY: General Agent has no authority to accept any
risk on Company's behalf, to issue, make, alter or discharge any contract,
to extend the time of payments, to waive or extend any contract obligation
or condition, or to alter or amend any communication sent by Company
without express authority in writing from an officer of Company.
3. ASSIGNABILITY: No assignment, sale or transfer of this Agreement or any
of the rights, claims or interests under it may be made by General Agent
without the prior written consent of Company. An assignment, sale or
transfer by General Agent without written consent of Company will
immediately make this Agreement void and shall be a release in full to
Company of any and all of its obligations under this Agreement.
4. AGENCY STAFFING: General Agent agrees to recruit, train and supervise
registered representatives to solicit Investment Products and Services
offered through Company. General Agent agrees to develop a sales force of
sufficient size and quality to adequately penetrate the market with
Investment Products and Services of Company.
<PAGE>
5. BUSINESS AUTHORIZED: General Agent agrees to act for Company in the
solicitation of orders only for those Investment Products and Services for
which Company has executed sales agreements. General Agent shall monitor
his/her registered representatives on a continuing basis to prevent the
offering or the selling of Investment Products and Services not offered by
Company and to prevent registered representatives of Company from
exercising discretionary authority on behalf of any of their clients.
6. SUBMISSION OF APPLICATIONS/ACCOUNTING FOR FUNDS COLLECTED: General Agent
agrees to establish and maintain at Agency procedures, as outlined in
Company manuals, concerning the collection, recording and transmittal of
all applications and/or payments collected on behalf of Company, any
issuer, or any sponsor.
General Agent agrees to be responsible to Company for monies collected by
registered representatives and for any securities, certificates, payments,
receipts and other Company papers in the possession of registered
representatives and employees of Agency.
Purchase checks for Investment Products and Services are to be client
personal checks, cashier's checks or money orders made payable to either
the Company, appropriate issuer, sponsor or other designated agent.
Purchase checks may not be made payable to registered representative,
General Agent or any personal or Agency Accounts.
7. REVIEW OF INVESTMENT PRODUCT BUSINESS: General Agent agrees, in accordance
with Company procedures, to conduct periodic reviews of Investment Product
and Services business of each registered representative. Such review of
Investment Product and Services business shall include, but not be limited
to, reviews for adequate NASD registrations and state securities and/or
insurance licensing of registered representative, prompt transmittal of
applications, checks and other pertinent items to Agency and subsequently
to Home Office, the correct use of applications and proper mode of payment
and the suitability of Investment Products and Service based on client's
financial profile and objectives.
8. BOOKS AND RECORDS: General Agent agrees to maintain a regular and
accurate record of all Investment Products and Services transactions of
Agency, including any journal, account books, records, papers, customer
account files or any other material, as required by Company. General Agent
agrees, at such times that Company may request, to make detailed report to
Company, on forms furnished for that purpose, showing an accurate
accounting of all monies and other items received for, or on behalf of
Company.
General Agent agrees that all records, files and papers are, and remain,
property of Company and will at all times be freely exhibited for the
purpose of examinations and inspection by duly authorized personnel of
Company.
Upon termination, all records revert to Company and should be turned over
to a Company representative.
9. DISTRIBUTION AND USE OF ADVERTISING MATERIAL, CORRESPONDENCE: General
Agent agrees not to directly or indirectly recommend or distribute any
advertising and/or sales literature to registered representatives
(including but not limited to prospectuses, illustrations, circulars, form
letters or postal cards, business cards, stationary, booklets, schedules,
broadcasting and other sales material of any kind) concerning Company
and/or the offering of Investment Products and Services until the material
has been approved in writing by a registered principal in the Company's
Compliance Department.
General Agent also agrees to obtain from his/her registered
representatives, at the time of development, copies of all correspondence
pertaining to the solicitations and/or sale of any Investment Products and
Services or to any other aspect of their Investment Products and Services
business, and to forward the correspondence to Home Office to allow for the
review and endorsement of correspondence in writing, on an official record
of Company, by a registered principal in the Company's Compliance
Department. General Agent shall periodically inspect Registered
Representatives' materials, sales literature and correspondence to ensure
compliance with Company requirements.
10. COMPENSATION: General Agent, subject to the provisions of this Agreement,
will be allowed expense reimbursement or allowances and overriding
commissions on payments collected on all Investment Product sales solicited
by Registered Representatives assigned to General Agent and effected
through Agency at rates established and published by Company, as may be
amended from time to time.
<PAGE>
11. COMMISSIONS: Company will pay commissions to General Agent, after
concession payments are made to Company by an issuer or sponsor, in
connection with sales of Investment Products and Services effected through
General Agent's personal solicitation. Such commissions will be paid on
the same basis and terms as specified in Company's Registered
Representative Agreement, which is incorporated herein by reference and as
may be amended from time to time.
12. TERMINATION WITHOUT CAUSE: General Agent and Company may terminate this
Agreement at any time without cause.
13. RELATIONSHIP OF PARTIES: Nothing contained in this Agreement is to be
construed to create the relationship of employer and employee between
Company and General Agent. General Agent, however, is to always comply
with all of the applicable laws, rules and regulations of the SEC, NASD,
federal and state authorities as well as Company's rules, regulations and
procedures concerning methods of conducting Investment Products and
Services business, as may be amended from time to time.
14. EFFECTIVENESS OF CONTRACT: This Agreement between General Agent and
Company is not binding until Agreement has been duly executed by both
parties. This Agreement supersedes all previous agreements, whether oral
or written. This Agreement shall not cancel or affect any right, claim or
interest General Agent may have concerning commissions now due or hereafter
to become due under preceding agreements between General Agent and Company.
Neither shall Agreement cancel, terminate or affect in any way any lien,
right or interest which Company may have, or may hereafter acquire, with
respect to commissions or equities to General Agent under any other
agreement with Company, any provision of any such agreement which, by its
terms or by implications, continues beyond termination of such agreement.
IN WITNESS THEREOF, this Agreement has been executed by the undersigned on the
dates indicated below.
Allmerica Investments, Inc.
By: By:
---------------------------------- ----------------------------------
General Agent Signature Home Office Principal
Date: Date:
-------------------------------- --------------------------------
<PAGE>
ALLMERICA FINANCIAL LIFE 440 Lincoln Street
INSURANCE AND ANNUITY COMPANY Worcester, MA 01653 CAREER AGENT AGREEMENT
- --------------------------------------------------------------------------------
Allmerica Financial Life Insurance and Annuity Company (the "Company") does
hereby appoint_____________________________ of _________________________________
("Career Agent") its Agent to solicit applications for insurance and annuities
and to submit such applications through the office of
__________________________________________ ("General Agent"), this appointment
to be effective on _____________________________.
Career Agent accepts this appointment, subject to the terms and provisions set
forth in this Agreement.
WITNESSETH:
Career Agent will solicit applications for coverages offered by the Company and
for which he/she is duly licensed. Career Agent is authorized to collect and
pay over to General Agent premiums on coverages solicited by him/her. Career
Agent shall not delegate any authority granted under this Agreement and shall
not appoint any solicitors or subagents to act on his/her behalf.
TERRITORY AND CLASSES OF BUSINESS
Territory SECTION 1. The district within which Career Agent may
solicit insurance and annuity applications for the Company
is the district assigned to General Agent.
Permissible SECTION 2. Career Agent agrees that in the sale and service
Activity of insurance and annuities he/she will act only on behalf of
the Company and such of its affiliates as he/she is
authorized to represent; and he/she will not engage in any
other activity for remuneration or profit which requires
his/her personal services without first obtaining the
consent of the Company. If the Company makes arrangements
with another business entity to make any of its products
available to Career Agents, this will constitute consent to
Career Agent to enter into an arrangement with such entity
to sell and service such products on its behalf. If, with
the consent of the Company, Career Agent engages in any
personal service activities for remuneration or profit,
he/she will, upon request of the Company, disclose the
amount of time expended and the amount of income derived
from such other activities.
STATUS, DUTIES AND AUTHORITY
Relationship SECTION 3. Nothing in this Agreement will be construed to
of Parties create the relationship of employer and employee between the
Company and Career Agent. Within the scope of his/her
authority, Career Agent will be free to exercise his/her
independent judgment as to the time, place and manner of
solicitation and servicing of business underwritten by the
Company. However, he/she will have no authority to act in a
manner which does not conform to applicable statutes,
ordinances or governmental regulations pertaining to the
conduct of the business or to reasonable rules adopted, from
time to time, by the Company.
-1-
<PAGE>
Limitations SECTION 4. Career Agent will have no authority to accept
on Authority risks of any kind; to make, alter or discharge contracts of
insurance or annuities; to waive forfeitures or exclusions;
to fix any premium for hazardous or substandard risks; to
alter or amend any papers received by him/her from the
Company; to deliver any policy of insurance or any document,
agreement or endorsement changing the amount of insurance
coverage if Career Agent knows or has reason to believe that
the insured is uninsurable; to collect any premium after the
expiration of the policy grace period except in connection
with a policy reinstatement; to accept payment of any
premium unless the premium meets the minimum premium
requirement for the policy established by the Company; or to
contract any debt rendering or purporting to render the
Company liable therefor, without express authority in
writing from an authorized officer of the Company.
Implied SECTION 5. Career Agent will have no power or authority
Authority other than as expressly provided in this Agreement and no
other power or authority shall be implied from the grant or
denial of power specifically mentioned in this Agreement.
Duty of SECTION 6. Career Agent agrees that he/she will not
Compliance; intentionally violate any applicable state or Federal law,
Negative ruling or regulation pertaining to the insurance business or
Obligations any rule or regulation of the Company. Career Agent will
not knowingly engage in any activity which is detrimental to
the best interests of the Company or any of its affiliates.
Neither while this Career Agent Agreement is in force nor
for a period of two years following the termination of this
Agreement will Career Agent directly or indirectly interfere
with the relationship of the Company or any of its
affiliates with any agent or broker.
Policy While this Agreement remains in force, Career Agent agrees
Termination that he/she will not, directly or indirectly, replace or
and Replacement induce or attempt to induce any policyholder to terminate or
replace any policy issued by the Company or any of its
affiliates except when permitted by the rules of the issuing
insurer. For a period of two years following termination of
this Agreement, Career Agent agrees that he/she will not,
directly or indirectly, replace or induce or attempt to
induce any policyholder serviced through the office of the
General Agent to terminate or replace any policy issued by
the Company or any of its affiliates.
SOLICITATION OF INSURANCE AND ANNUITIES
Submission of SECTION 7. Career Agent will submit through General Agent
Applications; all Company policy applications solicited by him/her,
Delivery of whether or not it appears the proposed insured is an
Policies; acceptable risk under the rules of the Company. Career
Rejected Agent will deliver, or cause to be delivered, in accordance
Business with the rules of the Company all policies issued on
applications submitted by him/her and will return to General
Agent any policy which is declined by the applicant or which
cannot be delivered within the time permitted by the
Company's rules. If an application is declined by the
Company or is accepted at a rate higher than standard which
is not acceptable to the applicant, with the Company's
permission Career Agent may place the coverage with another
insurance company.
-2-
<PAGE>
Limitation on SECTION 8. Career Agent will not solicit any insurance or
Solicitation annuities in any jurisdiction in which he/she is not
licensed nor will he/she solicit by mail or otherwise any
insurance or annuities outside the district assigned to
General Agent without first receiving consent of the Company
and ascertaining that he/she is properly licensed to solicit
such insurance or annuities.
Advertising SECTION 9. The Company, through General Agent, will make
Material, Rate available to Career Agent a supply of canvassing and
Books, Forms, advertising materials, stationery, books, records and forms
etc. necessary or suitable to properly solicit insurance and
annuities. Career Agent will not print, publish or
distribute any advertisement, circular, statement or
document relating to the business of the Company or any of
its affiliates or use any title or language descriptive of
his/her status without the prior approval of the Company.
Policyowner Solely to assist Career Agent in rendering service to
Service Aids policyowners, Career Agent may use whatever aids, such as
data cards, computer printouts, etc. as may be available.
All such aids, whether furnished by the Company or otherwise
- including any copies thereof - shall be the property of
the Company.
Illustrations Career Agent will not furnish any prospective insured or
and Proposals policyowner an illustration of the financial or other
aspects of a policy or a proposal for a policy of the
Company unless the same has been either furnished by the
Company or prepared from computer software or other material
furnished or approved by the Company. Any illustration or
proposal delivered by Career Agent will conform to standards
of completeness and accuracy established by the Company. If
the proposal or illustration was not furnished by the
Company, Career Agent will retain in his/her records for
availability to the Company a copy thereof or the means to
duplicate the same. Any computer software or materials
furnished by the Company will be and remain its property.
Return of Upon termination of this Agreement, Career Agent will return
Materials, etc. to the Company all manuals, computer software, policyholder
data cards, policyholder files, stationery and business
cards and other material which, by the terms of this Section
or otherwise, is the property of the Company.
Accounting for SECTION 10. In accordance with the rules of the Company,
Funds Collected Career Agent will account for and remit immediately through
General Agent all funds received or collected by him/her for
or on behalf of the Company without deduction for any
commissions, fees, or other claim he/she may have against
the Company and will make such reports and file such
substantiating documents and records as the Company or
General Agent may require.
Liability for SECTION 11. If the Company pays Career Agent commissions or
Refund of fees in advance of receipt of the premium on which the
Commissions payment is based, the amount by which the payment to Career
and Fees Agent exceeds, at any time, the amount attributable to the
premiums paid will constitute a personal debt of Career
Agent payable on demand. If the Company returns premiums on
a policy for any reason whatsoever (other than as a part of
claim settlement) or rescinds or cancels a policy for any
reason whatsoever or if a policyholder exercises a right to
surrender
-3-
<PAGE>
the policy for return of all premiums paid, Career Agent
will pay on demand the amount of any commissions received on
the premiums returned.
Notwithstanding the foregoing, after this Agreement has been
in force for 10 complete years and prior to the date the
Agreement is terminated for cause, unearned commissions paid
in advance on policies the premiums for which are being paid
under the Company's Monthly Automatic Premium (MAP) Plan or
other annualized commission arrangement that are repayable
because of a lapse or surrender of the policy may only be
recovered by set-off from first year and renewal commissions
and fees otherwise payable by the Company or its affiliates
to Career Agents.
COMPENSATION
Basis of SECTION 12. Career Agent's compensation will be a
Compensation combination of commissions and fees payable on premiums for
individual and group life, health and annuity policies
placed with the Company. The amount of commissions and fees
payable for individual insurance and annuity policies will
be determined by the further provisions of this Agreement
and the published rules of the Company. The amount of
commissions and fees payable on group life and health
insurance and group annuity policies solicited by Career
Agent will be specified in separate agreements related
solely to that class of business.
Commissions payable on premiums on a policy resulting from
conversion, exchange, replacement or the exercise of an
option to purchase additional insurance will be determined
by Company rules in effect at the time of the conversion,
exchange, replacement or exercise of the option.
Published Rules The Company may, by published rule, limit the amount of
Affecting premium on which commissions or fees are payable and limit,
Compensation defer, or exclude commissions or fees because of the nature
of the transaction, discretionary nature of the premium or
other circumstances.
Payor All compensation due Career Agent under this Agreement will
be paid by First Allmerica Financial Life Insurance Company
(First Allmerica), an affiliate of the Company, as the
common paymaster.
Time of Payment SECTION 13. A premium will not be considered paid until it
of Commissions has been received by the Company at its Principal Office.
On premiums paid or allocated prior to the 15th day of the
month, commissions and fees will be paid on the last
business day of the month. On premiums paid or allocated
subsequent to the 15th day of the month, commissions and
fees will be paid on the 15th day of the following month, or
on the last business day preceding such pay date, if such
pay date is not a business day.
-4-
<PAGE>
TERMINATION AND ITS EFFECT ON COMMISSIONS AND FEES
Termination SECTION 14. This Agreement may be terminated for cause and
for Cause without notice if Career Agent:
(a) misappropriates any funds belonging to or received on
behalf of the Company or any of its affiliates; or
(b) withholds any funds or other property belonging to the
Company or any of its affiliates after the same should
have been reported and transmitted to the Company or
its affiliate or after a demand has been made for the
same; or
(c) commits any willful or dishonest act which injures the
Company or any of its affiliates; or
(d) commits any intentional act which violates any
applicable Fair Trade Practices Act and thereby injures
the Company or any of its affiliates; or
(e) intentionally performs any act prohibited by law or
intentionally omits any act required by law with the
result that the Company or any of its affiliates is
subject to disciplinary action; or
(f) willfully violates any of the provisions of this
Agreement.
Forfeiture of SECTION 15. No commissions or fees will be paid following
Commissions termination of this Agreement, if it is terminated for
and Fees cause, nor will commissions or fees continue to be paid
after termination of this Agreement if Career Agent breaches
any of its terms or conditions by the commission of an act
prohibited by its terms.
Termination SECTION 16. Notwithstanding the foregoing, and whether or
Without Cause not there is a breach of this Agreement, either party may
terminate this Agreement during its first year by giving 10
days' notice in writing to the other party of the intention
to do so and thereafter by giving 30 days' notice in writing
to the other party of the intention to do so.
Effect of Certain SECTION 17. If this Agreement terminates without breach of
Terminations any of its provisions by Career Agent:
(a) by reason of the death of Career Agent; or
(b) by reason of the permanent Total Disability of Career
Agent; or
(c) by reason of retirement of Career Agent under the
Career Agents' Retirement Plan established and
maintained by the Company; or
(d) by reason of employment of Career Agent by the Company
or any of its affiliates in some capacity other than as
a Career Agent;
-5-
<PAGE>
commissions will continue to be paid to Career Agent only as
provided in the Exhibits attached hereto.
After termination of this Agreement by reason of the
permanent Total Disability of Career Agent, if Career Agent
recovers from said disability, this Agreement may be
reinstated. If Career Agent recovers from disability and
this Agreement is not reinstated, commissions will be
payable on premiums paid thereafter only if they would have
been payable if Section 18 had applied on termination.
Effect of Other SECTION 18. If this Agreement terminates without breach of
Terminations any of its provisions by Career Agent for any reason other
Without Cause than asset forth in Section 17, commissions will continue to
be paid to Career Agent only as provided in the Exhibits
attached hereto.
GENERAL PROVISIONS
Right of SECTION 19. The Company, for its own benefit, for the
Set-Off benefit of its affiliates and for the benefit of the General
Agent, will have a lien on any commissions and fees payable
under this Agreement, whether or not the commissions are now
due or hereafter become due, and may apply any such monies
to the satisfaction of indebtedness to any of said persons
to the extent permitted by law.
Non-waiver SECTION 20. Waiver of any breach of any provision of this
of Breach Agreement will not be construed as a waiver of the provision
or of the right of the Company to enforce said provision
thereafter.
Assignability SECTION 21. This Agreement is not transferable. Without
the consent of the Company, no rights or interest in or to
commissions or fees will be subject to assignment, other
than a collateral assignment of commissions and fees, and
any attempted absolute assignment, sale or transfer of this
Agreement or of any commissions or fees without the written
consent of the Company will immediately make this Agreement
void and be a release to the Company in full of any and all
of its obligations hereunder.
Errors and SECTION 22. Career Agent agrees to maintain errors and
Omissions omissions insurance coverage meeting the Company's minimum
Coverage coverage requirements and to furnish the Company proof of
such coverage upon request. If any lawsuit is brought
against the Company as a result of any alleged action, error
or omission of Career Agent and if (1) Career Agent has
maintained errors and omissions coverage which complies with
the Company's minimum requirements, and (2) the alleged
action, error or omission of Career Agent was not committed
intentionally or with dishonest, fraudulent or criminal
intent, Career Agent agrees to reimburse the Company and its
affiliates for all costs of the lawsuit, including
attorney's fees, and all damages resulting therefrom up to
the Company's Career Agent liability limit. The minimum
coverage requirements and Career Agent liability limit will
be set forth in a bulletin or announcement published by the
Company and are subject to change at any time. Distribution
of the bulletin or announcement in the usual manner will
constitute notice to Career Agent. If any lawsuit is
brought against the Company as a result of any alleged
Career Agent action, error or omission and if Career Agent
(1) did not maintain at least the
-6-
<PAGE>
required minimum errors and omissions coverage, or (2) did
maintain such coverage but Career Agent's action, error or
omission was committed intentionally or with dishonest,
fraudulent or criminal intent, Career Agent agrees to
reimburse the Company and its affiliates for all costs of
the lawsuit, including attorney's fees, and all damages
resulting therefrom unless the court determines the suit to
be groundless and without merit.
Reservation of SECTION 23. The Company reserves the right at any time to
Right to Change change the terms and conditions of this Agreement,
including but not limited to, the rates of commissions and
fees, or to discontinue the payment of any commissions and
fees described in the Exhibits attached hereto.
Effective Date SECTION 24. Any change will become effective on the date
of Change specified in a notice or, if later, 30 days after the notice
is given to Career Agent. However, the requirement to give
advance notice shall not apply if the change becomes
necessary or expedient by reason of legislation or the
requirements of any governmental body and, in the opinion of
the Company, it is not reasonably possible to meet the 30
day requirement. Changes will not be retroactive and will
apply only to units of coverage solicited on or after the
effective date of the change. Notice of any change may be
given by a Company bulletin or announcement and distribution
of the bulletin or announcement in the usual manner will
constitute notice to Career Agent.
Arbitration SECTION 25. By his/her execution of this Agreement, Career
Agent agrees to settle any dispute, claim or controversy
arising between Career Agent and the Company by arbitration
pursuant to the then current rules of the American
Arbitration Association. Judgment upon any award rendered
in the arbitration may be entered in any court of competent
jurisdiction.
All applicable disputes shall be referred to three
arbitrators, one to be chosen by each party, and the third
by the two so chosen. If either party refuses or neglects
to appoint an arbitrator within thirty days after the
receipt of written notice from the other party requesting it
to do so, the requesting party may nominate two arbitrators
who shall choose the third. In the event the two
arbitrators do not agree on the selection of the third
arbitrator within thirty days after both arbitrators have
been named, then the third arbitrator shall be selected
pursuant to the then current rules of the American
Arbitration Association. The decision of the majority of
the arbitrators shall be final and binding upon all parties.
The expenses of the arbitrators and of the arbitration shall
be equally divided between all parties. Arbitration is the
sole remedy for disputes arising under this Career Agent
Agreement.
General Agent SECTION 26. General Agent means the General Agent
identified on the face page or any other General Agent in
charge from time to time of a general agency office to which
Career Agent is assigned.
Definitions SECTION 27. As used in this Agreement, including the
Exhibits attached hereto:
"Replacement" means a transaction in which a new life or
disability insurance policy or a new annuity contract is to
be purchased, and by reason of the transaction, all or a
portion of
-7-
<PAGE>
any existing life or disability insurance policy or any
existing annuity contract has been or is to be lapsed,
forfeited, reduced in face amount, surrendered, assigned to
the replacing insurer, placed on a reduced paid-up basis or
under another nonforfeiture provision or terminated, or
subjected to borrowing or withdrawals, whether in a single
sum or under a schedule of borrowing or withdrawals over a
period of time.
"Total Disability" means the inability of the Career Agent,
because of injury or sickness, to perform the duties of any
occupation for which he/she is reasonably fitted by
training, education or experience. During the first 24
months of total disability, Career Agent will be considered
to have met the foregoing requirement if he/she is unable to
perform the duties of his/her regular occupation and is not
performing the duties of any other occupation. Total
disability will be considered permanent after it has existed
6 months and thereafter while it continues.
"Flexible premium policy" means an individual insurance or
annuity policy under which the policyowner may unilaterally
vary the amount and timing of premium payments.
"Unit of Coverage" means all benefits of a policy which have
the same date of issue, except as modified by Company
published rules. Usually all the benefits specified in the
policy Schedule of Benefits and in each Supplementary
Schedule of Benefits constitute a unit of coverage.
"Policy Year," as to each unit of coverage, means a period
of 1 year commencing on its date of issue and each
anniversary thereof.
"Monthaversary," as to each unit of coverage, means its date
of issue and the corresponding day of each month thereafter.
"Basic premium," for each unit of coverage, means the sum of
the basic or target premiums for each benefit in the unit,
as determined from the Company's Rate Manual.
"Excess premium" means premium paid in any policy year in
excess of basic or target premium.
"Agreement" means this entire agreement, including all
Exhibits and commission and fee schedules attached thereto.
Other Exhibits issued hereafter will become a part of this
Agreement on their effective date.
Notice SECTION 28. Whenever this Agreement requires a notice to be
given, the requirement will be considered to have been met,
in the case of notice to the Company, if delivered or mailed
postage prepaid to General Agent at the agency office or to
a Vice President in the Company's Allmerica Financial
Services Operation and, in the case of notice to Career
Agent, if left at the usual place for him/her to pick up
mail within the agency office, or by mailing postage
prepaid, to Career Agent's last home address known to the
Company or to such other address as may be designated by
Career Agent.
-8-
<PAGE>
Captions SECTION 29. Captions are used for informational purposes
only and no caption shall be construed to affect the
substance of any provision of this Agreement.
Effectiveness; SECTION 30. This Agreement contains the entire contract
Entire Contract; between the parties. Upon execution it will replace all
Prior Agreements previous agreements between Career Agent and the Company
relating to the solicitation of insurance and annuity
policies except as the previous agreement relates to the
payment of commissions and fees on policies solicited prior
to the effective date of this Agreement. For purposes of
determining vestings on termination, the date of the
earliest prior Career Agent Agreement executed by Career
Agent during his current period of continuous service with
the Company and First Allmerica will be considered the date
of this Agreement. It is hereby understood and agreed that
any other agreement or representation, commitment, promise
or statement of any nature, whether oral or written,
relating to or purporting to relate to the relationship of
the parties is hereby rendered null and void.
IT IS UNDERSTOOD THAT THIS IS AN "AT WILL" RELATIONSHIP WHICH MAY BE TERMINATED
BY EITHER PARTY WITHOUT CAUSE OR REASON AS PROVIDED FOR IN SECTION 16.
IN WITNESS WHEREOF, the parties have executed this Agreement in triplicate to
take effect on its effective date.
Allmerica Financial Life Insurance and Annuity Company
By:
--------------------------------------------------
Vice President
--------------------------------------------------
Career Agent
Approved:
--------------------------------------------------
General Agent
-9-
<PAGE>
COMMISSION SCHEDULE FOR VARIABLE ANNUITY POLICIES:
Writing Agent 5% of all initial and subsequent payment amounts
General Agent 2.0% of all initial and subsequent payment amounts
Middle Management Overrides will be paid to fully-licensed and NASD
registered Middle Management in an amount of 10% of
commissions earned on policies written by career
agents in their first two contract years or trainee
agents in their first five contract years.
<PAGE>
Registered
[LOGO] ALLMERICA Allmerica 440 Lincoln Street Representative's
FINANCIAL(R) Investments, Inc. Worcester, MA 01653 Agreement
- --------------------------------------------------------------------------------
Allmerica Investments, Inc. ("Company") hereby appoints ________________________
("Registered Representative") for the purpose of selling and servicing variable
contracts offered by Allmerica Financial Life Insurance and Annuity Company,
mutual funds, limited partnerships and other investment products and services
(collectively "Investment Products and Services") offered and distributed by
Company. Registered Representative will submit Investment Products and Services
business through the office of _________________________________________________
("General Agent") or successor at ______________________________________________
("Agency") or successor. This appointment is effective as of the date accepted
by Registered Representative and acknowledged by General Agent.
1. DUTY OF COMPLIANCE/SUPERVISION: Registered Representative is assigned to
the above named Agency and General Agent for the purposes of training,
supervision and recordkeeping. Registered Representative agrees to comply
with all of the applicable laws, rules and regulations of the Securities
and Exchange Commission (SEC), National Association of Securities Dealers,
Inc. (NASD) and all other applicable federal and state insurance and
securities laws and regulations.
Registered Representative agrees to comply with all procedures and
requirements outlined in Company manuals, memoranda and other publications
as may be amended from time-to-time.
Registered Representative agrees to abide by Company's Compliance Program
including his/her mandatory attendance, on at least an annual basis, at
Agency's Compliance Meeting(s) and/or Interview(s). Failure to attend
Compliance Meeting and/or Interview is grounds for immediate termination
for cause.
2. LIMITATIONS OF AUTHORITY: Registered Representative may not delegate any
authority granted under this Agreement and shall not appoint any
solicitors or subagents to act on his/her behalf. Registered
Representative may not sign and/or submit any customer applications or
orders on behalf of any individual who is not fully qualified as a
Registered Representative of Company.
Registered Representative will only offer for sale those Investment
Products and Services for which he/she is properly NASD registered,
securities-licensed through Company and, if required by state law, state
insurance-licensed through Allmerica Financial Life Insurance and Annuity
Company, and for which Company has fully executed sales agreements with
the sponsor or issuer. To participate in the sale of Investment Products
and Services for which no agreement has been executed is to "sell-away"
from Company and is grounds for immediate termination of this Agreement
upon written notice to Registered Representative.
Registered Representative will maintain his/her NASD registration solely
through Company and will provide full disclosure to Company of his/her
background. Registered Representative agrees to notify Company immediately
of any matter requiring disclosure on the NASD Form U-4, Uniform
Application for Securities Industry Registration, including but not
limited to any income generating business activity, other than personal,
passive investment, which is outside the scope of Registered
Representative's Agreement with Company.
Customer accounts or applications may only be accepted on behalf of
Company based on approval by a Home Office principal. Registered
Representative has no authority to accept any risk on Company's behalf, to
incur any indebtedness or liability on behalf of Company and understands
and agrees to Company's prohibition against assuming discretionary
authority over client investments.
3. ASSIGNABILITY: No assignment, sale or transfer of this Agreement or any of
the rights, claims or interests under it may be made by Registered
Representative without the prior written consent of Company. Such
assignment, sale or transfer by Registered Representative without written
consent of Company will immediately make this Agreement void, and will be
a release in full to Company of any and all of its obligations hereunder.
4. SUBMISSION OF APPLICATIONS/ACCOUNTING FOR FUNDS COLLECTED: All
applications and/or payments collected by Registered Representative on
behalf of Company or any issuer or sponsor are to be delivered immediately
to Registered Representative's Agency no later than noon of the business
day following receipt by Registered Representative.
Investment Product and Services purchase checks are to be client personal
checks, cashier's checks or money orders made payable to either the
Company, appropriate issuer, sponsor or other designated agent. Such
checks may not be made payable to Registered Representative, General Agent
or any personal or Agency account.
5. SUITABILITY/RESPONSIBILITY TO EXPLAIN INVESTMENT PRODUCTS: Registered
Representative agrees to make Investment Product and Services
recommendations to clients only after obtaining sufficient information
regarding a client's financial background, goals and objectives so as to
make a reasonable determination that the proposed Investment Product
and/or Service is suitable based on such background, goals and
objectives. Registered Representative agrees to fully explain the risks,
terms and conditions of the purchase of an Investment Product or Service
and that he/she will not make untrue statements, interpretations,
misrepresentations nor omit or evade material facts concerning such
Investment Product or Service.
6. DISTRIBUTION AND USE OF ADVERTISING MATERIAL, CORRESPONDENCE: Registered
Representative agrees not to directly or indirectly use or distribute
any advertising or sales literature material (including but not limited
to prospectuses, illustrations, circulars, form letters or postal cards,
business cards, stationery, booklets, schedules, broadcasting and other
sales material of any kind) concerning Company and/or the offering of
Investment Products and Services of any kind until the material has been
approved by Company in writing.
Registered Representative also agrees to provide to General Agent copies
of all correspondence pertaining to the solicitation of execution of any
Investment Products and Services transaction, and to any other aspect of
his/her Investment Products and Services business in order to allow for
the review and endorsement of the correspondence in writing, on an
official internal record of Company by a registered principal located at
Home Office.
SMAE-050NS (11/95)
<PAGE>
7. RECORDKEEPING: Registered Representative agrees, in accordance with
Company guidelines and requirements, to cooperate in the maintenance of
complete customer account files and other records at the assigned Agency
which pertain to the conduct of Investment Products and Services business
through Company. Customer account files of Registered Representative are
to be considered the property of Company and are not to be taken from the
immediate Agency premises for any purpose.
8. COMMISSIONS: Commissions for the sale of Investment Products and Services
offered or effected by Registered Representative will be paid after
compensation for those sales is paid to Company. Commissions for
Investment Products and Services will be paid at the rates established and
published by Company.
Commissions may be changed by Company at any time without advance notice.
However, this policy shall not be applied retroactively to divest any
Registered Representative of specific commission amounts already due
him/her.
Registered Representative agrees not to share commissions with
non-qualified representatives or with clients.
Under certain circumstances, i.e., termination of agents subject to
variable contract commission vesting, retirement or death, Registered
Representative or his/her estate may be entitled to receive continuing
commissions from Company for transactions conducted prior to the cessation
of his/her service with Company. Continuing commissions will be paid based
on vesting schedules established and published by Company, as may be
amended from time-to-time.
If Company or any issuer or sponsor returns or waives payments on any
application or order, commissions will not be due or payable on the
payments. Registered Representative shall repay to Company on demand any
commissions already received by Registered Representative with respect to
such returned or waived payments.
Where cancellation of any Investment Products and Services order results
in expense or loss to Company, Registered Representative is liable for
reimbursement to Company of the expense or loss including but not limited
to any sales charge levied by an issuer and any decline in the price of an
Investment Product, as of the time of cancellation.
In the event Registered Representative becomes party to a Career Builder
Supplemental Agreement (Supplemental Agreement) with First Allmerica
Financial Life Insurance Company ("First Allmerica"), and its affiliate,
Allmerica Financial Life Insurance and Annuity Company, commissions
payable under this Registered Representative's Agreement will be credited
to the Reserve Account described in such Supplemental Agreement during the
period such Supplemental Agreement is in effect and will be paid to
Registered Representative only as provided therein.
Company reserves the right to pay commissions to the Registered
Representative for Investment Products and Services sold or performed by
utilizing one check issued by Allmerica Financial or one of its
wholly-owned subsidiaries. Such check may also contain compensation for
traditional life, health and disability policies as well as other products
and services sold by Registered Representatives through Allmerica
Financial.
9. RIGHT OF OFF-SET: Company, for its own benefit and/or the benefit of its
affiliates, will have a lien on any commissions and other compensation
payable under this Agreement, and may deduct any monies owed Company or
affiliates from such commissions or other compensation to the extent
permitted by law.
10. TERMINATION FOR CAUSE: If Registered Representative withholds or
misappropriates monies, securities, certificates, payments, receipts,
"sells-away," commits any willful or dishonest act which, in the sole
discretion of Company, is detrimental to Company, or fails to comply with
any of the conditions, duties or obligations of this Agreement, this
Agreement will immediately terminate without notice.
11. TERMINATIONS WITHOUT CAUSE: Registered Representative or company may
terminate this Agreement without cause during the first twelve (12) months
following the date this Agreement is executed by providing ten (10) days'
notice in writing to the other party of the intention to terminate. After
the first twelve (12) months, Registered Representative or Company may
terminate this Agreement without cause upon thirty (30) days' notice in
writing of the intention to terminate.
In the event Registered Representative terminates his/her Career Agent
Agreement with First Allmerica Financial Life Insurance Company, this
Agreement will be terminated upon written notice as described herein.
12. RELATIONSHIP OF PARTIES: Nothing contained in this Agreement is to be
construed to create the relationship of employer and employee between
Company and Registered Representative or between Company's General Agent
and Registered Representative. Registered Representative shall exercise
his/her own judgment concerning the individual(s) to whom he/she will
solicit Investment Products and Services as well as the time, place and
manner of the solicitations. Registered Representative, however, shall
comply with all applicable laws, rules and regulations of the SEC, NASD,
federal and state authorities as well as Company's rules, regulations
and procedures concerning the conduct of Investment Products and
Services business, as may be amended from time-to-time.
13. EFFECTIVENESS OF CONTRACT: This Agreement constitutes the entire contract
between Registered Representative and Company.
Registered Representative accepts the appointment, subject to all of the
conditions and provisions set forth in this Agreement. This Agreement
supersedes all previous agreements, whether oral or written between the
parties, and no modification, except to attached Compensation Schedules
(if any), will be valid unless made in writing and signed by both parties.
IN WITNESS WHEREOF, this Agreement has been executed by the undersigned on the
____________________________________ day of
_________________________ ,19 _______. Allmerica Investments, Inc.
By__________________________
__________________________________ ____________________________
Registered Representative General Agent
<PAGE>
INDEMNIFICATION AGREEMENT
INDEMNIFICATION AGREEMENT (the "Agreement") made by and between SCUDDER
KEMPER INVESTMENTS, INC., a Delaware corporation ("Scudder Kemper"), with a
principal place of business in Boston, Massachusetts and [NAME OF INSURANCE
COMPANY], a [STATE OF INCORPORATION] corporation (the "Company"), with a
principal place of business in [PRINCIPAL PLACE OF BUSINESS - CITY, STATE] on
behalf of the [SEPARATE ACCOUNT NAME], a separate account of the Company, and
any other separate account of the Company as designated by the Company from time
to time, upon written notice to the Fund in accordance with Section 8 herein
(the "Account").
WHEREAS, Scudder Kemper has caused to be organized Scudder Variable Life
Investment Fund (the "Fund"), a Massachusetts business trust created under a
Declaration of Trust dated March 15, 1985, as amended, the beneficial interest
in which is divided into several series, each designated a "Portfolio" and
representing the interest in a particular managed portfolio of securities, each
of which series (except Money Market Portfolio) is divided into two classes of
shares of beneficial interest; and
WHEREAS, the purpose of the Fund is to act as the investment vehicle for
the separate accounts established for variable life insurance policies and
variable annuity contracts to be offered by insurance companies which have
entered into indemnification agreements substantially identical to this
Agreement; and
WHEREAS, the parties desire to express their agreement as to certain other
matters;
NOW THEREFORE, in consideration of the foregoing and the mutual covenants
and agreements hereinafter contained, the parties hereto agree as follows:
1. ADDITIONAL DEFINITIONS.
For purposes of this Agreement, the following definitions shall apply:
(a) "Shares" means shares of beneficial interest, without par value,
of any class of any Portfolio, now or hereafter created, of the Fund.
<PAGE>
2. ACCESS TO OTHER PRODUCTS.
Scudder Kemper shall permit an Account to participate in any registered
investment company other than the Fund which is intended as the funding vehicle
for insurance products and for which Scudder Kemper or an affiliate of Scudder
Kemper acts as investment adviser, on the same basis as other insurance
companies are permitted to participate in such a registered investment company.
This provision shall not require Scudder Kemper to make available to the Company
shares of any investment company which is organized solely as the funding
vehicle for insurance products offered by a single insurance company or a group
of affiliated insurance companies.
3. RIGHT TO REVIEW AND APPROVE SALES MATERIALS.
The Company shall furnish, or shall cause to be furnished, to Scudder
Kemper or its designee, at least twenty days prior to its intended use, each
piece of promotional material in which Scudder Kemper or the Fund is named. No
such material shall be used unless Scudder Kemper or its designee shall have
approved such use in writing, or twenty days shall have elapsed without
approval, rejection or objection since receipt by Scudder Kemper or its designee
of such material.
Scudder Kemper shall furnish, or shall cause to be furnished, to the
Company or its designee, at least twenty days prior to its intended use, each
piece of promotional material in which the Company or its separate account(s) is
named. No such material shall be used unless the Company or its designee shall
have approved such use in writing, or twenty days shall have elapsed without
approval, rejection or objection since receipt by the Company or its designee of
such material.
4. SALES ORGANIZATION MEETINGS.
Representatives of Scudder Kemper or its designee shall meet with the sales
organizations of the Company at such reasonable times and places as may be
agreed upon by the Company and Scudder Kemper or its designee for the purpose of
educating sales personnel about the Fund.
5. DURATION.
This Agreement shall continue in effect for five (5) years from the date of
its execution, except that the obligation of each party hereto to indemnify the
other party hereto shall continue with respect to all losses, claims, damages,
liabilities or litigation based upon the acquisition of Shares
2
<PAGE>
purchased as the funding vehicle for any variable life insurance policy or
variable annuity contract issued by the Company or any affiliated insurance
company.
6. INDEMNIFICATION.
(a) The Company agrees to indemnify and hold harmless Scudder Kemper and
each of its directors and officers and each person, if any, who controls Scudder
Kemper within the meaning of Section 15 of the Securities Act of 1933 (the
"Act") or any person, controlled by or under common control with Scudder Kemper
("affiliate") against any and all losses, claims, damages, liabilities or
litigation (including legal and other expenses) to which Scudder Kemper or such
directors, officers or affiliate may become subject under the Act, under any
other statute, at common law or otherwise, arising out of the acquisition of any
Shares by any person which (i) may be based upon any wrongful act by the
Company, any of its employees or representatives, any affiliate of or any person
acting on behalf of the Company or a principal underwriter of its insurance
products, or (ii) may be based upon any untrue statement or alleged untrue
statement of a material fact contained in a registration statement or prospectus
covering Shares or any amendment thereof or supplement thereto or the omission
or alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading if such a
statement or omission was made in reliance upon information furnished to Scudder
Kemper or the Fund by the Company, provided, however, that in no case (i) is the
Company's indemnity in favor of a director or officer or any other person deemed
to protect such director or officer or other person against any liability to
which any such person would otherwise be subject by reason of willful
misfeasance, bad faith, or gross negligence in the performance of his duties or
by reason of his reckless disregard of obligations and duties under this
Agreement or (ii) is the Company to be liable under its indemnity agreement
contained in this Paragraph 6 with respect to any claim made against Scudder
Kemper or any person indemnified unless Scudder Kemper or such person, as the
case may be, shall have notified the Company in writing pursuant to Paragraph 8
within a reasonable time after the summons or other first legal process giving
information of the nature of the claims shall have been served upon Scudder
Kemper or upon such person (or after Scudder Kemper or such person shall have
received notice of such service on any designated agent), but failure to notify
the Company of any such claim shall not
3
<PAGE>
relieve the Company from any liability which it has to Scudder Kemper or any
person against whom such action is brought otherwise than on account of the
indemnity agreement contained in this Paragraph 6. The Company shall be
entitled to participate, at its own expense, in the defense, or, if it so
elects, to assume the defense of any suit brought to enforce any such liability,
but, if it elects to assume the defense, such defense shall be conducted by
counsel chosen by it and satisfactory to Scudder Kemper, to its officers and
directors, or to any affiliates, defendant or defendants in the suit. In the
event that the Company elects to assume the defense of any such suit and retain
such counsel, Scudder Kemper, such officers and directors or affiliates,
defendant or defendants in the suit, shall bear the fees and expenses of any
additional counsel retained by them, but, in case the Company does not elect to
assume the defense of any such suit, the Company will reimburse Scudder Kemper,
such officers and directors or affiliates, defendant or defendants in such suit,
for the reasonable fees and expenses of any counsel retained by them. The
Company agrees promptly to notify Scudder Kemper pursuant to Paragraph 8 of the
commencement of any litigation or proceedings against it in connection with the
issue and sale of any Shares.
(b) Scudder Kemper agrees to indemnify and hold harmless the Company and
each of its directors and officers and each person, if any, who controls the
Company within the meaning of Section 15 of the Act against any and all losses,
claims, damages, liabilities or litigation (including legal and other expenses)
to which it or such directors, officers or controlling persons may become
subject under the Act, under any other statute, at common law or otherwise,
arising out of the acquisition of any Shares by any person which (i) may be
based upon any wrongful act by Scudder Kemper, any of its employees or
representatives or a principal underwriter of the Fund, or (ii) may be based
upon any untrue statement or alleged untrue statement of a material fact
contained in a registration statement or prospectus covering Shares or any
amendment thereof or supplement thereto or the omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading if such statement or omission was made in
reliance upon information furnished to the Fund or the Company by Scudder
Kemper; provided, however, that in no case (i) is Scudder Kemper's indemnity in
favor of a director or officer or any other person deemed to protect such
director or officer or other person against any liability to
4
<PAGE>
which any such person would otherwise be subject by reason of willful
misfeasance, bad faith, or gross negligence in the performance of his duties or
by reason of his reckless disregard of obligations and duties under this
Agreement or (ii) is Scudder Kemper to be liable under its indemnity agreement
contained in this Paragraph 6 with respect to any claims made against the
Company or any such director, officer or controlling person unless the Company
or such director, officer or controlling person, as the case may be, shall have
notified Scudder Kemper in writing pursuant to Paragraph 8 within a reasonable
time after the summons or other first legal process giving information of the
nature of the claim shall have been served upon it or upon such director,
officer or controlling person (or after the Company or such director, officer or
controlling person shall have received notice of such service on any designated
agent), but failure to notify Scudder Kemper of any claim shall not relieve it
from any liability which it may have to the person against whom such action is
brought otherwise than on account of its indemnity agreement contained in this
Paragraph 6. Scudder Kemper will be entitled to participate at its own expense
in the defense, or, if it so elects, to assume the defense of any suit brought
to enforce any such liability, but if Scudder Kemper elects to assume the
defense, such defense shall be conducted by counsel chosen by it and
satisfactory to the Company, its directors, officers or controlling person or
persons, defendant or defendants, in the suit. In the event Scudder Kemper
elects to assume the defense of any such suit and retain such counsel, the
Company, its directors, officers or controlling person or persons, defendant or
defendants in the suit, shall bear the fees and expenses of any additional
counsel retained by them, but, in case Scudder Kemper does not elect to assume
the defense of any such suit, it will reimburse the Company or such directors,
officers or controlling person or persons, defendant or defendants in the suit,
for the reasonable fees and expenses of any counsel retained by them. Scudder
Kemper agrees promptly to notify the Company pursuant to Paragraph 8 of the
commencement of any litigation or proceedings against it or any of its officers
or directors in connection with the issuance or sale of any Shares.
(c) Scudder Kemper agrees to indemnify and hold harmless the Company and
each of its directors and officers against any and all losses, claims, damages,
liabilities or litigation arising from the imposition of additional federal
income taxes on the Company or any policyholder solely as a
5
<PAGE>
result of a Final Determination that any Portfolio has failed (x) to comply with
the diversification requirements of section 817(h) of the Internal Revenue Code
of 1986, as amended (the "Code"), relating to the diversification requirements
for variable annuity, endowment and life insurance contracts, or (y) to qualify
as a regulated investment company within the meaning of section 851 of the Code;
PROVIDED, HOWEVER, that (i) Scudder Kemper shall have no liability under this
Paragraph 6(c) if such failure is caused by a third party who is not an employee
or agent of Scudder Kemper (E.G., the Fund's custodian or another service
provider), and (ii) in no case is Scudder Kemper's indemnity under this
Paragraph 6(c) deemed to protect any person against any liability to which that
person would otherwise be subject by reason of willful misfeasance, bad faith or
gross negligence in the performance of that person's duties or by reason of
reckless disregard by that person of obligations under this Agreement.
The Company agrees that if the Internal Revenue Service asserts in
writing in connection with any governmental audit or review of the Company or,
to the Company's knowledge, of any policyholder, that any Portfolio has failed
to comply with the diversification requirements of section 817(h) of the Code or
the Company otherwise becomes aware of any facts that could give rise to any
claim against Scudder Kemper as a result of such a failure or alleged failure,
(i) the Company shall promptly notify Scudder Kemper of such assertion or
potential claim; (ii) the Company shall consult with Scudder Kemper as to how to
minimize any liability that may arise as a result of such failure or alleged
failure; (iii) the Company shall use its best efforts to minimize any liability
of Scudder Kemper for indemnification resulting from such failure, including,
without limitation, demonstrating, pursuant to Treasury Regulations Section
1.817-5(a) (2), to the Commissioner of the Internal Revenue Service that such
failure was inadvertent; (iv) the Company shall permit Scudder Kemper and its
legal and accounting advisors to participate in any conferences, settlement
discussions or other administrative or judicial proceedings or contests
(including judicial appeals thereof) with the Internal Revenue Service, any
policyholder or any other claimant regarding any claims that could give rise to
indemnification by Scudder Kemper as a result of such a failure or alleged
failure; (v) any written materials to be submitted by the Company to the
Internal Revenue Service, any policyholder or any other claimant in connection
with any of the foregoing proceedings
6
<PAGE>
or contests (including, without limitation, any such materials to be submitted
to the Internal Revenue Service pursuant to Treasury Regulations Section
1.817-5(a) (2)), (a) shall be provided by the Company to Scudder Kemper
(together with any supporting information or analysis) at least 10 business days
prior to the day on which such proposed materials are to be submitted and (b)
shall not be submitted by the Company to any such person without the express
written consent of Scudder Kemper, which shall not be unreasonably withheld;
(vi) the Company shall provide Scudder Kemper and its advisors with such
cooperation as Scudder Kemper shall reasonably request (including, without
limitation, by permitting Scudder Kemper and its accounting and legal advisors
to review the relevant books and records of the Company) in order to facilitate
Scudder Kemper's review of any written submissions provided to it pursuant to
the preceding clause or its assessment of the validity or amount of any claim
against it arising from such a failure or alleged failure; (vii) the Company
shall not with respect to any claim of the IRS or any policyholder that would
give rise to a claim for indemnification against Scudder Kemper (a) compromise
or settle any claim, (b) accept any adjustment on audit, or (c) forego any
allowable judicial appeals, without the express written consent of Scudder
Kemper, which shall not be unreasonably withheld, PROVIDED that the Company
shall not be required to appeal any adverse judicial decision unless Scudder
Kemper shall have provided an opinion of independent counsel to the effect that
a reasonable basis (consistent with Formal Opinion 85-352 of the American Bar
Association) exists for taking such appeal; and (viii) Scudder Kemper shall have
no liability as a result of such failure or alleged failure if the Company fails
to comply with any of the foregoing clauses (i) through (vii). Should Scudder
Kemper refuse to give its written consent to any compromise or settlement of any
claim or liability hereunder, the Company may, in its discretion, authorize
Scudder Kemper to act in the name of the Company in, and to control the conduct
of, such conferences, discussions, proceedings, contests or appeals and all
administrative or judicial appeals thereof, and in that event Scudder Kemper
shall bear the fees and expenses associated with the conduct of the proceedings
that it is so authorized to control.
For purposes of this Paragraph 6(c), "Final Determination" shall mean, with
respect to any claim, a settlement of such claim (including the acceptance of an
adjustment proposed by the Internal Revenue Service) or a decision of a court of
competent jurisdiction with respect to such claim that
7
<PAGE>
has become final after either the (i) exhaustion of allowable appeals or (2)
expiration of the time to take any such appeal with respect to the claim.
7. MASSACHUSETTS LAW TO APPLY.
This Agreement shall be construed and the provisions hereof interpreted
under and in accordance with the laws of The Commonwealth of Massachusetts.
8. NOTICES.
Any notice shall be sufficiently given when sent by registered or certified
mail to the other party at the address of such party set forth below or at such
other address as such party may from time to time specify in writing to the
other party.
If to Scudder Kemper:
Scudder Kemper Investments, Inc.
Two International Place
Boston, Massachusetts 02110
(617) 295-2275
Attn: David B. Watts
If to the Company:
[PARTICIPATING INSURANCE COMPANY, ADDRESS AND ATTN:]
9. MISCELLANEOUS.
The captions in the Agreement are included for convenience of reference
only and in no way define or delineate any of the provisions hereof or otherwise
affect their construction or effect. This Agreement may be executed
simultaneously in two or more counterparts, each of which taken together shall
constitute one and the same instrument.
8
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to
be executed in its name and behalf by its duly authorized representative and its
seal to be hereunder affixed hereto as of the ___ day of ________, 1998.
SEAL SCUDDER KEMPER INVESTMENTS, INC.
By:
---------------------------
Authorized Officer
SEAL [PARTICIPATING INSURANCE
COMPANY]
By:
---------------------------
Name:
Title:
9
<PAGE>
AGREEMENT FOR LOCKBOX SERVICES
This Agreement is entered into as of July 1, 1997, by and between Boston
Financial Data Services Inc. ("BFDS") and First Allmerica Financial Life
Insurance Company, its subsidiaries and affiliates ("Customer") for the
lockbox services provided in the Exhibit(s) attached hereto and hereby made a
part of this Agreement.
WHEREFORE the parties hereto in consideration of the mutual covenants
contained herein and intending to be legally bound, agree as follows:
A. SERVICES:
Upon Customer's authorization of the postmaster in Boston to permit employees
of BFDS to access the P.O. Box specified and subject to the terms and
conditions of this Agreement, BFDS hereby agrees to provide Customer with the
services described in the Exhibit(s) attached hereto.
B. INVOICES:
As compensation for services hereunder, Customer shall pay BFDS mutually
agreed upon fees and expenses as specified in Exhibit _A_. These fees will
remain in effect for a period of three years with an allowable increase in
year two and three no greater than the calculated Northeast CPI for the
previous period. In addition, BFDS will charge such account for all
reasonable out-of-pocket expenses, such as courier fees, incurred by BFDS in
connection with any rent paid by BFDS for the P.O. Box. Payment on all
invoices submitted by BFDS shall be due net thirty (30) days from receipt of
invoice.
C. TERMINATION:
This Agreement may be terminated by either party with material cause at any
time by 30 days prior written notice to the other, and without cause at any
time by 90 days prior written notice to the other. Either party may
terminate this Agreement at any time on notice to the other in the event of
dissolution or insolvency or the commencement of any proceedings under any
bankruptcy or insolvency law by or against the other.
D. LIABILITY AND INDEMNIFICATION:
Notwithstanding anything to the contrary contained herein, neither party, in
performing its duties under this Agreement, shall be liable to the other
except for gross negligence or willful misconduct. Neither party shall be
liable for special or consequential damages. BFDS shall maintain fidelity
bonding of at least $1,000,000.00 for claims arising from fraudulent or
dishonest acts on the part of any BFDS employee, which shall be underwritten
by reputable insurer(s) licensed to do business in the Commonwealth of
Massachusetts and having an A. M. Best rating of "A" or better. Within ten
(10) days from Customer's request therefor, BFDS shall provide to Customer
either (a) copies of all relevant insurance policies, or (b) Certificates of
Insurance reasonably specifying the policies required hereunder.
E. FORCE MAJEURE:
Neither party shall be responsible for delays or failure in performance
resulting from causes beyond its control, including, without limitation, acts
of God, riots, acts of war, governmental regulations, fire, communication
line failures, power failures, earthquakes, or other disasters.
F. NO ADVERTISEMENT:
BFDS shall not (a) make any mention of this Agreement in any advertisement or
promotional material; or (b) issue or release any publicity statement or
release concerning this Agreement or the services provided, or to be
provided,
<PAGE>
hereunder, without the written consent of Customer being first obtained.
G. SOLICITATION:
BFDS shall not solicit any of Customer's employees while said employees are
employed by Customer, and for one (1) year following the date that Customer's
employee has terminated employment with Customer, unless otherwise expressly
agreed in writing by Customer.
H. CONFIDENTIALITY:
As used herein, the term "confidential information" shall mean non-public
information that either party designates as confidential, or which, under the
circumstances, ought to be treated as confidential. Confidential information
may be in any tangible form, including without limitation written or printed
text or documents, audio or video tapes, CD's or disks and computer disks or
tapes, whether in machine readable or user readable form. Confidential
information shall include without limitation information relating directly or
indirectly to the marketing or promotion of either party's products, released
or unreleased software or other programs, trade secrets, business policies
and/or practices, and any information received by or about third parties,
including claimants, that either party is obligated to treat as confidential.
Customer and BFDS hereby acknowledge and agree that, in providing sufficient
information or access to BFDS to allow BFDS to perform in accordance with
this Agreement, or otherwise allowing BFDS to perform as required hereunder,
Customer and/or its agents, servants, customers or employees may disclose to
BFDS, or BFDS may otherwise obtain, certain information that is confidential
and/or proprietary to Customer and/or its agents, servants, employees,
customers or the dependents thereof. Customer and BFDS hereby also
acknowledge and agree that, in providing sufficient information or access to
Customer to allow Customer to perform in accordance with this Agreement, or
otherwise allowing Customer to perform as required hereunder, BFDS and/or its
agents, servants, customers or employees may disclose to Customer, or
Customer may otherwise obtain, certain information that is confidential
and/or proprietary to BFDS and/or its agents, servants, employees, customers
or the dependents thereof. Accordingly, the parties hereby agree to keep
such information confidential and prevent its unauthorized disclosure. Each
party shall: (a) not make any copies of the other's (and/or its agents'
servants' or employees', or customers') confidential information without
first obtaining the written consent of such other and/or the appropriate
individual(s) therefor; (b) not utilize any confidential information of the
other (and/or any confidential information of its agents, servants,
employees, or customers) except in the furtherance of the obligations and
responsibilities specified hereunder, and for no other purpose(s) whatsoever;
and (c) return any such confidential information in its possession to the
other immediately upon (i) the other's demand therefor, (ii) the
accomplishment of the purpose for which such confidential information is or
was held or obtained, or (iii) the expiration or other termination of this
Agreement. In the event of any breach or threatened breach by either party
(or any of either party's agents, servants, vendors, principles, owners,
affiliated persons or employees) of the covenants, agreements and/or
conditions contained in this section, the other party and/or the appropriate
agents, servants, employees, claimants, or customers shall be entitled to an
injunction prohibiting such breach in addition to any other legal and/or
equitable remedies available to them and/or the appropriate individual(s) in
connection with such breach. The parties acknowledge that any confidential
information disclosed to it is valuable, proprietary and unique and that any
disclosure thereof in breach of this Agreement shall result in irreparable
harm. The agreements, covenants and conditions contained in this section
shall survive the expiration or any earlier termination of this Agreement.
I. ASSIGNMENT:
II.
Notwithstanding the foregoing, Customer may, without the consent of BFDS,
assign or transfer this Agreement to any present or future affiliate or
<PAGE>
subsidiary of First Allmerica Financial Life Insurance Company. BFDS agrees
to release Customer from all obligations under this Agreement in the event
that such obligations are assumed under the preceding sentence by a
corporation or entity whose financial responsibility is equivalent to or
greater than that of Customer. As used herein, the term "Customer" shall
include First Allmerica Financial Life Insurance Company and all of its
present or future affiliates or subsidiaries, including without limitation
all corporate successors of any of the foregoing that may result from merger,
consolidation, reorganization, demutualization or conversion. As used
herein, the term "affiliate" shall include any entity controlling, controlled
by or under common control with, First Allmerica Financial Life Insurance
Company, or which following a merger, consolidation, demutualization or
reorganization involving First Allmerica Financial Life Insurance Company is
controlled by an entity that controlled First Allmerica Financial Life
Insurance Company or that First Allmerica Financial Life Insurance Company
controlled or that was under common control with First Allmerica Financial
Life Insurance Company, in each case, prior to such merger, consolidation,
demutualization or reorganization. BFDS may not, without the consent of
Customer, assign or transfer this Agreement to any present or future
affiliate or subsidiary of Boston Financial Data Services, Inc.
J. NOTICE:
Any notice under this Agreement shall be deemed to have been given if sent by
mail, postage prepaid, to the following addresses: if to Customer - First
Allmerica Financial Life Insurance Company, 440 Lincoln Street, Worcester, MA
01653, Attn: Manager, Cash Management, N479; or such other address as
Customer may designate by written notice to BFDS; if to BFDS - Boston
Financial Data Service, Inc., 2 Heritage Drive, No. Quincy, MA 02171,
Attention: Cash Management Services, 1st Floor.
K. SEVERABILITY:
Each and every covenant, provision, term and clause contained in this
Agreement is severable from the others, and each such covenant, provision,
term and clause shall be valid and effective notwithstanding the invalidity
or unenforceability of any other such covenant, provision, term or clause.
L. ENTIRE AGREEMENT:
This Agreement constitutes the entire Agreement between the parties hereto
and supersedes any prior agreement with respect to the subject matter hereof,
whether written or oral, and may not be changed or otherwise terminated,
orally or otherwise, except as expressly provided herein or by an instrument
in writing signed by a duly authorized representative of Customer and BFDS.
M. GOVERNING LAW:
This Agreement shall be governed by the laws of the Commonwealth of
Massachusetts.
The Exhibits attached hereto are hereby made a part of this Agreement.
Additional Exhibits may be added to this Agreement if set forth in a writing
signed by a duly authorized representative of both parties. If any terms are
inconsistent between this Agreement and any Exhibits attached hereto, the
terms of this Agreement shall prevail.
IN WITNESS WHEREOF, the parties hereto by their duly authorized
representatives have executed this Agreement effective as of the date first
written above.
BOSTON FINANCIAL DATA SERVICES, INC.
BY: /s/ STEPHEN HILL
<PAGE>
EXHIBIT A
(ALLMERICA FINANCIAL FEE PROPOSAL BOSTON FINANCIAL DATA SERVICES MAY 1997)
(REV. 7-14-97)
<PAGE>
Allmerica Financial
440 Lincoln Street
Worcester, MA 01653
Re: Retail Lockbox Agreement (Page 1 of 3)
Boston Financial Data Services Inc, ("BFDS") is pleased to establish a
lockbox service for your organization. The lockbox will be operated in
conjunction with Post Office Box No (the "P.O. Box") (See Attached) Boston,
MA, our unique zip code of 02266, and your deposit account(s) at Bank of
Boston entitled (the "Account").
We understand that you have authorized the postmaster in Boston to
permit employees of BFDS to access the P.O. Box. Subject to the terms of
this Agreement, BFDS hereby agrees to provide the following services:
1. BFDS will collect all mail received at the P.O. Box at
various times each day.
2. All checks removed by BFDS from the P.O. Box will be deposited
into the Account as instructed within the client's operating
procedures.
3. BFDS shall not have any responsibilities to read any letter
or other communication received in the P.O. Box, although
checks received with any letter or other communication will
be deposited in the Account. Likewise, any post-dated check
which BFDS determines will be received by the drawee bank by
the date of such check will be deposited in the Account.
BFDS is authorized to endorse checks deposited in the Account
with the endorsement "absence of endorsement guaranteed" or
other similar endorsements and you agree to indemnify BFDS
against any loss, cost or expense resulting from such
endorsement.
4. All processing, depositing and collection of checks shall be
subject to the established procedures followed from time to
time by BFDS in connection with any regular deposit received
by BFDS.
5. Checks returned unpaid because of insufficient funds will be
automatically forwarded for collection a second time; if
unpaid after the second presentation, such checks, together
with advice of debit, will be sent to you.
6. As compensation for services hereunder, you shall pay BFDS mutually
agreed upon fees and expenses.
These fees are to be applied to your account and will remain in effect
for a period of three years with an allowable increase in year two and
three no greater than the calculated Northeast CPI for the previous
period. In addition, BFDS will charge the Account for all out-of-pocket
expenses, such as courier fees, incurred by BFDS in connection with any
rent paid by BFDS for the P.O. Box.
7. This Agreement may be terminated by either party at any time by 90- days
prior written notice to the other, provided that BFDS may terminate this
Agreement at any time on notice to you in the event of your dissolution
or
<PAGE>
insolvency or the commencement of any proceedings under any bankruptcy or
insolvency law or by or against you.
8. BFDS, in performing its duties under this Agreement, shall not be liable
to you except for gross negligence or willful misconduct. BFDS shall
not be responsible for delays or failure in performance resulting from
causes beyond its control including, without limitation, acts of God,
strikes, lockouts, riots, acts of war, governmental regulations, fire,
communication line failures, power failures, earthquakes or other
disasters. BFDS shall also not be liable for special or consequential
damages.
9. Any notice under this Agreement shall be deemed to have been given if
sent by mail, postage prepaid, to the following addresses: If to you,
the address set forth on page one hereof, or to such other address as
you may designate by written notice to BFDS; if to BFDS, Boston
Financial Data Service, Inc., 2 Heritage Drive, No. Quincy, MA 02171,
Attention: Cash Management Services, 1st Floor.
10. This Agreement constitutes the entire Agreement between the parties
hereto and supersedes any prior agreement with respect to the subject
matter hereof, whether written or oral.
11. BFDS hereby agrees that all records which it maintains on behalf of
Allmerica are property of Allmerica, and further agrees to surrender
promptly to Allmerica such records upon Allmerica's request. However,
BFDS has the right to make copies of such records, in its discretion.
To the extent that any records maintained on behalf of Allmerica are
subject to section 31a-1 under the Investment Company Act of 1940 ("1940
Act"), BFDS agrees to preserve such records for the periods prescribed
by rule 31a-2 under the 1940 Act.
12. Each party hereto shall cooperate with each other party and all
appropriate governmental authorities (including without limitation the
SEC, the NASD, and state insurance regulators) and shall permit such
authorities reasonable access to its books and records in conjunction
with any investigation or inquiry relating to the services to be
provided by BFDS. Notwithstanding the generality of the foregoing, each
party hereto further agrees to furnish the Insurance Commissioner of any
state with any information or reports in connection with services
provided under this Agreement which such Commissioner may reasonably
request in order to ascertain whether the variable contracts operations
of Allmerica are being conducted in a manner consistent with the state's
regulations concerning variable contracts and any other applicable law
or regulation.
13. This Agreement shall be governed by the laws of the Commonwealth of
Massachusetts.
BOSTON FINANCIAL DATA SERVICES INC.
BY: /s/ Stephen Hill
TITLE: Vice President
DATE: 11/4/97
ALLMERICA FINANCIAL
BY: /s/ Edward A. Ostrout
TITLE: Assistant Treasurer
DATE: 11/5/97
<PAGE>
Service Level Agreement
Boston Financial Data Services
First Allmerica Financial Life Insurance Company
and
Allmerica Financial Life Insurance and Annuity Company
THIS AGREEMENT is entered into as of this _____ day of January, 1998 by and
among First Allmerica Financial Life Company and Allmerica Financial Life
Insurance and Annuity Company (collectively, "Allmerica") and Boston Financial
Data Services, Inc., ("BFDS").
WHEREAS, Allmerica and BFDS have entered into a Retail Lockbox Agreement and
Allmerica wishes to obtain from BFDS additional mailroom services in connection
with said Retail Lockbox Agreement,
NOW, THEREFORE, in consideration of their mutual promises, Allmerica and BFDS
hereby agree as follows:
1. SERVICES
BFDS hereby agrees to provide Customer with Services ("Services")
according to the specifications ("Service Levels") described in the
following Exhibits(s), which are attached hereto and made a part of this
Agreement:
1. Exhibit B "Boston Financial Data Services--Operations Support Services--
Service
Level Agreement--Allmerica Financial"
2. Exhibit C "Allmerica Financial--Notes for BFDS on Allmerica's intended
Procedures"
Additional Exhibits may be added to this Agreement if set forth in a writing
signed by duly authorized representatives of both parties. If any terms are
inconsistent between this Agreement and any exhibits attached hereto, the
terms of this Agreement shall prevail.
Material failure to provide the Services and Service Levels set forth in the
Exhibits shall be considered a Default for the purposes of section 4.
TERMINATION.
2. COMPENSATION
As compensation for services hereunder, Customer shall pay BFDS mutually
agreed upon fees and expenses as specified in Exhibit A.
<PAGE>
3. LIMITATION OF LIABILITY
Notwithstanding anything to the contrary contained herein, neither party, in
performing its duties under this Agreement, shall be liable to the other
except for gross negligence or willful misconduct. Neither party shall be
liable for special or consequential damages. BFDS shall maintain fidelity
bonding of at least $1,000,000 for claims arising from fraudulent or
dishonest acts on the part of any BFDS employee, which shall be underwritten
by reputable insurers(s) licensed to do business in the Commonwealth of
Massachusetts and having an A.M. Best rating of "A" or better. Within ten
(10) days from Customer's request therefor, BFDS shall provide to Customer
either (a) copies of all relevant insurance Policies, or (b) Certificates of
Insurance reasonably specifying the policies required hereunder.
Neither party shall not responsible for delays or failure in performance
resulting from causes beyond its control including, without limitation,
acts, of God, strikes, lockouts, rots, acts of war, governmental
regulations, fire, communication line failures, power failures, earthquakes
or other disasters.
4. TERMINATION
This Agreement may be terminated: (a) by either party at any time by 90 days
prior written notice to the other; (b) at any time by mutual written consent
of the parties; or (c) by either party immediately, upon notice to the other
party that the other party is in Default. The occurrence of any one or more
of the following events shall constitute a Default under the Agreement by
the party to whom the event relates:
(a) Any failure or refusal by a party to substantially perform or satisfy
any material term or condition of the Agreement, if such failure or
refusal continues for more than 30 days after the earlier of (i) notice
thereof to such defaulting party by the other party, or (ii) actual
knowledge by the failing party that it is failing to perform or satisfy a
material term or condition of the Agreement.
(b) The voluntary or involuntary bankruptcy or insolvency of a party, the
voluntary or involuntary dissolution or liquidation of a party, the
admission in writing by a party of its inability to pay its debts as
they mature, or the assignment by a party for the benefit of creditors.
- 2 -
<PAGE>
5. NOTICES
Any notice shall be sufficiently given when sent by registered or certified
mail to the other party at the address of such party set forth below or at
such other address as such party may from time to time specify in writing to
the other party.
If to the Fund:
Boston Financial Data Services, Inc.
2 Heritage Drive
North Quincy, MA 02171
If to Allmerica:
First Allmerica Financial Life Insurance Company
440 Lincoln Street
Worcester, MA 01653
Attention: William Hayward, Vice President
Allmerica Financial Life Insurance and Annuity Company
440 Lincoln Street
Worcester, MA 01653
Attention: William Hayward, Vice President
6. RECORDS
BFDS hereby agrees that all records which it maintains on behalf of
Allmerica are the property of Allmerica, and further agrees to surrender
promptly to Allmerica such records upon Allmerica's request. However, BFDS
has the right to make copies of such records, in its discretion. To the
extent that any records maintained on behalf of Allmerica are subject to
section 312a-1 under the Investment Company Act of 1940 ("1940 Act") BFDS
agrees to preserve such records for the periods prescribed by Rule 31a-2
under the 1940 Act.
7. COUNTERPARTS
This Agreement may be executed simultaneously in two or more counterparts,
each of which taken together shall constitute one and the same instrument.
8. SEVERABILITY
Each and every covenant, profession, term and clause contained in this
Agreement is severable from the others, and each such covenant, provision,
term and clause shall be valid and effective notwithstanding the invalidity
or unenforceability of any other such covenant, provision, term, or clause.
If any provision of the Agreement shall be held or made invalid by a court
decision, statute, rule or otherwise, the remainder of the Agreement shall
not be affected thereby.
- 3 -
<PAGE>
9. ASSIGNMENT
Customer may, without the consent of BFDS, assign or transfer this Agreement
to any present or future affiliate or subsidiary of First Allmerica
Financial Life Insurance Company. As used herein, the term "affiliate"
shall include any entity controlling, controlled by or under common control
with, First Allmerica Financial Life Insurance Company. BFDS may not,
without the consent of Customer, assign or transfer this Agreement to any
present or future affiliate or subsidiary of BFDS. This Agreement or any of
the rights and obligations hereunder may not be assigned by any party
without the prior written consent of all parties hereto.
10. REGULATORY AUTHORITIES
Each party hereto shall cooperate with each other party and all appropriate
governmental authorities (including without limitation the SEC, the NASD,
and state insurance regulators) and shall permit such authorities reasonable
access to its books and records in connection with any investigation or
inquiry relating to this Agreement or the transactions contemplated hereby.
Notwithstanding the generality of the foregoing, each party hereto further
agrees to furnish the Insurance Commissioner of any state with any
information or reports in connection with services provided under this
Agreement which such Commissioner may request in order to ascertain whether
the insurance operations of the Company are being conducted in a manner
consistent with applicable laws and regulations.
11. CAPTIONS
The captions in this Agreement are included for convenience of reference
only and in no way define or delineate any of the provisions hereof or
otherwise affect their construction or effect.
12. CONTROLLING LAW
This Agreement shall be governed by and its provisions shall be construed in
accordance with the laws of the Commonwealth of Massachusetts.
- 4 -
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to
be executed in its name and on behalf by its duly authorized representative
and its seal to be hereunder affixed hereto as of the date specified below.
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
By: /s/ William Hayward
-----------------------------------------------------
Title: Vice President & Managing Director
-----------------------------------------------------
Date: 2/6/98
-----------------------------------------------------
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
By: /s/ William Hayward
-----------------------------------------------------
Title: Vice President & Managing Director
-----------------------------------------------------
Date: 2/6/98
-----------------------------------------------------
BOSTON FINANCIAL DATA SERVICES, INC.
By: /s/ John E. Ciardi
-----------------------------------------------------
Title: Vice President - Operations Support Services
-----------------------------------------------------
Date: 2/4/98
-----------------------------------------------------
- 5 -
<PAGE>
SERVICES AGREEMENT
The terms and conditions of this Services Agreement between Scudder Kemper
Investments, Inc. (the "Adviser") and Allmerica Financial Life Insurance and
Annuity Company and First Allmerica Financial Life Insurance Company
(collectively, the "Companies") are effective as of ______________, 1998.
WHEREAS, the Companies and Scudder Investor Services, Inc. ("Investor
Services") have entered into a Participating Contract and Policy Agreement dated
____________, 199__, as may be amended from time to time (the "Participation
Agreement"), pursuant to which the Companies, on behalf of certain of its
separate accounts (the "Separate Accounts"), purchases shares ("Shares") of
certain portfolios of Scudder Variable Life Investment Fund (the "Fund," the
portfolios of which are referred to herein as "Portfolios") to serve as an
investment vehicle under certain variable annuity and/or variable life insurance
contracts ("Variable Contracts") offered by the Companies, which Portfolios may
be one of several investment options available under the Variable Contracts; and
WHEREAS, the Adviser recognizes that in the course of soliciting
applications for its Variable Contracts and in servicing owners of the Variable
Contracts, the Companies and its agents that are registered representatives of
broker-dealers provide information about the Fund and its Portfolios from time
to time, answer questions concerning the Fund and its Portfolios, including
questions respecting Variable Contract owners' interests in one or more
Portfolios, and provide services respecting investments in the Portfolios; and
WHEREAS, the Adviser desires that the efforts of the Companies and its
agents in providing written and oral information and services regarding the Fund
to current and prospective Variable Contract owners shall continue; and
WHEREAS, the following represents the collective intention and
understanding of the service fee agreement between the Adviser and the
Companies.
NOW, THEREFORE, in consideration of their mutual promises, the COMPANIES
and THE ADVISER agree as follows:
1. SERVICES. The Companies and/or its affiliates agree to provide
services ("Services") to current and prospective owners of Variable Contracts
including, but limited to: teleservicing support in connection with the
Portfolios; delivery of reports, notices, proxies and proxy statements and other
informational materials; facilitation of the tabulation of Variable Contract
owners' votes in the event of a Fund shareholder vote; maintenance of Variable
Contract records reflecting Shares purchased and redeemed and Share balances;
provision of support services including providing information about the Fund and
its Portfolios and answering questions concerning the Fund and its Portfolios,
including questions respecting Variable Contract owners' interests in one or
more Portfolios; provision and administration of Variable Contract features for
the benefit of Variable Contract owners in connection with the Portfolios
including fund transfers, dollar cost averaging, asset allocation, portfolio
rebalancing, earnings sweep, and
<PAGE>
pre-authorized deposits and withdrawals; and provision of other services as may
be agreed upon from time to time.
2. COMPENSATION. In consideration of the Services, the Adviser agrees to
pay to the Companies a service fee at an annual rate equal to fifteen (15) basis
points (0.15%) (five (5) basis points for the Money Market Portfolio) of the
average daily value of the Shares held in Separate Accounts. Such payments will
be made monthly in arrears, PROVIDED HOWEVER, that such payments shall only be
payable for each calendar month during which time the total dollar value of
Shares held by the Separate Accounts purchased pursuant to the Participation
Agreement exceeds $15 million. For purposes of computing the payment to the
Companies under this paragraph 2, the average daily value of Shares held in
Separate Accounts over a monthly period shall be computed by totaling such
Separate Accounts' aggregate investment (Share net asset value multiplied by
total number of Shares held by such Separate Accounts) on each business day
during the calendar month, and dividing by the total number of business days
during such month. The payment to the Companies under this paragraph 2 shall be
calculated by the Companies at the end of each calendar month and the Companies
shall send a detailed statement of each such fee computation to the Advisor.
Payment shall be due and will be paid to the Companies within 30 days
thereafter.
3. TERM. This Services Agreement shall remain in full force and effect
for an initial term of one year, and shall automatically renew for successive
one year periods. This Services Agreement may be terminated by either party
hereto upon 60 days written notice to the other. This Services Agreement shall
terminate automatically upon the redemption of all Shares held in Separate
Accounts, upon termination of the Participation Agreement, or upon its
assignment by either party hereto. Notwithstanding the termination of this
Services Agreement, the Adviser will continue to pay the service fees in
accordance with paragraph 2 so long as net assets of the Companies or a Separate
Account remain in a Portfolio, provided such continued payment is permitted in
accordance with applicable law and regulation.
4. AMENDMENT. This Services Agreement may be amended only upon mutual
agreement of the parties hereto in writing.
5. EFFECT ON OTHER TERMS, OBLIGATIONS AND COVENANTS. Nothing herein shall
amend, modify or supersede any contractual terms, obligations or covenants among
or between any of the Companies, the Adviser or the Fund previously or currently
in effect, including those contractual terms, obligations or covenants contained
in the Participation Agreement.
2
<PAGE>
IN WITNESS WHEREOF, the parties have caused their duly authorized officers
to execute this Services Agreement.
SCUDDER KEMPER INVESTMENTS, INC. ALLMERICA FINANCIAL LIFE INSURANCE AND
ANNUITY COMPANY
- ----------------------------------- -----------------------------------
By: By:
Title: Title:
Date: Date:
FIRST ALLMERICA FINANCIAL LIFE
INSURANCE COMPANY
- -----------------------------------
By:
Title:
Date:
3
<PAGE>
April 15, 1998
Allmerica Financial Life Insurance and Annuity Company
440 Lincoln Street
Worcester MA 01653
RE: SEPARATE ACCOUNT KGC OF ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY
COMPANY
FILE #'S: 333-10283 AND 811-7777
Gentlemen:
In my capacity as Counsel of Allmerica Financial Life Insurance and Annuity
Company (the "Company"), I have participated in the preparation of the
Post-Effective Amendment to the Registration Statement for 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 qualified and non-qualified
variable annuity contracts.
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 variable annuity contracts, when issued in accordance with
the Prospectus contained in the Registration Statement and upon compliance
with applicable local law, will be legal and binding obligations of the
Company in accordance with their terms and when sold will be legally
issued, fully paid and non-assessable.
In arriving at the foregoing opinion, I have made such examination of law and
examined such records and other documents as in my judgment are necessary or
appropriate.
I hereby consent to the filing of this opinion as an exhibit to this
Post-Effective Amendment to the Registration Statements on Form N-4 under the
Securities Act of 1933.
Very truly yours,
/s/Sylvia Kemp-Orino
Sylvia Kemp-Orino
Assistant Vice President and Counsel
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Statement of Additional Information
constituting part of this Post-Effective Amendment No. 2 to the Registration
Statement of the Separate Account KGC of Allmerica Financial Life Insurance
and Annuity Company on Form N-4 of our report dated February 3, 1998,
relating to the financial statements of Allmerica Financial Life Insurance
and Annuity Company, and our report dated March 25, 1998, relating to the
financial statements of the Separate Account KGC -- Kemper Gateway Custom of
Allmerica Financial Life Insurance and Annuity Company, both of which appear
in such Statement of Additional Information. We also consent to the
reference to us under the heading "Experts" in such Statement of Additional
Information.
/s/ Price Waterhouse LLP
Price Waterhouse LLP
Boston, Massachusetts
April 29, 1998
<PAGE>
PARTICIPATION AGREEMENT
PARTICIPATION AGREEMENT (the "Agreement") made by and between SCUDDER
VARIABLE LIFE INVESTMENT FUND (the "Fund"), a Massachusetts business trust
created under a Declaration of Trust dated March 15, 1985, as amended, with a
principal place of business in Boston, Massachusetts and [PARTICIPATING
INSURANCE COMPANY], a [STATE OF INCORPORATION] corporation (the "Company"),
with a principal place of business in [PRINCIPAL PLACE OF BUSINESS, CITY,
STATE] on behalf of [SEPARATE ACCOUNT NAME], a separate account of the
Company, and any other separate account of the Company as designated by the
Company from time to time, upon written notice to the Fund in accordance
with Section 9 herein (each, an "Account").
WHEREAS, the Fund acts as the investment vehicle for the separate
accounts established for variable life insurance policies and variable
annuity contracts (collectively referred to herein as "Variable Insurance
Products") to be offered by insurance companies which have entered into
participation agreements substantially identical to this Agreement
("Participating Insurance Companies") and their affiliated insurance
companies; and
WHEREAS, the beneficial interest in the Fund is divided into several
series of shares of beneficial interest without par value ("Shares"), and
additional series of Shares may be established, each designated a "Portfolio"
and representing the interest in a particular managed portfolio of
securities; and
WHEREAS, each Portfolio of the Fund, except the Money Market Portfolio,
is divided into two classes of Shares, and additional classes of Shares may
be established; and
WHEREAS, the Parties desire to evidence their agreement as to certain
other matters,
NOW THEREFORE, in consideration of the foregoing and the mutual
covenants and agreements hereinafter contained, the parties hereto agree as
follows:
1. DUTY OF FUND TO SELL.
The Fund shall make its Shares available for purchase at the applicable net
asset value per Share by Participating Insurance Companies and their affiliates
and separate accounts on those days
<PAGE>
on which the Fund calculates its net asset value pursuant to rules of the
Securities and Exchange Commission; provided, however, that the Trustees of
the Fund may refuse to sell Shares of any Portfolio to any person, or suspend
or terminate the offering of Shares of any Portfolio, if such action is
required by law or by regulatory authorities having jurisdiction or is, in
the sole discretion of the Trustees, necessary in the best interest of the
shareholders of any Portfolio.
2. FUND MATERIALS.
The Fund, at its expense, shall provide the Company or its designee with
camera-ready copy or computer diskette versions of all prospectuses,
statements of additional information, annual and semi-annual reports and
proxy materials (collectively, "Fund Materials") to be printed and
distributed by the Company or its broker/dealer to the Company's existing or
prospective contract owners, as appropriate. The Company agrees to bear the
cost of printing and distributing such Fund Materials.
3. REQUIREMENT TO EXECUTE PARTICIPATION AGREEMENT; REQUESTS.
Each Participating Insurance Company shall, prior to purchasing Shares
in the Fund, execute and deliver a participation agreement in a form
substantially identical to this Agreement.
The Fund shall make available, upon written request from the
Participating Insurance Company given in accordance with Paragraph 9, to each
Participating Insurance Company which has executed an Agreement and which
Agreement has not been terminated pursuant to Paragraph 7 (i) a list of all
other Participating Insurance Companies, and (ii) a copy of the Agreement as
executed by any other Participating Insurance Company.
The Fund shall also make available upon request to each Participating
Insurance Company which has executed an Agreement and which Agreement has not
been terminated pursuant to Paragraph 7, the net asset value of any Portfolio
of the Fund as of any date upon which the Fund calculates the net asset value
of its Portfolios for the purpose of purchase and redemption of Shares.
4. INDEMNIFICATION.
(a) The Company agrees to indemnify and hold harmless the Fund and each
of its Trustees and officers and each person, if any, who controls the Fund
within the meaning of Section 15 of the Securities Act of 1933 (the "Act")
against any and all losses, claims, damages, liabilities or litigation
2
<PAGE>
(including legal and other expenses), arising out of the acquisition of any
Shares by any person, to which the Fund or such Trustees, officers or
controlling person may become subject under the Act, under any other statute,
at common law or otherwise, which (i) may be based upon any wrongful act by
the Company, any of its employees or representatives, any affiliate of or any
person acting on behalf of the Company or a principal underwriter of its
insurance products, or (ii) may be based upon any untrue statement or alleged
untrue statement of a material fact contained in a registration statement or
prospectus covering Shares or any amendment thereof or supplement thereto or
the omission or alleged omission to state therein a material fact required to
be stated therein or necessary to make the statements therein not misleading
if such a statement or omission was made in reliance upon information
furnished to the Fund by the Company, or (iii) may be based on any untrue
statement or alleged untrue statement of a material fact contained in a
registration statement or prospectus covering insurance products sold by the
Company or any insurance company which is an affiliate thereof, or any
amendments or supplement thereto, or the omission or alleged omission to
state therein a material fact required to be stated therein or necessary to
make the statement or statements therein not misleading, unless such
statement or omission was made in reliance upon information furnished to the
Company or such affiliate by or on behalf of the Fund; provided, however,
that in no case (i) is the Company's indemnity in favor of a Trustee or
officer or any other person deemed to protect such Trustee or officer or
other person against any liability to which any such person would otherwise
be subject by reason of willful misfeasance, bad faith, or gross negligence
in the performance of his duties or by reason of his reckless disregard of
obligations and duties under this Agreement or (ii) is the Company to be
liable under its indemnity agreement contained in this Paragraph 4 with
respect to any claim made against the Fund or any person indemnified unless
the Fund or such person, as the case may be, shall have notified the Company
in writing pursuant to Paragraph 9 within a reasonable time after the summons
or other first legal process giving information of the nature of the claims
shall have been served upon the Fund or upon such person (or after the Fund
or such person shall have received notice of such service on any designated
agent), but failure to notify the Company of any such claim shall not relieve
the Company from any liability which it has to the Fund or any person against
whom such action is brought
3
<PAGE>
otherwise than on account of its indemnity agreement contained in this
Paragraph 4. The Company shall be entitled to participate, at its own
expense, in the defense, or, if it so elects, to assume the defense of any
suit brought to enforce any such liability, but, if it elects to assume the
defense, such defense shall be conducted by counsel chosen by it and
satisfactory to the Fund, to its officers and Trustees, or to any controlling
person or persons, defendant or defendants in the suit. In the event that
the Company elects to assume the defense of any such suit and retain such
counsel, the Fund, such officers and Trustees or controlling person or
persons, defendant or defendants in the suit, shall bear the fees and
expenses of any additional counsel retained by them, but, in case the Company
does not elect to assume the defense of any such suit, the Company will
reimburse the Fund, such officers and Trustees or controlling person or
persons, defendant or defendants in such suit, for the reasonable fees and
expenses of any counsel retained by them. The Company agrees promptly to
notify the Fund pursuant to Paragraph 9 of the commencement of any litigation
or proceedings against it in connection with the issue and sale of any Shares.
(b) The Fund agrees to indemnify and hold harmless the Company and each
of its directors and officers and each person, if any, who controls the
Company within the meaning of Section 15 of the Act against any and all
losses, claims, damages, liabilities or litigation (including legal and other
expenses) to which it or such directors, officers or controlling person may
become subject under the Act, under any other statute, at common law or
otherwise, arising out of the acquisition of any Shares by any person which
(i) may be based upon any wrongful act by the Fund, any of its employees or
representatives or a principal underwriter of the Fund, or (ii) may be based
upon any untrue statement or alleged untrue statement of a material fact
contained in a registration statement or prospectus covering Shares or any
amendment thereof or supplement thereto or the omission or alleged omission
to state therein a material fact required to be stated therein or necessary
4
<PAGE>
to make the statements therein not misleading unless such statement or
omission was made in reliance upon information furnished to the Fund by the
Company or (iii) may be based on any untrue statement or alleged untrue
statement of a material fact contained in a registration statement or
prospectus covering insurance products sold by the Company, or any amendment
or supplement thereto, or the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the
statement or statements therein not misleading, if such statement or omission
was made in reliance upon information furnished to the Company by or on
behalf of the Fund; provided, however, that in no case (i) is the Fund's
indemnity in favor of a director or officer or any other person deemed to
protect such director or officer or other person against any liability to
which any such person would otherwise be subject by reason of willful
misfeasance, bad faith, or gross negligence in the performance of his duties
or by reason of his reckless disregard of obligations and duties under this
Agreement or (ii) is the Fund to be liable under its indemnity agreement
contained in this Paragraph 4 with respect to any claims made against the
Company or any such director, officer or controlling person unless it or such
director, officer or controlling person, as the case may be, shall have
notified the Fund in writing pursuant to Paragraph 9 within a reasonable time
after the summons or other first legal process giving information of the
nature of the claim shall have been served upon it or upon such director,
officer or controlling person (or after the Company or such director, officer
or controlling person shall have received notice of such service on any
designated agent), but failure to notify the Fund of any claim shall not
relieve it from any liability which it may have to the person against whom
such action is brought otherwise than on account of its indemnity agreement
contained in this Paragraph. The Fund will be entitled to participate at its
own expense in the defense, or, if it so elects, to assume the defense of any
suit brought to enforce any such liability, but if the Fund elects to assume
the defense, such defense shall be conducted by counsel chosen by it and
satisfactory to the Company, its directors, officers or controlling person or
persons, defendant or defendants, in the suit. In the event the Fund elects
to assume the defense of any such suit and retain such counsel, the Company,
its directors, officers or controlling person or persons, defendant or
defendants in the suit, shall bear the fees and expenses of any additional
counsel retained by them, but, in case the Fund does not elect to assume the
defense of any such suit, it will reimburse the Company or such directors,
officers or controlling person or persons, defendant or defendants in the
suit, for the reasonable fees and expenses of any counsel retained by them.
The Fund agrees promptly to notify the Company pursuant to Paragraph 9 of the
commencement of any litigation or proceedings against it or any of its
officers or Trustees in connection with the issuance or sale of any Shares.
5
<PAGE>
The provisions of this Section 4 shall survive the termination of the
Agreement.
5. PROCEDURE FOR RESOLVING IRRECONCILABLE CONFLICTS.
(a) The Trustees of the Fund will monitor the operations of the Fund
for the existence of any material irreconcilable conflict among the interests
of all the contract holders and policy owners of Variable Insurance Products
(the "Participants") of all separate accounts investing in the Fund. An
irreconcilable material conflict may arise, among other things, from: (a) an
action by any state insurance regulatory authority; (b) a change in
applicable insurance laws or regulations; (c) a tax ruling or provision of
the Internal Revenue Code or the regulations thereunder; (d) any other
development relating to the tax treatment of insurers, contract holders or
policy owners or beneficiaries of Variable Insurance Products; (e) the manner
in which the investments of any Portfolio are being managed; (f) a difference
in voting instructions given by variable annuity contract holders, on the one
hand, and variable life insurance policy owners, on the other hand, or by the
contract holders or policy owners of different participating insurance
companies; or (g) a decision by an insurer to override the voting
instructions of Participants.
(b) The Company will be responsible for reporting any potential or
existing conflicts to the Trustees of the Fund. The Company will be
responsible for assisting the Trustees in carrying out their responsibilities
under this Paragraph 5(b) and Paragraph 5(a), by providing the Trustees with
all information reasonably necessary for the Trustees to consider the issues
raised. The Fund will also request its investment adviser to report to the
Trustees any such conflict which comes to the attention of the adviser.
(c) If it is determined by a majority of the Trustees of the Fund, or a
majority of its disinterested Trustees, that a material irreconcilable
conflict exists involving the Company, the Company shall, at its expense, and
to the extent reasonably practicable (as determined by a majority of the
disinterested Trustees), take whatever steps are necessary to eliminate the
irreconcilable material conflict, including withdrawing the assets allocable
to some or all of the separate accounts from the Fund or any Portfolio or
class thereof and reinvesting such assets in a different investment medium,
including another Portfolio of the Fund or class thereof, offering to the
affected Participants
6
<PAGE>
the option of making such a change or establishing a new funding medium
including a registered investment company.
For purposes of this Paragraph 5(c), the Trustees, or the disinterested
Trustees, shall determine whether or not any proposed action adequately
remedies any irreconcilable material conflict. In the event of a
determination of the existence of an irreconcilable material conflict, the
Trustees shall cause the Fund to take such action, such as the establishment
of one or more additional Portfolios or classes, as they in their sole
discretion determine to be in the interest of all shareholders and
Participants in view of all applicable factors, such as cost, feasibility,
tax, regulatory and other considerations. In no event will the Fund be
required by this Paragraph 5(c) to establish a new funding medium for any
variable contract or policy.
The Company shall not be required by this Paragraph 5(c) to establish a
new funding medium for any variable contract or policy if an offer to do so
has been declined by a vote of a majority of the Participants materially
adversely affected by the material irreconcilable conflict. The Company will
recommend to its Participants that they decline an offer to establish a new
funding medium only if the Company believes it is in the best interest of the
Participants.
(d) The Trustees' determination of the existence of an irreconcilable
material conflict and its implications promptly shall be communicated to all
Participating Insurance Companies by written notice thereof delivered or
mailed, first class postage prepaid.
6. VOTING PRIVILEGES.
The Company shall be responsible for assuring that its separate account
or accounts participating in the Fund shall use a calculation method of
voting procedures substantially the same as the following: those
Participants permitted to give instructions and the number of Shares for
which instructions may be given will be determined as of the record date for
the Fund shareholders' meeting, which shall not be more than 60 days before
the date of the meeting. Whether or not voting instructions are actually
given by a particular Participant, all Fund shares held in any separate
account or sub-account thereof and attributable to policies will be voted
for, against, or withheld from voting on any proposition in the same
proportion as (i) the aggregate record date cash value held in such
sub-account for policies giving instructions, respectively, to vote for,
against, or
7
<PAGE>
withhold votes on such proposition, bears to (ii) the aggregate record date
cash value held in the sub-account for all policies for which voting
instructions are received. Participants continued in effect under lapse
options will not be permitted to give voting instructions. Shares held in any
other insurance company general or separate account or sub-account thereof
will be voted in the proportion specified in the second preceding sentence
for shares attributable to policies.
7. DURATION AND TERMINATION.
This Agreement shall continue in effect for five (5) years from the date
of its execution. This Agreement may be terminated at any time, at the
option of either of the Company or the Fund, when neither the Company, any
insurance company nor the separate account or accounts of such insurance
company which is an affiliate thereof which is not a Participating Insurance
Company own any Shares of the Fund or may be terminated by either party to
the Agreement upon a determination by a majority of the Trustees of the Fund,
or a majority of its disinterested Trustees, following certification thereof
by a Participating Insurance Company given in accordance with Paragraph 9
that an irreconcilable conflict exists among the interests of (i) all
contract holders and policy holders of Variable Insurance Products of all
separate accounts or (ii) the interests of the Participating Insurance
Companies investing in the Fund. If this Agreement is so terminated, the Fund
may, at any time thereafter, automatically redeem the Shares of any Portfolio
held by a Participating Shareholder.
8. COMPLIANCE.
The Fund will comply with the provisions of Section 4240(a) of the New
York Insurance Law.
Each Portfolio of the Fund will use its best efforts to comply with the
provisions of Section 817(h) of the Internal Revenue Code of 1986, as amended
(the "Code"), relating to diversification requirements for variable annuity,
endowment and life insurance contracts. Specifically, each Portfolio will
comply with either (i) the requirement of Section 817(h)(1) of the Code that
its assets be adequately diversified, or (ii) the "Safe Harbor for
Diversification" specified in Section 817(h)(2) of the Code, or (iii) in the
case of variable life insurance contracts only, the diversification
requirement of Section 817(h)(1) of the Code by having all or part of its
assets invested in U.S.
8
<PAGE>
Treasury securities which qualify for the "Special Rule for Investments in
United States Obligations" specified in Section 817(h)(3) of the Code. The
Fund will notify the Company immediately upon having a reasonable basis for
believing that a Portfolio has ceased to comply with the requirements of
Section 817(h) of the Code or that the Portfolio might not so comply in the
future.
The provisions of Paragraphs 5 and 6 of this Agreement shall be
interpreted in a manner consistent with any Rule or order of the Securities
and Exchange Commission under the Investment Company Act of 1940, as amended,
applicable to the parties hereto.
No Shares of any Portfolio of the Fund may be sold to the general public.
9. NOTICES.
Any notice shall be sufficiently given when sent by registered or
certified mail to the other party at the address of such party set forth
below or at such other address as such party may from time to time specify in
writing to the other party.
If to the Fund:
Scudder Variable Life Investment Fund
Two International Place
Boston, Massachusetts 02110
(617) 295-2275
Attn: David B. Watts
If to the Company:
10. MASSACHUSETTS LAW TO APPLY.
This Agreement shall be construed and the provisions hereof interpreted
under and in accordance with the laws of The Commonwealth of Massachusetts.
11. MISCELLANEOUS.
The name "Scudder Variable Life Investment Fund" is the designation of
the Trustees for the time being under a Declaration of Trust dated March 15,
1985, as amended, and all persons dealing with the Fund must look solely to
the property of the Fund for the enforcement of any claims against the Fund
as neither the Trustees, officers, agents or shareholders assume any personal
liability for
9
<PAGE>
obligations entered into on behalf of the Fund. No Portfolio shall be liable
for any obligations properly attributable to any other Portfolio.
The captions in this Agreement are included for convenience of reference
only and in no way define or delineate any of the provisions hereof or
otherwise affect their construction or effect. This Agreement may be executed
simultaneously in two or more counterparts, each of which taken together
shall constitute one and the same instrument.
12. ENTIRE AGREEMENT.
This Agreement incorporates the entire understanding and agreement among
the parties hereto, and supersedes any and all prior understandings and
agreements between the parties hereto with respect to the subject matter
hereof.
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement
to be executed in its name and behalf by its duly authorized representative
and its seal to be hereunder affixed hereto as of the ____ day of __________,
1998.
SEAL SCUDDER VARIABLE LIFE
INVESTMENT FUND
By:________________________________
David B. Watts
President
SEAL [PARTICIPATING INSURANCE
COMPANY]
By:________________________________
Its:_______________________________
10
<PAGE>
Scudder Investor Services, Inc.
Two International Place
Boston, Massachusetts 02110
PARTICIPATING CONTRACT AND POLICY AGREEMENT
Ladies and Gentlemen:
We (sometimes hereinafter referred to as "Investor Services") are the
Principal Underwriter of shares of Scudder Variable Life Investment Fund (the
"Fund"), a no-load, open-end, diversified registered management investment
company established in 1985 as a Massachusetts business trust. The Fund is a
series fund consisting of the Balanced Portfolio, Bond Portfolio, Capital
Growth Portfolio, Global Discovery Portfolio, International Portfolio, Money
Market Portfolio, and Growth and Income Portfolio (individually or
collectively hereinafter referred to as the "Portfolio" or the "Portfolios").
In addition, each Portfolio, except the Money Market Portfolio, is divided
into two classes of shares of beneficial interest ("Shares"). Additional
Portfolios and classes may be created from time to time. The Fund is the
funding vehicle for variable annuity contracts and variable life insurance
policies ("Participating Contracts and Policies") to be offered to the
separate accounts (the "Accounts") of certain life insurance companies
("Participating Insurance Companies"). Owners of Participating Contracts and
Policies will designate a portion of their premium to be invested in
insurance company separate accounts or sub-accounts which invest in, or
represent an investment in, directly or indirectly, Shares the Portfolios of
the Fund. You are a registered broker-dealer which intends to offer and sell
Participating Contracts and Policies. In connection with such offer and sale
you will be obligated to deliver the prospectuses of such Participating
Contracts and Policies and, contemporaneously therewith, the prospectus of
the Fund. Sales of Shares to Participating Insurance Companies or their
affiliates or the separate accounts of either shall be effected solely by us
as principal underwriter of the Fund, and not by you; provided, however, that
you shall be our agent in connection with the receipt of purchase orders for
Fund Shares and not in connection with their offer and sale. The
relationship between us shall be further governed by the following terms and
conditions:
1. To the extent, if any, that your activities or the activities of the
Participating Insurance Companies in connection with the sale of
Participating Contracts and Policies may
<PAGE>
constitute the sale of Shares, you and we agree that (i) we are the
sole "principal underwriter" of the Fund and the sole "underwriter"
of the Shares as those terms are defined in the Investment Company
Act of 1940 (the "1940 Act") and the Securities Act of 1933 (the
"1933 Act"), respectively, and (ii) neither you nor the
Participating Insurance Companies or the Accounts shall be deemed
to be "principal underwriters" of the Fund or "underwriters" of the
Fund within the meaning of the 1940 Act and the 1933 Act,
respectively.
2. You hereby represent and warrant to us as follows:
(a) You are a corporation duly organized and validly existing in
good standing under the laws of the [STATE OF INCORPORATION]
and have full power and authority to enter into this Agreement.
(b) This Agreement has been duly authorized, executed and delivered
by you and is a valid and binding obligation enforceable
against you in accordance with its terms.
(c) Your compliance with the provisions of this Agreement will not
conflict with or result in a violation of the provisions of
your charter or by-laws, or any statute or any judgment, decree,
order, rule or regulation of any court or governmental agency or
body having jurisdiction.
3. We hereby represent and warrant to you as follows:
(a) A registration statement (File No. 2-96461) on Form N-1A with
respect to the Shares (x) has been prepared by the Fund in
conformity with the requirements of the 1940 Act and the 1933
Act and all applicable published instructions, rules and
regulations (the "Rules and Regulations") of the Securities
and Exchange Commission (the "Commission"), (y) has been filed
with the Commission, and (z) is currently effective. The
registration statement, including financial statements and
exhibits, and the final prospectus, including the statement of
additional information, as subsequently amended and
supplemented, are herein respectively referred to as the
"Registration Statement" and the "Prospectus".
(b) The Registration Statement and the Prospectus and any
amendment or supplement thereto will contain all statements
required to be stated therein and will comply in all material
respects with the requirements of the 1940 Act, the 1933 Act
and the Rules and Regulations, and the Registration Statement
and any post-effective amendment thereto will not contain or
incorporate by reference any untrue statement of a material
fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein, in light
of the circumstances under which they were made, not
misleading, and the Prospectus and any amendment or supplement
thereto will not contain or incorporate by reference any
untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary in
order to make
2
<PAGE>
the statements therein, in light of the circumstances under
which they were made, not misleading.
(c) We are a corporation duly organized and validly existing in good
standing under the laws of The Commonwealth of Massachusetts and
have full power and authority to enter into this Agreement.
(d) This Agreement has been duly authorized, executed and delivered
by us and is a valid and binding obligation enforceable against
us in accordance with its terms.
(e) Our compliance with all of the provisions of this Agreement will
not conflict with or result in a violation of the provisions of
our charter or by-laws, or any statute or any judgment, decree,
order, rule or regulation of any court or governmental agency or
body having jurisdiction over us.
4. You hereby covenant and agree with us as follows:
(a) You shall be an independent contractor and neither you nor any
of your directors, partners, officers or employees as such, is
or shall be an employee of us or of the Fund. You are
responsible for your own conduct and the employment, control
and conduct of your agents and employees and for injury to such
agents or employees or to others through your agents or
employees.
(b) You or one or more Participating Insurance Companies will be
responsible for insuring compliance with all applicable laws and
regulations of any regulatory body having jurisdiction over you
or Participating Contracts and Policies.
(c) No person is authorized to make any representations concerning
Shares except those contained in the Prospectus relating thereto
and in such printed information as issued by us for use as
information supplemental to the prospectus. In offering
Participating Contracts and Policies you shall, with respect to
the Fund and the Shares, rely solely on the representations
contained in the Prospectus and in the above-mentioned
supplemental information.
(d) You are not entitled to any compensation whatsoever from us or
the Fund with respect to offers of Participating Contracts and
Policies.
(e) With respect to payments to be made to us pursuant to a Rule
12b-1 Plan for the Fund, you will not seek reimbursement for
administrative and recordkeeping services under the Fund's
Rule 12b-1 Plan that have been or will be paid for by any fees
or charges imposed on owners of Participating Contracts and
Policies by a Participating Insurance Company for such
services. This limitation does not, however, apply to profits
that you earn from fees and charges under Participating
Contracts and Policies for your nondistribution-related costs
and expenses, such as mortality and expense risk
3
<PAGE>
charges under Participating Contracts and Policies, which
profits may be available for your use to pay distribution and
other expense incurred by you. Further, this provision does
not restrict you from receiving sales charges on purchases and
redemptions, consistent with applicable law, made under or
redemption proceeds from a Participating Contract or Policy at
the same time that you are seeking reimbursement for expenses
under the Fund's Rule 12b-1 Plan.
5. We hereby covenant and agree with you as follows:
(a) If, at any time when a Prospectus relating to the Shares is
required to be delivered under the 1940 Act, the 1933 Act or
the Rules and Regulations, we become aware of the occurrence
of any event as a result of which the Prospectus as then
amended or supplemented would include any untrue statement of
a material fact, or omit to state a material fact necessary to
make the statements therein, in light of the circumstances
under which made, not misleading, or if we become aware that
it has become necessary at any time to amend or supplement the
Prospectus to comply with the 1940 Act, the 1933 Act or the
Rules and Regulations, we will promptly notify you and
promptly request the Fund to prepare and to file with the
Commission an amendment to the Registration Statement or
supplement to the Prospectus which will correct such statement
or omission or an amendment or supplement which will effect
such compliance, and deliver to you copies of any such
amendment or supplement.
(b) We will cooperate with you in taking such action as may be
necessary to qualify the Shares for offering and sale under
the securities or Blue Sky laws of any state or jurisdiction
as you may request and will continue such qualification in
effect so long as is required by applicable law in connection
with the distribution of Shares.
(c) We shall reimburse you, subject to the minimum amounts set
forth in the attached schedule, for those distribution and
shareholder servicing-related expenses that are permitted to
be paid for by the Fund under the Fund's Rule 12b-1 Plan and
for which (i) you submit documentation, as may be requested by
us or by the Fund's Board of Trustees, and (ii) we receive
payment for such expenses from the Fund under the Fund's Rule
12b-1 Plan. We shall remit to you as promptly as reasonably
practicable all payments received by us from the Fund for
remittance to you pursuant to the Fund's Rule 12b-1 Plan.
6. We reserve the right in our discretion, with 30 days' written
notice, to suspend sales or withdraw the offering of Shares
entirely, as to any person or generally, except that sales of
Shares may be suspended or the offering of Shares withdrawn without
notice (i) if the continued offering or sale of Shares would
violate any applicable statute or regulation, order or decree of
any court, governmental agency or self-regulatory organization
having jurisdiction, or (ii) if in the sole discretion of the
Trustees of the Fund, including a majority of those Trustees who
are not "interested persons" (as
4
<PAGE>
defined in the 1940 Act) of the Fund or of its investment adviser,
such action is determined to be necessary in the best interests of
the Shareholders of any Portfolio. We reserve the right to amend
this Agreement at any time, and you agree that the sale of
Participating Contracts and Policies, after notice of any such
amendment has been sent to you, including a written notice from
Investor Services stating that the amendment is necessary to
prevent the continued offering or sale of Shares from violating any
applicable statute or regulation, order or decree of any court,
governmental agency or self-regulatory organization having
jurisdiction, shall constitute your agreement to any such amendment.
7. If we elect to provide to you for the purpose of your offering
Participating Contracts and Policies copies of any Prospectus
relating to the Shares and printed information supplemental
thereto, we shall furnish you with such copies as you reasonably
request upon the payment of reasonable charges therefor by you or
one or more Participating Insurance Companies. If we elect not to
provide such copies of such documents, you or one or more
Participating Insurance Companies shall bear the entire cost of
printing copies for your use. You shall not use such copies of such
documents printed by you or one or more Participating Insurance
Companies until you shall have furnished us with a copy thereof and
we either have given you written approval for use or twenty days
shall have elapsed following our receipt thereof and we have not
objected thereto in writing.
8. (a) You will indemnify and hold harmless Investor Services and each
of its directors and officers and each person, if any, who
controls Investor Services within the meaning of Section 15 of
the 1933 Act, against any loss, liability, damages, claim or
expense (including the reasonable cost of investigating or
defending any alleged loss, liability, damages, claim or expense
and reasonable counsel fees incurred in connection therewith),
arising by reason of any person's acquiring any Shares, which may
be based upon the 1933 Act or any other statute or common law,
and which (i) may be based upon any wrongful act by you, any of
your employees or representatives, any affiliate of or any person
acting on behalf of you, or (ii) may be based upon any untrue
statement or alleged untrue statement of a material fact
contained in a registration statement or prospectus covering
Shares or any amendment thereof or supplement thereto or the
omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements
therein not misleading if such a statement or omission was made
in reliance upon information furnished to us or the Fund by you,
or (iii) may be based on any untrue statement or alleged untrue
statement of a material fact contained in a registration
statement or prospectus covering insurance products sold by you,
or any amendments or supplement thereto, or the omission or
alleged omission to state therein a material fact required to be
stated therein or necessary to make the statement or statements
therein not misleading, unless such statement or omission was
made in reliance upon information furnished to you or a
Participating Insurance Company by or on behalf of Investor
Services or the Fund; provided, however, that in no case (i) is
the indemnity by you in favor of any person indemnified to be
deemed to
5
<PAGE>
protect Investor Services or any such person against any
liability to which Investor Services or any such person would
otherwise be subject by reason of willful misfeasance, bad
faith or gross negligence in the performance of its or his
duties or by reason of its or his reckless disregard of its
obligations and duties under this Agreement, or (ii) are you
to be liable under your indemnity agreement contained in this
paragraph with respect to any claim made against Investor
Services or any person indemnified unless Investor Services or
such person, as the case may be, shall have notified you in
writing within a reasonable time after the summons or other
first legal process giving information of the nature of the
claim shall have been served upon Investor Services or upon
such person (or after Investor Services or such person shall
have received notice of such service on any designated agent),
but failure to notify you of any such claim shall not relieve
you from any liability which you may have to Investor Services
or any person against whom such action is brought otherwise
than on account of your indemnity agreement contained in this
paragraph. You shall be entitled to participate, at your own
expense, in the defense, or, if you so elect, to assume the
defense of any suit brought to enforce any such liability,
but, if you elect to assume the defense, such defense shall be
conducted by counsel chosen by you and satisfactory to
Investor Services, or to its officers or directors, or to any
controlling person or persons, defendant or defendants in the
suit. In the event that you assume the defense of any such
suit and retain such counsel, Investor Services or such
officers or directors or controlling person or persons,
defendant or defendants in the suit, shall bear the fees and
expenses of any additional counsel retained by them, but, in
case you do not elect to assume the defense or any such suit,
you shall reimburse Investor Services and such officers,
directors or controlling person or persons, defendant of
defendants in such suit, for the reasonable fees and expenses
of any counsel retained by them. You agree promptly to notify
Investor Services of the commencement of any litigation or
proceedings against it in connection with the offer, issue and
sale of any shares.
(b) Investor Services will indemnify and hold harmless you and
each of your directors and officers and each person, if any,
who controls you within the meaning of Section 15 of the 1933
Act, against any loss, liability, damages, claim or expense
(including the reasonable cost of investigating or defending
any alleged loss, liability, damages, claim or expense and
reasonable counsel fees incurred in connection therewith),
arising by reason of any person's acquiring any Shares, which
may be based upon the 1933 Act or any other statute or common
law, and which (i) may be based upon any wrongful act by
Investor Services, any of its employees or representatives, or
(ii) may be based upon any untrue
6
<PAGE>
statement or alleged untrue statement of a material fact
contained in a registration statement or prospectus covering
Shares or any amendment thereof or supplement thereto or the
omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the
statements therein not misleading unless such statement or
omission was made in reliance upon information furnished to
Investor Services or the Fund by you or (iii) may be based on
any untrue statement or alleged untrue statement of a material
fact contained in a registration statement or prospectus
covering insurance products sold by you, or any amendment or
supplement thereto, or the omission or alleged omission to
state therein a material fact required to be stated therein or
necessary to make the statement or statements therein not
misleading, if such statement or omission was made in reliance
upon information furnished to you by or on behalf of Investor
Services or the Fund; provided, however, that in no case (i)
is the indemnity by Investor Services in favor of any person
indemnified to be deemed to protect you or any such person
against any liability to which you or any such person would
otherwise be subject by reason of willful misfeasance, bad
faith or gross negligence in the performance of your or his
duties by reason of your or his reckless disregard of your or
his obligations and duties under this Agreement, or (ii) is
Investor Services to be liable under its indemnity agreement
contained in this paragraph with respect to any claim made
against you or any person indemnified unless you or such
person, as the case may be, shall have notified Investor
Services in writing within a reasonable time after the summons
or other first legal process giving information of the nature
of the claim shall have been served upon you or upon such
person (or after you or such person shall have received notice
of such service on any designated agent), but failure to
notify Investor Services of any such claim shall not relieve
Investor Services from any liability to which Investor
Services may have to you or any person against whom such
action is brought otherwise than on account of its indemnity
agreement contained in this paragraph. Investor Services
shall be entitled to participate, at its own expense, in the
defense, or, if it so elects, to assume the defense of any
suit brought to enforce any such liability, but, if it elects
to assume the defense, such defense shall be conducted by
counsel chosen by Investor Services and satisfactory to you,
or to your officers or directors, or to any controlling person
or persons, defendant or defendants in the suit. In the event
that Investor Services assumes the defense of any such suit
and retains such counsel, you or such officers or directors or
controlling person or persons, defendant or defendants in the
suit, shall bear the fees and expenses of any additional
counsel retained by you, but, in case Investor Services does
not elect to assume the defense of any such suit, Investor
Services shall reimburse you and such officers, directors or
controlling person or persons, defendant or defendants in such
suit, for the reasonable fees and expenses of any counsel
retained by you. Investor Services agrees promptly to notify
you of the commencement of any litigation or proceedings
against it in connection with the offer, issue and sale of any
Shares.
9. The indemnities, representations, warranties, covenants and
agreements of each party to this Agreement as set forth in this
Agreement will remain in full force and effect regardless of any
investigation made by or on behalf of either of such parties or any
of their respective officers, directors, partners or any
controlling person, and will survive delivery of and payment for
the Shares.
7
<PAGE>
10. Any provision of this Agreement which may be determined by
competent authority to be prohibited or unenforceable in any
jurisdiction shall, as to such jurisdiction, be ineffective to the
extent of such prohibition or unenforceability without invalidating
the remaining provisions hereof, and any such prohibition or
unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction. To the
extent permitted by applicable law, each party hereto waives any
provision of law which renders any provision hereof prohibited or
unenforceable in any respect.
11. This Agreement constitutes the entire agreement among the parties
concerning the subject matter hereof, and supersedes any and all
prior understandings.
12. This Agreement shall automatically terminate in the event of its
assignment. This Agreement may be terminated at any time by either
party by 30 days' written notice given to the other party, except
that the Agreement may be terminated by Investor Services without
notice (i) if the continued offering or sale of Shares would
violate any applicable statute or regulation, order or decree of
any court, governmental agency or self-regulatory organization
having jurisdiction, or (ii) if in the sole discretion of the
Trustees of the Fund, including a majority of those Trustees who
are not "interested persons" (as defined in the 1940 Act) of the
Fund or of its investment adviser, such action is determined to be
necessary in the best interests of the Shareholders of any
Portfolio. The obligation of each party to indemnify the other
party pursuant to paragraph 8 hereof shall apply with respect to
any Shares sold before or after such termination. To the extent we
receive payments under any provision of this Agreement pursuant to
a Rule 12b-1 Plan for the Fund, both you and we understand and
agree that this Agreement will be subject to the applicable
approval, reporting and termination requirements as set forth in
Rule 12b-1.
13. Any notice hereunder shall be duly given if mailed or telegraphed
to the other party hereto at the address specified below. This
Agreement shall be governed by and construed in accordance with the
laws of The Commonwealth of Massachusetts.
14. This Agreement may be executed in any number of counterparts which,
taken together shall constitute one and the same instrument. This
Agreement shall become effective upon receipt by us of your
acceptance hereof.
15. This Agreement may not be modified or amended except by a written
instrument duly executed by the parties hereto.
8
<PAGE>
SCUDDER INVESTOR SERVICES, INC.
By: ___________________________________
President
Two International Place
Boston, Massachusetts 02110
The undersigned hereby accepts the offer set forth
in the above letter.
[REGISTERED BROKER-DEALER]
Dated: ____________________ By:_____________________________________
Authorized Representative
Address:
9
