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File Nos. 333-11377
811-7799
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
PRE-EFFECTIVE AMENDMENT NO. 1
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 1
FULCRUM SEPARATE ACCOUNT OF ALLMERICA FINANCIAL LIFE INSURANCE
AND ANNUITY COMPANY
(Exact Name of Trust)
Allmerica Financial Life Insurance and Annuity Company
440 Lincoln Street
Worcester, MA 01653
(508) 855-1000
(Registrant'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 complete address of agent for service)
It is proposed that this filing will become effective:
____ immediately upon filing pursuant to paragraph (b) of Rule 485
____ on ____________ pursuant to paragraph (b) of Rule 485
____ 60 days after filing pursuant to paragraph (a)(1) of Rule 485
____ on ____________ pursuant to paragraph (a)(1) of Rule 485
VARIABLE ANNUITY POLICIES
Pursuant to Reg. Section 270.24f-2 of the Investment Company Act of 1940,
Registrant hereby declares that an indefinite amount of its securities is
being registered under the Securities Act of 1933. The $500 filing fee
required by said rule is paid herewith.
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CROSS REFERENCE SHEET SHOWING LOCATION IN PROSPECTUS OF
ITEMS CALLED FOR BY FORM N-4
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FORM N-4 ITEM NO. CAPTION IN PROSPECTUS
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1................................ Cover Page
2................................ "Special Terms"
3................................ "Summary"; "Annual and Transaction Expenses"
4................................ Omitted
5................................ "Description of the Company, the Variable Account,
the Palladian Trust and Allmerica Investment Trust."
6................................ "Charges and Deductions"
7................................ "The Variable Annuity Policies"
8................................ "The Variable Annuity Policies"
9................................ "Death Benefit"
10............................... "Purchase Payments; Computation of Policy Values and
Annuity Payments"
11............................... "Surrender"; "Withdrawals"
12............................... "Federal Tax Considerations"
13............................... "Legal Matters"
14............................... "Table of Contents of the Statement of Additional
Information"
FORM N-4 ITEM NO. CAPTION IN STATEMENT OF ADDITIONAL INFORMATION
- ----------------- ----------------------------------------------
15............................... "Cover Page"
16............................... "Table of Contents"
17............................... "General Information and History"
18............................... "Services"
19............................... "Underwriters"
20............................... "Underwriters"
21............................... "Performance Information"
22............................... "Annuity Payments"
23............................... "Financial Statements"
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ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
FLEXIBLE PAYMENT DEFERRED VARIABLE AND FIXED ANNUITY CONTRACTS
This prospectus describes interests under flexible payment deferred variable and
fixed annuity contracts, known as the Fulcrum Fund-SM- Variable Annuity
Contracts, which are issued either on a group basis or as individual contracts
by Allmerica Financial Life Insurance and Annuity Company ("Company") to
individuals and businesses in connection with retirement plans which may or may
not qualify for special federal income tax treatment. (For information about the
tax status when used with a particular type of plan, see "FEDERAL TAX
CONSIDERATIONS.") Participation in a group contract will be accounted for by the
issuance of a certificate describing the individual's interest under the group
contract. Participation in an individual contract will be evidenced by the
issuance of an individual contract. Certificates and individual contracts are
collectively referred to herein as the "Contracts." The following is a summary
of information about these Contracts. More detailed information can be found
under the referenced captions in this Prospectus.
Contract values may accumulate on a variable basis in the Contract's Variable
Account, known as the Fulcrum Separate Account. The Assets of the Variable
Account are divided into Sub-Accounts, each investing exclusively in shares of
one series of an underlying investment company. The following portfolios of THE
PALLADIAN-SM- TRUST are offered under the Contract:
VALUE PORTFOLIO
GROWTH PORTFOLIO
INTERNATIONAL GROWTH PORTFOLIO
GLOBAL STRATEGIC INCOME PORTFOLIO
GLOBAL INTERACTIVE/TELECOMM PORTFOLIO
The following series of ALLMERICA INVESTMENT TRUST is offered under the
Contract:
MONEY MARKET FUND
In most jurisdictions, values may also be allocated on a fixed basis to the
Fixed Account, which is part of the Company's General Account, and during the
accumulation period to one or more of the Guarantee Period Accounts. Amounts
allocated to the Fixed Account earn interest at a guaranteed rate for one year
from the date allocated. Amounts allocated to a Guarantee Period Account earn a
fixed rate of interest for the duration of the applicable Guarantee Period. The
interest earned is guaranteed if held for the entire Guarantee Period. If
removed prior to the end of the Guarantee Period the value may be increased or
decreased by a Market Value Adjustment. Amounts allocated to the Guarantee
Period Accounts in the accumulation phase are held in the Company's Separate
Account GPA.
Additional information is contained in a Statement of Additional Information
dated November 15, 1996 ("SAI"), filed with the Securities and Exchange
Commission and incorporated herein by reference. The Table of Contents of the
SAI is on page 3 of this Prospectus. The SAI is available upon request and
without charge through Allmerica Investments, Inc., 440 Lincoln Street,
Worcester, Massachusetts 01653, 508-855-3590.
THIS PROSPECTUS IS VALID ONLY WHEN ACCOMPANIED BY A CURRENT PROSPECTUS OF
ALLMERICA INVESTMENT TRUST AND THE PALLADIAN-SM- TRUST. THE GLOBAL STRATEGIC
INCOME PORTFOLIO MAY INVEST IN HIGHER YIELDING, LOWER RATED DEBT SECURITIES (SEE
"INVESTMENT OBJECTIVES AND POLICIES"). INVESTORS SHOULD RETAIN A COPY OF THIS
PROSPECTUS FOR FUTURE REFERENCE.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE CONTRACTS ARE OBLIGATIONS OF ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY
COMPANY AND ARE DISTRIBUTED BY ALLMERICA INVESTMENTS, INC. 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. INVESTMENT IN THE
CONTRACTS IS SUBJECT TO VARIOUS RISKS, INCLUDING THE FLUCTUATION OF VALUE AND
POSSIBLE LOSS OF PRINCIPAL.
DATED NOVEMBER 15, 1996
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TABLE OF CONTENTS
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TABLE OF CONTENTS OF THE STATEMENT OF ADDITIONAL INFORMATION............ 3
SPECIAL TERMS........................................................... 4
SUMMARY................................................................. 5
ANNUAL AND TRANSACTION EXPENSES......................................... 9
PERFORMANCE INFORMATION................................................. 11
WHAT IS AN ANNUITY?..................................................... 12
RIGHT TO REVOKE INDIVIDUAL RETIREMENT ANNUITY........................... 13
RIGHT TO REVOKE OR SURRENDER IN SOME STATES............................. 13
DESCRIPTION OF THE COMPANY, THE VARIABLE ACCOUNT,
THE PALLADIAN-SM- TRUST, AND ALLMERICA INVESTMENT TRUST................ 13
INVESTMENT OBJECTIVES AND POLICIES...................................... 15
ADDITION, DELETION AND SUBSTITUTION OF INVESTMENTS...................... 16
VOTING RIGHTS........................................................... 17
CHARGES AND DEDUCTIONS.................................................. 17
A. Annual Charge Against Variable Account Assets................... 17
B. Contract Fee.................................................... 18
C. Premium Taxes................................................... 18
D. Contingent Deferred Sales Charge................................ 19
E. Transfer Charge................................................. 22
DESCRIPTION OF CONTRACT................................................. 22
A. Payments........................................................ 23
B. Transfer Privilege.............................................. 23
C. Dollar Cost Averaging and Automatic Rebalancing Options......... 24
D. Surrender....................................................... 24
E. Withdrawals..................................................... 25
F. Death Benefit................................................... 25
G. The Spouse of the Contract Owner as Beneficiary................. 26
H. Assignment....................................................... 26
I. Electing the Form of Annuity and the Annuity Date............... 26
J. Description of Variable Annuity Options......................... 27
K. NORRIS Decision................................................. 28
L. Computation of Variable Account Values and Annuity
Benefit Payments................................................. 28
GUARANTEE PERIOD ACCOUNTS............................................... 30
FEDERAL TAX CONSIDERATIONS.............................................. 32
A. Qualified and Non-Qualified Contracts........................... 33
B. Taxation of the Contract in General............................. 33
C. Tax Withholding and Penalties................................... 34
D. Provisions Applicable to Qualified Employee Benefit Plans....... 34
E. Qualified Employee Pension and Profit Sharing Trusts............ 35
F. Self-Employed Individuals....................................... 35
G. Individual Retirement Account Plans............................. 35
H. Simplified Employee Pensions..................................... 36
I. Public School Systems and Certain Tax-Exempt Organizations...... 36
J. Texas Optional Retirement Program............................... 37
K. Section 457 Plans for State Governments and Tax-Exempt
Entities......................................................... 37
L. Non-Individual Owners........................................... 37
REPORTS................................................................. 37
LOANS (QUALIFIED CONTRACTS ONLY)........................................ 37
CHANGES IN OPERATION OF THE VARIABLE ACCOUNT............................ 38
</TABLE>
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<TABLE>
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DISTRIBUTION............................................................ 38
LEGAL MATTERS........................................................... 38
FURTHER INFORMATION..................................................... 39
APPENDIX A -- MORE INFORMATION ABOUT THE FIXED ACCOUNT.................. 40
APPENDIX B -- SURRENDER CHARGES AND THE MARKET VALUE ADJUSTMENT......... 41
APPENDIX C -- THE DEATH BENEFIT......................................... 43
STATEMENT OF ADDITIONAL INFORMATION
TABLE OF CONTENTS
GENERAL INFORMATION AND HISTORY......................................... 2
TAXATION OF THE VARIABLE ACCOUNT AND THE COMPANY........................ 3
SERVICES................................................................ 3
UNDERWRITERS............................................................ 3
ANNUITY PAYMENTS........................................................ 4
PERFORMANCE INFORMATION................................................. 6
TAX DEFERRED ACCUMULATION............................................... 8
FINANCIAL STATEMENTS.................................................... 8
</TABLE>
THE CONTRACTS OFFERED BY THIS PROSPECTUS MAY NOT BE AVAILABLE IN ALL STATES.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN
OFFER TO BUY SECURITIES IN ANY STATE TO ANY PERSON TO WHOM IT IS UNLAWFUL TO
MAKE OR SOLICIT AN OFFER IN THAT STATE.
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SPECIAL TERMS
ACCUMULATED VALUE: the sum of the value of all Accumulation Units in the
Sub-Accounts and of the value of all accumulations in the Fixed Account and
Guarantee Period Accounts then credited to the Contract, on any date before the
Annuity Date.
ACCUMULATION UNIT: a measure of the Contract Owner's interest in a Sub-Account
before annuity benefit payments begin.
ANNUITANT: the person designated in the Contract upon whose life annuity benefit
payments are to be made.
ANNUITY DATE: the date on which annuity benefit payments begin.
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: an Annuity payout option providing for annuity benefit payments
which remain fixed in an amount throughout the annuity benefit payment period
selected.
FUNDS: the portfolios of The Palladian-SM- Trust and fund of Allmerica
Investment Trust which are offered under the Contract. These are the Value
Portfolio, Growth Portfolio, International Growth Portfolio, Global Strategic
Income Portfolio, and Global Interactive/Telecomm Portfolio of The Palladian-SM-
Trust and the Money Market Fund of Allmerica Investment Trust.
GUARANTEED INTEREST RATE: the annual effective rate of interest after daily
compounding credited to a Guarantee Period Account.
GUARANTEE PERIOD: the number of years that a Guaranteed Interest Rate is
credited.
GUARANTEE PERIOD ACCOUNT: an account which corresponds to a Guaranteed Interest
Rate for a specified Guarantee Period and is supported by assets in a
non-unitized separate account.
GENERAL ACCOUNT: all the assets of the Company other than those held in a
separate account.
MARKET VALUE ADJUSTMENT: a positive or negative adjustment assessed if any
portion of a Guarantee Period Account is withdrawn or transferred prior to the
end of its Guarantee Period.
SUB-ACCOUNT: a subdivision of the Variable Account. Each Sub-Account available
under the Contract invests exclusively in the shares of a corresponding
portfolio of The Palladian-SM- Trust or fund of Allmerica Investment Trust.
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.
VALUATION DATE: a day on which the net asset value of the shares of any of the
Funds 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, and on such other days (other than a day during which no
payment, withdrawal, or surrender of a Contract was received) when there is a
sufficient degree of trading in a Fund's portfolio securities such that the
current net asset value of the Sub-Accounts may be materially affected.
VARIABLE ACCOUNT: the Fulcrum Account, 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: an Annuity payout option providing for payments varying in
amount in accordance with the investment experience of certain of the Funds.
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SUMMARY
WHAT IS THE FULCRUM FUND-SM- VARIABLE ANNUITY?
The Fulcrum Fund-SM- Variable Annuity contract (the "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
- Experienced professional investment advisors who are paid on an
incentive fee basis
- Tax deferral on earnings
- Guarantees that can protect your family during the accumulation
phase
- Income that can be guaranteed for life
The Contract has two phases, an accumulation phase and an annuity payout phase.
During the accumulation phase, your initial payment and any additional payments
you choose to make may be allocated to the combination of portfolios of
securities ("Funds") under your Contract. Your Contract's Accumulated Value is
based on the investment performance of the Funds. No income taxes are paid on
any earnings under the Contract unless and until Accumulated Values are
withdrawn.
During the annuity payout phase, the Annuitant can receive income based on
several annuity options. These options include payment over a period of years or
for the rest of the Annuitant's life.
THE ACCUMULATION PHASE
During the accumulation phase, you select the investment options most
appropriate for your investment needs. The Contract permits net payments to be
allocated among the Funds, the Guarantee Period Account, and the Fixed Account.
Each Fund is professionally advised by an investment advisor with experience
managing the types of investments in the Fund. All investment gains or losses of
the Funds will be reflected in the accumulated value under the Contract.
The accumulation phase provides certain protection and guarantees for the
beneficiary if the Annuitant should die before the annuity phase begins. See
discussion below under "What happens upon death during the accumulation phase?"
THE ANNUITY PAYOUT PHASE
You choose the annuity option and the date for the annuity benefit payments to
begin. Annuity benefit payments may be on a variable basis (dependent upon the
performance of the Funds), on a fixed basis (with payment amounts guaranteed),
or on a combination variable and fixed basis. Among the income options available
during the annuity phase are:
- Lump sum; or
- At regular intervals over a specified number of years; or
- At regular intervals for the rest of the Annuitant's life,
regardless of how long he or she lives.
WHO ARE THE KEY PERSONS UNDER THE CONTRACT?
The Contract is between you and us -- Allmerica Financial Life Insurance and
Annuity Company ("Company"). Each Contract has a Contract Owner (or an Owner and
a Joint Owner, in which case one of the two must also be the Annuitant), an
Annuitant and a Beneficiary. As Contract Owner, you make purchase 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 death of the
Contract Owner or Annuitant.
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CAN I EXAMINE THE CONTRACT?
Yes. Your Contract will be delivered to you after your purchase. If you return
the Contract to the Company during the first 10 days from the date you received
it, the Contract will be cancelled. (There may be a longer period in certain
states; see the "Right to Examine" provision on the cover of your Contract.) If
your Contract was issued as an individual retirement annuity or provides for a
full refund of the initial purchase payment under its "Right to Examine"
provision, you will incur no fees to cancel within the right-to-examine period
and will receive the greater of (1) your entire purchase payment, or (2) the
accumulated value of the Contract plus any amounts deducted under the Contract
or by the Funds for taxes, charges or fees. If your Contract does not provide
for a full refund of the initial purchase payment, you will receive upon
cancellation 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 (on the date the cancellation request is received by the Company)
attributable to amounts allocated to the Variable Account Sub-Account. See
"RIGHT TO REVOKE CONTRACT."
WHAT ARE MY INVESTMENT CHOICES?
The Contract permits net payments to be allocated among the Funds, the Guarantee
Period Accounts, and the Fixed Account. The Fixed Account is part of the General
Account of the Company and provides a guarantee by the Company of principal and
a fixed interest rate for one year from the date amounts are allocated to the
account. Payments allocated to a Guarantee Period Account are held in a separate
account and earn a guaranteed interest rate if held for the full duration of the
Guarantee Period.
THE FIXED ACCOUNT AND/OR THE GUARANTEE PERIOD ACCOUNTS MAY NOT BE AVAILABLE IN
ALL STATES. SIMILARLY, NOT ALL FUNDS MAY BE AVAILABLE IN ALL STATES.
You have a choice of six Funds:
- Value Portfolio of The Palladian-SM- Trust
Managed by GAMCO Investors, Inc.
- Growth Portfolio of The Palladian-SM- Trust
Managed by Stonehill Capital Management, Inc.
- International Growth Portfolio of The Palladian-SM- Trust
Managed by Bee & Associates Incorporated
- Global Strategic Income Portfolio of The Palladian-SM- Trust
Managed by Fischer Francis Trees & Watts, Inc.
- Global Interactive/Telecomm Portfolio of The Palladian-SM-
Trust
Managed by GAMCO Investors, Inc.
- Money Market Fund of Allmerica Investment Trust
Managed by Allmerica Asset Management, Inc.
This range of investment choices enables you to allocate your money among the
Funds to meet your particular investment needs. If your Contract was issued as
an individual retirement annuity or provides for a full refund of the initial
purchase payment under its "Right to Examine" provision (see "RIGHT TO REVOKE
CONTRACT"), for the first 14 days following the date of issue, all Fund
investments and allocations to the Guarantee Period Accounts will be allocated
to the Money Market Fund. Thereafter, all amounts will be allocated according to
your investment choices. For a more detailed description of the Funds, see "THE
PALLADIAN-SM- TRUST" and "ALLMERICA INVESTMENT TRUST," and "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
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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 Guarantee Interest Rate depends on the number of years of the Guarantee
Period selected. The Company currently makes available seven Guarantee Periods
ranging from three to ten years in duration (excluding a four-year Guarantee
Period.) Once declared, the Guarantee Interest Rate will not change during the
duration of the Guarantee Period. If amounts allocated to a Guarantee Period
Account are transferred, surrendered or applied to any annuity option at any
time other than the day following the last day of the applicable Guarantee
Period, a Market Value Adjustment will apply that may increase or decrease the
Account's value. For more information about the Guarantee Period Accounts and
the Market Value Adjustment, see "Guarantee Period Accounts."
FIXED ACCOUNT. The Fixed Account is part of the General Account which consists
of all the Company's assets other than those allocated to the Variable Account
and any other separate account. Allocations to the Fixed Account are guaranteed
as to principal and a minimum rate of interest. Additional excess interest may
be declared periodically at the Company's discretion. Furthermore, the initial
rate in effect on the date an amount is allocated to the Fixed Account will be
guaranteed for one year from that date. For more information about the Fixed
Account see APPENDIX A, "MORE INFORMATION ABOUT THE FIXED ACCOUNT."
WHO ARE THE INVESTMENT ADVISORS?
THE PALLADIAN-SM- TRUST. Palladian-SM- Advisors, Inc. ("PAI") serves as overall
manager of The Palladian-SM- Trust and is responsible for general investment
supervisory services to the Portfolios. PAI has retained the services of Tremont
Partners, Inc. ("Tremont") to provide research concerning registered investment
advisors to be retained by the Trust as Portfolio Managers and to monitor and
assist PAI with the periodic reevaluation of existing Portfolio Managers.
The Portfolio Managers of the five Portfolios of The Palladian-SM- Trust are as
follows:
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PORTFOLIO PORTFOLIO MANAGER
- --------------------------------------------------- ---------------------------------------------------
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Value Portfolio GAMCO Investors, Inc.
Growth Portfolio Stonehill Capital Management, Inc.
International Growth Portfolio Bee & Associates Incorporated
Global Strategic Income Portfolio Fischer Francis Trees & Watts, Inc.
Global Interactive/Telecomm Portfolio GAMCO Investors, Inc.
</TABLE>
ALLMERICA INVESTMENT TRUST. Allmerica Investment Management Company, Inc. is the
investment manager of Allmerica Investment Trust and, subject to the direction
of its Board of Trustees, handles the day-to-day affairs of the Trust. Allmerica
Investment Management Company, Inc. has entered into a Sub-Advisor Agreement
with its affiliate, Allmerica Asset Management, Inc., for investment management
services for the Money Market Fund. Both Allmerica Investment Management
Company, Inc. and Allmerica Asset Management, Inc. are located at 440 Lincoln
Street, Worcester, Massachusetts 01653.
For more information, see "The Palladian-SM- Trust" and "Allmerica Investment
Trust."
CAN I MAKE TRANSFERS AMONG THE FUNDS?
Yes. Prior to the Annuity Date, you may transfer among the Funds, the Guarantee
Period Account, 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 so that assets remain allocated according to a desired mix
or choose automatic dollar cost averaging to gradually move funds into one or
more Sub-Accounts. See "TRANSFER PRIVILEGE."
HOW MUCH CAN I INVEST AND HOW OFTEN?
The number and frequency of your payments are flexible, subject to the minimum
and maximum payments stated in "PAYMENTS."
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WHAT IF I NEED MY MONEY BEFORE MY ANNUITY PHASE BEGINS?
You can withdraw the greater of 100% of cumulative earnings or 15% of the total
Accumulated Value per calendar year without a surrender charge. You may
surrender your Contract or make withdrawals any time before your annuity phase
begins, subject to the restrictions discussed in "Surrender," "Withdrawals," and
"GUARANTEE PERIOD ACCOUNTS." Certain charges may apply (see "CHARGES AND
DEDUCTIONS"), and there may be a tax penalty assessed under the Internal Revenue
Code ("the Code"). See "FEDERAL TAX CONSIDERATIONS."
WHAT HAPPENS UPON DEATH DURING MY ACCUMULATION PHASE?
If the Annuitant, Contract Owner or Joint Owner should die before the Annuity
Date, a death benefit will be paid to the beneficiary. Upon the death of the
Annuitant (or an Owner who is also an Annuitant), the death benefit is equal to
the GREATEST of:
- The Accumulated Value increased by any positive Market Value
Adjustment;
- Gross payments, with interest accumulating daily at an annual
rate of 5% starting on the date each payment was applied,
reduced proportionately to reflect withdrawals (for each
withdrawal, the proportionate reduction is calculated as the
death benefit under this option immediately prior to the
withdrawal, multiplied by the withdrawal amount, and divided by
the Accumulated Value immediately prior to the withdrawal); or
- The death benefit that would have been payable on the most
recent Contract anniversary, increased for subsequent payments
and reduced proportionately to reflect withdrawals after that
date.
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 "Death Benefit."
WHAT ARE MY ANNUITY PAYOUT OPTIONS UNDER THE CONTRACT?
You may choose variable annuity benefit payments based on the investment
performance of certain Funds, fixed-amount annuity benefit payments, or a
combination of fixed-amount and variable annuity benefit payments. Fixed-amount
payments are guaranteed by the Company. See "DESCRIPTION OF THE CONTRACT" for
information about annuity benefit payment options, selecting the Annuity Date,
and how annuity benefit payments are calculated.
WHAT CHARGES WILL I INCUR UNDER MY CONTRACT?
At each Contract anniversary and upon surrender, if the Accumulated Value is
$100,000 or less, the Company will deduct a $30 Contract fee from your Contract.
There will be no Contract fee if the Accumulated Value is $100,000 or more. The
Contract fee is waived for contracts issued to and maintained by a trustee of a
401(k) plan.
Should you decide to surrender 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 1% 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 "Premium Taxes."
Currently, the Company does not charge for processing transfers. The first
twelve (12) transfers in a Contract year are guaranteed to be free of a transfer
charge. For each subsequent transfer in a Contract year, the Company reserves
the right to assess a charge which is guaranteed never to exceed $25.
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The Company will deduct a daily Mortality and Expense Risk Charge and
Administrative Expense Charge equal to 1.25% and 0.20%, respectively, of the
average daily net assets invested in each Fund. The Funds will incur certain
management fees and expenses which are more fully described in "ANNUAL AND
TRANSACTION EXPENSES" and in the prospectus of the Funds, which accompanies this
Prospectus.
For more information, see "CHARGES AND DEDUCTIONS."
CAN I MAKE FUTURE CHANGES UNDER MY CONTRACT?
There are several changes you can make after receiving your Contract:
- You may assign your ownership to someone else, except under
certain qualified plans.
- You may change the beneficiary, unless you have designated a
beneficiary irrevocably.
- You may change the allocation of payments, with no tax
consequences under current law.
- You may make transfers of Contract value among your current
investments.
- You may cancel your Contract within 10 days of delivery, as
discussed above.
- You may select the form and timing of annuity benefit payments.
ANNUAL AND TRANSACTION EXPENSES
The purpose of the following tables is to assist the Contract Owner in
understanding the various costs and expenses that a Contract Owner will bear
directly or indirectly under the Contracts. The tables reflect charges under the
Contract, expenses of the Sub-Accounts, and expenses of the Underlying Series.
In addition to the charges and expenses described below, in some states premium
taxes may be applicable.
CONTRACT OWNER TRANSACTION EXPENSES
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CONTRACT
YEAR
AFTER DATE
OF
CONTINGENT DEFERRED SALES CHARGE PAYMENT CHARGE
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The charge (as a percentage of payments, applied to the amount 0-1 7%
surrendered in excess of the amount, if any, which 2 6%
may be surrendered free of charge) will be assessed 3 5%
upon surrender, redemption, or annuitization under any 4 4%
commutable period certain option or a noncommutable 5 3%
period certain less than 10 years. 6 2%
7 1%
more than 7 0%
TRANSFER CHARGE
The Company currently makes no charge for processing transfers. The None
Company guarantees that the first twelve transfers in a Contract
year will be free of a transfer charge. For the thirteenth and
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.
</TABLE>
9
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<TABLE>
<S> <C> <C>
ANNUAL CONTRACT FEE
An annual Contract fee, equal to $30, is deducted when Accumulated $30
Value is less than $100,000. The Contract fee is currently waived
for contracts issued to a trustee of a 401(k) plan, but the
Company reserves the right to impose the Contract fee on such
contracts.
VARIABLE ACCOUNT ANNUAL EXPENSES
(as a percentage of average account value)
Mortality and Expense Risk Charge 1.25%
Variable Account Administrative Expense Charge 0.20%
---------
Total Annual Expenses 1.45%
</TABLE>
FUND EXPENSES
(annual basis as percentage of average daily net assets)
<TABLE>
<CAPTION>
OTHER EXPENSES
(AFTER ANY TOTAL
MANAGEMENT APPLICABLE OPERATING
FUND FEES REIMBURSEMENTS) EXPENSES
- ------------------------------------------------- --------------- ------------------- --------------
<S> <C> <C> <C>
Value Portfolio 0.80%(1) 0.85%(2) 1.65%
Growth Portfolio 0.80%(1) 1.10%(2) 1.90%
International Growth Portfolio 0.80%(1) 1.23%(2) 2.03%
Global Strategic Income Portfolio 0.80%(1) 1.23%(2) 2.03%
Global Interactive/Telecomm Portfolio 0.80%(1) 0.96%(2) 1.76%
Money Market Fund 0.29% 0.07%(3) 0.36%
</TABLE>
(1) The total advisory fee for the Portfolios of The Palladian-SM- Trust for
the first 12 months of operations is 0.80% of its average daily net assets.
After that time, there is an incentive fee arrangement. The base fee is
2.00%, but may vary from between 0.00% to 4.00%, depending on the
Portfolio's performance.
(2) Based on estimated expenses for the current fiscal year. No expense
limitations have been declared.
(3) Under the Management Agreement with Allmerica Investment Trust, Allmerica
Investment Management Company, Inc. ("Manager") has declared a voluntary
expense limitation of 0.60% for the Money Market Fund. No reimbursement was
provided in 1995 as the total operating expenses were less than the expense
limitation.
The following examples demonstrate the cumulative expenses which would be paid
by the Contract Owner at 1-year, 3-year, 5-year and 10-year intervals under
certain contingencies. Each example assumes a $1,000 investment in a Sub-Account
and a 5% annual return on assets, as required by rules of the SEC. Because the
expenses of the Funds differ, separate examples are used to illustrate the
expenses incurred by a contract owner on an investment in the various
Sub-Accounts.
THE INFORMATION GIVEN UNDER THE FOLLOWING EXAMPLES SHOULD NOT BE CONSIDERED A
REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR
LESSER THAN THOSE SHOWN.
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<PAGE>
(a) If, at the end of the applicable period, you surrender your contract or
annuitize* under a commutable variable period certain option or a noncommutable
period certain option of less than ten years or any fixed period certain option,
you would pay the following expenses on a $1,000 investment, assuming a 5%
annual return on assets:
<TABLE>
<CAPTION>
FUND 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- --------------------------------------------------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Value Portfolio $ 92 $ 142 $ 193 $ 345
Growth Portfolio $ 95 $ 149 $ 204 $ 368
International Growth Portfolio $ 96 $ 153 $ 210 $ 380
Global Strategic Income Portfolio $ 96 $ 153 $ 210 $ 380
Global Interactive/Telecomm Portfolio $ 93 $ 145 $ 198 $ 355
Money Market Fund $ 80 $ 105 $ 130 $ 217
</TABLE>
b) If, at the end of the applicable time period, you annuitize* under a life
option or a noncommutable period certain option of ten years or longer, or if
you do not surrender or annuitize your contract, you would pay the following
expenses on a $1,000 investment, assuming a 5% annual return on assets:
<TABLE>
<CAPTION>
FUND 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- --------------------------------------------------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Value Portfolio $ 32 $ 97 $ 165 $ 345
Growth Portfolio $ 34 $ 104 $ 177 $ 368
International Growth Portfolio $ 36 $ 108 $ 183 $ 380
Global Strategic Income Portfolio $ 36 $ 108 $ 183 $ 380
Global Interactive/Telecomm Portfolio $ 33 $ 100 $ 170 $ 355
Money Market Fund $ 19 $ 58 $ 100 $ 217
</TABLE>
As required in rules promulgated under the 1940 Act, the Contract fee is
reflected in the examples by a method to show the "average" impact on an
investment in the Variable Account. The total Contract fees collected are
divided by the total average net assets attributable to the contracts. The
resulting percentage is 0.076%, and the amount of the Contract fee is assumed to
be $.075 in the examples.
* The Contract fee is not deducted after annuitization. No contingent deferred
sales charge is assessed at the time of annuitization under an option
including a life contingency or under a noncommutable period certain option
of ten years or longer.
PERFORMANCE INFORMATION
The Contract was first offered to the public in 1996. The Company, however, may
advertise "Total Return" and "Average Annual Total Return" performance
information based on the periods that the Funds have been in existence. The
results for any period prior to the Contract being offered will be calculated as
if the Contract had been offered during that period of time, with all charges
assumed to be those applicable to the Sub-Accounts, the Funds, and assuming that
the Contract is surrendered at the end of the applicable period.
The "Total Return" of a Sub-Account refers to the total of the income generated
by an investment in the Sub-Account and of the changes in the value of the
principal (due to realized and unrealized capital gains or losses) for a
specified period, reduced by certain charges, and expressed as a percentage of
the investment. The "Average Annual Total Return" represents the average annual
percentage change in the value of an investment in a Sub-Account over a given
period of time. "Average Annual Total Return" represents 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 Money Market Fund of the
Allmerica Investment Trust 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
11
<PAGE>
when annualized, the income earned by an investment in the Sub-Account is
assumed to be reinvested. Thus the "Effective Yield" will be slightly higher
than the "Yield" because of the compounding effect of this assumed reinvestment.
The Total Return, Average Annual Total Return, Yield, and Effective Yield
figures are adjusted to reflect the Sub-Account's asset charges. The Total
Return figures also reflect the $30 annual Contract fee and the contingent
deferred sales charge which would be assessed if the investment were completely
surrendered at the end of the specified period.
The Company also may advertise supplemental total return performance
information. Supplemental total return refers to the total of the income
generated by an investment in the Sub-Account and of the changes in value of the
principal invested (due to realized and unrealized capital gains or losses),
adjusted by the Sub-Account's annual asset charges, and expressed as a
percentage of the investment. Because it is assumed that the investment is NOT
surrendered at the end of the specified period, the contingent deferred sales
charge is NOT included in the calculation of supplemental total return.
Performance information for a Sub-Account may be compared, in reports and
promotional literature, to: (i) the Standard & Poor's 500 Stock Index ("S & P
500"), Dow Jones Industrial Average ("DJIA"), Shearson Lehman Aggregate Bond
Index or other unmanaged indices so that investors may compare the Sub-Account
results with those of a group of unmanaged securities widely regarded by
investors as representative of the securities markets in general; (ii) other
groups of variable annuity variable accounts or other investment products
tracked by Lipper Analytical Services, a widely used independent research firm
which ranks mutual funds and other investment products by overall performance,
investment objectives, and assets, or tracked by other services, companies,
publications, or persons, such as Morningstar, Inc., who rank such investment
products on overall performance or other criteria; or (iii) the Consumer Price
Index (a measure for inflation) to assess the real rate of return from an
investment in the Sub-Account. Unmanaged indices may assume the reinvestment of
dividends but generally do not reflect deductions for administrative and
management costs and expenses.
WHAT IS AN ANNUITY?
In general, an annuity is an insurance contract designed to provide a retirement
income in the form of periodic payments for the lifetime of the Contract Owner
or an individual chosen by the Contract Owner. The retirement income payments
are called "annuity benefit payments" and the individual receiving the payments
is called the "Annuitant." Annuity benefit payments begin on the Annuity Date.
Under an annuity contract, the insurance company assumes a mortality risk and an
expense risk. The mortality risk arises from the insurance company's guarantee
that annuity benefit payments will continue for the life of the Annuitant,
regardless of how long the Annuitant lives or how long all Annuitants as a group
live. The expense risk arises from the insurance company's guarantee that
charges will not be increased beyond the limits specified in the Contract,
regardless of actual costs of operations.
The Contract Owner's payments, less any applicable deductions, are invested by
the insurance company. After retirement, annuity benefit payments are paid to
the Annuitant for life or for such other period chosen by the Contract Owner. In
the case of a "fixed" annuity, the value of these annuity benefit payments is
guaranteed by the insurance company, which assumes the risk of making the
investments to enable it to make the guaranteed payments. For more information
about fixed annuities see APPENDIX A, "MORE INFORMATION ABOUT THE FIXED
ACCOUNT." With a variable annuity, the value of the Contract and the annuity
benefit payments are not guaranteed but will vary depending on the investment
performance of a portfolio of securities. Any investment gains or losses are
reflected in the value of the Contract and in the annuity benefit payments. If
the portfolio increases in value, the value of the Contract increases. If the
portfolio decreases in value, the value of the Contract decreases.
12
<PAGE>
RIGHT TO REVOKE INDIVIDUAL RETIREMENT ANNUITY
An individual purchasing a Contract intended to qualify as an Individual
Retirement Annuity ("IRA") may revoke the Contract at any time within 10 days
after receipt of the Contract and receive a refund. In order to revoke the
Contract, the Contract Owner must mail or deliver the Contract to the
representative through whom the Contract was purchased, to the Principal Office
of the Company at 440 Lincoln Street, Worcester, Massachusetts 01653, or to any
local office of the Company. Mailing or delivery must occur on or before 10 days
after receipt of the Contract for revocation to be effective.
Within seven days the Company will provide a refund equal to the greater of (1)
gross payments, or (2) the Accumulated Value plus any amounts deducted under the
Contract or by the Funds for taxes, charges or fees.
The liability of the Variable Account under this provision is limited to the
Contract Owner's Accumulated Value in the Sub-Accounts on the date of
cancellation. Any additional amounts refunded to the Contract Owner will be paid
by the Company.
RIGHT TO REVOKE OR SURRENDER IN SOME STATES
In Georgia, Idaho, Indiana, Michigan, Missouri, North Carolina, Oklahoma,
Oregon, South Carolina, Texas, Utah, Washington and West Virginia, any contract
owner may revoke the contract at any time within ten days (20 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, a contract owner may return the contract at any time within
10 days (or the number of days required by state law if more than 10) after
receipt of the contract. The Company will pay to the contract owner an amount
equal to the sum of (i) the difference between the premium paid, including fees,
and any amount allocated to the Variable Account; and (ii) the Accumulated Value
of amounts allocated to the Variable Account as of the date the request is
received. If the contract was purchased as an IRA, the IRA revocation right
described above may be utilized in lieu of the special surrender right.
DESCRIPTION OF THE COMPANY, THE VARIABLE ACCOUNT,
THE PALLADIAN-SM- TRUST, AND ALLMERICA INVESTMENT TRUST
THE COMPANY -- The Company is a life insurance company organized under the laws
of Delaware in July, 1974. Its Principal Office is located at 440 Lincoln
Street, Worcester, Massachusetts 01653; Telephone 508-855-1000. The Company is
subject to the laws of the state of Delaware governing insurance companies and
to regulation by the Commissioner of Insurance of Delaware. In addition, the
Company is subject to the insurance laws and regulations of other states and
jurisdictions in which it is licensed to operate. As of December 31, 1995, the
Company had over $5 billion in assets and over $18 billion of life insurance in
force.
Effective October 1, 1995, the Company changed its name from SMA Life Assurance
Company to Allmerica Financial Life Insurance and Annuity Company. The Company
is an indirect wholly owned subsidiary of First Allmerica Financial Life
Insurance Company ("First Allmerica"), which in turn is a wholly owned
subsidiary of Allmerica Financial Corporation ("AFC"). First Allmerica,
originally organized under the laws of Massachusetts in 1844 as a mutual life
insurance company and known as State Mutual Life Assurance Company of America,
converted to a stock life insurance company on October 16, 1995 and adopted its
present name. First Allmerica is the fifth oldest life insurance company in
America. As of December 31, 1995, First Allmerica and its subsidiaries
(including the Company) had over $11 billion in combined assets and over $35.2
billion in life insurance in force.
THE VARIABLE ACCOUNT -- The Fulcrum Separate Account (the "Variable Account") is
a separate investment account of The Company with six Sub-Accounts. The assets
used to fund the variable portions of the Contracts are set aside in
Sub-Accounts kept separate from the general assets of the Company. Each
Sub-Account is administered and accounted for as part of the general business of
the
13
<PAGE>
Company. The income, capital gains, or capital losses of each Sub-Account,
however, are allocated to each Sub-Account, without regard to any other income,
capital gains, or capital losses of the Company. Under Delaware law, the assets
of the Variable Account may not be charged with any liabilities arising out of
any other business of the Company.
The Variable Account was authorized by vote of the Board of Directors of the
Company on June 13, 1996. The Variable Account meets the definition of "separate
account" under federal securities laws and is registered with the Securities and
Exchange Commission ("SEC") as a unit investment trust under the 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.
THE PALLADIAN-SM- TRUST -- The Palladian-SM- Trust was established as a
Massachusetts business trust on September 8, 1993, and is registered with the
SEC as a management investment company. Five investment portfolios currently are
available under the Contract. The assets of each Portfolio are held separate
from the assets of the other Portfolios. Each Portfolio operates as a separate
investment vehicle and the income or losses of one Portfolio have no effect on
the investment performance of another Portfolio. Shares of The Palladian-SM-
Trust are not offered to the general public, but solely to separate accounts of
insurance companies for the purpose of providing a vehicle for the investment of
assets.
Palladian-SM- Advisors, Inc. ("PAI") serves as overall manager of The
Palladian-SM- Trust and is responsible for general investment supervisory
services to the Portfolios. The Palladian-SM- Trust and PAI have retained
several Portfolio Managers to manage the assets of each Portfolio. PAI has also
retained Tremont Advisors, Inc. ("Tremont"), as Portfolio Advisor, to research,
evaluate, recommend and monitor the Portfolio Managers. PAI is located at 4225
Executive Square, Suite 270, La Jolla, California 92037.
The five Portfolios of The Palladian-SM- Trust and their respective Portfolio
Managers are as follows:
<TABLE>
<CAPTION>
PORTFOLIO PORTFOLIO MANAGER
- ---------------------------------------------- ----------------------------------
<S> <C>
The Value Portfolio GAMCO Investors, Inc.
The Growth Portfolio Stonehill Capital Management, Inc.
The International Growth Portfolio Bee & Associates Incorporated
Fischer Francis Trees & Watts,
The Global Strategic Income Portfolio Inc.
The Global Interactive/Telecomm Portfolio GAMCO Investors, Inc.
</TABLE>
The Palladian-SM- Trust pays PAI and the Portfolio Managers a monthly fee (the
"advisory fee") based on the average daily net assets of each Portfolio. Each
Portfolio Manager is paid on an incentive fee basis, which could result in
either higher than average advisory fees or, possibly, no advisory fee at all,
depending on how well each Portfolio Manager performs. There are two components
to the advisory fee: the basic fee and the incentive fee. The advisory fee is
structured to vary based upon the Portfolio's performance (after expenses)
compared to that of an appropriate market benchmark selected for that Portfolio.
The total advisory fee for PAI, Tremont and the Portfolio Managers for the first
12 months of operations is, for each Portfolio, 0.80% of average daily net
assets. As of February 1, 1997, the Management and Advisory fee schedule
provides for an incentive performance fee for superior performance, and provides
for a lower fee for sub-par performance. The base fee will be 2.00%, but it may
vary from 0.00% to 4.00% depending on the Portfolio's performance. Each
Portfolio Manager also has invested $1 million in the Portfolio it manages, so
it is managing a portion of its money along with your money. PAI is responsible
for paying the fee of Tremont, which is structured to vary based on how well the
Portfolio Managers perform. See the prospectus of The Palladian-SM- Trust for
more details.
14
<PAGE>
ALLMERICA INVESTMENT TRUST -- Allmerica Investment Trust is an open-end,
diversified management investment company registered with the SEC under the 1940
Act.
Allmerica Investment Trust was established as a Massachusetts business trust on
October 11, 1984, for the purpose of providing a vehicle for the investment of
assets of various variable accounts established by the Company or other
affiliated insurance companies. The Money Market Fund of Allmerica Investment
Trust is currently available under the Contract. Shares of the Trust are not
offered to the general public, but solely to such variable accounts. Other funds
of Allmerica Investment Trust are not currently offered under the Contract.
Allmerica Investment Management Company, Inc. ("AIMCO") is the investment
manager of Allmerica Investment Trust and, subject to the direction of the Board
of Trustees, handles the day-to-day affairs of the Trust. AIMCO has entered into
a Sub-Advisor Agreement with its affiliate, Allmerica Asset Management, Inc.
("AAM") for investment management services for the Money Market Fund. Under the
Sub-Advisor Agreement, AAM is authorized to engage in portfolio transactions on
behalf of the Money Market Fund, subject to such general or specific
instructions as may be given by the Trustees. The terms of the Sub-Advisor
Agreement cannot be materially changed without the approval of a majority in
interest of the shareholders of the Fund. Both AIMCO and AAM are located at 440
Lincoln Street, Worcester, Massachusetts 01653.
Other than the expenses specifically assumed by AIMCO under the Management
Agreement, all expenses incurred in the operation of the Trust are borne by it,
including fees and expenses associated with the registration and qualification
of the Trust's shares under the Securities Act of 1933, other fees payable to
the SEC, independent public accountant, legal and custodian fees, association
membership dues, taxes, interest, insurance premiums, brokerage commission, fees
and expenses of the Trustees who are not affiliated with the Manager, expenses
for proxies, prospectuses, reports to shareholders and other expenses.
For providing its services under the Management Agreement, AIMCO will receive a
fee, computed daily at an annual rate based on the average daily net asset value
of the Money Market Fund as follows: 0.35% on net asset value up to $50,000,000;
0.25% on the next $200,000,000; and 0.20% on the remainder. The fee is paid from
the assets of the Money Market Fund. AIMCO is solely responsible for the payment
of all fees for investment management services to AAM, which will be paid a fee
of 0.10%, computed daily at an annual rate based on the average daily net asset
value of the Money Market Fund.
INVESTMENT OBJECTIVES AND POLICIES
A summary of investment objectives of each of the Funds is set forth below. MORE
DETAILED INFORMATION REGARDING THE INVESTMENT OBJECTIVES, RESTRICTIONS AND
RISKS, EXPENSES PAID BY THE FUNDS, AND OTHER RELEVANT INFORMATION REGARDING THE
FUNDS MAY BE FOUND IN THE PROSPECTUSES OF THE PALLADIAN-SM- TRUST AND ALLMERICA
INVESTMENT TRUST WHICH ACCOMPANY THIS PROSPECTUS AND SHOULD BE READ CAREFULLY
BEFORE INVESTING. The Statements of Additional Information of the Trusts are
available upon request. There can be no assurance that the investment objectives
of the Funds can be achieved or that the value of a Contract will equal or
exceed the aggregate amount of the payments made under the Contract.
VALUE PORTFOLIO seeks to make money for investors by investing primarily in
companies that the Portfolio Manager believes are undervalued and that by virtue
of anticipated developments may, in the Portfolio Manager's judgment, achieve
significant capital appreciation.
GROWTH PORTFOLIO seeks to make money for investors by investing primarily in
securities selected for their long-term growth prospects.
INTERNATIONAL GROWTH PORTFOLIO seeks to make money for investors by investing
internationally for long-term capital appreciation, primarily in equity
securities.
15
<PAGE>
GLOBAL STRATEGIC INCOME PORTFOLIO seeks to make money for investors by investing
for high current income and capital appreciation in a variety of domestic and
foreign fixed-income securities.
GLOBAL INTERACTIVE/TELECOMM PORTFOLIO seeks to make money for investors
primarily by investing globally in equity securities of companies engaged in the
development, manufacture or sale of interactive and/or telecommunications
services and products.
MONEY MARKET FUND seeks to obtain maximum current income consistent with the
preservation of capital and liquidity. Allmerica Asset Management, Inc. is the
Sub-Advisor of the Money Market Fund.
If there is a material change in the investment policy of a Fund, the Contract
Owner will be notified of the change. If the Contract Owner has Accumulated
Value allocated to that Fund, he or she may have the Accumulated Value
reallocated without charge to another Fund or to the Fixed Account or a
Guarantee Period Account, where available, on written request received by the
Company within sixty (60) days of the later of (1) the effective date of such
change in the investment policy or (2) the receipt of the notice of the Contract
Owner's right to transfer.
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 Fund
are no longer available for investment or if in the Company's judgment further
investment in any Fund 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 Fund and substitute shares of another registered open-end
management company. The Company will not substitute any shares attributable to a
Contract interest in a Sub-Account without notice to the Contract Owner and
prior approval of the 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 the Contract Owner.
The Company also reserves the right to establish additional Sub-Accounts of the
Variable Account, each of which would invest in shares corresponding to a new
Fund or in shares of another investment company having a specified investment
objective. Subject to applicable law and any required SEC approval, the Company
may, in its sole discretion, establish new Sub-Accounts or eliminate one or more
Sub-Accounts if marketing needs, tax considerations or investment conditions
warrant. Any new Sub-Accounts may be made available to existing contract owners
on a basis to be determined by the Company.
Shares of the Funds are also issued to variable accounts of the Company and its
affiliates which issue variable life contracts ("mixed funding"). Shares of the
Funds also may be also issued to other unaffiliated insurance companies ("shared
funding"). It is conceivable that in the future such mixed funding or shared
funding may be disadvantageous for variable life contract owners or variable
annuity contract owners. Although the Company and the Trustees of The
Palladian-SM- Trust and of Allmerica Investment Trust do not currently foresee
any such disadvantages to either variable life insurance contract owners or
variable annuity contract owners, the Company and the respective Trustees intend
to monitor events in order to identify any material conflicts between such
contract owners and to determine what action, if any, should be taken in
response thereto. If the Trustees were to conclude that separate funds should be
established for variable life and variable annuity separate accounts, the
Company will bear the attendant expenses.
If any of these substitutions or changes are made, the Company may, by
appropriate endorsement, change the Contract to reflect the substitution or
change and will notify contract owners of all such changes. If the Company deems
it to be in the best interest of contract owners, and subject to any approvals
that may be required under applicable law, the Variable Account or any
Sub-Account(s) may
16
<PAGE>
be operated as a management company under the 1940 Act, may be deregistered
under the 1940 Act if registration is no longer required, or may be combined
with other Sub-Accounts or other separate accounts of the Company.
VOTING RIGHTS
The Company will vote Fund shares held by each Sub-Account in accordance with
instructions received from contract owners and, after the Annuity Date, from the
annuitants. Each person having a voting interest in a Sub-Account will be
provided with proxy materials of the Fund 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 contracts 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 a contract owner or annuitant may cast will be
determined by the Company as of the record date established by the Fund. During
the accumulation period, the number of Fund shares attributable to each contract
owner will be determined by dividing the dollar value of the Accumulation Units
of the Sub-Account credited to the contract by the net asset value of one Fund
share. During the annuity period, the number of Fund 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 Fund share.
Ordinarily, the annuitant's voting interest in the Fund will decrease as the
reserve for the variable annuity is depleted.
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
Funds are described in the Prospectus and Statement of Additional Information of
The Palladian-SM- Trust and Allmerica Investment Trust.
A. ANNUAL CHARGES AGAINST VARIABLE ACCOUNT ASSETS.
MORTALITY AND EXPENSE RISK CHARGE -- The Company makes a charge of 1.25% on an
annual basis of the daily value of each Sub-Account's assets to cover the
mortality and expense risk which the Company assumes in relation to the variable
portion of the Contract. The charge is imposed during both the accumulation
period and the annuity 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
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.
17
<PAGE>
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 0.80% for mortality risk and
0.45% for expense risk.
ADMINISTRATIVE EXPENSE CHARGE -- The Company assesses each Sub-Account with a
daily charge at an annual rate of 0.20% of the average daily net assets of the
Sub-Account. The charge is imposed during both the accumulation period and the
annuity period. The daily Administrative Expense Charge is assessed to help
defray administrative expenses actually incurred in the administration of the
Sub-Account, without profits. However, there is no direct relationship between
the amount of administrative expenses imposed on a given contract and the amount
of expenses actually attributable to that contract.
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 includes, 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 purchase shares of the Funds, the
value of the net assets of the Sub-Accounts will reflect the investment advisory
fee and other expenses incurred by the Underlying Funds. The Prospectus and
Statement of Additional Information of The Palladian-SM- Trust and Allmerica
Investment Trust contain additional information concerning expenses of the
Funds.
B. CONTRACT FEE.
A $30 Contract fee currently is deducted on the Contract anniversary date and
upon full surrender of the Contract when the Accumulated Value is less than
$100,000. 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.
C. PREMIUM TAXES.
Some states and municipalities impose a premium tax on variable annuity
contracts. State premium taxes currently range up to 3.5%.
The Company makes a charge for state and municipal premium taxes, when
applicable, and deducts the amount paid as a premium tax charge. The current
practice of the Company is to deduct the premium tax charge in one of two ways:
(1) if the premium tax was paid by the Company when payments were received,
the premium tax charge is deducted on a pro-rata basis when withdrawals
are made, upon surrender of the Contract, or when annuity benefit
payments begin (the Company reserves the right instead to deduct the
premium tax charge for these contracts at the time the payments are
received); or
(2) the premium tax charge is deducted when annuity benefit payments begin.
In no event will a deduction be taken before the Company has incurred a tax
liability under applicable state law
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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.
D. CONTINGENT DEFERRED SALES CHARGE.
No charge for sales expense is deducted from payments at the time the payments
are made. However, a contingent deferred sales charge is deducted from the
Accumulated Value of the Contract in the case of surrender of and/or withdrawals
from the Contract 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 seven years preceding the date of the
surrender; (2) Old Payments -- Accumulated payments not defined as New Payments;
and (3) Earnings -- the amount of Contract Value in excess of all payments that
have not been previously surrendered. For purposes of determining the amount of
any contingent deferred sales charge, surrenders will be deemed to be taken
first from Old Payments, then from New Payments. Old Payments may be withdrawn
from the Contract at any time without the imposition of a contingent deferred
sales charge. If a withdrawal is attributable all or in part to New Payments, a
contingent deferred sales charge may apply.
CHARGES FOR SURRENDER AND WITHDRAWALS. 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. The amount of the
charge will depend upon the number of years that the New Payments, if any, to
which the withdrawal is attributed have remained credited under the Contract.
Amounts withdrawn are deducted first from Old Payments. Then, for the purpose of
calculating surrender charges for New Payments, all amounts withdrawn are
assumed to be deducted first from the earliest New Payment and then from the
next earliest New Payment and so on, until all New Payments have been exhausted
pursuant to the first-in-first-out ("FIFO") method of accounting. (See "FEDERAL
TAX CONSIDERATIONS" for a discussion of how withdrawals are treated for income
tax purposes.)
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%
7 1%
Thereafter 0%
</TABLE>
The amount withdrawn equals the amount requested by the Contract Owner plus the
charge, if any. The charge is applied as a percentage of the New Payments
withdrawn, but in no event will the total contingent deferred sales charge
exceed a maximum limit of 7.0% 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 WITHDRAWAL CHARGES. Where permitted by law, the
Company will waive the contingent deferred sales charge in the event that an
Owner (or the Annuitant, if the Owner is not an individual) is: (a) admitted to
a medical care facility after the issue date of the Contract and remains
confined there until the later of one year after the issue date or 90
consecutive days; (b) first diagnosed by a licensed physician as having a fatal
illness after the issue date of the Contract; (c) physically
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disabled after the issue date of the Contract and before attaining age 65; or
(d) commencing one year after issue of the Contract, is confined to a hospice or
receives home health services, with certification from a licensed physician that
the confinement to the hospice or receipt of home health care services is
expected to continue until death. The Company may require proof of such
disability and continuing disability, including written confirmation of receipt
and approval of any claim for Social Security Disability Benefits and reserves
the right to obtain an examination by a licensed physician of its choice and at
its expense.
For purposes of the above provision, "medical care facility" means any state
licensed facility or, in a state that does not require licensing, a facility
that is operating pursuant to state law, providing medically necessary inpatient
care which is prescribed 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 any one of the
situations discussed above, no additional payments under this Contract will be
accepted. Where permitted by law, no contingent deferred sales charge is imposed
(and no commissions will be paid) on contracts issued where both the Contract
Owner and the Annuitant on the date of issue are within the following classes of
individuals ("eligible persons"): employees and registered representatives of
any broker-dealer which has entered into a Sales Agreement with the Company to
sell the Contract; officers, directors, trustees and employees of any of the
Funds, investment managers or sub-advisors; and the spouses, children and other
legal dependants (under age 21) of such eligible persons.
In addition, from time to time the Company may also reduce the amount of the
contingent deferred sales, the period during which it applies, or both, when
contracts are sold to individuals or groups of individuals in a manner that
reduces sales expenses. The Company will consider (a) the size and type of
group; (b) the total amount of payments to be received; (c) other transactions
where sales expenses are likely to be reduced. Any reduction or elimination in
the amount or duration of the contingent deferred sales charge will not
discriminate unfairly between Contract Owners. The Company will not make any
changes to this charge where prohibited by law.
WITHDRAWAL WITHOUT SURRENDER CHARGE. In each calendar year, the Company will
waive the contingent deferred sales charge, if any, on an amount ("Withdrawal
Without Surrender Charge") equal to the greatest of (1), (2) or (3):
Where (1) is:
The Accumulated Value as of the Valuation Date coincident with or next
following the date of receipt of the request for withdrawal, reduced by
total gross payments not previously withdrawn ("Cumulative Earnings")
Where (2) is:
15% of the Accumulated Value as of the Valuation Date coincident with or
next following the date of receipt of the request for withdrawal,
reduced by the total amount of any prior withdrawals made in the same
calendar year to which no contingent deferred sales charge was applied.
Where (3) is:
The amount calculated under the Company's life expectancy distribution
(see "LED Distributions," below) whether or not the withdrawal was part
of such distribution (applies only if Annuitant is also an Owner)
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For example, an 81-year-old Owner/Annuitant with an Accumulated Value of
$15,000, of which $1,000 is Cumulative Earnings, would have a Free Withdrawal
Amount of $2,250, which is equal to the greatest of:
(1) Cumulative Earnings ($1,000);
(2) 15% of Accumulated Value ($2,250); or
(3) Life Expectancy Distribution (see LED DISTRIBUTIONS, below) of 10.2% of
Accumulated Value ($1,530).
The Withdrawal Without Surrender Charge will first be deducted from Cumulative
Earnings. If the Withdrawal Without Surrender Charge exceeds Cumulative
Earnings, the excess amount will be deemed withdrawn from payments not
previously withdrawn on a last-in-first-out ("LIFO") basis. If more than one
withdrawal is made during the year, on each subsequent withdrawal the Company
will waive the contingent deferred sales load, if any, until the entire
Withdrawal Without Surrender Charge amount has been withdrawn. Amounts withdrawn
from a Guarantee Period Account prior to the end of the applicable Guarantee
Period will be subject to a Market Value Adjustment.
LED DISTRIBUTIONS. Prior to the Annuity Date a Contract Owner who is also the
Annuitant may elect to make a series of systematic withdrawals from the Contract
according to a life expectancy distribution ("LED") option, by returning a
properly signed LED request form to the Company's Principal Office. The LED
option permits the Contract Owner to make systematic withdrawals from the
Contract over his or her lifetime. The amount withdrawn from the Contract
changes each year, because life expectancy changes each year that a person
lives. For example, actuarial tables indicate that a person age 70 has a life
expectancy of 16 years, but a person who attains age 86 has a life expectancy of
another 6.5 years.
If the Contract Owner elects the LED option, in each calendar year a fraction of
the Accumulated Value is withdrawn based on the Contract Owner's then life
expectancy. The numerator of the fraction is 1 (one) and the denominator of the
fraction is the remaining life expectancy of the Contract Owner, as determined
annually by the Company. The resulting fraction, expressed as a percentage, is
applied to the Accumulated Value at the beginning of the year to determine the
amount to be distributed during the year. The Contract Owner may elect monthly,
bimonthly, quarterly, semiannual, or annual distributions, and may terminate the
LED option at any time. The Contract Owner may also elect to receive
distributions under an LED option which is determined on the joint life
expectancy of the Contract Owner and a beneficiary. The Company may also offer
other systematic withdrawal options.
If the Contract Owner makes withdrawals under the LED distribution 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," "B. Taxation of the
Contracts in General." The LED will cease on the Annuity Date.
SURRENDERS. In the case of a complete surrender, the amount received by the
Contract Owner is equal to the entire Accumulated Value under the Contract, net
of the applicable contingent deferred sales charge on New Payments, the Contract
Fee and any applicable tax withholding, and adjusted for any applicable Market
Value Adjustment. Subject to the same rules applicable to withdrawals, the
Company will not assess a contingent deferred sales charge on an amount equal to
the greater of the Withdrawal Without Surrender Charge amount, described above,
or the life expectancy distribution, if applicable.
Where a contract owner who is a trustee under a pension plan surrenders, in
whole or in part, a contract on a terminating employee, the trustee will be
permitted to reallocate all or a part of the total Accumulated Value under the
contract to other contracts issued by the Company and owned by the
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trustee, with no deduction for any otherwise applicable contingent deferred
sales charge. Any such reallocation will be at the unit values for the
Sub-Accounts as of the valuation date on which a written, signed request is
received at the Company's Principal Office.
For further information on surrender and withdrawal, including minimum limits on
amount withdrawn and amounts remaining under the Contract in the case of
withdrawal, and important tax considerations, see "Surrender" and "Withdrawals"
under "DESCRIPTION OF CONTRACT" and see "FEDERAL TAX CONSIDERATIONS."
CHARGE AT THE TIME ANNUITY BENEFIT PAYMENTS BEGIN. If any commutable period
certain option or a non-commutable period certain option for less than ten years
is chosen, a contingent deferred sales charge will be deducted from the
Accumulated Value of the Contract if the Annuity Date occurs at any time when
the surrender charge would still apply had the Contract been surrendered on the
Annuity Date.
No contingent deferred sales charge is imposed at the time of annuitization in
any Contract year under an option involving a life contingency or for any
non-commutable period certain option for ten years or more. A Market Value
Adjustment, however, may apply. See "Guarantee Period Accounts."
If an owner of a fixed annuity contract issued by the Company wishes to elect a
variable annuity option, the Company may permit such owner to exchange, at the
time of annuitization, the fixed contract for the Contract offered in this
Prospectus. The proceeds of the fixed contract, minus any contingent deferred
sales charge applicable under the fixed Contract if a period certain option is
chosen, will be applied towards the variable annuity option desired by the
owner. The number of Annuity Units under the option will be calculated using the
Annuity Unit values as of the 15th of the month preceding the Annuity Date.
E. TRANSFER CHARGE.
The Company currently makes no charge for processing transfers. The Company
guarantees that the first twelve transfers in a Contract Year will be free of
transfer charge, but reserves the right to assess a charge, guaranteed never to
exceed $25, for each subsequent transfer in a Contract year.
The Contract Owner may have automatic transfers of at least $100 a month made on
a periodic basis (a) from the Sub-Account which invests in the Money Market Fund
or the Global Strategic Portfolio or from the Fixed Account to one or more of
the other Sub-Accounts; or (b) in order to reallocate Contract value among the
Sub-Accounts. The first automatic transfer counts as one transfer towards the
twelve transfers which are guaranteed to be free of a transfer charge in each
contract year. For more information, see "The Contract Transfer Privilege."
DESCRIPTION OF THE CONTRACT
The Contract is designed for use in connection with several types of retirement
plans, as well as for sale to individuals. Participants under such plans, as
well as Contract Owners, Annuitants, and beneficiaries, are cautioned that the
rights of any person to any benefits under such Contract may be subject to the
terms and conditions of the plans themselves, regardless of the terms and
conditions of the Contract.
The Contract offered by this Prospectus may be purchased from representatives of
Allmerica Investments, Inc. and of certain independent broker-dealers that are
registered under the Securities Exchange Act of 1934 and are members of the
National Association of Securities Dealers, Inc. (NASD). The Principal
Underwriter of the Contract is Allmerica Investments, Inc., 440 Lincoln Street,
Worcester, Massachusetts 01653, an indirect wholly owned subsidiary of First
Allmerica.
Contract owners may direct any inquiries to Annuity Customer Services, Allmerica
Financial Life Insurance and Annuity Company, 440 Lincoln Street, Worcester,
Massachusetts 01653.
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<PAGE>
A. PAYMENTS.
The Company's underwriting requirements, which include receipt of the initial
payment and allocation instructions by the Company at its Principal Office, must
be met before a contract can be issued. These requirements also may include the
proper completion of an application; however, where permitted, the Company may
issue a contract without completion of an application for certain classes of
annuity contracts. Payments are to be made payable to the Company. A net payment
is equal to the payment received less the amount of any applicable premium tax.
The initial net payment will be credited to the Contract as of the date that all
issue requirements are properly met. If all issue requirements are not complied
with within five business days of the Company's receipt of the initial payment,
the payment will be returned unless the Contract 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
$25,000. Under a salary deduction or monthly automatic payment plan, the minimum
initial payment is $50. In all cases, each subsequent payment must be at least
$50. Where the contribution on behalf of an employee under an employer-sponsored
retirement plan is less than $600 but more than $300 annually, the Company may
issue a contract on the employee, if the plan's average annual contribution per
eligible plan participant is at least $600. The minimum allocation to a
Guarantee Period Account is $1,000. If less than $1,000 is allocated to a
Guarantee Period Account, the Company reserves the right to apply that amount to
the Money Market Fund.
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.
To the extent permitted by state law, however, if the Contract is issued as an
IRA or is issued in Georgia, Idaho, Indiana, Michigan, Missouri, North Carolina,
Oklahoma, Oregon, South Carolina, Texas, Utah, Washington or West Virginia, any
portion of the initial net payment and of additional net payments received
during the Contract's first 15 days measured from the date of issue, allocated
to any Sub-Account and/or any Guarantee Period Account, will be held in the
Money Market Fund until the end of the 15-day period. Thereafter, these amounts
will be allocated as requested.
The Contract Owner may change allocation instructions for new payments pursuant
to a written or telephone request. If telephone requests are elected by the
Contract Owner, a properly completed authorization must be on file before
telephone requests will be honored. The policy of the Company and its agents and
affiliates is that they 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 the Contract Owner identify themselves by name and identify the
Annuitant by name, date of birth and social security number. All transfer
instructions by telephone are tape recorded.
B. TRANSFER PRIVILEGE.
At any time prior to the Annuity Date the Contract Owner may have amounts
transferred among all accounts. Transfer values will be effected at the
Accumulation Value next computed after receipt of the transfer order. The
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.
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Transfers to a Guarantee Period Account must be at least $1,000. If the amount
to be transferred to a Guarantee Period Account is less than $1,000, the Company
may transfer that amount to the Sub-Account which invests in the Money Market
Fund.
C. DOLLAR COST AVERAGING AND AUTOMATIC OPTIONS.
The Contract Owner may have automatic transfers of at least $100 each made on a
periodic basis from the Money Market Fund, from the Fixed Account to one or more
of the other Sub-Accounts ("Dollar Cost Averaging") or may elect automatic
reallocation of Contract values among the Sub-Accounts ("Automatic Rebalancing
Option"). Automatic transfers or automatic rebalancing may be made on a monthly,
bimonthly, quarterly, semiannual or annual schedule. The first automatic
transfer counts as one transfer towards the twelve transfers discussed below.
Any subsequent automatic transfer will not count as a transfer for the purposes
of the charge.
Currently, the Company makes no charge for transfers. The first twelve (12)
transfers in a Contract year are guaranteed to be free of any charge. For each
subsequent transfer in a Contract year the Company reserves the right to assess
a charge, guaranteed never to exceed $25, to reimburse it for the expense of
processing transfers. The Dollar Cost Averaging Option and the Automatic
Rebalancing Option may not be in effect at the same time.
D. SURRENDER.
At any time prior to the Annuity Date, the Contract Owner may surrender the
Contract and receive its Accumulated Value, less applicable charges and adjusted
for any Market Value Adjustment ("Surrender Amount"). The Contract Owner must
return the Contract and a signed, written request for surrender, satisfactory to
the Company, to the Company's Principal Office. The amount payable to the
Contract Owner upon surrender will be based on the Contract's Accumulated Value
as of the Valuation Date on which the request and the Contract are received at
the Company's Principal Office.
Before the Annuity Date, a contingent deferred sales charge may be deducted when
a Contract is surrendered if payments have been credited to the Contract during
the last seven full contract years. See "CHARGES AND DEDUCTIONS." The Contract
Fee will be deducted upon surrender of the Contract.
After the Annuity Date, only Contracts under which future annuity benefit
payments are limited to a specified period (as specified in the Period Certain
Annuity Option) may be surrendered. The Surrender Value is the commuted value of
any unpaid installments, computed on the basis of the assumed interest rate
incorporated in such annuity benefit payments. No contingent deferred sales
charge is imposed after the Annuity Date.
Any amount surrendered is normally payable within seven days following the
Company's receipt of the surrender request. The Company reserves the right to
defer surrenders and withdrawals of amounts in each Sub-Account in any period
during which (1) trading on the New York Stock Exchange is restricted as
determined by the SEC or such Exchange is closed for other than weekends and
holidays, (2) the SEC has by order permitted such suspension, or (3) an
emergency, as determined by the SEC, exists such that disposal of portfolio
securities or valuation of assets of each separate account is not reasonably
practicable.
The right is reserved by the Company to defer surrenders and withdrawals of
amounts allocated to the Company's Fixed Account and Guarantee Period Accounts
for a period not to exceed six months.
The surrender rights of Contract Owners who are participants under Section
403(b) plans or who are participants in the Texas Optional Retirement Program
(Texas ORP) are restricted; see "FEDERAL TAX CONSIDERATIONS," "I. Public School
Systems and Certain Tax-Exempt Organizations" and "J. Texas Optional Retirement
Program."
For important tax consequences which may result from surrender, see "FEDERAL TAX
CONSIDERATIONS."
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E. WITHDRAWALS.
At any time prior to the Annuity Date, a Contract Owner may withdraw a portion
of the Accumulated Value of his or her Contract, subject to the limits stated
below. The Contract Owner must file a signed, written request for withdrawals,
satisfactory to the Company, at the Company's Principal Office. The written
request must indicate the dollar amount the Contract Owner wishes to receive and
the accounts from which such amount is to be withdrawn. The amount withdrawn
equals the amount requested by the Contract Owner plus any applicable contingent
deferred sales charge, as described under "CHARGES AND DEDUCTIONS." In addition,
amounts withdrawn from a Guarantee Period Account prior to the end of the
applicable Guarantee Period will be subject to a Market Value Adjustment, as
described under "GUARANTEE PERIOD ACCOUNTS."
Where allocations have been made to more than one account, a percentage of the
withdrawal may be allocated to each such account. A withdrawal from a
Sub-Account will result in cancellation of a number of units equivalent in value
to the amount withdrawn, computed as of the Valuation Date that the request is
received at the Company's Principal Office.
Each withdrawal must be in a minimum amount of $100. No withdrawals will be
permitted if the Accumulated Value remaining under the Contract would be reduced
to less than $1,000. Withdrawals will be paid in accordance with the time
limitations described under "Surrender."
After the Annuity Date, only Contracts under which future variable annuity
benefit payments are limited to a specified period may be withdrawn. A
withdrawal after the Annuity Date will result in cancellation of a number of
Annuity Units equivalent in value to the amount withdrawn.
For important restrictions on withdrawals which are applicable to Contract
Owners who are participants under Section 403(b) plans or under the Texas ORP,
see "FEDERAL TAX CONSIDERATIONS," "I. Public School Systems and Certain
Tax-Exempt Organizations" and "J. Texas Optional Retirement Program."
For important tax consequences which may result from surrender and withdrawals,
see "FEDERAL TAX CONSIDERATIONS."
F. DEATH BENEFIT.
In the event that the Annuitant, Owner or Joint Owner, if applicable, dies while
the Contract is in force, the Company will pay the Beneficiary a death benefit,
except where the Contract is continued in force as provided in "F. "THE SPOUSE
OF THE CONTRACT OWNER AS BENEFICIARY." The amount of the death benefit and the
time requirements for receipt of payment may vary depending upon whether the
Annuitant or an Owner dies first and whether death occurs prior to or after the
Annuity Date.
DEATH OF THE ANNUITANT PRIOR TO THE ANNUITY DATE. At the death of the Annuitant
(including an Owner who is also the Annuitant), the benefit is equal to the
greatest of (a) the Accumulated Value under the Contract increased for any
positive Market Value Adjustment; (b) gross payments accumulated at 5% annual
interest starting on the date each payment is applied, reduced proportionately
to reflect withdrawals (for each withdrawal, the proportionate reduction is
calculated as the death benefit under this option immediately prior to the
withdrawal multiplied by the withdrawal amount and divided by the Accumulated
Value immediately prior to the withdrawal); or (c) the death benefit that would
have been payable on the most recent Contract anniversary, increased for
subsequent payment and reduced proportionately to reflect withdrawals after that
date.
DEATH OF AN OWNER WHO IS NOT ALSO THE ANNUITANT PRIOR TO THE ANNUITY DATE. If an
Owner who is not also the Annuitant dies before the Annuity Date, the death
benefit will be the Accumulated Value increased by any positive Market Value
Adjustment. The death benefit will never be reduced by a negative Market Value
Adjustment.
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PAYMENT OF THE DEATH BENEFIT PRIOR TO THE ANNUITY DATE. The death benefit will
generally be paid to the Beneficiary in one sum within 7 business days of the
receipt of due proof of death at the Company's 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:
(a) defer distribution of the death benefit for a period no more than five
years from the date of death; or
(b) receive a life annuity or an annuity for a period certain not extending
beyond the Beneficiary's life expectancy, with annuity benefit payments
beginning one year from the date of death.
If distribution of the death benefit is deferred under (a) or (b), any value in
the Guarantee Period Accounts will be transferred to the Sub-Account investing
in the Money Market Fund. The excess, if any, of the death benefit over the
Accumulated Value will also be added to the Money Market Fund. The Beneficiary
may, by written request, effect transfers and withdrawals during the deferral
period and prior to annuitization under (b), but may not make additional
payments. 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 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.
G. THE SPOUSE OF THE CONTRACT OWNER AS BENEFICIARY.
The Contract Owner's spouse, if named as the sole primary beneficiary, may by
written request continue the Contract in lieu of receiving the amount payable
upon death of the Contract Owner. Upon such election, the spouse will become the
Owner and Annuitant subject to the following: (a) any value in the Guarantee
Period Accounts will be transferred to the Sub-Account investing in the Money
Market Fund; (b) the excess, if any, of the death benefit over the Contract's
Accumulated Value will also be added to the Sub-Account investing in the Money
Market Fund. Additional payments may be made; however, a surrender charge will
apply to these amounts. All other rights and benefits provided in the Contract
will continue, except that any subsequent spouse of such new Contract Owner will
not be entitled to continue the Contract upon such new Owner's death.
H. ASSIGNMENT.
The Contract, other than those sold in connection with certain qualified plans,
may be assigned by the Contract Owner at any time prior to the Annuity Date and
while the Annuitant is alive (see "FEDERAL TAX CONSIDERATIONS"). The Company
will not be deemed to have knowledge of an assignment unless it is made in
writing and filed at the Principal Office. The Company will not assume
responsibility for determining the validity of any assignment. If an assignment
of the Contract is in effect on the Annuity Date, the Company reserves the right
to pay to the assignee, in one sum, that portion of the Surrender Value of the
Contract to which the assignee appears to be entitled. The Company will pay the
balance, if any, in one sum to the Contract Owner in full settlement of all
liability under the Contract. The interest of the Contract Owner and of any
beneficiary will be subject to any assignment.
I. ELECTING THE FORM OF ANNUITY AND THE ANNUITY DATE.
Subject to certain restrictions described below, the Contract Owner has the
right (1) to select the annuity option under which annuity benefit payments are
to be made, and (2) to determine whether payments are to be made on a fixed
basis, a variable basis, or a combination fixed and variable basis. Annuity
benefit payments are determined according to the annuity tables in the Contract,
by the
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annuity option selected, and by the investment performance of the Sub-Account(s)
selected. To the extent a fixed annuity payout is selected, Accumulated Value
will be transferred to the Fixed Account of the Company, and the annuity benefit
payments will be fixed in amount. See APPENDIX A, "MORE INFORMATION ABOUT THE
FIXED ACCOUNT."
Under a variable annuity payout, a payment equal to the value of the fixed
number of Annuity Units in the Sub-Account(s) is made monthly, quarterly,
semiannually or annually. Since the value of an Annuity Unit in a Sub-Account
will reflect the investment performance of the Sub-Account, the amount of each
annuity benefit payment will vary.
The annuity option selected must produce an initial payment of at least $50 (a
lower amount may be required in some states). The Company reserves the right to
increase this minimum amount. If the annuity option(s) selected does not produce
an initial payment which 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 in the case where future
annuity benefit payments are limited to a "period certain." Only beneficiaries
entitled to receive remaining payments for a "period certain" may elect to
instead receive a lump sum settlement.
The Annuity Date is selected by the Contract Owner. To the extent permitted in
the Contract Owner's state, the Annuity Date may be the first day of any month
(a) before the Annuitant's 85th birthday, if the Annuitant's age at the date of
issue of the Contract is 75 or under; or (b) within 10 years from the date of
issue of the Contract and before the Annuitant's 90th birthday, if the
Annuitant's age at the date of issue is between 76 and 90. The Contract Owner
may elect to change the Annuity Date by sending a request to the Company's
Principal Office at least one month before the new Annuity Date. The new Annuity
Date must be the first day of any month occurring before the Annuitant's 90th
birthday and must be within the life expectancy of the Annuitant. The Company
shall determine such life expectancy at the time a change in Annuity Date is
requested. The Code and the terms of qualified plans impose limitations on the
age at which annuity benefit payments may commence and the type of annuity
option selected. See "FEDERAL TAX CONSIDERATIONS" for further information.
If the Contract Owner does not elect otherwise, a variable life annuity with
periodic payments for 10 years guaranteed will be purchased. Changes in either
the Annuity Date or annuity option can be made up to one month prior to the
Annuity Date.
J. DESCRIPTION OF VARIABLE ANNUITY OPTIONS.
The Company provides the variable annuity options described below. Currently,
Variable annuity options may be funded through the Sub-Accounts investing in the
Portfolios and the Money Market Fund.
The Company also provides these same options funded through the Fixed Account
(fixed-amount annuity option). Regardless of how payments were allocated during
the accumulation period, any of the variable annuity options or the fixed-amount
options may be selected, or any of the variable annuity options may be selected
in combination with any of the fixed-amount annuity options. Other annuity
options may be offered by the Company.
VARIABLE LIFE ANNUITY WITH PAYMENTS GUARANTEED FOR 10 YEARS. This variable
annuity is payable periodically during the lifetime of the payee with the
guarantee that if the payee should die before all payments have been made, the
remaining annuity benefit payments will continue to the Beneficiary.
VARIABLE LIFE ANNUITY PAYABLE PERIODICALLY DURING THE LIFETIME OF THE PAYEE
ONLY. It would be possible under this option for the Annuitant to receive only
one annuity benefit payment if the Annuitant dies prior to the due date of the
second annuity benefit payment, two annuity benefit payments if the Annuitant
dies before the due date of the third annuity benefit payment, and so on.
Payments, however, will continue during the lifetime of the payee, no matter how
long the payee lives.
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UNIT REFUND VARIABLE LIFE ANNUITY. This is an annuity payable periodically
during the lifetime of the payee with the guarantee that if (1) exceeds (2) then
periodic variable annuity benefit payments will continue to the Beneficiary
until the number of such payments equals the number determined in (1).
Where:
(1) is the dollar amount of the Accumulated Value divided by the dollar
amount of the first payment; and
(2) is the number of payments paid prior to the death of the payee.
JOINT AND SURVIVOR VARIABLE LIFE ANNUITY This variable annuity is payable
jointly to two payees during their joint lifetime, and then continues thereafter
during the lifetime of the survivor. The amount of each payment to the survivor
is based on the same number of Annuity Units which applied during the joint
lifetime of the two payees. One of the payees must be either the person
designated as the Annuitant in the Contract or the Beneficiary. There is no
minimum number of payments under this option.
JOINT AND TWO-THIRDS SURVIVOR VARIABLE LIFE ANNUITY This variable annuity is
payable jointly to two payees during their joint lifetime, and then continues
thereafter during the lifetime of the survivor. However, the amount of each
periodic payment to the survivor is based upon two-thirds of the number of
Annuity Units which applied during the joint lifetime of the two payees. One of
the payees must be the person designated as the Annuitant in the Contract or the
Beneficiary. There is no minimum number of payments under this option.
PERIOD CERTAIN VARIABLE ANNUITY This variable annuity has periodic payments for
a stipulated number of years ranging from one to 30.
It should be noted that the Period Certain Option does not involve a life
contingency. In the computation of the payments under this option, the charge
for annuity rate guarantees, which includes a factor for mortality risks, is
made. Although not contractually required to do so, the Company currently
follows a practice of permitting persons receiving payments under the Period
Certain Option to elect to convert to a variable annuity involving a life
contingency. The Company may discontinue or change this practice at any time,
but not with respect to election of the option made prior to the date of any
change in this practice. See "FEDERAL TAX CONSIDERATIONS" for a discussion of
the possible adverse tax consequences of selecting a Period Certain Option.
K. NORRIS DECISION.
In the case of ARIZONA GOVERNING COMMITTEE V. NORRIS, the United States Supreme
Court ruled that, in connection with retirement benefit options offered under
certain employer-sponsored employee benefit plans, annuity options based on
sex-distinct actuarial tables are not permissible under Title VII of the Civil
Rights Act of 1964. The ruling requires that benefits derived from contributions
paid into a plan after August 1, 1983 be calculated without regard to the sex of
the employee. Annuity benefits attributable to payments received by the Company
under a Contract issued in connection with an employer-sponsored benefit plan
affected by the NORRIS decision will be based on the greater of (1) the
Company's unisex Non-Guaranteed Current Annuity Option Rates or (2) the
guaranteed unisex rates described in such Contract, regardless of whether the
Annuitant is male or female.
L. COMPUTATION OF VALUES AND ANNUITY BENEFIT PAYMENTS.
THE ACCUMULATION UNIT. Each net payment is allocated to the account(s) selected
by the Contract Owner. Allocations to the Sub-Accounts are credited to the
Contract in the form of Accumulation Units. Accumulation Units are credited
separately for each Sub-Account. The number of Accumulation Units of each
Sub-Account credited to the Contract is equal to the portion of the net payment
allocated to the Sub-Account, divided by the dollar value of the applicable
Accumulation Unit as of the Valuation Date the payment is received at the
Company's Principal Office. The number of Accumulation Units resulting from each
payment will remain fixed unless changed by a subsequent split of Accumulation
Unit value, a transfer, a withdrawal, or surrender. The dollar value of an
Accumulation
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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 Funds. 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 Appendix B.
The Accumulated Value under the Contract is determined by (1) multiplying the
number of Accumulation Units in each Sub-Account by the value of an Accumulation
Unit of that Sub-Account on the Valuation Date, (2) adding the products, and (3)
adding the amount of the accumulations in the Fixed Account and Guarantee Period
Accounts, if any.
NET INVESTMENT FACTOR. The Net Investment Factor is an index that measures the
investment performance of a Sub-Account from one Valuation Period to the next.
This factor is equal to 1.000000 plus the result from dividing (a) by (b) and
subtracting (c) and (d) where:
(a) is the investment income of a Sub-Account for the Valuation Period,
including realized or unrealized capital gains and losses during the
Valuation Period, adjusted for provisions made for taxes, if any;
(b) is the value of that Sub-Account's assets at the beginning of the
Valuation Period;
(c) is a charge for mortality and expense risks equal to 1.25% on an annual
basis of the daily value of the Sub-Account's assets; and
(d) is an administrative charge of 0.20% on an annual basis of the daily
value of the Sub-Account's assets.
The dollar value of an Accumulation Unit as of a given Valuation Date is
determined by multiplying the dollar value of the corresponding Accumulation
Unit as of the immediately preceding Valuation Date by the appropriate net
investment factor.
For an illustration of Accumulation Unit calculation using a hypothetical
example see "ANNUITY PAYMENTS" in the Statement of Additional Information.
THE ANNUITY UNIT. On and after the Annuity Date, the Annuity Unit is a measure
of the value of the Annuitant's monthly annuity benefit payments under a
variable annuity option. The value of an Annuity Unit in each Sub-Account
initially was set at $1.00. The value of an Annuity Unit under a Sub-Account on
any Valuation Date thereafter is equal to the value of such unit on the
immediately preceding Valuation Date, multiplied by the product of (1) the net
investment factor of the Sub-Account for the current Valuation Period and (2) a
factor to adjust benefits to neutralize the assumed interest rate. The assumed
interest rate, discussed below, is incorporated in the variable annuity options
offered in the Contract.
DETERMINATION OF THE FIRST AND SUBSEQUENT ANNUITY BENEFIT PAYMENTS. The first
periodic annuity benefit payment is based upon the Accumulated Value as of a
date not more than four weeks preceding the date that the first annuity benefit
payment is due. Currently, variable annuity benefit payments are made on the
first of a month based on unit values as of the 15th day of the preceding month.
The Contract provides annuity rates which determine the dollar amount of the
first periodic payment under each form of annuity for each $1,000 of applied
value. For Life Option and Noncommutable Period Certain Options of 10 or more
years, the annuity value is the Accumulated Value less any premium taxes and
adjusted for any Market Value Adjustment. For commutable period certain options
or any period certain option less than 10 years, the value is the 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.
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The amount of the first monthly payment depends upon the form of annuity
selected, the sex (however, see "K. NORRIS Decision") and age of the Annuitant
and the value of the amount applied under the annuity option. The variable
annuity options offered by the Company are based on a 3 1/2% assumed interest
rate. Variable payments are affected by the assumed interest rate used in
calculating the annuity option rates. Variable annuity benefit payments will
increase over periods when the actual net investment result of the
Sub-Account(s) funding the annuity exceeds the equivalent of the assumed
interest rate for the period. Variable annuity benefit payments will decrease
over periods when the actual net investment result of the respective Sub-Account
is less than the equivalent of the assumed interest rate for the period.
The dollar amount of the first periodic annuity benefit payment under life
annuity options and non-commutable period certain options of 10 years or more is
determined by multiplying (1) the Accumulated Value applied under that option
(after application of any Market Value Adjustment and less premium tax, if any)
divided by $1,000, by (2) the applicable amount of the first monthly payment per
$1,000 of value. For commutable period certain options and any period certain
option of less than 10 years, the Surrender Value less premium taxes, if any, is
used rather than the Accumulated Value. The dollar amount of the first variable
annuity benefit payment is then divided by the value of an Annuity Unit of the
selected Sub-Account(s) to determine the number of Annuity Units represented by
the first payment. This number of Annuity Units remains fixed under all annuity
options except the joint and two-thirds survivor annuity option. For each
subsequent payment, the dollar amount of the variable annuity benefit payment is
determined by multiplying this fixed number of Annuity Units by the value of an
Annuity unit on the applicable Valuation Date.
After the first benefit payment, the dollar amount of each periodic variable
annuity benefit payment will vary with subsequent variations in the value of the
Annuity Unit of the selected Sub-Account(s). The dollar amount of each fixed
amount annuity benefit payment is fixed and will not change, except under the
joint and two-thirds survivor annuity option.
The Company may, from time to time, offer its contract owners both fixed and
variable annuity rates more favorable than those contained in the Contract. Any
such rates will be applied uniformly to all contract owners of the same class.
For an illustration of a variable annuity benefit payment calculation using a
hypothetical example, see "ANNUITY PAYMENTS" in the Statement of Additional
Information.
GUARANTEE PERIOD ACCOUNTS
Due to certain exemptive and exclusionary provisions in the securities laws,
interests in the Guarantee Period Accounts and the Company's Fixed Account are
not registered as an investment company under the provisions of the Securities
Act of 1933 or the 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 this annuity Contract or any benefits offered
under these accounts may be subject to the provisions of the Securities Act of
1933 relating to the accuracy and completeness of statements made in this
Prospectus.
INVESTMENT OPTIONS. In most jurisdictions, there currently are seven Guarantee
Periods available under the Contract with durations of three, five, six, seven,
eight, nine and ten years. Each Guarantee Period Account established for the
Contract Owner is accounted for separately in a non-unitized segregated account.
Each Guarantee Period Account provides for the accumulation of interest at a
Guaranteed Interest Rate. The Guaranteed Interest Rate on amounts allocated or
transferred to a Guarantee Period Account is determined from 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%.
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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 the Contract initially was issued and to stop accepting new
allocations, transfers or renewals to a particular Guarantee Period.
Contract Owners may allocate net payments or make transfers from any of the
Sub-Accounts, the Fixed Account or an existing Guarantee Period Account to
establish a new Guarantee Period Account at any time prior to the Annuity Date.
(In Oregon and Massachusetts, payments and transfers to the Fixed Account are
subject to certain restrictions. See Appendix A.) Transfers from a Guarantee
Period Account on any date other than on the day following the expiration of
that Guarantee Period will be subject to a Market Value Adjustment. The Company
establishes a separate investment account each time the Contract Owner allocates
or transfers amounts to a Guarantee Period Account except that amounts allocated
to the same Guarantee Period on the same day will be treated as one Guarantee
Period Account. The minimum that may be allocated to establish a Guarantee
Period Account is $1,000. If less than $1,000 is allocated, the Company reserves
the right to apply that amount to the Money Market Fund. The Contract Owner may
allocate amounts to any of the Guarantee Periods available. Notwithstanding any
other provision in this Prospectus, with respect to contracts issued in
Pennsylvania, no amounts may be allocated or transferred to any Guarantee Period
that would extend more than six months beyond the Annuity Date in effect on the
date the allocation or transfer is effected.
At least 45 days, but not more than 75 days, prior to the end of a Guarantee
Period, the Company will notify the Contract Owner in writing of the expiration
of that Guarantee Period. At the end of a Guarantee Period the Owner may
transfer amounts to the Sub-Accounts, the Fixed Account or establish a new
Guarantee Period Account of any duration then offered by the Company without a
Market Value Adjustment. If reallocation instructions are not received at the
Principal Office before the end of a Guarantee Period, the account value will be
automatically applied to a new Guarantee Period Account with the same duration
unless (1) less than $1,000 would remain in the Guarantee Period Account on the
expiration date; or (2) the Guarantee Period would extend beyond the Annuity
Date or is no longer available. In such cases, the Guarantee Period Account
value will be transferred to the Money Market Fund. Where amounts have been
automatically renewed into a new Guarantee Period, it is the Company's current
practice to give the Owner an additional 30 days to transfer out of the
Guarantee Period Account without application of a Market Value Adjustment.
MARKET VALUE ADJUSTMENT. No Market Value Adjustment will be applied to
transfers, withdrawals, or a surrender from a Guarantee Period Account on the
expiration of its Guarantee Period. In addition, no negative Market Value
Adjustment will be applied to a death benefit although a positive Market Value
Adjustment, if any, will be applied to increase the value of the death benefit
when based on the Contract's Accumulated Value. See "Death Benefit." A Market
Value Adjustment will apply to all other transfers, withdrawals, or a surrender.
Amounts applied under an annuity option are treated as withdrawals when
calculating the Market Value Adjustment. The Market Value Adjustment will be
determined by multiplying the amount taken from each Guarantee Period Account
before deduction of any Surrender Charge by the market value factor. The market
value factor for each Guarantee Period Account is equal to:
[(1+i)/(1+j)]n/365 -1
where:
i is the Guaranteed Interest Rate expressed as a decimal (for example: 3% =
0.03) being credited to the current Guarantee Period;
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.
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If the Guaranteed Interest Rate being credited is lower than the new Guaranteed
Interest Rate, the Market Value Adjustment will decrease the Guarantee Period
Account value. Similarly, if the Guaranteed Interest Rate being credited is
higher than the new Guaranteed Interest Rate, the Market Value Adjustment will
increase the Guarantee Period Account value. The Market Value Adjustment will
never result in a change to the value more than the interest earned in excess of
the Minimum Guarantee Period Account Interest Rate, compounded annually from the
beginning of the current Guarantee Period. For examples of how the Market Value
Adjustment works, See Appendix B.
PROGRAM TO PROTECT PRINCIPAL AND PROVIDE GROWTH POTENTIAL -- Under this feature,
the Owner elects a Guarantee Period and one or more Sub-Accounts. The Company
will then compute the proportion of the initial payment that must be allocated
to the Guarantee Period selected, assuming no transfers or withdrawals, in order
to ensure that on the last day of the Guarantee Period it will equal the amount
of the entire initial payment. The required amount is then allocated to the
pre-selected Guarantee Period Account. The balance of the initial payment is
allocated among the other investment options selected by the Contract Owner, as
discussed in "A. Payments." If the Contract is issued as an IRA or is issued in
Georgia, Idaho, Indiana, Michigan, Missouri, North Carolina, Oklahoma, Oregon,
South Carolina, Texas, Utah, Washington or West Virginia, the allocation to the
Guarantee Period Account and to any Sub-Account will be held in the Money Market
Fund for the first 15 days.
WITHDRAWALS -- Prior to the Annuity Date, the Contract Owner may make
withdrawals of amounts held in the Guarantee Period Accounts. Withdrawals from
these accounts will be made in the same manner and be subject to the same rules
as set forth under "Withdrawals" and "Surrender." In addition, the following
provisions also apply to withdrawals from a Guarantee Period Account: a) a
Market Value Adjustment will apply to all withdrawals, including Withdrawals
without Surrender Charge, unless made at the end of the Guarantee Period; and b)
the Company reserves the right to defer payments of amounts withdrawn from a
Guarantee Period Account for up to six months from the date it receives the
withdrawal request. If deferred for 30 days or more, the Company will pay
interest on the amount deferred at a rate of at least 3%.
In the event that a Market Value Adjustment applies to a withdrawal of a portion
of the value of a Guarantee Period Account, it will be calculated on the amount
requested and deducted or added to the amount remaining in the Guarantee Period
Account. If the entire amount in a Guarantee Period Account is requested, the
adjustment will be made to the amount payable. If a contingent deferred sales
charge applies to the withdrawal, it will be calculated as set forth under
"Contingent Deferred Sales Charge" after application of the Market Value
Adjustment.
FEDERAL TAX CONSIDERATIONS
The effect of federal income taxes on the value of the Contract, on withdrawals
or surrenders, on annuity benefit payments, and on the economic benefit to the
Contract Owner, Annuitant, or Beneficiary depends upon a variety of factors. The
following discussion is based upon the Company's understanding of current
federal income tax laws as they are interpreted as of the date of this
Prospectus. No representation is made regarding the likelihood of continuation
of current federal income tax laws or of current interpretations by the 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 ADVISOR SHOULD ALWAYS BE CONSULTED WITH REGARD TO THE APPLICATION
OF LAW TO INDIVIDUAL CIRCUMSTANCES.
The Company intends to make a charge for any effect which the income, assets, or
existence of the 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
Contract Owners and with respect to each separate account as though that
separate account were a separate taxable entity.
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The Variable Account is considered a part of and taxed with the operations of
the Company. The Company is taxed as a life insurance company under subchapter L
of the Code. The Company files a consolidated tax return with its affiliates.
The IRS has issued regulations relating to the diversification requirements for
variable annuity and variable life insurance contracts under Section 817(h) of
the Code. The regulations provide that the investments of a segregated asset
account underlying a variable annuity contract are adequately diversified if no
more than 55% of the value of its assets is represented by any one investment,
no more than 70% by any two investments, no more than 80% by any three
investments, and no more than 90% by any four investments. If the investments
are not adequately diversified, the income on the Contract, for any taxable year
of the Contract Owner, would be treated as ordinary income received or accrued
by the Contract Owner. It is anticipated that the Portfolios of The
Palladian-SM- Trust and the Money Market Fund of the Allmerica Investment Trust
will comply with the diversification requirements.
A. QUALIFIED AND NON-QUALIFIED CONTRACTS.
From a federal tax viewpoint there are two types of variable annuity contracts:
"qualified" contracts and "non-qualified" contracts. A qualified contract is one
that is purchased in connection with a retirement plan which meets the
requirements of Sections 401, 403, 408, or 457 of the Code, while a
non-qualified contract is one that is not purchased in connection with one of
the indicated retirement plans. The tax treatment for certain withdrawals or
surrenders will vary according to whether they are made from a qualified
contract or a non-qualified contract. For more information on the tax provisions
applicable to qualified contracts, see Sections D through J, below.
B. TAXATION OF THE CONTRACT IN GENERAL.
The Company believes that the Contract described in this Prospectus will, with
certain exceptions (see K below), be considered an annuity contract under
Section 72 of the Code. This section provides for the taxation of annuities. The
following discussion concerns annuities subject to Section 72. Section
72(e)(11)(A)(ii) requires that all non-qualified deferred annuity contracts
issued by the same insurance company to the same contract owner during the same
calendar year be treated as a single contract in determining taxable
distributions under Section 72(e).
With certain exceptions, any increase in the Accumulated Value of the Contract
is not taxable to the Contract Owner until it is withdrawn from the Contract. If
the Contract is surrendered or amounts are withdrawn prior to the Annuity Date,
withdrawal of investment gain in value over the cost basis of the Contract would
be taxed as ordinary income. Under the current provisions of the Code, amounts
received under a non-qualified contract prior to the Annuity Date (including
payments made upon the death of the Annuitant or Contract Owner), or as
non-periodic payments after the Annuity Date, are generally first attributable
to any investment gains credited to the Contract over the taxpayer's basis (if
any) in the Contract. Such amounts will be treated as income subject to federal
income taxation.
A 10% penalty tax may be imposed on the withdrawal of investment gains if the
withdrawal is made prior to age 59 1/2. The penalty tax will not be imposed
after age 59 1/2, or if the withdrawal follows the death of the Contract Owner
(or, if the Contract Owner is not an individual, the death of the primary
Annuitant, as defined in the Code), or in the case of the "total disability" (as
defined in the Code) of the Contract Owner. Furthermore, under Section 72 of the
Code, this penalty tax will not be imposed, irrespective of age, if the amount
received is one of a series of "substantially equal" periodic payments made at
least annually for the life or life expectancy of the payee. This requirement is
met when the Contract Owner elects to have distributions made over the Contract
Owner's life expectancy, or over the joint life expectancy of the Contract Owner
and Beneficiary. The requirement that the amount be paid out as one of a series
of "substantially equal" periodic payments is met when the number of units
withdrawn to make each distribution is substantially the same.
In a Private Letter Ruling, the IRS took the position that where distributions
from a variable annuity contract were determined by amortizing the accumulated
value of the contract over the taxpayer's
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remaining life expectancy (such as under the Contract's life expectancy
distribution ("LED") option), and the option could be changed or terminated at
any time, the distributions failed to qualify as part of a "series of
substantially equal payments" within the meaning of Section 72 of the Code. The
distributions were therefore subject to the 10% federal penalty tax. This
Private Letter Ruling may be applicable to a Contract Owner who receives
distributions under the LED option prior to age 59 1/2. Subsequent private
letter rulings, however, have treated LED-type withdrawal programs as
effectively avoiding the 10% penalty tax. The position of the IRS on this issue
is unclear.
If the Contract Owner transfers (assigns) the Contract to another individual as
a gift prior to the Annuity Date, the Code provides that the Contract Owner will
incur taxable income at the time of the transfer. An exception is provided for
certain transfers between spouses. The amount of taxable income upon such
taxable transfer is equal to the excess, if any, of the Surrender Value of the
Contract over the Contract Owner's cost basis at the time of the transfer. The
transfer is also subject to federal gift tax provisions. Where the Contract
Owner and Annuitant are different persons, the change of ownership of the
Contract to the Annuitant on the Annuity Date, as required under the Contract,
is a gift and will be taxable to the Contract Owner as such; however, the
Contract Owner will not incur taxable income. Instead, the Annuitant will incur
taxable income upon receipt of annuity benefit payments as discussed below.
When annuity benefit payments are commenced under the Contract, generally a
portion of each payment may be excluded from gross income. The excludable
portion is generally determined by a formula that establishes the ratio that the
cost basis of the Contract bears to the expected return under the Contract. The
portion of the payment in excess of this excludable amount is taxable as
ordinary income. Once all cost basis in the Contract is recovered, the entire
payment is taxable. If the Annuitant dies before cost basis is recovered, a
deduction for the difference is allowed on the Annuitant's final tax return.
C. TAX WITHHOLDING AND PENALTIES.
The Code requires withholding with respect to payments or distributions from
nonqualified contracts and IRAs, unless a taxpayer elects not to have
withholding. A 20% withholding requirement applies to distributions from most
other qualified contracts. In addition, the Code requires reporting to the IRS
of the amount of income received with respect to payment or distributions from
annuities.
In certain situations, the Code provides for a tax penalty if, prior to death,
disability or attainment of age 59 1/2, a Contract Owner makes a withdrawal or
receives any amount under the Contract, unless the distribution is in the form
of a life annuity (including life expectancy distributions). The penalty is 10%
of the amount includible in income by the Contract Owner.
The tax treatment of certain withdrawals from or surrenders of the non-qualified
contract offered by this prospectus will vary according to whether the amount
withdrawn or surrendered is allocable to an investment in the contract made
before or after certain dates.
D. PROVISIONS APPLICABLE TO QUALIFIED EMPLOYER PLANS.
The tax rules applicable to qualified employer plans, as defined by the Code,
vary according to the type of plan and the terms and conditions of the plan
itself. Therefore, the following is general information about the use of the
Contract with various types of qualified plans. The rights of any person to any
benefits under such qualified plans will be subject to the terms and conditions
of the qualified plans themselves regardless of the terms and conditions of the
Contract.
A loan to a participant or beneficiary from plans qualified under Sections 401
and 403 or an assignment or pledge of an interest in such a plan is generally
treated as a distribution. This general rule does not apply to loans which
contain certain repayment terms and do not exceed a specified maximum amount, as
required under Section 72(p).
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E. QUALIFIED EMPLOYEE PENSION AND PROFIT SHARING TRUSTS AND QUALIFIED ANNUITY
PLANS.
When an employee (including a self-employed individual) or one or more of the
employee's beneficiaries receives a "lump-sum" distribution (a distribution from
a qualified plan described in Code Section 401(a) within one taxable year equal
to the total amount payable with respect to such an employee), the taxable
portion of such distribution may qualify for special treatment under a special
five-year income averaging provision of the Code. The employee must have had at
least five years of participation under the plan, and the lump sum distribution
must be made after the employee has attained age 59 1/2 or on account of his or
her death, separation from the employer's service (in the case of a common-law
employee) or disability (in the case of a self-employed individual). Such
treatment can be elected for only one taxable year once the individual has
reached age 59 1/2. An employee who attained age 50 before January 1, 1986 may
elect to treat part of the taxable portion of a lump-sum distribution as
long-term capital gains and may also elect 10-year averaging instead of
five-year averaging.
The Company can provide prototype plans for certain of the pension or profit
sharing plans for review by your legal counsel. For information, ask your
financial representative.
F. SELF-EMPLOYED INDIVIDUALS.
The Self-Employed Individuals Tax Retirement Act of 1962, as amended, frequently
referred to as "H.R. 10," allows self-employed individuals and partners to
establish qualified pension and profit sharing trusts and annuity plans to
provide benefits for themselves and their employees.
These plans generally are subject to the same rules and requirements applicable
to corporate qualified plans, with some special restrictions imposed on
"owner-employees." An "owner-employee" is an employee who (1) owns the entire
interest in an unincorporated trade or business, or (2) owns more than 10% of
either the capital interest or profits interest in a partnership.
G. INDIVIDUAL RETIREMENT ACCOUNT PLANS.
Any individual who earns "compensation" (as defined in the Code and including
alimony payable under a court decree) from employment or self-employment,
whether or not he or she is covered by another qualified plan, may establish an
Individual Retirement Account or Annuity plan ("IRA") for the accumulation of
retirement savings on a tax-deferred basis. Income from investments is not
included in "compensation." The assets of an IRA may be invested in, among other
things, annuity contracts including the Contract offered by this Prospectus.
Contributions to the IRA may be made by the individual or on behalf of the
individual by an employer. IRA contributions may be deductible up to the lesser
of (1) $2,000 or (2) 100% of compensation. The deduction is reduced
proportionately for adjusted gross income between $40,000 and $50,000 (between
$25,000 and $35,000 for unmarried taxpayers and between $0 and $10,000 for a
married taxpayer filing separately) if the taxpayer and his or her spouse file a
joint return and either is an active participant in an employer sponsored
retirement plan.
An individual and a working spouse each may have an IRA with the above-described
limit on each. An individual with an IRA may establish an additional IRA for a
non-working spouse if they file a joint return. For the 1996 tax year,
contributions to the two IRAs together are deductible up to the lesser of $2,250
or 100% of compensation. No deduction is allowed for contributions made for the
year in which the individual attains age 70 1/2 and years thereafter.
Contributions for that year and for years thereafter will result in certain
adverse tax consequences. Effective for the 1997 tax year and thereafter, an
individual may establish a spousal IRA if the spouse's compensation is less than
the individual's and they file a joint return. The maximum contribution to the
two IRA's is the lesser of $4,000 or 100% of combined income.
Non-deductible contributions may be made to IRAs until the year in which the
individual attains age 70 1/2. Although these contributions may not be deducted,
taxes on their earnings are deferred until the
35
<PAGE>
earnings are distributed. The maximum permissible non-deductible contribution is
$2,000 for an individual taxpayer and $2,250 for a taxpayer and non-working
spouse. These limits are reduced by the amount of any deductible contributions
made by the taxpayer.
Contributions may be made with respect to a particular year until the due date
of the individual's federal income tax return for that year, not including
extensions. For reporting purposes, however, the Company will regard
contributions as being applicable to the year made unless it receives notice to
the contrary.
All annuity benefit payments and other distributions under an IRA will be taxed
as ordinary income unless the owner has made non-deductible contributions. In
addition, a minimum level of distributions must begin no later than April 1
following the year in which the individual attains age 70 1/2, and failure to
make adequate distributions at this time may result in certain adverse tax
consequences to the individual.
Distributions from all of an individual's IRAs are treated as if they were a
distribution from one IRA, and all distributions during the same taxable year
are treated as if they were one distribution. An individual who makes a
non-deductible contribution to an IRA or receives a distribution from an IRA
during the taxable year must provide certain information on the individual's tax
return to enable the IRS to determine the proportion of the IRA balance which
represents non-deductible contributions. If the required information is
provided, that part of the amount withdrawn which is proportionate to the
individual's aggregate non-deductible contributions over the aggregate balance
of all of the individual's IRAs, is excludable from income.
Distributions which are a return of a non-deductible contribution are
non-taxable, as they represent a return of basis. If the required information is
not provided to the IRS, distributions from an IRA to which both deductible and
non-deductible contributions have been made are presumed to be fully taxable.
H. SIMPLIFIED EMPLOYEE PENSIONS.
Employers may establish Simplified Employee Pensions ("SEPs") under Code Section
408(k) until the end of the 1996 tax year if certain requirements are met. A SEP
is an IRA to which the employer contributes under a written formula. Currently,
a SEP may accept employer contributions each year up to $30,000 or 15% of
compensation (as defined), whichever is less. To establish SEPs the employer
must make a contribution for every employee age 21 and over who has performed
services for the employer for at least three of the five immediately preceding
calendar years and who has earned at least $300 for the year. SEP contributions
for employees over age 70 1/2 are permissible.
The employer's contribution is excluded from the employee's gross income for the
taxable year for which it was made up to the $30,000/15% limit. In addition to
the employer's contribution, the employee may contribute 100% of the employee's
earned income, up to $2,000, to the SEP, but such contributions will be subject
to the rules described above in "G. Individual Retirement Account Plans."
These plans are subject to the general employer's deduction limitations
applicable to all corporate qualified plans. Employers may not establish new SEP
plans after the end of the 1996 tax year.
I. PUBLIC SCHOOL SYSTEMS AND CERTAIN TAX-EXEMPT ORGANIZATIONS.
Under the provisions of Section 403(b) of the Code, payments made for annuity
contracts purchased for employees under annuity plans adopted by public school
systems and certain organizations which are tax exempt under Section 501(c)(3)
of the Code are excludable from the gross income of such employees to the extent
that the aggregate payments for such annuity contracts in any year do not exceed
the maximum contribution permitted under the Code.
A contract qualifying under Section 403(b) of the Code must provide that
withdrawals or other distributions attributable to salary reduction
contributions (including earnings thereon) may not begin before the employee
attains age 59 1/2, separates from service, dies, or becomes disabled. In the
36
<PAGE>
case of hardship, a contract owner may withdraw amounts contributed by salary
reduction, but not the earnings on such amounts. Even though a distribution may
be permitted under these rules (e.g., for hardship or after separation from
service), it may nonetheless be subject to a 10% penalty tax as a premature
distribution, in addition to income tax. The distribution restrictions are
effective for years beginning after December 31, 1988, but only with respect to
amounts that were not held under the Contract as of that date.
J. TEXAS OPTIONAL RETIREMENT PROGRAM.
Under a Code Section 403(b) annuity contract issued as a result of participation
in the Texas ORP, distributions may not be received except in the case of the
participant's death, retirement or termination of employment in the Texas public
institutions of higher education. These restrictions are imposed by reason of an
opinion of the Texas Attorney General interpreting the Texas laws governing the
Optional Retirement Program.
K. SECTION 457 PLANS FOR STATE GOVERNMENTS AND TAX-EXEMPT ENTITIES.
Code Section 457 allows employees of a state, one of its political subdivisions,
or certain tax-exempt entities to participate in eligible government deferred
compensation plans. An eligible plan, by its terms, must not allow deferral of
more than $7,500 or 33 1/3%of a participant's includible compensation for the
taxable year, whichever is less. Includible compensation does not include
amounts excludable under the eligible deferred compensation plan or amounts paid
into a Code Section 403(b) annuity. The amount a participant may defer must be
reduced dollar-for-dollar by elective deferrals under a SEP, 401(k) plan or a
deductible employee contribution to a 501(c)(18) plan. Under eligible deferred
compensation plans the state, political subdivision, or tax-exempt entity will
be owner of the Contract.
If an employee also participates in another eligible plan or contributes to a
Code Section 403(b) annuity, a single limit of $7,500 will be applied for all
plans. Additionally, the employee must designate how much of the $7,500 or
33 1/3% limitation will be allocated among the various plans. Contributions to
an eligible plan will serve to reduce the maximum exclusion allowance for a Code
Section 403(b) annuity. Amounts received by employees under such plans generally
are includible in gross income in the year of receipt.
L. NON-INDIVIDUAL OWNERS.
Non-individual Owners (e.g., a corporation) of deferred annuity contracts
generally will be currently taxed on any increase in the cash surrender value of
the deferred annuity attributable to contributions made after February 28, 1986.
This rule does not apply to immediate annuities or to deferred annuities held by
a qualified pension plan, an IRA, a 403(b) plan, estates, employers with respect
to terminated pension plans, or a nominee or agent holding a contract for the
benefit of an individual. Corporate-owned annuities may result in exposure to
the alternative minimum tax, to the extent that income on the annuities
increases the corporation's adjusted current earnings.
REPORTS
The Contract Owner is sent a report semi-annually which states certain financial
information about the Funds. The Company also will furnish an annual report to
the Contract Owner containing a statement of his or her account, including unit
values and other information as required by applicable law, rules and
regulations.
LOANS (QUALIFIED CONTRACTS ONLY)
Loans are available to owners of TSA contracts (i.e., contracts issued under
Section 403(b) of the Code and to contracts issued to plans qualified under
Sections 401(a) and 401(k) of the Code. Loans are subject to provisions of the
Code and to applicable qualified retirement plan rules. Tax advisors and plan
fiduciaries should be consulted prior to exercising loan privileges.
Loaned amounts will first be withdrawn from Sub-Account and Fixed Account values
on a pro-rata basis until exhausted. Thereafter, any additional amounts will be
withdrawn from the Guarantee
37
<PAGE>
Period Accounts (pro-rata by duration and LIFO (last-in, first-out) within each
duration), subject to any applicable Market Value Adjustments. The maximum loan
amount will be determined under the Company's maximum loan formula. The minimum
loan amount is $1,000. Loans will be secured by a security interest in the
Contract and the amount borrowed will be transferred to a loan asset account
within the Company's General Account, where it will accrue interest at a
specified rate below the then-current loan rate. Generally, loans must be repaid
within five years or less, and repayments must be made quarterly and in
substantially equal amounts. Repayments will be allocated pro rata in accordance
with the most recent payment allocation, except that any allocations to a
Guarantee Period Account will instead be allocated to the Money Market Fund.
CHANGES IN OPERATION OF THE VARIABLE ACCOUNT
The Company reserves the right, subject to compliance with applicable law, to
(1) transfer assets from any Separate 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 Fund shares held by a Sub-Account, in the
event that Fund shares are unavailable for investment, or if the Company
determines that further investment in such Fund shares is inappropriate in view
of the purpose of the Sub-Account, (5) to change the methodology for determining
the net investment factor, and (6) to change the names of the Variable Account
or of the Sub-Accounts. In no event will the changes described above be made
without notice to Contract Owners in accordance with the 1940 Act.
DISTRIBUTION
The Contract offered by this Prospectus may be purchased from certain
independent broker-dealers which are registered under the Securities Exchange
Act of 1934 and members of the National Association of Securities Dealers, Inc.
("NASD"). The Contract also is offered through Allmerica Investments, Inc.,
which is the principal underwriter and distributor of the Contract. Allmerica
Investments, Inc., 440 Lincoln Street, Worcester, Massachusetts 01653, is a
registered broker-dealer, member of the NASD, and an indirect wholly owned
subsidiary of First Allmerica.
The Company pays commissions not to exceed 6.0% of payments to broker-dealers
which sell the Contract. Alternative commission schedules are available with
lower initial commission amounts based on payments, plus ongoing annual
compensation of up to 1% of Contract value. To the extent permitted by NASD
rules, promotional incentives or payments may also be provided to such broker-
dealers based on sales volumes, the assumption of wholesaling functions, or
other sales-related criteria. Additional payments may be made for other services
not directly related to the sale of the 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
Contract Owners or to the Separate Account. Any contingent deferred sales
charges assessed on the Contract will be retained by the Company.
Contract Owners may direct any inquiries to their financial representative or to
Allmerica Investments, Inc., 440 Lincoln Street, Worcester, Massachusetts 01653,
508-855-3590.
LEGAL MATTERS
There are no legal proceedings pending to which the Variable Account is a party.
38
<PAGE>
FURTHER INFORMATION
A Registration Statement under the Securities Act of 1933 relating to this
offering has been filed with the Securities and Exchange Commission. Certain
portions of the Registration Statement and amendments have been omitted in this
Prospectus pursuant to the rules and regulations of the Commission. The omitted
information may be obtained from the Commission's principal office in
Washington, D.C., upon payment of the Commission's prescribed fees.
39
<PAGE>
APPENDIX A
MORE INFORMATION ABOUT THE FIXED ACCOUNT
Because of exemption and exclusionary provisions in the securities laws,
interests in the Fixed Account are not generally subject to regulation under the
provisions of the Securities Act of 1933 or the Investment Company Act of 1940.
Disclosures regarding the fixed portion of the annuity contract and the Fixed
Account may be subject to the provisions of the Securities Act of 1933
concerning the accuracy and completeness of statements made in the Prospectus.
The disclosures in this APPENDIX A have not been reviewed by the SEC.
The Fixed Account is made up of all of the general assets of the Company other
than those allocated to the separate account. Allocations to the Fixed Account
become part of the assets of the Company and are used to support insurance and
annuity obligations. A portion or all of net payments may be allocated to
accumulate at a fixed rate of interest in the Fixed Account. Such net amounts
are guaranteed by the Company as to principal and a minimum rate of interest.
Under the 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 less than seven full
contract years.
In Massachusetts, payments and transfers to the Fixed Account are subject to the
following restrictions:
If a 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 a Contract is issued on or after the
Annuitant's 60th birthday, up through and including the Annuitant's 81st
birthday, Fixed Account allocations will be permitted during the first
Contract year. On and after the first Contract anniversary, no additional
allocations to the Fixed Account will be permitted. If a Contract is issued
after the Annuitant's 81st birthday, no payments to the Fixed Account will
be permitted at any time.
If an allocation designated as a Fixed Account allocation is received at the
Principal Office during a period when the Fixed Account is not available due
to the limitations outlined above, the monies will be allocated to the Money
Market Fund.
In Oregon, no payment to the Fixed Account will be permitted if a Contract is
issued after the Annuitant's 81st birthday.
40
<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 date of issue and no additional
payments are made. Assume there are no withdrawals and that the Withdrawal
Without Surrender Charge Amount is equal to the greater of 15% of the current
Account Value or the accumulated earnings in the Contract. The table below
presents examples of the surrender charge resulting from a full surrender of the
Contract Owner's Account, based on hypothetical Accumulated Values.
<TABLE>
<CAPTION>
HYPOTHETICAL WITHDRAWAL SURRENDER
ACCOUNT ACCUMULATED WITHOUT SURRENDER CHARGE SURRENDER
YEAR VALUE CHARGE AMOUNT PERCENTAGE CHARGE
- --------- ------------ ----------------- ------------- ----------
<S> <C> <C> <C> <C>
1 54,000.00 8,100.00 7% 3,213.00
2 58,320.00 8,748.00 6% 2,974.32
3 62,985.60 12,985.60 5% 2,500.00
4 68,024.45 18,024.45 4% 2,000.00
5 73,466.40 23,466.40 3% 1,500.00
6 79,343.72 29,343.72 2% 1,000.00
7 85,691.21 35,691.21 1% 500.00
8 92,546.51 42,546.51 0% 0.00
</TABLE>
WITHDRAWALS
Assume a payment of $50,000 is made on the date of issue and no additional
payments are made. Assume that the Withdrawal Without Surrender Charge Amount is
equal to the greater of 15% of the current Account Value or the accumulated
earnings in the contract and there are withdrawals as detailed below. The table
below presents examples of the surrender charge resulting from surrenders of the
Contract Owner's Account, based on hypothetical Accumulated Values.
<TABLE>
<CAPTION>
HYPOTHETICAL WITHDRAWAL SURRENDER
ACCOUNT ACCUMULATED WITHOUT SURRENDER CHARGE SURRENDER
YEAR VALUE WITHDRAWAL CHARGE AMOUNT PERCENTAGE CHARGE
- --------- ------------- ----------- ----------------- ------------- ----------
<S> <C> <C> <C> <C> <C>
1 54,000.00 0.00 8,100.00 7% 0.00
2 58,320.00 0.00 8,748.00 6% 0.00
3 62,985.60 0.00 12,985.60 5% 0.00
4 68,024.45 30,000.00 18,024.45 4% 479.02
5 41,066.40 10,000.00 6,159.96 3% 115.20
6 33,551.72 5,000.00 5,032.76 2% 0.00
7 30,835.85 10,000.00 4,625.38 1% 53.75
8 22,502.72 15,000.00 3,375.41 0% 0.00
</TABLE>
PART 2: MARKET VALUE ADJUSTMENT
The market value factor is: [(1+i)/(1+j)]n/365-1
The following examples assume:
1. The Payment was allocated to a ten-year Guarantee Period Account with
a guaranteed interest rate of 8%.
2. The date of surrender is seven years (2555 days) from the expiration
date.
3. The value of the Guarantee Period Account is equal to $62,985.60 at
the end of three years.
4. No transfers or withdrawals affecting this Guarantee Period Account
have been made.
5. Surrender charges, if any, are calculated in the same manner as shown
in the examples in Part 1.
41
<PAGE>
NEGATIVE MARKET VALUE ADJUSTMENT (UNCAPPED)
Assume that on the date of surrender, the current rate (j) is 10.00% or 0.10
<TABLE>
<S> <C>
The market value factor = [(1+i)/(1+j)]n/365-1
= [(1+.08)/(1+.10)]2555/365-1
= (.98182)7-1
= -.12054
= the market value factor multiplied by the
The market value adjustment withdrawal
= -.12054X$62,985.60
= -$7,592.11
</TABLE>
POSITIVE MARKET VALUE ADJUSTMENT (UNCAPPED)
Assume that on the date of surrender, the current rate (j) is 7.00% or 0.07
<TABLE>
<S> <C>
The market value factor = [(1+i)/(1+j)]n/365-1
= [(1+.08)/(1+.07)]2555/365-1
= (1.0093)7-1
= .06694
= the market value factor multiplied by the
The market value adjustment withdrawal
= .06694X$62,985.60
= $4,216.26
</TABLE>
NEGATIVE MARKET VALUE ADJUSTMENT (CAPPED)
Assume that on the date of surrender, the current rate (j) is 11.00% or 0.11
<TABLE>
<S> <C>
The market value factor = [(1+i)/(1+j)]n/365-1
= [(1+.08)/(1+.11)]2555/365-1
= (.97297)7-1
= -.17454
The market value adjustment = Minimum of the market value factor multiplied by
the withdrawal or the negative of the excess
interest earned over 3%
= Minimum (-.17454X$62,985.60 or -$8,349.25)
= Minimum (-$10,993.51 or -$8,349.25)
= -$8,349.25
</TABLE>
POSITIVE MARKET VALUE ADJUSTMENT (CAPPED)
Assume that on the date of surrender, the current rate (j) is 6.00% or 0.06
<TABLE>
<S> <C>
The market value factor = [(1+i)/(1+j)]n/365-1
= [(1+.08)/(1+.06)]2555/365-1
= (1.01887)7-1
= .13981
The market value adjustment = Minimum of the market value factor multiplied by
the withdrawal or the excess interest earned over
3%
= Minimum of (.13981X$62,985.60 or $8,349.25)
= Minimum of ($8,806.02 or $8,349.25)
= $8,349.25
</TABLE>
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<PAGE>
APPENDIX C
THE DEATH BENEFIT
PART 1: DEATH OF THE ANNUITANT
DEATH BENEFIT ASSUMING NO WITHDRAWALS
Assume a payment of $50,000 is made on the date of issue and no additional
payments are made. Assume there are no withdrawals and that the Death Benefit
Effective Annual Yield is equal to 5%. The table below presents examples of the
Death Benefit based on the hypothetical Accumulated Values.
<TABLE>
<CAPTION>
HYPOTHETICAL
HYPOTHETICAL MARKET HYPOTHETICAL
ACCUMULATED VALUE DEATH DEATH DEATH DEATH
YEAR VALUE ADJUSTMENT BENEFIT (A) BENEFIT (B) BENEFIT (C) BENEFIT
--- ------------ ------------ ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
1 53,000.00 0.00 53,000.00 52,500.00 50,000.00 53,000.00
2 53,530.00 500.00 54,030.00 55,125.00 53,000.00 55,125.00
3 58,883.00 0.00 58,883.00 57,881.25 55,125.00 58,883.00
4 52,994.70 500.00 53,494.70 60,775.31 58,883.00 60,775.31
5 58,294.17 0.00 58,294.17 63,814.08 60,775.31 63,814.08
6 64,123.59 500.00 64,623.59 67,004.78 63,814.08 67,004.78
7 70,535.95 0.00 70,535.95 70,355.02 67,004.78 70,535.95
8 77,589.54 500.00 78,089.54 73,872.77 70,535.95 78,089.54
9 85,348.49 0.00 85,348.49 77,566.41 78,089.54 85,348.49
10 93,883.34 0.00 93,883.34 81,444.73 85,348.49 93,883.34
</TABLE>
Death Benefit (a) is the Accumulated Value increased by any positive Market
Value Adjustment.
Death Benefit (b) is the gross payments accumulated daily at the Death Benefit
Effective Annual Yield reduced proportionately to reflect withdrawals.
Death Benefit (c) is the death benefit that would have been payable on the most
recent Contract anniversary, increased for subsequent payments, and decreased
proportionately for subsequent withdrawals.
The Hypothetical Death Benefit is equal to the greatest of Death Benefits (a),
(b), or (c).
DEATH BENEFIT ASSUMING WITHDRAWALS
Assume a payment of $50,000 is made on the date of issue and no additional
payments are made. Assume there are withdrawals as detailed in the table below
and that the Death Benefit Effective Annual Yield is equal to 5%. The table
below presents examples of the Death Benefit based on the hypothetical
Accumulated Values.
<TABLE>
<CAPTION>
HYPOTHETICAL
HYPOTHETICAL MARKET HYPOTHETICAL
ACCUMULATED PARTIAL VALUE DEATH DEATH DEATH DEATH
YEAR VALUE WITHDRAWAL ADJUSTMENT BENEFIT (A) BENEFIT (B) BENEFIT (C) BENEFIT
--- ------------ ----------- ------------ ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
1 53,000.00 0.00 0.00 53,000.00 52,500.00 50,000.00 53,000.00
2 53,530.00 0.00 500.00 54,030.00 55,125.00 53,000.00 55,125.00
3 3,883.00 50,000.00 0.00 3,883.00 3,816.94 3,635.18 3,883.00
4 3,494.70 0.00 500.00 3,994.70 4,007.79 3,883.00 4,007.79
5 3,844.17 0.00 0.00 3,844.17 4,208.18 4,007.79 4,208.18
6 4,228.59 0.00 500.00 4,728.59 4,418.59 4,208.18 4,728.59
7 4,651.45 0.00 0.00 4,651.45 4,639.51 4,728.59 4,728.59
8 5,116.59 0.00 500.00 5,616.59 4,871.49 4,728.59 5,616.59
9 5,628.25 0.00 0.00 5,628.25 5,115.07 5,616.59 5,628.25
10 691.07 5,000.00 0.00 691.07 599.51 628.25 691.07
</TABLE>
43
<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 the Death Benefit
Effective Annual Yield 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)
PART 2: DEATH OF THE OWNER WHO IS NOT THE ANNUITANT
Assume a payment of $50,000 is made on the date of issue and no additional
payments are made. Assume there are no withdrawals and that the Death Benefit
Effective Annual Yield is equal to 5%. The table below presents examples of the
Death Benefit based on the hypothetical Accumulated Values.
<TABLE>
<CAPTION>
HYPOTHETICAL
HYPOTHETICAL MARKET HYPOTHETICAL
ACCUMULATED VALUE DEATH
YEAR VALUE ADJUSTMENT BENEFIT
--- ------------ ------------ ------------
<S> <C> <C> <C>
1 53,000.00 0.00 53,000.00
2 53,530.00 500.00 54,030.00
3 58,883.00 0.00 58,883.00
4 52,994.70 500.00 53,494.70
5 58,294.17 0.00 58,294.17
6 64,123.59 500.00 64,623.59
7 70,535.95 0.00 70,535.95
8 77,589.54 500.00 78,089.54
9 85,348.49 0.00 85,348.49
10 93,883.34 0.00 93,883.34
</TABLE>
The hypothetical Death Benefit is the Accumulated Value increased by any
positive Market Value Adjustment.
44
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
STATEMENT OF ADDITIONAL INFORMATION
FOR
FLEXIBLE PAYMENT DEFERRED VARIABLE AND FIXED ANNUITY CONTRACTS FUNDED THROUGH
FULCRUM SEPARATE ACCOUNT
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS. IT SHOULD BE READ
IN CONJUNCTION WITH THE PROSPECTUS FOR THE VARIABLE ACCOUNT DATED NOVEMBER 15,
1996, ("THE PROSPECTUS"). THE PROSPECTUS MAY BE OBTAINED FROM ALLMERICA
INVESTMENTS, INC., 440 LINCOLN STREET, WORCESTER, MASSACHUSETTS 01653, (508)
855-3590.
Dated November 15, 1996
1
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
TABLE OF CONTENTS
<TABLE>
<S> <C>
General Information and History......................................................... 2
Taxation of the Contract, The Variable Account and the Company.......................... 3
Services................................................................................ 3
Underwriters............................................................................ 3
Annuity Payments........................................................................ 4
Performance Information................................................................. 6
Tax Deferred Accumulation............................................................... 8
Financial Statements.................................................................... 8
</TABLE>
2
<PAGE>
GENERAL INFORMATION AND HISTORY
The Fulcrum Separate Account ("Separate Account") is a separate investment
account of Allmerica Financial Life Insurance and Annuity Company ("Company")
authorized by vote of the Board of Directors on June 13, 1996. The Company is a
life insurance company organized under the laws of Delaware in July, 1974. Its
Principal Office is located at 440 Lincoln Street, Worcester, Massachusetts
01653, Telephone 508-855-1000. The Company is subject to the laws of the state
of Delaware governing insurance companies and to regulation by the Commissioner
of Insurance of Delaware. In addition, the Company is subject to the insurance
laws and regulations of other states and jurisdictions in which it is licensed
to operate. As of December 31, 1995, the Company had over $5 billion in assets
and over $18 billion of life insurance in force.
Effective October 1, 1995, the Company changed its name from SMA Life Assurance
Company to Allmerica Financial Life Insurance and Annuity Company. The Company
is an indirectly wholly-owned subsidiary of First Allmerica Financial Life
Insurance Company ("First Allmerica"), which in turn is a wholly-owned
subsidiary of Allmerica Financial Corporation ("AFC"). First Allmerica,
originally organized under the laws of Massachusetts in 1844 as a mutual life
insurance company known as State Mutual Life Assurance Company of America,
converted to a stock life insurance company on October 16, 1995 and adopted its
present name. First Allmerica is the fifth oldest life insurance company in
America. As of December 31, 1995 First Allmerica and its subsidiaries (including
the Company) had over $11 billion in combined assets and over $35.2 billion in
life insurance in force.
Currently, 6 Sub-Accounts of the Separate Account are available under the
Contracts. Each Sub-Account invests in a corresponding investment portfolio of
The Palladian Trust ("Palladian") or fund of Allmerica Investment Trust
("Trust"). Palladian and the Trust are both open-end, diversified series
investment companies. The following Portfolios of Palladian are available under
the Contract: Value, Growth, International Growth, Global Strategic Income, and
Global Interactive/Telecomm. One Fund of the Trust is available under the
Contracts: the Money Market Fund. Each Portfolio and Fund available under the
Contracts has its own investment objectives and certain attendant risks; for
more information, see the Prospectus and Statement of Additional Information for
Palladian and for the Trust.
TAXATION OF THE CONTRACT,
VARIABLE ACCOUNT AND THE COMPANY
The Company currently imposes no charge for taxes payable in connection with the
Contract, other than for state and local premium taxes and similar assessments
when applicable. The Company reserves the right to impose a charge for any other
taxes that may become payable in the future in connection with the Contracts or
the Separate 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 Contracts or the Separate Account may have upon its tax.
Such charge for taxes, if any, will be assessed on a fair and equitable basis in
order to preserve equity among classes of Contract Owners. The Separate Account
presently is not subject to tax.
SERVICES
CUSTODIAN OF SECURITIES. The Company serves as custodian of the assets of the
Separate Account. Shares of the Portfolios of Palladian and of the Money Market
Fund of the Trust which are owned by
3
<PAGE>
the Sub-Accounts are held on an open account basis. A Sub-Account's ownership of
Portfolio shares is reflected on the records of Palladian and of Fund shares on
the records of the Trust, and are not represented by any transferable stock
certificates.
EXPERTS. The financial statements of the Company as of December 31, 1995 and
1994 and for each of the three years in the period ended December 31, 1995,
included in this Statement of Additional Information constituting part of the
Registration Statement, have been so included in reliance on the report of Price
Waterhouse LLP, independent accountants, given on the authority of said firm as
experts in auditing and accounting.
The financial statements of the Company included herein should be considered
only as bearing on the ability of the Company to meet its obligations under the
Contracts.
UNDERWRITERS
Allmerica Investments, Inc., ("Allmerica Investments") a registered
broker-dealer under the Securities Exchange Act of 1934 and a member of the
National Association of Securities Dealers, Inc. (NASD), serves as principal
underwriter for the Contracts pursuant to a Contract with the Company and the
Variable Account. Allmerica Investments distributes the Contracts on a best
efforts basis. Allmerica Investments, 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 Contracts offered by this Prospectus are offered continuously and may be
purchased from certain independent broker-dealers which are NASD members and
whose representatives are authorized by applicable law to sell variable annuity
Contracts.
All persons selling Contracts are required to be licensed by their respective
state insurance authorities for the sale of variable annuity Contracts. The
Company pays commissions not to exceed 6.0% of purchase payments to entities
which sell the Contracts. To the extent permitted by NASD rules, promotional
incentives or payments may also be provided to such entities based on sales
volumes, the assumption of wholesaling functions, or other sales-related
criteria. Additional payments may be made for other services not directly
related to the sale of the Contracts, including the recruitment and training of
personnel, production of promotional literature, and similar services. A
Promotional Allowance of 1.1% is paid to Western Capital Financial Group for
administrative and support services with respect to the distribution of the
contracts. Commissions paid on the Contracts, including additional incentives or
payments, and the Promotional Allowance paid to Western Capital Financial Croup
are paid by the Company and do not result in any charge to Contract Owners or to
the Separate Account in addition to the charges described under "CHARGES AND
DEDUCTIONS" in the Prospectus. The Company intends to recoup the commission and
other sales expense through a combination of anticipated surrender, withdrawal,
and/or annuitization charges, profits from the Company's general account,
including the investment earnings on amounts allocated to accumulate on a fixed
basis in excess of the interest credited on fixed accumulations by the Company,
and the profit, if any, from the mortality and expense risk charge.
ANNUITY PAYMENTS
The method by which the Accumulated Value under the Contract is determined is
described in detail under "COMPUTATION OF Contract VALUES AND ANNUITY PAYMENTS"
in the Prospectus.
ILLUSTRATION OF ACCUMULATION UNIT CALCULATION USING HYPOTHETICAL EXAMPLE. The
Accumulation Unit calculation for a daily Valuation Period may be illustrated by
the following hypothetical example: Assume that the 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
4
<PAGE>
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> <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):(2)........... 0.000335
(5) Annual Charge (one day equivalent of 1.45% per annum)..................... 0.000038
(6) Net Investment Rate (4)-(5)............................................... 0.000297
(7) Net Investment Factor 1.000000 + (6)...................................... 1.000297
(8) Accumulation Unit Value -- Current Period (1)x(7)......................... $1.135337
</TABLE>
Conversely, if unrealized capital losses and charges for expenses and taxes
exceeded investment income and net realized capital gains by $1,675, the
accumulated unit value at the end of the Valuation Period would have been
$1.134577.
The method for determining the amount of annuity payments is described in detail
under "COMPUTATION OF Contract VALUES AND ANNUITY PAYMENTS" in the Prospectus.
ILLUSTRATION OF VARIABLE ANNUITY PAYMENT CALCULATION USING HYPOTHETICAL
EXAMPLE. The determination of the Annuity Unit value and the variable annuity
payment may be illustrated by the following hypothetical example: Assume an
Annuitant has 40,000 Accumulation Units in a Separate Account, and that the
value of an Accumulation Unit on the Valuation Date used to determine the amount
of the first variable annuity payment is $1.120000. Therefore, the Accumulation
Value of the Contract is $44,800 (40,000 x $1.120000). Assume also that the
Contract Owner elects an option for which the first monthly payment is $6.57 per
$1,000 of Accumulated Value applied. Assuming no premium tax or contingent
deferred sales charge, the first monthly payment would be 44.800 multiplied by
$6.57, or $294.34.
Next, assume that the Annuity Unit value for the assumed rate of 3 1/2% per
annum for the Valuation Date as of which the first payment was calculated was
$1.100000. Annuity Unit values will not be the same as Accumulation Unit values
because the former reflect the 3 1/2% assumed interest rate used in the annuity
rate calculations. When the Annuity Unit value of $1.100000 is divided into the
first monthly payment the number of Annuity Units represented by that payment is
determined to be 267.5818. The value of this same number of Annuity Units will
be paid in each subsequent month under most options. Assume further that the net
investment factor for the Valuation Period applicable to the next annuity
payment is 1.000190. Multiplying this factor by .999906 (the one-day adjustment
factor for the assumed interest rate of 3 1/2% per annum) produces a factor of
1.000096. This is then multiplied by the Annuity Unit value on the immediately
preceding Valuation Date (assumed here to be $1.105000). The result is an
Annuity Unit value of $1.105106 for the current monthly payment. The current
monthly payment is then determined by multiplying the number of Annuity Units by
the current Annuity Unit value, or 267.5818 times $1.105106, which produces a
current monthly payment of $295.71.
Method for Determining Variable Annuity Option V Redemption and Illustration
Using Hypothetical Example. As discussed in the Prospectus under "DESCRIPTION OF
VARIABLE ANNUITY OPTIONS," the Annuitant, or the beneficiary if the Annuitant
has died, may choose at any time to redeem the Contract and receive its commuted
value. Commuted value is the present value of remaining payments commuted at
3 1/2% interest. However, if the annuitant elects the redemption, the remaining
payments are deemed to be the remaining payments that would have been payable
had the
5
<PAGE>
Surrender Value, rather than the Accumulation Value, been applied at the Annuity
Date. The determination of the commuted value upon redemption by an Annuitant
may be illustrated by the following hypothetical example.
Assume an annuity period of 10 years or longer is elected. The number of Annuity
Units each payment is based on would be calculated using the Accumulated Value.
Assume this results in 267.5818 Annuity Units. Assume the commuted value is
requested with 60 monthly payments remaining and a current Annuity Unit Value of
$1.200000. Based on these assumptions, the dollar amount of remaining payments
would be $321.10 a month for 60 months. If the commuted value was requested by a
beneficiary, the value would be based on the present value at 3 1/2% interest of
this stream of annuity payments. The commuted value would be $17,725.39.
However, if the commuted value is requested by an Annuitant, the value is
calculated as if the Surrender Value, not the Accumulated Value, had been used
to calculate the number of Annuity units. Assume this results in 250 Annuity
units. Based on these assumptions, the dollar amount of remaining payments would
be $300 a month for 60 months. The present value at 3 1/2% of all remaining
payments would be $16,560.72.
PERFORMANCE INFORMATION
Performance information for a Sub-Account may be compared, in reports and
promotional literature, to certain indices described in the prospectus under
"Performance Information." In addition, the Company may provide advertising,
sales literature, periodic publications or other materials information on
various topics of interest to Contract owners and prospective Contract owners.
These topics may include the relationship between sectors of the economy and the
economy as a whole and its effect on various securities markets, investment
strategies and techniques (such as value investing, market timing, dollar cost
averaging, asset allocation, constant ratio transfer and account rebalancing),
the advantages and disadvantages of investing in tax-deferred and taxable
investments, customer profiles and hypothetical purchase and investment
scenarios, financial management and tax and retirement planning, and investment
alternatives to certificates of deposit and other financial instruments,
including comparisons between the Contracts and the characteristics of and
market for such financial instruments.
TOTAL RETURN
"Total Return" refers to the total of the income generated by an investment in a
Sub-Account and of the changes of value of the principal invested (due to
realized and unrealized capital gains or losses) for a specified period, reduced
by the Sub-Accounts asset charge and any applicable contingent deferred sales
charge which would be assessed upon complete redemption of the investment.
Total Return figures are calculated by standardized methods prescribed by rules
of the Securities and Exchange Commission. The quotations are computed by
finding the average annual compounded rates of return over the specified periods
that would equate the initial amount invested to the ending redeemable values,
according to the following formula:
P(1 + T)n = ERV
Where: P = a hypothetical initial payment to the Variable Account of $1,000
T = average annual total return
n = number of years
ERV = the ending redeemable value of the $1,000 payment at the end of the
specified period
The calculation of Total Return includes the annual charges against the asset of
the Sub-Account. This charge is 1.45% on an annual basis. The calculation of
ending redeemable value assumes (1) the
6
<PAGE>
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 PURCHASE CHARGE AS PERCENTAGE
PAYMENT TO DATE OF WITHDRAWAL OF NEW PURCHASE PAYMENTS REDEEMED*
- ------------------------------- -----------------------------------------
<S> <C>
0-1 7%
2 6%
3 5%
4 4%
5 3%
6 2%
7 1%
8 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 all calendar years an amount equal to the greater of: (a)
15% of the Accumulated Value; or (b) cumulative earnings (Accumulated Value less
total gross payments not previously withdrawn) is not subject to the contingent
deferred sales charge.
The calculations of Total Return reflect the deduction of the $30 Annual
Contract fee.
SUPPLEMENTAL TOTAL RETURN INFORMATION
The Supplemental Total Return information in this section refers to the total of
the income generated by an investment in a Sub-Account and of the changes of
value of the principal invested (due to realized and unrealized capital gains or
losses) for a specified period reduced by the Sub-Account's asset charges.
However, it is assumed that the investment is NOT redeemed 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:
P(1 + T)n = 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 1.45% 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 there is
therefore no adjustment for the contingent deferred sales charge that would be
applicable if the Contract was withdrawn at the end of the period. The
calculations of Supplemental Total Return includes the deduction of the $30
Annual Contract fee.
YIELD AND EFFECTIVE YIELD -- MONEY MARKET SUB-ACCOUNT
Set forth below is hypothetical yield and effective yield information for the
Money Market Sub-Account for the seven-day period ended December 31, 1995,
calculated as if the Money Market Sub-account had been in existence at that
time:
Yield 5.53%
Effective Yield 5.68%
The yield and effective yield figures are calculated by standardized methods
prescribed by rules of the Securities and Exchange Commission. 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
7
<PAGE>
account having a balance of one accumulation unit of the Sub-Account at the
beginning of the period, subtracting a charge reflecting the annual 1.45%
deduction for mortality and expense risk and the administrative charge, dividing
the difference by the value of the account at the beginning of the same period
to obtain the base period return, and then multiplying the return for a
seven-day base period by (365/7), with the resulting yield carried to the
nearest hundredth of one percent.
The Money Market Sub-Account computes effective yield by compounding the
unannualized base period return by using the formula:
Effective Yield = [(base period return + 1)(365/7)] - 1
The calculations of yield and effective yield do not reflect the $30 Annual
Contract fee.
TAX-DEFERRED ACCUMULATION
$50,000 "AFTER-TAX" INVESTMENT(1)
<TABLE>
<CAPTION>
YEARS
SINCE TAX-DEFERRED CONVENTIONAL
INVESTMENT ANNUITY CONTRACT SAVINGS PLAN
- ----------------------------------------------- -------------------------------------------- ----------------
TAX-DEFERRED NET AMOUNT AFTER
ACCUMULATION TAXABLE LUMP TAXABLE
(BEFORE WITHDRAWALS)(2) SUM WITHDRAWAL(3) ACCUMULATION(3)
----------------------- ------------------- ----------------
<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>
1 This chart compares the accumulation of a $50,000 investment in a tax-deferred
nonqualified annuity contract and in a conventional taxable savings plan. The
$50,000 investment in the annuity contract and in the conventional savings
plan is assumed to be made on an "after-tax" basis. Only the gain in the
annuity contract will be subject to income tax upon a taxable lump sum
withdrawal.
Unlike conventional savings plans, investments in non-qualified annuity
contracts provide tax-deferred treatment on earnings. 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.
2 The chart does not reflect the following charges and expenses under the
annuity contract; 1.25% for mortality and expense risk; 0.20% administration
charges; 7% maximum deferred withdrawal charge; and $30 annual records
maintenance charge. The tax-deferred accumulation would be reduced if these
charges were reflected. No implication is intended by the use of these
assumptions that the return shown is guaranteed in any way or that the return
shown represents an average or expected rate of return over the period of the
Contracts. [IMPORTANT -- THIS IS NOT AN ILLUSTRATION OF YIELD OR RETURN.]
3 The chart assumes a 37.1% federal marginal tax rate and an 8% annual return.
The 37.1% federal marginal tax is based on a marginal tax rate of 36%,
representative of the target market, adjusted to reflect a decrease of $3 of
itemized deductions for each $100 of income over $117,950. Tax rates are
subject to change as is the tax-deferred treatment of the Contracts. Income on
non-qualified annuity contracts is taxed as ordinary income upon withdrawal. A
10% tax penalty may apply to early withdrawals. See "Federal Income Taxes" in
the prospectus.
FINANCIAL STATEMENTS
Financial Statements are included for Allmerica Financial Life Insurance and
Annuity Company. The Fulcrum Separate Account has not begun operations;
therefore, no financials have been included.
8
<PAGE>
ALLMERICA FINANCIAL
LIFE INSURANCE AND
ANNUITY COMPANY
(FORMERLY SMA LIFE ASSURANCE COMPANY)
STATUTORY FINANCIAL STATEMENTS
DECEMBER 31, 1995
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
DECEMBER 31, 1995
<TABLE>
<S> <C>
Statutory Financial Statements
Report of Independent Accountants....................................................... 1
Statement of Assets, Liabilities, Surplus and Other Funds............................... 3
Statement of Operations and Changes in Capital and Surplus.............................. 4
Statement of Cash Flows................................................................. 5
Notes to Statutory Financial Statements................................................. 6
</TABLE>
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND STOCKHOLDER OF
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(FORMERLY KNOWN AS SMA LIFE ASSURANCE COMPANY)
We have audited the accompanying statutory basis statement of assets,
liabilities, surplus and other funds of Allmerica Financial Life Insurance and
Annuity Company as of December 31, 1995 and 1994, and the related statutory
basis statements of operations and changes in capital and surplus, and of cash
flows for each of the three years ended December 31, 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As described more fully in Note 1 to the financial statements, the Company
prepared these financial statements using accounting practices prescribed or
permitted by the Insurance Department of the State of Delaware, which practices
differ from generally accepted accounting principles. The effects on the
financial statements of the variances between the statutory basis of accounting
and generally accepted accounting principles, although not reasonably
determinable, are presumed to be material.
In our opinion, because of the effects of the matter discussed in the preceding
paragraph, the financial statements referred to above do not present fairly, in
conformity with generally accepted accounting principles, the financial position
of Allmerica Financial Life Insurance and Annuity Company as of December 31,
1995 and 1994, or the results of its operations or its cash flows for each of
the three years ended December 31, 1995.
<PAGE>
TO THE BOARD OF DIRECTORS AND STOCKHOLDER OF
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(FORMERLY KNOWN AS SMA LIFE ASSURANCE COMPANY)
Page 2
In our opinion, the financial statements referred to above present fairly, in
all material respects, the assets, liabilities, surplus and other funds of
Allmerica Financial Life Insurance and Annuity Company as of December 31, 1995
and 1994, and the results of its operations and its cash flows for each of the
three years ended December 31, 1995, on the basis of accounting described in
Note 1.
As discussed in Note 1 to the financial statements, the Company's parent, State
Mutual Life Assurance Company of America, converted from a Massachusetts mutual
life insurance company to a Massachusetts stock life insurance company on
October 16, 1995. In connection with this transaction, the Company changed its
name to Allmerica Financial Life Insurance and Annuity Company and its parent
became a wholly-owned subsidiary of Allmerica Financial Corporation.
/s/ Price Waterhouse LLP
- ------------------
Price Waterhouse LLP
Boston, MA
February 5, 1996
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(A WHOLLY OWNED SUBSIDIARY OF FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY)
STATEMENT OF ASSETS, LIABILITIES, SURPLUS AND OTHER FUNDS
AS OF DECEMBER 31,
(IN THOUSANDS)
<TABLE>
<CAPTION>
ASSETS 1995 1994
---------- ----------
<S> <C> <C>
Cash......................................... $ 7,791 $ 7,248
Investments:
Bonds...................................... 1,659,575 1,595,275
Stocks..................................... 18,132 12,283
Mortgage loans............................. 239,522 295,532
Policy loans............................... 122,696 116,600
Real estate................................ 40,967 51,288
Short term investments..................... 3,500 45,239
Other invested assets...................... 40,196 27,443
---------- ----------
Total cash and investments............. 2,132,379 2,150,908
Premiums deferred and uncollected............ (1,231) 5,452
Investment income due and accrued............ 38,413 39,442
Other assets................................. 6,060 10,569
Assets held in separate accounts............. 2,978,409 1,869,695
---------- ----------
$5,154,030 $4,076,066
---------- ----------
---------- ----------
LIABILITIES, SURPLUS AND OTHER FUNDS
Liabilities:
Policy liabilities:
Life reserves.............................. $ 856,239 $ 890,880
Annuity and other fund reserves............ 865,216 928,325
Accident and health reserves............... 167,246 121,580
Claims payable............................. 11,047 11,720
---------- ----------
Total policy liabilities............... 1,899,748 1,952,505
Expenses and taxes payable................... 20,824 17,484
Other liabilities............................ 27,499 36,466
Asset valuation reserve...................... 31,556 20,786
Obligations related to separate account
business.................................... 2,967,547 1,859,502
---------- ----------
Total liabilities...................... 4,947,174 3,886,743
---------- ----------
Surplus and Other Funds:
Common stock, $1,000 par value
Authorized -- 10,000 shares
Issued and outstanding -- 2,517
shares.................................... 2,517 2,517
Paid-in surplus............................ 199,307 199,307
Unassigned surplus (deficit)............... 4,282 (13,621)
Special contingency reserves............... 750 1,120
---------- ----------
Total surplus and other funds.......... 206,856 189,323
---------- ----------
$5,154,030 $4,076,066
---------- ----------
---------- ----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(A WHOLLY OWNED SUBSIDIARY OF FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY)
STATEMENT OF OPERATIONS AND CHANGES IN CAPITAL AND SURPLUS
FOR THE YEAR ENDED DECEMBER 31,
(IN THOUSANDS)
<TABLE>
<CAPTION>
REVENUE 1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Premiums and other considerations:
Life..................................... $ 156,864 $ 195,633 $ 189,285
Annuities................................ 729,222 707,172 660,143
Accident and health...................... 31,790 31,927 35,718
Reinsurance commissions and reserve
adjustments............................. 20,198 4,195 2,309
----------- ----------- -----------
Total premiums and other
considerations........................ 938,074 938,927 887,455
Net investment income...................... 167,470 170,430 177,612
Realized capital losses, net of tax........ (2,295) (17,172) (7,225)
Other revenue.............................. 37,466 26,065 19,055
----------- ----------- -----------
Total revenue.......................... 1,140,715 1,118,250 1,076,897
----------- ----------- -----------
POLICY BENEFITS AND OPERATING EXPENSES
Policy benefits:
Claims, surrenders and other benefits.... 391,254 331,418 275,290
Increase (decrease) in policy reserves... (22,669) 40,113 15,292
----------- ----------- -----------
Total policy benefits.................. 368,585 371,531 290,582
Operating and selling expenses............. 150,215 164,175 160,928
Taxes, except capital gains tax............ 26,536 22,846 19,066
Net transfers to separate accounts......... 556,856 553,295 586,539
----------- ----------- -----------
Total policy benefits and operating
expenses.............................. 1,102,192 1,111,847 1,057,115
----------- ----------- -----------
NET INCOME................................... 38,523 6,403 19,782
Capital and Surplus, Beginning of Year....... 189,323 182,216 171,941
Unrealized capital gains (losses) on
investments............................... 8,279 12,170 (9,052)
Transfer from (to) asset valuation
reserve................................... (10,770) (9,822) 1,974
Other adjustments.......................... (18,499) (1,644) (2,429)
----------- ----------- -----------
CAPITAL AND SURPLUS, END OF YEAR............. $ 206,856 $ 189,323 $ 182,216
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(A WHOLLY OWNED SUBSIDIARY OF FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY)
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31,
(IN THOUSANDS)
<TABLE>
<CAPTION>
CASH FLOW FROM OPERATING ACTIVITIES 1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Premiums, deposits and other income......... $ 964,129 $ 962,147 $ 902,725
Allowances and reserve adjustments on
reinsurance ceded......................... 20,693 3,279 22,185
Net investment income...................... 170,949 173,294 182,843
Net increase in policy loans............... (6,096) (7,585) (7,812)
Benefits to policyholders and
beneficiaries............................. (393,472) (330,900) (298,612)
Operating and selling expenses and taxes... (153,504) (193,796) (171,533)
Net transfers to separate accounts......... (608,480) (600,760) (634,021)
Federal income tax (excluding tax on
capital gains)............................ (6,771) (19,603) (4828)
Other sources (applications)............... (13,642) 19,868 7,757
---------- ---------- ----------
NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES.................................. (26,194) 5,944 (1,296)
---------- ---------- ----------
CASH FLOW FROM INVESTING ACTIVITIES
Sales and maturities of long term
investments:
Bonds.................................... 572,640 478,512 386,414
Stocks................................... 481 63 64
Real estate and other invested assets.... 13,008 3,008 11,094
Repayment of mortgage principal.......... 55,202 65,334 79,844
Capital gains tax........................ (400) (968) (3,296)
Acquisition of long term investments:
Bonds.................................... (640,339) (508,603) (466,086)
Stocks................................... (44) -- --
(24,544)
Real estate and other invested assets.... (11,929) ( 392)
Mortgage loans........................... (415) (364) (2,266)
Other investing activities............... (3,206) 18,934 (27,254)
---------- ---------- ----------
NET CASH PROVIDED BY (USED IN) INVESTING
ACTIVITIES.................................. (15,002) 31,372 (23,878)
---------- ---------- ----------
Net change in cash and short term
investments................................. (41,196) 37,316 (25,174)
CASH AND SHORT TERM INVESTMENTS
Beginning of the year...................... 52,487 15,171 40,345
---------- ---------- ----------
End of the year............................ $ 11,291 $ 52,487 $ 15,171
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(A WHOLLY OWNED SUBSIDIARY OF FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY)
NOTES TO STATUTORY FINANCIAL STATEMENTS
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BASIS OF PRESENTATION -- Allmerica Financial Life Insurance and
Annuity Company ("Allmerica Financial" or the "Company", formerly SMA Life
Assurance Company) is a wholly owned subsidiary of SMA Financial Corp., which is
wholly owned by First Allmerica Financial Life Insurance Company ("First
Allmerica", formerly, State Mutual Life Assurance Company of America), a stock
life insurance company. On October 16, 1995, First Allmerica converted from a
mutual life insurance company to a stock life insurance company. Concurrent with
this transaction, First Allmerica became a wholly owned subsidiary of Allmerica
Financial Corporation ("AFC").
The stockholder's equity of the Company is being maintained at a minimum level
of 5% of general account assets by First Allmerica in accordance with a policy
established by vote of First Allmerica's Board of Directors.
The Company's financial statements have been prepared on the basis of accounting
practices prescribed or permitted by the Insurance Department of the State of
Delaware and in conformity with practices prescribed by the National Association
of Insurance Commissioners (NAIC), which while common in the industry, vary in
some respects from generally accepted accounting principles. Significant
differences include:
- Bonds considered to be "available-for-sale" or "trading" are
not carried at fair value and changes in fair value are not
recognized through surplus or the statement of operations,
respectively;
- The Asset Valuation Reserve, represents a reserve against
possible losses on investments and is recorded as a liability
through a charge to surplus. The Interest Maintenance Reserve
is designed to include deferred realized gains and losses (net
of applicable federal income taxes) due to interest rate
changes and is also recorded as a liability, however, the
deferred net realized investment gains and losses are amortized
into future income generally over the original period to
maturity of the assets sold. These liabilities are not required
under generally accepted accounting principles;
- Total premiums, deposits and benefits on certain
investment-type contracts are reflected in the statement of
operations, instead of using the deposit method of accounting;
- Policy acquisition costs, such as commissions, premium taxes
and other items, are not deferred and amortized in relation to
the revenue/gross profit streams from the related contracts;
- Benefit reserves are determined using statutorily prescribed
interest, morbidity and mortality assumptions instead of using
more realistic expense, interest, morbidity, mortality and
voluntary withdrawal assumptions with provision made for
adverse deviation;
- Amounts recoverable from reinsurers for unpaid losses are not
recorded as assets, but as offsets against the respective
liabilities;
- Deferred federal income taxes are not provided for temporary
differences between amounts reported in the financial
statements and those included in the tax returns;
6
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(A WHOLLY OWNED SUBSIDIARY OF FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY)
NOTES TO STATUTORY FINANCIAL STATEMENTS --CONTINUED
- Certain adjustments related to prior years are recorded as
direct charges or credits to surplus;
- Certain assets, designated as "non-admitted" assets
(principally agents' balances), are not recorded as assets, but
are charged to surplus; and,
- Costs related to other postretirement benefits are recognized
only for employees that are fully vested.
The preparation of financial statements in accordance with practices prescribed
or permitted by the Insurance Department of the State of Delaware and in
conformity with practices prescribed by the NAIC requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amount of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Certain reclassifications have been made to prior year amounts to conform with
the current year presentation.
VALUATION OF INVESTMENTS Investments in bonds are carried principally at
amortized cost, in accordance with NAIC guidelines. Preferred stocks are carried
generally at cost and common stocks are carried at market value. Policy loans
are carried principally at unpaid principal balances.
Mortgage loans on real estate are stated at unpaid principal balances, net of
unamortized discounts. Mortgage loans are reduced for losses expected by
management to be realized on transfers of mortgage loans to real estate (upon
foreclosure), on the disposition or settlement of mortgage loans and on mortgage
loans which management believes may not be collectible in full. In determining
the amount of the loss, management considers, among other things, the estimated
fair value of the underlying collateral. Investment real estate and real estate
acquired through foreclosure are carried at the lower of depreciated cost or
market value. Depreciation is generally calculated using the straight-line
method.
An asset valuation reserve (AVR) for bonds, mortgage loans, stocks, real estate,
and other invested assets is maintained by appropriations from surplus in
accordance with a formula specified by the NAIC and is classified as a
liability.
FINANCIAL INSTRUMENTS In the normal course of business, the Company enters into
transactions involving various types of financial instruments including
investments such as bonds, stocks and mortgage loans and investment and loan
commitments. These instruments involve credit risk and also may be subject to
risk of loss due to interest rate fluctuations. The Company evaluates and
monitors each financial instrument individually and, when appropriate, obtains
collateral or other security to minimize losses.
RECOGNITION OF PREMIUM INCOME AND ACQUISITION COSTS In general, premiums are
recognized as revenue over the premium paying period of the policies;
commissions and other costs of acquiring the policies are charged to operations
when incurred.
SEPARATE ACCOUNTS Separate account assets and liabilities represent segregated
funds administered and invested by the Company for the benefit of certain
variable annuity and variable life contract holders. Assets consist principally
of bonds, common stocks, mutual funds, and short term obligations at market
value. The investment income, gains, and losses of these accounts generally
accrue to the
7
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(A WHOLLY OWNED SUBSIDIARY OF FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY)
NOTES TO STATUTORY FINANCIAL STATEMENTS --CONTINUED
contract holders and therefore, are not included in the Company's net income.
Appreciation and depreciation of the Company's interest in the separate
accounts, including undistributed net investment income, is reflected in capital
and surplus.
INSURANCE RESERVES AND ANNUITY AND OTHER FUND RESERVES Reserves for life
insurance, annuities, and accident and health insurance are established in
amounts adequate to meet the estimated future obligations of policies in force.
These liabilities are computed based upon mortality, morbidity and interest rate
assumptions applicable to these coverages, including provision for adverse
deviation. Reserves are computed using interest rates ranging from 3% to 6% for
individual life insurance policies, 3% to 5 1/2% for accident and health
policies and 3 1/2% to 9 1/2% for annuity contracts. Mortality, morbidity and
withdrawal assumptions for all policies are based on the Company's own
experience and industry standards. The assumptions vary by plan, age at issue,
year of issue and duration. Claims reserves are computed based on historical
experience modified for expected trends in frequency and severity. Withdrawal
characteristics of annuity and other fund reserves vary by contract. At December
31, 1995 and 1994, approximately 84% and 77%, respectively, of the contracts
(included in both the general account and separate accounts of the Company) were
not subject to discretionary withdrawal or were subject to withdrawal at book
value less surrender charge.
All policy liabilities and accruals are based on the various estimates discussed
above. Although the adequacy of these amounts cannot be assured, management
believes that it is more likely than not that policy liabilities and accruals
will be sufficient to meet future obligations of policies in force. The amount
of liabilities and accruals, however, could be revised in the near term if the
estimates discussed above are revised.
FEDERAL INCOME TAXES AFC, its life insurance subsidiaries, First Allmerica and
Allmerica Financial and its non-insurance domestic subsidiaries file a
life-nonlife consolidated United States federal income tax return. Entities
included within the consolidated group are segregated into either a life
insurance or non-life insurance company subgroup. The consolidation of these
subgroups is subject to certain statutory restrictions on the percentage of
eligible non-life taxable operating losses that can be applied to offset life
company taxable income. Allmerica P&C and its subsidiaries file a separate
United States Federal income tax return.
The federal income tax allocation policies and procedures are subject to written
agreement between the companies. The federal income tax for all subsidiaries in
the consolidated return of AFC is calculated on a separate return basis. Any
current tax liability is paid to AFC. Tax benefits resulting from taxable
operating losses or credits of AFC's subsidiaries are not reimbursed to the
subsidiary until such losses or credits can be utilized by the subsidiary on a
separate return basis.
CAPITAL GAINS AND LOSSES Realized capital gains and losses, net of applicable
capital gains tax or benefit, exclusive of those transferred to the interest
maintenance reserve ("IMR"), are included in the statement of operations.
Unrealized capital gains and losses are reflected as direct credits or charges
to capital and surplus. The IMR, which is included in other liabilities,
establishes a reserve for realized gains and losses, net of tax, resulting from
changes in interest rates on short and long term fixed income investments. Net
realized gains and losses charged to the IMR are amortized into net investment
income over the remaining life of the investment sold. The Company uses the
seriatim method of amortization for interest related gains and losses arising
from the sale of mortgages, and uses the group method to amortize interest
related gains and losses arising from all other fixed income investments.
8
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(A WHOLLY OWNED SUBSIDIARY OF FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY)
NOTES TO STATUTORY FINANCIAL STATEMENTS --CONTINUED
NOTE 2 -- INVESTMENTS
BONDS The carrying value and fair value of investments in bonds are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1995
------------------------------------------------------
GROSS GROSS
CARRYING UNREALIZED UNREALIZED FAIR
(IN THOUSANDS) VALUE APPRECIATION DEPRECIATION VALUE
---------- ------------- ------------- ----------
<S> <C> <C> <C> <C>
Federal government bonds................................ $ 67,039 $ 3,063 $ -- $ 70,102
State, local and government agency bonds................ 13,607 2,290 23 15,874
Foreign government bonds................................ 12,121 772 249 12,644
Corporate securities.................................... 1,471,422 55,836 6,275 1,520,983
Mortgage-backed securities.............................. 95,385 951 -- 96,336
---------- ------------- ------------- ----------
Total................................................... $1,659,574 $62,912 $ 6,457 $1,715,939
---------- ------------- ------------- ----------
---------- ------------- ------------- ----------
<CAPTION>
DECEMBER 31, 1995
------------------------------------------------------
GROSS GROSS
CARRYING UNREALIZED UNREALIZED FAIR
(IN THOUSANDS) VALUE APPRECIATION DEPRECIATION VALUE
---------- ------------- ------------- ----------
<S> <C> <C> <C> <C>
Federal government bonds................................ $ 17,651 $ 8 $ 762 $ 16,897
State, local and government agency bonds................ 1,110 54 -- 1,164
Foreign government bonds................................ 31,863 83 3,735 28,211
Corporate securities.................................... 1,462,871 8,145 56,011 1,415,005
Mortgage-backed securities.............................. 81,780 268 1,737 80,311
---------- ------------- ------------- ----------
Total................................................... $1,595,275 $ 8,558 $62,245 $1,541,588
---------- ------------- ------------- ----------
---------- ------------- ------------- ----------
</TABLE>
The carrying value and fair value by contractual maturity at December 31, 1995,
are shown below. Actual maturities will differ from contractual maturities
because borrowers may have the right to call or prepay obligations with or
without call or prepayment penalties or the Company may have the right to put or
sell the obligation back to the issuer. Mortgage-backed securities are
classified based on expected maturities.
<TABLE>
<CAPTION>
CARRYING FAIR
(IN THOUSANDS) VALUE VALUE
--------------------
<S> <C> <C>
Due in one year or less................. $ 250,578 $ 258,436
Due after one year through five years... 736,003 763,179
Due after five years through ten
years.................................. 538,897 558,445
Due after ten years..................... 134,097 135,880
--------------------
Total................................... $1,659,575 $1,715,940
--------------------
--------------------
</TABLE>
MORTGAGE LOANS AND REAL ESTATE Mortgage loans and real estate investments, are
diversified by property type and location. Real estate investments have been
obtained primarily through foreclosure.
9
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(A WHOLLY OWNED SUBSIDIARY OF FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY)
NOTES TO STATUTORY FINANCIAL STATEMENTS --CONTINUED
Mortgage loans are collateralized by the related properties and are generally no
more than 75% of the property value at the time the original loan is made. At
December 31, 1995 and 1994, mortgage loan and real estate investments were
distributed by the following types and geographic regions:
<TABLE>
<CAPTION>
(IN THOUSANDS)
PROPERTY TYPE 1995 1994
- ---------------------------------------- -------- --------
<S> <C> <C>
Office buildings........................ $127,149 $140,292
Residential............................. 59,934 57,061
Retail.................................. 29,578 72,787
Industrial/Warehouse.................... 38,192 39,424
Other................................... 25,636 37,256
-------- --------
Total................................... $280,489 $346,820
-------- --------
-------- --------
<CAPTION>
GEOGRAPHIC REGION 1995 1994
- ---------------------------------------- -------- --------
<S> <C> <C>
South Atlantic.......................... $ 86,410 $ 92,934
East North Central...................... 55,991 72,704
Middle Atlantic......................... 38,666 48,688
Pacific................................. 32,803 39,892
West North Central...................... 21,486 27,377
Mountain................................ 9,939 12,211
New England............................. 24,886 26,613
East South Central...................... 5,487 6,224
West South Central...................... 4,821 20,177
-------- --------
Total................................... $280,489 $346,820
-------- --------
-------- --------
</TABLE>
Reserves for mortgage loans and real estate reflected in the above amounts were
$18.9 million and $21.0 million at December 31, 1995 and 1994, respectively.
NET INVESTMENT INCOME The components of net investment income for the year ended
December 31 were as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Bonds........................................ $122,318 $123,495 $126,729
Stocks....................................... 1,653 1,799 953
Mortgage loans............................... 26,356 31,945 40,823
Real estate.................................. 9,139 8,425 9,493
Policy loans................................. 9,486 8,797 8,215
Other investments............................ 3,951 1,651 674
Short term investments....................... 2,252 1,378 840
-------- -------- --------
175,155 177,490 187,727
Less investment expenses................... 9,703 9,138 11,026
-------- -------- --------
Net investment income, before IMR
amortization................................ 165,452 168,352 176,701
IMR amortization........................... 2,018 2,078 911
-------- -------- --------
Net investment income........................ $167,470 $170,430 $177,612
-------- -------- --------
-------- -------- --------
</TABLE>
10
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(A WHOLLY OWNED SUBSIDIARY OF FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY)
NOTES TO STATUTORY FINANCIAL STATEMENTS --CONTINUED
REALIZED CAPITAL GAINS AND LOSSES Realized capital gains (losses) on investments
for the years ended December 31 were as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Bonds........................................ $ 727 $ 645 $ 10,133
Stocks....................................... (263) (62) 16
Mortgage loans............................... (1,083) (17,142) (83)
Real estate.................................. (1,892) 605 (2,044)
-------- -------- --------
(2,511) (15,954) 8,022
Less income tax.............................. 400 968 3,296
-------- -------- --------
Net realized capital gains (losses) before
transfer to IMR............................. (2,911) (16,922) 4,726
Net realized capital gains transferred to
IMR......................................... 616 (250) (11,951)
-------- -------- --------
Net realized capital gains (losses).......... $ (2,295) $(17,172) $ (7,225)
-------- -------- --------
-------- -------- --------
</TABLE>
Proceeds from voluntary sales of investments in bonds during 1995, 1994 and 1993
were $22.4 million, $17.9 million, and $13.2 million, respectively. Gross gains
of $4.3 million, $3.0 million, and $4.5 million and gross losses of $5.2
million, $4.6 million, and $.5 million, respectively, were realized on those
sales.
NOTE 3 -- FAIR VALUE DISCLOSURES OF FINANCIAL INFORMATION
Statement of Financial Accounting Standards No. 107, "Disclosures about Fair
Value of Financial Instruments" requires disclosure of fair value information
about certain financial instruments (insurance contracts, real estate, goodwill
and taxes are excluded) for which it is practicable to estimate such values,
whether or not these instruments are included in the balance sheet. The fair
values presented for certain financial instruments are estimates which, in many
cases, may differ significantly from the amounts which could be recognized upon
immediate liquidation. In cases where market prices are not available, estimates
of fair value are based on discounted cash flow analyses which utilize current
interest rates for similar financial instruments which have comparable terms and
credit quality.
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments:
FINANCIAL ASSETS:
CASH AND SHORT TERM INVESTMENTS The carrying amounts reported in the statement
of assets, liabilities, surplus and other funds approximate fair value.
BONDS Fair values are based on quoted market prices, if available. If a quoted
market price is not available, fair values are estimated using independent
pricing sources or internally developed pricing models using discounted cash
flow analyses.
STOCKS Fair values are based on quoted market prices, if available. If a quoted
market price is not available, fair values are estimated using independent
pricing sources or internally developed pricing models.
MORTGAGE LOANS Fair values are estimated by discounting the future contractual
cash flows using the current rates at which similar loans would be made to
borrowers with similar credit ratings. The fair value of below investment grade
mortgage loans is limited to the lesser of the present value of the cash flows
or book value.
11
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(A WHOLLY OWNED SUBSIDIARY OF FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY)
NOTES TO STATUTORY FINANCIAL STATEMENTS --CONTINUED
POLICY LOANS The carrying amount reported in the statement of assets,
liabilities, surplus and other funds approximates fair value since policy loans
have no defined maturity dates and are inseparable from the insurance contracts.
FINANCIAL LIABILITIES:
ANNUITY AND OTHER FUND RESERVES (WITHOUT MORTALITY/MORBIDITY FEATURES) Fair
values for the Company's liabilities under individual annuity contracts are
estimated based on current surrender values.
The estimated fair values of the financial instruments as of December 31 were as
follows:
<TABLE>
<CAPTION>
1995 1996
---------------------- ----------------------
CARRYING FAIR CARRYING FAIR
(IN THOUSANDS) VALUE VALUE VALUE VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Financial Assets:
Cash.................................. $ 7,791 $ 7,791 $ 7,248 $ 7,248
Short term investments................ 3,500 3,500 45,239 45,239
Bonds................................. 1,659,575 1,715,940 1,595,275 1,541,588
Stocks................................ 18,132 18,414 12,283 12,590
Mortgage loans........................ 239,522 250,196 295,532 291,704
Policy loans.......................... 122,696 122,696 116,600 116,600
Financial Liabilities:
Individual annuity contracts.......... 803,099 797,024 869,230 862,662
Supplemental contracts without life
contingencies........................ 16,796 16,796 16,673 16,673
Other contract deposit funds............ 632 632 1,105 1,105
</TABLE>
NOTE 4 -- FEDERAL INCOME TAXES
The federal income tax provisions for 1995, 1994 and 1993 were $17.4 million,
$13.1 million and $8.6 million, respectively, which include taxes applicable to
realized capital gains of $.4 million, $1.0 million and $3.3 million.
The effective federal income tax rates were 27%, 67% and 30% in 1995, 1994 and
1993, respectively. The differences between the federal statutory rate and the
Company's effective tax rates are primarily related to decreases in taxable
income for the write-offs of mortgage loans; and increases in taxable income for
differences in policyholder liabilities for federal income tax purposes and
financial reporting purposes and the deferral of policy acquisition costs for
federal tax purposes.
The consolidated federal income tax returns are routinely audited by the
Internal Revenue Service (IRS) and provisions are routinely made in the
financial statements in anticipation of the results of these audits. The IRS has
completed its examination of all of the consolidated federal income tax returns
through 1988. In management's opinion, adequate tax liabilities have been
established for all years. However, the amount of these liabilities could be
revised in the near term if estimates of the Company's ultimate liability are
revised.
12
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(A WHOLLY OWNED SUBSIDIARY OF FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY)
NOTES TO STATUTORY FINANCIAL STATEMENTS --CONTINUED
NOTE 5 -- REINSURANCE
The Company participates in reinsurance to reduce overall risks, including
exposure to large losses and to permit recovery of a portion of direct losses.
Reinsurance contracts do not relieve the Company from its obligation to its
policyholders. Reinsurance financial data for the years ended December 31, is as
follows:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
Reinsurance premiums assumed................. $ 3,442 $ 3,788 $ 4,190
Reinsurance premiums ceded................... 42,914 17,430 14,798
Deduction from insurance liability including
reinsurance recoverable on unpaid claims.... 82,227 46,734 42,805
</TABLE>
Individual life premiums ceded to First Allmerica aggregated $6.8 million, $7.8
million and $9.0 million in 1995, 1994 and 1993, respectively. The Company has
also entered into various reinsurance agreements with First Allmerica under
which certain insurance risks related to individual accident and health
business, premium income and related expenses are assumed by the Company from
First Allmerica. Premiums assumed pursuant to these agreements aggregated $3.4
million, $3.8 million and $4.2 million in 1995, 1994 and 1993, respectively .
During the year Allmerica Financial entered into a coinsurance agreement to
reinsure substantially all of its yearly renewable term life insurance. Premiums
ceded and reinsurance credits taken under this agreement amounted to $25.4
million and $20.7 million, respectively. At December 31, 1995, the deduction
from insurance liability, including reinsurance recoverable on unpaid claims
under this agreement was $12.7 million.
NOTE 6 -- ACCIDENT AND HEALTH POLICY AND CLAIM LIABILITIES
The Company regularly updates its estimates of policy and claims liabilities as
new information becomes available and further events occur which may impact the
resolution of unsettled claims for its accident and health line of business.
Changes in prior estimates are generally reflected in results of operations in
the year such changes are determined to be needed and recorded.
The policy and claims liabilities related to the Company's accident and health
business were $169.7 million and $123.5 million at December 31, 1995 and 1994,
respectively. Accident and health policy and claims liabilities have been
re-estimated for all prior years and were increased by $42.5 million, $10.9
million and $13.2 million, in 1995, 1994 and 1993, respectively, including $21.9
million and $2.8 million recorded as an adjustment to surplus in 1995 and 1993,
respectively. The unfavorable development is primarily due to reserve
strengthening and adverse experience in the Company's individual accident and
health line of business.
NOTE 7 -- DIVIDEND RESTRICTIONS
Delaware has enacted laws governing the payment of dividends to stockholders by
insurers. These laws affect the dividend paying ability of the Company. Pursuant
to Delaware's statute, the maximum amount of dividends and other distributions
that an insurer may pay in any twelve month period, without the prior approval
of the Delaware Commissioner of Insurance, is limited to the greater of (i) 10%
of its statutory policyholder surplus as of the preceding December 31 or (ii)
the individual company's statutory net gain from operations for the preceding
calendar year (if such insurer is a life company) or its net income (not
including realized capital gains) for the preceding calendar year (if such
insurer is not a life company). Any dividends to be paid by an insurer, whether
or not in excess of
13
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(A WHOLLY OWNED SUBSIDIARY OF FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY)
NOTES TO STATUTORY FINANCIAL STATEMENTS --CONTINUED
the aforementioned threshold, from a source other than statutory earned surplus
would also require the prior approval of the Delaware Commissioner of Insurance.
At January 1, 1996, the Company could pay dividends of $4.3 million to First
Allmerica, without prior approval.
NOTE 8 -- OTHER RELATED PARTY TRANSACTIONS
First Allmerica provides management, operating personnel and facilities on a
cost reimbursement basis to the Company. Expenses for services received from
First Allmerica were $85.8 million, $102.5 million and $98.9 million in 1995,
1994 and 1993, respectively. The net amounts payable to First Allmerica and
affiliates for accrued expenses and various other liabilities and receivables
were $12.6 million and $8.3 million at December 31, 1995 and 1994, respectively.
NOTE 9 -- FUNDS ON DEPOSIT
In March 1994, the Company voluntarily withdrew from being licensed in New York.
In connection with the withdrawal First Allmerica, which is licensed in New
York, became qualified to sell the products previously sold by Allmerica
Financial in New York. The Company agreed with the New York Department of
Insurance to maintain, through a custodial account in New York, a security
deposit, the market value of which will at all times equal 102% of all
outstanding general account liabilities of the Company for New York
policyholders, claimants and creditors. As of December 31, 1995, the carrying
value and fair value of the assets or deposit was $295.0 million and $303.6
million, respectively, which is in excess of the required amount.
Additional securities with a carrying value of $4.2 million and $3.9 million
were on deposit with various other state and governmental authorities as of
December 31, 1995 and 1994, respectively.
NOTE 10 -- LITIGATION
The Company has been named a defendant in various legal proceedings arising in
the normal course of business. In the opinion of management, based on the advice
of legal counsel, the ultimate resolution of these proceedings will not have a
material effect on the Company's financial statements.
14
<PAGE>
PART C. OTHER INFORMATION
Item 24. FINANCIAL STATEMENTS AND EXHIBITS.
(A) FINANCIAL STATEMENTS
FINANCIAL STATEMENTS INCLUDED IN PART A
None
FINANCIAL STATEMENTS INCLUDED IN PART B
Financial Statements for Allmerica Financial Life Insurance and Annuity Company
FINANCIAL STATEMENTS INCLUDED IN PART C
None
(B) EXHIBITS
Exhibit 1 - Vote of Board of Directors of the Company Authorizing
Establishment of Registrant dated June 13, 1996 was previously
filed in Registrant's Initial Registration Statement on
September 4, 1996, and is incorporated by reference herein.
Exhibit 2 - Not Applicable. Pursuant to Rule 26a-2, the Insurance Company
may hold the assets of the Registrant NOT pursuant to a trust
indenture or other such instrument.
Exhibit 3 - (a) Wholesaling Agreement is filed herewith.
(b) Form of Sales Agreement was previously
filed in Registrant's Initial Registration Statement on
September 4, 1996, and is incorporated by reference herein.
(c) Broker's Agreement and Specimen Schedule of Sales
Commissions for Variable Annuity Policies were previously
filed on November 3, 1994 in Registration Statement
No. 33-85916, and are incorporated by reference herein.
Exhibit 4 - Policy Form was previously filed in Registrant's Initial
Registration Statement on September 4, 1996, and is
incorporated by reference herein.
Exhibit 5 - Application Form was previously filed in Registrant's Initial
Registration Statement on September 4, 1996, and is
incorporated by reference herein.
Exhibit 6 - The Depositor's Articles of Incorporation and Bylaws is filed
herewith were previously filed in Registrant's Initial
Registration Statement on September 4, 1996, and is
incorporated by reference herein.
Exhibit 7 - Not Applicable.
Exhibit 8 - Not Applicable.
Exhibit 9 - Consent and 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 - Participation Agreement is filed herewith.
<PAGE>
Item 25. DIRECTORS AND OFFICERS OF THE DEPOSITOR.
The principal business address of all the following Officers is:
440 Lincoln Street
Worcester, Massachusetts 01653
NAME AND POSITION PRINCIPAL OCCUPATION
- ----------------- ---------------------
Barry Z. Aframe Vice President and Counsel, First Allmerica
Vice President and Counsel Financial Life Insurance Company
Abigail M. Armstrong Secretary and Counsel, First Allmerica
Secretary and Counsel Financial Life Insurance Company
Richard J. Baker Vice President and Assistant Secretary, First
Vice President Allmerica Financial Life Insurance Company
Whitworth F. Bird, Jr., M.D. Vice President and Medical Director,
Vice President and Medical First Allmerica Financial Life Insurance Company
Director
Alan R. Boyer Vice President, First Allmerica Financial
Vice President Life Insurance Company
Mark R. Colborn Vice President and Controller, First Allmerica
Vice President Financial Life Insurance Company
Lisa M. Coleman Vice President, First Allmerica Financial
Vice President Life Insurance Company
Dix F. Davis Vice President, First Allmerica Financial
Vice President Life Insurance Company
Bruce A. Emond Vice President, First Allmerica Financial
Vice President Life Insurance Company
John P. Kavanaugh Vice President, First Allmerica Financial
Director and Vice President Life Insurance Company
John F. Kelly Senior Vice President, General Counsel and
Director Director First Allmerica Financial Life
Insurance Company
Joseph W. MacDougall, Jr. Vice President, Associate General Counsel and
Vice President, Associate Assistant Secretary, First Allmerica Financial
General Counsel and Life Insurance Company
Assistant Secretary
William H. Mawdsley Vice President and Actuary, First Allmerica
Vice President and Actuary Financial Life Insurance Company
James R. McAuliffe Director and President, Citizens Insurance
Director Company of America
Roderick A. McGarry, II Vice President, First Allmerica Financial Life
Vice President Insurance Company
John W. Nunley Vice President, First Allmerica Financial
Vice President Life Insurance Company
John F. O'Brien Director, President and Chief Executive
Director and Chairman of the Officer, First Allmerica Financial Life
Board Insurance Company
<PAGE>
Edward J. Parry, III Vice President and Treasurer, First
Vice President and Treasurer Allmerica Financial Life Insurance Company
Richard M. Reilly Director and Vice President, First Allmerica
Director, President and CEO Financial Life Insurance Company
Eric A. Simonsen Director, Vice President and Chief Financial
Vice President and Chief Officer, First Allmerica Financial Life
Financial Officer Insurance Company
Ann K. Tripp Vice President, First Allmerica Financial
Vice President Life Insurance Company
Jerome F. Weihs Vice President, First Allmerica Financial
Vice President Life Insurance Company
Item 26. PERSONS UNDER COMMON CONTROL WITH REGISTRANT. See attached
organization chart.
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
<TABLE>
<CAPTION>
NAME ADDRESS TYPE OF BUSINESS
- ---- ------- -----------------
<S> <C> <C>
AAM Equity Fund 440 Lincoln Street Massachusetts Grantor
Worcester MA 01653 Trust
Allmerica Asset Management, Inc. 440 Lincoln Street Investment Advisory
Worcester MA 01653 Services
Allmerica Employees Insurance 440 Lincoln Street Insurance Agency
Agency, Inc. Worcester MA 01653
Allmerica Financial Life Insurance 440 Lincoln Street Life insurance, accident
and Annuity Company Worcester, MA 01653 & health insurance,
Annuities, variable
annuities and variable
life insurance
Allmerica Financial Services 440 Lincoln Street Insurance Agency
Insurance Agency, Inc. Worcester, MA 01653
Allmerica Funds 440 Lincoln Street Investment Company
Worcester MA 01653
Allmerica Institutional 440 Lincoln Street Accounting, marketing
Services, Inc. Worcester MA 01653 and shareholder services
for investment companies
Allmerica Investment Services 440 Lincoln Street Holding Company
Inc. (formerly Allmerica Worcester, MA 01653
Financial Services, Inc.)
Allmerica Investment Management 440 Lincoln Street Investment Advisory
Company, Inc. Worcester MA 01653 Services
Allmerica Investments, Inc. 440 Lincoln Street Securities, Retail Broker-
Worcester MA 01653 Dealer
Allmerica Investment Trust 440 Lincoln Street Investment Company
(formerly SMA Investment Trust) Worcester MA 01653
<PAGE>
Allmerica Property and Casualty 440 Lincoln Street Holding Company
Companies, Inc. Worcester MA 01653
Allmerica Realty Advisors, Inc. 440 Lincoln Street Investment Advisory
Worcester MA 01653 Services
Allmerica Securities Trust 440 Lincoln Street Investment Company
Worcester MA 01653
Allmerica Services, Inc. 440 Lincoln Street Service Company
Worcester MA 01653
Allmerica Trust Company, N.A. 440 Lincoln Street Limited purpose national
Worcester MA 01653 trust company
AMGRO, Inc. 472 Lincoln Street Premium Financing
Worcester MA 01653
APC Funding Corp. 440 Lincoln Street Special purpose funding
Worcester MA 01653 vehicle for commercial paper
Beltsville Drive Limited 440 Lincoln Street Real estate
Partnership Worcester MA 01653 partnership
Citizens Corporation 440 Lincoln Street Holding Company
Worcester, MA 01653
Citizens Insurance Company 645 West Grand River Multi-line fire &
of America Howell MI 48843 casualty insurance
Citizens Insurance Company 645 West Grand River Multi-line fire &
of Ohio 8101 N. High Street casualty insurance
Citizens Management, Inc. 645 West Grand River Services management
Howell MI 48843 company
Greendale Special Placements 440 Lincoln Street Massachusetts Grantor
Fund Worcester MA 01653 Trust
The Hanover American Insurance 100 North Parkway Multi-line fire &
Company Worcester MA 01653 casualty insurance
The Hanover Insurance Company 100 North Parkway Multi-line fire &
Worcester MA 01605 casualty insurance
Hanover Texas Insurance 801 East Campbell Road Incorporated Branch
Management Company, Inc. Richardson TX 75081 Office of The Hanover
Insurance Company
Hanover Lloyd's Insurance 801 East Campbell Road Multi-line fire &
Company Richardson TX 75081 casualty insurance
Hollywood Center, Inc. 440 Lincoln Street General business
Worcester MA 01653 corporation
Linder Skokie Real Estate 440 Lincoln Street General business
Corporation Worcester MA 01653 corporation
Lloyds Credit Corporation 440 Lincoln Street Premium financing
Worcester MA 01653 service franchises
Logan Wells Water Company, Inc. 603 Heron Drive Water Company, serving
Bridgeport NJ 08014 land development
investment
<PAGE>
Massachusetts Bay Insurance 100 North Parkway Multi-line fire &
Company Worcester MA 01653 casualty
SMA Financial Corp. 440 Lincoln Street Holding Company
Worcester MA 01653
Allmerica Financial Life 440 Lincoln Street Life insurance, Insurance and
Annuity Company Worcester MA 01653 accident & health insurance,
annuities, variable life
insurance
Somerset Square, Inc. 440 Lincoln Street General business
Worcester MA 01653 corporation
Sterling Risk Management 100 North Parkway Risk management
Services, Inc. Worcester MA 01605 services
</TABLE>
Item 27. NUMBER OF CONTRACT OWNERS.
There are no Contact holders because operations have not began.
Item 28. INDEMNIFICATION.
Article VIII of the Bylaws of Allmerica Financial Life Insurance and Annuity
Company (the Depositor) state: Each Director and each Officer of the
Corporation, whether or not in office, (and his executors or administrators),
shall be indemnified or reimbursed by the Corporation against all expenses
actually and necessarily incurred by him in the defense or reasonable
settlement of any action, suit, or proceeding in which he is made a party by
reason of his being or having been a Director or Officer of the Corporation,
including any sums paid in settlement or to discharge judgement, except in
relation to matters as to which he shall be finally adjudged in such action,
suit or proceeding to be liable for negligence or misconduct in the
performance of his duties as such Director or Officer; and the foregoing
right of indemnification or reimbursement shall not affect any other rights
to which he may be entitled under the Articles of Incorporation, any statute,
bylaw, agreement, vote of stockholders, or otherwise.
Item 29. PRINCIPAL UNDERWRITERS.
(a) Allmerica Investments, Inc. also acts a principal underwriter for the
following:
-VEL Accounts: VEL '87, V EL '91, VEL Plus, Group VEL, Select VEL
and VEL II, Inheiritage Account, Allmerica Select Separate Account II,
Separate Accounts VA-K and VA-P, Allmerica Select, Individual Variable
Annuities: VA-A, VA-A, VA-A, VA-A, VA-B, VA-C, VA-G, VA-H, Separate
Accounts D, E & F, Separate Accounts KG and KGC, of Allmerica
Financial Life Insurance and Annuity Company.
- Separate Account I, Separate Accounts VA-K and VA-P, Separate
Accounts KG and KGC, Inheiritage Account, Allmerica Select
Separate Account, Group VEL Account, Fulcrum Separate Variable
Account and VEL II Account of First Allmerica Financial Life
Insurance Company.
- Allmerica Investment Trust
(b) The Principal Business Address of each of the following Directors and
Officers of Allmerica Investments, Inc. is:
440 Lincoln Street
Worcester, Massachusetts 01653
NAME POSITION OR OFFICE WITH UNDERWRITER
- ---- -----------------------------------
Emil Aberizk Vice President
Abigail M. Armstrong Secretary and Counsel
Philip J. Coffey Vice President
Thomas J. Cunningham Vice President, Chief Financial Officer
and Controller
<PAGE>
John F. Kelly Director
John F. O'Brien Director
Stephen Parker President, Director and Chief Executive Officer
Edward J. Parry, III Treasurer
Richard M. Reilly Director
Eric A. Simonsen Director
Mark Steinberg Senior Vice President
Item 30. LOCATION OF ACCOUNTS AND RECORDS.
Each account, book or other document required to be maintained by Section
31(a) of the Investment Company Act of 1940 and Rules 31a-1 to 31a-3
thereunder are maintained by the Company at 440 Lincoln Street, Worcester,
Massachusetts or on behalf of the Company by First Data Investor Services
Group, 4400 Computer Drive, Westboro, Ma 01581.
Item 31. MANAGEMENT SERVICES.
The Company provides daily unit value calculations and related services for
the Company's separate accounts.
Item 32. UNDERTAKINGS.
(a) Subject to the terms and conditions of Section 15(d) of the Securities
Exchange Act of 1934, the undersigned registrant hereby undertakes to file
with the Securities and Exchange Commission such supplementary and periodic
information, documents, and reports as may be prescribed by any rule or
regulation of the Commission heretofore or hereafter duly adopted pursuant to
authority conferred in that section.
(b) The Registrant hereby undertakes to include as part of the application to
purchase a Contract a space that the applicant can check to request a
Statement of Additional Information.
(c) The Registrant hereby undertakes to deliver a Statement of Additional
Information promptly upon written or oral request, according to the
requirements of Form N-4.
(d) Insofar as indemnification for liability arising under the 1933 Act may
be permitted to Directors, Officers and Controlling Persons of Registrant
under any registration statement, underwriting agreement or otherwise,
Registrant has been advised that, in the opinion of the Securities and
Exchange Commission, such indemnification is against public policy as
expressed in the 1933 Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by Registrant of expenses incurred or paid by a Director, Officer or
Controlling Person of Registrant in the successful defense of any action,
suit or proceeding) is asserted by such Director, Officer or Controlling
Person in connection with the securities being registered, Registrant will,
unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the 1933 Act and will be governed by the final adjudication of
such issue.
(e) The Company hereby represents that the aggregate fees and charges
under the Contracts are reasonable in relation to the services rendered,
expenses expected to be incurred, and risks assumed by the Company.
Item 33. REPRESENTATIONS CONCERNING WITHDRAWAL RESTRICTIONS ON SECTION
403(b) PLANS AND UNDER THE TEXAS OPTIONAL RETIREMENT PROGRAM.
Registrant, a separate account of 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.
2. Appropriate disclosures regarding the redemption restrictions imposed
by the Program and by Section
<PAGE>
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>
EXHIBIT TABLE
Exhibit 3(a) - Wholesaling Agreement
Exhibit 9 - Consent and Opinion of Counsel
Exhibit 10 - Consent of Independent Accountants
Exhibit 15 - Participation Agreement
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant has duly caused this Pre-Effective
Amendment No. 1 to its Registration Statement to be signed by the
undersigned, in the City of Worcester, and Commonwealth of Massachusetts, on
the 6th day of November, 1996.
FULCRUM SEPARATE ACCOUNT OF
ALLMERICA FINANCIAL LIFE INSURANCE
AND ANNUITY COMPANY
By: /s/ Abigail M. Armstrong
------------------------------
Abigail M. Armstrong
Secretary
SIGNATURES TITLE DATE
- ---------- ----- ----
/s/ John F. O'Brien Director and
John F. O'Brien Chairman of the Board
/s/ Bruce C. Anderson Director November 6, 1996
Bruce C. Anderson
/s/ John P. Kavanaugh Director and
John P. Kavanaugh Vice President
/s/ John F. Kelly Director
John F. Kelly
/s/ James R. McAuliffe Director
James R. McAuliffe
/s/ Edward J. Parry III Vice President and Treasurer
Edward J. Parry III (Chief Accounting Officer)
/s/ Richard M. Reilly Director, President and
Richard M. Reilly Chief Executive Officer
/s/ Larry C. Renfro Director
Larry C. Renfro
/s/ Eric A. Simonsen Director, Vice President and Chief
Eric A. Simonsen Financial Officer
/s/ Phillip E. Soule Director
Phillip E. Soule
<PAGE>
WHOLESALING AGREEMENT
AGREEMENT dated as of October 24, 1996 by and between Allmerica Financial
Life Insurance and Annuity Company, a Delaware insurance company
("Company"), ALLMERICA INVESTMENTS, INC., a Massachusetts corporation (the
"Underwriter"), Western Capital Financial Group, Inc., a California
corporation (the "Distributor"), and the insurance agency affiliates of the
Distributor listed on Schedule 1 to this Agreement (hereinafter referred to
as "Distributor Agency Affiliates).
WITNESSETH:
WHEREAS, the Company proposes to register with the Securities and Exchange
Commission interests in certain variable annuity contracts and variable life
insurance contracts under the Securities Act of 1933 and to issue and sell
such contracts through Underwriter acting as the principal underwriter for
such contracts; and
WHEREAS, the Company, Underwriter and Distributor desire to establish an
arrangement whereby the Distributor will act as a wholesaler for such
variable annuity contracts and variable life insurance contracts and, as
such, will recruit business firms to distribute such contracts;
NOW, THEREFORE, in consideration of their mutual promises, the Company,
Underwriter and Distributor hereby agree as follows:
1. DEFINITIONS
A. ACCOUNT -- Each and any separate account established by
the Company and listed on Schedule 2 to this Agreement, as
amended from time to time. The phrase "Account supporting
the Contracts" or "Account supporting a class of Contracts"
shall mean the separate account identified in such
Contracts as the separate account to which the Purchase
Payments made under such Contracts are allocated and as to
which income, gains and losses, whether or not realized,
from assets allocated to such separate account, are, in
accordance with such Contracts, credited to or charged
against such separate account without regard to other
income, gains, or losses of a Company or any other separate
account established by such Company.
B. CONTRACTS -- The variable annuity contracts or variable life
insurance contracts described more specifically on Schedule 3 to
this Agreement, as amended from time to time. The term "Contracts"
shall include any riders to such contracts and any other contracts
offered in connection therewith or any contracts for which such
Contracts may be exchanged or converted. The phrase "a class of
Contracts" shall mean those variable annuity contracts or variable
life insurance contracts, as the case may be, issued on the same
policy form or forms and covered by the same Registration Statement,
as shown on Schedule 3 to this Agreement.
C. REGISTRATION STATEMENT -- At any time while this Agreement is in
effect, the currently effective registration statement filed with
the SEC under the 1933 Act, or currently effective post-effective
amendment thereto, relating to a class of Contracts, including
financial statements included in, and all exhibits to, such
registration statement or post-effective amendment (for purposes of
Sections 5.A and 11 of this Agreement; however, the term
"Registration Statement" means any document that is or at any time
was a Registration Statement within the meaning of this Section 1.C).
D. PROSPECTUS -- The prospectus and any statement of additional
information included within a Registration Statement, except that,
if the prospectus and statement of additional information most
recently filed with the SEC pursuant to Rule 497 under the 1933 Act
after the date on which the Registration Statement became effective
differs from the prospectus and statement of additional information
included within the Registration Statement at the time it became
effective, the term "Prospectus" shall refer to the most recently
filed prospectus and statement of additional information filed under
Rule 497 under the 1933 Act from and after the date on which they
each shall have been filed. (For purposes of Sections 5.A and 11 of
this Agreement; however, the term "any Prospectus" means any
document that is or at any time was a Prospectus within
<PAGE>
the meaning of this Section l.C).
E. FUND -- The Palladian Trust
F. FUND REGISTRATION STATEMENT -- At any time while this Agreement
is in effect, the currently effective registration statement filed
with the SEC under the 1933 Act, or currently effective
post-effective amendment thereto, for shares of the Fund (for
purposes of Section 11 of this Agreement; however, the term "Fund
Registration Statement" means any document that is or at any time
was a Fund Registration Statement within the meaning of this Section
l.F).
G. FUND PROSPECTUS -- At any time while this Agreement is in effect,
the prospectus and statement of additional information for the Fund
most recently filed with the SEC pursuant to Rule 497 under the 1933
Act (for purposes of Section 11 of this Agreement;, however, the
term "Fund Prospectus" means any document that is or at any time was
a Fund Prospectus within the meaning of this Section l.G).
H. 1933 ACT -- The Securities Act of 1933, as amended.
I. 1934 ACT -- The Securities Exchange Act of 1934, as amended.
J. 1940 ACT -- The Investment Company Act of 1940, as amended.
K. SEC -- The Securities and Exchange Commission.
L. NASD -- The National Association of Securities Dealers, Inc.
M. REGULATIONS -- The rules and regulations promulgated by the
SEC under the 1933 Act, the 1934 Act and the 1940 Act as in
effect at the time this Agreement is executed or thereafter
promulgated, and as they may be amended from time to time.
N. TERRITORY -- The fifty states of the United States, the
District of Columbia, and all other territories of the United States.
O. STATE -- any state or commonwealth of the United States,
the District of Columbia or any other territory of the United States.
P. BROKER-DEALER -- An entity registered as a broker-dealer and
licensed as a life insurance agent or affiliated with an entity so
licensed, and recruited by the Distributor and subsequently
authorized by the Company and Underwriter to distribute the
Contracts pursuant to a sales agreement with the Company and
Underwriter entered into in accordance with Section 3 of this
Agreement.
Q. ASSOCIATED PERSON -- This term as used in this Agreement shall
have the meaning assigned to it in the 1934 Act.
R. REPRESENTATIVE -- An Associated Person of the Distributor
or a Broker-Dealer registered with the NASD as a registered
representative or principal of the Distributor or Broker-Dealer, as
the case may be.
S. PURCHASE PAYMENT -- A payment made under a Contract by an
applicant or purchaser to purchase benefits under the Contract.
T. PROCEDURES -- The administrative procedures prepared and
distributed by the Company, as such may be amended or supplemented
from time to time, relating to the solicitation, sale and delivery
of the Contracts.
U. PARTICIPATION AGREEMENT -- The agreement dated as of _________
1996 among the Company, Distributor and the Fund relating to the
investment of assets of the separate accounts of the Company in the
Fund.
2
<PAGE>
2. APPOINTMENT AND WHOLESALING RIGHT
A. The Company hereby authorizes the Distributor to represent the
Company in the wholesaling activities contemplated by this
Agreement. Where required by relevant state insurance law, the
Company hereby appoints the Distributor as an agent under such state
insurance laws to represent the Company in the wholesaling
activities contemplated by this Agreement. In those states in which
the Distributor is not licensed as an insurance agent and the
relevant state insurance law requires that the Distributor be
licensed as an insurance agent, the Company hereby appoints the
appropriate entity or individual ("Distributor Agency Affiliate")
affiliated with the Distributor (as set forth on Schedule 1 to this
Agreement, as such Schedule may be amended from time to time by the
Distributor to reflect changes in the licensing status, if any, as
required by relevant state insurance law of the Distributor or
Distributor Agency Affiliates) as its agent under the insurance laws
to engage in such wholesaling activities. The Underwriter hereby
authorizes the Distributor under applicable securities laws to
engage in the activities contemplated in this Agreement relating to
the wholesaling of the Contracts for which the Underwriter acts or
may act as principal underwriter.
B. The Distributor (both on its own behalf and on behalf of
Distributor Agency Affiliates) undertakes to use its best efforts to
recruit Broker-Dealers in accordance with Section 3 of this
Agreement, consistent with market conditions and compliance with its
responsibilities under the federal securities laws and NASD rules
and regulations. The obligations of the Distributor and Distributor
Agency Affiliates hereunder are further subject to the accuracy of
the representations and warranties of the Company and Underwriter
contained in this Agreement and to the performance by the Company of
its obligations hereunder.
C. The appointment and authorization of the Distributor and
Distributor Agency Affiliates to engage in wholesaling activities
pursuant to this Agreement is exclusive as to the Contracts listed
on Schedule 3, as amended from time to time in accordance with
Section 2.E of this Agreement. Neither the Company nor Underwriter
shall authorize any other person (as principal underwriter or
otherwise) to engage in wholesaling or distribution activities with
respect to the Contracts or to recruit business firms to engage in
wholesaling or distribution activities with respect to the Contracts
(other than business firms recommended by the Distributor pursuant
to Section 3 of this Agreement) without the Distributor's prior
written consent, nor shall the Company or Underwriter separately
engage in wholesaling or distribution activities relating to the
Contracts.
The Company shall design the Contracts, subject to consultation with
the Distributor and subject to the Distributors's right to refuse to
engage in wholesaling activities with respect to a class of
Contracts that the Distributor reasonably determines to be
unattractive from a marketing or business perspective. The
Contracts shall be issued by the Company and the variable portion
thereof shall be supported by the Accounts. The Company alone shall
be responsible for filing the initial Registration Statements and
any amendments thereto with the SEC in accordance with the 1933 Act,
1934 Act, 1940 Act and the Regulations to register interests in each
class of Contracts. The Company will not make any amendment or
rider to the Contracts or a class of Contracts, or file a
Registration Statement, or make an amendment to a Registration
Statement or supplement to a Prospectus, without the Distributor
having been given the opportunity to review any such filing,
amendment, rider or supplement. However, such opportunity to review
shall not make the Distributor responsible for the content of any
such filing, amendment, rider or supplement; the Company alone shall
be responsible for such content.
Each Company shall register its Accounts with the SEC. The
subaccounts of each Account available under the Contracts or a class
of Contracts are listed on Schedule 3 to this Agreement, as amended
from time to time. All amounts available under the Contracts shall
be invested only in the Fund (through the Account(s) supporting the
Contracts) and/or allocated to the Company's general account,
provided that such amounts may also be invested in an investment
company or investment vehicle other than the Fund
3
<PAGE>
if: (1) such other investment company is advised by the
Fund's investment adviser; (2) the Fund and/or Distributor,
in their sole discretion, consents to the use of such other
investment company or investment vehicle; (3) there is a
substitution of the Fund made in accordance with Section
10.1(e) of the Participation Agreement; or (4) the Participation
Agreement is terminated pursuant to Article X of the Participation
Agreement. The Company will not take action to operate any Account,
or any subaccount(s) of an Account listed on Schedule 3 to this
Agreement, as amended from time to time, as a management investment
company under the 1940 Act without the Fund's and Distributor's
prior written consent.
D. The Company shall obtain appropriate authorizations, to the
extent necessary, whether by registration, qualification, approval
or otherwise, for the issuance and sale of the Contracts in each
State in the Territory (provided, however, that it shall be within
the Company's discretion whether to obtain such authorization in
Guam). From time to time, the Company shall notify the Distributor
in writing of all States in the Territory in which each class of
Contracts can then lawfully be offered. To the extent that the
Company is not authorized to issue the Contracts or any class of
Contracts in any State in the Territory, the Company shall employ
all reasonable efforts to obtain such authorization in such State
(provided, however, that it shall be within such Company's
discretion whether to obtain such authorization in Guam).
E. The Distributor may unilaterally amend Schedule 1 from time to
time pursuant to Section 2.A of this Agreement. The parties to this
Agreement may amend Schedules 2 and 3 to this Agreement from time to
time by mutual agreement to reflect changes in or relating to the
Contracts and the Accounts and to add new classes of variable
annuity contracts and variable life insurance contracts to be issued
by the Company or which the Distributor will act as wholesaler. The
provisions of this Agreement shall be equally applicable to each
such class of Contracts, unless the context otherwise requires.
Schedule 4 to this Agreement may be amended only by mutual agreement
of the parties to this Agreement pursuant to Section 9 of this
Agreement.
3. RECRUITMENT OF BROKER-DEALERS AND RELATED RESPONSIBILITIES
A. The Company and Underwriter hereby authorize the Distributor and
any Distributor Agency Affiliates to contact and recommend business
firms to act as Broker-Dealers for the sale of the Contracts. The
Company shall have the right to reject any such recommendation, but
shall not do so arbitrarily or unreasonably.
B. The Company and Underwriter shall have the responsibility for:
(i) executing appropriate sales agreements with the business firms
recommended by the Distributor or Distributor Agency Affiliates and
(ii) except as limited in Section 9.C of this Agreement, appointing
such business firms, and/or Associated Persons of such firms, as
insurance agents of the Company in those States where such business
firms and/or Associated Persons possess insurance agent licenses.
None of the Distributor, Distributor Agency Affiliates, the Company
or Underwriter shall have responsibility for, or bear the cost of,
any registration or licensing of Broker-Dealers or any of their
Associated Persons with the SEC, NASD or any state insurance
governmental or regulatory agency. The costs of appointment shall
be borne as provided in Section 9.C hereof. The Company shall
maintain the appointment records of all agents appointed by the
Company to distribute the Contracts or, if required by relevant
state law, to engage in the wholesaling activities contemplated by
this Agreement.
C. Any sales agreement entered into by the Company and/or
Underwriter with a Broker-Dealer shall provide that:
(i) The Broker-Dealer (or an affiliated person duly
registered as a broker-dealer with the SEC) shall
train, supervise, and be solely responsible for the
conduct of all of its Associated Persons in the
proper method of solicitation, sale and delivery of
the Contracts for the purpose of complying on a
continuous basis with the NASD Rules of Fair
Practice and with federal and state securities and
insurance law requirements applicable in connection
with the offering and sale of the Contracts;
4
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(ii) Purchase Payments shall be made payable to the
Company and shall be delivered together with all
applications and related information in accordance
with the Procedures;
(iii) The Broker-Dealer shall be solely responsible for
all compensation paid to its Representatives and
all related tax reporting that may be required
under applicable law;
(iv) The Broker-Dealer and its Representatives shall
not use, develop or distribute any promotional,
sales or advertising material that has not been
approved in writing by the Company, Underwriter
and Distributor and filed with the appropriate
governmental or regulatory agencies; and
(v) The Broker-Dealer shall not have authority, on
behalf of the Company, Underwriter, Distributor or
Distributor Agency Affiliates: to make, alter or
discharge any Contract or other contract entered
into pursuant to a Contract; to waive any Contract
forfeiture provision; to extend the time of paying
any Purchase Payment; to receive any monies or
Purchase Payments (except for the sole purpose of
forwarding monies or Purchase Payments to the
Company); or to expend, or contract for the
expenditure of, funds of the Company, Underwriter,
Distributor or Distributor Agency Affiliates.
D. The Distributor and Distributor Agency Affiliates shall provide
assistance to the Company in the appointment process applicable to
Broker-Dealers and their Representatives as may be reasonably
acceptable to the Company.
E. The Distributor shall train, supervise, and be solely responsible
for the conduct of all of its Associated Persons (including
Distributor Agency Affiliates, but not Broker-Dealers or their
Representatives unaffiliated with the Distributor or Distributor
Agency Affiliates), for the purpose of complying on a continuous
basis with the NASD Rules of Fair Practice and with federal and
state securities and insurance laws applicable to the wholesaling
activities contemplated in this Agreement. The Distributor and
Distributor Agency Affiliates shall be responsible for the
maintenance of licenses, certifications or permits that they
determine to be necessary for themselves and/or their Associated
Persons pursuant to any federal or state securities law or state
insurance law.
F. None of the Distributor, Distributor Agency Affiliates, the
Company or Underwriter will have any supervisory responsibility (as
such supervision is contemplated by the 1934 Act or the NASD's Rules
of Fair Practice) with respect to Broker-Dealers or their
Representatives. Under no circumstances will the Distributor or
Distributor Agency Affiliates be responsible for Broker-Dealers' or
their Representatives' failure to comply with applicable law or the
Procedures.
G. The Distributor shall not have authority on behalf of the
Company: to make, alter or discharge any Contract or other contract
entered into pursuant to a Contract; to waive any Contract
forfeiture provision; to extend the time of paying any Purchase
Payment; or to receive any monies or Purchase Payments. The
Distributor shall not expend, nor contract for the expenditure of,
funds of the Company; nor shall the Distributor possess or exercise
any authority on behalf of the Company other than that expressly
conferred on the Distributor by this Agreement.
H. The Distributor and Distributor Agency Affiliates shall act as
independent contractors in the performance of their duties and
obligations under this Agreement and nothing contained in this
Agreement shall constitute the Distributor or any Distributor Agency
Affiliate or their respective Associated Persons as employees of the
Company or Underwriter in connection with the wholesaling activities
contemplated by this Agreement or otherwise.
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4. MARKETING AND SALES
A. Prior to use with any member of the public, the Company shall
provide to the Distributor copies of any promotional, sales and
advertising material developed by the Company for the Distributor's
review and written approval. Upon receipt of such material from the
Company, the Distributor shall be given a reasonable amount of time
to complete its review. The Distributor will respond on a prompt
and timely basis in approving any such material. Failure to respond
shall not relieve the Company of the obligation to obtain the prior
written approval of the Distributor.
In the event that the Distributor shall design any promotional,
sales or advertising material relating to the Contracts, the
Distributor shall provide to the Company copies of such material for
the Company's review and written approval. Upon receipt of such
material from the Distributor, the Company shall be given a
reasonable amount of time to complete its review. The Company will
respond on a prompt and timely basis in approving any such material.
Failure to respond shall not relieve the Distributor of the
obligation to obtain the prior written approval of the Company.
The Underwriter shall be responsible for filing, as required, all
promotional, sales or advertising material, whether developed by the
Company, Underwriter or Distributor, with the NASD and any federal
and state securities governmental or regulatory agencies. The
Company shall be responsible for filing, as required, such material,
whether developed by the Company, Underwriter or Distributor, with
any state insurance governmental or regulatory agencies. Neither
the Distributor nor Distributor Agency Affiliates shall have any
responsibility for any of the filings referred to in this paragraph.
If any such promotional, sales or advertising material names the
Fund or the Fund's investment adviser, the Company shall furnish
such material to the Fund or the Fund's distributor (if other than
the Distributor) prior to its use. Such material shall not be used
unless written approval has been obtained from the Fund or the
Fund's distributor. Failure of the Fund or the Fund's distributor
to respond shall not relieve the Company or Underwriter of the
obligation to obtain the prior written approval of the Fund or the
Fund's distributor.
B. The Distributor acknowledges that the Company shall have the
unconditional right to reject, in whole or in part, any application
for a Contract. In the event an application is rejected, any
Purchase Payment submitted will be returned by or on behalf of the
Company to the applicant. The Company will notify the Distributor
and the Broker-Dealer who submitted the Purchase Payment of such
action. In the event that a purchaser exercises his/her free look
right under his/her Contract, any amount to be refunded as provided
in such Contract will be so refunded to the purchaser by or on
behalf of the Company. The Company will notify the Distributor and
the Broker-Dealer who solicited the sale of the Contract of such
action.
C. The Distributor will pay the following expenses related to its
wholesaling activities contemplated by this Agreement:
(i) the compensation, if any, of its Associated Persons;
(ii) expenses associated with the initial licensing, if
any, and training of its Associated Persons
involved in the wholesaling activities;
(iii) expenses for design and development of (1)
marketing kits and prospectus covers in a design
which are agreed upon by the Company and the
Distributor, which meet regulatory requirements as
determined by the Company, and which are provided to the
Company in camera-ready format, and (2) of
promotional and advertising materials;
(iv) printing of promotional and advertising materials
(not including marketing kits and prospectuses);
(v) mailing of any promotional and advertisng material
and marketing kits in connection with the
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distribution of the contracts
(vi) fulfillment of marketing materials and forms to
broker-dealers
(vii) the printing, mailing (such mailing to be
conducted by the Distributor), and all other
activities associated with proxy solicitations;
(viii) mailing of Fund prospectuses, supplements and
periodic reports relating to the Fund to contract owners;
(ix) any additions, inserts, or packaging enhancements
to the Company's basic "Welcome Package";
(x) expenses associated with telecommunications with
the Company at the sites of the Distributor or
its Associated Persons, including site
installations and purchases, leases or rentals of
modems, terminals and other hardware, and lease
line telephone charges; and
(xi) any other expenses incurred by the Distributor or
its Associated Persons for the purpose of
carrying out the obligations of the Distributor
hereunder.
Except for such expenses and the expenses described in this Section
4.C and in Section 4.G of this Agreement, the Distributor shall not
be responsible for any expenses relating to the Contracts or
distribution of the Contracts or the processing of Contracts or
applications, including without limitation any expenses incurred in
connection with the return of Purchase Payments solicited by
Broker-Dealers for applications rejected or not timely received by
the Company, or relating to any of the matters or acts contemplated
by this Agreement.
D. The Company will pay all expenses in connection with:
(i) the preparation and filing with appropriate
governmental or regulatory agencies of the
Registration Statements and each preliminary
Prospectus and definitive Prospectus;
(ii) the preparation and issuance of the Contracts,
including the Company's basic "Welcome Package"
(any additions, inserts, or packaging
enhancements to the Company's basic "Welcome
Package" shall be at the expense of the
Distributor, as set forth in Section 4.C.(x), above).
(iii) any authorization, registration, qualification or
approval of the Contracts required under the
securities, blue-sky laws or insurance laws of
the States in the Territory;
(iv) registration fees for the Contracts payable to
the SEC, the NASD or any other governmental or
regulatory agency;
(v) printing of marketing kits materials, including
prospectus (other than those born by the Fund
pursuant to the Participation Agreement) used in
connection with the distribution of the Contracts
based on the schedule for each product as set
forth in Schedule 6.
(vi) the mailing of Contract Prospectuses and any
supplements thereto, as required by federal
securities laws, and periodic reports relating to
the Accounts to Contract owners;
(vii) the preparation and printing of administrative
forms utilized in connection with the
distribution of the Contracts, including but not
limited to the form of application;
(viii) the preparation of Contract Owner lists for the
purposes of proxy solicitations;
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<PAGE>
(ix) compensation as provided in Section 9 hereof; and
(x) any other expenses related to the distribution of
the Contracts except those set forth in Section
4.C of this Agreement and except as provided in
Section 4.E of this Agreement.
E. The Company alone shall be responsible for and bear the cost of
administration of the Contracts following their issuance including
all Contract Owner service and communication activities, but the
Distributor shall be responsible for answering inquiries from
Broker-Dealers or Representatives regarding the investment
performance of the Contracts as permitted by applicable law.
F. The Company, as agent for the Underwriter, will confirm to each
applicant for and owner of a Contract in accordance with Rule lOb-10
under the 1934 Act its acceptance of Purchase Payments and such
other transactions as are required by Rule l0b-10 or administrative
interpretations thereunder and in accordance with Release 8389 under
the 1934 Act.
G. The Distriubtor agrees to reimburse the Company for development
and implementation costs for each new product based upon the
schedule set forth in Schedule 5.
5. REPRESENTATIONS AND WARRANTIES
A. The Company and Underwriter each represent and warrant to the
Distributor and each Distributor Agency Affiliate, on the effective
date of each Registration Statement for the Contracts (or class of
Contracts) and at each time that a Contract is sold and, with
respect to Clauses (vii), (viii), (xi) and (xii) below, also on the
date of this Agreement, as follows:
(i) The Registration Statement has been declared
effective by the SEC or has become effective in
accordance with the Regulations.
(ii) The Registration Statements and the Prospectuses
each comply in all material respects with the
provisions of the 1933 Act and the 1940 Act and
the Regulations, and neither the Registration
Statements nor the Prospectuses contain an untrue
statement of a material fact or omits to state a
material fact required to be stated therein or
necessary to make the statements therein not
misleading, in light of the circumstances in
which they were made; provided, however, that none of the
representations and warranties in this Section
5.A.(ii) shall apply to statements in or omissions
from the Registration Statements or Prospectuses
made in reliance upon and in conformity with information
furnished to the Company in writing by the Distributor
expressly for use in the Registration Statements.
(iii) Neither the Company nor Underwriter has received
any notice from the SEC with respect to the Registration
Statement or the Account supporting the Contracts
described in the Registration Statements pursuant to
Section 8(e) of the 1940 Act and no stop order under the
1933 Act has been issued and no proceeding therefor has
been instituted or threatened by the SEC.
(iv) The accountants who certified the financial statements
included in the Registration Statements and Prospectuses
are independent public accountants as required by the 1933
Act and the Regulations.
(v) The financial statements included in the Registration
Statements present fairly the respective financial
positions of the Company and the Account supporting the
Contracts described in the Registration Statements as of
the dates indicated; and such financial statements have
been prepared in conformity with generally accepted
accounting principles in the United States applied on a
consistent basis.
(vi) Subsequent to the respective dates as of which information
is given in the Registration Statement
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<PAGE>
or the Prospectus, there has not been any material adverse
change in the condition, financial or otherwise, of the
Company, Underwriter or the Account supporting the
Contracts described in the Registration Statements that
would cause such information to be materially misleading.
(vii) The Company has been duly organized and is validly existing
as a corporation in good standing under the laws of its
state of domicile with full power and authority to own,
lease and operate its properties and conduct its business
in the manner described in the Prospectus; is duly
qualified to transact the business of a life insurance
company; and is in good standing, in each State in the
Territory in which the Contracts are or will be offered.
(viii) The Underwriter has been duly organized and is
validly existing as a corporation in good standing under
the laws of the Commonwealth of Massachusetts with full
power and authority to own, lease and operate its
properties and conduct its business in the manner
described in the Prospectuses; is duly registered as a
broker-dealer with the SEC and with the securities
commission of every state in the Territory with which such
registration is required; and is a member in good standing
with the NASD.
(ix) Each Account supporting the Contracts described in the
Registration Statements has been duly authorized and
established and is validly existing as a separate account
under the insurance code of the respective Company's state
of domicile, and is duly registered with the SEC as a unit
investment trust under the 1940 Act.
(x) The form of the Contracts has been approved to the
extent required by the Insurance Commissioner of each
Company's respective state of domicile and by the
governmental agency responsible for regulating insurance
companies in each other State in the Territory in which
the contracts are offered.
(xi) The execution and delivery of this Agreement and the
consummation of the transactions contemplated in this
Agreement have been duly authorized by all necessary
corporate action by the Company and Underwriter and when
so executed and delivered this Agreement will be the valid
and binding obligation of the Company and Underwriter
enforceable in accordance with its terms.
(xii) The consummation of the transactions contemplated by
this Agreement, and the fulfillment of the terms of this
Agreement, will not conflict with, result in any breach of
any of the terms and provisions of, or constitute (with or
without notice or lapse of time) a default under, the
charter or bylaws of the Company or Underwriter, or any
indenture, agreement, mortgage, deed of trust, or other
instrument to which the Company or Underwriter is a party
or by which either is bound, or violate any law, or, to
the best of the Company's or Underwriter's knowledge, any
order, rule or regulation applicable to the Company or
Underwriter of any court or of any federal or state
regulatory body, administrative agency or any other
governmental instrumentality having jurisdiction over the
Company or Underwriter or any of their respective
properties.
(xiii) No consent, approval, authorization or order of any
court or governmental authority or agency is required for
the issuance or sale of the Contracts or for the
consummation of the transactions contemplated by this
Agreement, that has not been obtained.
(xiv) The Company has filed with the SEC all statements and
other documents required for registration under the
provisions of the 1940 Act and the Regulations thereunder
of the Account supporting the Contracts described in the
Registration Statement, and such registration has been
effected; there are no agreements or documents required by
the 1933 Act, the 1940 Act, or the Regulations to be filed
with the SEC as exhibits to the Registration Statement,
that have not been so filed; and the Company has obtained
all exemptive or other orders of the SEC necessary to make
the public offering and consummate the sale of the
Contracts pursuant to this Agreement and to permit the
operation of the Accounts supporting the Contracts
described in the Registration Statements, as
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<PAGE>
contemplated in the Prospectuses.
(xv) The Contracts have been duly authorized by the Company
and conform to the descriptions thereof in the
Registration Statements and the Prospectuses and, when
issued as contemplated by the Registration Statements,
will constitute legal, validly issued and binding
obligations of the Company in accordance with their terms.
B. The Distributor represents and warrants to the Company on the date
hereof as follows:
(i) the Distributor has taken all action including, without
limitation, those necessary under its articles of
incorporation, by-laws and applicable state corporate law,
necessary to authorize the execution, delivery and
performance of this Agreement and all transactions
contemplated hereunder.
(ii) the Distributor is and during the term of this
Agreement shall remain duly registered as a broker-dealer
under the 1934 Act, a member in good standing with the
NASD, and duly registered as a broker-dealer under
applicable state securities laws.
6. ADDITIONAL RESPONSIBILITIES OF THE COMPANY
A. The Company shall use its best efforts:
(i) to maintain the registration of the Contracts with the
SEC and any state securities commissions of any State in
the Territory where the securities or blue-sky laws of
such State require registration of the Contracts,
including without limitation using its best efforts to
prevent a stop order from being issued or if a stop order
has been issued to cause such stop order to be withdrawn;
(ii) to gain approval or other authorization of the
Contract forms where required under the insurance laws and
regulations of each State in the Territory (provided,
however, that it shall be within the Company's discretion
whether to obtain such approval or authorization in Guam);
and
(iii) to keep such registration, approval and authorization in
effect thereafter so long as the Contracts are outstanding.
B. During the term of this Agreement the Company shall take all
reasonable action required to cause each class of Contracts to
comply, and to continue to comply, as annuity contracts or life
insurance contracts, as the case may be, and to cause the
Registration Statements and the Prospectus for each class of
Contracts to comply, and to continue to comply, with: all applicable
federal laws and regulations and all applicable laws and regulations
of each State in the Territory.
C. The Company, during the term of this Agreement, shall notify the
Distributor immediately:
(i) when each Registration Statement has become effective or any
post-effective amendment with respect to the Registration
Statement thereafter becomes effective;
(ii) of any request by the SEC for any amendment to a
Registration Statement or supplement to a Prospectus or
for additional information;
(iii) of any event that makes any material statement made in a
Registration Statement or a Prospectus untrue in any
material respect or results in a material omission in a
Registration Statement or a Prospectus;
(iv) of the issuance by the SEC of any stop order with respect
to a Registration Statement or any amendment thereto, or
the initiation of any proceedings for that purpose, or for
any other purpose relating to the registration and/or
offering of the Contracts (or class of Contracts);
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<PAGE>
(v) in which States in the Territory registration of the
Contracts (or class of Contracts) is required under the
securities or blue-sky laws, and when such registrations
have become effective.
D. The Company shall furnish to the Distributor without charge
promptly after filing five (5) copies of each Registration Statement
as originally filed and any pre-effective or post-effective
amendment thereto, including financial statements and all exhibits,
including exhibits incorporated therein by reference.
E. The Company shall timely file all reports, statements and
amendments required to be filed by or for each Account or class of
Contracts under the 1933 Act and/or the 1940 Act or the Regulations.
F. The Company shall deliver to the Distributor, as soon as
practicable after it becomes available, the Annual Statements for
the Company and for each Account in the form filed with their
respective state of domicile, and any quarterly reports upon the
Distributor's request.
G. The Company and Underwriter will provide the Distributor access
to such records, officers and employees of the Company, Underwriter
and each Account at reasonable times as is necessary to enable the
Distributor to fulfill its obligations under the federal securities
laws and NASD rules. The Distributor will provide the Company and
Underwriter access to such of its records, officers and employees at
reasonable times as is necessary to enable the Company and
Underwriter to fulfill their obligations under the federal
securities laws and NASD rules.
7. CONFIDENTIALITY
A. The Company and Underwriter acknowledge that the names and
addresses of all customers and prospective customers (for purposes
of this Section 7.A, the terms "customers" and "prospective
customers" shall not mean Broker-Dealers) of the Distributor, of its
parent company and of any affiliated person of the Distributor,
Distributor Agency Affiliates or of any Broker-Dealer that may come
to the attention of the Company, Underwriter or any person
affiliated with the Company or Underwriter as a result of their
relationship with the Distributor, its parent company or any
affiliated person of the Distributor, Distributor Agency Affiliates
or any Broker-Dealer and not from any independent source, are
confidential and shall not be used by the Company or Underwriter or
any person affiliated with the Company or Underwriter for any
purpose whatsoever except as may be necessary in connection with the
administration of the Contracts sold by the Broker-Dealers,
including responses to specific requests made to the Company for
service by Contract owners or efforts to prevent the replacement of
such Contracts or to encourage the exercise of options under the
terms of the Contracts. The restrictions set forth in the previous
sentence do not apply if and to the extent a Broker-Dealer knowingly
discloses the names and addresses of its customers or prospective
customers to the Company or Underwriter outside the operation of
this Agreement. In no event shall the names and addresses of such
customers and prospective customers be furnished by the Company,
Underwriter or any of their affiliated persons to any other person.
The intent of this paragraph is that neither the Company nor
Underwriter, nor persons affiliated with the Company or Underwriter,
shall utilize, or permit to be utilized, their knowledge of the
Distributor, of its parent company or of any affiliated person of
the Distributor, Distributor Agency Affiliates or any Broker-Dealer,
derived as a result of the relationship created through the funding
and sale of the Contracts or the solicitation of sales of any
product or service. This paragraph shall remain operative and in
full force and effect regardless of the termination of this
Agreement, and shall survive any such termination.
8. RECORDS
The Company, Underwriter, Distributor and Distributor Agency
Affiliates shall each maintain such accounts, books and other
documents as are required to be maintained by each of them by
applicable laws and regulations and shall preserve such accounts,
books and other documents for the periods prescribed by such laws
and regulations. The accounts, books and records of the Company,
Underwriter, the Account, the Distributor and Distributor Agency
Affiliates as to all transactions hereunder shall be maintained so
as to clearly and accurately disclose the nature and details of the
transactions, including such accounting
11
<PAGE>
information as necessary to support the reasonableness of the
amounts paid by the Company hereunder. Each party shall have the
right to inspect and audit such accounts, books and records of the
other party during normal business hours upon reasonable written
notice to the other party. Each party shall keep confidential all
information obtained pursuant to such an inspection or audit, and
shall disclose such information to third parties only upon receipt
of written authorization from the other party, except as required by
law.
9. BROKER-DEALER COMPENSATION AND DISTRIBUTOR PROMOTIONAL ALLOWANCES
A. The Company shall compensate Broker-Dealers for sales of the
Contracts by the Broker-Dealers pursuant to Schedule 4 to this
Agreement, as such Schedule may be amended from time to time upon
mutual agreement of the parties to this Agreement. Such
compensation shall be based on Purchase Payments received and
accepted by the Company for all Contracts issued on applications
obtained by the Broker-Dealers or any of their respective
Representatives. The Company will pay compensation due
Broker-Dealers in accordance with the procedures set forth on
Schedule 4. The compensation provided for in this Section 9 shall be
payable to the Broker-Dealer in accordance with the Sales Agreement
between the Underwriter and the Broker-Dealer for so long as the
Contracts are outstanding regardless of whether this Agreement is
still in effect. In addition to the Compensation payable to
Broker-Dealers, the Company shall pay Distributor a Promotional
Allowance as a reimbursement for its expenses incurred relating to
its wholesaling activities contemplated by this Agreement.
Promotional Allowances shall be payable to Distributor in such
amount and in accordance with the procedures as set forth on
Schedule 4, as such Schedule may be amended from time to time upon
mutual agreement of the parties to this Agreement. Promotional
Allowances shall be payable to Distributor for so long as the
Contracts are outstanding and this Agreement remains in effect.
If any State in the Territory by insurance rule, regulation or
statute, prohibits payment of Promotional Allowances to the
Distributor, the Distributor shall designate in writing a business
entity or natural person, including Distributor Agency Affiliates,
meeting the requirements of such State to receive any amounts that
may otherwise be payable to the Distributor hereunder. The
Distributor may change such designation from time to time upon
written notice to the Company. Any payments made by the Company to
any person or entity so designated by the Distributor shall
discharge the Company's liability to the Distributor hereunder.
If a purchaser rescinds a Contract or exercises a right to surrender
a contract for return of all Purchase Payments, the Distributor will
pay on demand the amount of any Promotional Allowances it received
on the Purchase Payments returned.
B. INDEBTEDNESS. Nothing in this Agreement shall be construed as
giving the Distributor the right to incur any indebtedness on behalf
of the Company.
C. APPOINTMENT FEES. The Company will pay the initial and renewal
fees for agent appointment by the Company of duly licensed
Distributor Agency Affiliates and Broker-Dealers and their
respective Associated Persons, as follows:
(i) that if total annual sales of the Contracts exceed
$60,000,000 during any calendar year beginning January 1,
1997, the Company will pay up to $600,000 of appointment
fees; provided, however, if sales do not meet this goal,
the Distributor will reimburse the Company for all
appointment fees paid during the calendar year.
(ii) if total sales of contracts exceed $100,000,000 during any
calendar year, the Company will pay up to $1,300,000 of
appointment fees. If sales do not meet this goal but do
exceed $60,000,000, the Distributor will reimburse the
Company for all appointment fees paid during the calendar
year over $600,000.
(iii) The Distributor will reimburse the Company for all
appointment fees over $1,3000,000 during any
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calendar year, unless prior agreement is made with the
Company.
The Company reserves the right to refuse to pay renewal fees for
individuals not meeting such minimal sales as may be agreed upon
from time to time.
D. REPORTING. The Distributor shall be responsible for all tax
reporting information, if any, that the Distributor is required to
provide under applicable tax law to its Associated Persons with
respect to the Contracts. Nothing contained in this Agreement or
any sales agreement with a Broker-Dealer is to be construed to
require the Distributor to provide any tax reporting information
directly or indirectly to any Broker-Dealer or its Representatives.
E. SURVIVAL. This Section 9 shall remain operative and in full force
and effect regardless of the termination of this Agreement, and
shall survive any such termination.
10. INVESTIGATION AND PROCEEDINGS
A. The Company, Underwriter and Distributor will cooperate fully in
any securities or insurance governmental or regulatory investigation
or proceeding or judicial proceeding arising in connection with the
offering, sale or distribution of the Contracts for which the
Distributor acts as wholesaler pursuant to this Agreement. Without
limiting the foregoing, the Company, Underwriter and Distributor
agree to notify one another promptly of any customer complaint or
notice of any governmental or regulatory investigation or proceeding
or judicial proceeding received by any of them with respect to the
Company, Underwriter, Distributor or any of their respective
Associated Persons or that may affect the issuance of any Contract
for which the Distributor acts as wholesaler pursuant to this
Agreement.
B. In the case of a substantive customer complaint, the Company,
Underwriter, Distributor and Distributor Agency Affiliates will
cooperate in investigating such complaint and any response by the
Company or Underwriter, as one party, or the Distributor or
Distributor Agency Affiliates, as another party, to such complaint
will be sent to the other party for approval not less than five
business days prior to its being sent to the customer or any
governmental or regulatory agency, except that if a more prompt
response is required, the proposed response shall be communicated by
telephone, telegraph or facsimile. Neither such party will release
any such response without the other party's prior written approval,
unless otherwise required by applicable law.
11. INDEMNIFICATION
A. The Company and Underwriter, jointly and severally, shall
indemnify and hold harmless the Distributor and Distributor Agency
Affiliates and each person who controls or is associated with the
Distributor or Distributor Agency Affiliates within the meaning of
such terms under the federal securities laws, and any officer,
director, employee or agent of the foregoing, against any and all
losses, claims, damages or liabilities, joint or several (including
any investigative, legal and other expenses reasonably incurred in
connection with, and any amounts paid in settlement of, any action,
suit or proceeding or any claim asserted), to which the Distributor,
Distributor Agency Affiliates and/or such person may become subject,
under any statute or regulation, at common law or otherwise, insofar
as such losses, claims, damages or liabilities:
(i) arise out of or are based upon any untrue statement or
alleged untrue statement of a material fact contained in
any Registration Statement, Prospectus, blue sky
application or other document executed by the Company
specifically for the purpose of qualifying any or all of the
Contracts for sale under the securities laws of any State,
promotional, sales or advertising material for the
Contracts, or the Contracts themselves (or any amendment
or supplement to any of the foregoing), or arise out of or
are based upon the omission or the alleged omission to
state therein a material fact required to be stated
therein or necessary to make the statements therein not
misleading in light of the circumstances in which they
were made; provided that this obligation to indemnify
shall not apply
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if such untrue statement or omission or such alleged
untrue statement or alleged omission was made in reliance
upon and in conformity with information furnished in
writing to the Company or Underwriters by the Distributor
specifically for use in the preparation of any such
Registration Statement, Prospectus or blue-sky application
or other document, material or Contract (or any such
amendment or supplement thereto); or
(ii) arise out of or are based upon any untrue statement or
alleged untrue statement of a material fact contained in
any Fund Registration Statement, Fund Prospectus, blue sky
application or other document executed by the Fund
specifically for the purpose of qualifying any or all of the
shares of the Fund for sale under the securities law of
any State, or in any promotional, sales or advertising
material or written information relating to the shares of
the Fund authorized by the Fund (or any amendment or
supplement to any of the foregoing), or arise out of or are
based upon the omission or the alleged omission to state
therein a material fact required to be stated therein or
necessary to make the statements therein not misleading in
light of the circumstances in which they were made, in
each case to the extent, but only to the extent, that such
untrue statement or alleged untrue statement or omission
or alleged omission was made in reliance upon and in
conformity with information furnished in writing to the
Distributor or the Fund by the Company specifically for
use in the preparation of any such Fund Registration
Statement, Fund Prospectus, blue-sky application or other
document (or any such amendment or supplement thereto); or
(iii) arise out of or are based upon any untrue statement
or alleged untrue statement or omission or alleged
omission of a material fact by or on behalf of the Company
or Underwriter (other than statements or representations
contained in the Fund Registration Statement, Fund
Prospectus or promotional, sales or advertising material
of the Fund that were not supplied by the Company,
Underwriter or persons under their control) or wrongful
conduct of the Company or Underwriter or persons under
their control with respect to the sale or distribution of
the Contracts; or
(iv) result because of the terms of any Contract or
because of any material breach by the Company or
Underwriter of any terms of this Agreement or of any
Contract or that proximately result from any activities of
the Company' or Underwriter' officers, directors,
employees or agents or their failure to take action in
connection with the sale of a Contract, to the extent of
the Company's or Underwriter's obligations under this
Agreement or otherwise, or the processing or
administration of the Contracts.
This indemnification obligation will be in addition to any liability
that the Company or Underwriter may otherwise have; provided,
however, that no person shall be entitled to indemnification
pursuant to this Section ll.a if such loss, claim, damage or
liability is due to the willful misfeasance, bad faith, gross
negligence or reckless disregard of duty by the person seeking
indemnification.
B. The Distributor shall indemnify and hold harmless the Company and
Underwriter and each person who controls or is associated with the
Company or Underwriter within the meaning of such terms under the
federal securities laws and any officer, director, employee or agent
of the foregoing, against any and all losses, claims, damages or
liabilities, joint or several (including any investigative, legal
and other expenses reasonably incurred in connection with, and any
amounts paid in settlement of, any action, suit or proceeding or any
claim asserted), to which the Company and/or any such person may
become subject under any statute or regulation, at common law or
otherwise, insofar as such losses, claims, damages or liabilities
arise out of or are based upon:
(i) any untrue statement or alleged untrue statement of a
material fact contained in any Registration Statement,
Prospectus or blue-sky application or other document
executed by the Company specifically for the purposes of
qualifying any or all of the Contracts for sale under the
securities law of any State (or any amendment or
supplement to the foregoing), or omission or alleged
omission to state therein a material fact required to be
stated therein or necessary in order to make the
statements therein not misleading, in light of the
circumstances in which they were made, in each case to the
extent, but only to the extent, that such untrue statement
or alleged untrue statement or
14
<PAGE>
omission or alleged omission was made in reliance upon and
in conformity with information furnished in writing to the
Company or Underwriter by the Distributor specifically for
use in the preparation of any such Registration Statement,
Prospectus, such blue-sky application or other document
(or any such amendment or supplement thereto); or
(ii) any use of promotional, sales or advertising material
for the Contracts not authorized by the Company or any
verbal or written misrepresentations or any unlawful sales
practices concerning the Contracts by the Distributor or
Distributor Agency Affiliates under federal securities
laws or NASD regulations (but not including state
insurance laws compliance with which is a responsibility
of the Company or Underwriter under this Agreement or
otherwise); or
(iii) claims by agents, representatives or employees of the
Distributor for compensation or other remuneration of any
type; or
(iv) any material breach by the Distributor or Distributor
Agency Affiliates of any provision of this Agreement.
This indemnification obligation will be in addition to any liability
that the Distributor may otherwise have; provided, however, that no
person shall be entitled to indemnification pursuant to this Section
ll.b if such loss, claim, damage or liability is due to the willful
misfeasance, bad faith, gross negligence or reckless disregard of
duty by the person seeking indemnification.
C. After receipt by a party entitled to indemnification
("indemnified party") under this Section 11 of notice of the
commencement of any action, if a claim in respect thereof is to be
made by the indemnified party against any person obligated to
provide indemnification under this Section 11 ("indemnifying
party"), such indemnified party will notify the indemnifying party
in writing of the commencement thereof as soon as practicable
thereafter, provided that the omission to so notify the indemnifying
party will not relieve it from any liability under this Section 11,
except to the extent that the omission results in a failure of
actual notice to the indemnifying party and such indemnifying party
is damaged solely as a result of the failure to give such notice.
The indemnifying party, upon the request of the indemnified party,
shall retain counsel reasonably satisfactory to the indemnified
party to represent the indemnified party and any others the
indemnifying party may designate in such proceeding and shall pay
the fees and disbursements of such counsel related to such
proceeding. In any such proceeding, any indemnified party shall
have the right to retain its own counsel, but the fees and expenses
of such counsel shall be at the expense of such indemnified party
unless (i) the indemnifying party and the indemnified party shall
have mutually agreed to the retention of such counsel or (ii) the
named parties to any such proceeding (including any impleaded
parties) include both the indemnifying party and the indemnified
party and representation of both parties by the same counsel would
be inappropriate due to actual or potential differing interests
between them. The indemnifying party shall not be liable for any
settlement of any proceeding effected without its written consent
but if settled with such consent or if there be a final judgment for
the plaintiff, the indemnified party shall indemnify the indemnified
party from and against any loss or liability by reason of such
settlement or judgment.
D. The indemnification provisions contained in this Section 11 shall
remain operative in full force and effect, regardless of (i) any
investigation made by or on behalf of the Company or by or on behalf
of any controlling person thereof, (ii) delivery of any Contracts
and Purchase Payments therefor, or (iii) any termination of this
Agreement. A successor by law of the Distributor or the Company, as
the case may be, shall be entitled to the benefits of the
indemnification provisions contained in this Section 11.
12. TERMINATION
A. This Agreement may be terminated at the option of any party upon
six months advance written notice to the other parties, such
termination to be effective no earlier than one year following the
date on which the first Contract is issued to the public.
15
<PAGE>
B. This Agreement shall terminate automatically if it is assigned.
This Agreement may be terminated at the option of the Company and
Underwriter, as one party, or the Distributor and Distributor Agency
Affiliates, as one party, upon the other party's material breach of
any provision of this Agreement.
C. Upon termination of this Agreement all authorizations, rights and
obligations shall cease except:
(i) the obligation to settle accounts hereunder, as set forth in
Schedule 4;
(ii) the provisions contained in Sections 7, 9 and 11 of this
Agreement; and
(iii) the indemnification provisions set forth in Section 11 of
this Agreement, or as otherwise specifically noted in this
Agreement.
13. RIGHTS, REMEDIES, ETC, ARE CUMULATIVE.
The rights, remedies and obligations contained in this Agreement are
cumulative and are in addition to any and all rights, remedies and
obligations, at law or in equity, which the parties to this
Agreement are entitled to under state and federal laws. Failure of
the Distributor or Distributor Agency Affiliates, as one party, or
the Company or Underwriter, as another party, to insist upon strict
compliance by the other party with any of the conditions of this
Agreement shall not be construed as a waiver of any of the
conditions, but the same shall remain in full force and effect. No
waiver of any of the provisions of this Agreement shall be deemed,
or shall constitute, a waiver of any other provisions, whether or
not similar, nor shall any waiver constitute a continuing waiver.
14. NOTICES
All notices hereunder are to be made in writing and shall be given:
if to the Company to:
Richard M. Reilly
President
Allmerica Financial Life Insurance and Annuity Company
40 Lincoln Street
Worcester, MA 01653
if to the Underwriter:
Stephen J. Parker
President and CEO
Allmerica Investments Inc.
440 Lincoln Street
Worcester, MA 01653
if to the Distributor or Distributor Agency Affiliates, to:
Western Capital Financial Group, Inc.
At.: President
4285 Executive Square, Suite 325
Legale, CA 92037
or such other address as such party may hereafter specify in
writing. Each such notice to a party shall be either hand
delivered or transmitted by registered or certified United States
mail with return receipt requested, and shall be effective upon
delivery.
16
<PAGE>
15. INTERPRETATION, JURISDICTION ETC.
This Agreement constitutes the whole agreement between the parties
to this Agreement relating to the wholesaling activities
contemplated in this Agreement, and supersedes all prior oral or
written negotiations between the parties to this Agreement with
respect to the subject matter of this Agreement. The parties
acknowledge that the Company, the Distributor and the Fund have
entered into the Participation Agreement in contemplation of
entering into this Agreement. This Agreement shall be construed and
the provisions of this Agreement interpreted under and in accordance
with the internal laws of the Commonwealth of Massachusetts without
giving effect to principles of conflict of laws.
16. ARBITRATION
Any controversy or claim arising out of or relating to this
Agreement, or the breach of this Agreement, shall be settled by
arbitration in accordance with the Commercial Arbitration Rules of
the American Arbitration Association, and judgment upon the award
rendered by the arbitrator(s) may be entered in any court having
jurisdiction thereof.
17. HEADINGS
The headings in this Agreement are included for convenience of
reference only and in no way define or delineate any of the
provisions of this Agreement or otherwise affect their construction
or effect.
18. COUNTERPARTS
This Agreement may be executed in two or more counterparts, each of
which taken together shall constitute one and the same instrument.
19. SEVERABILITY
This is a severable agreement and in the event that any part or
parts of this Agreement shall be held to be unenforceable to its or
their full extent, then it is the intention of the parties to this
Agreement that such part or parts shall be enforced to the extent
permitted under the law, and, in any event, that all other parts of
this Agreement shall remain valid and duly enforceable as if the
unenforceable part or parts had never been a part of this Agreement.
20. REGULATION
This Agreement shall be subject to the provisions of the 1933 Act,
1934 Act and 1940 Act and the Regulations and the rules and
regulations of the NASD, from time to time in effect, including such
exemptions from the 1940 Act as the SEC may grant, and the terms of
this Agreement shall be interpreted and construed in accordance
therewith. Without limiting the generality of the foregoing, the
term "assigned" shall not include any transaction exempted from
Section 15(b)(2) of the 1940 Act.
21. MISCELLANEOUS
For the purposes of Section 4(G), "Aggregate Sales" shall refer to
the aggregate sales through Distributor pursuant both to this
Agreement and to the Wholesaling Agreement ("First Allmerica
Agreement") with First Allmerica Financial Life Insurance Company
("First Allmerica"). Based on such Aggregate Sales, Distributor
shall be responsible for only a single Reimbursement amount, and
such Reimbursement shall be divided between the Company and First
Allmerica as they may mutually agree. For the purposes of Section
9(C), "total annual sales" shall refer to the total annual sales
through Distributor pursuant both to this Agreement and to the
First Allmerica Agreement, and "total amount of initial or renewal
fees" shall refer to the aggregate amount of such fees incurred by
the Company and First Allmerica. For the purposes of Schedule 6,
"total quantity" shall refer to the total number of marketing kits
and prospectuses provided
17
<PAGE>
pursuant both to this Agreement and to the First Allmerica Agreement.
IN WITNESS WHEREOF, each party hereto represents that the officer
signing this Agreement on the party's behalf is duly authorized to
execute this Agreement; and each party has caused this Agreement to
be duly executed by such authorized officer on the date specified
below.
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
Date: By: /s/ Richard M. Reilly
---------------------------
Name: Richard M. Reilly
Title: President and Chief Executive Officer
ALLMERICA INVESTMENTS, INC.
Date: By: /s/ Richard M. Reilly
---------------------------
Name: Richard M. Reilly
Title: Director
WESTERN CAPITAL FINANCIAL GROUP, INC.
(on its own behalf and on behalf of
the Distributor Agency Affiliates)
Date: By: /s/ M. Michael Schwartz
---------------------------
Name: M. Michael Schwartz
Title: President
18
<PAGE>
SCHEDULE I
DISTRIBUTOR AGENCY AFFILIATES
Effective______ , 1996
STATE(S) IN
DISTRIBUTOR AGENCY AFFILIATE WHICH LICENSED
- ---------------------------- --------------
Palladian Marketing Group, Inc. Connecticut, New York
19
<PAGE>
SCHEDULE 2
FUND PORTFOLIOS
AVAILABLE UNDER THE CONTRACTS
Effective _________, 1996
NAME OF SEPARATE ACCOUNT UNDERLYING FUNDS
- ------------------------ ----------------
Fulcrum Fund Separate Account of Value Portfolio of The Palladian Trust
Allmerica Financial Life Insurance
and Annuity Company
Growth Portfolio of The Palladian Trust
International Growth Portfolio of
The Palladian Trust
Global Strategic Income Portfolio of
The Palladian Trust
Global Interactive/Telecomm Portfolio
of The Palladian Trust
Money Market Fund of
Allmerica Investment Trust
NAME OF SEPARATE ACCOUNT UNDERLYING FUNDS
- ------------------------ ----------------
Fulcrum Fund Variable Life Value Portfolio of The Palladian Trust
Separate Account of
Allmerica Financial Life Insurance
and Annuity Company
Growth Portfolio of The Palladian Trust
International Growth Portfolio of
The Palladian Trust
Global Strategic Income Portfolio of
The Palladian Trust
Global Interactive/Telecomm Portfolio
of The Palladian Trust
Money Market Fund of
Allmerica Investment Trust
20
<PAGE>
SCHEDULE 3
CONTRACTS SUBJECT TO PROMOTIONAL AGENT AGREEMENT
Effective , 1996
<TABLE>
<CAPTION>
SEC
MARKETING POLICY REGISTRATION NAME OF
NAME FORM NO. NO. SEPARATE ACCOUNT
- --------- -------- ------------ -----------------
<S> <C> <C> <C>
Fulcrum Fund A3025-96 333-11377 Fulcrum Separate Account of
Variable Annuity 811-7799 Allmerica Financial Life Insurance
and Annuity Company
Fulcrum Fund Single 1030-96 Fulcrum Variable Life Separate
Premium Variable Account of Allmerica Financial Life
Life Policy Insurance and Annuity Company
</TABLE>
21
<PAGE>
SCHEDULE 4
BROKER-DEALER COMPENSATION AND
DISTRIBUTOR PROMOTIONAL ALLOWANCE SCHEDULE
VARIABLE ANNUITY CONTRACTS
(A). The maximum Broker-Dealer Commission and Distributor Service Fees
Compensation payable by the Company with respect to the sale and distribution
of the Contracts shall be 7.1% of initial and subsequent Purchase Payments
received and accepted by the Company.
(B). Of the amount specified in item (A), above, 6.00% shall be payable by
the Company as Broker-Dealer sales commissions, or in lieu thereof the
Broker-Dealer may select an alternative trail commission option, if
available. In the event that an annuitant is over 85.5 years old, the only
commission option available to the Broker-Dealer will be a 1% trail option.
Commission to the Broker-Dealer will be reduced by 0.50% for contracts sold
is states that require the Company to pay premium tax at time of issue.
(C). Of the amount specified in item (A), above, 1.10% shall be payable to
the Distributor for administrative and support services ("Variable Annuity
Promotional Allowance") with respect to the distribution of the contracts.
(D). Actual compensation paid to the Distributor will be net of an offset of
$30 for each policy anniversary and surrender of any contract issued to a
401(k) plan with Accumulated Value of less than $100,000. This offset will
apply only to the extent that the Company waives its policy fee in connection
with contracts issued in connection with such 401(k) plans.
(E). Variable Annuity Promotional Allowances will be paid to the Distributor
no less frequently than twice a month.
(F). To the extent that the commissions paid to the Broker-Dealer as outlined
in item (B), above, increases or decreases, than the Variable Annuity
Promotional Allowance, outlined in item (C), above, shall decrease or
increase accordingly, such that the total compensation paid by the Company
shall be equal to a maximum of 7.10%.
(G). Notwithstanding item (F), above, the Company reserves the right to
reduce the commission payable to a Broker-Dealer on any contract sold in
connection with a 401(k) plan, without increasing the compensation payable to
the Distributor under item (C), above.
SINGLE PREMIUM VARIABLE LIFE CONTRACTS
(A). Maximum Initial Compensation payable by the Company with respect to the
sale and distribution of Variable Life Contracts shall be 8.0% of initial and
subsequent payments. The Maximum Initial Compensation is reduced for issue
ages 65 and older, and is payable as follows:
ISSUE MAXIMUM INITIAL
AGE COMPENSATION
------------------------------------
65 and Under 8.00%
66 - 75 7.70%
76 - 85 6.75%
86 + 4.95%
Of the Maximum Initial Compensation above, between 6.50% and 7.00% shall be
payable by the Company as Broker-Dealer sales commissions. The remainder
shall be payable to the Distributor for administrative and support services
with respect to the distribution of the Contracts ("Variable Life Promotional
Allowance").
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<PAGE>
(B). In addition to the amount specified in (A) above as Maximum Initial
Compensation, 0.50% shall be payable to the Distributor as fees with respect
to product development/consultation ("Product Development Fees").
(C). In addition to the Commissions payable in (A), Broker-Dealers shall be
paid deferred compensation beginning in contract year 11 as follows:
Deferred Compensation-COI based: 50% of standard (even if the Contract charges
substandard rates)
COI charges in year 1-10, paid quarterly
beginning in contract year 11
Trail: 0.25% of account value (unloaned assets) each
quarter, beginning in contract year 11
(D). If the Distributor should determine that the level of Commissions
payable to the Broker-Dealer as set forth in (A) shall increase or decrease,
than the Variable Life Promotional Allowance shall decrease or increase
accordingly, such that the total compensation payable by the Company shall be
equal to the Maximum Initial Compensation set forth in (A).
23
<PAGE>
SCHEDULE 5
DEVELOPMENT AND ADMINISTRATIVE COST REIMBURSEMENT
(A) FULCRUM FUND VARIABLE ANNUITY
(1) With respect to the Fulcrum Fund Variable Annuity product, the
Distributor agrees to reimburse the Company for development and
implementation costs at the end of a period (the "initial Variable
Annuity measurement period") of 15 months from the later of the
following dates:
(a) the date on which the Company has obtained approval of the product in
35 states (which will include California, Florida, Arizona, Michigan,
Massachusetts, Texas, and Pennsylvania, unless (1) the Company
determines, in good faith and upon notice to the Distributor, that
approval of the product in any such state is not reasonably possible
without material modifications to the contract, or (2) in California,
if approval is not obtained because of any failure of the funds of
The Palladian Trust to satisfy the requirements of California
insurance statutes and regulations, or interpretive positions of the
California Insurance Department).
(b) the date on which the registration statement for the product under
the 1933 Act is effective; or
(c) the date on which the product is available for sale to the public, as
determined by the Company.
based on the following schedule unless the combined product sales require
Variable Annuity reimbursement of a lower amount (as described in
Section (A)(2) and Section (B)(2)):
AGGREGATE SALES REIMBURSEMENT
--------------- -------------
$0 up to $75,000,000 $600,000
$75,000,001 to $95,000,000 $480,000
$95,000,001 to $115,000,000 $360,000
$115,000,001 to $135,000,000 $240,000
$135,000,001 to $155,000,000 $120,000
$155,000,001 to $175,000,000 $50,000
$175,000,001 and over $0
(2) For sales over $175 million during the initial Variable Annuity
measurement period, the Distributor will receive a credit of $100,000 for
each $20 million (pro rata for a portion thereof), of annuity sales to
offset any SPVUL reimbursement which may be required for the Fulcrum Fund
SPVUL, as set forth in Section (B), below. Under no circumstances will
the Company make any payments to the Distributor for the credit.
(3) If Variable Annuity reimbursement is required, it will be payable in
equal monthly installments over a 24 month period from the date the
Company provides notice to the Distributor that Variable Annuity
reimbursement is due the Company.
(4) If Variable Annuity reimbursement is required and during the next 15
month period from date of expiration of the initial Variable Annuity
measurement period (the "subsequent Variable Annuity measurement period")
cumulative sales for any consecutive 15 month period reach $175 million,
then the Distributor will no longer be required to make Variable Annuity
reimbursement payments and the Company will refund all Variable Annuity
reimbursement payments made to date. If during the subsequent Variable
Annuity measurement period, cumulative sales for any three month period
(which may include the last 3 months of the initial Variable Annuity
measurement period), exceeds $44 million, then the Distributor may
suspend Variable Annuity reimbursement payments until the end of the
subsequent Variable Annuity measurement period, at which time the Company
will make a determination as to whether Variable Annuity reimbursement
payments are due. If cumulative sales reach $175 million for any period
of 15 consecutive
24
<PAGE>
months by the end of the subsequent Variable Annuity measurement period,
then the Distributor will no longer be required to make Variable Annuity
reimbursement payments and the Company will refund all Variable Annuity
reimbursement payments which have been made.
(5) If during the initial Variable Annuity measurement period or the
subsequent Variable Annuity measurement period there should be material
changes to federal tax laws ("Material Tax Law Change"), which have a
significant negative impact on the sales of variable annuities, then each
Variable Annuity reimbursement amount set forth above in Section (A)(1)
will be reduced by 50%. For the purposes of this section, "significant
negative impact" shall mean a reduction of 35 % or more in the average
monthly industry sales of individual variable annuity contracts from the
average monthly industry sales of individual variable annuity contracts
for the consecutive three month period prior to the Material Tax Law
Change, as reported by VARDS, and the Company agrees that the reduction is
reasonably attributable to the Material Tax Law Change.
(B) FULCRUM FUND SPVUL
(1) With respect to the Fulcrum Fund SPVUL product, the Distributor agrees to
reimburse the Company for development and implementation costs at the end
of a period (the "initial SPVUL measurement period") of 18 months from
the later of the following dates:
a) the date on which the Company has obtained approval of the product in
35 states (which will include California, Florida, Arizona, Michigan,
Massachusetts, Texas, and Pennsylvania, unless (1) the Company
determines, in good faith and upon notice to the Distributor, that
approval of the product in any such state is not reasonably possible
without material modifications to the contract, or (2) in California,
if approval is not obtained because of any failure of the funds of The
Palladian Trust to satisfy the requirements of California insurance
statutes and regulations, or interpretive positions of the California
Insurance Department).
b) the date on which the registration statement for the Fulcrum Fund
SPVUL under the 1933 Act is effective; or
c) the date on which the product is available for sale to the public, as
determined by the Company,
based on the following schedule unless the combined product sales require
SPVUL reimbursement of a lower amount (as described in Section (A)(2)
and Section (B)(2)):
AGGREGATE SALES REIMBURSEMENT
--------------- -------------
$0 up to $80,000,000 $700,000
$80,000,001 to $100,000,000 $580,000
$100,000,001 to $120,000,000 $460,000
$120,000,001 to $140,000,000 $340,000
$140,000,001 to $160,000,000 $220,000
$160,000,001 to $175,000,000 $100,000
$175,000,001 and over $0
(2) For sales over $175 million during the initial SPVUL measurement period,
the Distributor will receive a credit of $100,000 for each $20 million
(pro rata for a portion thereof) of SPVUL sales to offset any
reimbursement which may be required for the Fulcrum Fund Variable Annuity.
Under no circumstances will the Company make any payments to the
Distributor for the credit.
(3) If SPVUL reimbursement is required it will be payable in equal monthly
installments over the 24 month period from the date the Company provides
notice to the Distributor that SPVUL reimbursement is due the Company.
25
<PAGE>
(4) If SPVUL reimbursement is required, and during the next 24 month period
from date of expiration of the initial SPVUL measurement period ( "the
subsequent SPVUL measurement period") cumulative sales for any
consecutive 15 month period reach $175 million, then the Distributor will
no longer be required to pay SPVUL reimbursement expenses and the Company
will refund all SPVUL reimbursement payments made to date. If during the
subsequent SPVUL measurement period, cumulative sales for any three month
period (which may include up to 3 months of the initial SPVUL measurement
period), exceeds $43.75 million, then the Distributor can suspend SPVUL
reimbursement payments until the end of the subsequent SPVUL measurement
period, at which time the Company will make a determination as to whether
SPVUL reimbursement is due. If cumulative SPVUL sales reach $175 million
for any period of 15 consecutive months by the end of the subsequent
SPVUL measurement period, then the Distributor will no longer be required
to pay SPVUL reimbursement to the Company and the Company will refund all
SPVUL reimbursement payments which have been made.
(5) If during the initial or the subsequent SPVUL measurement period there
should be material changes to federal tax laws ("Material Tax Law
Change"), which have a significant negative impact on the sales of single
premium variable life contracts, then each SPVUL reimbursement amount set
forth above in Section (B)(1) will be reduced by 50%. For the purposes of
this section, "significant negative impact" shall mean a reduction of 35%
or more in the average monthly industry sales of single premium variable
life insurance from the average monthly industry sales of single premium
variable life insurance over the three month period prior to the Material
Tax Law Change, as reported by VARDS, and the Company agrees that the
reduction is reasonably attributable to the Material Tax Law Change.
26
<PAGE>
SCHEDULE 6
MARKETING KIT AND PROSPECTUS SALES MATERIALS
FULCRUM FUND VARIABLE ANNUITIES
The Company will print an initial total quantity of 25,000 marketing kits and
prospectuses to be available at the time of the product launch or on a
schedule agreed upon between the Company and the Distributor. Additional
quantities may be provided at the discretion of the Company.
The Company will provide a minimum total quantity of 65,000 marketing kits
and prospectuses each year up to a rate of 25,000 kits per $100,000,000 of
sales. Additional quantities may be provided at the discretion of the
Company.
FULCRUM FUND SPVUL
The Company will print an initial total quantity of 10,000 marketing kits and
prospectuses to be available at the time of the product launch or on a
schedule agreed upon between the Company and the Distributor. Additional
quantities may be provided at the discretion of the Company.
The Company will provide a minimum total quantity of 20,000 marketing kits
and prospectuses per year up to a total quantity of 20,000 marketing kits
and prospectus per $100,000,000 of sales. Additional quantities may be
provided at the discretion of the Company.
27
<PAGE>
EXHIBIT 9
November 11, 1996
Allmerica Financial Life Insurance and Annuity Company
440 Lincoln Street
Worcester, MA 01653
Gentlemen:
In my capacity as Counsel of Allmerica Financial Life Insurance and Annuity
Company (the "Company"), I have participated in the preparation of the
Pre-effective Amendment No. 1 to the Registration for the Fulcrum Separate
Account on Form N-4 under the Securities Act of 1933 and the Investment
Company Act of 1940, with respect to the Company's individual and group
variable annuity policies.
I am of the following opinion:
1. Fulcrum Separate Account 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 Fulcrum Separate Account are not chargeable with
liabilities arising out of any other business the Company may conduct.
3. The individual and group variable annuity policies, when issued in
accordance with the Prospectus contained in the Registration Statement and
upon compliance with applicable local law, will be legal and binding
obligations of the Company in accordance with their terms and when sold
will be legally issued, fully paid and non-assessable.
In arriving at the foregoing opinion, I have made such examination of law and
examined such records and other documents as in my judgment are necessary or
appropriate.
I hereby consent to the filing of this opinion as an exhibit to the
Pre-effective Amendment No. 1 Registration of Fulcrum Separate Account filed
under the Securities Act of 1933.
Very truly yours,
/s/Sheila B. St. Hilaire
Sheila B. St. Hilaire
Counsel
<PAGE>
EXHIBIT 10
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Statement of Additional Information
constituting part of this Pre-Effective Amendment No. 1 to the Registration
Statement for Fulcrum Separate Account of Allmerica Financial Life Insurance
and Annuity Company on Form N-4 of our report dated February 5, 1996,
relating to the financial statements of Allmerica Financial Life Insurance
and Annuity Company which appears in such Statement of Additional
Information. We also consent to the reference to us under the heading
"Experts" in such Statement of Additional Information.
/s/ Price Waterhouse, LLP
Price Waterhouse LLP
Boston, Massachusetts
November 11, 1996
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PARTICIPATION AGREEMENT
Among
THE PALLADIAN TRUST
WESTERN CAPITAL FINANCIAL GROUP, INC.
and
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
THIS AGREEMENT, made and entered into as of this 24th day of October, 1996 by
and among Allmerica Financial Life Insurance and Annuity Company
(hereinafter, the "Company"), a Delaware insurance company, on its own behalf
and on behalf of each segregated asset account of the Company set forth on
Schedule A hereto as may be amended from time to time (hereinafter referred
to as the "Accounts"), The Palladian Trust, a business trust organized under
the laws of Massachusetts (hereinafter referred to as the "Fund"), and
Western Capital Financial Group, Inc., the underwriter of the Fund
(hereinafter the "Distributor"), a California corporation.
WHEREAS, the Fund is engaged in business as an open-end management investment
company and wishes to act as the investment vehicle for separate accounts
established for variable life insurance policies and variable annuity
contracts (collectively referred to as "Variable Insurance Contracts" and
the owners of such products being referred to as "Contract Owners") to be
offered by insurance companies which have entered into participation
agreements with the Fund ("Participating Insurance Companies"); and
WHEREAS, the shares of the Fund (the "Fund shares") consist of separate
classes or series of shares, each designated a "Portfolio" and each series of
shares ("Portfolio shares") representing an interest in a particular managed
portfolio of securities and other assets; and
WHEREAS, the Fund has filed a registration statement (referred to herein as
the "Fund Registration Statement" and the prospectus contained therein,
referred to herein as the "Fund Prospectus") with the Securities and Exchange
Commission (the "SEC") on Form N-lA to register itself as an open-end
management investment company (File No. 811-08278) under the Investment
Company Act of 1940, as amended (the "1940 Act"), and the Fund shares (File
No. 33-73882) under the Securities Act of 1933, as amended (the "1933 Act");
and
WHEREAS, each Account is a validly existing separate account duly authorized
and established by resolution of the Board of Directors of the Company on
the date set forth on Schedule 2, and sets aside and invests assets
attributable to the Contracts, and the Company has registered or will have
registered each Account with the SEC as a unit investment trust under the
1940 Act before any Contracts are issued by the Account; and
WHEREAS, the Company has filed or will file registration statements with the
SEC to register under the 1933 Act certain variable annuity contracts and
variable life contracts described in Schedule 1 to this Agreement, as may be
amended from time-to-time (the "Contracts"), each such registration statement
for a class or classes of contracts listed on Schedule 1 being referred to as
the "Contracts Registration Statement," and the prospectus for each such
class or classes being referred to herein as the "Contracts Prospectus," and
the owners of such contracts; and,
WHEREAS, the Fund has obtained or has filed an application to obtain an order
from the Securities and Exchange Commission ("SEC")granting Participating
Insurance Companies and variable annuity and variable life insurance separate
accounts exemptions from the provisions of Sections
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9)a),13(a),15(a), and 15(b) of the Investment Company Act of 1940, as
amended, (hereinafter the "1940 Act") and Rules 6e(b)(15) and 6e(T)(b)(15)
thereunder, if any to the extent necessary to permit shares of the Fund to be
sold to and held by variable annuity and variable life insurance separate
accounts of both affiliated and unaffiliated life insurance companies
(hereinafter the "Shared Funding Exemptive Order"); and
WHEREAS, Palladian Advisors, Inc. (the "Investment Manager") is registered as
an investment adviser under the Investment Advisers Act of 1940 and any
applicable state securities laws and serves as overall manager to the Fund;
and
WHEREAS, the Distributor is registered as a broker-dealer with the SEC under
the Securities Exchange Act of 1934, as amended (the "1934 Act"), and is a
member in good standing of the National Association of Securities Dealers,
Inc. (the "NASD"), and
WHEREAS, the Distributor and the Fund have entered into a Distribution
Agreement (the "Fund Distribution Agreement") dated October 12, 1995
pursuant to which the Distributor will distribute Fund shares, and to the
extent permitted by applicable insurance laws and regulations, the Company
intends to purchase Portfolio shares on behalf of the Accounts to fund the
Contracts and the Distributor is authorized to sell such shares to unit
investment trusts such as the Accounts at net asset value;
NOW, THEREFORE, in consideration of their mutual promises, the Company, the
Fund and the Distributor agree as follows:
ARTICLE I. TRANSACTIONS IN FUND SHARES
1.1. The Fund agrees to sell to the Company those shares of the Fund which
the Company orders on behalf of the Accounts, executing such orders on a
daily basis in accordance with Section 1.4 of this Agreement.
1.2. The Fund agrees to make the shares of its Portfolios available for
purchase by the Company on behalf of the Accounts at the then applicable net
asset value per share on Business Days as defined in Section 1.4 of this
Agreement, and the Fund shall use reasonable efforts to calculate such net
asset value on each such Business Day. Notwithstanding any other provision
in this Agreement to the contrary, the Board of Directors of the Fund (the
"Board") may suspend or terminate the offering of Fund shares of any
Portfolio, if such action is required by law or by regulatory authorities
having jurisdiction or if, in the sole discretion of the Board acting in good
faith and in light of its fiduciary duties under Federal and any applicable
state laws, suspension or termination is necessary and in the best interests
of the shareholders of any Portfolio.
1.3. The Fund agrees to redeem, upon request, any full or fractional shares
of the Fund held by the Accounts or the Company, executing such requests at
net asset value on a daily basis in accordance
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with Section 1.4 of this Agreement and applicable provisions of the 1940 Act.
Notwithstanding the foregoing, the Fund may delay redemption of Fund shares
to the extent permitted by the 1940 Act, or any rules, regulations or orders
thereunder.
1.4.(a) For purposes of Sections 1.1, 1.2 and 1.3, the Company shall be the
agent of the Fund for the limited purpose of receiving redemption and
purchase requests from the Account (but not from the general accounts of the
Company), and receipt on any Business Day by the Company as such limited
agent of the Fund by the time prescribed in the current Contracts Prospectus
(which as of the date of execution of this Agreement is expected to be 4
p.m.). shall constitute receipt by the Fund on that same Business Day,
provided that the Fund receives notice of such redemption or purchase request
by 11:00 a.m. Eastern Time on the next following Business Day. For purposes
of this Agreement, "Business Day" shall mean any day on which the New York
Stock Exchange is open for trading or as otherwise provided in the Fund's
then currently effective Fund Prospectus.
(b) The Company shall pay for shares of each Portfolio on the same day
that it places an order with the Fund to purchase those Portfolio shares.
Payment for Portfolio shares will be made by the Account or the Company in
Federal funds transmitted to the Fund by wire to be received by 11:00 a.m. on
the day the Fund is notified of the purchase order for Portfolio shares
(unless sufficient proceeds are available from redemption of shares of other
Portfolios). If Federal funds are not received on time, such funds will be
invested, and Portfolio shares purchased thereby will be issued, as soon as
practicable.
(c) Payment for Portfolio shares redeemed by the Accounts or the Company
will be made in Federal funds transmitted to the Company by wire on the day
the Fund is notified of the redemption order of Fund shares (unless
redemption proceeds are applied to the purchase of shares of other
Portfolios), except that the Fund reserves the right to delay payment of
redemption proceeds, but in no event may such payment be delayed longer than
the period permitted under Section 22(e) of the 1940 Act. The Fund shall
bear no responsibility whatsoever for the disbursement or crediting of
redemption proceeds.
1.5. Issuance and transfer of Fund shares will be by book entry only. Stock
certificates will not be issued to the Company or the Accounts. Purchase and
redemption orders for Fund shares will be recorded in an appropriate ledger
for the Account or the appropriate SubAccount of the Account.
1.6. The Fund shall furnish notice as soon as reasonably practicable to the
Company of any income dividends or capital gain distributions payable on Fund
shares. The Company hereby elects to receive all such dividends and
distributions as are payable on any Portfolio shares in the form of
additional shares of that Portfolio. The Company reserves the right to
revoke this election and to receive all such dividends in cash. The Fund
shall notify the Company of the number of Portfolio shares so issued as
payment of such dividends and distributions.
1.7. The Fund shall use its best efforts to make the net asset value per
share for each Portfolio available to the Company by 7 p.m. Eastern Time each
Business Day, and in any event, as soon as reasonably practicable after the
net asset value per share for such series is calculated, and shall calculate
such net asset value in accordance with the then currently effective Fund
Prospectus.
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Neither the Fund, the Distributor, nor the Investment Manager nor any of
their affiliates shall be liable for any information provided to the Company
pursuant to this Agreement which information is based on incorrect
information supplied by the Company to the Fund, the Distributor or the
Investment Manager.
1.8. While this Agreement is in effect, the Company agrees that all amounts
available for investment under the Contracts shall be invested only in the
Fund and/or allocated to the Company's general account, provided that such
amounts may also be invested in an investment other than the Fund if:
(a) such other investment company is advised by the Fund's Investment
Manager;
(b) the Fund and/or the Distributor, in their sole discretion, consents
to the use of such other investment company;
(c) this Agreement is terminated pursuant to Article X of this Agreement.
The Company also agrees that it will not take any action to operate the
Accounts as management investment companies under the 1940 Act without the
Fund's and Distributor's prior written consent.
1.9. The Fund and the Distributor agree that Fund shares will be sold only to
Participating Insurance Companies, their separate accounts, and to certain
qualified pension plans, as may be permitted by Section 817 of the Internal
Revenue Code of 1986, as amended. The Fund and the Distributor will not
sell Fund shares to any insurance company, separate account, or qualified
pension plan unless an agreement containing provisions substantially the same
as Article VII of this Agreement, as it may be amended from time to time, is
in effect to govern such sales. No Fund shares of any Portfolio will be sold
to the general public.
ARTICLE II. REPRESENTATIONS AND WARRANTIES
2.1. The Company represents and warrants:
(a) that the Contracts are registered under the 1933 Act or will be so
registered before the issuance thereof;
(b) that the Contracts will be issued in compliance in all material
respects with all applicable Federal and state laws; and
(c) that the Company will require of every person distributing the
Contracts (i) that the Contracts be offered and sold in compliance in all
material respects with all applicable Federal and state laws and (ii) that at
the time it is issued each Contract is a suitable purchase for the applicant
therefor under applicable state insurance laws.
The Company further represents and warrants that it is an insurance company
duly organized and in good standing under applicable law and that it has
legally and validly authorized each of its
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Accounts as a separate account under the insurance law of its state of
domicile, and has registered or, prior to the issuance of any Contracts, will
register the Accounts as unit investment trusts in accordance with the
provisions of the 1940 Act to serve as separate accounts for the Contracts,
and that such registration will be maintained for as long as any Contracts
are outstanding.
2.2. The Fund represents and warrants that Fund shares sold pursuant to this
Agreement shall be registered under the 1933 Act and duly authorized for
issuance in accordance with applicable law and that the Fund is a business
trust duly organized and in good standing under the laws of Massachusetts.
2.3. The Fund represents that each series currently qualifies and will make
every effort to continue to qualify as a Regulated Investment Company under
Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code")
and to maintain such qualification (under Subchapter M or any successor or
similar provision), and that the Fund will notify the Company immediately
upon having a reasonable basis for believing that it has ceased to so qualify
or that it might not so qualify in the future.
2.4. The Fund represents that each series currently complies with and will
make every effort to continue to comply with Section 817(h) (or any successor
or similar provision) of the Code, and all regulations issued thereunder, and
that the Fund will notify the Company immediately upon having a reasonable
basis for believing that it has ceased to so qualify or that it might not so
qualify in the future.
2.5. The Company represents that the Contracts are currently and at the time
of issuance will be treated as annuity contracts or life insurance policies,
whichever is appropriate, under applicable provisions of the Code. The
Company shall make every effort to maintain such treatment and shall notify
the Fund and the Distributor immediately upon having a reasonable basis for
believing that the Contracts have ceased to be so treated or that they might
not be so treated in the future.
2.6. The Fund represents that the Fund's investment policies, fees and
expenses and operations are and shall at all times remain in material
compliance with the laws of Massachusetts, to the extent required to perform
this Agreement. The Fund, however, makes no representation as to whether any
aspect of its operations (including, but not limited to, fees and expenses
and investment policies) otherwise complies with the insurance laws or
regulations of any states.
2.7. The Distributor represents and warrants that the Distributor is duly
registered as a broker-dealer under the 1934 Act, is a member in good
standing with the NASD, and is duly registered as a broker-dealer under
applicable state securities laws; its operations are in compliance with
applicable law, and it will distribute the Fund shares according to
applicable law.
2.8. The Distributor, on behalf of the Investment Manager, represents and
warrants that the Investment Manager is registered as an investment adviser
under the Investment Advisers Act of 1940 and is in compliance with
applicable federal and state securities laws.
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ARTICLE III. PROSPECTUSES AND PROXY STATEMENTS;
SALES MATERIAL AND OTHER INFORMATION
3.1 At lease annually, the Fund or its designee shall provide the Company,
free of charge, with "camera ready" copy of the new prospectus as set in
type, or, at the request of the Company, as a diskette in the form sent to a
financial printer, and other assistance as is reasonably necessary in order
for the parties hereto once each year (or more frequently if the prospectus
for the Fund is supplemented or amended) to have the prospectus for the
Contracts and the prospectus for the shares printed together in one document.
The Fund or its designee shall bear the cost of printing and mailing the
Fund's prospectus portion of such document for distribution to Contract
owners of existing Contracts, and the Company shall bear the expenses of
printing and mailing the portion of such document relating to the Accounts;
provided, however, that the Company shall bear all printing expenses of such
combined document where used for distribution to prospective purchasers.
3.2 The Fund's prospectus shall state that the current Statement of
Additional Information ("SAI") for the Fund is available from the Distributor
(or, in the Fund's discretion, from the Fund),and the Distributor (or the
Fund) at its expense, shall print, or otherwise reproduce, and provide a copy
of such SAI free of charge to the Company for itself and for any Contract
owner who requests such SAI.
3.3 The Fund, at its expense, shall provide the Company with copies of its
proxy material, reports to shareholders, and other communications to
shareholders in such quantity as the Company shall reasonably require for
distributing to Contract owners. The Fund or its designee shall bear the
cost of printing, duplicating, and mailing of these documents to current
Contract owners, and the Company shall bear the cost for such documents used
for purposes other than distribution to current Contract owners.
3.4. The Company shall furnish each piece of sales literature or other
promotional material in which the Fund or the Investment Manager or the
Distributor is named to the Fund and the Distributor prior to its use. No
such material shall be used, except with the prior written permission of the
Fund and the Distributor. The Fund and the Distributor agree to respond to
any request for approval on a prompt and timely basis. Failure to respond
shall not relieve the Company of the obligation to obtain the prior written
permission of the Fund or the Distributor.
3.5. The Company shall not give any information or make any representations
or statements on behalf of the Fund or concerning the Fund other than the
information or representations contained in the Fund Registration Statement
or Fund Prospectus, as such Registration Statement and Prospectus may be
amended or supplemented from time to time, or in reports or proxy statements
for the Fund, or in sales literature or other promotional material approved
by the Fund or by the Distributor, except with the prior written permission
of the Fund or the Distributor. The Fund and the Distributor agree to
respond to any request for permission on a prompt and timely basis. Failure
to respond shall not relieve the Company of the obligation to obtain the
prior written permission of the Fund or the Distributor.
3.6. The Fund and the Distributor shall not give any information or make any
representations on behalf of the Company or concerning the Company, the
Accounts or the Contracts other than the information or representations
contained in the Contracts Registration Statement or Contracts Prospectus, as
such Registration Statement and Prospectus may be amended or supplemented
from time to time, or in published reports of the Account which are in the
public domain or approved in writing by the Company for distribution to
Contract Owners, or in sales literature or other promotional material
approved in writing by the Company, except with the prior written permission
of the Company. The Company agrees to respond to any request for permission
on a prompt and timely basis. Failure
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to respond shall not relieve the Fund or the Distributor of the obligation to
obtain the prior written permission of the Company.
3.7. Each party will provide to the other party copies of draft versions of
any registration statements, prospectuses, statements of additional
information, reports, proxy statements, solicitations for voting
instructions, sales literature and other promotional materials, applications
for exemptions, requests for no-action letters, and all amendments or
supplements to any of the above, to the extent that the other party
reasonably needs such information for purposes of preparing a report or other
filing to be filed with or submitted to a regulatory agency. If a party
requests any such information before it has been filed, the other party will
provide the requested information if then available and in the version then
available at the time of such request.
3.8. For purposes of this Article IV, the phrase "sales literature or other
promotional material" includes, but is not limited to, advertisements (such
as material published, or designed for use, in a newspaper, magazine or other
periodical, radio, television, telephone or tape recording, videotape
display, signs or billboards, motion pictures or other public media), sales
literature (i.e., any written communication distributed or made generally
available to customers or the public, including brochures, circulars,
research reports, market letters, form letters, seminar texts, or reprints or
excerpts of any other advertisement, sales literature, or published article),
educational or training materials or other communications distributed or made
generally available to some or all agents or employees, registration
statements, prospectuses, Statements of Additional Information, shareholder
reports and proxy materials, and any other material constituting sales
literature or advertising under NASD rules, the 1940 Act or the 1933 Act.
ARTICLE IV. VOTING
4.1 Subject to applicable law, the Company shall:
(a) solicit voting instructions from Contract Owners;
(b) vote Fund shares of each Portfolio attributable to Contract Owners in
accordance with instructions or proxies timely received from such Contract
Owners;
(c) vote Fund shares of each Portfolio attributable to Contract Owners for
which no instructions have been received in the same proportion as Fund
shares of such Portfolio for which instructions have been timely received; and
(d) vote Fund shares of each Portfolio held by the Company on its own behalf
or on behalf of the Account that are not attributable to Contract Owners in
the same proportion as Fund shares of such Portfolio for which instructions
have been timely received.
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The Company shall be responsible for assuring that voting privileges for the
Account are calculated in a manner consistent with the provisions set forth
above. The Company reserves the right to vote Fund shares held in any
segregated asset account in its own right, to the extent permitted by law.
4.2 Participating Insurance Companies shall be responsible for assuring that
each of their separate accounts participating in a Designated Portfolio
calculates voting privileges as required by the Shared Funding Exemptive
Order and consistent with any reasonable standards that the Fund may adopt.
4.3 The Fund will comply with all provisions of the 1940 Act requiring voting
by shareholders, and in particular the Fund will either provide for annual
meetings or comply with Section 16(c) of the 1940 Act (although the Fund is
not one of the trusts described in Section 16(c) of that Act) as well as with
Sections 16(a) and, if and when applicable, 16(b). Further, the Fund will
act in accordance with the SEC's interpretation of the requirements of
Section 16(a) with respect to periodic elections of directors or trustees and
with whatever rules the SEC may promulgate with respect thereto.
ARTICLE V. FEES AND EXPENSES
5.1. The Fund and Distributor shall pay no fee or other compensation to the
Company under this Agreement, except that if the Fund or any Portfolio adopts
and implements a plan pursuant to Rule 12b-l under the 1940 Act to finance
distribution expenses, then the Distributor may make payments to the Company
in amounts agreed to by the Company and the Distributor in writing. The
Fund currently does not intend to make any payments to finance distribution
expenses pursuant to Rule 12b-l under the 1940 Act or in contravention of
such rule, although it may make payments pursuant to Rule 12b-l in the
future. Nothing herein shall prevent the parties from otherwise agreeing to
perform, and arranging for appropriate compensation for, other services
relating to the Fund and/or the Accounts.
5.2. All expenses incident to performance by the Fund under this Agreement
(including expenses expressly assumed by the Fund pursuant to this Agreement)
shall be paid by the Fund to the extent permitted by law. Except as may
otherwise be provided in Sections 1.4 and 3.1 of this Agreement (or Article
VII, as it may be amended), the Company shall not bear any of the expenses
for the cost of registration and qualification of the Fund shares under
Federal and any state securities law, preparation and filing of the Fund
Prospectus and Fund Registration Statement, Fund proxy materials and reports,
setting the Fund Prospectus in type, setting in type and printing and
distributing the Fund proxy materials and reports to shareholders (including
the costs of printing a prospectus that constitutes an annual report), the
preparation of all statements and notices required by any Federal or state
securities law, all taxes on the issuance or transfer of Fund shares, and any
expenses permitted to be paid or assumed by the Fund pursuant to a plan, if
any, under Rule 12b-l under the 1940 Act.
ARTICLE VI. COMPLIANCE UNDERTAKINGS
6.1. The Fund undertakes to comply with Sub-chapter M and Section 817(h) of
the Code, and all regulations issued thereunder.
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6.2. The Company shall amend the Contracts Registration Statement under the
1933 Act and the Account's Registration Statement under the 1940 Act from
time to time as required in order to effect the continuous offering of the
Contracts or as may otherwise be required by applicable law. The Company
shall register and qualify the Contracts for sale to the extent required by
applicable securities laws of the various states.
6.3. The Fund shall amend the Fund Registration Statement under the 1933 Act
and the 1940 Act from time to time as required in order to effect for so long
as Fund shares are sold the continuous offering of Fund shares as described
in the then currently effective Fund Prospectus. The Fund shall register and
qualify Fund shares for sale to the extent required by applicable securities
laws of the various states.
6.4. The Company shall be responsible for assuring that any prospectus
offering a Contract that is a life insurance contract where it is reasonably
probable that such Contract would be a "modified endowment contract," as that
term is defined in Section 7702A of the Code, will identify such Contract as
a modified endowment contract (or policy).
6.5. To the extent that it decides to finance distribution expenses pursuant
to Rule 12b-l, the Fund undertakes to have a Board of Trustees, a majority of
whom are not interested persons of the Fund, formulate and approve any plan
under Rule 12b-l to finance distribution expenses.
ARTICLE VII. POTENTIAL CONFLICTS
The following provisions apply effective upon (a) the issuance of the Shared
Funding Exemptive Order, and (b) investment in the Fund by a separate account
of a Participating Insurance Company supporting variable life insurance
contracts.
7.1 The Board will monitor the Fund for the existence of any material
irreconcilable conflict between the interests of the contract owners of all
separate accounts investing in the Fund. An irreconcilable material conflict
may arise for a variety of reasons, including: (a) an action by any state
insurance regulatory authority; (b) a change in applicable federal or state
insurance, tax, or securities laws or regulations, or a public ruling,
private letter ruling, no-action or interpretative letter, or any similar
action by insurance, tax, or securities regulatory authorities; (c) an
administrative or judicial decision in any relevant proceeding; (d) the
manner in which the investments of any Portfolio are being managed; (e) a
difference in voting instructions given by variable annuity contract and
variable life insurance contract owners; or (f) a decision by an insurer to
disregard the voting instructions of contract owners. The Board shall
promptly inform the Company if it determines that an irreconcilable material
conflict exists and the implications thereof.
7.2 The Company will report any potential or existing conflicts of which it
is aware to the Board. The Company will assist the Board in carrying out its
responsibilities under the Shared Funding Exemptive Order, by providing the
Board with all information reasonably necessary for the Board to consider any
issues raised. This includes, but is not limited to, an obligation by the
Company to inform the Board whenever Contract owner voting instructions are
disregarded.
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7.3 If it is determined by a majority of the Board, or a majority of its
disinterested members, that a material irreconcilable conflict exists, the
Company and other Participating Insurance Companies shall, at their expense
and to the extent reasonably practicable (as determined by a majority of the
disinterested Board members), take whatever steps are necessary to remedy or
eliminate the irreconcilable material conflict, up to and including: (1),
withdrawing the assets allocable to some or all of the separate accounts from
the Fund or any Portfolio and reinvesting such assets in a different
investment medium, including (but not limited to) another Portfolio of the
Fund, or submitting the question whether such segregation should be
implemented to a vote of all affected contract owners and, as appropriate,
segregating the assets of any appropriate group (i.e. annuity contract
owners, life insurance contract owners, or variable contract owners of one or
more Participating Insurance Companies) that votes in favor of such
segregation, or offering to the affected contract owners the option of making
such a change; and (2), establishing a new registered management investment
company or managed separate account.
7.4 If a material irreconcilable conflict arises because of a decision by the
Company to disregard contract owner voting instructions and that decision
represents a minority position or would prelude a majority vote, the Company
may be required, at the Fund's election, to withdraw the affected Account's
investment in the Fund and terminate this Agreement with respect to such
Account provided, however, that such withdrawal and termination shall be
limited to the extent required by the foregoing material irreconcilable
conflict as determined by a majority of the disinterested members of the
Board. Any such withdrawal and termination must take place within six (6)
months after the Fund gives written notice that this provision is being
implemented, and until the end of that six month period the Fund shall
continue to accept and implement orders by the Company for the purchase (and
redemption) of shares of the Fund.
7.5 If a material irreconcilable conflict arises because a particular state
insurance regulator's decision applicable to the Company conflicts with the
majority of other state regulators, then the Company will withdraw the
affected Account's investment in the Fund and terminate this Agreement with
respect to such Account within six months after the Board informs the Company
in writing that it has determined that such decision has created an
irreconcilable material conflict; provided, however, that such withdrawal and
termination shall be limited to the extent required by the foregoing material
irreconcilable conflict as determined by a majority of the disinterested
members of the Board. Until the end of the foregoing six month period, the
Fund shall continue to accept and implement orders by the company for the
purchase (and redemption) of shares of the Fund.
7.6 For purposes of Section 7.3 through 7.6 of this Agreement, a majority of
the disinterested members of the Board shall determine whether any proposed
action adequately remedies any irreconcilable material conflict, but in no
event will the Fund be required to establish a new funding medium for the
Contracts. The Company shall not be required by Section 7.3 to establish a
new funding medium for the Contract if fan offer to do so has been declined
by vote of a majority of Contract owners materially adversely affected by the
irreconcilable material conflict. In the event that the Board determines
that any proposed action does not adequately remedy any irreconcilable
material conflict, then the Company will withdraw the Account's investment in
the Fund and terminate this Agreement within six (6) months after the Board
informs the Company in writing of the foregoing determination; provided,
however, that such withdrawal and termination shall be limited to the extent
required by any such material irreconcilable conflict as determination by a
majority of the disinterested members of the Board.
7.7 If and to the extent the Shared Funding Order contains terms and
conditions different from Sections, 3.4, 3.6, 7.1, 7.2, 7.3, 7.4 and 7.5 of
this Agreement, then the Fund and/or the Participating
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Insurance Companies, as appropriate, shall take such steps as may be
necessary to comply with the Shared Funding Exemptive Order, and Sections
3.4, 3.5, 7.1, 7.2, 7.3, 7.4 and 7.5 of the Agreement shall continue in
effect only to the extent that terms and conditions substantially identical
to such Sections are contained in the Shared Funding Exemptive Order or any
amendment thereto. If and to the extent that Rule 6e-2 and Rule 6e-3(T) are
amended, or Rule 6e-3 is adopted, to provide exemptive relief from any
provision of the 1940 Act or the rules promulgated thereunder with respect to
mixed or shared funding (as defined in the Shared Funding Exemptive Order) on
terms and conditions materially different from those contained in the Shared
Funding Exemptive Order, then (a) the Fund and/or the Participating Insurance
Companies, as appropriate, shall take such steps as may be necessary to
comply with Rules 6e-2 and 6e-3(T), as amended, and Rule 6e-3, as adopted, to
the extent such rules are applicable; and (b) Sections 3.4, 3.5, 3.6, 7.1,
7.2, 7.3, 7.4 and 7.5 of this Agreement shall continue in effect only to the
extent that terms and conditions substantially identical to such Sections are
contained in such Rule(s) as so amended or adopted.
ARTICLE VIII. INDEMNIFICATION
8.1. Indemnification by the Company
The Company agrees to indemnify and hold harmless the Fund, the Distributor
and each person who controls or is associated with the Fund or the
Distributor within the meaning of such terms under the Federal securities
laws and any officer, trustee, director, employee or agent of the foregoing,
against any and all losses, claims, damages or liabilities, joint or several
(including any investigative, legal and other expenses reasonably incurred in
connection with, and any amounts paid in settlement of, any action, suit or
proceeding or any claim asserted), to which they or any of them may become
subject under any statute or regulation, at common law or otherwise, insofar
as such losses, claims, damages or liabilities:
(a) arise out of or are based upon any untrue statement or alleged untrue
statement of any material fact contained in the Contracts Registration
Statement, Contracts Prospectus, sales literature for the Contracts or the
Contracts themselves (or any amendment or supplement to any of the
foregoing), or arise out of or are based upon the omission or the alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading in light of the
circumstances in which they were made; provided that this obligation to
indemnify shall not apply if such statement or omission or such alleged
statement or alleged omission was made in reliance upon and in conformity
with information furnished in writing to the Company by the Fund or the
Distributor (or a person authorized in writing to do so on behalf of the
Fund or the Distributor) for use in the Contracts Registration Statement,
Contracts Prospectus or in the Contracts or sales literature (or any
amendment or supplement) or otherwise for use in connection with the sale
of the Contracts or Fund shares; or
(b) arise out of or are based upon any untrue statement or alleged
untrue statement of a material fact by or on behalf of the Company
(other than statements or representations contained in the Fund
Registration Statement, Fund Prospectus or sales literature of the Fund
not supplied by the Company or persons under its control) or wrongful
conduct of the Company or persons under its control with respect to the
sale or distribution of the Contracts or Fund shares; or
(c) arise out of any untrue statement or alleged untrue statement of a
material fact contained in the Fund Registration Statement, Fund
Prospectus or sales literature of the Fund or any amendment thereof or
supplement thereto, or the omission or alleged omission to state
therein a material fact required to be stated therein or necessary to
make the statements therein not
11
<PAGE>
misleading in light of the circumstances in which they were made; or
(d) arise out of any material breach by the Company to provide the
services and furnish the materials required under the terms of this
Agreement, including but not limited to any failure to transmit a
request for redemption or purchase of Fund shares on a timely basis in
accordance with the procedures set forth in Article I.
This indemnification will be in addition to any liability which the Company
may otherwise have; provided, however, that no party shall be entitled to
indemnification if such loss, claim, damage or liability is due to the wilful
misfeasance, bad faith, gross negligence or reckless disregard of duty by the
party seeking indemnification.
8.2. Indemnification by the Distributor
The Distributor agrees to indemnify and hold harmless the Company and each
person who controls or is associated with the Company within the meaning of
such terms under the Federal securities laws and any officer, director,
employee or agent of the foregoing, against any and all losses, claims,
damages or liabilities, joint or several (including any investigative, legal
and other expenses reasonably incurred in connection with, and any amounts
paid in settlement of, any action, suit or proceeding or any claim asserted),
to which they or any of them may become subject under any statute or
regulation, at common law or otherwise, insofar as such losses, claims,
damages or liabilities:
(a) arise out of or are based upon any untrue statement or alleged untrue
statement of any material fact contained in the Fund Registration
Statement, Fund Prospectus (or any amendment or supplement thereto) or
sales literature of the Fund, or arise out of or are based upon the
omission or the alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein
not misleading in light of the circumstances in which they were made;
provided that this obligation to indemnify shall not apply if such
statement or omission or alleged statement or alleged omission was made
in reliance upon and in conformity with information furnished in writing
by the Company to the Fund or the Distributor for use in the Fund
Registration Statement, Fund Prospectus (or any amendment or supplement
thereto) or sales literature for the Fund or otherwise for use in
connection with the sale of the Contracts or Fund shares; or
(b) arise out of or are based upon any untrue statement or alleged untrue
statement of a material fact by the Distributor or the Fund (other than
statements or representations contained in the Fund Registration
Statement, Fund Prospectus or sales literature of the Fund not supplied
by the Distributor or the Fund or persons under their control) or
wrongful conduct of the Distributor or persons under its control with
respect to the sale or distribution of the Contracts or Fund shares; or
12
<PAGE>
(c) arise out of any untrue statement or alleged untrue statement of a
material fact contained in the Contracts Registration Statement,
Contracts Prospectus or sales literature for the Contracts (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 statements therein not misleading in light of the
circumstances in which they were made, if such statement or omission was
made in reliance upon information furnished in writing by the Distributor
of the Fund to the Company (or a person authorized in writing to do so on
behalf of the Fund or the Distributor); or
(d) arise as a result of any material breach by the Distributor or the
Fund to provide the services and furnish the materials required under the
terms of this Agreement (including a failure, whether unintentional or in
good faith or otherwise, to comply with the diversification requirements
specified in Article VI of this Agreement).
This indemnification will be in addition to any liability which the
Distributor may otherwise have; provided, however, that no party shall be
entitled to indemnification if such loss, claim, damage or liability is due
to the wilful misfeasance, bad faith, gross negligence or reckless disregard
of duty by the party seeking indemnification.
8.3. Indemnification Procedures
After receipt by a party entitled to indemnification ("indemnified party")
under this Article VIII of notice of the commencement of any action, if a
claim in respect thereof is to be made against any person obligated to
provide indemnification under this Article VIII ("indemnifying party"), such
indemnified party will notify the indemnifying party in writing of the
commencement thereof as soon as practicable thereafter, provided that the
omission to so notify the indemnifying party will not relieve it from any
liability under this Article VIII, except to the extent that the omission
results in a failure of actual notice to the indemnifying party and such
indemnifying party is damaged solely as a result of the failure to give such
notice. The indemnifying party, upon the request of the indemnified party,
shall retain counsel reasonably satisfactory to the indemnified party to
represent the indemnified party and any others the indemnifying party may
designate in such proceeding and shall pay the fees and disbursements of such
counsel related to such proceeding. In any such proceeding, any indemnified
party shall have the right to retain its own counsel, but the fees and
expenses of such counsel shall be at the expense of such indemnified party
unless (i) the indemnifying party and the indemnified party shall have
mutually agreed to the retention of such counsel or (ii) the named parties to
any such proceeding (including any impleaded parties) include both the
indemnifying party and the indemnified party and representation of both
parties by the same counsel would be inappropriate due to actual or potential
differing interests between them. The indemnifying party shall not be liable
for any settlement of any proceeding effected without its written consent but
if settled with such consent or if there be a final judgment for the
plaintiff, the indemnifying party agrees to indemnify the indemnified party
from and against any loss or liability by reason of such settlement or
judgment.
A successor by law of the parties to this Agreement shall be entitled to the
benefits of the indemnification contained in this Article VIII. The
indemnification provisions contained in this Article VIII shall survive any
termination of this Agreement.
13
<PAGE>
8.4 Limitation of Liability
Notwithstanding anything to the contrary above, Company and its respective
officers, directors, employees and agents shall not be responsible for, and
the Fund and the Distributor shall indemnify and hold harmless the Company
from and against any and all losses, damages, charges, costs, reasonable
attorney's fees, payments, expenses and liabilities arising out of or
attributable to the reasonable reliance on information, records or documents
furnished by or on behalf of the Distributor or the Fund. Without limiting
the generality of the foregoing, the Company shall not be liable for any
error, delay, or failures to provide services under this Agreement
attributable, in whole or in part, to the error, delay, or failure of the
Distributor, the Fund or their agents in making the daily net asset value per
share of the Portfolios available to the Company.
ARTICLE IX. APPLICABLE LAW
9.1. This Agreement shall be construed and the provisions hereof interpreted
under and in accordance with the laws of the state of Massachusetts, without
giving effect to the principles of conflicts of laws.
9.2. This Agreement shall be subject to the provisions of the 1933, 1934 and
1940 Acts, and the rules and regulations and rulings thereunder, including
such exemptions from those statutes, rules and regulations as the SEC may
grant, and the terms hereof shall be limited, interpreted and construed in
accordance therewith.
ARTICLE X. TERMINATION
10.1. This Agreement shall terminate:
(a) at the option of any party upon six months advance written notice to
the other parties, such termination to be effective no earlier than one
year following the date on which the first Contract is issued to the
public; or
(b) at the option of the Company if shares of any or all Portfolios are
not reasonably available to meet the requirements of the Contracts as
determined by the Company. Prompt notice of the election to terminate
for such cause shall be furnished by the Company, said termination to be
effective ten days after receipt of notice unless the Fund makes
available a sufficient number of Fund shares to meet the requirements of
the Contracts within said ten-day period; or
(c) at the option of the Fund upon institution of formal proceedings
against the Company by the NASD, the SEC, the insurance commission of
any state or any other regulatory body regarding the Company's duties
under this Agreement or related to the sale of the Contracts, the
operation of the Account, the administration of the Contracts or the
purchase of Fund shares, or an expected or anticipated ruling, judgment
or outcome which would, in the Fund's reasonable judgment, materially
impair the Company's ability to meet and perform the Company's
obligations and duties hereunder; or
(d) at the option of the Company upon institution of formal proceedings
against the Fund by the NASD, the SEC, or any state securities or
insurance commission or any other regulatory body; or
(e) upon requisite vote of the Contract Owners having an interest in the
affected Portfolio and the written approval of the Distributor (unless
otherwise required by applicable law), to substitute the
14
<PAGE>
shares of another investment company for the corresponding Portfolio
shares of the Fund in accordance with the terms of the Contracts; or
(f) at the option of the Fund in the event any of the Contracts are not
registered, issued or sold in accordance with applicable Federal and/or
state law; or
(g) by either the Company or the Fund upon a determination by a majority
of the Board, or a majority of disinterested Board members, that an
irreconcilable material conflict exists among the interests of (i) all
Product owners or (ii) the interests of the Participating Insurance
Companies investing in the Fund; or
(h) at the option of the Company if any series of the Fund or the Fund
ceases to qualify as a Regulated Investment Company under Subchapter M of
the Code, or under any successor or similar provision, or if the Company
reasonably believes based on an opinion of counsel satisfactory to the
Fund that the series or Fund may fail to so qualify and the Fund does not
take reasonable steps to ensure qualification; or
(i) at the option of the Company if the Fund fails to meet the
diversification requirements specified in Article VI hereof; or
(j) at the option of the Fund if the Contracts cease to qualify as
annuity contracts or life insurance policies, as applicable, under the
Code, or if the Fund reasonably believes that the Contracts may fail to
so qualify; or
(k) at the option of either the Fund or the Distributor if the Fund or
the Distributor, respectively, shall determine, in their sole judgment
exercised in good faith, that either (1) the Company shall have suffered
a material adverse change in its business or financial condition or (2)
the Company shall have been the subject of material adverse publicity
which is likely to have a material adverse impact upon the business and
operations of either the Fund or the Distributor; or
(l) at the option of the Company, if (1) the Company shall determine, in
its sole judgment exercised in good faith, that the Fund or the
Distributor shall have been the subject of material adverse publicity
which is likely to have a material adverse impact upon the business and
operations of the Company; or (2) the Company shall have notified the
Fund in writing of such determination and the basis therefore, and (3)
after sixty (60) days after notice the Company again makes the same
determination;
(m) upon the assignment of this Agreement (including, without limitation,
any transfer of the Contracts or the Account to another insurance company
pursuant to an assumption reinsurance agreement) unless the non-assigning
party consents thereto or unless this Agreement is assigned to an
affiliate of the Distributor; or
(n) at the option of Company, as one party, or the Fund and the
Distributor, as one party, upon the other party's material breach of any
provision of this Agreement.
10.2. Notice Requirement
Except as otherwise provided in Section 10.1, no termination of this
Agreement shall be effective unless and until the party terminating this
Agreement gives prior written notice to all other parties to
15
<PAGE>
this Agreement of its intent to terminate which notice shall set forth
the basis for such termination. Furthermore:
(a) In the event that any termination is based upon the provisions of
Article VII or the provisions of Section 10.1(a) of this Agreement, such
prior written notice shall be given in advance of the effective date of
termination as required by such provisions; and
(b) in the event that any termination is based upon the provisions of
Section 10.1(c) or 10.1(d) of this Agreement, such prior written notice
shall be given at least ninety (90) days before the effective date of
termination; and
(c) in the event that any termination is based upon the provisions of
Section 10.1(e) of this Agreement, such prior written notice shall be
given at least sixty (60) days before the date of any proposed vote to
replace the Fund's shares.
10.3. Except as necessary to implement Contract Owner initiated transactions,
or as required by state insurance laws or regulations, the Company shall not
redeem Fund shares attributable to the Contracts (as opposed to Fund shares
attributable to the Company's assets held in an Account).
10.4. Effect of Termination
(a) Notwithstanding any termination of this Agreement pursuant to Section
10.1 of this Agreement, the Fund and the Distributor may, at the option
of the Fund, continue to make available additional Fund shares for so
long after the termination of this Agreement as the Fund desires pursuant
to the terms and conditions of this Agreement as provided in paragraph
(b) below, for all Contracts in effect on the effective date of
termination of this Agreement (hereinafter referred to as "Existing
Contracts"). Specifically, without limitation, if the Fund or
Distributor so elects to make additional Fund shares available, the
owners of the Existing Contracts or the Company, whichever shall have
legal authority to do so, shall be permitted to reallocate investments in
the Fund, redeem investments in the Fund and/or invest in the Fund upon
the making of additional purchase payments under the Existing Contracts.
(b) In the event of a termination of this Agreement pursuant to Section
10.1 of this Agreement, the Fund and the Distributor shall promptly
notify the Company whether the Distributor and the Fund will continue to
make Fund shares available after such termination. If Fund shares
continue to be made available after such termination, the provisions of
this Agreement shall remain in effect except for Section 10.1(a) and
thereafter either the Fund or the Company may terminate the Agreement, as
so continued pursuant to this Section 10.4, upon prior written notice to
the other party, such notice to be for a period that is reasonable under
the circumstances but, if given by the Fund, need not be for more than
six months.
(c) The parties agree that this Section 10.4 shall not apply to any
termination under Article VII and the effect of such Article VII
termination shall be governed by Article VII of this Agreement.
ARTICLE XI. APPLICABILITY TO NEW ACCOUNTS AND NEW CONTRACTS
The parties to this Agreement may amend the schedules to this Agreement from
time to time to reflect changes in or relating to the Contracts and to add
new classes of variable annuity contracts and variable life insurance
policies to be issued by the Company through Separate Accounts investing in
16
<PAGE>
the Fund. The provisions of this Agreement shall be equally applicable to
each such class of contracts or policies, unless the context otherwise
requires.
ARTICLE XII. 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:
The Palladian Trust
Attn: President
4225 Executive Square, Suite 270
La Jolla, CA 92037
If to the Distributor:
Western Capital Financial Group, Inc.
Attn: President
4285 Executive Square, Suite 325
La Jolla, CA 92037
If to the Company:
Richard M. Reilly
President
Allmerica Financial Life Insurance and Annuity Company
440 Lincoln Street
Worcester, MA 01653
ARTICLE XIII. MISCELLANEOUS
13.1 All persons dealing with the Fund must look solely to the property of
such Fund, and in the case of a series company, the respective Designated
Portfolio listed on Schedule A hereto as though such Designated Portfolio had
separately contracted with the Company and the Underwriter for the
enforcement of any claims against the Fund. The parties agree that neither
the Board, officers, agents or shareholders of the Fund assume any personal
liability or responsibility for obligations entered into by or on behalf of
the Fund.
17
<PAGE>
13.2 Subject to the requirements of legal process and regulatory authority,
each party hereto shall treat as confidential the names and addresses of the
owners of the Contracts and all information reasonably identified as
confidential in writing by any other party hereto and, except as permitted by
this Agreement, shall not disclose, disseminate or utilize such names and
addresses and other confidential information without the express written
consent of the affected party until such time as such information may come
into the public domain.
13.3 The captions in this Agreement are included for convenience of reference
only and in no way define or delineate any of the provisions hereof or
otherwise affect their construction or effect.
13.4 This Agreement may be executed simultaneously in two or more
counterparts, each of which taken together shall constitute one and the same
instrument.
13.5 If any provision of this Agreement shall be held or made invalid by a
court decision, statute, rule or otherwise, the remainder of the Agreement
shall not be affected thereby.
13.6 Each party hereto shall cooperate with each other party and all
appropriate governmental authorities (including without limitation the SEC,
the NASD, and state insurance regulators) and shall permit such authorities
reasonable access to its books and records in connection with any
investigation or inquiry relating to this Agreement or the transactions
contemplated hereby. Notwithstanding the generality of the foregoing, each
party hereto further agrees to furnish the Delaware Insurance Commissioner
with any information or reports in connection with services provided under
this Agreement which such Commissioner may request in order to ascertain
whether the variable annuity operations of the Company are being conducted
in a manner consistent with variable annuity laws and regulations and any
other applicable law or regulations.
13.7 The rights, remedies and obligations contained in this Agreement are
cumulative and are in addition to any and all rights, remedies, and
obligations, at law or in equity, which the parties hereto are entitled to
under state and federal laws.
13.8 This Agreement or any of the rights and obligations hereunder may not be
assigned by any party without the prior written consent of all parties hereto.
13.9 A copy of the Fund's Declaration of Trust is on file with the Secretary
of the Commonwealth of Massachusetts. The Declaration of Trust has been
executed on behalf of the Fund by certain Trustees in their capacity as
Trustees of the Trust and not individually. All persons dealing with the
Fund must look solely to the property of the Fund for the enforcement of any
claims against the Fund as neither the Board, officers, agents, or
shareholders assume any personal liability for obligations entered into on
behalf of the Fund.
18
<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.
COMPANY: ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
By: /s/ Richard M. Reilly
------------------------------------
Title: President
---------------------------------
Date: 10/16/96
----------------------------------
FUND: THE PALLADIAN TRUST
By: /s/ M. Michael Schwartz
------------------------------------
Title: President
---------------------------------
Date: 10/24/96
----------------------------------
DISTRIBUTOR: WESTERN CAPITAL FINANCIAL GROUP, INC.
By: /s/ M. Michael Schwartz
------------------------------------
Title: President
---------------------------------
Date: 10/24/96
----------------------------------
19
<PAGE>
SCHEDULE A
<TABLE>
<CAPTION>
Name of Separate Account
(Date Authorized
by Board of Directors) Contracts Designated Portfolios
- ------------------------- --------- ----------------------
<S> <C> <C>
Fulcrum Separate Account Policy Form 3025-96/ 8025-96 Value Portfolio
(June 13, 1996) Growth Portfolio
International Growth Portfolio
Global Strategic Income Portfolio
Global Interactive/Telecomm Portfolio
Fulcrum Variable Life Value Portfolio
Separate Account Growth Portfolio
(June 13, 1996) International Growth Portfolio
Global Strategic Income Portfolio
Global Interactive/Telecomm Portfolio
</TABLE>
20
