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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
POST-EFFECTIVE AMENDMENT NO. 1
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 2
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
_x__ on May 1, 1997 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 has registered an indefinite amount of its securities under the
Securities Act of 1933. The Rule 24f-2 Notice for the issuer's fiscal year ended
December 31, 1996 was filed on or before February 28, 1997.
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CROSS REFERENCE SHEET SHOWING LOCATION IN PROSPECTUS OF
ITEMS CALLED FOR BY FORM N-4
FORM N-4 ITEM NO. CAPTION IN PROSPECTUS
- ----------------- ---------------------
1................................ Cover Page
2................................ "Special Terms"
3................................ "Summary"; "Annual and Transaction Expenses"
4................................ "Condensed Financial Information";
Performance Information
5................................ "Description of the Company, the Variable
Account, the Palladian Trust and Allmerica
Investment Trust."
6................................ "Charges and Deductions"
7................................ "Description of the Contract"
8................................ "Electing the Form of Annuity and the Annuity
Date"; "Description of Variable Annuity
Options"; "Annuity Benefit Payments"
9................................ "Death Benefit"
10............................... "Payments"; "Computation of Values";
"Distribution"
11............................... "Surrender"; "Withdrawals"; "Charge for
Surrender and Withdrawal;" "Withdrawal
Without Surrender Charge"; "Texas Optional
Retirement Program"
12............................... "Federal Tax Considerations"
13............................... "Legal Matters"
14............................... "Statement of Additional Information-Table
of Contents"
FORM N-4 CAPTION IN STATEMENT OF ADDITIONAL INFORMATION
ITEM NO.
15............................... "Cover Page"
16............................... "Table of Contents"
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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 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 referred to
collectively herein as the "Contract(s)." The following is a summary of
information about these Contracts. More detailed information can be found under
the referenced captions in this Prospectus.
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 also may be allocated on a fixed basis to the
Fixed Account, which is part of the Company's General Account, and during the
accumulation period to one or more of the Guarantee Period Accounts. Amounts
allocated to the Fixed Account earn interest at a guaranteed rate for one year
from the date allocated. Amounts allocated to a Guarantee Period Account earn a
fixed rate of interest for the duration of the applicable Guarantee Period. 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
("SAI") dated May 1, 1997 filed with the Securities and Exchange Commission
("SEC") 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, MA
01653, Telephone 800-917-1909.
THIS PROSPECTUS IS VALID ONLY WHEN ACCOMPANIED BY A CURRENT PROSPECTUS OF
ALLMERICA INVESTMENT TRUST AND THE PALLADIAN 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 MAY 1, 1997
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TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
STATEMENT OF ADDITIONAL INFORMATION TABLE OF CONTENTS
SPECIAL TERMS 4
SUMMARY 6
ANNUAL AND TRANSACTION EXPENSES 11
PERFORMANCE INFORMATION 15
DESCRIPTION OF THE COMPANY, THE VARIABLE ACCOUNT, THE PALLADIAN TRUST, AND ALLMERICA
INVESTMENT TRUST 16
INVESTMENT OBJECTIVES AND POLICIES 18
DESCRIPTION OF THE CONTRACT 19
A. Payments 19
B. Right to Revoke Individual Retirement Annuity 20
C. Right to Revoke All Other Contracts 20
D. Transfer Privilege 20
Automatic Transfers and Automatic Account Rebalancing Options 20
E. Surrender 21
F. Withdrawals 22
Systematic Withdrawals 22
Life Expectancy Distributions 22
G. Death Benefit 23
Death of the Annuitant Prior to the Annuity Date 23
Death of an Owner Who is Not Also the Annuitant Prior to the Annuity Date 23
Payment of the Death Benefit Prior to the Annuity Date 23
Death of the Annuitant After the Annuity Date 24
H. The Spouse of the Owner as Beneficiary 24
I. Assignment 24
J. Electing the Form of Annuity and the Annuity Date 24
K. Description of Variable Annuity Payout Options 25
L. Annuity Benefit Payments 26
The Annuity Unit 26
Determination of the First and Subsequent Annuity Benefit Payments 26
M. NORRIS Decision 27
N. Computation of Values 27
The Accumulation Unit 27
Net Investment Factor 28
CHARGES AND DEDUCTIONS 28
A. Variable Account Deductions 28
Mortality and Expense Risk Charge 28
Administrative Expense Charge 28
Other Charges 29
B. Contract Fee 29
C. Premium Taxes 29
D. Contingent Deferred Sales Charge 30
Charge for Surrender and Withdrawal 30
Reduction or Elimination of Surrender Charge 30
Withdrawal Without Surrender Charge 31
Surrenders 32
Charge at the Time Annuity Benefit Payments Begin 32
E. Transfer Charge 32
</TABLE>
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<TABLE>
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GUARANTEE PERIOD ACCOUNTS 32
FEDERAL TAX CONSIDERATIONS 35
A. Qualified and Non-Qualified Contracts 35
B. Taxation of the Contracts in General 35
Withdrawals Prior to Annuitization 36
Annuity Payouts After Annuitization 36
Penalty on Distribution 36
Assignments or Transfers 36
Non-Natural Owners 37
Deferred Compensation Plans of State and Local Governments and TaxExempt
Organizations 37
C. Tax Withholding 37
D. Provisions Applicable to Qualified Employer Plans 37
Corporate and SelfEmployed Pension and Profit Sharing Plans 37
Individual Retirement Annuities 37
Tax Sheltered Annuities 38
Texas Optional Retirement Program 38
REPORTS 38
LOANS (QUALIFIED CONTRACTS ONLY) 38
ADDITION, DELETION OR SUBSTITUTION OF INVESTMENTS 39
CHANGES TO COMPLY WITH LAW AND AMENDMENTS 39
VOTING RIGHTS 40
DISTRIBUTION 40
LEGAL MATTERS 40
FURTHER INFORMATION 41
APPENDIX A -- MORE INFORMATION ABOUT THE FIXED ACCOUNT A-1
APPENDIX B -- SURRENDER CHARGES AND THE MARKET VALUE ADJUSTMENT A-2
APPENDIX C -- THE DEATH BENEFIT A-4
</TABLE>
STATEMENT OF ADDITIONAL INFORMATION
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
GENERAL INFORMATION AND HISTORY 2
TAXATION OF THE VARIABLE ACCOUNT AND THE COMPANY 3
SERVICES 3
UNDERWRITERS 3
ANNUITY BENEFIT PAYMENTS 4
EXCHANGE OFFER 5
PERFORMANCE INFORMATION 7
FINANCIAL STATEMENTS F-1
</TABLE>
THE CONTRACTS OFFERED BY THIS PROSPECTUS MAY NOT BE AVAILABLE IN ALL STATES.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY JURISDICTION IN WHICH
SUCH OFFERING MAY NOT LAWFULLY BE MADE. NO PERSON IS AUTHORIZED TO MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS.
3
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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 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 PAYOUT: an Annuity payout option providing for annuity benefit
payments which remain fixed in 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.
GENERAL ACCOUNT: all the assets of the Company other than those held in a
separate account.
GUARANTEE PERIOD: the number of years that a Guaranteed Interest Rate is
credited.
GUARANTEE PERIOD ACCOUNT: an account which corresponds to a Guaranteed Interest
Rate for a specified Guarantee Period and is supported by assets in a
non-unitized separate account.
GUARANTEED INTEREST RATE: the annual effective rate of interest after daily
compounding credited to a Guarantee Period Account.
MARKET VALUE ADJUSTMENT: a positive or negative adjustment assessed if any
portion of a Guarantee Period Account is withdrawn or transferred prior to the
end of its Guarantee Period.
OWNER: the person, persons or entity entitled to exercise the rights and
privileges under the Contract. Joint Owners are permitted if one of the two is
the Annuitant.
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.
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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 PAYOUT: an Annuity payout option providing for payments varying
in amount in accordance with the investment experience of certain of the Funds.
5
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SUMMARY
WHAT IS THE FULCRUM FUND VARIABLE ANNUITY?
The Fulcrum Fund Variable Annuity contract is an insurance contract designed to
help you, the Owner, 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 advisers 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
- - issue age up to 90.
The Contract has two phases: an accumulation phase and, if you choose to
annuitize, an annuity payout phase. During the accumulation phase, your initial
payment and any additional payments you choose to make may be allocated among
the SubAccounts investing in the portfolios of securities (the "Funds"), to the
Guarantee Period Accounts, and to the Fixed Account. You select the investment
options most appropriate for your investment needs. As those needs change, you
may also change your allocation without incurring any tax consequences. The
Contract's Accumulated Value is based on the investment performance of the Funds
and any accumulations in the Guarantee Period and Fixed Accounts. No income
taxes are paid on any earnings under the Contract unless and until Accumulated
Values are withdrawn. In addition, during the accumulation phase, the
beneficiaries receive certain protections and guarantees in the event of the
Annuitant's death. See discussion below: "WHAT HAPPENS UPON DEATH DURING THE
ACCUMULATION PHASE?"
WHAT HAPPENS IN THE ANNUITY PAYOUT PHASE?
During the annuity payout phase, the Annuitant can receive income based on
several annuity payout options. You choose the annuity payout option and the
date for annuity benefit payments to begin. You also decide whether you want
variable annuity benefit payments based on the investment performance of certain
Funds, fixed annuity benefit payments with payment amounts guaranteed by the
Company, or a combination of fixed and variable annuity benefit payments. Among
the payout options available during the annuity payout phase are:
- - periodic payments for your lifetime (assuming you are the Annuitant);
- - periodic payments for your life and the life of another person selected by
you;
- - periodic payments for your lifetime with guaranteed payments continuing to the
beneficiary for ten years in the event that you die before the end of ten
years;
- - periodic payments over a specified number of years (1 to 30); under this
option you may reserve the right to convert remaining payments to a lumpsum
payout by electing a "commutable" option.
WHO ARE THE KEY PERSONS UNDER THE CONTRACT?
The Contract is between you, (the Owner), and us, Allmerica Financial Life
Insurance and Annuity Company ("Company"). Each Contract has an Owner (or an
Owner and a Joint Owner, in which case one of the two must be the Annuitant), an
Annuitant and a beneficiary. As Owner, you make payments, choose investment
allocations and select the Annuitant and beneficiary. The Annuitant is the
individual who receives annuity benefit payments under the Contract. The
beneficiary is the person who receives any payment on the death of the Owner or
Annuitant.
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HOW MUCH CAN I INVEST AND HOW OFTEN?
The number and frequency of payments are flexible, subject to the minimum and
maximum payments stated in "A. Payments."
WHAT ARE MY INVESTMENT CHOICES?
The Contract permits net payments to be allocated among the Funds, the Guarantee
Period Accounts, and the Fixed Account.
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. For a more detailed description
of the Funds, see "INVESTMENT OBJECTIVES AND POLICIES."
GUARANTEE PERIOD ACCOUNTS. Assets supporting the guarantees under the Guarantee
Period Accounts are held in the Company's Separate Account GPA, a non-unitized
insulated separate account. Values and benefits calculated on the basis of
Guarantee Period Account allocations, however, are obligations of the Company's
General Account. Amounts allocated to a Guarantee Period Account earn a
Guaranteed Interest Rate declared by the Company. The level of the Guaranteed
Interest Rate depends on the number of years of the Guarantee Period selected.
The Company may offer up to nine Guarantee Periods ranging from two to ten years
in duration. Once declared, the Guaranteed Interest Rate will not change during
the duration of the Guarantee Period. If amounts allocated to a Guarantee Period
Account are transferred, surrendered or applied to any annuity option at any
time other than the day following the last day of the applicable Guarantee
Period, a Market Value Adjustment will apply that may increase or decrease the
account's value. For more information about the Guarantee Period Accounts and
the Market Value Adjustment, see "GUARANTEE PERIOD ACCOUNTS."
THE GUARANTEE PERIOD ACCOUNTS MAY NOT BE AVAILABLE IN ALL STATES.
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."
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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:
<TABLE>
<CAPTION>
PORTFOLIO PORTFOLIO MANAGER
- ------------------------------------------------------------------------- ---------------------------------------
<S> <C>
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, MA 01653.
For more information, see "DESCRIPTION OF THE COMPANY, THE VARIABLE ACCOUNT, THE
PALLADIAN TRUST AND ALLMERICA INVESTMENT TRUST."
CAN I MAKE TRANSFERS AMONG THE FUNDS?
Yes. Prior to the Annuity Date, you may transfer among the SubAccounts, the
Guarantee Period Accounts, and the Fixed Account. You will incur no current
taxes on transfers while your money remains in the Contract. See "D. Transfer
Privilege." The first 12 transfers in a Contract year are guaranteed to be free
of a transfer charge. For each subsequent transfer in a Contract year, the
Company does not currently charge but reserves the right to assess a processing
charge guaranteed never to exceed $25.
WHAT IF I NEED MY MONEY BEFORE MY ANNUITY PAYOUT PHASE BEGINS?
You may surrender the Contract or make withdrawals any time before your annuity
payout phase begins. Each year you can take without a surrender charge the
greatest of 100% of cumulative earnings, 15% of the Contract's Accumulated Value
or, if you are both an Owner and the Annuitant, an amount based on your life
expectancy. A 10% tax penalty may apply on all amounts deemed to be earnings if
you are under age 59 1/2. Additional amounts may be withdrawn at any time but
may be subject to the surrender charge for payments that have not been invested
in the Contract for more than seven years. (A Market Value Adjustment may apply
to any withdrawal made from a Guarantee Period Account prior to the expiration
of the Guarantee Period.)
In addition, except where prohibited by state law, you may withdraw all or a
portion of your money without a surrender charge if, after the Contract is
issued, you are admitted to a medical care facility, become disabled or are
diagnosed with a fatal illness. For details and restrictions, see "Reduction or
Elimination of Surrender Charge."
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WHAT HAPPENS UPON DEATH DURING MY ACCUMULATION PHASE?
If the Annuitant, Owner or Joint Owner should die before the Annuity Date, a
death benefit will be paid to the beneficiary. Upon the death of the Annuitant
(or an Owner who is also an Annuitant), the death benefit is equal to the
highest 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, and continuing throughout your
investments' entire accumulation phase, reduced proportionately to reflect
withdrawals; or
- - The highest Accumulated Value that would have been payable as a death benefit
on any Contract anniversary, increased for subsequent payments and reduced
proportionately to reflect withdrawals since that anniversary.
If an Owner who is not also the Annuitant dies during the accumulation phase,
the death benefit will equal the Accumulated Value of the Contract increased by
any positive Market Value Adjustment.
(If the Annuitant dies after the Annuity Date but before all guaranteed annuity
benefit payments have been made, the remaining payments will be paid to the
beneficiary at least as rapidly as under the annuity option in effect. See "G.
Death Benefit.")
WHAT CHARGES WILL I INCUR UNDER MY CONTRACT?
If the Accumulated Value is less than $100,000 on each Contract anniversary and
upon surrender, a $30 Contract fee will be deducted from the Contract. 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 payout 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.
A deduction for state and local premium taxes, if any, may be made as described
under "C. Premium Taxes."
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 Underlying Fund. The Funds will incur
certain management fees and expenses which are more fully described in "Other
Charges" and in the prospectus for the Fund, which accompanies this Prospectus.
CAN I EXAMINE THE CONTRACT?
Yes. The Contract will be delivered to you after your purchase. If you return
the Contract to the Company within ten days of receipt, the Contract will be
cancelled. (There may be a longer period in certain states; see the "Right to
Examine" provision on the cover of the Contract.) If you cancel the Contract,
you will receive a refund of any amounts allocated to the Fixed and Guarantee
Period Accounts and the Accumulated Value of any amounts allocated to the
SubAccounts (plus any fees or charges that may have been deducted.) If state law
requires, or if the Contract was issued as an Individual Retirement Annuity
("IRA") however, you will receive the greater of the amount described above or
your entire payment. See "B. Right to Revoke Individual Retirement Annuity."
CAN I MAKE FUTURE CHANGES UNDER MY CONTRACT?
There are several changes you can make after receiving the Contract:
- - You may assign your ownership to someone else, except under certain qualified
plans.
- - You may change the beneficiary, unless you have irrevocably designated a
beneficiary.
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- - You may change your allocation of payments.
- - You may make transfers of Contract value among your current investments
without any tax consequences.
- - You may cancel the Contract within ten days of delivery (or longer if required
by state law).
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ANNUAL AND TRANSACTION EXPENSES
The following tables show charges under your Contract, expenses of the
Sub-Accounts, and expenses of the Funds. In addition to the charges and expenses
described below, premium taxes are applicable in some states and deducted as
described under "Premium Taxes.".
CONTRACT CHARGES:
<TABLE>
<CAPTION>
YEARS FROM
DATE OF PAYMENT CHARGE
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CONTINGENT DEFERRED SALES CHARGE: 0-1 7%
This charge may be assessed upon surrender, withdrawal or 2 6%
annuitization under any commutable period certain option or a 3 5%
noncommutable period certain option of less than ten years. 4 4%
The charge is a percentage of payments applied to the amount 5 3%
surrendered (in excess of any amount that is free of surrender 6 2%
charge) within the indicated time period. 7 1%
Thereafter 0%
TRANSFER CHARGE: None
The Company currently makes no charge for transfers, and
guarantees that the first 12 transfers in a Contract year will
not be subject to a transfer charge. For each subsequent
transfer, the Company reserves the right to assess a charge,
guaranteed never to exceed $25, to reimburse the Company for
the costs of processing the transfer.
ANNUAL CONTRACT FEE: $30
The $30 Contract fee is deducted annually and upon surrender
when Accumulated Value is less than $100,000. The Contract fee
is currently waived for Contracts issued to and maintained by
the trustee of a 401(k) plan.
VARIABLE ACCOUNT ANNUAL EXPENSES:
(on an annual basis as a percentage of average daily net
assets)
Mortality and Expense Risk Charge: 1.25%
Administrative Expense Charge: 0.20%
---------
Total Annual Expenses: 1.45%
FUND EXPENSES:
(Annual basis as percentage of average daily net assets)
</TABLE>
Each of the five Portfolios of The Palladian-SM- Trust has a performance-based
advisory fee. The base fee is 2.00%, but the actual fee may vary from between
0.00% to 4.00%, depending on the Portfolio's performance. The base fee of 2.00%
will be paid if the Portfolio's performance (net of all fees and expenses,
including the advisory fee) is between 1.5 and 3.0 percentage points higher than
the applicable benchmark index. A fee of 4.00% will be paid only if the
Portfolio's performance (net of all fees and expenses, including the advisory
fee) is at least 7.5 percentage points higher than the applicable benchmark
index. No fee will apply if the Portfolio's performance is more than 3.0
percentage points lower than the applicable benchmark index; see the prospectus
of The Palladian-SM- Trust for more details. Because of this variation, expense
information assuming fees of 0.00%, 2.00% and 4.00% is shown below. The fee,
however, could be any percentage from 0.00% to 4.00%.
11
<PAGE>
EXAMPLE 1 -- ASSUMING ADVISORY FEE OF 0.00% FOR THE PORTFOLIOS OF THE
PALLADIAN-SM- TRUST
(For the fee to be 0.00% a Portfolio's performance, net of all fees and
expenses, would have to be more than 3.0 percentage points below the benchmark
index.)
<TABLE>
<CAPTION>
OTHER EXPENSES
(AFTER ANY
APPLICABLE TOTAL OPERATING
FUND MANAGEMENT FEES REIMBURSEMENT) EXPENSES
- -------------------------------------------------------------- ----------------- ---------------- ----------------
<S> <C> <C> <C>
Value Portfolio............................................... 0.00%(1) 0.70%(2) 0.70%
Growth Portfolio.............................................. 0.00%(1) 0.70%(2) 0.70%
International Growth Portfolio................................ 0.00%(1) 1.20%(2) 1.20%
Global Strategic Income Portfolio............................. 0.00%(1) 1.20%(2) 1.20%
Global Interactive/Telecomm Portfolio......................... 0.00%(1) 1.20%(2) 1.20%
Money Market Fund............................................. 0.28% 0.06%(3) 0.34%
</TABLE>
EXAMPLE 2 -- ASSUMING ADVISORY FEE OF 2.00% FOR THE PORTFOLIOS OF THE
PALLADIAN-SM- TRUST
(For the fee to be 2.00%, a Portfolio's performance, net of all fees and
expenses, would have to be between 1.5 and 3.0 percentage points higher than the
benchmark index.)
<TABLE>
<CAPTION>
OTHER EXPENSES
(AFTER ANY
APPLICABLE TOTAL OPERATING
FUND MANAGEMENT FEES REIMBURSEMENT) EXPENSES
- -------------------------------------------------------------- ----------------- ---------------- ----------------
<S> <C> <C> <C>
Value Portfolio............................................... 2.00%(1) 0.70%(2) 2.70%
Growth Portfolio.............................................. 2.00%(1) 0.70%(2) 2.70%
International Growth Portfolio................................ 2.00%(1) 1.20%(2) 3.20%
Global Strategic Income Portfolio............................. 2.00%(1) 1.20%(2) 3.20%
Global Interactive/Telecomm Portfolio......................... 2.00%(1) 1.20%(2) 3.20%
Money Market Fund............................................. 0.28% 0.06%(3) 0.34%
</TABLE>
EXAMPLE 3 -- ASSUMING ADVISORY FEE OF 4.00% FOR THE PORTFOLIOS OF THE
PALLADIAN-SM- TRUST.
(For the fee to be 4.00%, a Portfolio's performance, net of all fees and
expenses, would have to be at least 7.5 percentage points higher than the
benchmark index.)
<TABLE>
<CAPTION>
OTHER EXPENSES
(AFTER ANY
APPLICABLE TOTAL OPERATING
FUND MANAGEMENT FEES REIMBURSEMENT) EXPENSES
- -------------------------------------------------------------- ----------------- ---------------- ----------------
<S> <C> <C> <C>
Value Portfolio............................................... 4.00%(1) 0.70%(2) 4.70%
Growth Portfolio.............................................. 4.00%(1) 0.70%(2) 4.70%
International Growth Portfolio................................ 4.00%(1) 1.20%(2) 5.20%
Global Strategic Income Portfolio............................. 4.00%(1) 1.20%(2) 5.20%
Global Interactive/Telecomm Portfolio......................... 4.00%(1) 1.20%(2) 5.20%
Money Market Fund............................................. 0.28% 0.06%(3) 0.34%
</TABLE>
(1) A performance based advisory fee is in effect, which fee may vary anywhere
from 0.00% to 4.00%.
(2) The Manager has agreed to limit operating expenses and reimburse those
expenses to the extent that the Portfolio's "other expenses" (i.e., expenses
other than management fees) through at least December 31, 1997 exceed the
following expense limitations: Value Portfolio, 0.70%; Growth Portfolio, 0.70%;
International Growth Portfolio, 1.20%; Global Strategic Income Portfolio, 1.20%;
and Global Interactive/ Telecomm Portfolio, 1.20%. For the two years following
the date that the expense limitation ends, each Portfolio will reimburse the
Manager for any fees it waived or expenses it reimbursed pursuant to the expense
limitation, provided that such reimbursement would not cause the Portfolio's
"other expense" ratio to exceed the expense limitation set forth above. After
this two-year period, the Portfolio's reimbursement liability to the Manager
will cease. In addition, if at any time the investment management agreement
12
<PAGE>
between the Manager and the Portfolios terminates, the Portfolio's reimbursement
liability to the Manager will cease.
(3) Under its 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. The total operating expenses of
the Money Market Fund was less than the expense limitation throughout 1996. The
declaration of a voluntary expense limitation in any year does not bind
Allmerica Investment to declare future expense limitations with respect to this
Fund.
THE FOLLOWING EXAMPLES DEMONSTRATE THE CUMULATIVE EXPENSES WHICH WOULD BE PAID
AT ONE YEAR AND THREE YEARS, ASSUMING A $1,000 INVESTMENT IN A SUB-ACCOUNT AND A
5% ANNUAL RETURN ON ASSETS, AS REQUIRED BY RULES OF THE SEC.
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. IN PARTICULAR, BECAUSE THE ADVISORY FEE OF THE FIVE
PORTFOLIOS OF THE PALLADIAN-SM- TRUST MAY VARY FROM 0.00% TO 4.00% DEPENDING ON
PERFORMANCE, THREE SEPARATE EXAMPLES ARE PROVIDED: EXAMPLE (1) ASSUMES THAT NO
ADVISORY FEE IS PAID FOR EACH OF THE FIVE PORTFOLIOS; EXAMPLE (2) ASSUMES THAT
THE ADVISORY FEE FOR THE FIVE PORTFOLIOS IS PAID AT THE ANNUAL RATE OF 2.00%;
AND EXAMPLE (3) ASSUMES THAT THE ADVISORY FEE IS PAID AT THE ANNUAL RATE OF
4.00%.
(1) If, at the end of the applicable period, you surrender the Contract or
annuitize* under a commutable period certain option or a non-commutable 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:
EXAMPLE 1 -- ASSUMING ADVISORY FEE OF 0.00% FOR THE PORTFOLIOS OF THE
PALLADIAN-SM- TRUST
<TABLE>
<CAPTION>
FUND 1 YEAR 3 YEARS
- ------------------------------------------------------------------------------------------------- ----------- -----------
<S> <C> <C>
Value Portfolio.................................................................................. $ 83 $ 115
Growth Portfolio................................................................................. $ 83 $ 115
International Growth Portfolio................................................................... $ 88 $ 129
Global Strategic Income Portfolio................................................................ $ 88 $ 129
Global Interactive/Telecomm Portfolio............................................................ $ 88 $ 129
Money Market Fund................................................................................ $ 80 $ 105
</TABLE>
EXAMPLE 2 -- ASSUMING ADVISORY FEE OF 2.00% FOR THE PORTFOLIOS OF THE
PALLADIAN-SM- TRUST
<TABLE>
<CAPTION>
FUND 1 YEAR 3 YEARS
- ------------------------------------------------------------------------------------------------- ----------- -----------
<S> <C> <C>
Value Portfolio.................................................................................. $ 102 $ 171
Growth Portfolio................................................................................. $ 102 $ 171
International Growth Portfolio................................................................... $ 107 $ 185
Global Strategic Income Portfolio................................................................ $ 107 $ 185
Global Interactive/Telecomm Portfolio............................................................ $ 107 $ 185
Money Market Fund................................................................................ $ 80 $ 105
</TABLE>
EXAMPLE 3 -- ASSUMING ADVISORY FEE OF 4.00% FOR THE PORTFOLIOS OF THE
PALLADIAN-SM- TRUST
<TABLE>
<CAPTION>
FUND 1 YEAR 3 YEARS
- ------------------------------------------------------------------------------------------------- ----------- -----------
<S> <C> <C>
Value Portfolio.................................................................................. $ 121 $ 225
Growth Portfolio................................................................................. $ 121 $ 225
International Growth Portfolio................................................................... $ 126 $ 239
Global Strategic Income Portfolio................................................................ $ 126 $ 239
Global Interactive/Telecomm Portfolio............................................................ $ 126 $ 239
Money Market Fund................................................................................ $ 80 $ 105
</TABLE>
13
<PAGE>
(2) If, at the end of the applicable time period, you annuitize* under a life
option or a non-commutable period certain option of ten years or longer, or if
you do not surrender or annuitize the Contract, you would pay the following
expenses on a $1,000 investment, assuming a 5% annual return on assets:
EXAMPLE 1 -- ASSUMING ADVISORY FEE OF 0.00% FOR THE PORTFOLIOS OF THE
PALLADIAN-SM- TRUST
<TABLE>
<CAPTION>
FUND 1 YEAR 3 YEARS
- ------------------------------------------------------------------------------------------------- ----------- -----------
<S> <C> <C>
Value Portfolio.................................................................................. $ 22 $ 69
Growth Portfolio................................................................................. $ 22 $ 69
International Growth Portfolio................................................................... $ 27 $ 84
Global Strategic Income Portfolio................................................................ $ 27 $ 84
Global Interactive/Telecomm Portfolio............................................................ $ 27 $ 84
Money Market Fund................................................................................ $ 19 $ 58
</TABLE>
EXAMPLE 2 -- ASSUMING ADVISORY FEE OF 2.00% FOR THE PORTFOLIOS OF THE
PALLADIAN-SM- TRUST
<TABLE>
<CAPTION>
FUND 1 YEAR 3 YEARS
- ------------------------------------------------------------------------------------------------- ----------- -----------
<S> <C> <C>
Value Portfolio.................................................................................. $ 42 $ 128
Growth Portfolio................................................................................. $ 42 $ 128
International Growth Portfolio................................................................... $ 47 $ 142
Global Strategic Income Portfolio................................................................ $ 47 $ 142
Global Interactive/Telecomm Portfolio............................................................ $ 47 $ 142
Money Market Fund................................................................................ $ 19 $ 58
</TABLE>
EXAMPLE 3 -- ASSUMING ADVISORY FEE OF 4.00% FOR THE PORTFOLIOS OF THE
PALLADIAN-SM- TRUST(1)
<TABLE>
<CAPTION>
FUND 1 YEAR 3 YEARS
- ------------------------------------------------------------------------------------------------- ----------- -----------
<S> <C> <C>
Value Portfolio.................................................................................. $ 62 $ 184
Growth Portfolio................................................................................. $ 62 $ 184
International Growth Portfolio................................................................... $ 67 $ 198
Global Strategic Income Portfolio................................................................ $ 67 $ 198
Global Interactive/Telecomm Portfolio............................................................ $ 67 $ 198
Money Market Fund................................................................................ $ 19 $ 58
</TABLE>
(1) In order to have a 5% annual return and a management fee of 4%, the
performance of the Portfolios of the Palladian-SM- Trust would have to be 9%
before the deduction of the 4% fee resulting in performance of 5% and the
benchmark index would have to decrease at least 2.5 percentage points (meaning
the Portfolio's performance after fees and expenses was at least 7.5 percentage
points better than the benchmark index.
As required in rules promulgated under the Investment Company Act of 1940 (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 0.075%, and the amount of the
Contract fee is assumed to be $0.75 in the examples. The Contract fee is
deducted only when the Accumulated Value is less than $100,000. Lower costs
apply to Contracts issued to a 401(k) plan.
* The Contract fee is not deducted after annuitization. No contingent deferred
sales charge is assessed at the time of annuitization under an option
including a life contingency or under a noncommutable period certain option of
ten years or longer.
14
<PAGE>
PERFORMANCE INFORMATION
This Contract first was offered to the public in 1997. The Company, however, may
advertise "Total Return" and "Average Annual Total Return" performance
information based on the periods that the 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 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: (1) the Standard & Poor's 500 Composite Stock Price
Index ("S&P 500"), Dow Jones Industrial Average ("DJIA"), Shearson Lehman
Aggregate Bond Index or other unmanaged indices so that investors may compare
the Sub-Account results with those of a group of unmanaged securities widely
regarded by investors as representative of the securities markets in general;
(2) other groups of variable annuity 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., which rank such
investment products on overall performance or other criteria; or (3) the
Consumer Price Index (a measure for inflation) to assess the real rate of return
from an investment in the Sub-Account. Unmanaged indices may assume the
reinvestment of dividends but generally do not reflect deductions for
administrative and management costs and expenses.
For more information on performance, see "PERFORMANCE INFORMATION" in the SAI.
15
<PAGE>
DESCRIPTION OF THE COMPANY, THE VARIABLE ACCOUNT,
THE PALLADIAN 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 ("Principal Office") is located
at 440 Lincoln Street, Worcester, MA 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, 1996, the
Company had over $6.7 billion in assets and over $25.8 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 and adopted its present name on
October 16, 1995. First Allmerica is the fifth oldest life insurance company in
America. As of December 31, 1996, First Allmerica and its subsidiaries
(including the Company) had over $13.3 billion in combined assets and over $45.3
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 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 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
("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 to serve as the underlying
investment vehicle for variable contracts, qualified retirement plans, life
insurance companies, and advisors to the Portfolios and their affiliates.
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.
16
<PAGE>
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
The Global Strategic Income Portfolio Fischer Francis Trees & Watts, 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 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 the total fee may vary from 0.00% to 4.00% depending on the
Portfolio's performance. Each Portfolio Manager also has agreed to invested $1
million in the Portfolio it manages, so once that investment is made 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.
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, MA 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 (the "1933 Act"), 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 AIMCO, 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.
17
<PAGE>
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.
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 Owner will
be notified of the change. If the 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 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 Owner's right to transfer.
DESCRIPTION OF THE CONTRACT
A. PAYMENTS.
The Company's underwriting requirements, which include receipt of the initial
payment and allocation instructions by the Company at its Principal Office, must
be met before a contract can be issued. These requirements 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 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
18
<PAGE>
$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 issue date, 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 Owner may change allocation instructions for new payments pursuant to a
written or telephone request. If telephone requests are elected by the Owner, a
properly completed authorization must be on file before telephone requests will
be honored. The 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 Owner identify
themselves by name and identify the Annuitant by name, date of birth and social
security number. All transfer instructions by telephone are tape recorded.
B. RIGHT TO REVOKE INDIVIDUAL RETIREMENT ANNUITY.
An individual purchasing a Contract intended to qualify as an Individual
Retirement Annuity ("IRA") may revoke the Contract at any time within ten days
after receipt of the Contract and receive a refund. In order to revoke the
Contract, the Owner must mail or deliver the Contract to the representative
through whom the Contract was purchased, to the Principal Office at 440 Lincoln
Street, Worcester, MA 01653, or to any local office of the Company. Mailing or
delivery must occur on or before ten days after receipt of the Contract for
revocation to be effective.
Within seven days the Company will provide a refund equal to the 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
Owner's Accumulated Value in the Sub-Accounts on the date of cancellation. Any
additional amounts refunded to the Owner will be paid by the Company.
C. RIGHT TO REVOKE ALL OTHER CONTRACTS.
In Georgia, Idaho, Indiana, Michigan, Missouri, North Carolina, Oklahoma,
Oregon, South Carolina, Texas, Utah, Washington and West Virginia, an Owner may
revoke the Contract at any time within ten days (20 in Idaho) after receipt of
the Contract and receive a refund as described under "B. Right to Revoke
Individual Retirement Annuity," above.
In all other states, an Owner may return the Contract at any time within ten
days (or the number of days required by state law if more than ten) after
receipt of the contract. The Company will pay to the Owner an amount equal to
the sum of (1) the difference between the premium paid, including fees, and any
amount allocated to the Variable Account; and (2) the Accumulated Value of
amounts allocated to the Variable Account as of the date the request is
received. If the contract was purchased as an IRA, the IRA revocation right
described above may be utilized in lieu of the special surrender right.
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D. TRANSFER PRIVILEGE.
At any time prior to the Annuity Date the 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. MORE INFORMATION ABOUT THE FIXED ACCOUNT."
Transfers to a Guarantee Period Account must be at least $1,000. If the amount
to be transferred to a Guarantee Period Account is less than $1,000, the Company
may transfer that amount to the Sub-Account which invests in the Money Market
Fund.
AUTOMATIC TRANSFERS (DOLLAR COST AVERAGING) AND AUTOMATIC ACCOUNT REBALANCING
OPTIONS. The Owner may elect automatic transfers of a predetermined dollar
amount, not less than $100, on a periodic basis (monthly, bi-monthly, quarterly,
semi-annually or annually) from the Global Strategic Fund, Money Market Fund or
the Fixed Account (the "source account") to one or more Funds. Automatic
transfers may not be made into the Fixed Account, the Guarantee Period Accounts
or, if applicable, the Fund being used as the source account. If an automatic
transfer would reduce the balance in the source account to less than $100, the
entire balance will be transferred proportionately to the chosen Funds.
Automatic transfers will continue until the amount in the source account on a
transfer date is zero or the Owner's request to terminate the option is received
by the Company. If additional amounts are allocated to the source account after
its balance has fallen to zero, this option will not restart automatically, and
the Owner must provide a new request to the Company.
The Owner may request automatic rebalancing of Sub-Account allocations on a
monthly, quarterly, semi-annual or annual basis in accordance with percentage
allocations specified by the Owner. As frequently as specified by the Owner, the
Company will review the percentage allocations in the Funds and, if necessary,
transfer amounts to ensure conformity with the designated percentage allocation
mix. If the amount necessary to re-establish the mix on any scheduled date is
less than $100, no transfer will be made. Automatic Account Rebalancing will
continue until the Owner's request to terminate the option is received by the
Company. If additional amounts are allocated to the source account after its
balance has fallen to zero, this option will not restart automatically and the
Owner must provide a new request to the Company.
The Company reserves the right to limit the number of Funds that may be utilized
for automatic transfers and rebalancing, and to discontinue either option upon
advance written notice. Currently, Dollar Cost Averaging and Automatic Account
Rebalancing may not be in effect simultaneously. Either option may be elected
when the Contract is purchased or at a later date.
E. SURRENDER.
At any time prior to the Annuity Date, the Owner may surrender the Contract and
receive its Accumulated Value, less applicable charges and adjusted for any
Market Value Adjustment ("Surrender Amount"). The Owner must return the Contract
and a signed, written request for surrender, satisfactory to the Company, to the
Principal Office. The amount payable to the Owner upon surrender will be based
on the Contract's Accumulated Value as of the Valuation Date on which the
request and the Contract are received at the Principal Office.
Before the Annuity Date, a contingent deferred sales charge may be deducted when
a Contract is surrendered if payments have been credited to the Contract during
the last seven full contract years. See "CHARGES AND DEDUCTIONS." The Contract
fee will be deducted upon surrender of the Contract.
After the Annuity Date, the Contract may be surrendered only if a commutable
period certain option has been elected. 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.
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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 Owners who are participants under Section 403(b) plans
or who are participants in the Texas Optional Retirement Program ("Texas ORP")
are restricted; see "TaxSheltered Annuities" and "Texas Optional Retirement
Program."
For important tax consequences which may result from surrender, see "FEDERAL TAX
CONSIDERATIONS."
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F. WITHDRAWALS.
At any time prior to the Annuity Date, an Owner may withdraw a portion of the
Accumulated Value of his or her Contract, subject to the limits stated below.
The Owner must file a signed, written request for withdrawals, satisfactory to
the Company, at the Principal Office. The written request must indicate the
dollar amount the Owner wishes to receive and the accounts from which such
amount is to be withdrawn. The amount withdrawn equals the amount requested by
the Owner plus any applicable contingent deferred sales charge, as described
under "CHARGES AND DEDUCTIONS." In addition, amounts withdrawn from a Guarantee
Period Account prior to the end of the applicable Guarantee Period will be
subject to a Market Value Adjustment, as described under "GUARANTEE PERIOD
ACCOUNTS."
Where allocations have been made to more than one account, a percentage of the
withdrawal may be allocated to each such account. A withdrawal from a
Sub-Account will result in cancellation of a number of units equivalent in value
to the amount withdrawn, computed as of the Valuation Date that the request is
received at the Principal Office.
Each withdrawal must be in a minimum amount of $100. No 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 "E. 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 Owners who are
participants under Section 403(b) plans or under the Texas ORP, see "Tax
Sheltered Annuities" and "Texas Optional Retirement Program."
For important tax consequences which may result from surrender and withdrawals,
see "FEDERAL TAX CONSIDERATIONS."
SYSTEMATIC WITHDRAWALS. The Owner may elect an automatic schedule of
withdrawals (systematic withdrawals) from amounts in the Sub-Accounts and/or the
Fixed Account on a monthly, bi-monthly, quarterly, semi-annual or annual basis.
Systematic withdrawals from Guarantee Period Accounts are not available. The
minimum amount of each withdrawal is $100, and will be subject to any applicable
withdrawal charges. If elected at the time of purchase, the Owner must designate
in writing the specific dollar amount of each withdrawal and the percentage of
this amount which should be taken from each designated Sub-Account and/or the
Fixed Account. Systematic withdrawals then will begin on the 16th day following
the issue date or the date elected, if later. If elected after the issue date,
the Owner may elect, by written request, a specific dollar amount and the
percentage of this amount to be taken from each designated Sub-Account and/or
the Fixed Account. Alternatively, the Owner may elect to withdraw a specific
percentage of the Accumulated Value calculated as of the withdrawal dates, and
may designate the percentage of this amount which should be taken from each
account. The first withdrawal will take place on the date the written request is
received at the Principal Office or, if later, on a date specified by the Owner.
If a withdrawal would cause the remaining Accumulated Value to be less than
$1,000, systematic withdrawals will be discontinued. Systematic withdrawals will
cease automatically on the Annuity Date. The Owner may change or terminate
systematic withdrawals only by written request to the Principal Office.
LIFE EXPECTANCY DISTRIBUTIONS. Prior to the Annuity Date an Owner who also is
the Annuitant may elect to make a series of systematic withdrawals from the
Contract according to a life expectancy distribution ("LED") option by returning
a properly signed LED request form to the Principal Office. The LED option
permits the Owner to make systematic withdrawals from the Contract over his or
her lifetime. The amount withdrawn from the Contract changes each year, because
life expectancy changes each year that a person lives. For example, actuarial
tables indicate that a person age 70 has a life expectancy of 16 years, but a
person who attains age 86 has a life expectancy of another 6.5 years.
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If an Owner elects the LED option, in each calendar year a fraction of the
Accumulated Value is withdrawn based on the Owner's then life expectancy. The
numerator of the fraction is 1 (one), and the denominator of the fraction is the
remaining life expectancy of the Owner, as determined annually by the Company.
The resulting fraction, expressed as a percentage, is applied to the Accumulated
Value at the beginning of the year to determine the amount to be distributed
during the year. The Owner may elect monthly, bi-monthly, quarterly,
semi-annual, or annual distributions, and may terminate the LED option at any
time. The Owner also may elect to receive distributions under a LED option which
is determined on the joint life expectancy of the Owner and a beneficiary. The
Company also may offer other systematic withdrawal options.
If an Owner makes withdrawals under the LED option prior to age 59 1/2, the
withdrawals may be treated by the Internal Revenue Service ("IRS") as premature
distributions from the Contract. The payments then would be taxed on an "income
first" basis and be subject to a 10% federal tax penalty. For more information,
see "FEDERAL TAX CONSIDERATIONS," "B. Taxation of the Contracts in General."
G. 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 "H. The Spouse of
the Owner as Beneficiary." The amount of the death benefit and the time
requirements for receipt of payment may vary depending upon whether the
Annuitant or an Owner dies first and whether death occurs prior to or after the
Annuity Date.
DEATH OF THE ANNUITANT PRIOR TO THE ANNUITY DATE. At the death of the Annuitant
(including an Owner who is also the Annuitant), the benefit is equal to the
greatest of (1) the Accumulated Value under the Contract increased for any
positive Market Value Adjustment; (2) gross payments 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 (3) the highest Accumulated Value
that would have been payable as a death benefit on any 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.
PAYMENT OF THE DEATH BENEFIT PRIOR TO THE ANNUITY DATE. The death benefit will
generally be paid to the Beneficiary in one sum within seven business days of
the receipt of due proof of death at the Principal Office unless the Owner has
specified a death benefit annuity option. Instead of payment in one sum, the
Beneficiary may, by written request, elect to:
(1) defer distribution of the death benefit for a period no more than five
years from the date of death; or
(2) receive a life annuity or an annuity for a period certain not extending
beyond the Beneficiary's life expectancy, with annuity benefit payments
beginning one year from the date of death.
If distribution of the death benefit is deferred under (1) or (2), any value in
the Guarantee Period Accounts will be transferred to the Sub-Account investing
in the 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 (2), but may not make additional
payments. The death benefit will reflect any earnings or losses experienced
during the deferral period. If there are multiple beneficiaries, the consent of
all is required.
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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.
H. THE SPOUSE OF THE OWNER AS BENEFICIARY.
The 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 Owner. Upon such election, the spouse will become the Owner and Annuitant
subject to the following: (1) any value in the Guarantee Period Accounts will be
transferred to the Sub-Account investing in the Money Market Fund; (2) 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 Owner will not be entitled to continue
the Contract upon such new Owner's death.
I. ASSIGNMENT.
The Contract, other than those sold in connection with certain qualified plans,
may be assigned by the Owner at any time prior to the Annuity Date and while the
Annuitant is alive. The Company will not be deemed to have knowledge of an
assignment unless it is made in writing and filed at the Principal Office. The
Company will not assume responsibility for determining the validity of any
assignment. If an assignment of the Contract is in effect on the Annuity Date,
the Company reserves the right to pay to the assignee, in one sum, that portion
of the Surrender Value of the Contract to which the assignee appears to be
entitled. The Company will pay the balance, if any, in one sum to the Owner in
full settlement of all liability under the Contract. The interest of the Owner
and of any beneficiary will be subject to any assignment.
For important tax liability which may result from assignments, see "FEDERAL TAX
CONSIDERATIONS."
J. ELECTING THE FORM OF ANNUITY AND THE ANNUITY DATE.
The Annuity Date is selected by the Owner. To the extent permitted in the
Owner's state, the Annuity Date may be the first day of any month (1) before the
Annuitant's 85th birthday, if the Annuitant's age on the issue date of the
Contract is 75 or under; or (2) within ten years from the issue date of the
Contract and before the Annuitant's 90th birthday, if the Annuitant's age on the
issue date is between 76 and 90. The Owner may elect to change the Annuity Date
by sending a request to the Principal Office at least one month before the 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.
Subject to certain restrictions described below, the Owner has the right (1) to
select the annuity option under which annuity benefit payments are to be made,
and (2) to determine whether payments are to be made on a fixed basis, a
variable basis, or a combination fixed and variable basis. Annuity benefit
payments are determined according to the annuity tables in the Contract, by the
annuity option selected, and by the investment performance of the Sub-Accounts
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
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payments will be fixed in amount. See "APPENDIX A. MORE INFORMATION ABOUT THE
FIXED ACCOUNT."
Under a variable annuity payout, a payment equal to the value of the fixed
number of Annuity Units in the Sub-Accounts is made monthly, quarterly,
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 options 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 a
commutable "period certain" option has been elected. Only beneficiaries entitled
to receive remaining payments for a "period certain" may elect to instead
receive a lump sum settlement.
If the Owner does not elect otherwise, a variable life annuity with periodic
payments for ten years guaranteed will be purchased. Changes in either the
Annuity Date or annuity option can be made up to one month prior to the Annuity
Date.
K. DESCRIPTION OF VARIABLE ANNUITY PAYOUT OPTIONS.
The Company provides the variable annuity payout options described below.
Currently, variable annuity payout options may be funded through the
Sub-Accounts investing in the Value Portfolio, the Growth Portfolio, the
International Growth Portfolio and the Global Strategic Income Portfolio. The
Company also provides these same annuity payout options funded through the Fixed
Account (fixed annuity payout 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 TEN YEARS. This variable
annuity is payable periodically during the lifetime of the payee with the
guarantee that if the payee should die before all payments have been made, the
remaining annuity benefit payments will continue to the Beneficiary.
VARIABLE LIFE ANNUITY PAYABLE PERIODICALLY DURING THE LIFETIME OF THE ANNUITANT
ONLY. It would be possible under this option for the Annuitant to receive only
one annuity benefit payment if the Annuitant dies prior to the due date of the
second annuity benefit payment, two annuity benefit payments if the Annuitant
dies before the due date of the third annuity benefit payment, and so on.
Payments, however, will continue during the lifetime of the Annuitant, no matter
how long he or she lives.
UNIT REFUND VARIABLE LIFE ANNUITY. This is an annuity payable periodically
during the lifetime of the Annuitant with the guarantee that if (1) exceeds (2)
then periodic variable annuity benefit payments will continue to the Beneficiary
until the number of such payments equals the number determined in (1).
Where: (1) is the dollar amount of the Accumulated Value divided by the
dollar amount of the first payment, and
(2) is the number of payments paid prior to the death of the payee.
JOINT AND SURVIVOR VARIABLE LIFE ANNUITY. This variable annuity is payable
jointly to two payees during their joint lifetime, and then continues thereafter
during the lifetime of the survivor. The amount of each payment to the survivor
is based on the same number of Annuity Units which applied during the joint
lifetime of the two payees. One of the payees must be either the person
designated as the Annuitant in the Contract or the Beneficiary. There is no
minimum number of payments under this option.
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JOINT AND TWO-THIRDS SURVIVOR VARIABLE LIFE ANNUITY. This variable annuity is
payable jointly to two payees during their joint lifetime, and then continues
thereafter during the lifetime of the survivor. The amount of each periodic
payment to the survivor, however, is based upon two-thirds of the number of
Annuity Units which applied during the joint lifetime of the two payees. One of
the payees must be the person designated as the Annuitant 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. This option may be
commutable, that is, the payee reserves the right to receive a lump sum in place
of installments, or it becomes noncommutable. The payee must reserve this right
at the time benefits begin.
It should be noted that the period certain option does not involve a life
contingency. In the computation of the payments under this option, the Company
charges for annuity rate guarantees, which guarantees include a factor for
mortality risks. 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 payout involving
a life contingency. The Company may discontinue or change this practice at any
time, but not with respect to election of the option made prior to the date of
any change in this practice. See "FEDERAL TAX CONSIDERATIONS" for a discussion
of the possible adverse tax consequences of selecting a period certain option.
L. ANNUITY BENEFIT PAYMENTS.
THE ANNUITY UNIT. On and after the Annuity Date, the Annuity Unit is a measure
of the value of the Annuitant's monthly annuity benefit payments under a
variable annuity option. The value of an Annuity Unit in each Sub-Account
initially was set at $1.00. The value of an Annuity Unit under a Sub-Account on
any Valuation Date thereafter is equal to the value of such unit on the
immediately preceding Valuation Date, multiplied by the product of (1) the net
investment factor of the Sub-Account for the current Valuation Period and (2) a
factor to adjust benefits to neutralize the assumed interest rate. The assumed
interest rate, discussed below, is incorporated in the variable annuity options
offered in the Contract.
DETERMINATION OF THE FIRST AND SUBSEQUENT ANNUITY BENEFIT PAYMENTS. The first
periodic annuity benefit payment is based upon the Accumulated Value as of a
date not more than four weeks preceding the date that the first annuity benefit
payment is due. Variable annuity benefit payments are due on the first of a
month,which is the date the payment is to be received by the Annuitant, and
currently are based on unit values as of the 15th day of the preceding month.
The Contract provides annuity rates which determine the dollar amount of the
first periodic payment under each form of annuity for each $1,000 of applied
value. For life option and noncommutable period certain options of ten or more
years, the annuity value is the Accumulated Value less any premium taxes and
adjusted for any Market Value Adjustment. For commutable period certain options
or any period certain option less than ten years, the value is 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.
The amount of the first monthly payment depends upon the form of annuity
selected, the sex (however, see "M. NORRIS Decision") and age of the Annuitant
and the value of the amount applied under the annuity option. The variable
annuity options offered by the Company are based on a 3 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-Accounts
funding the annuity exceeds the equivalent of the assumed interest rate for the
period. Variable annuity benefit payments will decrease over periods when the
actual net investment result of the respective Sub-Account is less than the
equivalent of the assumed interest rate for the period.
The dollar amount of the first periodic annuity benefit payment under life
annuity options and non-commutable period certain options of ten years or more
is determined by multiplying (1) the Accumulated
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Value applied under that option (after application of any Market Value
Adjustment and less premium tax, if any) divided by $1,000, by (2) the
applicable amount of the first monthly payment per $1,000 of value. For
commutable period certain options and any period certain option of less than ten
years, the Surrender Value less premium taxes, if any, is used rather than the
Accumulated Value. The dollar amount of the first variable annuity benefit
payment is then divided by the value of an Annuity Unit of the selected Sub-
Accounts to determine the number of Annuity Units represented by the first
payment. This number of Annuity Units remains fixed under all annuity options
except the joint and two-thirds survivor annuity option. For each subsequent
payment, the dollar amount of the variable annuity benefit payment is determined
by multiplying this fixed number of Annuity Units by the value of an Annuity
unit on the applicable Valuation Date.
After the first benefit payment, the dollar amount of each periodic variable
annuity benefit payment will vary with subsequent variations in the value of the
Annuity Unit of the selected Sub-Accounts. The dollar amount of each fixed
amount annuity benefit payment is fixed and will not change, except under the
joint and two-thirds survivor annuity option.
From time to time, the Company may offer Owners both fixed and variable annuity
rates more favorable than those contained in the Contract. Any such rates will
be applied uniformly to all Owners of the same class.
For an illustration of a variable annuity benefit payment calculation using a
hypothetical example, see "ANNUITY BENEFIT PAYMENTS" in the SAI.
M. NORRIS DECISION.
In the case of ARIZONA GOVERNING COMMITTEE V. NORRIS, the United States Supreme
Court ruled that, in connection with retirement benefit options offered under
certain employer-sponsored employee benefit plans, annuity options based on
sex-distinct actuarial tables are not permissible under Title VII of the Civil
Rights Act of 1964. The ruling requires that benefits derived from contributions
paid into a plan after August 1, 1983 be calculated without regard to the sex of
the employee. Annuity benefits attributable to payments received by the Company
under a Contract issued in connection with an employer-sponsored benefit plan
affected by the NORRIS decision will be based on the greater of (1) the
Company's unisex Non-Guaranteed Current Annuity Option Rates or (2) the
guaranteed unisex rates described in such Contract, regardless of whether the
Annuitant is male or female.
N. COMPUTATION OF VALUES.
THE ACCUMULATION UNIT. Each net payment is allocated to the accounts selected
by the Owner. Allocations to the Sub-Accounts are credited to the Contract in
the form of Accumulation Units. Accumulation Units are credited separately for
each Sub-Account. The number of Accumulation Units of each Sub-Account credited
to the Contract is equal to the portion of the net payment allocated to the
Sub-Account, divided by the dollar value of the applicable Accumulation Unit as
of the Valuation Date the payment is received at the Principal Office. The
number of Accumulation Units resulting from each payment will remain fixed
unless changed by a subsequent split of Accumulation Unit value, a transfer, a
withdrawal, or surrender. The dollar value of an Accumulation Unit of each
Sub-Account varies from Valuation Date to Valuation Date based on the investment
experience of that Sub-Account and will reflect the investment performance,
expenses and charges of its 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.
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NET INVESTMENT FACTOR. The Net Investment Factor is an index that measures the
investment performance of a Sub-Account from one Valuation Period to the next.
This factor is equal to 1.000000 plus the result from dividing (1) by (2) and
subtracting (3) and (4) where:
(1) is the investment income of a Sub-Account for the Valuation Period,
including realized or unrealized capital gains and losses during the
Valuation Period, adjusted for provisions made for taxes, if any;
(2) is the value of that Sub-Account's assets at the beginning of the
Valuation Period;
(3) is a charge for mortality and expense risks equal to 1.25% on an annual
basis of the daily value of the Sub-Account's assets; and
(4) is an administrative charge 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 the SAI.
CHARGES AND DEDUCTIONS
Deductions under the Contract and charges against the assets of the Sub-Accounts
are described below. Other deductions and expenses paid out of the assets of the
Funds are described in the prospectuses and SAIs of The Palladian-SM- Trust and
Allmerica Investment Trust.
A. VARIABLE ACCOUNT DEDUCTIONS.
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.
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
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profits. There is no direct relationship, however, between the amount of
administrative expenses imposed on a given contract and the amount of expenses
actually attributable to that contract.
Deductions for the Contract fee (described under "B. Contract Fee") and for the
administrative expense charge are designed to reimburse the Company for the cost
of administration and related expenses and are not expected to be a source of
profit. The administrative functions and expense assumed by the Company in
connection with the Variable Account and the Contract 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 Funds. The prospectuses and SAIs 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.
Where permitted by law, the Contract fee also may be waived for Contracts where,
on the issue date, either the Owner or the Annuitant is within the following
class of individuals ("eligible persons"): employees and registered
representatives of any brokerdealer which has entered into a sales agreement
with the Company to sell the Contract; employees of the Company, its affiliates
and subsidiaries; officers, directors, trustees and employees of any of the
Funds; investment managers or Sub-Advisers; and the spouses of and immediate
family members residing in the same household with such eligible persons.
"Immediate family members" means children, siblings, parents and grandparents.
C. PREMIUM TAXES.
Some states and municipalities impose a premium tax on variable annuity
contracts. State premium taxes currently range up to 3.5%.
The Company makes a charge for state and municipal premium taxes, when
applicable, and deducts the amount paid as a premium tax charge. The current
practice of the Company is to deduct the premium tax charge in one of two ways:
(1) if the premium tax was paid by the Company when payments were received,
the premium tax charge is deducted on a pro-rata basis when withdrawals
are made, upon surrender of the Contract, or when annuity benefit payments
begin (the Company reserves the right instead to deduct the premium tax
charge for these contracts at the time the payments are received); or
(2) the premium tax charge is deducted when annuity benefit payments begin.
In no event will a deduction be taken before the Company has incurred a tax
liability under applicable state law
If no amount for premium tax was deducted 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.
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D. CONTINGENT DEFERRED SALES CHARGE.
No charge for sales expense is deducted from payments at the time the payments
are made. A contingent deferred sales charge is deducted, however, 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 accumulated earnings, then from the withdrawal without surrender
charge amount, if greater than earnings; then from Old Payments, and then from
New Payments. Earnings and any excess withdrawal without surrender charge
amount, if applicable, followed by Old Payments may be withdrawn from the
Contract at any time without the imposition of a contingent deferred sales
charge. If a withdrawal is attributable all or in part to New Payments, a
contingent deferred sales charge may apply.
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
DATE OF CHARGE AS PERCENTAGE OF
PAYMENT NEW 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 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 state law,
the Company will waive the contingent deferred sales charge in the event that an
Owner (or the Annuitant, if the Owner is not an individual): (1) is admitted to
a medical care facility after the issue date of the Contract and remains
confined there until the later of one year after the issue date or 90
consecutive days; (2) is first diagnosed by a licensed physician as having a
fatal illness after the issue date of the Contract; (3) is physically disabled
after the issue date of the Contract and before attaining age 65; or (4)
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
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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
four situations discussed above, no additional payments under the Contract will
be accepted.
In addition, where permitted by law, the Company may reduce or waive contingent
deferred sales charges and/or credit additional amounts on Contracts issued
where either the Owner or the Annuitant on the issue date is within the
following class of individuals ("eligible persons"): employees and registered
representatives of any broker-dealer which has entered into a Sales Agreement
with the Company to sell the Contract; employees of the Company, its
subsidiaries and affiliates; 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 reduce the amount of the
contingent deferred sales, the period during which it applies, or both, and/or
credit additional amounts on the Contract when the Contract is sold to
individuals or groups of individuals in a manner that reduces sales expenses.
The Company will consider (1) the size and type of group; (2) the total amount
of payments to be received and the manner in which payments are remitted; (3)
the purpose for which the Contract is being purchased and whether that purpose
makes it likely that costs and expenses will be reduced; (4) other transactions
where sales expenses are likely to be reduced; or (5) the level of commissions
paid to selling broker-dealers or certain financial institutions with respect to
contracts within the same group or class (for example, broker-dealers who offer
the Contract in connection with financial planning services offered on a
fee-for-service basis). Finally, contingent deferred sales charges may be waived
under Section 403(b) Contracts where the amount withdrawn is being contributed
to a life insurance policy issued by the Company as part of the individual's
Section 403(b) plan. Any reduction or elimination in the amount or duration of
the contingent deferred sales charge will not discriminate unfairly among
Owners. The Company will not make any changes to this charge where prohibited by
law.
Pursuant to Section 11 of the 1940 Act and Rule 11a-2 thereunder, the contingent
deferred sales charge is modified to effect certain exchanges of existing
contracts issued by the Company for this Contract. See "EXCHANGE OFFER" in the
SAI.
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<PAGE>
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):
<TABLE>
<S> <C>
Where (1) The Accumulated Value as of the Valuation Date coincident with or next
is: following the date of receipt of the request for withdrawal, reduced by total
gross payments not previously withdrawn ("Cumulative Earnings")
Where (2) 15% of the Accumulated Value as of the Valuation Date coincident with or next
is: 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) The amount calculated under the Company's life expectancy distribution (see
is: "Life Expectancy Distributions,") whether or not the withdrawal was part of
such distribution (applies only if the Annuitant is also an Owner)
</TABLE>
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) LED 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.
SURRENDERS. In the case of a complete surrender, the amount received by the
Owner is equal to the entire Accumulated Value under the Contract, net of the
applicable contingent deferred sales charge on New Payments, the Contract fee
and any applicable tax withholding, and adjusted for any applicable Market Value
Adjustment. Subject to the same rules applicable to withdrawals, the Company
will not assess a contingent deferred sales charge on an amount equal to the
greater of the Withdrawal Without Surrender Charge amount, described above, or
the life expectancy distribution, if applicable.
Where an Owner who is a trustee under a pension plan surrenders, in whole or in
part, the Contract on a terminating employee, the trustee will be permitted to
reallocate all or a part of the total Accumulated Value under the Contract to
other Contracts issued by the Company and owned by the trustee, with no
deduction for any otherwise applicable contingent deferred sales charge. Any
such reallocation will be at the unit values for the Sub-Accounts as of the
Valuation Date on which a written, signed request is received at the Principal
Office.
For further information on surrender and withdrawal, including minimum limits on
amount withdrawn and amounts remaining under the Contract in the case of
withdrawal, and important tax considerations, see "E. Surrender" and "F.
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.
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<PAGE>
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 12 transfers in a Contract year will be free of
transfer charge, but reserves the right to assess a charge, guaranteed never to
exceed $25, for each subsequent transfer in a Contract year. For more
information, see "D. Transfer Privilege."
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 1933 Act or
the 1940 Act. Accordingly, the staff of the SEC has not reviewed the disclosures
in this Prospectus relating to the Guarantee Period Accounts or the Fixed
Account. Nevertheless, disclosures regarding the Guarantee Period Accounts and
the Fixed Account of this Contract or any benefits offered under these accounts
may be subject to the provisions of the 1933 Act relating to the accuracy and
completeness of statements made in this Prospectus.
INVESTMENT OPTIONS. In most jurisdictions, Guarantee Periods ranging from two
through ten years may be available under the Contract. Each Guarantee Period
Account established for the Owner is accounted for separately in a non-unitized
segregated account. Each Guarantee Period Account provides for the accumulation
of interest at a Guaranteed Interest Rate. The Guaranteed Interest Rate on
amounts allocated or transferred to a Guarantee Period Account is determined
from time to time by the Company in accordance with market conditions; however,
once an interest rate is in effect for a Guarantee Period Account, the Company
may not change it during the duration of the Guarantee Period. In no event will
the Guaranteed Interest Rate be less than 3%.
To the extent permitted by law, the Company reserves the right at any time to
offer Guarantee Periods with durations that differ from those which were
available when the Contract initially was issued and to stop accepting new
allocations, transfers or renewals to a particular Guarantee Period.
Owners may allocate net payments or make transfers from any of the Sub-Accounts,
the Fixed Account or an existing Guarantee Period Account to establish a new
Guarantee Period Account at any time prior to the Annuity Date. (In Oregon and
Massachusetts, payments and transfers to the Fixed Account are subject to
certain restrictions. See APPENDIX A.) Transfers from a Guarantee Period Account
on any date other than on the day following the expiration of that Guarantee
Period will be subject to a Market Value Adjustment. The Company establishes a
separate investment account each time the Owner allocates or transfers amounts
to a Guarantee Period Account except that amounts allocated to the same
Guarantee Period on the same day will be treated as one Guarantee Period
Account. The minimum that may be allocated to establish a Guarantee Period
Account is $1,000. If less than $1,000 is allocated, the Company reserves the
right to apply that amount to the Money Market Fund. The Owner may allocate
amounts to any of the Guarantee Periods available.
At least 45 days, but not more than 75 days, prior to the end of a Guarantee
Period, the Company will notify the Owner in writing of the expiration of that
Guarantee Period. At the end of a Guarantee Period the Owner may transfer
amounts to the Sub-Accounts, the Fixed Account or establish a new Guarantee
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<PAGE>
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. This
practice may be discontinued or changed at the Company's discretion.
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." All other
transfers, withdrawals, or a surrender prior to the end of a Guarantee Period
will be subject to a Market Value Adjustment, which may increase or decrease the
account value. Amounts applied under an annuity option are treated as
withdrawals when calculating the Market Value Adjustment. The Market Value
Adjustment will be determined by multiplying the amount taken from each
Guarantee Period Account before deduction of any Surrender Charge by the market
value factor. The market value factor for each Guarantee Period Account is equal
to:
[(1+i)/(1+j)]((n/365)) - 1
where: i is the Guaranteed Interest Rate expressed as a decimal (for example: 3%
= 0.03) being credited to the current Guarantee Period;
j is the new Guaranteed Interest Rate, expressed as a decimal, for a
Guarantee Period with a duration equal to the number of years remaining
in the current Guarantee Period, rounded to the next higher number of
whole years. If that rate is not available, the Company will use a
suitable rate or index allowed by the Department of Insurance; and
n is the number of days remaining from the effective Valuation Date to
the end of the current Guarantee Period.
Based on the application of this formula, the value of a Guarantee Period
Account will increase after the Market Value Adjustment is applied if the then
current market rates are lower than the rate being credited to the Guarantee
Period Account. Similarly, the value of a Guarantee Period Account will decrease
after the Market Value Adjustment is applied if the then current market rates
are higher than the rate being credited to the Guarantee Period Account. The
Market Value Adjustment is limited, however, so that even if the account value
is decreased after application of a Market Value Adjustment, it will equal or
exceed the Owner's principal plus 3% earnings per year less applicable Contract
fees. Conversely, if the then current market rates are lower and the account
value is increased after the Market Value Adjustment is applied, the increase in
value also is affected by the minimum guaranteed rate of 3% such that the amount
that will be added to the Guarantee Period Account is limited to the difference
between the amount earned and the 3% minimum guaranteed earnings. For examples
of how the Market Value Adjustment works, see APPENDIX B.
PROGRAM TO PROTECT PRINCIPAL AND PROVIDE GROWTH POTENTIAL. Under this feature,
the Owner elects a Guarantee Period and one or more Sub-Accounts. The Company
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 then will be allocated to the
preselected Guarantee Period Account and the remaining balance to the other
investment options selected by the Owner in accordance with the procedures
described in "A. Payments."
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<PAGE>
WITHDRAWALS. Prior to the Annuity Date, the Owner may make withdrawals of
amounts held in the Guarantee Period Accounts. Withdrawals from these accounts
will be made in the same manner and be subject to the same rules as set forth
under "E. Surrender" and "F. Withdrawals." In addition, the following provisions
also apply to withdrawals from a Guarantee Period Account: (1) a Market Value
Adjustment will apply to all withdrawals, including Withdrawals without
Surrender Charge, unless made at the end of the Guarantee Period; and (2) the
Company reserves the right to defer payments of amounts withdrawn from a
Guarantee Period Account for up to six months from the date it receives the
withdrawal request. If deferred for 30 days or more, the Company will pay
interest on the amount deferred at a rate of at least 3%.
In the event that a Market Value Adjustment applies to a withdrawal of a portion
of the value of a Guarantee Period Account, it will be calculated on the amount
requested and deducted or added to the amount remaining in the Guarantee Period
Account. If the entire amount in a Guarantee Period Account is requested, the
adjustment will be made to the amount payable. If a contingent deferred sales
charge applies to the withdrawal, it will be calculated as set forth under "D.
Contingent Deferred Sales Charge" after application of the Market Value
Adjustment.
FEDERAL TAX CONSIDERATIONS
The effect of federal income taxes on the value of a Contract, on withdrawals or
surrenders, on annuity benefit payments, and on the economic benefit to the
Owner, Annuitant, or beneficiary depends upon a variety of factors. The
following discussion is based upon the Company's understanding of current
federal income tax laws as they are interpreted as of the date of this
Prospectus. No representation is made regarding the likelihood of continuation
of current federal income tax laws or of current interpretations by the IRS. In
addition, this discussion does not address state or local tax consequences that
may be associated with this Contract.
IT SHOULD BE RECOGNIZED THAT THE FOLLOWING DISCUSSION OF FEDERAL INCOME TAX
ASPECTS OF AMOUNTS RECEIVED UNDER VARIABLE ANNUITY CONTRACTS IS NOT EXHAUSTIVE,
DOES NOT PURPORT TO COVER ALL SITUATIONS, AND IS NOT INTENDED AS TAX ADVICE. A
QUALIFIED TAX ADVISER ALWAYS SHOULD BE CONSULTED WITH REGARD TO THE APPLICATION
OF LAW TO INDIVIDUAL CIRCUMSTANCES.
The Company intends to make a charge for any effect which the income, assets, or
existence of the Contract, the Variable Account or the Sub-Accounts may have
upon its tax. The Variable Account presently is not subject to tax, but the
Company reserves the right to assess a charge for taxes should the Variable
Account at any time become subject to tax. Any charge for taxes will be assessed
on a fair and equitable basis in order to preserve equity among classes of
Owners and with respect to each separate account as though that separate account
were a separate taxable entity.
The Variable Account is considered a part of and taxed with the operations of
the Company. The Company is taxed as a life insurance company under Subchapter L
of the Internal Revenue Code (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 diversified adequately if no
more than 55% of the value of its assets is represented by any one investment,
no more than 70% by any two investments, no more than 80% by any three
investments, and no more than 90% by any four investments. If the investments
are not adequately diversified, the income on a contract, for any taxable year
of the owner, would be treated as ordinary income received or accrued by the
owner. It is anticipated that the Portfolios of the Palladian-SM- Trust and the
Money Market Fund of Allmerica Investment Trust will comply with the current
diversification requirements. In the event that future IRS regulations and/or
rulings would require Contract modifications in order to remain in compliance
with the diversification standards, the Company will make reasonable efforts to
comply, and it reserves the right to make such changes as it deems appropriate
for that purpose.
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A. QUALIFIED AND NON-QUALIFIED CONTRACTS.
From a federal tax viewpoint there are two types of variable annuity contracts:
"qualified" contracts and "non-qualified" contracts. A qualified contract is one
that is purchased in connection with a retirement plan which meets the
requirements of Sections 401, 403, or 408 of the Code, while a non-qualified
contract is one that is not purchased in connection with one of the indicated
retirement plans. The tax treatment for certain withdrawals or surrenders will
vary, depending on whether they are made from a qualified contract or a
non-qualified contract. For more information on the tax provisions applicable to
qualified contracts, see "D. Provisions Applicable to Qualified Employer Plans"
below.
B. TAXATION OF THE CONTRACTS IN GENERAL.
The Company believes that the Contract described in this Prospectus will, with
certain exceptions (see "Non-Natural Owner" below), be considered an annuity
contract under Section 72 of the Code. This section governs the taxation of
annuities. The following discussion concerns annuities subject to Section 72.
WITHDRAWALS PRIOR TO ANNUITIZATION. With certain exceptions, any increase in
the Contract's Accumulated Value is not taxable to the Owner until it is
withdrawn from the Contract. If the Contract is surrendered or amounts are
withdrawn prior to the Annuity Date, any withdrawal of investment gain in value
over the cost basis of the Contract will be taxed as ordinary income. Under the
current provisions of the Code, amounts received under an annuity contract prior
to annuitization (including payments made upon the death of the annuitant or
owner), generally are first attributable to any investment gains credited to the
contract over the taxpayer's "investment in the contract." Such amounts will be
treated as gross income subject to federal income taxation. "Investment in the
Contract" is the total of all payments to the Contract which were not excluded
from the Owner's gross income less any amounts previously withdrawn which were
not included in income. Section 72(e)(11)(A)(ii) requires that all non-qualified
deferred annuity contracts issued by the same insurance company to the same
owner during a single calendar year be treated as one contract in determining
taxable distributions.
ANNUITY PAYOUTS AFTER ANNUITIZATION. When annuity benefit payments are
commenced under the Contract, generally a portion of each payment may be
excluded from gross income. The excludable portion generally is determined by a
formula that establishes the ratio that the 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 the cost basis is recovered, a deduction for the difference is allowed on
the annuitant's final tax return.
PENALTY ON DISTRIBUTION. A 10% penalty tax may be imposed on the withdrawal of
investment gains if the withdrawal is made prior to age 59 1/2. The penalty tax
will not be imposed on withdrawals taken on or after age 59 1/2, or if the
withdrawal follows the death of the Owner (or, if the Owner is not an
individual, the death of the primary Annuitant, as defined in the Code) or, in
the case of the Owner's "total disability" (as defined in the Code).
Furthermore, under Section 72 of the Code, this penalty tax will not be imposed,
irrespective of age, if the amount received is one of a series of "substantially
equal" periodic payments made at least annually for the life or life expectancy
of the payee. This requirement is met when the Owner elects to have
distributions made over the Owner's life expectancy, or over the joint life
expectancy of the Owner and beneficiary. The requirement that the amount be paid
out as one of a series of "substantially equal" periodic payments is met when
the number of units withdrawn to make each distribution is substantially the
same. Any modification, other than by reason of death or disability, of
distributions which are part of a series of substantially equal periodic
payments that occurs before the Owner's age 59 1/2 or five years, will subject
the Owner to the 10% penalty tax on the prior distributions.
In a Private Letter Ruling, the IRS took the position that where distributions
from a variable annuity contract were determined by amortizing the accumulated
value of the contract over the taxpayer's remaining life expectancy (such as
under the Contract's LED option), and the option could be changed or terminated
at any time, the distributions failed to qualify as part of a "series of
substantially equal
36
<PAGE>
payments" within the meaning of Section 72 of the Code. The distributions,
therefore, were subject to the 10% federal penalty tax. This Private Letter
Ruling may be applicable to an Owner who receives distributions under the LED
option prior to age 59 1/2. Subsequent Private Letter Rulings, however, have
treated LED-type withdrawal programs as effectively avoiding the 10% penalty
tax. The position of the IRS on this issue is unclear.
ASSIGNMENTS OR TRANSFERS. If the Owner transfers (assigns) the Contract to
another individual as a gift prior to the Annuity Date, the Code provides that
the Owner will incur taxable income at the time of the transfer. An exception is
provided for certain transfers between spouses. The amount of taxable income
upon such taxable transfer is equal to any investment gain in value over the
Owner's cost basis at the time of the transfer. The transfer also is subject to
federal gift tax provisions. Where the Owner and Annuitant are different
persons, the change of ownership of the Contract to the Annuitant on the Annuity
Date, as required under the Contract, is a gift and will be taxable to the Owner
as such; however, the Owner will not incur taxable income. Instead, the
Annuitant will incur taxable income upon receipt of annuity benefit payments as
discussed above.
NON-NATURAL OWNERS. As a general rule, deferred annuity contracts owned by
"non-natural persons" (e.g., a corporation) are not treated as annuity contracts
for federal tax purposes, and the investment income attributable to
contributions made after February 28, 1986 is taxed as ordinary income that is
received or accrued by the owner during the taxable year. This rule does not
apply to annuity contracts purchased with a single payment when the annuity date
is no later than a year from the issue date or to deferred annuities owned by
qualified employer plans, estates, employers with respect to a terminated
pension plan, and entities other than employers, such as a trust, holding an
annuity as an agent for a natural person. This exception, however, will not
apply in cases of any employer who is the owner of an annuity contract under a
non-qualified deferred compensation plan.
DEFERRED COMPENSATION PLANS OF STATE AND LOCAL GOVERNMENTS AND TAX-EXEMPT
ORGANIZATIONS. Under Section 457 of the Code, deferred compensation plans
established by governmental and certain other tax-exempt employers for their
employees may invest in annuity contracts. Contributions and investment earnings
are not taxable to employees until distributed. With respect to payments made
after February 28, 1986, however, a contract owned by a state or local
government or a tax-exempt organization will not be treated as an annuity under
Section 72. In addition, plan assets are treated as property of the employer,
and are subject to the claims of the employer's general creditors.
C. TAX WITHHOLDING.
The Code requires withholding with respect to payments or distributions from
non-qualified contracts and IRAs, unless a taxpayer elects not to have
withholding. A 20% withholding requirement applies to distributions from most
other qualified contracts. In addition, the Code requires reporting to the IRS
of the amount of income received with respect to payment or distributions from
annuities.
The tax treatment of certain withdrawals or surrenders of the non-qualified
Contracts offered by this Prospectus will vary according to whether or not 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 retirement plans, as defined by the Code,
are complex and vary according to the type of plan. Benefits under a qualified
plan may be subject to that plan's terms and conditions irrespective of the
terms and conditions of any annuity contract used to fund such benefits. As
such, the following is simply a general description of various types of
qualified plans that may use the Contract. Before purchasing any annuity
contract for use in funding a qualified plan, more specific information should
be obtained.
A qualified Contract may include special provisions (endorsements) changing or
restricting rights and benefits otherwise available to an Owner of a
non-qualified Contract. Individuals purchasing a qualified
37
<PAGE>
Contract should review carefully any such changes or limitations which may
include restrictions to ownership, transferability, assignability,
contributions, and distributions.
CORPORATE AND SELF-EMPLOYED ("H.R. 10" AND "KEOGH") PENSION AND PROFIT SHARING
PLANS. Sections 401(a), 401(k) and 403(a) of the Code permit business employers
and certain associations to establish various types of tax-favored retirement
plans for employees. The Self-Employed Individuals' Tax Retirement Act of 1962,
as amended, permits Self-Employed individuals to establish similar plans for
themselves and their employees. Employers intending to use qualified Contracts
in connection with such plans should seek competent advice as to the suitability
of the Contract to their specific needs and as to applicable Code limitations
and tax consequences.
The Company can provide prototype plans for certain pension or profit sharing
plans for review by the plan's legal counsel. For information, ask your
financial representative.
INDIVIDUAL RETIREMENT ANNUITIES. Section 408 of the Code permits eligible
individuals to contribute to an individual retirement program known as an
Individual Retirement Annuity ("IRA"). IRAs are subject to limits on the amounts
that may be contributed, the persons who may be eligible, and on the time when
distributions may commence. In addition, certain distributions from other types
of retirement plans may be "rolled over," on a tax-deferred basis, to an IRA.
Purchasers of an IRA Contract will be provided with supplementary information as
may be required by the IRS or other appropriate agency, and will have the right
to revoke the Contract as described in this Prospectus. See "B. Right to Revoke
Individual Retirement Annuities."
Eligible employers that meet specified criteria may establish simplified
employee pension plans (SEP-IRAs) or SIMPLE IRA plans for their employees using
the employees IRAs. Employer contributions that may be made to such plans are
larger than the amounts that may be contributed to regular IRAs and may be
deductible to the employer.
TAX SHELTERED ANNUITIES ("TSAS"). Under the provisions of Section 403(b) of the
Code, payments made to annuity contracts purchased for employees under annuity
plans adopted by public school systems and certain organizations which are tax
exempt under Section 501(c)(3) of the Code are excludable from the gross income
of such employees to the extent that total annual payments do not exceed the
maximum contribution permitted under the Code. Purchasers of TSA Contracts
should seek competent advice as to eligibility, limitations on permissible
payments and other tax consequences associated with the Contracts.
Withdrawals or other distributions attributable to salary reduction
contributions (including earnings thereon) made to a TSA contract after December
31, 1988, may not begin before the employee attains age 59, separates from
service, dies or becomes disabled. In the case of hardship, an Owner may
withdraw amounts contributed by salary reduction, but not the earnings on such
amounts. Even though a distribution may be permitted under these rules (e.g.,
for hardship or after separation from service), it may be subject to a 10%
penalty tax as a premature distribution, in addition to income tax.
TEXAS OPTIONAL RETIREMENT PROGRAM. Distributions under a TSA Contract issued to
participants in the Texas Optional Retirement Program may not be received except
in the case of the participant's death, retirement or termination of employment
in the Texas public institutions of higher education. These additional
restrictions are imposed under the Texas Government Code and a prior opinion of
the Texas Attorney General.
REPORTS
The 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 Owner containing a statement of his or her account, including unit values
and other information as required by applicable law, rules and regulations.
38
<PAGE>
LOANS (QUALIFIED CONTRACTS ONLY)
Loans are available to Owners of TSA Contracts (i.e., Contracts issued under
Section 403(b) of the Code and to Contracts issued to plans qualified under
Sections 401(a) and 401(k) of the Code. Loans are subject to provisions of the
Code and to applicable qualified retirement plan rules. Tax advisors and plan
fiduciaries should be consulted prior to exercising loan privileges.
Loaned amounts will first be withdrawn from Sub-Account and Fixed Account values
on a pro-rata basis until exhausted. Thereafter, any additional amounts will be
withdrawn from the Guarantee Period Accounts (pro-rata by duration and LIFO
(last-in, first-out) within each duration), subject to any applicable Market
Value Adjustments. The maximum loan amount will be determined under the
Company's maximum loan formula. The minimum loan amount is $1,000. Loans will be
secured by a security interest in the Contract and the amount borrowed will be
transferred to a loan asset account within the Company's General Account, where
it will accrue interest at a specified rate below the then-current loan rate.
Generally, loans must be repaid within five years or less, and repayments must
be made quarterly and in substantially equal amounts. Repayments will be
allocated pro rata in accordance with the most recent payment allocation, except
that any allocations to a Guarantee Period Account will instead be allocated to
the Money Market Fund.
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 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 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 Owners on a
basis to be determined by the Company.
Shares of the Funds also are issued to variable accounts of the Company and its
affiliates which issue variable life contracts ("mixed funding"). Shares of the
Funds are also issued to other unaffiliated insurance companies ("shared
funding"). Shares of the Funds may be offered to certain qualified retirement
plans. It is conceivable that in the future such mixed funding, shared funding
or sales to qualified plans may be disadvantageous for variable life owners,
variable annuity owners or plan participants. Although the Company and the
Trustees of The Palladian-SM- Trust and of Allmerica Investment Trust do not
currently foresee any such disadvantages to variable life insurance owners,
variable annuity owners or plan participants, the Company and the respective
Trustees intend to monitor events in order to identify any material conflicts
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 may be
required to 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 Owners of all such changes. If the Company deems it to be
in the best interest of Owners, and subject to any approvals that may be
required under applicable law, the Variable Account or any Sub-Accounts may be
operated as a management
39
<PAGE>
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.
The Company reserves the right, subject to compliance with applicable law, to
(1) transfer assets from the Variable Account or Sub-Accounts to another of the
Company's separate 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 Owners in accordance with the 1940 Act.
CHANGES TO COMPLY WITH LAW AND AMENDMENTS
The Company reserves the right, without the consent of Owners, to suspend sales
of the Contract as presently offered, and to make any change to provisions of
the Contract to comply with, or give the Owners the benefit of, any federal or
state statute, rule or regulations, including but not limited to requirements
for annuity contracts and retirement plans under the Code and pertinent
regulations or any state statute or regulation.
VOTING RIGHTS
The Company will vote Fund shares held by each Sub-Account in accordance with
instructions received from Owners and, after the Annuity Date, from the
Annuitants. Each person having a voting interest in a Sub-Account will be
provided with proxy materials of the 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 an Owner or Annuitant may cast will be determined by
the Company as of the record date established by the Fund. During the
accumulation phase, the number of Fund shares attributable to each Owner will be
determined by dividing the dollar value of the Accumulation Units of the
Sub-Account credited to the contract by the net asset value of one Fund share.
During the annuity payout phase, 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.
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, MA 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
40
<PAGE>
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
Owners or to the Variable Account. Any contingent deferred sales charges
assessed on the Contract will be retained by the Company.
Owners may direct any inquiries to their financial representative or to
Allmerica Investments, Inc., 440 Lincoln Street, Worcester, MA 01653, Telephone
800-917-1909.
LEGAL MATTERS
There are no legal proceedings pending to which the Variable Account is a party.
FURTHER INFORMATION
A Registration Statement under the 1933 Act relating to this offering has been
filed with the SEC. Certain portions of the Registration Statement and
amendments have been omitted in this Prospectus pursuant to the rules and
regulations of the SEC. The omitted information may be obtained from the SEC's
principal office in Washington, DC, upon payment of the SEC's prescribed fees.
41
<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 part of the Company's General Account and 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 amount in excess of the Withdrawal
Without Surrender Charge 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 at least 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.
A-1
<PAGE>
APPENDIX B
SURRENDER CHARGES AND THE MARKET VALUE ADJUSTMENT
PART 1: SURRENDER CHARGES
FULL SURRENDER
Assume a payment of $50,000 is made on the issue date and no additional payments
are made. Assume there are no withdrawals and that the Withdrawal Without
Surrender Charge Amount is equal to the greater of 15% of the current
Accumulated Value or the accumulated earnings in the Contract. The table below
presents examples of the surrender charge resulting from a full surrender of the
Owner's Account, based on hypothetical Accumulated Values.
<TABLE>
<CAPTION>
HYPOTHETICAL WITHDRAWAL SURRENDER
CONTRACT 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 issue date and no additional payments
are made. Assume that the Withdrawal Without Surrender Charge Amount is equal to
the greater of 15% of the current Accumulated Value or the accumulated earnings
in the contract and there are withdrawals as detailed below. The table below
presents examples of the surrender charge resulting from withdrawals, based on
hypothetical Accumulated Values.
<TABLE>
<CAPTION>
HYPOTHETICAL WITHDRAWAL SURRENDER
CONTRACT ACCUMULATED WITHOUT SURRENDER CHARGE SURRENDER
YEAR VALUE WITHDRAWALS 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.
A-2
<PAGE>
5. Surrender charges, if any, are calculated in the same manner as shown in
the examples in Part 1.
NEGATIVE MARKET VALUE ADJUSTMENT (UNCAPPED)
Assume that on the date of surrender, the current rate (j) is 10.00% or 0.10
The market value factor = [(1+i)/(1+j)](n/365) - 1
= [(1+.08)/(1+.10)](2555/365) - 1
= (.98182)(7) - 1
= -.12054
The market value adjustment = the market value factor multiplied by the
withdrawal
= -.12054 X $62,985.60
= -$7,592.11
POSITIVE MARKET VALUE ADJUSTMENT (UNCAPPED)
Assume that on the date of surrender, the current rate (j) is 7.00% or 0.07
The market value factor = [(1+i)/(1+j)](n/365) - 1
= [(1+.08)/(1+.07)](2555/365) - 1
= (1.0093)(7) - 1
= .06694
The market value adjustment = the market value factor multiplied by the
withdrawal
= .06694 X $62,985.60
= $4,216.26
NEGATIVE MARKET VALUE ADJUSTMENT (CAPPED)
Assume that on the date of surrender, the current rate (j) is 11.00% or 0.11
The market value factor = [(1+i)/(1+j)](n/365) - 1
= [(1+.08)/(1+.11)](2555/365) - 1
= (.97297)(7) - 1
= .17454
The market value adjustment = Minimum of the market value factor multiplied by
the withdrawal or
the negative of the excess interest earned over 3%
= Minimum (-.17454 X $62,985.60 or -$8,349.25)
= Minimum (-$10,993.51 or -$8,349.25)
= $8,349.25
POSITIVE MARKET VALUE ADJUSTMENT (CAPPED)
Assume that on the date of surrender, the current rate (j) is 6.00% or 0.06
The market value factor = [(1+i)/(1+j)](n/365) - 1
= [(1+.08)/(1+.06)](2555/365) - 1
= (1.01887)(7) - 1
= .13981
The market value adjustment = Minimum of the market value factor multiplied by
the withdrawal or
the excess interest earned over 3%
= Minimum of (.13981 x $62,985.60 or $8,349.25)
= Minimum of ($8,806.02 or $8,349.25)
= $8,349.25
A-3
<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 issue date 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 HYPOTHETICAL
ACCUMULATED MARKET VALUE DEATH DEATH DEATH DEATH
YEAR VALUE ADJUSTMENT BENEFIT (1) BENEFIT (2) BENEFIT (3) 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 (1) is the Accumulated Value increased by any positive Market
Value Adjustment.
Death Benefit (2) is the gross payments accumulated daily at the Death Benefit
Effective Annual Yield reduced proportionately to reflect withdrawals.
Death Benefit (3) 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 (1),
(2), or (3).
DEATH BENEFIT ASSUMING WITHDRAWALS
Assume a payment of $50,000 is made on the issue date and no additional payments
are made. Assume there are withdrawals as detailed in the table below 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 HYPOTHETICAL
ACCUMULATED PARTIAL MARKET VALUE DEATH DEATH DEATH DEATH
YEAR VALUE WITHDRAWAL ADJUSTMENT BENEFIT (1) BENEFIT (2) BENEFIT (3) BENEFIT
- --------- ------------ ------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
1 $ 53,000.00 $ 0.00 $ 0.00 $ 53,000.00 $ 52,500.00 $ 50,000.00 $ 53,000.00
2 53,530.00 0.00 500.00 54,030.00 55,125.00 53,000.00 55,125.00
3 3,883.00 50,000.00 0.00 3,883.00 3,816.94 3,635.18 3,883.00
4 3,494.70 0.00 500.00 3,994.70 4,007.79 3,883.00 4,007.79
5 3,844.17 0.00 0.00 3,844.17 4,208.18 4,007.79 4,208.18
6 4,228.59 0.00 500.00 4,728.59 4,418.59 4,208.18 4,728.59
7 4,651.45 0.00 0.00 4,651.45 4,639.51 4,728.59 4,728.59
8 5,116.59 0.00 500.00 5,616.59 4,871.49 4,728.59 5,616.59
9 5,628.25 0.00 0.00 5,628.25 5,115.07 5,616.59 5,628.25
10 691.07 5,000.00 0.00 691.07 599.51 628.25 691.07
</TABLE>
Death Benefit (1) is the Accumulated Value increased by any positive Market
Value Adjustment.
A-4
<PAGE>
Death Benefit (2) is the gross payments accumulated daily at the Death Benefit
Effective Annual Yield reduced proportionately to reflect withdrawals.
Death Benefit (3) 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 (1),
(2), or (3).
PART 2: DEATH OF THE OWNER WHO IS NOT THE ANNUITANT
Assume a payment of $50,000 is made on the issue date and no additional payments
are made. Assume there are no withdrawals. The table below presents examples of
the Death Benefit based on the hypothetical Accumulated Values.
<TABLE>
<CAPTION>
HYPOTHETICAL HYPOTHETICAL HYPOTHETICAL
ACCUMULATED MARKET 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.
A-5
<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 FULCRUM SEPARATE ACCOUNT, DATED MAY
1, 1997 ("THE PROSPECTUS"). THE PROSPECTUS MAY BE OBTAINED FROM ALLMERICA
INVESTMENTS, INC., 440 LINCOLN STREET, WORCESTER, MASSACHUSETTS 01653, TELEPHONE
800-917-1909.
DATED: MAY 1, 1997
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
TABLE OF CONTENTS
GENERAL INFORMATION AND HISTORY . . . . . . . . . . . . . . . . . . . 2
TAXATION OF THE CONTRACT, THE VARIABLE ACCOUNT AND THE
COMPANY . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
SERVICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
UNDERWRITERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
ANNUITY BENEFIT PAYMENTS . . . . . . . . . . . . . . . . . . . . . . 4
PERFORMANCE INFORMATION . . . . . . . . . . . . . . . . . . . . . . . 5
TAX-DEFERRED ACCUMULATION . . . . . . . . . . . . . . . . . . . . . . 7
FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . 8
GENERAL INFORMATION AND HISTORY
The Fulcrum Separate Account (the "Variable Account") is a separate investment
account of Allmerica Financial Life Insurance and Annuity Company (the
"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 ("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, 1996, the
Company had over $6.7 billion in assets and over $25.8 billion of life
insurance in force.
Effective October 1, 1995, the Company changed its name from SMA Life Assurance
Company to Allmerica Financial Life Insurance and Annuity Company. The Company
is an indirectly wholly owned subsidiary of First Allmerica Financial Life
Insurance Company ("First Allmerica") which, in turn, is a wholly owned
subsidiary of Allmerica Financial Corporation ("AFC"). First Allmerica,
originally organized under the laws of Massachusetts in 1844 as a mutual life
insurance company and known as State Mutual Life Assurance Company of America,
converted to a stock life insurance company and adopted its present name on
October 16, 1995. First Allmerica is the fifth oldest life insurance company in
America. As of December 31, 1996, First Allmerica and its subsidiaries
(including the Company) had over $13.3 billion in combined assets and over $45.3
billion in life insurance in force.
Currently, six Sub-Accounts of the Variable Account are available under the
Contract. Each Sub-Account invests in a corresponding investment portfolio of
The Palladian Trust ("Palladian") or a fund of Allmerica Investment Trust (the
"Trust"). Palladian and the Trust are both open-end, diversified management
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
Contract: the Money Market Fund. Each Portfolio ("Underlying Portfolio") and
Fund ("Underlying Fund") available under the Contract 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.
2
<PAGE>
TAXATION OF THE CONTRACT, THE VARIABLE
ACCOUNT AND THE COMPANY
The Company currently imposes no charge for taxes payable in connection with the
Contract, other than for state and local premium taxes and similar assessments
when applicable. The Company reserves the right to impose a charge for any
other taxes that may become payable in the future in connection with the
Contract or the Variable Account.
The Variable Account is considered to be a part of and taxed with the operations
of the Company. The Company is taxed as a life insurance company under
Subchapter L of the Internal Revenue Code (the "Code"), and files a consolidated
tax return with its parent and affiliated companies.
The Company reserves the right to make a charge for any effect which the income,
assets, or existence of the Contract or the Variable Account may have upon its
tax. Such charge for taxes, if any, will be assessed on a fair and equitable
basis in order to preserve equity among classes of Contract Owners ("Owners").
The Variable Account presently is not subject to tax.
SERVICES
CUSTODIAN OF SECURITIES. The Company serves as custodian of the assets of the
Variable Account. Shares of the Portfolios of Palladian and of the Money
Market Fund of the Trust which are owned by 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, 1996 and
1995, and for each of the three years in the period ended December 31, 1996,
included in this Statement of Additional Information ("SAI") 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
Contract.
UNDERWRITERS
Allmerica Investments, Inc. ("Allmerica Investments"), a registered
broker-dealer under the Securities Exchange Act of 1934 and a member of the
National Association of Securities Dealers, Inc. ("NASD"), serves as
principal underwriter for the Contract pursuant to a contract with the
Company and the Variable Account. Allmerica Investments distributes the
Contract on a best-efforts basis. Allmerica Investments, Inc., 440 Lincoln
Street, Worcester, Massachusetts 01653, was organized in 1969 as a wholly
owned subsidiary of First Allmerica, and presently is indirectly wholly
owned by First Allmerica.
The Contract offered by this Prospectus is offered continuously, and may be
purchased from certain independent broker-dealers which are NASD members and
whose representatives are authorized by applicable law to sell variable annuity
contracts.
All persons selling the Contract are required to be licensed by their respective
state insurance authorities for the sale of variable annuity contracts. The
Company pays commissions, not to exceed 6.0% of purchase payments, to entities
which sell the Contract. To the extent permitted by NASD rules, promotional
incentives or payments also may be provided to such entities based on sales
volumes, the assumption of wholesaling functions or other sales-related
criteria. Additional payments may be made for other services not directly
related to the sale of the Contract, including the recruitment and training of
personnel, production of promotional literature and similar services. A
Promotional Allowance of 1.1% is paid to Western Capital
3
<PAGE>
Financial Group, Inc. for administrative and support services with respect
to the distribution of the Contract. Commissions paid on the Contract,
including additional incentives or payments, and the Promotional Allowance
paid to Western Capital Financial Group, Inc. are paid by the Company and do
not result in any charge to Owners or to the Variable Account in addition to
the charges described under "CHARGES AND DEDUCTIONS" in the Prospectus. The
Company intends to recoup the commission and other sales expense through a
combination of anticipated surrender, withdrawal and/or annuitization
charges, profits from the Company's general account, including the investment
earnings on amounts allocated to accumulate on a fixed basis in excess of the
interest credited on fixed accumulations by the Company, and the profit, if
any, from the mortality and expense risk charge.
ANNUITY BENEFIT PAYMENTS
The method by which the Accumulated Value under the Contract is determined is
described in detail under "Computation of Values" in the Prospectus.
ILLUSTRATION OF ACCUMULATION UNIT CALCULATION USING HYPOTHETICAL EXAMPLE. The
Accumulation Unit calculation for a daily Valuation Period may be illustrated by
the following hypothetical example: Assume that the assets of a Sub-Account at
the beginning of a one-day Valuation Period were $5,000,000; that the value of
an Accumulation Unit on the previous date was $1.135000; and that during the
Valuation Period, the investment income and net realized and unrealized capital
gains exceed net realized and unrealized capital losses by $1,675. The
Accumulation Unit Value at the end of the current Valuation Period would be
calculated as follows:
(1) Accumulation Unit Value -- Previous Valuation Period $ 1.135000
(2) Value of Assets -- Beginning of Valuation Period $5,000,000
(3) Excess of Investment Income and Net Gains Over Capital Losses $1,675
(4) Adjusted Gross Investment Rate for the Valuation Period
(3) DIVIDED BY (2) 0.000335
(5) Annual Charge (one-day equivalent of 1.45% per annum) 0.000040
(6) Net Investment Rate (4) - (5) 0.000295
(7) Net Investment Factor 1.000000 + (6) 1.000295
(8) Accumulation Unit Value -- Current Period (1) x (7) $ 1.135335
Conversely, if unrealized capital losses and charges for expenses and taxes
exceeded investment income and net realized capital gains by $1,675, the
Accumulation Unit Value at the end of the Valuation Period would have been
$1.134574.
The method for determining the amount of annuity benefit payments is
described in detail under "Determination of First and Subsequent Annuity
Benefit Payments" in the Prospectus.
ILLUSTRATION OF VARIABLE ANNUITY PAYMENT CALCULATION USING HYPOTHETICAL
EXAMPLE. The determination of the Annuity Unit value and the variable annuity
benefit payment may be illustrated by the following hypothetical example:
Assume an Annuitant has 40,000 Accumulation Units in a Variable Account, and
that the value of an Accumulation Unit on the Valuation Date used to
determine the amount of the first variable annuity payment is $1.120000.
Therefore, the Accumulation Value of the Contract is $44,800 (40,000 x
$1.120000). Assume also that the Owner elects an option for which the first
monthly payment is $6.57 per $1,000 of Accumulated Value applied. Assuming
no premium tax or contingent deferred sales charge, the first monthly payment
would be 44.800 multiplied by $6.57, or $294.34.
4
<PAGE>
Next, assume that the Annuity Unit value for the assumed rate of 3.5% per
annum for the Valuation Date as of which the first payment was calculated was
$1.100000. Annuity Unit values will not be the same as Accumulation Unit
values because the former reflect the 3.5% assumed interest rate used in the
annuity rate calculations. When the Annuity Unit value of $1.100000 is
divided into the first monthly payment the number of Annuity Units
represented by that payment is determined to be 267.5818. The value of this
same number of Annuity Units will be paid in each subsequent month under most
options. Assume further that the net investment factor for the Valuation
Period applicable to the next annuity payment is 1.000190. Multiplying this
factor by .999906 (the one-day adjustment factor for the assumed interest
rate of 3.5% per annum) produces a factor of 1.000096. This then is
multiplied by the Annuity Unit value on the immediately preceding Valuation
Date (assumed here to be $1.105000). The result is an Annuity Unit value of
$1.105106 for the current monthly payment. The current monthly payment then
is determined by multiplying the number of Annuity Units by the current
Annuity Unit value, or 267.5818 times $1.105106, which produces a current
monthly payment of $295.71.
METHOD FOR DETERMINING COMMUTED VALUE ON VARIABLE ANNUITY PERIOD CERTAIN
OPTIONS AND ILLUSTRATION USING HYPOTHETICAL EXAMPLE. The Contract offers
both commutable and non-commutable period certain options. A commutable
option gives the Annuitant the right to exchange any remaining payments for a
lump sum payment based on the commuted value. The Commuted Value is the
present value of remaining payments calculated at 3.5% interest. The
determination of the Commuted Value may be illustrated by the following
hypothetical example.
Assume a commutable period certain option is elected. The number of Annuity
Units on which each payment is based would be calculated using the Surrender
Value less any premium tax. Assume this results in 250.0000 Annuity Units.
Assume the Commuted Value is requested with 60 monthly payments remaining and
a current Annuity Unit Value of $1.200000. Based on these assumptions, the
dollar amount of remaining payments would be $300 a month for 60 months. The
present value at 3.5% of all remaining payments would be $16,560.72.
EXCHANGE OFFER
A. VARIABLE ANNUITY CONTRACT EXCHANGE OFFER
The Company will permit Owners of certain variable annuity contracts,
described below, to exchange their contracts at net asset value for the
variable annuity Contract described in the Prospectus, which is issued on
Form No. A3026-96 or a state variation thereof ("new Contract"). The Company
reserves the right to suspend this exchange offer at any time. This offer
applies to the exchange of the Company's Elective Payment Variable Annuity
contracts issued on Forms A3012-79 and A3013-79 ("Elective Payment Exchanged
Contract," all such contracts having numbers with a "JQ" or "JN" prefix), and
Single Payment Variable Annuity contracts issued on Forms A3014-79 and
A3015-79 ("Single Payment Exchanged Contract," all such contracts having
numbers with a "KQ" or "KN" prefix). These contracts are referred to
collectively as the "Exchanged Contract." To effect an exchange, the Company
should receive (1) a completed application for the new Contract, (2) the
contract being exchanged, and (3) a signed Letter of Awareness.
CONTINGENT DEFERRED SALES CHARGE COMPUTATION. No surrender charge otherwise
applicable to the Exchanged Contract will be assessed as a result of the
exchange. Instead, the contingent deferred sales charge under the new
Contract will be computed as if the payments that had been made to the
Exchanged Contract were made to the new Contract as of the date of issue of
the Exchanged Contract. Any additional payments to the new Contract after
the exchange will be subject to the contingent deferred sales charge
computation outlined in the new Contract and the Prospectus; i.e., the charge
will be computed based on the number of years that the additional payment (or
portion of that payment) that is being withdrawn has been credited to the new
Contract.
5
<PAGE>
SUMMARY OF DIFFERENCES BETWEEN THE EXCHANGED CONTRACT AND THE NEW CONTRACT.
The new Contract and the Exchanged Contract differ substantially as
summarized below. There may be additional differences important to a person
considering an exchange, and the Prospectuses for the new Contract and the
Exchanged Contract should be reviewed carefully before the exchange request
is submitted to the Company.
CONTINGENT DEFERRED SALES CHARGE. The contingent deferred sales charge under
the new Contract, as described in the Prospectus, imposes higher charge
percentages against the excess amount redeemed than the Single Payment
Exchanged Contract. In addition, if an Elective Payment Exchanged Contract
was issued more than nine years before the date of an exchange under this
offer, additional payments to the Exchanged Contract would not be subject to
a surrender charge. New payments to the new Contract may be subject to a
charge if withdrawn prior to the surrender charge period described in the
Prospectus.
CONTRACT FEE. Under the new Contract, the Company deducts a $30 fee on each
Contract anniversary and at surrender if the Accumulated Value is less than
$100,000. This fee is waived if the new Contract is part of a 401(k) plan.
No Contract fees are charged on the Single Payment Exchanged Contract. A $9
semi-annual fee is charged on the Elective Payment Exchanged Contract if the
Accumulated Value is $10,000 or less.
VARIABLE ACCOUNT ADMINISTRATIVE EXPENSE CHARGE. Under the new Contract, the
Company assesses each Sub-Account a daily administrative expense charge at an
annual rate of 0.20% of the average daily net assets of the Sub-Account. No
administrative expense charge based on a percentage of Sub-Account assets is
imposed under the Exchanged Contract.
TRANSFER CHARGE. No charge for transfers is imposed under the Exchanged
Contract. Currently, no transfer charge is imposed under the new Contract;
however, the Company reserves the right to assess a charge not to exceed $25
for each transfer after the twelfth in any Contract year.
DEATH BENEFIT. The Exchanged Contract offers a death benefit that is
guaranteed to be the greater of a Contract's Accumulated Value or gross
payments made (less withdrawals). At the time an exchange is processed, the
Accumulated Value of the Exchanged Contract becomes the "payment" for the new
Contract. Therefore, prior purchase payments made under the Exchanged
Contract (if higher than the Exchanged Contract's Accumulated Value) no
longer are a basis for determining the death benefit under the new Contract.
Consequently, whether the initial minimum death benefit under the new
Contract is greater than, equal to, or less than, the death benefit of the
Exchanged Contract depends on whether the Accumulated Value transferred to
the new Contract is greater than, equal to, or less than, the gross payments
under the Exchanged Contract. In addition, under the Exchanged Contract, the
amount of any prior withdrawals is subtracted from the value of the death
benefit. Under the new Contract, where there is a reduction in the death
benefit amount due to a prior withdrawal, the value of the death benefit is
reduced in the same proportion that the new Contract's Accumulated Value was
reduced on the date of the withdrawal.
ANNUITY TABLES. The Exchanged Contract contains higher guaranteed annuity
rates.
FUND EXPENSES. Under the new Contract, each of the five Palladian Portfolios
have a performance-based advisory fee. The base fee is 2% but the actual fee
may vary from between 0.00% to 4.00%, depending on the Portfolio's
performance.
B. FIXED ANNUITY EXCHANGE OFFER.
This exchange offer also applies to all fixed annuity contracts issued by the
Company. A fixed annuity contract to which this exchange offer applies may
be exchanged at net asset value for the Contract described in this
Prospectus, subject to the same provisions for effecting the exchange and for
applying the new Contract's contingent deferred sales charge as described
above for variable annuity contracts. This Prospectus should be read
carefully before making such exchange. Unlike a fixed annuity, the new
Contract's value is not guaranteed, and will vary depending on the investment
performance of the Underlying Portfolios
6
<PAGE>
to which it is allocated. The new Contract has a different charge structure
than a fixed annuity contract, which includes not only a contingent deferred
sales charge that may vary from that of the class of contracts to which the
exchanged fixed contract belongs, but also Contract fees, mortality and
expense risk charges (for the Company's assumption of certain mortality and
expense risks), administrative expense charges, transfer charges (for
transfers permitted among Sub-Accounts and the Fixed Account), and expenses
incurred by the Underlying Portfolios. Additionally, the interest rates
offered under the Fixed Account of the new Contract and the Annuity Tables
for determining minimum annuity benefit payments may be different from those
offered under the exchanged fixed contract.
C. EXERCISE OF "FREE-LOOK PROVISION" AFTER ANY EXCHANGE.
Persons who, under the terms of this exchange offer, exchange their contract
for the new Contract and subsequently revoke the new Contract within the time
permitted, as described in the sections of this Prospectus captioned "Right
to Revoke Individual Retirement Annuity" and "Right to Revoke All Other
Contracts," will have their exchanged contract automatically reinstated as of
the date of revocation. The refunded amount will be applied as the new
current Accumulated Value under the reinstated contract, which may be more or
less than it would have been had no exchange and reinstatement occurred. The
refunded amount will be allocated initially among the Fixed Account and
Sub-Accounts of the reinstated contract in the same proportion that the value
in the Fixed Account and the value in each Sub-Account bore to the
transferred Accumulated Value on the date of the exchange of the contract for
the new Contract. For purposes of calculating any contingent deferred sales
charge under the reinstated contract, the reinstated contract will be deemed
to have been issued and to have received past purchase payments as if there
had been no exchange.
PERFORMANCE INFORMATION
Performance information for a Sub-Account may be compared, in reports and
promotional literature, to certain indices described in the prospectus under
"PERFORMANCE INFORMATION." In addition, the Company may provide advertising,
sales literature, periodic publications or other material information on
various topics of interest to Owners and prospective Owners. These topics
may include the relationship between sectors of the economy and the economy
as a whole and its effect on various securities markets, investment
strategies and techniques (such as value investing, market timing, dollar
cost averaging, asset allocation, constant ratio transfer and account
rebalancing), the advantages and disadvantages of investing in tax-deferred
and taxable investments, customer profiles and hypothetical purchase and
investment scenarios, financial management and tax and retirement planning,
and investment alternatives to certificates of deposit and other financial
instruments, including comparisons between the Contract and the
characteristics of and market for such financial instruments. Total Return
data may be advertised based on the period of time that an Underlying
Portfolio or the Underlying Fund has been in existence, even if longer than
the period of time that the Contract has been offered. The results for any
period prior to a Contract being offered will be calculated as if the
Contract had been offered during that period of time, with all charges
assumed to be those applicable to the Contract.
TOTAL RETURN
"Total Return" refers to the total of the income generated by an investment
in a Sub-Account and of the changes of value of the principal invested (due
to realized and unrealized capital gains or losses) for a specified period,
reduced by the Sub-Account's asset charge and any applicable contingent
deferred sales charge which would be assessed upon complete withdrawal of the
investment.
Total Return figures are calculated by standardized methods prescribed by rules
of the Securities and Exchange Commission (the "SEC"). The quotations are
computed by finding the average annual compounded rates of return over the
specified periods that would equate the initial amount invested to the ending
7
<PAGE>
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
assets of the Sub-Account. This charge is 1.45% on an annual basis. The
calculation of ending redeemable value assumes (1) the Contract was issued at
the beginning of the period, and (2) a complete surrender of the Contract at
the end of the period. The deduction of the contingent deferred sales
charge, if any, applicable at the end of the period is included in the
calculation, according to the following schedule:
CHARGE AS
YEARS FROM DATE OF PERCENTAGE
PURCHASE PAYMENT OF NEW PURCHASE
TO PAYMENTS
DATE OF WITHDRAWAL WITHDRAWN*
------------------ ---------------
0-1 7%
2 6%
3 5%
4 4%
5 3%
6 2%
7 1%
Thereafter 0%
* Subject to the maximum limit described in the Prospectus.
No contingent deferred sales charge is deducted upon expiration of the
periods specified above. In all calendar years, an amount equal to the
greater of: (a) 15% of the Accumulated Value, (b) cumulative earnings
(Accumulated Value less total gross payments not previously withdrawn), or
(c) the life expectancy distribution, is not subject to the contingent
deferred sales charge.
The calculations of Total Return reflect the deduction of the $30 annual
Contract fee. See Table 1 below.
SUPPLEMENTAL TOTAL RETURN INFORMATION
The Supplemental Total Return information in this section refers to the total
of the income generated by an investment in a Sub-Account and of the changes
of value of the principal invested (due to realized and unrealized capital
gains or losses) for a specified period reduced by the Sub-Account's asset
charges. It is assumed, however, that the investment is NOT withdrawn at the
end of each period.
The quotations of Supplemental Total Return are computed by finding the
average annual compounded rates of return over the specified periods that
would equate the initial amount invested to the ending values, according to
the following formula:
P(1 + T)(n) = EV
8
<PAGE>
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 surrendered at the end of the specified period, and therefore
there is no adjustment for the contingent deferred sales charge that would be
applicable if the Contract was surrendered at the end of the period. The
calculations of Supplemental Total Return include the deduction of the $30
annual Contract fee. See Table 2
TABLE 1
TOTAL ANNUAL RETURNS FOR PERIOD ENDING DECEMBER 31, 1996
(ASSUMING COMPLETE WITHDRAWAL OF THE INVESTMENT)
FOR YEAR 10 YEARS
ENDED OR SINCE
FUND 12/31/96 5 YEARS INCEPTION
- ---- -------- ------- ---------
Value Portfolio......................... N/A N/A 8.22%
Growth Portfolio........................ N/A N/A 1.33%
International Growth Portfolio.......... N/A N/A -0.76%
Global Strategic Income Portfolio....... N/A N/A -6.77%
Global Interactive/Telecomm Portfolio... N/A N/A -6.73%
Money Market Portfolio.................. -3.73% 1.51% 4.26%
TABLE 2
TOTAL ANNUAL RETURNS FOR PERIOD ENDING DECEMBER 31, 1996
(ASSUMING NO WITHDRAWAL OF INVESTMENT)
FOR YEAR
10 YEARS
ENDED OR SINCE
FUND 12/31/96 5 YEARS INCEPTION
- ---- -------- ------- ---------
Value Portfolio......................... N/A N/A 15.8%
Growth Portfolio........................ N/A N/A 7.74%
International Growth Portfolio.......... N/A N/A -5.52%
Global Strategic Income Portfolio....... N/A N/A -0.87%
Global Interactive/Telecomm Portfolio... N/A N/A -0.83%
Money Market Portfolio.................. 3.76% 2.79% 4.26%
The inception dates for the Funds are: 2/1/96 for the Value, Growth, Global
Strategic Income and Global Interactive/Telecomm Portfolios; 3/26/96 for the
International Growth Portfolio and 4/29/85 for the Money Market Fund.
9
<PAGE>
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, 1996,
calculated as if the Money Market Sub-Account had been in existence at that
time:
Yield 4.12%
Effective Yield 4.20%
The yield and effective yield figures are calculated by standardized methods
prescribed by rules of the SEC. Under those methods, the yield quotation is
computed by determining the net change (exclusive of capital changes) in the
value of a hypothetical pre-existing account having a balance of one
accumulation unit of the Sub-Account at the beginning of the period,
subtracting a charge reflecting the annual 1.45% 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 reflect the $30 annual Contract
fee.
TAX DEFERRED ACCUMULATION
NON-QUALIFIED CONVENTIONAL
ANNUITY CONTRACT SAVINGS PLAN
AFTER-TAX CONTRIBUTIONS
AND TAX-DEFERRED EARNINGS
-------------------------
TAXABLE LUMP AFTER-TAX CONTRIBUTIONS
NO WITHDRAWALS SUM WITHDRAWAL AND TAXABLE EARNINGS
10 Years . . . . $107,946 $ 86,448 $ 81,693
20 Years . . . . 233,048 165,137 133,476
30 Years . . . . 503,133 335,021 218,082
This chart compares the accumulation of a $50,000 initial investment into a
non-qualified annuity contract and a conventional savings plan.
Contributions to the non-qualified annuity contract and the conventional
savings plan are made after tax. Only the gain in the non-qualified annuity
contract will be subject to income tax in a taxable lump sum withdrawal. The
chart assumes a 37.1% federal marginal tax rate and an 8% annual return. The
37.1% federal marginal tax is based on a marginal tax rate of 36%,
representative of the target market, adjusted to reflect a decrease of $3 of
itemized deductions for each $100 of income over $117,950. Tax rates are
subject to change as is the tax-deferred treatment of the Contract. Income
on non-qualified annuity contracts is taxed as ordinary income upon
withdrawal. A 10% tax penalty may apply to early withdrawals. See "Federal
Income Taxes" in the Prospectus.
The chart does not reflect the following charges and expenses under the
contract: 1.25% for mortality and expense risk; 0.20% administration charges;
7% maximum deferred sales charge; and $30 annual Contract fee. The
tax-deferred accumulation would be reduced if these charges were reflected.
No implication is intended by the use of these assumptions that the return
shown is guaranteed in any way or that the return shown represents an average
or expected rate of return over the period of the Contract. (IMPORTANT --
THIS IS NOT AN ILLUSTRATION OF YIELD OR RETURN.)
10
<PAGE>
Unlike savings plans, contributions to non-qualified annuity contracts
provide tax-deferred treatment on earnings. In addition, contributions to
tax-deferred retirement annuities are not subject to current tax in the year
of contribution. When monies are received from a non-qualified annuity
contract (and you have many different options on how you receive your funds),
they are subject to income tax. At the time of receipt, if the person
receiving the monies is retired, not working or has additional tax
exemptions, these monies may be taxed at a lesser rate.
FINANCIAL STATEMENTS
Financial Statements are included for Allmerica Financial Life Insurance and
Annuity Company.
11
<PAGE>
ALLMERICA FINANCIAL
LIFE INSURANCE AND
ANNUITY COMPANY
FINANCIAL STATEMENTS
DECEMBER 31, 1996
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholder of
Allmerica Financial Life Insurance and Annuity Company
In our opinion, the accompanying balance sheet and the related statement of
income, of shareholder's equity, and of cash flows present fairly, in all
material respects, the financial position of Allmerica Financial Life Insurance
and Annuity Company at December 31, 1996, and the results of their operations
and their cash flows for the year in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audit. We conducted our audit of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for the opinion expressed above.
/s/ Price Waterhouse LLP
Price Waterhouse LLP
Boston, Massachusetts
February 3, 1997
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
STATEMENT OF INCOME
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
(IN MILLIONS) 1996
----------------------------------------------- ---------
<S> <C>
REVENUES
Premiums..................................... $ 32.7
Universal life and investment product
policy fees............................... 176.2
Net investment income...................... 171.7
Net realized investment losses............. (3.6)
Other income............................... 0.9
---------
Total revenues......................... 377.9
---------
BENEFITS, LOSSES AND EXPENSES
Policy benefits, claims, losses and loss
adjustment expenses....................... 192.6
Policy acquisition expenses................ 49.9
Other operating expenses................... 86.6
---------
Total benefits, losses and expenses.... 329.1
---------
Income before federal income taxes............. 48.8
---------
FEDERAL INCOME TAX EXPENSE (BENEFIT)
Current.................................... 26.9
Deferred................................... (9.8)
---------
Total federal income tax expense....... 17.1
---------
Net income..................................... $ 31.7
---------
---------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-1
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
(IN MILLIONS) 1996
-------------------------------------------------------- ----------
<S> <C>
ASSETS
Investments:
Fixed maturities-at fair value (amortized cost of
$1,660.2).......................................... $ 1,698.0
Equity securities-at fair value (cost of $33.0)..... 41.5
Mortgage loans...................................... 221.6
Real estate......................................... 26.1
Policy loans........................................ 131.7
Other long-term investments......................... 7.9
----------
Total investments............................... 2,126.8
----------
Cash and cash equivalents............................. 18.8
Accrued investment income............................. 37.7
Deferred policy acquisition costs..................... 632.7
----------
Reinsurance receivables:
Future policy benefits.............................. 68.1
Outstanding claims, losses and loss adjustment
expenses........................................... 3.5
Other............................................... 0.9
----------
Total reinsurance receivables................... 72.5
----------
Other assets.......................................... 8.2
Separate account assets............................... 4,524.0
----------
Total assets.................................... $ 7,420.7
----------
----------
LIABILITIES
Policy liabilities and accruals:
Future policy benefits.............................. $ 2,163.0
Outstanding claims, losses and loss adjustment
expenses........................................... 15.4
Unearned premiums................................... 2.7
Contractholder deposit funds and other policy
liabilities........................................ 32.8
----------
Total policy liabilities and accruals........... 2,213.9
----------
Expenses and taxes payable............................ 77.3
Deferred federal income taxes......................... 60.2
Separate account liabilities.......................... 4,523.6
----------
Total liabilities............................... 6,875.0
----------
Commitments and contingencies (Note 12)
SHAREHOLDER'S EQUITY
Common stock, $1,000 par value, 10,000 shares
authorized, 2,518 shares issued and outstanding...... 2.5
Additional paid-in-capital............................ 346.3
Unrealized appreciation on investments, net........... 20.5
Retained earnings..................................... 176.4
----------
Total shareholder's equity...................... 545.7
----------
Total liabilities and shareholder's equity...... $ 7,420.7
----------
----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-2
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
STATEMENTS OF SHAREHOLDER'S EQUITY
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
(IN MILLIONS) 1996
----------------------------------------------- ---------
<S> <C>
COMMON STOCK
Balance at beginning of year............... $ 2.5
Issued during year......................... --
---------
Balance at end of year..................... 2.5
---------
ADDITIONAL PAID-IN-CAPITAL
Balance at beginning of year............... 324.3
Contributed from parent.................... 22.0
---------
Balance at end of year..................... 346.3
---------
RETAINED EARNINGS
Balance at beginning of year............... 144.7
Net income................................. 31.7
---------
Balance at end of year..................... 176.4
---------
NET UNREALIZED APPRECIATION (DEPRECIATION) ON
INVESTMENTS
Balance at beginning of year............... 23.8
---------
Appreciation (depreciation) during the
period:
Net appreciation (depreciation) on
available-for-sale securities........... (5.1)
(Provision) benefit for deferred
federal income taxes.................... 1.8
---------
(3.3)
---------
Balance at end of year................. 20.5
---------
Total shareholder's equity......... $ 545.7
---------
---------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-3
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
(IN MILLIONS) 1996
-------------------------------------------- ----------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.............................. $ 31.7
Adjustments to reconcile net income to
net cash provided by operating
activities:
Net realized losses................. 3.6
Net amortization and depreciation... 3.5
Deferred federal income taxes
(benefits)........................... (9.8)
Change in deferred policy
acquisition costs.................... (66.8)
Change in premiums and notes
receivable, net of reinsurance
payable.............................. (0.2)
Change in accrued investment
income............................... 1.2
Change in policy liabilities and
accruals, net........................ (39.9)
Change in reinsurance receivable.... (1.5)
Change in expenses and taxes
payable.............................. 32.3
Separate account activity, net...... 10.5
Other, net.......................... (0.2)
----------
Net cash provided by operating
activities.................... (35.6)
----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from disposals and maturities
of available-for-sale fixed
maturities............................. 809.4
Proceeds from disposals of equity
securities............................. 1.5
Proceeds from disposals of other
investments............................ 17.5
Proceeds from mortgages matured or
collected.............................. 34.0
Purchase of available-for-sale fixed
maturities............................. (795.8)
Purchase of equity securities........... (13.2)
Purchase of other investments........... (36.2)
Other investing activities, net......... (2.1)
----------
Net cash (used in) provided by
investing activities.......... 15.1
----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of stock and
capital paid in........................ 22.0
----------
Net cash provided by financing
activities.................... 22.0
----------
Net change in cash and cash equivalents..... 1.5
Cash and cash equivalents, beginning of
year....................................... 17.3
----------
Cash and cash equivalents, end of year...... $ 18.8
----------
----------
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid........................... $ 3.4
Income taxes paid....................... $ 16.5
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-4
<PAGE>
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. BASIS OF PRESENTATION
Allmerica Financial Life Insurance and Annuity Company ("AFLIAC" or the
"Company") is organized as a stock life insurance company, and is a wholly-owned
subsidiary of SMA Financial Corporation, which is wholly owned by First
Allmerica Financial Life Insurance Company ("FAFLIC"). FAFLIC is 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 FAFLIC in accordance with a policy
established by vote of FAFLIC's Board of Directors.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amount of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
B. VALUATION OF INVESTMENTS
The Company classifies all debt and equity securities as available-for-sale.
Realized gains and losses on sales of fixed maturities and equity securities
are determined on the specific-identification basis using amortized cost for
fixed maturities and cost for equity securities. Fixed maturities and equity
securities with other than temporary declines in fair value are written down to
estimated fair value resulting in the recognition of realized losses.
Mortgage loans on real estate are stated at unpaid principal balances, net
of unamortized discounts and reserves. Reserves on mortgage loans are based on
losses expected by management to be realized on transfers of mortgage loans to
real estate (upon foreclosure), on the disposition or settlement of mortgage
loans and on mortgage loans which management believes may not be collectible in
full. In establishing reserves, management considers, among other things, the
estimated fair value of the underlying collateral.
Fixed maturities and mortgage loans that are delinquent are placed on
non-accrual status, and thereafter interest income is recognized only when cash
payments are received.
Policy loans are carried principally at unpaid principal balances.
Real estate that has been acquired through the foreclosure of mortgage loans
is valued at the estimated fair value at the time of foreclosure. The Company
considers several methods in determining fair value at foreclosure, using
primarily third-party appraisals and discounted cash flow analyses. After
foreclosure, the Company makes a determination as to whether the asset should be
held for production of income or held for sale.
Real estate investments held for the production of income and held for sale
are carried at depreciated cost less valuation allowances, if necessary, to
reduce the carrying value to fair value. Depreciation is generally calculated
using the straight-line method.
Realized investment gains and losses, other than those related to separate
accounts for which the Company does not bear the investment risk, are reported
as a component of revenues based upon specific identification of the investment
assets sold. When an other-than-temporary impairment of the value of a specific
investment or a group of investments is determined, a realized investment loss
is recorded. Changes in the valuation allowance for mortgage loans and real
estate are included in realized investment gains or losses.
F-5
<PAGE>
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
C. FINANCIAL INSTRUMENTS
In the normal course of business, the Company enters into transactions
involving various types of financial instruments, including debt, investments
such as fixed maturities, mortgage loans and equity securities, and investment
and loan commitments. These instruments involve credit risk and also may be
subject to risk of loss due to interest rate fluctuation. The Company evaluates
and monitors each financial instrument individually and, when appropriate,
obtains collateral or other security to minimize losses.
D. CASH AND CASH EQUIVALENTS
Cash and cash equivalents includes cash on hand, amounts due from banks and
highly liquid debt instruments purchased with an original maturity of three
months or less.
E. DEFERRED POLICY ACQUISITION COSTS
Acquisition costs consist of commissions, underwriting costs and other
costs, which vary with, and are primarily related to, the production of
revenues. Acquisition costs related to universal life and group variable
universal life products and contractholder deposit funds are deferred and
amortized in proportion to total estimated gross profits over the expected life
of the contracts using a revised interest rate applied to the remaining benefit
period. Acquisition costs related to annuity and other life insurance businesses
are deferred and amortized, generally in proportion to the ratio of annual
revenue to the estimated total revenues over the contract periods based upon the
same assumptions used in estimating the liability for future policy benefits.
Deferred acquisition costs for each product are reviewed to determine if they
are recoverable from future income, including investment income. If such costs
are determined to be unrecoverable, they are expensed at the time of
determination.
Although realization of deferred policy acquisition costs is not assured,
management believes it is more likely than not that all of these costs will be
realized. The amount of deferred policy acquisition costs considered realizable,
however, could be reduced in the near term if the estimates of gross profits or
total revenues discussed above are reduced. The amount of amortization of
deferred policy acquisition costs could be revised in the near term if any of
the estimates discussed above are revised.
F. SEPARATE ACCOUNTS
Separate account assets and liabilities represent segregated funds
administered and invested by the Company for the benefit of certain pension,
variable annuity and variable life insurance contractholders. Assets consist
principally of bonds, common stocks, mutual funds, and short-term obligations at
market value. The investment income, gains, and losses of these accounts
generally accrue to the contractholders and, therefore, are not included in the
Company's net income. Appreciation and depreciation of the Company's interest in
the separate accounts, including undistributed net investment income, is
reflected in shareholder's equity or net investment income.
G. POLICY LIABILITIES AND ACCRUALS
Future policy benefits are liabilities for life, health and annuity
products. Such liabilities are established in amounts adequate to meet the
estimated future obligations of policies in force. The liabilities associated
with traditional life insurance products are computed using the net level
premium method for individual life and annuity policies, and are based upon
estimates as to future investment yield, mortality and withdrawals that include
provisions for adverse deviation. Future policy benefits for individual life
insurance and annuity policies are computed using interest rates ranging from 2
1/2% to 6% for life insurance and 2% to 9 1/2% for annuities. Mortality,
morbidity and withdrawal assumptions for all policies are based on the Company's
own experience and industry standards. Liabilities for universal life include
deposits received from customers and investment earnings on their fund balances,
less administrative charges. Universal life fund balances are also assessed
mortality and surrender charges.
F-6
<PAGE>
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
Individual health benefit liabilities for active lives are estimated using
the net level premium method, and assumptions as to future morbidity,
withdrawals and interest which provide a margin for adverse deviation. Benefit
liabilities for disabled lives are estimated using the present value of benefits
method and experience assumptions as to claim terminations, expenses and
interest.
Liabilities for outstanding claims, losses and loss adjustment expenses are
estimates of payments to be made for reported claims and estimates of claims
incurred but not reported. These liabilities are determined using case basis
evaluations and statistical analyses and represent estimates of the ultimate
cost of all claims incurred but not paid. These estimates are continually
reviewed and adjusted as necessary; such adjustments are reflected in current
operations.
Premiums for individual accident and health insurance are reported as earned
on a pro-rata basis over the contract period. The unexpired portion of these
premiums is recorded as unearned premiums.
Contractholder deposit funds and other policy liabilities include
investment-related products and consist of deposits received from customers and
investment earnings on their fund balances.
All policy liabilities and accruals are based on the various estimates
discussed above. Although the adequacy of these amounts cannot be assured,
management believes that it is more likely than not that policy liabilities and
accruals will be sufficient to meet future obligations of policies in force. The
amount of liabilities and accruals, however, could be revised in the near term
if the estimates discussed above are revised.
H. PREMIUM AND FEE REVENUE AND RELATED EXPENSES
Premiums for individual life and health insurance and individual annuity
products, excluding universal life and investment-related products, are
considered revenue when due. Individual accident and health insurance premiums
are recognized as revenue over the related contract periods. Benefits, losses
and related expenses are matched with premiums, resulting in their recognition
over the lives of the contracts. This matching is accomplished through the
provision for future benefits, estimated and unpaid losses and amortization of
deferred policy acquisition costs. Revenues for investment-related products
consist of net investment income and contract charges assessed against the fund
values. Related benefit expenses primarily consist of net investment income
credited to the fund values after deduction for investment and risk charges.
Revenues for universal life and group variable universal life products consist
of net investment income, and mortality, administration and surrender charges
assessed against the fund values. Related benefit expenses include universal
life benefits in excess of fund values and net investment income credited to
universal life fund values.
I. FEDERAL INCOME TAXES
AFC, FAFLIC, AFLIAC and FAFLIC's 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 tax losses that can be applied to offset life company taxable
income.
The Board of Directors has delegated to AFC management the development and
maintenance of appropriate Federal Income Tax allocation policies and
procedures, which are subject to written agreement between the companies. The
Federal income tax for all subsidiaries in the consolidated life-nonlife return
of AFC is calculated on a separate return basis. Any current tax liability is
paid to AFC. Tax benefits resulting from taxable operating losses or credits of
AFC's subsidiaries are not reimbursed to the subsidiary until such losses or
credits can be utilized by the subsidiary on a separate return basis.
Deferred income taxes are generally recognized when assets and liabilities
have different values for financial statement and tax reporting purposes, and
for other temporary taxable and deductible differences
F-7
<PAGE>
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
as defined by Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes" (SFAS No. 109). These differences result primarily from loss
reserves, policy acquisition expenses, and unrealized appreciation/depreciation
on investments.
J. NEW ACCOUNTING PRONOUNCEMENTS
In March, 1995, SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of", was issued. This statement
requires companies to write down to fair value long-lived assets whose carrying
value is greater than the undiscounted cash flows of those assets. The statement
also requires that long-lived assets of which management is committed to
dispose, either by sale or abandonment, be valued at the lower of their carrying
amount or fair value less costs to sell. This statement is effective for fiscal
years beginning after December 15, 1995. The adoption of this statement has not
had a material effect on the financial statements.
2. INVESTMENTS
A. SUMMARY OF INVESTMENTS
The Company accounts for its investments, all of which are classified as
available-for-sale, in accordance with the provisions of SFAS No. 115. The
amortized cost and fair value of available-for-sale fixed maturities and equity
securities were as follows:
<TABLE>
<CAPTION>
1996
--------------------------------------------
GROSS GROSS
DECEMBER 31 AMORTIZED UNREALIZED UNREALIZED FAIR
(IN MILLIONS) COST (1) GAINS LOSSES VALUE
- ---------------------------------------- ---------- -------- --------- --------
<S> <C> <C> <C> <C>
U.S. Treasury securities and U.S.
government and agency securities....... $ 15.7 $ 0.5 $ 0.2 $ 16.0
States and political subdivisions....... 8.9 1.6 -- 10.5
Foreign governments..................... 53.2 2.9 -- 56.1
Corporate fixed maturities.............. 1,437.2 38.6 6.1 1,469.7
Mortgage-backed securities.............. 145.2 2.2 1.7 145.7
---------- -------- --------- --------
Total fixed maturities
available-for-sale..................... $1,660.2 $45.8 $ 8.0 $1,698.0
---------- -------- --------- --------
Equity securities....................... $ 33.0 $10.2 $ 1.7 $ 41.5
---------- -------- --------- --------
---------- -------- --------- --------
</TABLE>
(1) Amortized cost for fixed maturities and cost for equity securities.
In March 1994, AFLIAC voluntarily withdrew its license in New York in order
to provide for certain commission arrangements prohibited by New York comparable
to AFLIAC's competitors. In connection with the withdrawal, FAFLIC, which is
licensed in New York, became qualified to sell the products previously sold by
AFLIAC in New York. AFLIAC agreed with the New York Department of Insurance to
maintain, through a custodial account in New York, a security deposit, the
market value of which will at all times equal 102% of all outstanding general
account liabilities of AFLIAC for New York policyholders, claimants and
creditors. At December 31, 1996, the amortized cost and market value of assets
on deposit were $284.9 million and $292.2 million, respectively. In addition,
fixed maturities, excluding those securities on deposit in New York, with an
amortized cost of $4.2 million were on deposit with various state and
governmental authorities at December 31, 1996.
There were no contractual fixed maturity investment commitments at December
31, 1996.
The amortized cost and fair value by maturity periods for fixed maturities
are shown below. Actual maturities may differ from contractual maturities
because borrowers may have the right to call or prepay
F-8
<PAGE>
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
obligations with or without call or prepayment penalties, or the Company may
have the right to put or sell the obligations back to the issuers. Mortgage
backed securities are included in the category representing their ultimate
maturity.
<TABLE>
<CAPTION>
1996
--------------------
DECEMBER 31 AMORTIZED FAIR
(IN MILLIONS) COST VALUE
- ------------------------------------------------------------ --------- ---------
<S> <C> <C>
Due in one year or less..................................... $ 129.2 $ 130.0
Due after one year through five years....................... 459.0 473.4
Due after five years through ten years...................... 735.1 751.1
Due after ten years......................................... 336.9 343.5
--------- ---------
Total................................................... $1,660.2 $1,698.0
--------- ---------
--------- ---------
</TABLE>
The proceeds from voluntary sales of available-for-sale securities and the
gross realized gains and gross realized losses on those sales were as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31 PROCEEDS FROM GROSS GROSS
(IN MILLIONS) VOLUNTARY SALES GAINS LOSSES
- ------------------------------------------------------------ ------------------ ----- ------
<S> <C> <C> <C>
1996
Fixed maturities............................................ $496.6 $4.3 $8.3
------- ----- ------
Equity securities........................................... $ 1.5 $0.4 $0.1
------- ----- ------
</TABLE>
Unrealized gains and losses on available-for-sale and other securities, are
summarized as follows:
<TABLE>
<CAPTION>
EQUITY
FOR THE YEAR ENDED DECEMBER 31 FIXED SECURITIES
(IN MILLIONS) MATURITIES AND OTHER (1) TOTAL
- ------------------------------------------------------------ ---------- ------------- ------
<S> <C> <C> <C>
1996
Net appreciation (depreciation), beginning of year.......... $ 20.4 $ 3.4 $ 23.8
---------- ------ ------
Net (depreciation) appreciation on available-for-sale
securities............................................... (20.8) 6.7 (14.1)
Net appreciation from the effect on deferred policy
acquisition costs and on policy liabilities.............. 9.0 -- 9.0
Provision for deferred federal income taxes............... 4.1 (2.3) 1.8
---------- ------ ------
(7.7) 4.4 (3.3)
---------- ------ ------
Net appreciation, end of year............................... $ 12.7 $ 7.8 $ 20.5
---------- ------ ------
---------- ------ ------
</TABLE>
(1) Includes net appreciation on other investments of $2.2 million.
B. MORTGAGE LOANS AND REAL ESTATE
AFLIAC's mortgage loans and real estate are diversified by property type and
location. Real estate investments have been obtained primarily through
foreclosure. Mortgage loans are collateralized by the related properties and
generally are no more than 75% of the property's value at the time the original
loan is made.
F-9
<PAGE>
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
The carrying values of mortgage loans and real estate investments net of
applicable reserves were as follows:
<TABLE>
<CAPTION>
DECEMBER 31
(IN MILLIONS) 1996
- ---------------------------------------- ------
<S> <C>
Mortgage loans.......................... $221.6
------
Real estate:
Held for sale......................... 26.1
Held for production of income......... --
------
Total real estate................... 26.1
------
Total mortgage loans and real estate.... $247.7
------
------
</TABLE>
Reserves for mortgage loans were $9.5 million at December 31, 1996.
During 1996, non-cash investing activities included real estate acquired
through foreclosure of mortgage loans, which had a fair value of $0.9 million.
At December 31, 1996, contractual commitments to extend credit under
commercial mortgage loan agreements amounted to approximately $16.0 million.
These commitments generally expire within one year.
Mortgage loans and real estate investments comprised the following property
types and geographic regions:
<TABLE>
<CAPTION>
DECEMBER 31
(IN MILLIONS) 1996
- ---------------------------------------- ------
<S> <C>
Property type:
Office building....................... $ 86.1
Residential........................... 39.0
Retail................................ 55.9
Industrial / warehouse................ 52.6
Other................................. 25.3
Valuation allowances.................. (11.2)
------
Total................................... $247.7
------
------
Geographic region:
South Atlantic........................ $ 72.9
Pacific............................... 37.0
East North Central.................... 58.3
Middle Atlantic....................... 35.0
West South Central.................... 5.7
New England........................... 21.9
Other................................. 28.1
Valuation allowances.................. (11.2)
------
Total................................... $247.7
------
------
</TABLE>
At December 31, 1996, scheduled mortgage loan maturities were as follows:
1997 -- $58.6 million; 1998 -- $53.1 million; 1999 -- $21.5 million; 2000 --
$52.3 million; 2001 -- $7.7 million; and $28.4 million thereafter. Actual
maturities could differ from contractual maturities because borrowers may have
the right to prepay obligations with or without prepayment penalties and loans
may be refinanced. During 1996, the Company refinanced $7.8 million of mortgage
loans based on terms which differed from those granted to new borrowers.
F-10
<PAGE>
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
C. INVESTMENT VALUATION ALLOWANCES
Investment valuation allowances which have been deducted in arriving at
investment carrying values as presented in the balance sheet and changes thereto
are shown below.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED BALANCE AT
DECEMBER 31 BALANCE AT DECEMBER
(IN MILLIONS) JANUARY 1 ADDITIONS DEDUCTIONS 31
- ------------------------- ---------- --------- ---------- ----------
<S> <C> <C> <C> <C>
1996
Mortgage loans........... $12.5 $4.5 $7.5 $ 9.5
Real estate.............. 2.1 -- 0.4 1.7
---------- --------- ---------- ----------
Total................ $14.6 $4.5 $7.9 $11.2
---------- --------- ---------- ----------
---------- --------- ---------- ----------
</TABLE>
The carrying value of impaired loans was $21.5 million with related reserves
of $7.3 million as of December 31, 1996. All impaired loans were reserved as of
December 31, 1996.
The average carrying value of impaired loans was $26.3 million, with related
interest income while such loans were impaired, of $3.4 million as of December
31, 1996.
D. OTHER
At December 31, 1996, AFLIAC had no concentration of investments in a single
investee exceeding 10% of shareholder's equity.
3. INVESTMENT INCOME AND GAINS AND LOSSES
A. NET INVESTMENT INCOME
The components of net investment income were as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31
(IN MILLIONS) 1996
- --------------------------------------------- ------
<S> <C>
Fixed maturities............................. $137.2
Mortgage loans............................... 22.0
Equity securities............................ 0.7
Policy loans................................. 10.2
Real estate.................................. 6.2
Other long-term investments.................. 0.8
Short-term investments....................... 1.4
------
Gross investment income...................... 178.5
Less investment expenses..................... (6.8)
------
Net investment income........................ $171.7
------
------
</TABLE>
At December 31, 1996, mortgage loans on non-accrual status were $5.0
million, including restructured loans of $2.6 million. The effect of
non-accruals, compared with amounts that would have been recognized in
accordance with the original terms of the investments, was to reduce net income
by $0.1 million in 1996. There were no fixed maturities on non-accrual status at
December 31, 1996.
The payment terms of mortgage loans may from time to time be restructured or
modified. The investment in restructured mortgage loans, based on amortized
cost, amounted to $25.4 million at December 31, 1996. Interest income on
restructured mortgage loans that would have been recorded in accordance with the
original terms of such loans amounted to $3.6 million in 1996. Actual interest
income on these loans included in net investment income aggregated $2.2 million
in 1996.
F-11
<PAGE>
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
There were no fixed maturities or mortgage loans which were non-income
producing for the twelve months ended December 31, 1996.
B. REALIZED INVESTMENT GAINS AND LOSSES
Realized gains (losses) on investments were as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31
(IN MILLIONS) 1996
- --------------------------------------------- -----
<S> <C>
Fixed maturities............................. $(3.3)
Mortgage loans............................... (3.2)
Equity securities............................ 0.3
Real estate.................................. 2.5
Other........................................ 0.1
-----
Net realized investment losses............... $(3.6)
-----
-----
</TABLE>
Proceeds from voluntary sales of investments in fixed maturities were $496.6
million in 1996. Realized gains on such sales were $4.3 million, and realized
losses were $8.3 million for 1996.
4. FAIR VALUE DISCLOSURES OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments", requires
disclosure of fair value information about certain financial instruments
(insurance contracts, real estate, goodwill and taxes are excluded) for which it
is practicable to estimate such values, whether or not these instruments are
included in the balance sheet. The fair values presented for certain financial
instruments are estimates which, in many cases, may differ significantly from
the amounts which could be realized upon immediate liquidation. In cases where
market prices are not available, estimates of fair value are based on discounted
cash flow analyses which utilize current interest rates for similar financial
instruments which have comparable terms and credit quality.
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments:
CASH AND CASH EQUIVALENTS
For these short-term investments, the carrying amount approximates fair value.
FIXED MATURITIES
Fair values are based on quoted market prices, if available. If a quoted market
price is not available, fair values are estimated using independent pricing
sources or internally developed pricing models using discounted cash flow
analyses.
EQUITY SECURITIES
Fair values are based on quoted market prices, if available. If a quoted market
price is not available, fair values are estimated using independent pricing
sources or internally developed pricing models.
MORTGAGE LOANS
Fair values are estimated by discounting the future contractual cash flows using
the current rates at which similar loans would be made to borrowers with similar
credit ratings. The fair value of below investment grade mortgage loans are
limited to the lesser of the present value of the cash flows or book value.
F-12
<PAGE>
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
REINSURANCE RECEIVABLES
The carrying amount of the reinsurance receivable for outstanding claims, losses
and loss adjustment expenses. reported in the balance sheet approximates fair
value.
POLICY LOANS
The carrying amount reported in the balance sheet approximates fair value since
policy loans have no defined maturity dates and are inseparable from the
insurance contracts.
INVESTMENT CONTRACTS (WITHOUT MORTALITY FEATURES)
Fair values for the Company's liabilities under investment type contracts are
estimated based on current surrender values.
The estimated fair values of the financial instruments were as follows:
<TABLE>
<CAPTION>
1996
--------------------
DECEMBER 31 CARRYING FAIR
(IN MILLIONS) VALUE VALUE
- --------------------------------------------- --------- --------
<S> <C> <C>
FINANCIAL ASSETS
Cash and cash equivalents.................. $ 18.8 $ 18.8
Fixed maturities........................... 1,698.0 1,698.0
Equity securities.......................... 41.5 41.5
Mortgage loans............................. 221.6 229.3
Policy loans............................... 131.7 131.7
Reinsurance receivables.................... 72.5 72.5
--------- --------
$2,184.1 $2,191.8
--------- --------
--------- --------
FINANCIAL LIABILITIES
Individual annuity contracts............... 910.2 703.6
Supplemental contracts without life
contingencies............................. 15.9 15.9
Other individual contract deposit funds.... 0.3 0.3
--------- --------
$ 926.4 $ 719.8
--------- --------
--------- --------
</TABLE>
5. DEBT
During 1996, the Company utilized repurchase agreements to finance certain
investments. Although the repurchase agreements were entirely settled by year
end, management may utilize this policy again in future periods.
Interest expense was $3.4 million in 1996, relating to interest payments on
repurchase agreements, and is recorded in other operating expenses.
F-13
<PAGE>
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
6. FEDERAL INCOME TAXES
Provisions for federal income taxes have been calculated in accordance with the
provisions of SFAS No. 109. A summary of the federal income tax expense
(benefit) in the statement of income is shown below:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31
(IN MILLIONS) 1996
- --------------------------------------------- -----
<S> <C>
Federal income tax expense (benefit)
Current.................................... $26.9
Deferred................................... (9.8)
-----
Total........................................ $17.1
-----
-----
</TABLE>
The provision for federal income taxes does not materially differ from the
amount of federal income tax determined by applying the appropriate U.S.
statutory income tax rate to income before federal income taxes.
The deferred tax (assets) liabilities are comprised of the following at
December 31, 1996:
<TABLE>
<CAPTION>
DECEMBER 31
(IN MILLIONS) 1996
- --------------------------------------------- -------
<S> <C>
Deferred tax (assets) liabilities
Loss reserves.............................. (137.0)
Deferred acquisition costs................. 186.9
Investments, net........................... 14.2
Bad debt reserve........................... (1.1)
Other, net................................. (2.8)
-------
Deferred tax liability, net.................. $ 60.2
-------
-------
</TABLE>
Gross deferred income tax liabilities totaled $201.1 million at December 31,
1996. Gross deferred income tax assets totaled $140.9 million at December 31,
1996.
Management believes, based on the Company's recent earnings history and its
future expectations, that the Company's taxable income in future years will be
sufficient to realize all deferred tax assets. In determining the adequacy of
future income, management considered the future reversal of its existing
temporary differences and available tax planning strategies that could be
implemented, if necessary.
The Company's federal income tax returns are routinely audited by the IRS,
and provisions are routinely made in the financial statements in anticipation of
the results of these audits. The IRS has examined the life-nonlife consolidated
group's federal income tax returns through 1991. The Company is currently
considering its response to certain adjustments proposed by the IRS with respect
to the life-nonlife consolidated group's federal income tax returns for 1989,
1990, and 1991. In management's opinion, adequate tax liabilities have been
established for all years. However, the amount of these tax liabilities could be
revised in the near term if estimates of the Company's ultimate liability are
revised.
7. RELATED PARTY TRANSACTIONS
The Company has no employees of its own, but has agreements under which FAFLIC
provides management, space and other services, including accounting, electronic
data processing, human resources, legal and other staff functions. Charges for
these services are based on full cost including all direct and indirect overhead
costs, and amounted to $112.4 million in 1996. The net amounts payable to FAFLIC
and affiliates for accrued expenses and various other liabilities and
receivables were $13.3 million at December 31, 1996.
F-14
<PAGE>
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
8. DIVIDEND RESTRICTIONS
Delaware has enacted laws governing the payment of dividends to stockholders by
insurers. These laws affect the dividend paying ability of the Company.
Pursuant to Delaware's statute, the maximum amount of dividends and other
distributions that an insurer may pay in any twelve month period, without the
prior approval of the Delaware Commissioner of Insurance, is limited to the
greater of (i) 10% of its policyholders' surplus as of the preceding December 31
or (ii) the individual company's statutory net gain from operations for the
preceding calendar year (if such insurer is a life company) or its net income
(not including realized capital gains) for the preceding calendar year (if such
insurer is not a life company). Any dividends to be paid by an insurer, whether
or not in excess of the aforementioned threshold, from a source other than
statutory earned surplus would also require the prior approval of the Delaware
Commissioner of Insurance.
At January 1, 1997, AFLIAC could pay dividends of $11.9 million to FAFLIC
without prior approval.
9. REINSURANCE
In the normal course of business, the Company seeks to reduce the loss that may
arise from events that cause unfavorable underwriting results by reinsuring
certain levels of risk in various areas of exposure with other insurance
enterprises or reinsurers. Reinsurance transactions are accounted for in
accordance with the provisions of SFAS No. 113.
Amounts recoverable from reinsurers are estimated in a manner consistent
with the claim liability associated with the reinsured policy. Reinsurance
contracts do not relieve the Company from its obligations to policyholders.
Failure of reinsurers to honor their obligations could result in losses to the
Company; consequently, allowances are established for amounts deemed
uncollectible. The Company determines the appropriate amount of reinsurance
based on evaluation of the risks accepted and analyses prepared by consultants
and reinsurers and on market conditions (including the availability and pricing
of reinsurance). The Company also believes that the terms of its reinsurance
contracts are consistent with industry practice in that they contain standard
terms with respect to lines of business covered, limit and retention,
arbitration and occurrence. Based on its review of its reinsurers' financial
statements and reputations in the reinsurance marketplace, the Company believes
that its reinsurers are financially sound.
The effects of reinsurance were as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31
(IN MILLIONS) 1996
----------------------------------------------- ---------
<S> <C>
Life insurance premiums:
Direct....................................... $ 53.3
Assumed...................................... 3.1
Ceded........................................ (23.7)
---------
Net premiums................................... $ 32.7
---------
Life insurance and other individual policy
benefits, claims, losses and loss adjustment
expenses:
Direct....................................... $ 206.4
Assumed...................................... 4.5
Ceded........................................ (18.3)
---------
Net policy benefits, claims, losses and loss
adjustment expenses........................... $ 192.6
---------
---------
</TABLE>
F-15
<PAGE>
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
10. DEFERRED POLICY ACQUISITION EXPENSES
The following reflects the changes to the deferred policy acquisition asset:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31
(IN MILLIONS) 1996
-------------------------------------------------- --------
<S> <C>
Balance at beginning of year...................... $ 555.7
Acquisition expenses deferred................... 116.6
Amortized to expense during the year............ (49.9)
Adjustment to equity during the year............ 10.3
--------
Balance at end of year............................ $ 632.7
--------
--------
</TABLE>
11. LIABILITIES FOR INDIVIDUAL ACCIDENT AND HEALTH BENEFITS
The Company regularly updates its estimates of liabilities for future policy
benefits and outstanding claims, losses and loss adjustment expenses as new
information becomes available and further events occur which may impact the
resolution of unsettled claims. Changes in prior estimates are reflected in
results of operations in the year such changes are determined to be needed and
recorded.
The liability for future policy benefits and outstanding claims, losses and
loss adjustment expenses related to the Company's accident and health business
was $178.6 million at December 31, 1996. Accident and health claim liabilities
have been re-estimated for all prior years and were increased by $3.2 million in
1996.
12. CONTINGENCIES
REGULATORY AND INDUSTRY DEVELOPMENTS
Unfavorable economic conditions may contribute to an increase in the number
of insurance companies that are under regulatory supervision. This may result in
an increase in mandatory assessments by state guaranty funds, or voluntary
payments by solvent insurance companies to cover losses to policyholders of
insolvent or rehabilitated companies. Mandatory assessments, which are subject
to statutory limits, can be partially recovered through a reduction in future
premium taxes in some states. The Company is not able to reasonably estimate the
potential effect on it of any such future assessments or voluntary payments.
LITIGATION
The Company has been named a defendant in various legal proceedings arising
in the normal course of business. In the opinion of management, based on the
advice of legal counsel, the ultimate resolution of these proceedings will not
have a material effect on the Company's financial statements. However,
liabilities related to these proceedings could be established in the near term
if estimates of the ultimate resolution of these proceedings are revised.
13. STATUTORY FINANCIAL INFORMATION
The Company is required to file annual statements with state regulatory
authorities prepared on an accounting basis prescribed or permitted by such
authorities (statutory basis). Statutory surplus differs from shareholder's
equity reported in accordance with generally accepted accounting principles for
stock life insurance companies primarily because policy acquisition costs are
expensed when incurred, investment
F-16
<PAGE>
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
reserves are based on different assumptions, life insurance reserves are based
on different assumptions and income tax expense reflects only taxes paid or
currently payable. Statutory net income and surplus are as follows:
<TABLE>
<CAPTION>
(IN MILLIONS) 1996
--------------------------------------------------- ---------
<S> <C>
Statutory net income............................... $ 5.4
Statutory Surplus.................................. $ 234.0
---------
</TABLE>
14. SUBSEQUENT EVENT (UNAUDITED)
On April 14, 1997, the Company entered into an agreement in principle to
transfer the Company's individual disability income business under a 100%
coinsurance agreement to Metropolitan Life Insurance Company. The consummation
of the transaction is subject to the negotiation of definitive arrangements and
regulatory approvals and is expected to occur on or before October 1, 1997. In
connection with this transaction, the Company has recorded an after-tax charge
of $35 million net income in the first quarter of 1997 related to the
reinsurance of this business.
F-17
<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.
[LOGO]
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) (4,828)
Other sources (applications)............... (13,642) 19,868 7,757
---------- ---------- ----------
NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES.................................. (26,194) 5,944 (1,296)
---------- ---------- ----------
CASH FLOW FROM INVESTING ACTIVITIES
Sales and maturities of long term
investments:
Bonds.................................... 572,640 478,512 386,414
Stocks................................... 481 63 64
Real estate and other invested assets.... 13,008 3,008 11,094
Repayment of mortgage principal.......... 55,202 65,334 79,844
Capital gains tax........................ (400) (968) (3,296)
Acquisition of long term investments:
Bonds.................................... (640,339) (508,603) (466,086)
Stocks................................... (44) -- --
Real estate and other invested assets.... (11,929) (24,544) (2,392)
Mortgage loans........................... (415) (364) (2,266)
Other investing activities............... (3,206) 18,934 (27,254)
---------- ---------- ----------
NET CASH PROVIDED BY (USED IN) INVESTING
ACTIVITIES.................................. (15,002) 31,372 (23,878)
---------- ---------- ----------
Net change in cash and short term
investments................................. (41,196) 37,316 (25,174)
CASH AND SHORT TERM INVESTMENTS
Beginning of the year...................... 52,487 15,171 40,345
---------- ---------- ----------
End of the year............................ $ 11,291 $ 52,487 $ 15,171
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(A WHOLLY OWNED SUBSIDIARY OF FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY)
NOTES TO STATUTORY FINANCIAL STATEMENTS
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BASIS OF PRESENTATION -- Allmerica Financial Life Insurance and
Annuity Company ("Allmerica Financial" or the "Company", formerly SMA Life
Assurance Company) is a wholly owned subsidiary of SMA Financial Corp., which is
wholly owned by First Allmerica Financial Life Insurance Company ("First
Allmerica", formerly, State Mutual Life Assurance Company of America), a stock
life insurance company. On October 16, 1995, First Allmerica converted from a
mutual life insurance company to a stock life insurance company. Concurrent with
this transaction, First Allmerica became a wholly owned subsidiary of Allmerica
Financial Corporation ("AFC").
The stockholder's equity of the Company is being maintained at a minimum level
of 5% of general account assets by First Allmerica in accordance with a policy
established by vote of First Allmerica's Board of Directors.
The Company's financial statements have been prepared on the basis of accounting
practices prescribed or permitted by the Insurance Department of the State of
Delaware and in conformity with practices prescribed by the National Association
of Insurance Commissioners (NAIC), which while common in the industry, vary in
some respects from generally accepted accounting principles. Significant
differences include:
- Bonds considered to be "available-for-sale" or "trading" are
not carried at fair value and changes in fair value are not
recognized through surplus or the statement of operations,
respectively;
- The Asset Valuation Reserve, represents a reserve against
possible losses on investments and is recorded as a liability
through a charge to surplus. The Interest Maintenance Reserve
is designed to include deferred realized gains and losses (net
of applicable federal income taxes) due to interest rate
changes and is also recorded as a liability, however, the
deferred net realized investment gains and losses are amortized
into future income generally over the original period to
maturity of the assets sold. These liabilities are not required
under generally accepted accounting principles;
- Total premiums, deposits and benefits on certain
investment-type contracts are reflected in the statement of
operations, instead of using the deposit method of accounting;
- Policy acquisition costs, such as commissions, premium taxes
and other items, are not deferred and amortized in relation to
the revenue/gross profit streams from the related contracts;
- Benefit reserves are determined using statutorily prescribed
interest, morbidity and mortality assumptions instead of using
more realistic expense, interest, morbidity, mortality and
voluntary withdrawal assumptions with provision made for
adverse deviation;
- Amounts recoverable from reinsurers for unpaid losses are not
recorded as assets, but as offsets against the respective
liabilities;
- Deferred federal income taxes are not provided for temporary
differences between amounts reported in the financial
statements and those included in the tax returns;
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, 1994
------------------------------------------------------
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>
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 AND REAL ESTATE -- Mortgage loans and real estate investments,
are diversified by property type and location. Real estate investments have been
obtained primarily through foreclosure. Mortgage loans are collateralized by the
related properties and are generally no more than 75% of the property value at
the time the original loan is made. At December 31, 1995 and 1994, mortgage loan
and real estate investments were distributed by the following types and
geographic regions:
<TABLE>
<CAPTION>
(IN THOUSANDS)
PROPERTY TYPE 1995 1994
- ---------------------------------------- -------- --------
<S> <C> <C>
Office buildings........................ $127,149 $140,292
Residential............................. 59,934 57,061
Retail.................................. 29,578 72,787
Industrial/Warehouse.................... 38,192 39,424
Other................................... 25,636 37,256
-------- --------
Total................................... $280,489 $346,820
-------- --------
-------- --------
<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 1994
---------------------- ----------------------
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
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
not in excess of the aforementioned threshold, from a source other than
statutory earned surplus would also require the prior approval of the Delaware
Commissioner of Insurance. At January 1, 1996, the Company could pay dividends
of $4.3 million to First Allmerica, without prior approval.
NOTE 8 -- OTHER RELATED PARTY TRANSACTIONS
First Allmerica provides management, operating personnel and facilities on a
cost reimbursement basis to the Company. Expenses for services received from
First Allmerica were $85.8 million, $102.5 million and $98.9 million in 1995,
1994 and 1993, respectively. The net amounts payable to First Allmerica and
affiliates for accrued expenses and various other liabilities and receivables
were $12.6 million and $8.3 million at December 31, 1995 and 1994, respectively.
NOTE 9 -- FUNDS ON DEPOSIT
In March 1994, the Company voluntarily withdrew from being licensed in New
York. In connection with the withdrawal First Allmerica, which is licensed in
New York, became qualified to sell the products previously sold by Allmerica
Financial in New York. The Company agreed with the New York Department of
Insurance to maintain, through a custodial account in New York, a security
deposit, the market value of which will at all times equal 102% of all
outstanding general account liabilities of the Company for New York
policyholders, claimants and creditors. As of December 31, 1995, the carrying
value and fair value of the assets or deposit was $295.0 million and $303.6
million, respectively, which is in excess of the required amount.
Additional securities with a carrying value of $4.2 million and $3.9 million
were on deposit with various other state and governmental authorities as of
December 31, 1995 and 1994, respectively.
NOTE 10 -- LITIGATION
The Company has been named a defendant in various legal proceedings arising
in the normal course of business. In the opinion of management, based on the
advice of legal counsel, the ultimate resolution of these proceedings will not
have a material effect on the Company's financial statements.
14
<PAGE>
THE FULCRUM FUND-SM- SEPARATE ACCOUNT
STATEMENTS OF ASSETS AND LIABILITIES
DECEMBER 31, 1996
<TABLE>
<CAPTION>
GLOBAL GLOBAL
VALUE GROWTH INTERNATIONAL STRATEGIC INTERACTIVE MONEY
PORTFOLIO PORTFOLIO GROWTH INCOME TELECOM MARKET
---------------------------------- ---------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Investment in shares of
Allmerica Investment Trust... -- -- -- -- -- --
Investments in shares of
Palladian Trust.............. -- -- -- -- -- --
---------------------------------- ---------------------------------
Total assets.............. -- -- -- -- -- --
LIABILITIES:
-- -- -- -- -- --
---------------------------------- ---------------------------------
Net assets................ -- -- -- -- -- --
---------------------------------- ---------------------------------
---------------------------------- ---------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-1
<PAGE>
THE FULCRUM FUND-SM- SEPARATE ACCOUNT
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
NOTE 1 -- ORGANIZATION
The Fulcrum Fund-SM- Separate Account (the Separate Account) is a separate
investment account of Allmerica Financial Life Insurance and Annuity Company
(the Company), established on November 15, 1996 for the purpose of separating
from the general assets of the Company those assets used to fund certain
variable annuity policies issued by the Company. The Company is a wholly-owned
subsidiary of First Allmerica Financial Life Insurance Company (First
Allmerica). Under applicable insurance law, the assets and liabilities of the
Separate Account are clearly identified and distinguished from the other assets
and liabilities of the Company. The Separate Account cannot be charged with
liabilities arising out of any other business of the Company.
The Separate Account is registered as a unit investment trust under the
Investment Company Act of 1940, as amended (the 1940 Act). The Separate Account
currently offers six Sub-Accounts under the Fulcrum Fund-SM- Variable Annuity
contracts. Each Sub-Account invests exclusively in one of five investment
portfolios of The Palladian Trust (PAI) managed by Palladian Advisors, Inc., or
in the Money Market Fund of the Allmerica Investment Trust (the Trust) managed
by Allmerica Investment Management Company, Inc., a wholly-owned subsidiary of
First Allmerica. PAI and the Trust are open-end, diversified management
investment companies registered under the 1940 Act.
The Separate Account has two types of variable annuity policies, "qualified"
policies and "non-qualified" policies. A qualified policy is one that is
purchased in connection with a retirement plan which meets the requirements of
Section 401, 403, or 408, of the Internal Revenue Code, while a non-qualified
policy is one that is not purchased in connection with one of the indicated
retirement plans. The tax treatment for certain partial redemptions or
surrenders will vary according to whether they are made from a qualified policy
or a non-qualified policy.
NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES
INVESTMENTS -- Security transactions are recorded on the trade date.
Investments held by the Sub-Accounts are stated at the net asset value per share
of the respective investment portfolio of PAI or the Trust. Net realized gains
and losses on securities sold are determined on the average cost method.
Dividends and capital gain distributions are recorded on the ex-dividend date
and are reinvested in additional shares of the respective investment portfolio
of PAI or the Trust at net asset value.
FEDERAL INCOME TAXES -- The Company is taxed as a "life insurance company"
under Subchapter L of the Internal Revenue Code and files a consolidated federal
income tax return with First Allmerica. The Company anticipates no tax liability
resulting from the operations of the Separate Account. Therefore, no provision
for income taxes has been charged against the Separate Account.
NOTE 3 -- INVESTMENTS
There were no investment purchases and sales for the year ended December 31,
1996.
NOTE 4 -- RELATED PARTY TRANSACTIONS
The Company makes a charge of 1.25% per annum based on the average daily net
assets of each Sub-Account at each valuation date for mortality and expense
risks. The Company also charges each Sub-Account .20% per annum based on the
average daily net assets of each Sub-Account for administrative
F-2
<PAGE>
THE FULCRUM FUND-SM- SEPARATE ACCOUNT
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
NOTE 4 -- RELATED PARTY TRANSACTIONS (CONTINUED)
expenses. These charges are deducted from the daily value of each Sub-Account
but are paid to the Company on a monthly basis.
A contract fee of $30 is currently deducted on the Contract anniversary date
and upon full surrender of the contract when the accumulated value is less than
$100,000. The contract fee is waived for contracts issued to and maintained by
the Trustee of a 401(k) plan. For the year ended December 31, 1996, there were
no contract fees deducted from accumulated value in the Separate Account.
Allmerica Investments, Inc. (Allmerica Investments), a wholly-owned
subsidiary of First Allmerica, is principal underwriter and general distributor
of the Separate Account, and does not receive any compensation for sales of the
Fulcrum Fund-SM- Variable Annuity Separate Account contracts. Commissions are
paid to registered representatives of Allmerica Investments by the Company. As
the current series of policies have a contingent deferred sales charge, no
deduction is made for sales charges at the time of the sale.
NOTE 5 -- DIVERSIFICATION REQUIREMENTS
Under the provisions of Section 817(h) of the Internal Revenue Code, a
variable annuity contract, other than a contract issued in connection with
certain types of employee benefit plans, will not be treated as an annuity
contract for federal income tax purposes for any period for which the
investments of the segregated asset account on which the contract is based are
not adequately diversified. The Code provides that the "adequately diversified"
requirement may be met if the underlying investments satisfy either a statutory
safe harbor test or diversification requirements set forth in regulations issued
by the Secretary of Treasury.
The Internal Revenue Service has issued regulations under Section 817(h) of
the Code. The Company believes that the Separate Account satisfies the current
requirements of the regulations, and it intends that the Separate Account will
continue to meet such requirements.
F-3
<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 for Fulcrum Separate Account of 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.
<PAGE>
Exhibit 3 - (a) Wholesaling Agreement is filed herewith was previously filed in
Pre-Effective Amendment No. 1 in November, 1996 and is incorporated
by reference herein.
(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
were previously filed in Registrant's Initial
Registration Statement on September 4, 1996, and are
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 was previously filed in Registrants's
Pre-Effective Amendment No. 1 in November, 1996 and is
incorporated by reference herein.
<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
DIRECTORS AND PRINCIPAL OFFICERS OF THE COMPANY
<TABLE>
<CAPTION>
NAME AND POSITION PRINCIPAL OCCUPATION(S) DURING
WITH COMPANY PAST FIVE YEARS
------------ ---------------
<S> <C>
Bruce C. Anderson, Director Director of First Allmerica since 1996; Vice President, First
Allmerica
Abigail M. Armstrong, Secretary and Counsel Secretary of First Allmerica since 1996; Counsel, First
Allmerica
John P. Kavanaugh, Director, Vice President and Director and Chief Investment Officer of First Allmerica since
Chief Investment Officer 1996; Vice President, First Allmerica since 1991
John F. Kelly, Director Director of First Allmerica since 1996; Senior Vice President,
General Counsel and Assistant Secretary, First Allmerica
J. Barry May, Director Director of First Allmerica since 1996; Director and President,
The Hanover Insurance Company since 1996; Vice President, The
Hanover Insurance Company, 1993 to 1996
James R. McAuliffe, Director Director of First Allmerica since 1996; President and CEO,
Citizens Insurance Company of America since 1994; Vice President
1982 to 1994 and Chief Investment Officer, First Allmerica 1986
to 1994
John F. O'Brien, Director and Chairman of the Board Director, Chairman of the Board, President and Chief Executive
Officer, First Allmerica since 1989
Edward J. Parry, III, Director, Vice President, Director and Chief Financial Officer of First Allmerica since
Chief Financial Officer and Treasurer 1996; Vice President and Treasurer, First Allmerica since 1993
Richard M. Reilly, Director, President and Director of First Allmerica since 1996; Vice President, First
Chief Executive Officer Allmerica since 1990; Director, Allmerica Investments, Inc.
since 1990; Director and President, Allmerica Investment
Management Company, Inc. since 1990
Larry C. Renfro, Director Director of First Allmerica since 1996; Vice President, First
Allmerica since 1990
<PAGE>
Eric A. Simonsen, Director and Vice President Director of First Allmerica since 1996; Vice President, First
Allmerica since 1990; Chief Financial Officer, First Allmerica
1990 to 1996
Phillip E. Soule, Director Director of First Allmerica since 1996; Vice President, First
Allmerica
</TABLE>
Item 26. PERSONS UNDER COMMON CONTROL WITH REGISTRANT. See attached
organization chart.
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Allmerica Financial Corporation
Delaware
| | | | |
___________________________________________________________________________________
100% 100% 100% 100% 100%
Allmerica, Inc. Allmerica First Allmerica AFC Capital Allmerica
Funding Corp. Financial Life Trust I Services
Insurance Corporation
Company
Massachusetts Massachusetts Massachusetts Delaware Massachusetts
|
_______________________________________________
|
100%
Logan Wells
Water Company,
Inc.
New Jersey
______________________________________________________________________________________________________________________
| | | | | |
59.47% 100% 99.2% 100% 100% 100%
Allmerica Sterling Risk Allmerica Somerset Allmerica Allmerica
Property Management Trust Square, Inc. Financial Life Institutional
& Casualty Services, Inc. Company, N.A. Insurance and Services, Inc.
Companies, Inc. Annuity Company
Federally
Delaware Delaware Chartered Massachusetts Delaware Massachusetts
|
___________________________________________________________________________
| | | |
100% 100% 100% 100%
APC The Hanover Allmerica Citizens
Funding Corp. Insurance Financial Insurance
Company Insurance Company of
Brokers, Inc. Illinois
Massachusetts New Hampshire Massachusetts Illinois
|
______________________________________________________________________________________________________________________
| | | | | |
100% 100% 100% 100% 82.5% 100%
Allmerica Allmerica The Hanover Hanover Texas Citizens Massachusetts
Financial Employee American Insurance Corporation Bay Insurance
Benefit Insurance Insurance Management Company
Insurance Agency, Inc. Company Company, Inc.
Company
Pennsylvania Massachusetts New Hampshire Texas Delaware New Hampshire
|
________________________________________________________
| | |
100% 100% 100%
Citizens Citizens Insurance Citizens
Insurance Company of Insurance
Company of Ohio America Company of the
Midwest
Ohio Michigan Indiana
|
_______________
100%
Citizens
Management Inc.
Michigan
<CAPTION>
Allmerica Financial Corporation
Delaware
| | | | |
___________________________________________________________________________________
100% 100% 100% 100% 100%
Allmerica, Inc. Allmerica First Allmerica AFC Capital Allmerica
Funding Corp. Financial Life Trust I Services
Insurance Corporation
Company
Massachusetts Massachusetts Massachusetts Delaware Massachusetts
|
_______________________________________________
|
100%
SMA
Financial Corp.
Massachusetts
|
______________________________________________________________________________________________________________________
| | | | | |
100% 100% 100% 100% 100% Allmerica
Allmerica Allmerica Allmerica Allmerica Linder Asset
Investments, Investment Asset Financial Services Skokie Management,
Inc. Management Management, Insurance Real Estate Limited
Company, Inc. Inc. Agency, Inc. Corporation
Massachusetts Massachusetts Massachusetts Massachusetts Massachusetts Bermuda
________________ _________________________________
Allmerica Equity Greendale AAM
Index Pool Special Equity Fund
Placements
Fund
Massachusetts Massachusetts Massachusetts
_____________________________________
| | Grantor Trusts established for the benefit of First
100% 100% Allmerica, Allmerica Financial Life, Hanover and
Allmerica AMGRO, Inc. Citizens
Financial Allmerica Allmerica Allmerica
Alliance Investment Trust Funds Securities
Insurance Trust
Company
Massachusetts Massachusetts Massachusetts
New Hampshire Massachusetts
|
|
100% Affiliated Management Investment Companies
Lloyd's
Credit Hanover Lloyd's
Corporation Insurance
Company
Massachusetts Texas
Affiliated Lloyd's plan company, controlled by
Underwriters for the benefit of the Hanover
Insurance Company
Beltsville
AAM High Drive
Yield Fund, Properties
L.L.C. Limited
Partnership
Massachusetts
Delaware
LLC established for the benefit of
First Allmerica, Allmerica Limited partnership involving First Allmerica, as
Financial Life, Hanover and general partner and Allmerica Financial Life as
Citizens limited partner
</TABLE>
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
<TABLE>
<CAPTION>
NAME ADDRESS TYPE OF BUSINESS
---- ------- ----------------
<S> <C> <C>
AAM Equity Fund 440 Lincoln Street Massachusetts Grantor Trust
Worcester MA 01653
AAM High Yield Fund, L.L.C. Limited Liability Company
AFC Capital Trust I Statutory Business Trust
Allmerica Asset Management Limited 440 Lincoln Street Investment advisory services
Worcester MA 01653
Allmerica Asset Management, Inc. 440 Lincoln Street Investment advisory services
Worcester MA 01653
Allmerica Employees Insurance Agency, Inc. 440 Lincoln Street Insurance Agency
Worcester MA 01653
Allmerica Equity Index Pool Grantor Trust
Allmerica Financial Alliance Insurance Company 100 North Parkway Multi-line property and casualty
Worcester MA 01605 insurance
Allmerica Financial Benefit Insurance Company 100 North Parkway Multi-line property and casualty insurance
Worcester MA 01605
Allmerica Financial Corporation 440 Lincoln Street Holding Company
Worcester MA 01653
Allmerica Financial Insurance Brokers, Inc. 440 Lincoln Street Insurance Broker
Worcester MA 01653
Allmerica Financial Life Insurance and Annuity 440 Lincoln Street Life insurance, accident and health
Company (formerly known as SMA Life Assurance Worcester MA 01653 insurance, annuities, variable annuities
Company) and variable life insurance
Allmerica Financial Services Insurance Agency, 440 Lincoln Street Insurance Agency
Inc. Worcester MA 01653
Allmerica Funding Corp. 440 Lincoln Street Special purpose funding vehicle for
Worcester MA 01653 commercial paper
<PAGE>
Allmerica Funds 440 Lincoln Street Investment Company
Worcester MA 01653
Allmerica, Inc. 440 Lincoln Street Common employer for Allmerica Financial
Worcester MA 01653 Corporation entities
Allmerica Institutional Services, Inc. 440 Lincoln Street Accounting, marketing and shareholder
(formerly known as 440 Financial Group of Worcester MA 01653 services for investment companies
Worcester, Inc.)
Allmerica Investment Management Company, Inc. 440 Lincoln Street Investment advisory services
Worcester MA 01653
Allmerica Investments, Inc. 440 Lincoln Street Securities, retail broker-dealer
Worcester MA 01653
Allmerica Investment Trust 440 Lincoln Street Investment Company
Worcester MA 01653
Allmerica Property & Casualty Companies, Inc. 440 Lincoln Street Holding Company
Worcester MA 01653
Allmerica Securities Trust 440 Lincoln Street Investment Company
Worcester MA 01653
Allmerica Services Corporation 440 Lincoln Street Internal administrative services provider
Worcester MA 01653 to Allmerica Financial Corporation
entities
Allmerica Trust Company, N.A. 440 Lincoln Street Limited purpose national trust company
Worcester MA 01653
AMGRO, Inc. 100 North Parkway Premium financing
Worcester MA 01605
APC Funding Corp. 440 Lincoln Street Special purpose funding vehicle for
Worcester MA 01653 commercial paper
Beltsville Drive Limited Partnership 440 Lincoln Street Real estate partnership
Worcester MA 01653
Citizens Corporation 440 Lincoln Street Holding Company
Worcester MA 01653
Citizens Insurance Company of America 645 West Grand River Multi-line property and casualty insurance
Howell MI 48843
Citizens Insurance Company of Illinois 333 Pierce Road Multi-line property and casualty insurance
Itasca IL 60143
Citizens Insurance Company of the Midwest 3950 Priority Way Multi-line property and casualty insurance
South Drive, Suite 200
Indianapolis IN 46280
<PAGE>
Citizens Insurance Company of Ohio 8101 N. High Street Multi-line property and casualty insurance
P.O. Box 342250
Columbus OH 43234
Citizens Management, Inc. 645 West Grand River Services management company
Howell MI 48843
First Allmerica Financial Life Insurance Company 440 Lincoln Street Life, pension, annuity, accident and
(formerly State Mutual Life Assurance Company of Worcester MA 01653 health insurance company
America)
Greendale Special Placements Fund 440 Lincoln Street Massachusetts Grantor Trust
Worcester MA 01653
The Hanover American Insurance Company 100 North Parkway Multi-line property and casualty insurance
Worcester MA 01605
The Hanover Insurance Company 100 North Parkway Multi-line property and casualty insurance
Worcester MA 01605
Hanover Texas Insurance Management Company, Inc. 801 East Campbell Road Attorney-in-fact for Hanover Lloyd's
Richardson TX 75081 Insurance Company
Hanover Lloyd's Insurance Company 801 East Campbell Road Multi-line property and casualty insurance
Richardson TX 75081
Linder Skokie Real Estate Corporation 440 Lincoln Street Real estate holding company
Worcester MA 01653
Lloyds Credit Corporation 440 Lincoln Street Premium financing service franchises
Worcester MA 01653
Logan Wells Water Company, Inc. 603 Heron Drive Water Company serving land development
Bridgeport NJ 08014 investment
Massachusetts Bay Insurance Company 100 North Parkway Multi-line property and casualty insurance
Worcester MA 01605
SMA Financial Corp. 440 Lincoln Street Holding Company
Worcester MA 01653
Somerset Square, Inc. 440 Lincoln Street Real estate holding company
Worcester MA 01653
Sterling Risk Management Services, Inc. 440 Lincoln Street Risk management services
Worcester MA 01653
</TABLE>
Item 27. NUMBER OF CONTRACT OWNERS.
As of December 31, 1996 the Variable Account had no Contract holders.
<PAGE>
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.
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.
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, Fulcrum
Variable Life Separate Account 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, Separate Account Fulcrum, 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
<PAGE>
NAME POSITION OR OFFICE WITH UNDERWRITER
- ---- -----------------------------------
Emil Aberizk Vice President and Chief Compliance Officer
Abigail M. Armstrong Secretary and Counsel
Richard F. Betzler, Jr. Vice President
Philip J. Coffey Vice President
Thomas J. Cunningham Vice President, Chief Financial Officer
and Controller
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.
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
<PAGE>
information, documents, and reports as may be prescribed by any rule or
regulation of the Commission heretofore or hereafter duly adopted pursuant to
authority conferred in that section.
(b) The Registrant hereby undertakes to include in the prospectus a postcard
that the applicant can remove to send for a Statement of Additional Information.
(c) The Registrant hereby undertakes to deliver a Statement of Additional
Information promptly upon written or oral request, according to the requirements
of Form N-4.
(d) 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:
<PAGE>
1. Appropriate disclosures regarding the redemption restrictions imposed by
the Program and by Section 403(b)(11) have been included in the
prospectus of each registration statement used in connection with the
offer of the Company's variable contracts.
2. Appropriate disclosures regarding the redemption restrictions imposed
by the Program and by Section 403(b)(11) have been included in sales
literature used in connection with the offer of the Company's variable
contracts.
3. Sales Representatives who solicit participants to purchase the variable
contracts have been instructed to specifically bring the redemption
restrictions imposed by the Program and by Section 403(b)(11) to the
attention of potential participants.
4. A signed statement acknowledging the participant's understanding of (I)
the restrictions on redemption imposed by the Program and by
Section 403(b)(11) and (ii) the investment alternatives available under
the employer's arrangement will be obtained from each participant who
purchases a variable annuity contract prior to or at the time of purchase.
Registrant hereby represents that it will not act to deny or limit a transfer
request except to the extent that a Service-Ruling or written opinion of
counsel, specifically addressing the fact pattern involved and taking into
account the terms of the applicable employer plan, determines that denial or
limitation is necessary for the variable annuity contracts to meet the
requirements of the Program or of Section 403(b). Any transfer request not
so denied or limited will be effected as expeditiously as possible.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940 the Registrant certifies that it meets all the requirements
for effectiveness of this Registration Statement pursuant to Rule 485(b) under
the Securities Act of 1933 and has duly caused this Registration Statement to be
signed on its behalf by the undersigned, thereto duly authorized, in the City of
Worcester, and Commonwealth of Massachusetts on the 2nd day of April, 1997.
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 April 2, 1997
Bruce C. Anderson
/s/ John P. Kavanaugh Director
John P. Kavanaugh
/s/ John F. Kelly Director
John F. Kelly
/s/J. Barry May Director
J. Barry May
/s/ James R. McAuliffe Director
James R. McAuliffe
/s/ Edward J. Parry III Director, Vice President, Treasurer
Edward J. Parry III and Chief Accounting Officer
<PAGE>
/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
Eric A. Simonsen
/s/ Phillip E. Soule Director
Phillip E. Soule
<PAGE>
EXHIBIT TABLE
Exhibit 9 - Consent and Opinion of Counsel
Exhibit 10 - Consent of Independent Accountants
<PAGE>
April 2, 1997
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 Post-
Effective Amendment 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:
Fulcrum Separate Account is a separate account of the company validly existing
pursuant to the Delaware Insurance Code and the regulations issued thereunder.
The assets held in Fulcrum Separate Account are not chargeable with liabilities
arising out of any other business the Company many conduct.
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 Post-
Effective Amendment to the Registration Statement of Fulcrum Separate Account
filed under the Securities Act of 1933.
Very truly yours,
/s/Sylvia Kemp-Orino
Sylvia Kemp-Orino
Assistant Vice President
and Counsel
<PAGE>
Exhibit 10
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Statement of Additional Information
constituting part of this Post-Effective Amendment No. 1 to the
Registration Statement on Form N-4 of our report dated February 3, 1997,
relating to the financial statements of Allmerica Financial Life
Insurance and Annuity Company, and our report dated February 5, 1996
relating to the statutory basis financial statements of Allmerica
Financial Life Insurance and Annuity Company, both of which appear in
such Statement of Additional Information. We also consent to the
reference to us under the heading "Experts" in such Statement of
Additional Information.
/s/ Price Waterhouse LLP
Price Waterhouse LLP
Boston, Massachusetts
April 21, 1997
