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File No. 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. 3
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 4
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)
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
Abigail M. Armstrong, Secretary and Counsel
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 September 1, 1998 pursuant to paragraph (b) of Rule 485
___ 60 days after filing pursuant to paragraph (a)(1) of Rule 485
___ on (date) pursuant to paragraph (a)(1) of Rule 485
___ this post-effective amendment designates a new effective
date for a previously filed post-effective amendment
VARIABLE ANNUITY POLICIES
Pursuant to Reg. Section 270.24f-2 of the Investment Company Act of 1940 ("the
1940 Act"), Registrant has registered an indefinite amount of its securities
under the Securities Act of 1933 ("the 1933 Act"). The Rule 24f-2 Notice for the
issuer's fiscal year ended December 31, 1997 was filed on March 27, 1998.
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CROSS REFERENCE SHEET SHOWING LOCATION IN PROSPECTUS OF
ITEMS CALLED FOR BY FORM N-4
FORM N-4 ITEM NO. CAPTION IN PROSPECTUS
- ----------------- ---------------------
1.....................Cover Page
2.....................Special Terms
3.....................Summary; Annual and Transaction Expenses
4.....................Condensed Financial Information; Performance Information
5.....................Description of the Company, the Variable Account
and the Underlying Funds
6.....................Charges and Deductions
7.....................Description of the Contract
8.....................Electing the Form of Annuity and the Annuity Date;
Description of Variable Annuity Payout Options;
Annuity Benefit Payments
9.....................Death Benefit
10....................Payments; Computation of Values; Distribution
11....................Surrender; Withdrawals; Charge for Surrender and
Withdrawals; Withdrawal Without Surrender Charge; Texas
Optional Retirement Program
12....................Federal Tax Considerations
13....................Legal Matters
14....................Statement of Additional Information - Table of Contents
FORM N-4 ITEM NO. CAPTION IN STATEMENT OF ADDITIONAL INFORMATION
- ----------------- ----------------------------------------------
15....................Cover Page
16....................Table of Contents
17....................General Information and History
18....................Services
19....................Underwriters
20....................Underwriters
21....................Performance Information
22....................Annuity Benefit Payments
23....................Financial Statements
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ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
WORCESTER, MASSACHUSETTS
FLEXIBLE PAYMENT DEFERRED VARIABLE AND FIXED ANNUITY CONTRACTS
This Prospectus describes interests under flexible payment deferred variable and
fixed annuity contracts, known as 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 of the following investment portfolios:
<TABLE>
<S> <C>
THE FULCRUM TRUST DELAWARE GROUP PREMIUM FUND, INC.
Global Interactive/Telecomm Portfolio Small Cap Value Series
International Growth Portfolio Delaware Series
Growth Portfolio LAZARD RETIREMENT SERIES, INC.
Value Portfolio Lazard Retirement International Equity
Strategic Income Portfolio Portfolio
ALLMERICA INVESTMENT TRUST MFS-Registered Trademark- VARIABLE INSURANCE
Money Market Fund TRUST-SM-
AIM VARIABLE INSURANCE FUNDS, INC. MFS-Registered Trademark- Emerging Growth
AIM V.I. Value Fund Series
MFS-Registered Trademark- Growth With Income
Series
OPPENHEIMER VARIABLE ACCOUNT FUNDS
Oppenheimer Aggressive Growth Fund
Oppenheimer Growth & Income Fund
</TABLE>
Additional information is contained in a Statement of Additional Information
("SAI") dated September 1, 1998 filed with the Securities and Exchange
Commission ("SEC") and incorporated herein by reference. The Table of Contents
of the SAI is on page 4 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 CURRENT PROSPECTUSES OF THE
FULCRUM TRUST, ALLMERICA INVESTMENT TRUST, AIM VARIABLE INSURANCE FUNDS, INC.,
DELAWARE GROUP PREMIUM FUND, INC., LAZARD RETIREMENT SERIES, INC.,
MFS-REGISTERED TRADEMARK- VARIABLE INSURANCE TRUST-SM- AND OPPENHEIMER VARIABLE
ACCOUNT FUNDS. THE 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 NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
DATED SEPTEMBER 1, 1998
440 LINCOLN STREET, WORCESTER, MA 01653
(508) 855-1000
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In most jurisdictions, values also may be allocated on a fixed basis to the
Fixed Account, which is part of the Company's General Account, and, during the
accumulation period, to one or more of the Guarantee Period Accounts. Amounts
allocated to the Fixed Account earn interest at a guaranteed rate for one year
from the date allocated. Amounts allocated to a Guarantee Period Account earn a
fixed rate of interest for the duration of the applicable Guarantee Period. 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.
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.
THE CONTRACTS OFFERED BY THIS PROSPECTUS MAY NOT BE AVAILABLE IN ALL STATES.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY JURISDICTION IN WHICH
SUCH OFFERING MAY NOT LAWFULLY BE MADE. NO PERSON IS AUTHORIZED TO MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS.
2
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
STATEMENT OF ADDITIONAL INFORMATION TABLE OF CONTENTS...................... 4
SPECIAL TERMS.............................................................. 5
SUMMARY.................................................................... 7
ANNUAL AND TRANSACTION EXPENSES............................................ 13
CONDENSED FINANCIAL INFORMATION............................................ 21
PERFORMANCE INFORMATION.................................................... 22
DESCRIPTION OF THE COMPANY, THE VARIABLE ACCOUNT, AND THE UNDERLYING
FUNDS..................................................................... 23
INVESTMENT OBJECTIVES AND POLICIES......................................... 26
DESCRIPTION OF THE CONTRACT................................................ 27
A. Payments............................................................. 27
B. Right to Revoke Individual Retirement Annuity........................ 28
C. Right to Revoke All Other Contracts.................................. 28
D. Transfer Privilege................................................... 29
Automatic Transfers and Automatic Account Rebalancing
Options...................................................... 29
E. Surrender............................................................ 30
F. Withdrawals.......................................................... 30
Systematic Withdrawals......................................... 31
Life Expectancy Distributions.................................. 31
G. Death Benefit........................................................ 32
Death of the Annuitant Prior to the Annuity Date............... 32
Death of an Owner Who Is Not Also the Annuitant Prior to the
Annuity Date................................................. 32
Payment of the Death Benefit Prior to the Annuity Date......... 32
Death of the Annuitant On or After the Annuity Date............ 33
H. The Spouse of the Owner as Beneficiary............................... 33
I. Assignment........................................................... 33
J. Electing the Form of Annuity and the Annuity Date.................... 33
K. Description of Variable Annuity Payout Options....................... 34
L. Annuity Benefit Payments............................................. 35
The Annuity Unit............................................... 35
Determination of the First and Subsequent Annuity Benefit
Payments..................................................... 35
M. NORRIS Decision....................................................... 36
N. Computation of Values................................................ 36
The Accumulation Unit.......................................... 36
Net Investment Factor.......................................... 36
CHARGES AND DEDUCTIONS..................................................... 37
A. Variable Account Deductions.......................................... 37
Mortality and Expense Risk Charge.............................. 37
Administrative Expense Charge.................................. 37
Other Charges.................................................. 38
B. Contract Fee......................................................... 38
C. Premium Taxes........................................................ 38
D. Contingent Deferred Sales Charge..................................... 39
Charge for Surrender and Withdrawals........................... 39
Reduction or Elimination of Withdrawal Charge.................. 39
Withdrawal Without Surrender Charge............................ 40
Surrenders..................................................... 41
Charge at the Time Annuity Benefit Payments Begin.............. 41
E. Transfer Charge...................................................... 42
GUARANTEE PERIOD ACCOUNTS.................................................. 42
</TABLE>
3
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<TABLE>
<S> <C>
FEDERAL TAX CONSIDERATIONS................................................. 44
A. Qualified and Non-Qualified Contracts................................ 44
B. Taxation of the Contracts in General................................. 45
Withdrawals Prior to Annuitization............................. 45
Annuity Payouts After Annuitization............................ 45
Penalty on Distribution........................................ 45
Assignments or Transfers....................................... 46
Non-Natural Owners............................................. 46
Deferred Compensation Plans of State and Local Governments and
Tax-Exempt Organizations..................................... 46
C. Tax Withholding...................................................... 46
D. Provisions Applicable to Qualified Employer Plans.................... 46
Corporate and Self-Employed Pension and Profit Sharing Plans... 46
Individual Retirement Annuities................................ 47
Tax-Sheltered Annuities........................................ 47
Texas Optional Retirement Program.............................. 47
REPORTS.................................................................... 47
LOANS (QUALIFIED CONTRACTS ONLY)........................................... 48
ADDITION, DELETION OR SUBSTITUTION OF INVESTMENTS.......................... 48
CHANGES TO COMPLY WITH LAW AND AMENDMENTS.................................. 49
VOTING RIGHTS.............................................................. 49
DISTRIBUTION............................................................... 49
LEGAL MATTERS.............................................................. 50
FURTHER INFORMATION........................................................ 50
APPENDIX A -- MORE INFORMATION ABOUT THE FIXED ACCOUNT..................... A-1
APPENDIX B -- SURRENDER CHARGES AND THE MARKET VALUE ADJUSTMENT............ B-1
APPENDIX C -- THE DEATH BENEFIT............................................ C-1
</TABLE>
STATEMENT OF ADDITIONAL INFORMATION
TABLE OF CONTENTS
<TABLE>
<S> <C>
GENERAL INFORMATION AND HISTORY............................................ 2
TAXATION OF THE CONTRACT, THE VARIABLE ACCOUNT AND THE COMPANY............. 3
SERVICES................................................................... 3
UNDERWRITERS............................................................... 4
ANNUITY BENEFIT PAYMENTS................................................... 4
EXCHANGE OFFER............................................................. 6
PERFORMANCE INFORMATION.................................................... 7
TAX-DEFERRED ACCUMULATION.................................................. 12
FINANCIAL STATEMENTS....................................................... F-1
</TABLE>
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SPECIAL TERMS
ACCUMULATED VALUE: the sum of the value of all Accumulation Units in the
Sub-Accounts and of the value of all accumulations in the Fixed Account and
Guarantee Period Accounts credited to the Contract, on any date before the
Annuity Date.
ACCUMULATION UNIT: a measure of the Owner's interest in a Sub-Account before
annuity benefit payments begin.
ANNUITANT: the person designated in the Contract upon whose life annuity benefit
payments are to be made.
ANNUITY DATE: the date on which annuity benefit payments begin.
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.
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 Fulcrum Trust (formerly The Palladian-SM- Trust) ("Fulcrum"), a
corresponding fund of Allmerica Investment Trust (the "Trust"), a corresponding
fund of AIM Variable Insurance Funds, Inc., ("AVIF"), a corresponding series of
Delaware Group Premium Fund, Inc. ("DGPF"), a corresponding portfolio of Lazard
Retirement Series, Inc. ("Lazard"), a corresponding series of
MFS-Registered Trademark- Variable Insurance Trust-SM- (the "MFS Trust"), or a
corresponding fund of Oppenheimer Variable Account Funds ("Oppenheimer").
SURRENDER VALUE: the Accumulated Value of the Contract on full surrender after
application of any Contract fee, contingent deferred sales charge, and Market
Value Adjustment.
UNDERLYING FUNDS (OR FUNDS): Value Portfolio, Growth Portfolio, International
Growth Portfolio, Strategic Income Portfolio (formerly the Global Strategic
Income Portfolio), and Global Interactive/Telecomm Portfolio of The Fulcrum
Trust; Money Market Fund of Allmerica Investment Trust; AIM V.I. Value Fund of
AVIF; Delaware Series and Small Cap Value Series of DGPF; Lazard Retirement
International Equity Portfolio of
5
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Lazard; and MFS Emerging Growth Series and MFS Growth With Income Series of the
MFS Trust; and Oppenheimer Aggressive Growth Fund and Oppenheimer Growth &
Income Fund of Oppenheimer.
VALUATION DATE: a day on which the net asset value of the shares of any of the
Funds is determined and unit values of the Sub-Accounts are determined.
Valuation dates currently occur on each day on which the New York Stock Exchange
is open for trading, and on such other days (other than a day during which no
payment, withdrawal, or surrender of a Contract was received) when there is a
sufficient degree of trading in a Fund's portfolio securities such that the
current net asset value of the Sub-Accounts may be materially affected.
VARIABLE ACCOUNT: the Fulcrum Account, one of the Company's Separate Accounts,
consisting of assets segregated from other assets of the Company. The investment
performance of the assets of the Variable Account is determined separately from
the other assets of the Company and are not chargeable with liabilities arising
out of any other business which the Company may conduct.
VARIABLE ANNUITY PAYOUT: an Annuity payout option providing for payments varying
in amount in accordance with the investment experience of certain of the Funds.
6
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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 your 90th birthday.
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 Sub-Accounts investing in the portfolios of securities (the "Underlying
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 lump sum
payout by electing a "commutable" option.
7
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WHO ARE THE KEY PERSONS UNDER THE CONTRACT?
The Contract is between you, (the "Owner"), and us, Allmerica Financial Life
Insurance and Annuity Company (the "Company"). Each Contract has an Owner (or an
Owner and a Joint Owner, in which case one of the two must be the Annuitant), an
Annuitant and one or more beneficiaries. As Owner, you make payments, choose
investment allocations and select the Annuitant and beneficiary. The Annuitant
is the individual 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.
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 Sub-Accounts
investing in the following Funds, the Guarantee Period Accounts, and the Fixed
Account. You have a choice of fourteen Funds:
- - Global Interactive/Telecomm Portfolio of The Fulcrum Trust
Managed by GAMCO Investors, Inc.
- - Oppenheimer Aggressive Growth Fund
Managed by OppenheimerFunds, Inc.
- - MFS Emerging Growth Series
Managed by Massachusetts Financial Services Company
- - Small Cap Value Series
Managed by Delaware Management Company
- - Lazard Retirement International Equity Portfolio
Managed by Lazard Asset Management
- - International Growth Portfolio of The Fulcrum Trust
Managed by Bee & Associates Incorporated
- - Growth Portfolio of The Fulcrum Trust
Managed by Pilgrim Baxter Analytic Investors, Inc.
- - Value Portfolio of The Fulcrum Trust
Managed by GAMCO Investors, Inc.
- - AIM V.I. Value Fund
Managed by A I M Advisors, Inc.
- - MFS Growth With Income Series
Managed by Massachusetts Financial Services Company
- - Oppenheimer Growth & Income Fund
Managed by OppenheimerFunds, Inc.
8
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- - Delaware Series
Managed by Delaware Management Company
- - Strategic Income Portfolio of The Fulcrum Trust
Managed by Allmerica Asset Management, Inc.
- - Money Market Fund of Allmerica Investment Trust
Managed by Allmerica Asset Management, Inc.
Certain Funds may not be available in some states.
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."
9
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WHO ARE THE INVESTMENT ADVISERS?
The following are the investment advisers of the Funds:
<TABLE>
<CAPTION>
FUND INVESTMENT ADVISER
- --------------------------------------- ---------------------------------------
<S> <C>
Global Interactive/Telecomm Portfolio GAMCO Investors, Inc.
Oppenheimer Aggressive Growth Fund OppenheimerFunds, Inc.
MFS Emerging Growth Series Massachusetts Financial Services
Company
Small Cap Value Series Delaware Management Company
Lazard Retirement International Equity Lazard Asset Management
Portfolio
International Growth Portfolio Bee & Associates Incorporated
Growth Portfolio Pilgrim Baxter Analytic Investors, Inc.
Value Portfolio GAMCO Investors, Inc.
AIM V.I. Value Fund A I M Advisors, Inc.
MFS Growth With Income Series Massachusetts Financial Services
Company
Oppenheimer Growth & Income Fund OppenheimerFunds, Inc.
Delaware Series Delaware Management Company
Strategic Income Portfolio Allmerica Asset Management, Inc.
Money Market Fund Allmerica Asset Management, Inc.
</TABLE>
For more information, see "DESCRIPTION OF THE COMPANY, THE VARIABLE ACCOUNT AND
THE UNDERLYING FUNDS."
CAN I MAKE TRANSFERS AMONG THE FUNDS?
Yes. Prior to the Annuity Date, you may transfer among the Sub-Accounts, 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. Similarly, no surrender charge will apply if an amount is withdrawn
based on the Annuitant's life expectancy if the Owner is a trust or other
non-natural person.) A 10% tax penalty may apply on all amounts deemed to be
income if you are under age 59 1/2. Additional amounts may be withdrawn at any
time but may be subject to the surrender charge for payments that have not been
invested in the Contract for more than seven years. (A Market Value Adjustment,
which may increase or decrease the value of your account, may apply to any
withdrawal made from a Guarantee Period Account prior to the expiration of the
Guarantee Period.)
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 Withdrawal Charge."
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WHAT HAPPENS UPON DEATH DURING THE ACCUMULATION PHASE?
If the Annuitant, Owner or Joint Owner should die before the Annuity Date, a
death benefit will be paid to the beneficiary. Upon the death of the Annuitant
(or an Owner who is also an Annuitant), the death benefit is equal to the
greatest of:
- - The Accumulated Value increased by any positive Market Value Adjustment;
- - Gross payments, compounded daily at an annual rate of 5%, decreased
proportionately to reflect withdrawals; or
- - The death benefit that would have been payable on the most recent Contract
anniversary, increased for subsequent payments and decreased proportionately
for subsequent withdrawals.
This guaranteed death benefit works in the following way assuming no withdrawals
are made. On the first anniversary, the death benefit will be equal to the
greater of (a) the Accumulated Value (increased by any positive Market Value
Adjustment) or (b) gross payments compounded at the annual rate of 5%. The
higher of (a) or (b) will then be locked in until the second anniversary, at
which time the death benefit will be equal to the greatest of (a) the Contract's
then current Accumulated Value increased by any positive Market Value
Adjustment; (b) gross payments compounded at the annual rate of 5%; or (c) the
locked-in value of the death benefit at the first anniversary. The greatest of
(a), (b) or (c) will be locked in until the next Contract anniversary. This
calculation will then be repeated on each anniversary while the Contract remains
in force and prior to the Annuity Date. As noted above, the values of (b) and
(c) will be decreased proportionately if withdrawals are taken.
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 prospectuses for the Funds, which accompany 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
canceled. (There may be a longer period in certain states; see
11
<PAGE>
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 Sub-Accounts (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.
- - 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).
12
<PAGE>
ANNUAL AND TRANSACTION EXPENSES
The following tables show charges under your Contract, expenses of the
Sub-Accounts, and expenses of the Underlying Funds. In addition to the charges
and expenses described below, premium taxes are applicable in some states and
deducted as described under "C. Premium Taxes."
<TABLE>
<CAPTION>
YEARS FROM
CONTRACT CHARGES DATE OF PAYMENT CHARGE
- --------------------------------------------------------------------------------------- --------------- ---------
<S> <C> <C>
0-1 7%
2 6%
CONTINGENT DEFERRED SALES CHARGE: 3 5%
This charge may be assessed upon surrender, withdrawal or annuitization under any 4 4%
commutable period certain option or a non-commutable period certain option of less 5 3%
than ten years. The Charge is a percentage of payments applied to the amount 6 2%
surrendered (in excess of any amount that is free of surrender charge) within the 7 1%
indicated time period. Thereafter 0%
TRANSFER CHARGE: None
The Company currently makes no charge for transfers, and guarantees that the first 12
transfers in a Contact 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%
---------
---------
</TABLE>
UNDERLYING FUND EXPENSES:
In addition to the charges described above, certain fees and expenses are
deducted from the assets of the Underlying Funds. The levels of fees and
expenses vary among the Funds. For more information concerning fees and
expenses, see the prospectuses of the Funds.
The following table gives certain fee and expense information for the Funds.
However, a performance-based management fee is provided for under the Management
Agreements for the Portfolios of the Fulcrum Trust (the "Portfolios"). The base
fee is 2.00%, but the actual fee may vary from between 0.00% to 4.00%, depending
on a Portfolio's performance. Because of the possibility of wide variations in
the management fees
13
<PAGE>
from year-to-year, hypothetical expense information assuming fees of 0.00%,
2.00% and 4.00%, is shown below under "MORE INFORMATION ABOUT PERFORMANCE FEES
OF THE FULCRUM TRUST."
<TABLE>
<CAPTION>
OTHER EXPENSES
(AFTER ANY
MANAGEMENT APPLICABLE TOTAL FUND
FUND FEES REIMBURSEMENT) EXPENSES
- ------------------------------------------------ --------------- ----------------- -------------
<S> <C> <C> <C>
Global Interactive/Telecomm Portfolio........... 0.27%(1) 1.20%(2) 1.47%
Oppenheimer Aggressive Growth Fund.............. 0.71% 0.02% 0.73%
MFS Emerging Growth Series...................... 0.75% 0.12% 0.87%
Small Cap Value Series.......................... 0.60% 0.25% 0.85%(6)(7)
Lazard Retirement International Equity
Portfolio...................................... 0.75% 0.85%(9)(10) 1.60%
International Growth Portfolio.................. 0.58%(1) 1.20%(2) 1.78%
Growth Portfolio................................ 0.80%(1) 1.00%(2)(5) 1.80%
Value Portfolio................................. 0.14%(1) 1.00%(2) 1.14%
AIM V.I. Value Fund............................. 0.62%(11) 0.08% 0.70%
MFS Growth With Income Series................... 0.75% 0.25% 1.00%(8)
Oppenheimer Growth & Income Fund................ 0.75% 0.08% 0.83%
Delaware Series................................. 0.60% 0.07% 0.67%(6)
Strategic Income Portfolio...................... 0.40%(1) 1.20%(2)(3) 1.60%
Money Market Fund............................... 0.27% 0.08% 0.35%(4)
</TABLE>
(1) A performance based advisory fee is in effect, which fee may vary anywhere
from 0.00% to 4.00%.
(2) Restated to reflect the expense limitation in effect during 1998. AFIMS has
agreed to limit operating expenses and reimburse those expenses to the extent
that the Portfolios' Other Expenses during 1998 (i.e., expenses other than
management fees) exceed the following expense limitations: 1.20% for the Global
Interactive/Telecomm Portfolio, 1.20% for the International Growth Portfolio,
1.00% for the Growth Portfolio, 1.00% for the Value Portfolio, and 1.20% for the
Strategic Income Portfolio. The limitations are in effect through December 31,
1998. Without the effect of the expense limitations, the 1997 "Other Expenses"
ratios would have been the following: 7.26% for the Global Interactive/Telecomm
Portfolio, 7.11% for the International Growth Portfolio, 6.12% for the Growth
Portfolio, 4.75% for the Value Portfolio, and 6.68% for the Strategic Income
Portfolio.
(3) The actual management fee for the Strategic Income Portfolio for 1997 was
0.41%. The fee has been restated to 0.40% because, effective April 13, 1998, a
new Portfolio Manager is in place. At a meeting of the Board of Trustees of The
Fulcrum Trust ("Board") which was held on April 9, 1998, the Board approved a
new Portfolio Manager Agreement with Allmerica Asset Management, Inc. ("AAM").
The Portfolio Manager Agreement with AAM was approved at a shareholders meeting
on June 8, 1998. The Portfolio Manager Agreement provides that during the
Portfolio Manager's first year of service, the Portfolio will pay a fixed annual
fee of 0.80% of average daily net assets, rather than paying a performance-based
fee. After the twelfth full calendar month has elapsed under the Portfolio
Manager Agreement, the performance-based fee will be in effect. Although the
Agreement sets the fee at 0.80% through April 30, 1999, the fee is subject to an
important limitation. The Manager and the Portfolio Manager have voluntarily
agreed to limit their fee from June 9, 1998 through April 30, 1999 to an annual
rate of 0.40%. See the prospectus of The Fulcrum Trust for more information.
(4) Under the Management Agreement with Allmerica Investment Trust, AFIMS has
declared a voluntary expense limitation of 0.60% for the Money Market Fund, but
the expenses of the Money Market Fund did not exceed the cap in 1997. The
limitation may be terminated at any time.
(5) On June 17, 1998, the Board approved a new Portfolio Manager Agreement with
Pilgrim Baxter Analytic Investors, Inc. ("Pilgrim Baxter Analytic"). The
Portfolio Manager Agreement is subject to the approval of
14
<PAGE>
shareholders. A vote is scheduled to be held on September 15, 1998. The
Agreement provides for a fixed fee for the first year of 0.80% of average daily
net assets of the Growth Portfolio. AFIMS and Pilgrim Baxter Analytic have
agreed as well to a limitation on the first year fee. Specifically, for the
first year, the fee will be calculated at the lesser of the following two rates:
(1) 0.80%; or (2) the rate that would have applied under the old Portfolio
Manager Agreement with the previous portfolio manager. The latter rate varies
based on prior performance. After the first year of its agreement, Pilgrim
Baxter Analytic will be paid under the same performance-based fee schedule
included in the current agreement with the previous portfolio manager.
(6) Effective May 1, 1998 through October 31, 1998, Delaware Management Company,
the Series' investment adviser, has voluntarily agreed to waive its management
fees and reimburse Small Cap Value Series and Delaware Series for expenses in
order that Total Fund Expenses will not exceed 0.85% and 0.80%, respectively.
The fee ratios shown above have been restated, as necessary, to reflect changes
in expense limitations effective May 1, 1998. The declaration of a voluntary
expense limitation does not bind the investment adviser to declare future
expense limitations with respect to these series.
(7) For the fiscal year ended December 31, 1997, before waiver and/or
reimbursement by the investment adviser, Total Fund Expenses as a percentage of
average daily net assets were 0.90% for Small Cap Value Series.
(8) The investment adviser to MFS Growth With Income Series has voluntarily
agreed to waive expenses, such that the Series' Other Expenses shall not exceed
0.25% and Total Fund Expenses shall not exceed 1.00% of average daily net assets
of the Series during the current fiscal year. Otherwise, Other Expenses would be
0.35% and Total Fund Expenses would be 1.10%.
(9) Lazard Retirement International Equity Portfolio commenced operations on
September 1, 1998, therefore, expenses reflected herein are estimated and should
not be considered representative of future expenses. Actual expenses may be
greater than those shown.
(10) Other Expenses for the Lazard Retirement International Equity Portfolio
include a 12b-1 fee which is deducted from Portfolio assets at a maximum annual
rate of 0.25% of the average daily value of the Portfolio's net assets. A
portion or all of the 12b-1 fee may be used to reimburse the Company for certain
administrative and distribution support services provided to the Lazard
Retirement International Equity Portfolio.
(11) A I M Advisors, Inc. ("AIM") may from time to time voluntarily waive or
reduce its respective fees. Effective May 1, 1998, the Fund reimburses AIM in an
amount up to 0.25% of the average net asset value of the Fund, for expenses
incurred in providing, or assuring that participating insurance companies
provide, certain administrative services. Currently, the fee only applies to the
average net asset value of the Fund in excess of the net asset value of the Fund
as calculated on April 30, 1998.
EXAMPLES
The following examples demonstrate the cumulative expenses which would be paid
at one, three, five, and ten years, assuming the 1997 expenses set forth above,
a $1,000 investment in a Sub-Account and a 5% annual return on assets, as
required by rules of the SEC.
(1) IF, AT THE END OF THE APPLICABLE TIME 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
15
<PAGE>
ANY FIXED PERIOD CERTAIN OPTION, YOU WOULD PAY THE FOLLOWING EXPENSES ON A
$1,000 INVESTMENT, ASSUMING A 5% ANNUAL RETURN ON ASSETS:
<TABLE>
<CAPTION>
FUND 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ------------------------------------------------------- --------- --------- --------- ---------
<S> <C> <C> <C> <C>
Global Interactive/Telecomm Portfolio.................. $91 $137 $184 $328
Oppenheimer Aggressive Growth Fund..................... $84 $116 $148 $255
MFS Emerging Growth Series............................. $85 $120 $155 $270
Small Cap Value Series................................. $85 $119 $154 $268
Lazard Retirement International Equity Portfolio....... $92 $140 $190 $340
International Growth Portfolio......................... $94 $146 $199 $357
Growth Portfolio....................................... $88 $129 $171 $302
Value Portfolio........................................ $88 $127 $168 $296
AIM V.I. Value Fund.................................... $83 $115 $147 $252
MFS Growth With Income Series.......................... $86 $123 $161 $283
Oppenheimer Growth & Income Fund....................... $85 $118 $153 $266
Delaware Series........................................ $83 $114 $145 $249
Strategic Income Portfolio............................. $92 $141 $191 $341
Money Market Fund...................................... $80 $105 $130 $216
</TABLE>
(2) IF, AT THE END OF THE APPLICABLE TIME PERIOD, YOU ANNUITIZE* UNDER A LIFE
OPTION OR A NON-COMMUTABLE PERIOD CERTAIN OPTION OF TEN YEARS OR LONGER, OR IF
YOU DO NOT SURRENDER OR ANNUITIZE THE CONTRACT, YOU WOULD PAY THE FOLLOWING
EXPENSES ON A $1,000 INVESTMENT, ASSUMING A 5% ANNUAL RETURN ON ASSETS:
<TABLE>
<CAPTION>
FUND 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ------------------------------------------------------- --------- --------- --------- ---------
<S> <C> <C> <C> <C>
Global Interactive/Telecomm Portfolio.................. $30 $92 $156 $328
Oppenheimer Aggressive Growth Fund..................... $23 $70 $119 $255
MFS Emerging Growth Series............................. $24 $74 $126 $270
Small Cap Value Series................................. $24 $73 $125 $268
Lazard Retirement International Equity Portfolio....... $31 $96 $162 $340
International Growth Portfolio......................... $33 $101 $171 $357
Growth Portfolio....................................... $27 $84 $143 $302
Value Portfolio........................................ $27 $82 $140 $296
AIM V.I. Value Fund.................................... $22 $69 $118 $252
MFS Growth With Income Series.......................... $25 $78 $133 $283
Oppenheimer Growth & Income Fund....................... $24 $73 $124 $266
Delaware Series........................................ $22 $68 $116 $249
Strategic Income Portfolio............................. $31 $96 $163 $341
Money Market Fund...................................... $19 $58 $100 $216
</TABLE>
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 0.04%, and the amount of the
Contract fee is assumed to be $0.40 in the examples. The Contract fee is
deducted only when the Accumulated Value is less than $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 non-commutable period certain option of ten years
or longer.
16
<PAGE>
MORE INFORMATION ABOUT PERFORMANCE FEES OF THE FULCRUM TRUST
The tables below show the expenses of the Portfolios of The Fulcrum Trust as if
the Portfolios paid performance-based management fees of 0.00%, 2.00%, and
4.00%, respectively.
A performance-based management fee is currently in effect for the Portfolios of
The Fulcrum Trust, other than the Strategic Income Portfolio and the Growth
Portfolio. The base fee is 2.00%, but the actual fee may vary from between 0.00%
to 4.00%, depending on the Portfolios' performance. The base fee of 2.00% will
be paid if the Portfolios' performance (net of all fees and expenses, including
the management 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 Portfolios'
performance (net of all fees and expenses, including the management fee) is at
least 7.5 percentage points higher than the applicable benchmark index. No fee
will apply if the Portfolios' performance is more than 3.0 percentage points
lower than the applicable benchmark index; see the prospectus of The Fulcrum
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
figure between 0.00% and 4.00%. In 1997, the actual management fees were 0.27%
for the Global Interactive/Telecomm Portfolio, 0.58% for the International
Growth Portfolio, 0.20% for the Growth Portfolio, and 0.14% for the Value
Portfolio.
For the first 12 full calendar months after a new Portfolio Manager is hired
(or, in the case of a Portfolio that had only one Portfolio Manager, for the
first 12 full calendar months of operations), the advisory agreement sets the
management fee at an annual rate of 0.80% of the Portfolio's average daily net
assets. As of the date of this prospectus, this initial fee is relevant for only
two Portfolios -- the Strategic Income Portfolio and the Growth Portfolio. The
Strategic Income Portfolio has retained Allmerica Asset Management, Inc. ("AAM")
as Portfolio Manager effective April 13, 1998. The Portfolio Manager Agreement
with AAM provides that, during AAM's first year of service the Portfolio will
pay a fixed annual fee of 0.80% of average daily net assets, rather than paying
a performance-based fee. After the twelfth full calendar month has elapsed under
the Portfolio Manager Agreement, the performance-based fee arrangement described
above will be in effect. However, AFIMS and AAM have voluntarily agreed that for
the first year (through April 30, 1999) the management fee will be capped at
0.40%. The fee is subject to additional limitations. The Growth Portfolio has
retained Pilgrim Baxter Analytic Investors, Inc. ("Pilgrim Baxter Analytic") as
Portfolio Manager, effective August 1, 1998. The Portfolio Manager Agreement
with Pilgrim Baxter Analytic also provides that, during Pilgrim Baxter
Analytic's first year of service, the Portfolio will pay a fixed annual fee of
0.80% of average daily net assets. AFIMS and Pilgrim Baxter Analytic have agreed
as well to a limitation on the first year fee. Specifically, for the first year,
the fee will be calculated at the lesser of the following two rates: (1) 0.80%;
or (2) the rate that would have applied under the old Portfolio Manager
Agreement with the previous portfolio manager. The latter rate varies based on
prior performance. After the first year of its agreement, Pilgrim Baxter
Analytic will be paid under the same performance-based fee schedule included in
the current agreement with the previous portfolio manager. For more information,
see Footnotes 3 and 4, below, and the prospectus for The Fulcrum Trust.
EXAMPLE 1 -- ASSUMING ADVISORY FEE OF 0.00% FOR THE PORTFOLIOS OF THE FULCRUM
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 TOTAL
MANAGEMENT APPLICABLE OPERATING
FUND FEES REIMBURSEMENT) EXPENSES
- ------------------------------------------------- --------------- ----------------- -----------
<S> <C> <C> <C>
Global Interactive/Telecomm Portfolio 0.00%(1) 1.20%(2) 1.20%
International Growth Portfolio 0.00%(1) 1.20%(2) 1.20%
Growth Portfolio 0.00%(4) 1.00%(2) 1.00%
Value Portfolio 0.00%(1) 1.00%(2) 1.00%
Strategic Income Portfolio 0.00%(3) 1.20%(2) 1.20%
</TABLE>
17
<PAGE>
EXAMPLE 2 -- ASSUMING ADVISORY FEE OF 2.00% FOR THE PORTFOLIOS OF THE FULCRUM
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 TOTAL
MANAGEMENT APPLICABLE OPERATING
FUND FEES REIMBURSEMENT) EXPENSES
- ------------------------------------------------- --------------- ----------------- -----------
<S> <C> <C> <C>
Global Interactive/Telecomm Portfolio 2.00%(1) 1.20%(2) 3.20%
International Growth Portfolio 2.00%(1) 1.20%(2) 3.20%
Growth Portfolio 2.00%(4) 1.00%(2) 3.00%
Value Portfolio 2.00%(1) 1.00%(2) 3.00%
Strategic Income Portfolio 2.00%(3) 1.20%(2) 3.20%
</TABLE>
EXAMPLE 3 -- ASSUMING ADVISORY FEE OF 4.00% FOR THE PORTFOLIOS OF THE FULCRUM
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 TOTAL
MANAGEMENT APPLICABLE OPERATING
FUND FEES REIMBURSEMENT) EXPENSES
- ------------------------------------------------- --------------- ----------------- -----------
<S> <C> <C> <C>
Global Interactive/Telecomm Portfolio 4.00%(1) 1.20%(2) 5.20%
International Growth Portfolio 4.00%(1) 1.20%(2) 5.20%
Growth Portfolio 4.00%(4) 1.00%(2) 5.00%
Value Portfolio 4.00%(1) 1.00%(2) 5.00%
Strategic Income Portfolio 4.00%(3) 1.20%(2) 5.20%
</TABLE>
- ------------------------
(1) A performance-based advisory fee is in effect, which fee may vary anywhere
from 0.00% to 4.00%.
(2) AFIMS has agreed to limit operating expenses and reimburse those expenses to
the extent that the Other Expenses of the Portfolios during 1998 (i.e., expenses
other than management fees) exceed the following expense limitations: 1.20% for
the Global Interactive/Telecomm Portfolio, 1.20% for the International Growth
Portfolio, 1.00% for the Growth Portfolio, 1.00% for the Value Portfolio, and
1.20% for the Strategic Income Portfolio. The limitations are in effect through
December 31, 1998. For the Value Portfolio and the Growth Portfolio, different
expense limitations were in effect during 1997. Without the effect of the
expense limitations, the 1997 "Other Expenses" ratios would have been 7.26% for
the Global Interactive/Telecomm Portfolio, 7.11% for the International Growth
Portfolio, 6.12% for the Growth Portfolio, 4.75% for the Value Portfolio, and
6.68% for the Strategic Income Portfolio.
(3) The actual management fee for the Strategic Income Portfolio for 1997 was
0.41%. The fee has been restated to 0.40% because, effective April 13, 1998, a
new Portfolio Manager is in place. At a meeting of the Board of Trustees of The
Fulcrum Trust ("Board") which was held on April 9, 1998, the Board approved a
new Portfolio Manager Agreement with Allmerica Asset Management, Inc. ("AAM").
The Portfolio Manager Agreement was approved at a shareholders meeting on June
8, 1998. The Portfolio Manager Agreement provides that during the Portfolio
Manager's first year of service, the Portfolio will pay a fixed annual fee of
0.80% of average daily net assets, rather than paying a performance-based fee.
After the twelfth full calendar month has elapsed under the Portfolio Manager
Agreement, the performance-based fee will be in effect. Although the Agreement
sets the fee at 0.80% through April 30, 1999, the fee is subject to an important
limitation. The Manager and the Portfolio Manager have voluntarily agreed to
limit their fee from June 9, 1998 through April 30, 1999 to an annual rate of
0.40%. See the prospectus of The Fulcrum Trust for more information.
18
<PAGE>
(4) On June 17, 1998, the Board approved a new Portfolio Manager Agreement with
Pilgrim Baxter Analytic Investors, Inc. ("Pilgrim Baxter Analytic"). The
Portfolio Manager Agreement is subject to the approval of shareholders. A vote
is scheduled to be held on September 15, 1998. The Agreement provides for a
fixed fee for the first year of 0.80% of average daily net assets of the Growth
Portfolio. AFIMS and Pilgrim Baxter Analytic have agreed as well to a limitation
on the first year fee. For the first year, the fee will be calculated at the
lesser of the following two rates: (1) 0.80%; or (2) the rate that would have
applied under the old Portfolio Manager Agreement with the previous portfolio
manager. The latter rate varies based on prior performance. After the first year
of its agreement, Pilgrim Baxter Analytic will be paid under the same
performance-based fee schedule included in the current agreement with the
previous portfolio manager.
EXAMPLES BASED ON HYPOTHETICAL PERFORMANCE FEES OF THE PORTFOLIOS OF THE FULCRUM
TRUST.
The information given under the following hypothetical 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 Fulcrum 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 TIME 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 FULCRUM
TRUST
<TABLE>
<CAPTION>
FUND 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ------------------------------------------------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Global Interactive/Telecomm Portfolio.................. $ 88 $ 129 $ 171 $ 302
International Growth Portfolio......................... $ 88 $ 129 $ 171 $ 302
Growth Portfolio....................................... $ 86 $ 123 $ 161 $ 283
Value Portfolio........................................ $ 86 $ 123 $ 161 $ 283
Strategic Income Portfolio............................. $ 88 $ 129 $ 171 $ 302
</TABLE>
EXAMPLE 2 -- ASSUMING ADVISORY FEE OF 2.00% FOR THE PORTFOLIOS OF THE FULCRUM
TRUST
<TABLE>
<CAPTION>
FUND 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ------------------------------------------------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Global Interactive/Telecomm Portfolio.................. $ 107 $ 185 $ 263 $ 478
International Growth Portfolio......................... $ 107 $ 185 $ 263 $ 478
Growth Portfolio....................................... $ 105 $ 180 $ 255 $ 462
Value Portfolio........................................ $ 105 $ 180 $ 255 $ 462
Strategic Income Portfolio............................. $ 107 $ 185 $ 263 $ 478
</TABLE>
EXAMPLE 3 -- ASSUMING ADVISORY FEE OF 4.00% FOR THE PORTFOLIOS OF THE FULCRUM
TRUST
<TABLE>
<CAPTION>
FUND 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ------------------------------------------------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Global Interactive/Telecomm Portfolio.................. $ 126 $ 239 $ 348 $ 623
International Growth Portfolio......................... $ 126 $ 239 $ 348 $ 623
Growth Portfolio....................................... $ 124 $ 233 $ 340 $ 609
Value Portfolio........................................ $ 124 $ 233 $ 340 $ 609
Strategic Income Portfolio............................. $ 126 $ 239 $ 348 $ 623
</TABLE>
19
<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 FULCRUM
TRUST
<TABLE>
<CAPTION>
FUND 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ------------------------------------------------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Global Interactive/Telecomm Portfolio.................. $ 27 $ 84 $ 143 $ 302
International Growth Portfolio......................... $ 27 $ 84 $ 143 $ 302
Growth Portfolio....................................... $ 25 $ 78 $ 133 $ 283
Value Portfolio........................................ $ 25 $ 78 $ 133 $ 283
Strategic Income Portfolio............................. $ 27 $ 84 $ 143 $ 302
</TABLE>
EXAMPLE 2 -- ASSUMING ADVISORY FEE OF 2.00% FOR THE PORTFOLIOS OF THE FULCRUM
TRUST
<TABLE>
<CAPTION>
FUND 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ------------------------------------------------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Global Interactive/Telecomm Portfolio.................. $ 47 $ 142 $ 238 $ 478
International Growth Portfolio......................... $ 47 $ 142 $ 238 $ 478
Growth Portfolio....................................... $ 45 $ 136 $ 228 $ 462
Value Portfolio........................................ $ 45 $ 136 $ 228 $ 462
Strategic Income Portfolio............................. $ 47 $ 142 $ 238 $ 478
</TABLE>
EXAMPLE 3 -- ASSUMING ADVISORY FEE OF 4.00% FOR THE PORTFOLIOS OF THE FULCRUM
TRUST(1)
<TABLE>
<CAPTION>
FUND 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ------------------------------------------------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Global Interactive/Telecomm Portfolio.................. $ 67 $ 198 $ 325 $ 623
International Growth Portfolio......................... $ 67 $ 198 $ 325 $ 623
Growth Portfolio....................................... $ 65 $ 193 $ 316 $ 609
Value Portfolio........................................ $ 65 $ 193 $ 316 $ 609
Strategic Income Portfolio............................. $ 67 $ 198 $ 325 $ 623
</TABLE>
- ------------------------
(1) In order to have a 5% annual return and a management fee of 4%, the
performance of the Portfolios of The Fulcrum 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 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 0.04%, and the amount of the Contract fee is assumed to
be $0.40 in the examples. The Contract fee is deducted only when the Accumulated
Value is less than $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 non-commutable period certain option of ten years
or longer.
20
<PAGE>
CONDENSED FINANCIAL INFORMATION
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
FULCRUM SEPARATE ACCOUNT
<TABLE>
<CAPTION>
SUB-ACCOUNT 1997
- ------------------------------------------------------------------------------------- ---------
<S> <C>
GLOBAL INTERACTIVE/TELECOMM PORTFOLIO
Unit Value:
Beginning of Period................................................................ 0
End of Period...................................................................... 1.295
Number of Units Outstanding at End of Period (in thousands).......................... 1,592
INTERNATIONAL GROWTH PORTFOLIO
Unit Value:
Beginning of Period................................................................ 0
End of Period...................................................................... 0.907
Number of Units Outstanding at End of Period (in thousands).......................... 3,438
GROWTH PORTFOLIO
Unit Value:
Beginning of Period................................................................ 0
End of Period...................................................................... 1.055
Number of Units Outstanding at End of Period (in thousands).......................... 3,964
VALUE PORTFOLIO
Unit Value:
Beginning of Period................................................................ 0
End of Period...................................................................... 1.243
Number of Units Outstanding at End of Period (in thousands).......................... 4,264
STRATEGIC INCOME PORTFOLIO
Unit Value:
Beginning of Period................................................................ 0
End of Period...................................................................... 1.028
Number of Units Outstanding at End of Period (in thousands).......................... 1,604
MONEY MARKET FUND
Unit Value:
Beginning of Period................................................................ 0
End of Period...................................................................... 1.032
Number of Units Outstanding at End of Period (in thousands).......................... 440
</TABLE>
No information is available for the Sub-Accounts investing in the Oppenheimer
Aggressive Growth Fund, MFS Emerging Growth Series, Small Cap Value Series,
Lazard Retirement International Equity Portfolio, AIM V.I. Value Fund, MFS
Growth With Income Series, Oppenheimer Growth & Income Fund and Delaware Series,
as these Sub-Accounts did not commence operations until on or after September 1,
1998.
21
<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 Sub-Accounts have been in existence
and the periods that the Underlying Funds have been in existence. Both the total
return and yield figures are based on historical earnings and are not intended
to indicate future performance.
The total return of a Sub-Account refers to the total of the income generated by
an investment in the Sub-Account and of the changes in the value of the
principal (due to realized and unrealized capital gains or losses) for a
specified period, reduced by Variable Account charges, and expressed as a
percentage.
The average annual total return represents the average annual percentage change
in the value of an investment in the Sub-Account over a given period of time. It
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 refers to the
income generated by an investment in the Sub-Account over a seven-day period
(which period will be specified in the advertisement). This income is then
"annualized" by assuming that the income generated in the specific week is
generated over a 52-week period. This annualized yield is shown as a percentage
of the investment. The "effective yield" calculation is similar but, when
annualized, the income earned by an investment in the Sub-Account is assumed to
be reinvested. Thus the effective yield will be slightly higher than the yield
because of the compounding effect of this assumed reinvestment.
The yield of a Sub-Account investing in a Fund other than the Money Market Fund
refers to the annualized income generated by an investment in the Sub-Account
over a specified 30-day or one-month period. The yield is calculated by assuming
that the income generated by the investment during that 30-day or one- month
period is generated each period over a 12-month period and is shown as a
percentage of the investment.
Quotations of average annual total return for the periods that the Sub-Accounts
have been in existence are calculated in the manner prescribed by the SEC and
show the percentage rate of return of a hypothetical initial investment of
$1,000 for the most recent one, five and ten year period or for a period
covering the time the Sub-Account has been in existence, if less than the
prescribed periods. The calculation is adjusted to reflect the deduction of the
annual Sub-Account asset charge of 1.45%, the Underlying Fund charges, the $30
annual Contract fee and the contingent deferred sales charge which would be
assessed if the investment were completely withdrawn at the end of the specified
period. Quotations of supplemental average total returns for the periods that
the Sub-Accounts have been in existence are calculated in exactly the same
manner and for the same periods of time except that it does not reflect the
contingent deferred sales charge but assumes that the Contract is not
surrendered at the end of the periods shown.
Additional performance may also be shown calculated in exactly the same manner
as described above, however, the period of time may be based on the Underlying
Fund's lifetime, which may predate the Sub-Account's inception date. These
performance calculations are based on the assumption that the Sub-Account
corresponding to the applicable Underlying Fund was actually in existence
throughout the stated period and that the contractual charges and expenses
during that period were equal to those currently assessed under the Contract.
For more detailed information about these performance calculations, including
actual formulas and performance numbers, see the SAI.
PERFORMANCE INFORMATION FOR ANY SUB-ACCOUNT REFLECTS ONLY THE PERFORMANCE OF A
HYPOTHETICAL INVESTMENT IN THE SUB-ACCOUNT DURING THE TIME PERIOD ON WHICH THE
CALCULATIONS ARE BASED. PERFORMANCE INFORMATION SHOULD BE CONSIDERED IN LIGHT OF
THE INVESTMENT OBJECTIVES AND POLICIES AND RISK CHARACTERISTICS OF THE
UNDERLYING FUND IN WHICH THE SUB-ACCOUNT INVESTS AND THE MARKET CONDITIONS
DURING THE
22
<PAGE>
GIVEN TIME PERIOD, AND SHOULD NOT BE CONSIDERED AS A REPRESENTATION OF WHAT MAY
BE ACHIEVED IN THE FUTURE.
Performance information for a Sub-Account may be compared, in reports and
promotional literature, to: (1) the Standard & Poor's 500 Composite Stock Price
Index ("S&P 500"), Dow Jones Industrial Average ("DJIA"), Shearson Lehman
Aggregate Bond Index or other unmanaged indices so that investors may compare
the Sub-Account results with those of a group of unmanaged securities widely
regarded by investors as representative of the securities markets in general;
(2) other groups of variable annuity separate accounts or other investment
products tracked by Lipper Analytical Services, a widely used independent
research firm which ranks mutual funds and other investment products by overall
performance, investment objectives, and assets, or tracked by other services,
companies, publications, or persons, who rank such investment products on
overall performance or other criteria; or (3) the Consumer Price Index (a
measure for inflation) to assess the real rate of return from an investment in
the Sub-Account. Unmanaged indices may assume the reinvestment of dividends but
generally do not reflect deductions for administrative and management costs and
expenses.
At times, the Company may also advertise the ratings and other information
assigned to it by independent rating organizations such as A.M. Best Company
("A.M. Best"), Moody's Investors Service ("Moody's"), Standard & Poor's
Insurance Rating Services ("S&P") and Duff & Phelps. A.M. Best's and Moody's
ratings reflect their current opinion of the Company's relative financial
strength and operating performance in comparison to the norms of the life/health
insurance industry. S&P's and Duff & Phelps' ratings measure the ability of an
insurance company to meet its obligations under insurance policies it issues and
do not measure the ability of such companies to meet other non-policy
obligations. The ratings also do not relate to the performance of the Funds.
DESCRIPTION OF THE COMPANY, THE VARIABLE ACCOUNT
AND THE UNDERLYING FUNDS
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, 1997, the
Company had over $9.4 billion in assets and over $26.6 billion of life insurance
in force.
Effective October 1, 1995, the Company changed its name from SMA Life Assurance
Company to Allmerica Financial Life Insurance and Annuity Company. The Company
is an 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, 1997, First Allmerica and its subsidiaries
(including the Company) had over $16.3 billion in combined assets and over $43.8
billion in life insurance in force.
The Company is a charter member of the Insurance Marketplace Standards
Association ("IMSA"). Companies that belong to IMSA subscribe to a rigorous set
of standards that cover the various aspects of sales and service for
individually sold life insurance and annuities. IMSA members have adopted
policies and procedures that demonstrate a commitment to honesty, fairness and
integrity in all customer contacts involving sales and service of individual
life insurance and annuity products.
23
<PAGE>
THE VARIABLE ACCOUNT
The Fulcrum Separate Account (the "Variable Account") is a separate investment
account of the Company with fourteen 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 FULCRUM TRUST. The Fulcrum Trust (previously known as 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 (the "Portfolios") are currently available under the
Contract.
Allmerica Financial Investment Management Services, Inc. ("AFIMS") serves as
overall manager of The Fulcrum Trust and is responsible for general investment
supervisory services to the Portfolios. The Fulcrum Trust and AFIMS have
retained several Portfolio Managers to manage the assets of each Portfolio.
AFIMS is located at 440 Lincoln Street, Worcester, MA 01653.
The five Portfolios of The Fulcrum Trust and their respective Portfolio Managers
are as follows:
<TABLE>
<CAPTION>
PORTFOLIO PORTFOLIO MANAGER
- ----------------------------------------- -----------------------------------------
<S> <C>
Global Interactive/Telecomm Portfolio GAMCO Investors, Inc.
International Growth Portfolio Bee & Associates Incorporated
Growth Portfolio Pilgrim Baxter Analytic Investors, Inc.
Value Portfolio GAMCO Investors, Inc.
Strategic Income Portfolio Allmerica Asset Management, Inc.
</TABLE>
Allmerica Asset Management, Inc. ("AAM") is an affiliate of the Company and of
AFIMS. The other Portfolio Managers are not affiliated with the Company or with
AFIMS.
The Fulcrum Trust currently pays AFIMS and the Portfolio Managers a monthly fee
(the "management fee") based on the average daily net assets of each Portfolio.
For the first year that a new Portfolio Manager is hired (or, in the case of a
Portfolio that has had only one Portfolio Manager, for the first year of
operations) the advisory fee is set at an annual rate of 0.80% of the
Portfolio's average daily net assets. After the twelfth full calendar month has
elapsed, the performance-based fee will be in effect. As of the date of this
prospectus, this first year fee arrangement is in effect for only two Portfolios
- -- the Strategic Income Portfolio and the Growth Portfolio. The Strategic Income
Portfolio has a new Portfolio Manager, AAM, effective April 13, 1998. The
Portfolio Manager Agreement with AAM was approved at a shareholders meeting on
June 8, 1998. AFIMS and AAM have voluntarily agreed that for the first year
(through April 30, 1999) the management fee for the Strategic Income Portfolio
will be set at 0.40%. The Growth Portfolio also has a new Portfolio Manager,
Pilgrim Baxter Analytic Investors, Inc. ("Pilgrim Baxter Analytic"), effective
August 1, 1998. The Portfolio Manager Agreement with Pilgim Baxter Analytic is
subject to the approval of shareholders. A vote is scheduled to be held on
September 15, 1998. The agreement provides for a fixed fee for the first year
equal to 0.80% of average daily net assets of the Growth Portfolio. AFIMS and
Pilgrim Baxter Analytic have agreed as well to a limitation on the first year
fee. Specifically, for the first year, the fee will be calculated at the lesser
of the following two rates: (1) 0.80%; or (2) the rate that would have applied
under the old Portfolio Manager
24
<PAGE>
Agreement with the previous portfolio manager. The latter rate varies based on
prior performance. After the first year of its agreement, Pilgrim Baxter
Analytic will be paid under the same performance-based fee schedule included in
the current agreement with the previous portfolio manager.
Other than the Strategic Income Portfolio and the Growth Portfolio, each
Portfolio Manager is currently paid on an incentive fee basis, which could
result in either higher than average management fees or, possibly, no management
fee at all, depending on how well each Portfolio Manager performs. There are two
components to the management fee: the basic fee and the incentive fee. The
management 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 management fee schedule provides for an incentive
performance fee for superior performance, and provides for a lower fee for
sub-par performance. The base fee is 2.00%, but may vary from 0.00% to 4.00%
depending on the Portfolio's performance.
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 available under the Contract; certain other funds of Allmerica
Investment Trust are not currently offered under the Contract. Shares of the
Trust are not offered to the general public but solely to such variable
accounts.
AFIMS 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. AFIMS has entered into a Sub-Adviser Agreement with its affiliate, AAM,
for investment management services for the Money Market Fund. Under the
Sub-Adviser 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-Adviser
Agreement cannot be materially changed without the approval of a majority in
interest of the shareholders of the Fund. Both AFIMS and AAM are located at 440
Lincoln Street, Worcester, Massachusetts 01653.
For providing its services under the Management Agreement, AFIMS 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. AFIMS is solely responsible for the payment
of all fees for investment management services to AAM, which will be a fee of
0.10%, computed daily at an annual rate based on the average daily net asset
value of the Money Market Fund.
AIM VARIABLE INSURANCE FUNDS, INC. AIM Variable Insurance Funds, Inc. ("AVIF"),
an open-end, series, management investment company, was organized as a Maryland
corporation on January 22, 1993, and is registered with the SEC under the 1940
Act. The investment adviser for the AIM V.I. Value Fund is A I M Advisors, Inc.
("AIM"), 11 Greenway Plaza, Suite 100, Houston, TX 77046-1173. AIM was organized
in 1976, and, together with its subsidiaries, manages or advises approximately
90 investment company portfolios encompassing a broad range of investment
objectives.
DELAWARE GROUP PREMIUM FUND, INC. Delaware Management Company ("Delaware
Management") is the investment adviser for the Small Cap Value Series and the
Delaware Series, two series of Delaware Group Premium Fund, Inc. ("DGPF"). DGPF,
a Maryland corporation organized on February 19, 1987, is an open-end management
investment company registered with the SEC under the 1940 Act. Delaware
Management and its predecessors have been managing the funds in the Delaware
Investments family since 1938. On December 31, 1997, Delaware Management and its
affiliates within Delaware Investments, were supervising in the aggregate more
than $40 billion in assets in the various institutional or separately managed
and investment company accounts.
25
<PAGE>
LAZARD RETIREMENT SERIES, INC. Lazard Asset Management ("LAM"), a division of
Lazard Freres & Co. LLC, is the investment adviser of Lazard Retirement
International Equity Portfolio, a portfolio of Lazard Retirement Series, Inc.
("Lazard"). Lazard, a Maryland corporation organized on February 13, 1997, is an
open-end, management investment company registered with the SEC under the 1940
Act. Lazard and LAM are located at 30 Rockefeller Plaza, New York, New York
10112. LAM and its affiliates provide investment management services to Lazard's
other portfolios and client discretionary accounts with assets totaling
approximately $67 billion as of March 31, 1998.
MFS VARIABLE INSURANCE TRUST. MFS Variable Insurance Trust (the "MFS Trust"), a
Massachusetts business trust organized on February 1, 1994, is an open-end,
management investment company registered with the SEC under the 1940 Act. The
investment adviser of MFS Emerging Growth Series and MFS Growth With Income
Series is Massachusetts Financial Services Company ("MFS"), America's oldest
mutual fund organization. MFS and its predecessor organizations have a history
of money management dating from 1924. Net assets under management of the MFS
organization were approximately $72 billion on behalf of approximately 2.8
million investor accounts as of January 30, 1998.
OPPENHEIMER VARIABLE ACCOUNT FUNDS. Oppenheimer Variable Account Funds
("Oppenheimer") was organized as a Massachusetts business trust in 1984 and is
an open-end, diversified management investment company registered with the SEC
under the 1940 Act. The investment adviser for the Oppenheimer Aggressive Growth
Fund and the Oppenheimer Growth & Income Fund is OppenheimerFunds, Inc.
("OppenheimerFunds"), which (including subsidiaries) advises investment company
portfolios having over $90 billion in assets as of June 30, 1998.
OppenheimerFunds has operated as an investment adviser since 1959.
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 Underlying Funds 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.
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.
OPPENHEIMER AGGRESSIVE GROWTH FUND -- seeks to achieve capital appreciation by
investing in "growth-type" companies.
MFS EMERGING GROWTH SERIES -- seeks to provide long-term growth of capital by
investing primarily in common stocks of foreign and domestic issuers.
SMALL CAP VALUE SERIES -- seeks capital appreciation by investing primarily in
small cap common stocks whose market value appears low relative to their
underlying value or future earnings and growth potential. Emphasis will also be
placed on securities of companies that may be temporarily out of favor or whose
value is not yet recognized by the market.
LAZARD RETIREMENT INTERNATIONAL EQUITY PORTFOLIO -- seeks capital appreciation.
This portfolio invests primarily in the equity securities of non-United States
companies that the investment adviser considers inexpensively priced relative to
the return on total capital or equity.
26
<PAGE>
INTERNATIONAL GROWTH PORTFOLIO -- seeks to make money for investors by investing
internationally for long-term capital appreciation, primarily in equity
securities.
GROWTH PORTFOLIO -- seeks to make money for investors by investing primarily in
securities selected for their long-term growth prospects.
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.
AIM V.I. VALUE FUND -- seeks to achieve long-term growth of capital by investing
primarily in equity securities judged by its adviser to be undervalued relative
to the current or projected earnings of the companies issuing the securities, or
relative to current market values of assets owned by the companies issuing the
securities or relative to the equity market generally. Income is a secondary
objective.
MFS GROWTH WITH INCOME SERIES -- seeks to provide reasonable current income and
long-term growth of capital and income.
OPPENHEIMER GROWTH & INCOME FUND -- seeks a high total return (which includes
growth in the value of its shares as well as current income) from equity and
debt securities. From time to time this Fund may focus on small to medium
capitalization common stocks, bonds and convertible securities.
DELAWARE SERIES -- seeks a balance of capital appreciation, income and
preservation of capital. It uses a dividend-oriented valuation strategy to
select securities issued by established companies that are believed to
demonstrate potential for income and capital growth.
STRATEGIC INCOME PORTFOLIO (formerly Global Strategic Income Portfolio) -- seeks
to make money for investors by investing for high current income and capital
appreciation in a variety of fixed-income securities.
MONEY MARKET FUND -- seeks to obtain maximum current income consistent with the
preservation of capital and liquidity.
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.
27
<PAGE>
Payments are not limited as to frequency and number, but there are certain
limitations as to amount. Currently, the initial payment must be at least
$25,000. Under a salary deduction or monthly automatic payment plan, the minimum
initial payment is $50. In all cases, each subsequent payment must be at least
$50. Where the contribution on behalf of an employee under an employer-sponsored
retirement plan is less than $600 but more than $300 annually, the Company may
issue a contract on the employee, if the plan's average annual contribution per
eligible plan participant is at least $600. The minimum allocation to a
Guarantee Period Account is $1,000. If less than $1,000 is allocated to a
Guarantee Period Account, the Company reserves the right to apply that amount to
the Money Market Fund.
Generally, unless otherwise requested, all payments will be allocated among the
accounts in the same proportion that the initial net payment is allocated, or,
if subsequently changed, according to the most recent allocation instructions.
To the extent permitted by state law, however, if the Contract is issued as an
IRA or is issued in Georgia, Idaho, Indiana, Michigan, Missouri, North Carolina,
Oklahoma, Oregon, South Carolina, Texas, Utah, Washington or West Virginia, any
portion of the initial net payment and of additional net payments received
during the Contract's first 15 days measured from the 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 Underlying 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
28
<PAGE>
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.
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 Strategic Income Portfolio, 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.
To the extent permitted by state law, the Company reserves the right, from time
to time, to credit an enhanced interest rate to certain initial and/or
subsequent payments which are deposited into the Fixed Account and which utilize
the Fixed Account as the source account for the payment from which to process
automatic transfers. For more information see APPENDIX A, "MORE INFORMATION
ABOUT THE FIXED ACCOUNT."
The Owner may request automatic rebalancing of Sub-Account allocations on a
monthly, bi-monthly, quarterly, semi-annual or annual basis in accordance with
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 or change 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. As such,
subsequent payment allocated in a manner different from the percentage
allocation mix in effect on the date the payment is received will be reallocated
in accordance with the existing mix on the next scheduled date unless the
Owner's timely request to change the mix or terminate the option is received by
the Company.
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.
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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.
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 "Tax-Sheltered Annuities" and "Texas Optional Retirement
Program."
For important tax consequences which may result from surrender, see "FEDERAL TAX
CONSIDERATIONS."
F. WITHDRAWALS
At any time prior to the Annuity Date, an Owner may withdraw a portion of the
Accumulated Value of his or her Contract, subject to the limits stated below.
The Owner must file a signed, written request for withdrawals, satisfactory to
the Company, at the Principal Office. The written request must indicate the
dollar amount the Owner wishes to receive and the accounts from which such
amount is to be withdrawn. The 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."
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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 date indicated on
the application. If elected after the issue date, the Owner may elect, by
written request, a specific dollar amount and the percentage of this amount to
be taken from each designated Sub-Account and/or the Fixed Account.
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.
Where the Owner is a trust or other non-natural person, the Owner may elect the
LED option based on the Annuitant's life expectancy.
If an Owner elects the LED option, in each calendar year a fraction of the
Accumulated Value is withdrawn based on the Owner's then life expectancy. The
numerator of the fraction is 1 (one), and the denominator of the fraction is the
remaining life expectancy of the Owner, as determined annually by the Company.
The resulting fraction, expressed as a percentage, is applied to the Accumulated
Value at the beginning of the year to determine the amount to be distributed
during the year. The Owner may elect monthly, bi-monthly, quarterly,
semi-annual, or annual distributions, and may terminate the LED option at any
time. 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."
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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, compounded daily at an
annual rate of 5% starting on the date each payment is applied, decreased
proportionately to reflect withdrawals (for each withdrawal, the proportionate
reduction is calculated as the death benefit under this option immediately prior
to the withdrawal multiplied by the withdrawal amount and divided by the
Accumulated Value immediately prior to the withdrawal); or (3) the death benefit
that would have been payable on the most recent Contract anniversary, increased
for subsequent payments and decreased proportionately for subsequent
withdrawals.
This guaranteed death benefit works in the following way assuming no withdrawals
are made. On the first anniversary, the death benefit will be equal to the
greater of (a) the Accumulated Value (increased by any positive Market Value
Adjustment) or (b) gross payments compounded at the annual rate of 5%. The
higher of (a) or (b) will then be locked in until the second anniversary, at
which time the death benefit will be equal to the greatest of (a) the Contract's
then current Accumulated Value increased by any positive Market Value
Adjustment; (b) gross payments compounded at the annual rate of 5%; or (c) the
locked-in value of the death benefit at the first anniversary. The greatest of
(a), (b) or (c) will be locked in until the next Contract anniversary. This
calculation will then be repeated on each anniversary while the Contract remains
in force and prior to the Annuity Date. As noted above, the values of (b) and
(c) will be decreased proportionately if withdrawals are taken.
DEATH OF AN OWNER WHO IS NOT ALSO THE ANNUITANT PRIOR TO THE ANNUITY DATE. If
an Owner who is not also the Annuitant dies before the Annuity Date, the death
benefit will be the Accumulated Value increased by any positive Market Value
Adjustment. The death benefit 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.
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.
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DEATH OF THE ANNUITANT ON OR AFTER THE ANNUITY DATE. If the Annuitant's death
occurs on or after the Annuity Date but before completion of all guaranteed
annuity benefit payments, any unpaid amounts or installments will be paid to the
Beneficiary. The Company must pay out the remaining payments at least as rapidly
as under the payment option in effect on the date of the Annuitant's death.
H. THE SPOUSE OF THE OWNER AS BENEFICIARY
The Owner's spouse, if named as the sole 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 Money Market Fund; (2) the excess, if any, of the death
benefit over the Contract's Accumulated Value will also be added to 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
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 option is selected, Accumulated
Value will be transferred to the Fixed Account of the Company, and the annuity
benefit payments will be fixed in amount. See APPENDIX A, "MORE INFORMATION
ABOUT THE FIXED ACCOUNT."
Under a variable annuity payout option, 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
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a Sub-Account will reflect the investment performance of the Sub-Account, the
amount of each annuity benefit payment will vary.
The annuity option selected must produce an initial payment of at least $50 (a
lower amount may be required in some states). The Company reserves the right to
increase this minimum amount. If the annuity option 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 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.
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.
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PERIOD CERTAIN VARIABLE ANNUITY. This variable annuity has periodic payments
for a stipulated number of years ranging from one to 30. This option may be
commutable, that is, the payee reserves the right to receive a lump sum in place
of installments, or it becomes non-commutable. The payee must reserve this right
at the time benefits begin.
It should be noted that the period certain option does not involve a life
contingency. In the computation of the payments under this option, the 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 non-commutable period certain options of ten or more
years, the annuity value is the Accumulated Value less any premium taxes and
adjusted for any Market Value Adjustment. For commutable period certain options
or any period certain option less than ten years, the value is 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 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
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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, "SURRENDER CHARGES AND THE MARKET VALUE
ADJUSTMENT."
The Accumulated Value under the Contract is determined by (1) multiplying the
number of Accumulation Units in each Sub-Account by the value of an Accumulation
Unit of that Sub-Account on the Valuation Date, (2) adding the products, and (3)
adding the amount of the accumulations in the Fixed Account and Guarantee Period
Accounts, if any.
NET INVESTMENT FACTOR. The Net Investment Factor is an index that measures the
investment performance of a Sub-Account from one Valuation Period to the next.
This factor is equal to 1.000000 plus the result from dividing (1) by (2) and
subtracting (3) and (4) where:
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(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 Fulcrum, the Trust, AVIF,
DGPF, Lazard, the MFS Trust and Oppenheimer.
A. VARIABLE ACCOUNT DEDUCTIONS
MORTALITY AND EXPENSE RISK CHARGE. The Company makes a daily charge equal to an
annual rate of 1.25% of the value of each Sub-Account's assets to cover the
mortality and expense risk which the Company assumes in relation to the variable
portion of the Contract. The charge is imposed during both the accumulation
period and the annuity payout period. The mortality risk arises from the
Company's guarantee that it will make annuity benefit payments in accordance
with annuity rate provisions established at the time the Contract is issued for
the life of the Annuitant (or in accordance with the annuity option selected),
no matter how long the Annuitant (or other payee) lives and no matter how long
all Annuitants as a class live. Therefore, the mortality charge is deducted
during the annuity 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 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.
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Deductions for the Contract fee (described below 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 Fulcrum,
the Trust, AVIF, DGPF, Lazard, the MFS Trust and Oppenheimer 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
classes of individuals ("eligible persons"): employees and registered
representatives of any broker dealer which has entered into a sales agreement
with the Company to sell the Contract; employees of the Company, its affiliates
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) the amount available under the Withdrawal Without Surrender Charge
provision. See "Withdrawal Without Surrender Charge" below. For purposes of
determining the amount of any contingent deferred sales charge, surrenders will
be deemed to be taken first from amounts available as a Withdrawal Without
Surrender Charge, if any; then from any Old Payments, and then from New
Payments. Amounts available as a Withdrawal Without Surrender Charge, followed
by Old Payments, may be withdrawn from the Contract at any time without the
imposition of a contingent deferred sales charge. If a withdrawal is
attributable all or in part to New Payments, a contingent deferred sales charge
may apply.
CHARGE 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 CHARGE. 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 continue until death. The
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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 classes of individuals ("eligible persons"): employees and registered
representatives of any broker-dealer which has entered into a Sales Agreement
with the Company to sell the Contract; employees of the Company, its
subsidiaries and affiliates; officers, directors, trustees and employees of any
of the Funds, investment managers or sub-advisers; 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, if permitted under state law, contingent
deferred sales charges may be waived under Section 403(b) Contracts where the
amount withdrawn is being contributed to a life insurance policy issued by the
Company as part of the individual's Section 403(b) plan. Any reduction or
elimination in the amount or duration of the contingent deferred sales charge
will not discriminate unfairly among 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.
WITHDRAWAL WITHOUT SURRENDER CHARGE. In each calendar year, the Company will
waive the contingent deferred sales charge, if any, on an amount ("Withdrawal
Without Surrender Charge") equal to the greatest of (1), (2) or (3):
Where: (1) is: The Accumulated Value as of the Valuation Date coincident with
or next following the date of receipt of the request for
withdrawal, reduced by total gross payments not previously
withdrawn ("Cumulative Earnings").
Where: (2) is: 15% of the Accumulated Value as of the Valuation Date
coincident with or next following the date of receipt of the
request for withdrawal, reduced by the total amount of any
prior withdrawals made in the same calendar year to which no
contingent deferred sales charge was applied.
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Where: (3) is: The amount calculated under the Company's life expectancy
distribution (see "Life Expectancy Distributions") whether or
not the withdrawal was part of such distribution (applies only
if the Annuitant is also an Owner).
For example, an 81-year-old Owner/Annuitant with an Accumulated Value of
$15,000, of which $1,000 is Cumulative Earnings, would have a Withdrawal Without
Surrender Charge 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 THE CONTRACT," and see "FEDERAL TAX
CONSIDERATIONS."
CHARGE AT THE TIME ANNUITY BENEFIT PAYMENTS BEGIN. If any commutable period
certain option or a non-commutable period certain option for less than ten years
is chosen, a contingent deferred sales charge will be deducted from the
Accumulated Value of the Contract if the Annuity Date occurs at any time when
the surrender charge would still apply had the Contract been surrendered on the
Annuity Date.
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
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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
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
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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 "G. 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, "SURRENDER CHARGES AND
THE MARKET VALUE ADJUSTMENT."
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."
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
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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 Underlying Funds 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.
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
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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 Owners" below), be considered an annuity
contract under Section 72 of the Code. This section governs the taxation of
annuities. The following discussion concerns annuities subject to Section 72.
WITHDRAWALS PRIOR TO ANNUITIZATION. With certain exceptions, any increase in
the Contract's Accumulated Value is not taxable to the Owner until it is
withdrawn from the Contract. If the Contract is surrendered or amounts are
withdrawn prior to the Annuity Date, any withdrawal of investment gain in value
over the cost basis of the Contract will be taxed as ordinary income. Under the
current provisions of the Code, amounts received under an annuity contract prior
to annuitization (including payments made upon the death of the annuitant or
owner), generally are first attributable to any investment gains credited to the
contract over the taxpayer's "investment in the contract." Such amounts will be
treated as gross income subject to federal income taxation. "Investment in the
Contract" is the total of all payments to the Contract which were not excluded
from the Owner's gross income less any amounts previously withdrawn which were
not included in income. Section 72(e)(11)(A)(ii) requires that all non-qualified
deferred annuity contracts issued by the same insurance company to the same
owner during a single calendar year be treated as one contract in determining
taxable distributions.
ANNUITY PAYOUTS AFTER ANNUITIZATION. When annuity benefit payments are
commenced under the Contract, generally a portion of each payment may be
excluded from gross income. The excludable portion generally is determined by a
formula that establishes the ratio that the 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 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.
45
<PAGE>
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 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
46
<PAGE>
types of tax-favored retirement plans for employees. The Self-Employed
Individuals' Tax Retirement Act of 1962, as amended, permits Self-Employed
individuals to establish similar plans for themselves and their employees.
Employers intending to use qualified Contracts in connection with such plans
should seek competent advice as to the suitability of the Contract to their
specific needs and as to applicable Code limitations and tax consequences.
The Company can provide prototype plans for certain pension or profit sharing
plans for review by the plan's legal counsel. For information, ask your
financial representative.
INDIVIDUAL RETIREMENT ANNUITIES. Section 408 of the Code permits eligible
individuals to contribute to an individual retirement program known as an
Individual Retirement Annuity ("IRA"). Note: this term covers all IRAs permitted
under Section 408(b) of the Code, including Roth IRAs. IRAs are subject to
limits on the amounts that may be contributed, the persons who may be eligible,
and on the time when distributions may commence. In addition, certain
distributions from other types of retirement plans may be "rolled over," on a
tax-deferred basis, to an IRA. Purchasers of an IRA Contract will be provided
with supplementary information as may be required by the IRS or other
appropriate agency, and will have the right to revoke the Contract as described
in this Prospectus. See "B. Right to Revoke Individual Retirement Annuity."
Eligible employers that meet specified criteria may establish simplified
employee pension plans (SEP-IRAs) or SIMPLE IRA plans for their employees using
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 1/2, separates from
service, dies or becomes disabled. In the case of hardship, an Owner may
withdraw amounts contributed by salary reduction, but not the earnings on such
amounts. Even though a distribution may be permitted under these rules (e.g.,
for hardship or after separation from service), it may be subject to a 10%
penalty tax as a premature distribution, in addition to income tax.
TEXAS OPTIONAL RETIREMENT PROGRAM. Distributions under a TSA Contract issued to
participants in the Texas Optional Retirement Program may not be received except
in the case of the participant's death, retirement or termination of employment
in the Texas public institutions of higher education. These additional
restrictions are imposed under the Texas Government Code and a prior opinion of
the Texas Attorney General.
REPORTS
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.
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.
47
<PAGE>
LOANS (QUALIFIED CONTRACTS ONLY)
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 Fulcrum, the Trust, AVIF, DGPF, Lazard, the MFS Trust and
Oppenheimer 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 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
48
<PAGE>
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 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.
49
<PAGE>
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.
The Company may receive 12b-1 fees from certain Underlying Funds as
reimbursement for administrative and distribution support services. The Company
may receive fees from the investment advisers or other service providers of
certain Underlying Funds in return for providing certain services to Owners.
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.
50
<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.
To the extent permitted by state law, the Company reserves the right, from time
to time, to credit an enhanced interest rate to certain initial and/or
subsequent payments ("eligible payments") which are deposited into the Fixed
Account under an Automatic Transfer Option (Dollar Cost Averaging election) that
uses the Fixed Account as the source account from which automatic transfers are
then processed. The following are not considered eligible payments: amounts
transferred into the Fixed Account from the Variable Account and/or the
Guarantee Period Accounts; amounts already in the Fixed Account at the time an
eligible payment is deposited and amounts transferred to the Contract from
another annuity contract issued by the Company.
An eligible payment must be automatically transferred out of the Fixed Account
over a continuous six month period. The enhanced rate will apply during the six
month period to any portion of the eligible payment remaining in the Fixed
Account. Amounts automatically transferred out of the Fixed Account will no
longer earn the enhanced rate of interest and, as of the date of transfer, will
be subject to the variable investment performance of the sub-account(s)
transferred into. If the automatic transfer option is terminated prior to the
end of the six month period, the enhanced rate will no longer apply. The Company
reserves the right to extend the period of time that the enhanced rate will
apply.
A-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 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, based on hypothetical
Accumulated Values.
<TABLE>
<CAPTION>
HYPOTHETICAL WITHDRAWAL WITHOUT SURRENDER
ACCOUNT ACCUMULATED SURRENDER CHARGE CHARGE SURRENDER
YEAR VALUE AMOUNT PERCENTAGE CHARGE
- ------------- ------------ ------------------ ---------------- ------------
<S> <C> <C> <C> <C>
1 $ 54,000.00 $ 8,100.00 7% $ 3,213.00
2 58,320.00 8,748.00 6% 2,974.32
3 62,985.60 12,985.60 5% 2,500.00
4 68,024.45 18,024.45 4% 2,000.00
5 73,466.40 23,466.40 3% 1,500.00
6 79,343.72 29,343.72 2% 1,000.00
7 85,691.21 35,691.21 1% 500.00
8 92,546.51 42,546.51 0% 0.00
</TABLE>
WITHDRAWAL
Assume a Payment of $50,000 is made on the issue date and no additional payments
are made. Assume that the Withdrawal Without Surrender Charge 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 WITHOUT SURRENDER
ACCOUNT ACCUMULATED SURRENDER CHARGE CHARGE SURRENDER
YEAR VALUE WITHDRAWAL AMOUNT PERCENTAGE CHARGE
- ------------- ------------ ------------ ------------------ ---------------- -----------
<S> <C> <C> <C> <C> <C>
1 $ 54,000.00 $ 0.00 $ 8,100.00 7% $ 0.00
2 58,320.00 0.00 8,748.00 6% 0.00
3 62,985.60 0.00 12,985.60 5% 0.00
4 68,024.45 30,000.00 18,024.45 4% 479.02
5 41,066.40 10,000.00 6,159.96 3% 115.20
6 33,551.72 5,000.00 5,032.76 2% 0.00
7 30,835.85 10,000.00 4,625.38 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 (2,555 days) from the expiration date.
3. The value of the Guarantee Period Account is equal to $62,985.60 at the end
of three years.
B-1
<PAGE>
4. No transfers or withdrawals affecting this Guarantee Period Account have
been made.
5. Surrender charges, if any, are calculated in the same manner as shown in the
examples in Part 1.
NEGATIVE MARKET VALUE ADJUSTMENT (UNCAPPED)
Assume that on the date of surrender, the current rate (j) is 10.00% or 0.10
<TABLE>
<S> <C> <C>
The market value factor = [(1+i)/(1+j)](n/365) -1
= [(1+.08)/(1+.10)](2555/365) -1
= (.98182)(7) -1
= -.12054
The market value = the market value factor multiplied by the withdrawal
adjustment
= -.12054X$62,985.60
= -$7,592.11
</TABLE>
POSITIVE MARKET VALUE ADJUSTMENT (UNCAPPED)
Assume that on the date of surrender, the current rate (j) is 7.00% or 0.07
<TABLE>
<S> <C> <C>
The market value factor = [(1+i)/(1+j)](n/365) -1
= [(1+.08)/(1+.07)](2555/365) -1
= (1.0093)(7) -1
= .06694
The market value = the market value factor multiplied by the withdrawal
adjustment
= .06694X$62,985.60
= $4,216.26
</TABLE>
NEGATIVE MARKET VALUE ADJUSTMENT (CAPPED)
Assume that on the date of surrender, the current rate (j) is 11.00% or 0.11
<TABLE>
<S> <C> <C>
The market value factor = [(1+i)/(1+j)](n/365) -1
= [(1+.08)/(1+.11)](2555/365) -1
= (.97297)(7) -1
= -.17454
The market value = Minimum of the market value factor multiplied by the
adjustment withdrawal or the negative of the excess interest earned
over 3%
= Minimum of (-.17454X$62,985.60 or -$8,349.25)
= Minimum of (-$10,993.51 or -$8,349.25)
= -$8,349.25
</TABLE>
B-2
<PAGE>
POSITIVE MARKET VALUE ADJUSTMENT (CAPPED)
Assume that on the date of surrender, the current rate (j) is 6.00% or 0.06
<TABLE>
<S> <C> <C>
The market value factor = [(1+i)/(1+j)](n/365) -1
= [(1+.08)/(1+.06)](2555/365) -1
= (1.01887)(7) -1
= .13981
The market value adjustment = Minimum of the market value factor multiplied by the
withdrawal or the excess interest earned over 3%
= Minimum of (.13981X$62,985.60 or $8,349.25)
= Minimum of ($8,806.02 or $8,349.25)
= $8,349.25
</TABLE>
B-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
CONTRACT ACCUMULATED MARKET VALUE DEATH DEATH DEATH HYPOTHETICAL
YEAR VALUE ADJUSTMENT BENEFIT (A) BENEFIT (B) BENEFIT (C) DEATH BENEFIT
- ------------- ------------ ------------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
1 $53,000.00 $ 0.00 $53,000.00 $52,500.00 $50,000.00 $ 53,000.00
2 53,530.00 500.00 54,030.00 55,125.00 53,000.00 55,125.00
3 58,883.00 0.00 58,883.00 57,881.25 55,125.00 58,883.00
4 52,994.70 500.00 53,494.70 60,775.31 58,883.00 60,775.31
5 58,294.17 0.00 58,294.17 63,814.08 60,775.31 63,814.08
6 64,123.59 500.00 64,623.59 67,004.78 63,814.08 67,004.78
7 70,535.95 0.00 70,535.95 70,355.02 67,004.78 70,535.95
8 77,589.54 500.00 78,089.54 73,872.77 70,535.95 78,089.54
9 85,348.49 0.00 85,348.49 77,566.41 78,089.54 85,348.49
10 93,883.34 0.00 93,883.34 81,444.73 85,348.49 93,883.34
</TABLE>
Death Benefit (a) is the Accumulated Value increased by any positive Market
Value Adjustment. Death Benefit (b) is the gross payments compounded annually at
5%, decreased proportionately to reflect withdrawals. Death Benefit (c) is the
death benefit that would have been payable on the most recent Contract
anniversary, increased for subsequent payments, and decreased proportionately
for subsequent withdrawals.
The Hypothetical Death Benefit is equal to the greatest of Death Benefits (a),
(b), or (c).
DEATH BENEFIT ASSUMING WITHDRAWALS
Assume a payment of $50,000 is made on the issue date and no additional payments
are made. Assume there are withdrawals as detailed in the table below 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
Value.
<TABLE>
<CAPTION>
HYPOTHETICAL HYPOTHETICAL
CONTRACT ACCUMULATED MARKET VALUE DEATH DEATH DEATH HYPOTHETICAL
YEAR VALUE WITHDRAWALS ADJUSTMENT BENEFIT (A) BENEFIT (B) BENEFIT (C) DEATH 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 4,171.13 3,972.50 4,171.13
4 3,494.70 0.00 500.00 3,994.70 4,379.68 4,171.13 4,379.68
5 3,844.17 0.00 0.00 3,844.17 4,598.67 4,379.68 4,598.67
6 4,228.59 0.00 500.00 4,728.59 4,828.60 4,598.67 4,828.60
7 4,651.45 0.00 0.00 4,651.45 5,070.03 4,828.60 5,070.03
8 5,116.59 0.00 500.00 5,616.59 5,323.53 5,070.03 5,616.59
9 5,628.25 0.00 0.00 5,628.25 5,589.71 5,616.59 5,628.25
10 691.07 5,000.00 0.00 691.07 712.70 683.44 712.70
</TABLE>
C-1
<PAGE>
Death Benefit (a) is the Accumulated Value increased by any positive Market
Value Adjustment. Death Benefit (b) is the gross payments compounded annually at
5%, decreased proportionately to reflect withdrawals. Death Benefit (c) is the
death benefit that would have been payable on the most recent Contract
anniversary, increased for subsequent payments, and decreased proportionately
for subsequent withdrawals.
The Hypothetical Death Benefit is equal to the greatest of Death Benefits (a),
(b), or (c).
PART 2: DEATH OF THE OWNER WHO IS NOT THE ANNUITANT
Assume a payment of $50,000 is made on the issue date and no additional payments
are made. Assume there are no partial withdrawals. The table below presents
examples of the Death Benefit based on the Hypothetical Accumulated Values.
<TABLE>
<CAPTION>
HYPOTHETICAL HYPOTHETICAL
CONTRACT ACCUMULATED MARKET VALUE HYPOTHETICAL
YEAR VALUE ADJUSTMENT DEATH BENEFIT
- ------------- ------------ ------------- -------------
<S> <C> <C> <C>
1 $53,000.00 $ 0.00 $ 53,000.00
2 53,530.00 500.00 54,030.00
3 58,883.00 0.00 58,883.00
4 52,994.70 500.00 53,494.70
5 58,294.17 0.00 58,294.17
6 64,123.59 500.00 64,623.59
7 70,535.95 0.00 70,535.95
8 77,589.54 500.00 78,089.54
9 85,348.49 0.00 85,348.49
10 93,883.34 0.00 93,883.34
</TABLE>
The Hypothetical Death Benefit is the Accumulated Value increased by any
positive Market Value Adjustment.
C-2
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
STATEMENT OF ADDITIONAL INFORMATION
OF
FLEXIBLE PAYMENT DEFERRED VARIABLE AND FIXED ANNUITY CONTRACTS FUNDED THROUGH
SUB-ACCOUNTS OF
FULCRUM SEPARATE ACCOUNT
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS. IT SHOULD BE
READ IN CONJUNCTION WITH THE PROSPECTUS OF THE FULCRUM SEPARATE ACCOUNT,
DATED SEPTEMBER 1, 1998 ("THE PROSPECTUS"). THE PROSPECTUS MAY BE OBTAINED
FROM ANNUITY CLIENT SERVICES, ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY
COMPANY, 440 LINCOLN STREET, WORCESTER, MASSACHUSETTS 01653, TELEPHONE
1-800-917-1909.
DATED SEPTEMBER 1, 1998
<PAGE>
TABLE OF CONTENTS
GENERAL INFORMATION AND HISTORY. . . . . . . . . . . . . . . . . . . . . .2
TAXATION OF THE CONTRACT, THE VARIABLE ACCOUNT
AND THE COMPANY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3
SERVICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3
UNDERWRITERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4
ANNUITY BENEFIT PAYMENTS . . . . . . . . . . . . . . . . . . . . . . . . .4
EXCHANGE OFFER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6
PERFORMANCE INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . . .7
TAX-DEFERRED ACCUMULATION. . . . . . . . . . . . . . . . . . . . . . . . 12
FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . .F-1
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 its Board of Directors on June 13,
1996. The Company is a life insurance company organized under the laws of
Delaware in July 1974. Its principal office (the "Principal Office") is
located at 440 Lincoln Street, Worcester, Massachusetts 01653, telephone
508-855-1000. The Company is subject to the laws of the State of Delaware
governing insurance companies and to regulation by the Commissioner of
Insurance of Delaware. In addition, the Company is subject to the insurance
laws and regulations of other states and jurisdictions in which it is
licensed to operate. As of December 31, 1997, the Company had over $9.4
billion in assets and over $26.6 billion of life insurance in force.
Effective October 1, 1995, the Company changed its name from SMA Life
Assurance Company to Allmerica Financial Life Insurance and Annuity Company.
The Company is an indirectly wholly owned subsidiary of First Allmerica
Financial Life Insurance Company ("First Allmerica") which, in turn, is a
wholly owned subsidiary of Allmerica Financial Corporation ("AFC"). First
Allmerica, originally organized under the laws of Massachusetts in 1844 as a
mutual life insurance company and known as State Mutual Life Assurance
Company of America, converted to a stock life insurance company and adopted
its present name on October 16, 1995. First Allmerica is the fifth oldest
life insurance company in America. As of December 31, 1997, First Allmerica
and its subsidiaries (including the Company) had over $16.3 billion in
combined assets and over $43.8 billion in life insurance in force.
Currently, fourteen (five in New York) Sub-Accounts of the Variable Account
are available under the Contract. Each Sub-Account invests in a
corresponding investment portfolio, fund or series of The Fulcrum Trust
("Fulcrum"), Allmerica Investment Trust (the "Trust"), AIM Variable Insurance
Funds, Inc ("AVIF"), Delaware Group Premium Fund, Inc. ("DGPF"), Lazard
Retirement Series, Inc. ("Lazard"), MFS Variable Insurance Trust (the "MFS
Trust"), and Oppenheimer Variable Account Funds ("Oppenheimer"). Fulcrum and
the Trust are managed by Allmerica Financial Investment Management Services,
Inc.
2
<PAGE>
("AFIMS"). AIM is managed by A I M Advisors, Inc. DGPF is managed by
Delaware Management Company. Lazard is managed by Lazard Asset Management.
The MFS Trust is managed by Massachusetts Financial Services Company and
Oppenheimer is managed by OppenheimerFunds, Inc.
Fulcrum, the Trust, AVIF, DGPF, Lazard, the MFS Trust and Oppenheimer are
open-end, management investment companies. Five different portfolios of Fulcrum
are available under the Contract: Global Interactive/Telecomm, International
Growth, Growth, Value, and Strategic Income. One fund of the Trust is available
under the Contract: the Money Market Fund. One fund of AVIF is available under
the Contract: the AIM V.I. Value Fund. Two series of DGPF are available under
the Contract: the Delaware Series and Small Cap Value Series. One portfolio of
Lazard is available under the Contract: the Lazard Retirement International
Equity Portfolio. Two funds of the MFS Trust are available under the Contract:
MFS Emerging Growth Series and MFS Growth With Income Series. Two funds of
Oppenheimer are available under the Contract: Oppenheimer Aggressive Growth Fund
and Oppenheimer Growth & Income Fund. Each portfolio, fund and series
available under the Contract (together, the "Underlying Funds") has its own
investment objectives and certain attendant risks. For more information, see the
Prospectuses and Statements of Additional Information for the Underlying Funds.
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 Underlying Funds owned by the
Sub-Accounts are held on an open account basis. A Sub-Account's ownership of
Underlying Fund shares is reflected on the records of the Underlying Funds,
and are not represented by any transferable stock certificates.
EXPERTS. The financial statements of the Company as of December 31, 1997 and
1996 and for each of the two years in the period ended December 31, 1997, and
the financial statements of the Fulcrum Separate Account of the Company as of
December 31, 1997 and for the periods indicated, included in this Statement
of Additional Information constituting part of this Registration Statement,
have been so included in reliance on the reports of PricewaterhouseCoopers
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.
3
<PAGE>
UNDERWRITERS
Allmerica Investments, Inc. ("Allmerica Investments"), a registered
broker-dealer under the Securities Exchange Act of 1934 and a member of the
National Association of Securities Dealers, Inc. ("NASD"), serves as
principal underwriter and general distributor for the Contract pursuant to a
contract with Allmerica Investments, the Company and the Variable Account.
Allmerica Investments distributes the Contract on a best-efforts basis.
Allmerica Investments, Inc., 440 Lincoln Street, Worcester, Massachusetts
01653, was organized in 1969 as a wholly owned subsidiary of First Allmerica,
and presently is indirectly wholly owned by First Allmerica.
The Contract offered by this Prospectus is offered continuously, and may be
purchased from certain independent broker-dealers which are NASD members and
whose representatives are authorized by applicable law to sell variable
annuity contracts.
All persons selling the Contract are required to be licensed by their
respective state insurance authorities for the sale of variable annuity
contracts. The Company pays commissions, not to exceed 6.0% of purchase
payments, to entities which sell the Contract. To the extent permitted by
NASD rules, promotional incentives or payments also may be provided to such
entities based on sales volumes, the assumption of wholesaling functions or
other sales-related criteria. Additional payments may be made for other
services not directly related to the sale of the Contract, including the
recruitment and training of personnel, production of promotional literature
and similar services.
Commissions paid on the Contract, including additional incentives or
payments, and allowances paid, if any, 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.
The aggregate amounts of commissions paid to Western Capital Financial Group,
Inc. and to independent broker-dealers, respectively, for sales of contracts
funded by Fulcrum Separate Account were $529,272.25 and $588,878.81 in 1997.
Sales of these contracts began in 1997.
ANNUITY BENEFIT PAYMENTS
The method by which the Accumulated Value under the Contract is determined is
described in detail under "Computation of Values" in the Prospectus.
ILLUSTRATION OF ACCUMULATION UNIT CALCULATION USING HYPOTHETICAL EXAMPLE.
The Accumulation Unit calculation for a daily Valuation Period may be
illustrated by the following hypothetical example: Assume that the assets of
a Sub-Account at the beginning of a one-day Valuation Period were $5,000,000;
that the value of an Accumulation Unit on the previous date was $1.135000;
and that during the Valuation Period, the investment income and net realized
and unrealized capital gains exceed net realized and unrealized capital
losses by $1,675. The Accumulation Unit Value at the end of the current
Valuation Period would be calculated as follows:
(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
<PAGE>
(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 the 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.
Next, assume that the Annuity Unit value for the assumed rate of 3.5% per
annum for the Valuation Date as of which the first payment was calculated was
$1.100000. Annuity Unit values will not be the same as Accumulation Unit
Values because the former reflect the 3.5% assumed interest rate used in the
annuity rate calculations. When the Annuity Unit value of $1.100000 is
divided into the first monthly payment, the number of Annuity Units
represented by that payment is determined to be 267.5818. The value of this
same number of Annuity Units will be paid in each subsequent month under most
options. Assume further that the net investment factor for the Valuation
Period applicable to the next annuity benefit payment is 1.000190.
Multiplying this factor by .999906 (the one-day adjustment factor for the
assumed interest rate of 3.5% per annum) produces a factor of 1.000096. This
then is multiplied by the Annuity Unit value on the immediately preceding
Valuation Date (assumed here to be $1.105000). The result is an Annuity Unit
value of $1.105106 for the current monthly payment. The current monthly
payment then is determined by multiplying the number of Annuity Units by the
current Annuity Unit value, or 267.5818 times $1.105106, which produces a
current monthly payment of $295.71.
METHOD FOR DETERMINING COMMUTED VALUE ON VARIABLE ANNUITY PERIOD CERTAIN
OPTIONS AND ILLUSTRATION USING HYPOTHETICAL EXAMPLE. The Contract offers
both commutable and non-commutable period certain options. A commutable
option gives the Annuitant the right to exchange any remaining payments for a
lump sum payment based on the commuted value. The Commuted Value is the
present value of remaining payments calculated at 3.5% interest. The
determination of the Commuted Value may be illustrated by the following
hypothetical example.
Assume a commutable period certain option is elected. The number of Annuity
Units upon which each payment is based would be calculated using the
Surrender Value less any premium tax rather than the Accumulated Value.
Assume this results in 250.0000 Annuity Units. Assume the Commuted Value is
requested with 60 monthly payments remaining and a current Annuity Unit Value
of $1.200000. Based on these assumptions, the dollar amount of remaining
payments would be $300 a month for 60 months. The present value at 3.5% of
all remaining payments would be $16,560.72.
5
<PAGE>
EXCHANGE OFFER
A. VARIABLE ANNUITY CONTRACT EXCHANGE OFFER
- --------------------------------------------
The Company will permit Owners of certain variable annuity contracts,
described below, to exchange their contracts at net asset value for the
variable annuity Contract described in the Prospectus, which is issued on
Form No. 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 Elective Payment Variable Annuity
contracts issued on Forms A3012-79 and A3013-79 ("Elective Payment Exchanged
Contract," all such contracts having numbers with a "JQ" or "JN" prefix), and
Single Payment Variable Annuity contracts issued on Forms A3014-79 and
A3015-79 ("Single Payment Exchanged Contract," all such contracts having
numbers with a "KQ" or "KN" prefix). These contracts are referred to
collectively as the "Exchanged Contract" To effect an exchange, the Company
should receive (1) a completed application for the new Contract, (2) the
contract being exchanged, and (3) a signed Letter of Awareness.
CONTINGENT DEFERRED SALES CHARGE COMPUTATION. No surrender charge otherwise
applicable to the Exchanged Contract will be assessed as a result of the
exchange. Instead, the contingent deferred sales charge under the new
Contract will be computed as if the payments that had been made to the
Exchanged Contract were made to the new Contract, as of the date of issue of
the Exchanged Contract. Any additional payments to the new Contract after
the exchange will be subject to the contingent deferred sales charge
computation outlined in the new Contract and the Prospectus; i.e., the charge
will be computed based on the number of years that the additional payment (or
portion of that payment) that is being withdrawn has been credited to the new
Contract.
SUMMARY OF DIFFERENCES BETWEEN THE EXCHANGED CONTRACT AND THE NEW CONTRACT.
The new Contract and the Exchanged Contract differ substantially as
summarized below. There may be additional differences important to a person
considering an exchange, and the Prospectuses for the new Contract and the
Exchanged Contract should be reviewed carefully before the exchange request
is submitted to the Company.
CONTINGENT DEFERRED SALES CHARGE. The contingent deferred sales charge under
the new Contract, as described in the Prospectus, imposes higher charge
percentages against the excess amount redeemed than the Single Payment
Exchanged Contract. In addition, if an Elective Payment Exchanged Contract
was issued more than nine years before the date of an exchange under this
offer, additional payments to the Exchanged Contract would not be subject to
a surrender charge. New payments to the new Contract may be subject to a
charge if withdrawn prior to the surrender charge period described in the
Prospectus.
CONTRACT FEE. Under the new Contract, the Company deducts a $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.
6
<PAGE>
DEATH BENEFIT. The Exchanged Contract offers a death benefit that is
guaranteed to be the greater of a Contract's Accumulated Value or gross
payments made (less withdrawals). At the time an exchange is processed, the
Accumulated Value of the Exchanged Contract becomes the "payment" for the new
Contract. Therefore, prior purchase payments made under the Exchanged
Contract (if higher than the Exchanged Contract's Accumulated Value) no
longer are a basis for determining the death benefit under the new Contract.
Consequently, whether the initial minimum death benefit under the new
Contract is greater than, equal to, or less than, the death benefit of the
Exchanged Contract depends on whether the Accumulated Value transferred to
the new Contract is greater than, equal to, or less than, the gross payments
under the Exchanged Contract. In addition, under the Exchanged Contract, the
amount of any prior withdrawals is subtracted from the value of the death
benefit. Under the new Contract, where there is a reduction in the death
benefit amount due to a prior withdrawal, the value of the death benefit is
reduced in the same proportion that the new Contract's Accumulated Value was
reduced on the date of the withdrawal.
ANNUITY TABLES. The Exchanged Contract contains higher guaranteed annuity
rates.
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 Funds 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 Funds. 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
7
<PAGE>
and techniques (such as value investing, market timing, dollar cost
averaging, asset allocation, constant ratio transfer and account
rebalancing), the advantages and disadvantages of investing in tax-deferred
and taxable investments, customer profiles and hypothetical purchase and
investment scenarios, financial management and tax and retirement planning,
and investment alternatives to certificates of deposit and other financial
instruments, including comparisons between the Contract and the
characteristics of and market for such financial instruments. Total return
data and supplemental total return information may be advertised based on the
period of time that an underlying Sub-Account has been in existence and the
period of time that an 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. Contracts funded by Fulcrum
Separate Account have been offered to the public since 1997.
TOTAL RETURN
- ------------
"Total Return" refers to the total of the income generated by an investment
in a Sub-Account and of the changes of value of the principal invested (due
to realized and unrealized capital gains or losses) for a specified period,
reduced by the Sub-Account's asset charge and any applicable contingent
deferred sales charge which would be assessed upon complete withdrawal of the
investment.
Total Return figures are calculated by standardized methods prescribed by
rules of the Securities and Exchange Commission (the "SEC"). The quotations
are computed by finding the average annual compounded rates of return over
the specified periods that would equate the initial amount invested to the
ending redeemable values, according to the following formula:
(n)
P(1 + T) = ERV
Where: P = a hypothetical initial payment to the Variable
Account of $1,000
T = average annual total return
n = number of years
ERV = the ending redeemable value of the $1,000 payment
at the end of the specified period
Quotations of average annual total return for the periods that the
Sub-Accounts and for periods that the Underlying Funds have been in existence
are calculated in the manner prescribed by the SEC and show the percentage
rate of return of a hypothetical initial investment of $1,000 for the most
recent one, five and ten year period or for a period covering the time the
Sub-Account has been in existence, if less than the prescribed periods. The
calculation is adjusted to reflect the deduction of the annual Sub-Account
asset charge of 1.45%, the $30 annual Contract fee and the contingent
deferred sales charge which would be assessed if the investment were
completely withdrawn at the end of the specified period, according to the
following schedule. See Tables 1A and 2A.
8
<PAGE>
<TABLE>
<CAPTION>
YEARS FROM DATE OF CHARGE AS PERCENTAGE
PURCHASE PAYMENT TO DATE OF OF NEW PURCHASE PAYMENTS
WITHDRAWAL WITHDRAWN*
---------- ----------
<S> <C>
0-1 7%
2 6%
3 5%
4 4%
5 3%
6 2%
7 1%
Thereafter 0%
</TABLE>
* Subject to the maximum limit described in the Prospectus.
No contingent deferred sales charge is deducted upon expiration of the
periods specified above. In 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.
SUPPLEMENTAL TOTAL RETURN INFORMATION
- -------------------------------------
The Supplemental Total Return information in this section refers to the total
of the income generated by an investment in a Sub-Account and of the changes
of value of the principal invested (due to realized and unrealized capital
gains or losses) for a specified period reduced by the Sub-Account's asset
charges. It is assumed, however, that the investment is NOT withdrawn at the
end of each period.
The quotations of Supplemental Total Return are computed by finding the
average annual compounded rates of return over the specified periods that
would equate the initial amount invested to the ending values, according to
the following formula:
(n)
P(1 + T) = EV
Where: P = a hypothetical initial payment to the Variable
Account of $1,000
T = average annual total return
n = number of years
EV = the ending value of the $1,000 payment at the
end of the specified period
Quotations of supplemental average total return for the periods that the
Sub-Accounts and for periods that the Underlying Funds have been in existence
are calculated in exactly the same manner as total return information and for
the same periods of time except that they do not reflect the contingent
deferred sales charge and assume that the Contract is not surrendered at the
end of the periods shown. See Table 2A.
9
<PAGE>
TABLE 1A
AVERAGE ANNUAL TOTAL RETURNS OF SUB-ACCOUNT FOR PERIODS
ENDING DECEMBER 31, 1997
SINCE INCEPTION OF SUB-ACCOUNT
(Assuming COMPLETE Withdrawal of the Investment)
<TABLE>
<CAPTION>
FOR YEAR SINCE
ENDED INCEPTION
SUB-ACCOUNT 12/31/97 OF SUB-ACCOUNT*
- ----------- -------- ---------------
<S> <C> <C>
Global Interactive/Telecomm Portfolio. . . . . . . N/A 22.49%
International Growth Portfolio . . . . . . . . . . N/A -14.72%
Growth Portfolio . . . . . . . . . . . . . . . . . N/A -0.83%
Value Portfolio. . . . . . . . . . . . . . . . . . N/A 17.29%
Strategic Income Portfolio . . . . . . . . . . . . N/A -3.33%
Money Market Fund. . . . . . . . . . . . . . . . . N/A -3.00%
</TABLE>
TABLE 1B
SUPPLEMENTAL AVERAGE ANNUAL TOTAL RETURNS OF SUB-ACCOUNT FOR PERIODS
ENDING DECEMBER 31, 1997
SINCE INCEPTION OF SUB-ACCOUNT
(Assuming NO Withdrawal of the Investment)
<TABLE>
<CAPTION>
FOR YEAR SINCE
ENDED INCEPTION
SUB-ACCOUNT 12/31/97 OF SUB-ACCOUNT*
- ----------- -------- ---------------
<S> <C> <C>
Global Interactive/Telecomm Portfolio. . . . . . . N/A 29.49%
International Growth Portfolio . . . . . . . . . . N/A -9.32%
Growth Portfolio . . . . . . . . . . . . . . . . . N/A 5.44%
Value Portfolio. . . . . . . . . . . . . . . . . . N/A 24.29%
Strategic Income Portfolio . . . . . . . . . . . . N/A 2.79%
Money Market Fund. . . . . . . . . . . . . . . . . N/A 3.14%
</TABLE>
* The inception date for the Sub-Accounts is March 13, 1997.
As of the date of this Statement of Additional Information, no performance
information is available for the following Sub-Accounts due to the fact that
sales to the public had not yet begun: Oppenheimer Aggressive Growth Fund,
MFS Emerging Growth Series, Small Cap Value Series, Lazard Retirement
International Equity Portfolio, AIM V.I. Value Fund, MFS Growth With Income
Series, Oppenheimer Growth & Income Fund and Delaware Series.
10
<PAGE>
TABLE 2A
AVERAGE ANNUAL TOTAL RETURNS OF SUB-ACCOUNT FOR PERIODS
ENDING DECEMBER 31, 1997
SINCE INCEPTION OF UNDERLYING FUND
(Assuming COMPLETE Withdrawal of Investment)
<TABLE>
<CAPTION>
10 YEARS OR
SINCE
FOR YEAR INCEPTION OF
ENDED UNDERLYING
SUB-ACCOUNT 12/31/97 5 YEARS FUND **
- ----------- -------- ------- -------
<S> <C> <C> <C>
Global Interactive/Telecomm Portfolio 31.16% N/A 15.05%
Oppenheimer Aggressive Growth Fund 3.49% 13.87% 14.53%
MFS Emerging Growth Series 13.11% N/A 19.82%
Small Cap Value Series 23.99% N/A 17.14%
Lazard Retirement International Equity N/A N/A N/A
Portfolio
International Growth Portfolio -12.22% N/A -4.61%
Growth Portfolio 2.13% N/A 5.18%
Value Portfolio 23.40% N/A 20.07%
AIM V.I. Value Fund 14.88% N/A 17.65%
MFS Growth With Income Series 20.91% N/A 24.65%
Oppenheimer Growth & Income Fund 23.54% N/A 33.91%
Delaware Series 17.57% 12.86% 12.24%
Strategic Income Portfolio -6.80% N/A -3.64%
Money Market Fund -2.29% 2.62% 4.22%
</TABLE>
TABLE 2B
SUPPLEMENTAL AVERAGE ANNUAL TOTAL RETURNS OF SUB-ACCOUNT FOR PERIODS
ENDING DECEMBER 31, 1997
SINCE INCEPTION OF UNDERLYING FUND
(Assuming NO Withdrawal of Investment)
<TABLE>
<CAPTION>
10 YEARS OR
SINCE
FOR YEAR INCEPTION OF
ENDED UNDERLYING
SUB-ACCOUNT 12/31/97 5 YEARS FUND **
- ----------- -------- ------- -------
<S> <C> <C> <C>
Global Interactive/Telecomm Portfolio 38.16% N/A 17.78%
Oppenheimer Aggressive Growth Fund 10.04% 14.22% 14.53%
MFS Emerging Growth Series 20.11% N/A 21.38%
Small Cap Value Series 30.99% N/A 17.60%
Lazard Retirement International N/A N/A N/A
Equity Portfolio
International Growth Portfolio -6.67% N/A -1.74%
Growth Portfolio 8.60% N/A 8.09%
Value Portfolio 30.40% N/A 22.70%
AIM V.I. Value Fund 21.88% N/A 18.00%
</TABLE>
11
<PAGE>
<TABLE>
<S> <C> <C> <C>
MFS Growth With Income Series 27.91% N/A 26.35%
Oppenheimer Growth & Income Fund 30.54% N/A 35.20%
Delaware Series 24.57% 13.23% 12.24%
Strategic Income Portfolio -0.90% N/A -0.97%
Money Market Fund 3.90% 3.15% 4.22%
</TABLE>
** The inception dates for the Underlying Funds are: 2/1/96 for the Value,
Growth, Strategic Income and Global Interactive/Telecomm Portfolios; 3/26/96
for the International Growth Portfolio; 4/29/85 for the Money Market Fund;
5/5/93 for the AIM V.I. Value Fund; 7/28/88 for the Delaware Series; 12/27/93
for the Small Cap Value Series; 9/1/98 for the Lazard Retirement
International Equity Portfolio; 8/15/86 for the Oppenheimer Aggressive Growth
Fund; 7/5/95 for the Oppenheimer Growth & Income Fund; 7/24/95 for the MFS
Emerging Growth Series; and 10/9/95 for the MFS Growth With Income Series.
YIELD AND EFFECTIVE YIELD - THE MONEY MARKET SUB-ACCOUNT
- --------------------------------------------------------
Set forth below is yield and effective yield information for the Money Market
Sub-Account for the seven-day period ended December 31, 1997:
Yield 4.30%
Effective Yield 4.39%
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:
(365/7)
Effective Yield = [(base period return + 1) ] - 1
The calculations of yield and effective yield reflect the $30 annual Contract
fee.
TAX DEFERRED ACCUMULATION
NON-QUALIFIED CONVENTIONAL
ANNUITY CONTRACT SAVINGS PLAN
AFTER-TAX CONTRIBUTIONS
AND TAX-DEFERRED EARNINGS
<TABLE>
<CAPTION>
TAXABLE LUMP AFTER-TAX CONTRIBUTIONS
NO WITHDRAWALS SUM WITHDRAWAL AND TAXABLE EARNINGS
<S> <C> <C> <C>
10 Years $107,946 $ 86,448 $ 81,693
20 Years 233,048 165,137 133,476
30 Years 503,133 335,021 218,082
</TABLE>
12
<PAGE>
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.)
Unlike savings plans, contributions to non-qualified annuity contracts
provide tax-deferred treatment on earnings. In addition, contributions to
tax-deferred retirement annuities are not subject to current tax in the year
of contribution. When monies are received from a non-qualified annuity
contract (and you have many different options on how you receive your funds),
they are subject to income tax. At the time of receipt, if the person
receiving the monies is retired, not working or has additional tax
exemptions, these monies may be taxed at a lesser rate.
FINANCIAL STATEMENTS
Financial Statements are included for Allmerica Financial Life Insurance and
Annuity Company and for its Fulcrum Separate Account.
13
<PAGE>
ALLMERICA FINANCIAL
LIFE INSURANCE AND
ANNUITY COMPANY
FINANCIAL STATEMENTS
DECEMBER 31, 1997
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholder of
Allmerica Financial Life Insurance and Annuity Company
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, of shareholder's equity, and of cash flows
present fairly, in all material respects, the financial position of Allmerica
Financial Life Insurance and Annuity Company at December 31, 1997 and 1996, and
the results of their operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ Price Waterhouse LLP
Price Waterhouse LLP
Boston, Massachusetts
February 3, 1998
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1997 1996
----------------------------------------------- --------- ---------
<S> <C> <C>
REVENUES
Premiums..................................... $ 22.8 $ 32.7
Universal life and investment product
policy fees.............................. 212.2 176.2
Net investment income...................... 164.2 171.7
Net realized investment gains (losses)..... 2.9 (3.6)
Other income............................... 1.4 0.9
--------- ---------
Total revenues......................... 403.5 377.9
--------- ---------
BENEFITS, LOSSES AND EXPENSES
Policy benefits, claims, losses and loss
adjustment expenses...................... 187.8 192.6
Policy acquisition expenses................ 2.8 49.9
Loss from cession of disability income
business................................. 53.9 --
Other operating expenses................... 101.3 86.6
--------- ---------
Total benefits, losses and expenses.... 345.8 329.1
--------- ---------
Income before federal income taxes............. 57.7 48.8
--------- ---------
FEDERAL INCOME TAX EXPENSE (BENEFIT)
Current.................................... 13.9 26.9
Deferred................................... 7.1 (9.8)
--------- ---------
Total federal income tax expense....... 21.0 17.1
--------- ---------
Net income..................................... $ 36.7 $ 31.7
--------- ---------
--------- ---------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-1
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
(IN MILLIONS) 1997 1996
-------------------------------------------------------- ---------- ----------
<S> <C> <C>
ASSETS
Investments:
Fixed maturities at fair value (amortized cost of
$1,340.5 and $1,660.2)............................ $ 1,402.5 $1,698.0
Equity securities at fair value (cost of $34.4 and
$33.0)............................................ 54.0 41.5
Mortgage loans...................................... 228.2 221.6
Real estate......................................... 12.0 26.1
Policy loans........................................ 140.1 131.7
Other long term investments......................... 20.3 7.9
---------- ----------
Total investments............................... 1,857.1 2,126.8
---------- ----------
Cash and cash equivalents............................. 31.1 18.8
Accrued investment income............................. 34.2 37.7
Deferred policy acquisition costs..................... 765.3 632.7
Reinsurance receivables on paid and unpaid losses,
benefits and unearned premiums...................... 251.1 81.5
Other assets.......................................... 10.7 8.2
Separate account assets............................... 7,567.3 4,524.0
---------- ----------
Total assets.................................... $10,516.8 $ 7,429.7
---------- ----------
---------- ----------
LIABILITIES
Policy liabilities and accruals:
Future policy benefits.............................. $ 2,097.3 $2,171.3
Outstanding claims, losses and loss adjustment
expenses.......................................... 18.5 16.1
Unearned premiums................................... 1.8 2.7
Contractholder deposit funds and other policy
liabilities....................................... 32.5 32.8
---------- ----------
Total policy liabilities and accruals........... 2,150.1 2,222.9
---------- ----------
Expenses and taxes payable............................ 77.6 77.3
Reinsurance premiums payable.......................... 4.9 --
Deferred federal income taxes......................... 75.9 60.2
Separate account liabilities.......................... 7,567.3 4,523.6
---------- ----------
Total liabilities............................... 9,875.8 6,884.0
---------- ----------
Commitments and contingencies (Note 13)
SHAREHOLDER'S EQUITY
Common stock, $1,000 par value, 10,000 shares
authorized, 2,521 and 2,518 shares issued and
outstanding......................................... 2.5 2.5
Additional paid in capital............................ 386.9 346.3
Unrealized appreciation on investments, net........... 38.5 20.5
Retained earnings..................................... 213.1 176.4
---------- ----------
Total shareholder's equity...................... 641.0 545.7
---------- ----------
Total liabilities and shareholder's equity...... $10,516.8 $ 7,429.7
---------- ----------
---------- ----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-2
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1997 1996
----------------------------------------------- --------- ---------
<S> <C> <C>
COMMON STOCK
Balance at beginning of period............. $ 2.5 $ 2.5
Issued during year......................... -- --
--------- ---------
Balance at end of period................... 2.5 2.5
--------- ---------
ADDITIONAL PAID IN CAPITAL
Balance at beginning of period............. 346.3 324.3
Contribution from Parent................... 40.6 22.0
--------- ---------
Balance at end of period................... 386.9 346.3
--------- ---------
RETAINED EARNINGS
Balance at beginning of period............. 176.4 144.7
Net income................................. 36.7 31.7
--------- ---------
Balance at end of period................... 213.1 176.4
--------- ---------
NET UNREALIZED APPRECIATION ON INVESTMENTS
Balance at beginning of period............. 20.5 23.8
Net appreciation (depreciation) on
available for sale securities............ 27.0 (5.1)
(Provision) benefit for deferred federal
income taxes............................. (9.0) 1.8
--------- ---------
Balance at end of period................... 38.5 20.5
--------- ---------
Total shareholder's equity............. $641.0 $545.7
--------- ---------
--------- ---------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-3
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1997 1996
-------------------------------------------- ---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.............................. $ 36.7 $ 31.7
Adjustments to reconcile net income to
net cash used in operating activities:
Net realized gains.................. (2.9) 3.6
Net amortization and depreciation... -- 3.5
Loss from cession of disability
income business................... 53.9 --
Deferred federal income taxes....... 7.1 (9.8)
Payment related to cession of
disability income business........ (207.0) --
Change in deferred acquisition
costs............................. (181.3) (66.8)
Change in premiums and notes
receivable, net of reinsurance
payable........................... 3.9 (0.2)
Change in accrued investment
income............................ 3.5 1.2
Change in policy liabilities and
accruals, net..................... (72.4) (39.9)
Change in reinsurance receivable.... 22.1 (1.5)
Change in expenses and taxes
payable........................... 0.2 32.3
Separate account activity, net...... 0.4 10.5
Other, net.......................... (7.5) (0.2)
---------- ----------
Net used in operating
activities.................... (343.3) (35.6)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from disposals and maturities
of available-for-sale fixed
maturities............................ 909.7 809.4
Proceeds from disposals of equity
securities............................ 2.4 1.5
Proceeds from disposals of other
investments........................... 23.7 17.4
Proceeds from mortgages matured or
collected............................. 62.9 34.0
Purchase of available-for-sale fixed
maturities............................ (579.7) (795.8)
Purchase of equity securities........... (3.2) (13.2)
Purchase of other investments........... (79.4) (36.2)
Other investing activities, net......... -- (2.0)
---------- ----------
Net cash provided by investing
activities........................ 336.4 15.1
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of stock and
capital paid in....................... 19.2 22.0
---------- ----------
Net cash provided by financing
activities........................ 19.2 22.0
---------- ----------
Net change in cash and cash equivalents..... 12.3 1.5
Cash and cash equivalents, beginning of
period..................................... 18.8 17.3
---------- ----------
Cash and cash equivalents, end of period.... $ 31.1 $ 18.8
---------- ----------
---------- ----------
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid........................... $ -- $ 3.4
Income taxes paid....................... $ 5.4 $ 16.5
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-4
<PAGE>
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
Allmerica Financial Life Insurance and Annuity Company ("AFLIAC" or the
"Company") is organized as a stock life insurance company, and is a wholly-owned
subsidiary of SMA Financial Corporation ("SMAFCO"), which is wholly owned by
First Allmerica Financial Life Insurance Company ("FAFLIC"). FAFLIC is a
wholly-owned subsidiary of Allmerica Financial Corporation ("AFC").
The consolidated financial statements of AFLIAC include the accounts of Somerset
Square, Inc., a wholly-owned non-insurance company and its results of operations
for the month of December, 1997. Somerset Square, Inc. was transferred from
SMAFCO effective November 30, 1997. (See Significant Transactions.)
The Statutory stockholder's equity of the Company is being maintained at a
minimum level of 5% of general account assets by FAFLIC in accordance with a
policy established by vote of FAFLIC's Board of Directors.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amount of revenues and expenses during the reporting period. Actual
results could differ from those estimates. Certain reclassifications have been
made to the 1996 financial statements in order to conform to the 1997
presentation.
B. VALUATION OF INVESTMENTS
In accordance with the provisions of Statement of Financial Accounting Standards
No. 115 ("Statement No. 115"), "ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND
EQUITY SECURITIES", the Company is required to classify its investments into one
of three categories: held-to-maturity, available-for-sale or trading. The
Company determines the appropriate classification of debt securities at the time
of purchase and reevaluates such designation as of each balance sheet date.
Mortgage loans on real estate are stated at unpaid principal balances, net of
unamortized discounts and reserves. Reserves on mortgage loans are based on
losses expected by management to be realized on transfers of mortgage loans to
real estate (upon foreclosure), on the disposition or settlement of mortgage
loans and on mortgage loans which management believes may not be collectible in
full. In establishing reserves, management considers, among other things, the
estimated fair value of the underlying collateral.
Fixed maturities and mortgage loans that are delinquent are placed on
non-accrual status, and thereafter interest income is recognized only when cash
payments are received.
Policy loans are carried principally at unpaid principal balances.
During 1997, the Company committed to a plan to dispose of all real estate
assets by the end of 1998. As a result of this decision real estate held by the
Company and real estate joint ventures were written down to the estimated fair
value less cost to sell. Depreciation is not recorded on these assets while they
are held for disposal.
Realized investment gains and losses, other than those related to separate
accounts for which the Company does not bear the investment risk, are reported
as a component of revenues based upon specific identification of the investment
assets sold. When an other-than-temporary impairment of the value of a specific
investment
F-5
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
or a group of investments is determined, a realized investment loss is recorded.
Changes in the valuation allowance for mortgage loans and real estate are
included in realized investment gains or losses.
C. FINANCIAL INSTRUMENTS
In the normal course of business, the Company enters into transactions involving
various types of financial instruments, including debt, investments such as
fixed maturities, mortgage loans and equity securities, and investment and loan
commitments. These instruments involve credit risk and also may be subject to
risk of loss due to interest rate fluctuation. The Company evaluates and
monitors each financial instrument individually and, when appropriate, obtains
collateral or other security to minimize losses.
D. CASH AND CASH EQUIVALENTS
Cash and cash equivalents includes cash on hand, amounts due from banks and
highly liquid debt instruments purchased with an original maturity of three
months or less.
E. DEFERRED POLICY ACQUISITION COSTS
Acquisition costs consist of commissions, underwriting costs and other costs,
which vary with, and are primarily related to, the production of revenues.
Acquisition costs related to universal life products, variable annuities and
contractholder deposit funds are deferred and amortized in proportion to total
estimated gross profits from investment yields, mortality, surrender charges and
expense margins over the expected life of the contracts. This amortization is
reviewed annually and adjusted retrospectively when the Company revises its
estimate of current or future gross profits to be realized from this group of
products, including realized and unrealized gains and losses from investments.
Acquisition costs related to fixed annuities and other life insurance products
are deferred and amortized, generally in proportion to the ratio of annual
revenue to the estimated total revenues over the contract periods based upon the
same assumptions used in estimating the liability for future policy benefits.
Deferred acquisition costs for each product are reviewed to determine if they
are recoverable from future income, including investment income. If such costs
are determined to be unrecoverable, they are expensed at the time of
determination. Although realization of deferred policy acquisition costs is not
assured, management believes it is more likely than not that all of these costs
will be realized. The amount of deferred policy acquisition costs considered
realizable, however, could be reduced in the near term if the estimates of gross
profits or total revenues discussed above are reduced. The amount of
amortization of deferred policy acquisition costs could be revised in the near
term if any of the estimates discussed above are revised.
F. SEPARATE ACCOUNTS
Separate account assets and liabilities represent segregated funds administered
and invested by the Company for the benefit of certain pension, variable annuity
and variable life insurance contractholders. Assets consist principally of
bonds, common stocks, mutual funds, and short-term obligations at market value.
The investment income, gains, and losses of these accounts generally accrue to
the contractholders and, therefore, are not included in the Company's net
income. Appreciation and depreciation of the Company's interest in the separate
accounts, including undistributed net investment income, is reflected in
shareholder's equity or net investment income.
G. POLICY LIABILITIES AND ACCRUALS
Future policy benefits are liabilities for life, health and annuity products.
Such liabilities are established in amounts adequate to meet the estimated
future obligations of policies in force. The liabilities associated with
traditional life insurance products are computed using the net level premium
method for individual life and annuity policies, and are based upon estimates as
to future investment yield, mortality and withdrawals that include provisions
for adverse deviation. Future policy benefits for individual life insurance and
annuity policies are computed using interest rates ranging from 2 1/2% to 6% for
life insurance and 2% to 9 1/2% for
F-6
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
annuities. Mortality, morbidity and withdrawal assumptions for all policies are
based on the Company's own experience and industry standards. Liabilities for
universal life include deposits received from customers and investment earnings
on their fund balances, less administrative charges. Universal life fund
balances are also assessed mortality and surrender charges. Individual health
benefit liabilities for active lives are estimated using the net level premium
method, and assumptions as to future morbidity, withdrawals and interest which
provide a margin for adverse deviation. Benefit liabilities for disabled lives
are estimated using the present value of benefits method and experience
assumptions as to claim terminations, expenses and interest.
Liabilities for outstanding claims, losses and loss adjustment expenses are
estimates of payments to be made for reported claims and estimates of claims
incurred but not reported. These liabilities are determined using case basis
evaluations and statistical analyses and represent estimates of the ultimate
cost of all claims incurred but not paid. These estimates are continually
reviewed and adjusted as necessary; such adjustments are reflected in current
operations.
Premiums for individual accident and health insurance are reported as earned on
a pro-rata basis over the contract period.
The unexpired portion of these premiums is recorded as unearned premiums.
Contractholder deposit funds and other policy liabilities include
investment-related products and consist of deposits received from customers and
investment earnings on their fund balances.
All policy liabilities and accruals are based on the various estimates discussed
above. Although the adequacy of these amounts cannot be assured, management
believes that it is more likely than not that policy liabilities and accruals
will be sufficient to meet future obligations of policies in force. The amount
of liabilities and accruals, however, could be revised in the near term if the
estimates discussed above are revised.
H. PREMIUM AND FEE REVENUE AND RELATED EXPENSES
Premiums for individual life and health insurance and individual annuity
products, excluding universal life and investment-related products, are
considered revenue when due. Individual accident and health insurance premiums
are recognized as revenue over the related contract periods. Benefits, losses
and related expenses are matched with premiums, resulting in their recognition
over the lives of the contracts. This matching is accomplished through the
provision for future benefits, estimated and unpaid losses and amortization of
deferred policy acquisition costs. Revenues for investment-related products
consist of net investment income and contract charges assessed against the fund
values. Related benefit expenses primarily consist of net investment income
credited to the fund values after deduction for investment and risk charges.
Revenues for universal life and group variable universal life products consist
of net investment income, and mortality, administration and surrender charges
assessed against the fund values. Related benefit expenses include universal
life benefits in excess of fund values and net investment income credited to
universal life fund values. Certain policy charges that represent compensation
for services to be provided in future periods are deferred and amortized over
the period benefited using the same assumptions used to amortize capitalized
acquisition costs.
I. FEDERAL INCOME TAXES
AFC, its life insurance subsidiaries, FAFLIC and AFLIAC, and its non-life
insurance domestic subsidiaries file a life-nonlife consolidated United States
Federal income tax return. Entities included within the consolidated group are
segregated into either a life insurance or non-life insurance company subgroup.
The consolidation of these subgroups is subject to certain statutory
restrictions on the percentage of eligible non-life insurance company taxable
operating losses that can be applied to offset life insurance company taxable
income. Allmerica P&C and its subsidiaries will be included in the AFC
consolidated return as part of the
F-7
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
non-life insurance company subgroup for the period July 17, 1997 through
December 31, 1997. For the period January 1, 1997 through July 16, 1997,
Allmerica P&C and its subsidiaries will file a separate consolidated United
States Federal income tax return.
The Board of Directors has delegated to AFC management, the development and
maintenance of appropriate Federal Income Tax allocation policies and
procedures, which are subject to written agreement between the companies. The
Federal income tax for all subsidiaries in the consolidated return of AFC is
calculated on a separate return basis. Any current tax liability is paid to AFC.
Tax benefits resulting from taxable operating losses or credits of AFC's
subsidiaries are not reimbursed to the subsidiary until such losses or credits
can be utilized by the subsidiary on a separate return basis.
Deferred income taxes are generally recognized when assets and liabilities have
different values for financial statement and tax reporting purposes, and for
other temporary taxable and deductible differences as defined by Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS No.
109). These differences result primarily from loss reserves, policy acquisition
expenses, and unrealized appreciation/depreciation on investments.
J. NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued Statement No. 131, DISCLOSURES ABOUT SEGMENTS OF
AN ENTERPRISE AND RELATED INFORMATION. This statement establishes standards for
the way that public enterprises report information about operating segments in
annual financial statements and requires that selected information about those
operating segments be reported in interim financial statements. This statement
supersedes Statement No. 14, FINANCIAL REPORTING FOR SEGMENTS OF A BUSINESS
ENTERPRISE. Statement No. 131 requires that all public enterprises report
financial and descriptive information about their reportable operating segments.
Operating segments are defined as components of an enterprise about which
separate financial information is available that is evaluated regularly by the
chief operating decision maker in deciding how to allocate resources and in
assessing performance. This statement is effective for fiscal years beginning
after December 15, 1997. The Company anticipates no impact from the adoption of
Statement No. 131.
In June 1997, the FASB also issued Statement No. 130, REPORTING COMPREHENSIVE
INCOME, which established standards for the reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements. All items that are required to be recognized under
accounting standards as components of comprehensive income are to be reported in
a financial statement that is displayed with the same prominence as other
financial statements. This statement stipulates that comprehensive income
reflect the change in equity of an enterprise during a period from transactions
and other events and circumstances from non-owner sources. This statement is
effective for fiscal years beginning after December 15, 1997. The Company
anticipates that the adoption of Statement No. 130 will result primarily in
reporting the changes in unrealized gains and losses on investments in debt and
equity securities in comprehensive income.
2. SIGNIFICANT TRANSACTIONS
On April 14, 1997, the Company entered into an agreement in principle to
transfer the Company's individual disability income under a 100% coinsurance
agreement to Metropolitan Life Insurance Company. The coinsurance agreement
became effective October 1, 1997. The transaction has resulted in the
recognition of a $53.9 million pre-tax loss in the first quarter of 1997.
During the 4th quarter of 1997, SMAFCO contributed $40.6 million of additional
paid in capital to the Company. The nature of the contribution was $19.2 million
in cash and $21.4 million in other assets including Somerset Square, Inc.
F-8
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Effective January 1, 1998, the Company entered into an agreement with
Reinsurance Group of America, Inc. to reinsure the mortality risk on the
universal life and variable universal life blocks of business. Management
believes that this agreement will not have a material effect on the results of
operations or financial position of the Company.
3. INVESTMENTS
A. SUMMARY OF INVESTMENTS
The Company accounts for its investments, all of which are classified as
available-for-sale, in accordance with the provisions of SFAS No. 115.
The amortized cost and fair value of available-for-sale fixed maturities and
equity securities were as follows:
<TABLE>
<CAPTION>
1997
--------------------------------------------
GROSS GROSS
DECEMBER 31, AMORTIZED UNREALIZED UNREALIZED FAIR
(IN MILLIONS) COST (1) GAINS LOSSES VALUE
- ---------------------------------------- ---------- -------- --------- --------
<S> <C> <C> <C> <C>
U.S. Treasury securities and U.S.
government and agency securities....... $ 6.3 $ .5 $-- $ 6.8
States and political subdivisions....... 2.8 .2 -- 3.0
Foreign governments..................... 50.1 2.0 -- 52.1
Corporate fixed maturities.............. 1,147.5 58.7 3.3 1,202.9
Mortgage-backed securities.............. 133.8 5.2 1.3 137.7
---------- -------- --------- --------
Total fixed maturities
available-for-sale..................... $1,340.5 $66.6 $ 4.6 $1,402.5
---------- -------- --------- --------
Equity securities....................... $ 34.4 $19.9 $ 0.3 $ 54.0
---------- -------- --------- --------
---------- -------- --------- --------
1996
--------------------------------------------
U.S. Treasury securities and U.S.
government and agency securities....... $ 15.7 $ 0.5 $ 0.2 $ 16.0
States and political subdivisions....... 8.9 1.6 -- 10.5
Foreign governments..................... 53.2 2.9 -- 56.1
Corporate fixed maturities.............. 1,437.2 38.6 6.1 1,469.7
Mortgage-backed securities.............. 145.2 2.2 1.7 145.7
---------- -------- --------- --------
Total fixed maturities
available-for-sale..................... $1,660.2 $45.8 $ 8.0 $1,698.0
---------- -------- --------- --------
Equity securities....................... $ 33.0 $10.2 $ 1.7 $ 41.5
---------- -------- --------- --------
---------- -------- --------- --------
</TABLE>
(1) Amortized cost for fixed maturities and cost for equity securities.
In connection with AFLIAC's voluntary withdrawal of its license in New York,
AFLIAC agreed with the New York Department of Insurance to maintain, through a
custodial account in New York, a security deposit, the market value of which
will at all times equal 102% of all outstanding liabilities of AFLIAC for New
York policyholders, claimants and creditors. At December 31, 1997, the amortized
cost and market value of these assets on deposit were $276.8 million and $291.7
million, respectively. At December 31, 1996, the amortized cost and market value
of these assets on deposit were $284.9 million and $292.2 million, respectively.
In addition, fixed maturities, excluding those securities on deposit in New
York, with an amortized cost of $4.2 million were on deposit with various state
and governmental authorities at December 31, 1997 and 1996.
There were no contractual fixed maturity investment commitments at December 31,
1997 and 1996, respectively.
F-9
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The amortized cost and fair value by maturity periods for fixed maturities are
shown below. Actual maturities may differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without call
or prepayment penalties, or the Company may have the right to put or sell the
obligations back to the issuers. Mortgage backed securities are included in the
category representing their ultimate maturity.
<TABLE>
<CAPTION>
1997
--------------------
DECEMBER 31, AMORTIZED FAIR
(IN MILLIONS) COST VALUE
- ------------------------------------------------------------ --------- ---------
<S> <C> <C>
Due in one year or less..................................... $ 63.0 $ 63.5
Due after one year through five years....................... 328.8 343.9
Due after five years through ten years...................... 649.5 679.9
Due after ten years......................................... 299.2 315.2
--------- ---------
Total....................................................... $1,340.5 $1,402.5
--------- ---------
--------- ---------
</TABLE>
The proceeds from voluntary sales of available-for-sale securities and the gross
realized gains and gross realized losses on those sales were as follows:
<TABLE>
<CAPTION>
PROCEEDS
FROM
FOR THE YEARS ENDED DECEMBER 31, VOLUNTARY GROSS GROSS
(IN MILLIONS) SALES GAINS LOSSES
- ------------------------------------------------------------ ---------- ------ ------
<S> <C> <C> <C>
1997
Fixed maturities............................................ $702.9 $ 11.4 $ 5.0
Equity securities........................................... $ 1.3 $ 0.5 $ --
1996
Fixed maturities............................................ $496.6 $ 4.3 $ 8.3
Equity securities........................................... $ 1.5 $ 0.4 $ 0.1
</TABLE>
Unrealized gains and losses on available-for-sale and other securities, are
summarized as follows:
<TABLE>
<CAPTION>
EQUITY
FOR THE YEAR ENDED DECEMBER 31, FIXED SECURITIES
(IN MILLIONS) MATURITIES AND OTHER (1) TOTAL
- ------------------------------------------------------------ ---------- ------------- ------
<S> <C> <C> <C>
1997
Net appreciation, beginning of year......................... $ 12.7 $ 7.8 $ 20.5
Net appreciation on available-for-sale securities........... 24.3 12.5 36.8
Net depreciation from the effect on deferred policy
acquisition costs and on policy liabilities................ (9.8) -- (9.8)
Provision for deferred federal income taxes................. (5.1) (3.9) (9.0)
---------- ------ ------
9.4 8.6 18.0
---------- ------ ------
Net appreciation, end of year............................... $ 22.1 $ 16.4 $ 38.5
---------- ------ ------
---------- ------ ------
</TABLE>
(1) Includes net appreciation on other investments of $11.1 million in 1997, and
$2.2 million in 1996.
F-10
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1996 FIXED SECURITIES
(IN MILLIONS) MATURITIES AND OTHER (1) TOTAL
- ------------------------------------------------------------ ---------- ------------- ------
<S> <C> <C> <C>
Net appreciation, beginning of year......................... $ 20.4 $ 3.4 $ 23.8
Net (depreciation) appreciation on available-for-sale
securities................................................. (20.8) 6.7 (14.1)
Net appreciation from the effect on deferred policy
acquisition costs and on policy liabilities................ 9.0 -- 9.0
Benefit (provision) for deferred federal income taxes....... 4.1 (2.3) 1.8
---------- ------ ------
(7.7) 4.4 (3.3)
---------- ------ ------
Net appreciation, end of year............................... $ 12.7 $ 7.8 $ 20.5
---------- ------ ------
---------- ------ ------
</TABLE>
(1) Includes net appreciation on other investments of $11.1 million in 1997, and
$2.2 million in 1996.
B. MORTGAGE LOANS AND REAL ESTATE
AFLIAC's mortgage loans and real estate are diversified by property type and
location. Real estate investments have been obtained primarily through
foreclosure. Mortgage loans are collateralized by the related properties and
generally are no more than 75% of the property's value at the time the original
loan is made.
The carrying values of mortgage loans and real estate investments net of
applicable reserves were as follows:
<TABLE>
<CAPTION>
DECEMBER 31
(IN MILLIONS) 1997 1996
- ------------------------------------------------------------ ---------- -------------
<S> <C> <C>
Mortgage loans.............................................. $228.2 $221.6
Real estate:
Held for sale............................................. 12.0 26.1
Held for production of income............................. -- --
---------- ------
Total real estate....................................... $ 12.0 $ 26.1
---------- ------
Total mortgage loans and real estate........................ $240.2 $247.7
---------- ------
---------- ------
</TABLE>
Reserves for mortgage loans were $9.4 million and $9.5 million at December 31,
1997 and 1996, respectively.
During 1997, the Company committed to a plan to dispose of all real estate
assets by the end of 1998. As a result, real estate assets with a carrying
amount of $15.7 million were written down to the estimated fair value less cost
to sell of $12.0 million, and a net realized investment loss of $3.7 million was
recognized. Depreciation is not recorded on these assets while they are held for
disposal.
There were no non-cash investing activities, including real estate acquired
through foreclosure of mortgage loans, in 1997. During 1996, non-cash investing
activities included real estate acquired through foreclosure of mortgage loans,
which had a fair value of $0.9 million.
At December 31, 1997, contractual commitments to extend credit under commercial
mortgage loan agreements amounted to approximately $18.7 million. These
commitments generally expire within one year.
F-11
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Mortgage loans and real estate investments comprised the following property
types and geographic regions:
<TABLE>
<CAPTION>
DECEMBER 31,
(IN MILLIONS) 1997 1996
- ------------------------------------------------------------ ---------- -------------
<S> <C> <C>
Property type:
Office building........................................... $101.7 $ 86.1
Residential............................................... 19.3 39.0
Retail.................................................... 42.2 55.9
Industrial/warehouse...................................... 61.9 52.6
Other..................................................... 24.5 25.3
Valuation allowances...................................... (9.4) (11.2)
---------- ------
Total....................................................... $240.2 $247.7
---------- ------
---------- ------
Geographic region:
South Atlantic............................................ $ 68.7 $ 72.9
Pacific................................................... 56.6 37.0
East North Central........................................ 61.4 58.3
Middle Atlantic........................................... 29.8 35.0
West South Central........................................ 6.9 5.7
New England............................................... 12.4 21.9
Other..................................................... 13.8 28.1
Valuation allowances...................................... (9.4) (11.2)
---------- ------
Total....................................................... $240.2 $247.7
---------- ------
---------- ------
</TABLE>
At December 31, 1997, scheduled mortgage loan maturities were as follows: 1998
- -- $52.0 million; 1999 -- $17.1 million; 2000 -- $46.3 million; 2001 -- $7.0
million; 2002 -- $11.7 million; and $94.1 million thereafter. Actual maturities
could differ from contractual maturities because borrowers may have the right to
prepay obligations with or without prepayment penalties and loans may be
refinanced. During 1997, the Company did not refinance any mortgage loans based
on terms which differed from those granted to new borrowers.
C. INVESTMENT VALUATION ALLOWANCES
Investment valuation allowances which have been deducted in arriving at
investment carrying values as presented in the balance sheet and changes thereto
are shown below.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, BALANCE AT BALANCE AT
(IN MILLIONS) JANUARY 1 ADDITIONS DEDUCTIONS DECEMBER 31
- ------------------------------------------------------------ ---------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
1997
Mortgage loans.............................................. $ 9.5 $ 1.1 $ 1.2 $ 9.4
Real estate................................................. 1.7 3.7 5.4 --
--------- ------ ------ ------
Total................................................... $ 11.2 $ 4.8 $ 6.6 $ 9.4
--------- ------ ------ ------
--------- ------ ------ ------
1996
Mortgage loans.............................................. $ 12.5 $ 4.5 $ 7.5 $ 9.5
Real estate................................................. 2.1 -- 0.4 1.7
--------- ------ ------ ------
Total................................................... $ 14.6 $ 4.5 $ 7.9 $ 11.2
--------- ------ ------ ------
--------- ------ ------ ------
</TABLE>
F-12
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Deductions of $5.4 million to the investment valuation allowance related to real
estate in 1997 primarily reflect writedowns to the estimated fair value less
cost to sell pursuant to the aforementioned 1997 plan of disposal.
The carrying value of impaired loans was $20.6 million and $21.5 million, with
related reserves of $7.1 million and $7.3 million as of December 31, 1997 and
1996, respectively. All impaired loans were reserved as of December 31, 1997 and
1996.
The average carrying value of impaired loans was $19.8 million and $26.3
million, with related interest income while such loans were impaired of $2.2
million and $3.4 million as of December 31, 1997 and 1996, respectively.
D. OTHER
At December 31, 1997, AFLIAC had no concentration of investments in a single
investee exceeding 10% of shareholder's equity.
4. INVESTMENT INCOME AND GAINS AND LOSSES
A. NET INVESTMENT INCOME
The components of net investment income were as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31
(IN MILLIONS) 1997 1996
- ------------------------------------------------------------ ---------- -------------
<S> <C> <C>
Fixed maturities............................................ $130.0 $137.2
Mortgage loans.............................................. 20.4 22.0
Equity securities........................................... 1.3 0.7
Policy loans................................................ 10.8 10.2
Real estate................................................. 3.9 6.2
Other long-term investments................................. 1.0 0.8
Short-term investments...................................... 1.4 1.4
---------- -------
Gross investment income..................................... 168.8 178.5
Less investment expenses.................................... (4.6) (6.8)
---------- -------
Net investment income....................................... $164.2 $171.7
---------- -------
---------- -------
</TABLE>
At December 31, 1997, mortgage loans on non-accrual status were $2.8 million,
which were all restructured loans. There were no fixed maturities on non-accrual
status at December 31, 1997. The effect of non-accruals, compared with amounts
that would have been recognized in accordance with the original terms of the
investment, had no impact in 1997, and reduced net income by $0.1 million in
1996.
The payment terms of mortgage loans may from time to time be restructured or
modified. The investment in restructured mortgage loans, based on amortized
cost, amounted to $21.1 million and $25.4 million at December 31, 1997 and 1996,
respectively. Interest income on restructured mortgage loans that would have
been recorded in accordance with the original terms of such loans amounted to
$1.9 million and $3.6 million in 1997 and 1996, respectively. Actual interest
income on these loans included in net investment income aggregated $2.1 million
and $2.2 million in 1997 and 1996, respectively.
There were no fixed maturities or mortgage loans which were non-income producing
for the twelve months ended December 31, 1997.
F-13
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
B. REALIZED INVESTMENT GAINS AND LOSSES
Realized gains (losses) on investments were as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31
(IN MILLIONS) 1997 1996
- ------------------------------------------------------------ ---------- -------------
<S> <C> <C>
Fixed maturities............................................ $ 3.0 $ (3.3)
Mortgage loans.............................................. (1.1) (3.2)
Equity securities........................................... 0.5 0.3
Real estate................................................. (1.5) 2.5
Other....................................................... 2.0 0.1
---------- -------
Net realized investment losses.............................. $ 2.9 $ (3.6)
---------- -------
---------- -------
</TABLE>
5. FAIR VALUE DISCLOSURES OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments", requires
disclosure of fair value information about certain financial instruments
(insurance contracts, real estate, goodwill and taxes are excluded) for which it
is practicable to estimate such values, whether or not these instruments are
included in the balance sheet. The fair values presented for certain financial
instruments are estimates which, in many cases, may differ significantly from
the amounts which could be realized upon immediate liquidation. In cases where
market prices are not available, estimates of fair value are based on discounted
cash flow analyses which utilize current interest rates for similar financial
instruments which have comparable terms and credit quality.
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments:
CASH AND CASH EQUIVALENTS
For these short-term investments, the carrying amount approximates fair value.
FIXED MATURITIES
Fair values are based on quoted market prices, if available. If a quoted market
price is not available, fair values are estimated using independent pricing
sources or internally developed pricing models using discounted cash flow
analyses.
EQUITY SECURITIES
Fair values are based on quoted market prices, if available. If a quoted market
price is not available, fair values are estimated using independent pricing
sources or internally developed pricing models.
MORTGAGE LOANS
Fair values are estimated by discounting the future contractual cash flows using
the current rates at which similar loans would be made to borrowers with similar
credit ratings. The fair value of below investment grade mortgage loans are
limited to the lesser of the present value of the cash flows or book value.
F-14
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
REINSURANCE RECEIVABLES
The carrying amount of the reinsurance receivable for outstanding claims, losses
and loss adjustment expenses reported in the balance sheet approximates fair
value.
POLICY LOANS
The carrying amount reported in the balance sheet approximates fair value since
policy loans have no defined maturity dates and are inseparable from the
insurance contracts.
INVESTMENT CONTRACTS (WITHOUT MORTALITY FEATURES)
Fair values for the Company's liabilities under investment type contracts are
estimated based on current surrender values.
The estimated fair values of the financial instruments were as follows:
<TABLE>
<CAPTION>
1997 1996
--------------------- ---------------------
DECEMBER 31, CARRYING FAIR CARRYING FAIR
(IN MILLIONS) VALUE VALUE VALUE VALUE
- ------------------------------------------------------------ --------- --------- --------- ---------
<S> <C> <C> <C> <C>
FINANCIAL ASSETS
Cash and cash equivalents................................. $ 31.1 $ 31.1 $ 18.8 $ 18.8
Fixed maturities.......................................... 1,402.5 1,402.5 1,698.0 1,698.0
Equity securities......................................... 54.0 54.0 41.5 41.5
Mortgage loans............................................ 228.2 239.8 221.6 229.3
Policy loans.............................................. 140.1 140.1 131.7 131.7
Reinsurance receivables................................... 251.1 251.1 72.5 72.5
--------- --------- --------- ---------
$2,107.0 $2,118.6 $2,184.1 $2,191.8
--------- --------- --------- ---------
--------- --------- --------- ---------
FINANCIAL LIABILITIES
Individual annuity contracts.............................. 876.0 850.6 910.2 885.9
Supplemental contracts without life contingencies......... 15.3 15.3 15.9 15.9
Other individual contract deposit funds................... 0.3 0.3 0.3 0.3
--------- --------- --------- ---------
$ 891.6 $ 866.2 $ 926.4 $ 902.1
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
6. DEBT
In 1997 the Company incurred no debt. During 1996, the Company utilized
repurchase agreements to finance certain investments.
Interest expense was $3.4 million in 1996, relating to the repurchase
agreements, and is recorded in other operating expenses.
F-15
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. FEDERAL INCOME TAXES
Provisions for federal income taxes have been calculated in accordance with the
provisions of SFAS No. 109. A summary of the federal income tax expense
(benefit) in the statement of income is shown below:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
(IN MILLIONS) 1997 1996
- ------------------------------------------------------------ ---------- ------
<S> <C> <C>
Federal income tax expense (benefit)
Current................................................... $ 13.9 $ 26.9
Deferred.................................................. 7.1 (9.8)
---------- -------
Total....................................................... $ 21.0 $ 17.1
---------- -------
---------- -------
</TABLE>
The provision for federal income taxes does not materially differ from the
amount of federal income tax determined by applying the appropriate U.S.
statutory income tax rate to income before federal income taxes. The deferred
tax (assets) liabilities are comprised of the following at December 31, 1997:
<TABLE>
<CAPTION>
DECEMBER 31,
(IN MILLIONS) 1997 1996
- ------------------------------------------------------------ ---------- -------------
<S> <C> <C>
Deferred tax (assets) liabilitie
Loss reserves............................................. $(175.8) $(137.0)
Deferred acquisition costs................................ 226.4 186.9
Investments, net.......................................... 27.0 14.2
Bad debt reserve.......................................... (2.0) (1.1)
Other, net................................................ 0.3 (2.8)
---------- -------------
Deferred tax liability, net............................... $ 75.9 $ 60.2
---------- -------------
---------- -------------
</TABLE>
Gross deferred income tax liabilities totaled $253.7 million and $201.1 million
at December 31, 1997 and 1996. Gross deferred income tax assets totaled $177.8
million and $140.9 at December 31, 1997 and 1996.
Management believes, based on the Company's recent earnings history and its
future expectations, that the Company's taxable income in future years will be
sufficient to realize all deferred tax assets. In determining the adequacy of
future income, management considered the future reversal of its existing
temporary differences and available tax planning strategies that could be
implemented, if necessary.
The Company's federal income tax returns are routinely audited by the IRS, and
provisions are routinely made in the financial statements in anticipation of the
results of these audits. The IRS has examined the life-nonlife consolidated
group's federal income tax returns through 1991. The Company is currently
considering its response to certain adjustments proposed by the IRS with respect
to the life-nonlife consolidated group's federal income tax returns for 1989,
1990, and 1991. In management's opinion, adequate tax liabilities have been
established for all years. However, the amount of these tax liabilities could be
revised in the near term if estimates of the Company's ultimate liability are
revised.
8. RELATED PARTY TRANSACTIONS
The Company has no employees of its own, but has agreements under which FAFLIC
provides management, space and other services, including accounting, electronic
data processing, human resources, legal and other staff functions. Charges for
these services are based on full cost including all direct and indirect overhead
costs, and amounted to $124.1 million and $112.4 million in 1997 and 1996. The
net amounts payable to FAFLIC and affiliates for accrued expenses and various
other liabilities and receivables were $15.0 million and $13.3 million at
December 31, 1997 and 1996.
F-16
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. DIVIDEND RESTRICTIONS
Delaware has enacted laws governing the payment of dividends to stockholders by
insurers. These laws affect the dividend paying ability of the Company.
Pursuant to Delaware's statute, the maximum amount of dividends and other
distributions that an insurer may pay in any twelve month period, without the
prior approval of the Delaware Commissioner of Insurance, is limited to the
greater of (i) 10% of its policyholders' surplus as of the preceding December 31
or (ii) the individual company's statutory net gain from operations for the
preceding calendar year (if such insurer is a life company) or its net income
(not including realized capital gains) for the preceding calendar year (if such
insurer is not a life company). Any dividends to be paid by an insurer, whether
or not in excess of the aforementioned threshold, from a source other than
statutory earned surplus would also require the prior approval of the Delaware
Commissioner of Insurance.
At January 1, 1998, AFLIAC could pay dividends of $33.9 million to FAFLIC
without prior approval.
10. REINSURANCE
In the normal course of business, the Company seeks to reduce the loss that may
arise from events that cause unfavorable underwriting results by reinsuring
certain levels of risk in various areas of exposure with other insurance
enterprises or reinsurers. Reinsurance transactions are accounted for in
accordance with the provisions of SFAS No. 113.
Amounts recoverable from reinsurers are estimated in a manner consistent with
the claim liability associated with the reinsured policy. Reinsurance contracts
do not relieve the Company from its obligations to policyholders. Failure of
reinsurers to honor their obligations could result in losses to the Company;
consequently, allowances are established for amounts deemed uncollectible. The
Company determines the appropriate amount of reinsurance based on evaluation of
the risks accepted and analyses prepared by consultants and reinsurers and on
market conditions (including the availability and pricing of reinsurance). The
Company also believes that the terms of its reinsurance contracts are consistent
with industry practice in that they contain standard terms with respect to lines
of business covered, limit and retention, arbitration and occurrence. Based on
its review of its reinsurers' financial statements and reputations in the
reinsurance marketplace, the Company believes that its reinsurers are
financially sound.
The effects of reinsurance were as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31
(IN MILLIONS) 1997 1996
- ------------------------------------------------------------ ---------- -------------
<S> <C> <C>
Insurance premiums:
Direct.................................................... $ 48.8 $ 53.3
Assumed................................................... 2.6 3.1
Ceded..................................................... (28.6) (23.7)
---------- --------
Net premiums................................................ $ 22.8 $ 32.7
---------- --------
---------- --------
Insurance and other individual policy benefits, claims,
losses and loss adjustment expenses:
Direct.................................................... $226.0 $206.4
Assumed................................................... 4.2 4.5
Ceded..................................................... (42.4) (18.3)
---------- --------
Net policy benefits, claims, losses and loss adjustment
expenses................................................... $187.8 $192.6
---------- --------
---------- --------
</TABLE>
F-17
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
11. DEFERRED POLICY ACQUISITION EXPENSES
The following reflects the changes to the deferred policy acquisition asset:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31
(IN MILLIONS) 1997 1996
- ------------------------------------------------------------ ---------- -------------
<S> <C> <C>
Balance at beginning of year................................ $632.7 $555.7
Acquisition expenses deferred............................. 184.1 116.6
Amortized to expense during the year...................... (53.0) (49.9)
Adjustment to equity during the year...................... (10.2) 10.3
Adjustment for cession of disability income insurance..... (38.6) --
Adjustment for revision of universal life and variable
universal life insurance mortality assumptions.......... 50.3 --
---------- --------
Balance at end of year...................................... $765.3 $632.7
---------- --------
---------- --------
</TABLE>
On October 1, 1997, the Company revised the mortality assumptions for universal
life and variable universal life product lines. These revisions resulted in a
$50.3 million recapitalization of deferred policy acquisition costs.
12. LIABILITIES FOR INDIVIDUAL ACCIDENT AND HEALTH BENEFITS
The Company regularly updates its estimates of liabilities for future policy
benefits and outstanding claims, losses and loss adjustment expenses as new
information becomes available and further events occur which may impact the
resolution of unsettled claims. Changes in prior estimates are reflected in
results of operations in the year such changes are determined to be needed and
recorded.
The liability for future policy benefits and outstanding claims, losses and loss
adjustment expenses related to the Company's accident and health business was
$219.9 million and $226.2 million at December 31, 1997 and 1996. Accident and
health claim liabilities have been re-estimated for all prior years and were
increased by $-0- million in 1997 and $3.2 million in 1996. Due to the
reinsurance agreement whereby the Company has ceded substantially all of its
accident and health business to the Metropolitan, management believes that no
material adverse development of losses will occur. However, the amount of the
liabilities could be revised in the near term if the estimates are revised.
13. CONTINGENCIES
REGULATORY AND INDUSTRY DEVELOPMENTS
Unfavorable economic conditions may contribute to an increase in the number of
insurance companies that are under regulatory supervision. This may result in an
increase in mandatory assessments by state guaranty funds, or voluntary payments
by solvent insurance companies to cover losses to policyholders of insolvent or
rehabilitated companies. Mandatory assessments, which are subject to statutory
limits, can be partially recovered through a reduction in future premium taxes
in some states. The Company is not able to reasonably estimate the potential
effect on it of any such future assessments or voluntary payments.
LITIGATION
In July 1997, a lawsuit was instituted in Louisiana against Allmerica Financial
Corp. and certain of its subsidiaries by individual plaintiffs alleging fraud,
unfair or deceptive acts, breach of contract, misrepresentation and related
claims in the sale of life insurance policies. In October 1997, plaintiffs
voluntarily dismissed the Louisiana suit and refiled the action in Federal
District Court in Worcester, Massachusetts. The plaintiffs
F-18
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
seek to be certified as a class. The case is in the early stages of discovery
and the Company is evaluating the claims. Although the Company believes it has
meritorious defenses to plaintiffs' claims, there can be no assurance that the
claims will be resolved on a basis which is satisfactory to the Company.
The Company has been named a defendant in various legal proceedings arising in
the normal course of business. In the opinion of management, based on the advice
of legal counsel, the ultimate resolution of these proceedings will not have a
material effect on the Company's financial statements. However, liabilities
related to these proceedings could be established in the near term if estimates
of the ultimate resolution of these proceedings are revised.
YEAR 2000
The Year 2000 Issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
computer programs that have date-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities. Although the Company does not
believe that there is a material contingency associated with the Year 2000
project, there can be no assurance that exposure for material contingencies will
not arise.
14. STATUTORY FINANCIAL INFORMATION
The Company is required to file annual statements with state regulatory
authorities prepared on an accounting basis prescribed or permitted by such
authorities (statutory basis). Statutory surplus differs from shareholder's
equity reported in accordance with generally accepted accounting principles for
stock life insurance companies primarily because policy acquisition costs are
expensed when incurred, investment reserves are based on different assumptions,
life insurance reserves are based on different assumptions and income tax
expense reflects only taxes paid or currently payable. Statutory net income and
surplus are as follows:
<TABLE>
<CAPTION>
(IN MILLIONS) 1997 1996
- ------------------------------------------------------------ ---------- -------------
<S> <C> <C>
Statutory net income........................................ $ 31.5 $ 5.4
Statutory Surplus........................................... $307.1 $234.0
---------- --------
---------- --------
</TABLE>
F-19
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of Allmerica Financial Life Insurance and Annuity
Company and Policyowners of the Fulcrum Separate Account of Allmerica
Financial Life Insurance and Annuity Company
In our opinion, the accompanying statements of assets and liabilities and the
related statements of operations and of changes in net assets present fairly,
in all material respects, the financial position of each of the Sub-Accounts
(Value, Growth, International Growth, Global Strategic Income, Global
Interactive/Telecomm and AIT Money Market) constituting the Fulcrum Separate
Account of Allmerica Financial Life Insurance and Annuity Company at December
31, 1997, the results of each of their operations and the changes in each of
their net assets for the period indicated, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of Allmerica Financial Life Insurance and Annuity Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these financial
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, and evaluating
the overall financial statement presentation. We believe that our audits,
which included confirmation of investments at December 31, 1997 by
correspondence with the Funds, provide a reasonable basis for the opinion
expressed above.
/s/ Price Waterhouse LLP
PRICE WATERHOUSE LLP
Boston, Massachusetts
March 25, 1998
<PAGE>
FULCRUM SEPARATE ACCOUNT
STATEMENTS OF ASSETS AND LIABILITIES
DECEMBER 31, 1997
<TABLE>
<CAPTION>
INTERNATIONAL GLOBAL GLOBAL
VALUE GROWTH GROWTH STRATEGIC INCOME INTERACTIVE/TELECOMM
----------- ----------- ----------- ---------------- --------------------
<S> <C> <C> <C> <C> <C>
ASSETS (NOTES 3 AND 7):
Investment in shares of Allmerica Investment
Trust..................................... $ -- $ -- $ -- $ -- $ --
Investments in shares of The Palladian
Trust..................................... 5,301,510 4,181,126 3,118,554 1,649,179 2,062,071
----------- ----------- ----------- ---------------- -----------
Total assets.............................. 5,301,510 4,181,126 3,118,554 1,649,179 2,062,071
LIABILITIES:
Payable to Allmerica Financial Life
Insurance and Annuity Company (Sponsor)... 492 -- -- -- --
----------- ----------- ----------- ---------------- -----------
Net assets................................ $ 5,301,018 $ 4,181,126 $3,118,554 $1,649,179 $2,062,071
----------- ----------- ----------- ---------------- -----------
----------- ----------- ----------- ---------------- -----------
Net asset distribution by category:
Qualified variable annuity policies....... $ 569,576 $ 552,820 $ 448,502 $ 102,350 $ 243,510
Non-qualified variable annuity policies... 4,731,442 3,628,306 2,670,052 1,546,829 1,818,561
----------- ----------- ----------- ---------------- -----------
$ 5,301,018 $ 4,181,126 $3,118,554 $1,649,179 $2,062,071
----------- ----------- ----------- ---------------- -----------
----------- ----------- ----------- ---------------- -----------
Qualified units outstanding, December 31,
1997...................................... 458,105 524,083 494,390 99,533 187,995
Net asset value per qualified unit, December
31, 1997.................................. $ 1.243331 $ 1.054832 $ 0.907182 $ 1.028306 $ 1.295302
Non-qualified units outstanding, December
31, 1997.................................. 3,805,457 3,439,700 2,943,237 1,504,250 1,403,968
Net asset value per non-qualified unit,
December 31, 1997......................... $ 1.243331 $ 1.054832 $ 0.907182 $ 1.028306 $ 1.295302
<CAPTION>
AIT
MONEY MARKET
------------
<S> <C>
ASSETS (NOTES 3 AND 7):
Investment in shares of Allmerica Investment
Trust..................................... $ 453,816
Investments in shares of The Palladian
Trust..................................... --
------------
Total assets.............................. 453,816
LIABILITIES:
Payable to Allmerica Financial Life
Insurance and Annuity Company (Sponsor)... --
------------
Net assets................................ $ 453,816
------------
------------
Net asset distribution by category:
Qualified variable annuity policies....... $ 142,771
Non-qualified variable annuity policies... 311,045
------------
$ 453,816
------------
------------
Qualified units outstanding, December 31,
1997...................................... 138,366
Net asset value per qualified unit, December
31, 1997.................................. $1.031833
Non-qualified units outstanding, December
31, 1997.................................. 301,449
Net asset value per non-qualified unit,
December 31, 1997......................... $1.031833
</TABLE>
The accompanying notes are an integral part of these financial statements.
SA-1
<PAGE>
FULCRUM SEPARATE ACCOUNT
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
INTERNATIONAL
VALUE GROWTH GROWTH GLOBAL GLOBAL
FOR THE FOR THE FOR THE STRATEGIC INCOME INTERACTIVE/TELECOMM
PERIOD PERIOD PERIOD FOR THE FOR THE
3/13/97* 3/13/97* 3/13/97* PERIOD 3/13/97* PERIOD 3/13/97*
TO 12/31/97 TO 12/31/97 TO 12/31/97 TO 12/31/97 TO 12/31/97
----------- ----------- ----------- ---------------- --------------------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends................................. $ 33,219 $ -- $ 15,067 $ 18,284 $ 6,234
----------- ----------- ----------- ------- --------
EXPENSES (NOTE 4):
Mortality and expense risk fees........... 26,133 23,833 18,996 10,592 8,363
Administrative expense fees............... 3,136 2,860 2,280 1,271 1,004
----------- ----------- ----------- ------- --------
Total expenses.......................... 29,269 26,693 21,276 11,863 9,367
----------- ----------- ----------- ------- --------
Net investment income (loss)............ 3,950 (26,693) (6,209) 6,421 (3,133)
----------- ----------- ----------- ------- --------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
Realized gain distributions from portfolio
sponsors................................ 297,334 -- 8,111 7,628 97,494
Net realized gain (loss) from sales of
investments............................. 13,707 9,779 (647) 2,379 3,758
----------- ----------- ----------- ------- --------
Net realized gain....................... 311,041 9,779 7,464 10,007 101,252
Net unrealized gain (loss)................ 263,903 (128,883) (281,439) 16,524 182,655
----------- ----------- ----------- ------- --------
Net realized and unrealized gain
(loss)................................ 574,944 (119,104) (273,975) 26,531 283,907
----------- ----------- ----------- ------- --------
Net increase (decrease) in net assets
from operations....................... $ 578,894 $ (145,797) $ (280,184) $ 32,952 $ 280,774
----------- ----------- ----------- ------- --------
----------- ----------- ----------- ------- --------
<CAPTION>
AIT
MONEY MARKET
FOR THE
PERIOD
3/13/97*
TO 12/31/97
------------
<S> <C>
INVESTMENT INCOME:
Dividends................................. $ 14,858
------------
EXPENSES (NOTE 4):
Mortality and expense risk fees........... 3,508
Administrative expense fees............... 421
------------
Total expenses.......................... 3,929
------------
Net investment income (loss)............ 10,929
------------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
Realized gain distributions from portfolio
sponsors................................ --
Net realized gain (loss) from sales of
investments............................. --
------------
Net realized gain....................... --
Net unrealized gain (loss)................ --
------------
Net realized and unrealized gain
(loss)................................ --
------------
Net increase (decrease) in net assets
from operations....................... $ 10,929
------------
------------
</TABLE>
* Date of initial investment
The accompanying notes are an integral part of these financial statements.
SA-2
<PAGE>
FULCRUM SEPARATE ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
INTERNATIONAL GLOBAL
VALUE GROWTH GROWTH STRATEGIC INCOME GLOBAL
PERIOD FROM PERIOD FROM PERIOD FROM PERIOD FROM INTERACTIVE/TELECOMM
3/13/97* TO 3/13/97* TO 3/13/97* TO 3/13/97* TO PERIOD FROM
12/31/97 12/31/97 12/31/97 12/31/97 3/13/97* TO 12/31/97
----------- ----------- ----------- ---------------- --------------------
<S> <C> <C> <C> <C> <C>
INCREASE IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss)............ $ 3,950 $ (26,693) $ (6,209) $ 6,421 $ (3,133)
Net realized gain....................... 311,041 9,779 7,464 10,007 101,252
Net unrealized gain (loss).............. 263,903 (128,883) (281,439) 16,524 182,655
----------- ----------- ----------- ---------------- -----------
Net increase (decrease) in net assets
from operations....................... 578,894 (145,797) (280,184) 32,952 280,774
----------- ----------- ----------- ---------------- -----------
FROM CAPITAL TRANSACTIONS (NOTE 5):
Net purchase payments................... 3,966,224 3,318,064 2,833,905 1,428,310 1,255,027
Withdrawals............................. (144,987) (97,359) (51,241) (44,514) (51,587)
Other transfers from (to) the General
Account of Allmerica Financial Life
Insurance and Annuity Company
(Sponsor)............................. 900,887 1,106,218 616,074 232,431 577,857
----------- ----------- ----------- ---------------- -----------
Net increase in net assets from capital
transactions.......................... 4,722,124 4,326,923 3,398,738 1,616,227 1,781,297
----------- ----------- ----------- ---------------- -----------
Net increase in net assets.................. 5,301,018 4,181,126 3,118,554 1,649,179 2,062,071
NET ASSETS:
Beginning of period....................... -- -- -- -- --
----------- ----------- ----------- ---------------- -----------
End of period............................. $5,301,018 $4,181,126 $3,118,554 $1,649,179 $2,062,071
----------- ----------- ----------- ---------------- -----------
----------- ----------- ----------- ---------------- -----------
<CAPTION>
AIT
MONEY MARKET
PERIOD FROM
3/13/97* TO
12/31/97
------------
<S> <C>
INCREASE IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss)............ $ 10,929
Net realized gain....................... --
Net unrealized gain (loss).............. --
------------
Net increase (decrease) in net assets
from operations....................... 10,929
------------
FROM CAPITAL TRANSACTIONS (NOTE 5):
Net purchase payments................... 3,780,479
Withdrawals............................. (250)
Other transfers from (to) the General
Account of Allmerica Financial Life
Insurance and Annuity Company
(Sponsor)............................. (3,337,342)
------------
Net increase in net assets from capital
transactions.......................... 442,887
------------
Net increase in net assets.................. 453,816
NET ASSETS:
Beginning of period....................... --
------------
End of period............................. $ 453,816
------------
------------
</TABLE>
* Date of initial investment
The accompanying notes are an integral part of these financial statements.
SA-3
<PAGE>
FULCRUM SEPARATE ACCOUNT
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- ORGANIZATION
The Fulcrum 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
contracts issued by the Company. The Company is a wholly-owned subsidiary of
First Allmerica Financial Life Insurance Company (First Allmerica). First
Allmerica is a wholly-owned subsidiary of Allmerica Financial Corporation (AFC).
Under applicable insurance law, the assets and liabilities of 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 variable annuity
contracts. Each Sub-Account invests exclusively in one of five investment
portfolios of The Palladian Trust managed by Palladian Advisors, Inc., or in the
Money Market Fund of the Allmerica Investment Trust (AIT) managed by Allmerica
Investment Management Company, Inc., a wholly-owned subsidiary of First
Allmerica. The Palladian Trust and AIT (the Funds) are open-end management
investment companies registered under the 1940 Act.
The Separate Account funds two types of variable annuity contracts,
"qualified" contracts and "non-qualified" contracts. A qualified contract is one
that is purchased in connection with a retirement plan which meets the
requirements of Section 401, 403, or 408, of the Internal Revenue Code, while a
non-qualified contract is one that is not purchased in connection with one of
the indicated retirement plans. The tax treatment for certain withdrawals or
surrenders will vary according to whether they are made from a qualified
contract or a non-qualified contract.
NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES
INVESTMENTS -- Security transactions are recorded on the trade date.
Investments held by the Sub-Accounts are stated at the net asset value per share
of the respective investment portfolio of The Palladian Trust or AIT. Net
realized gains and losses on securities sold are determined using the average
cost method. Dividends and capital gain distributions are recorded on the
ex-dividend date and are reinvested in additional shares of the respective
investment portfolio of The Palladian Trust or AIT at net asset value.
FEDERAL INCOME TAXES -- The Company is taxed as a "life insurance company"
under Subchapter L of the Internal Revenue Code (the Code) and files a
consolidated federal income tax return with First Allmerica. The Company
anticipates no tax liability resulting from the operations of the Separate
Account. Therefore, no provision for income taxes has been charged against the
Separate Account.
SA-4
<PAGE>
FULCRUM SEPARATE ACCOUNT
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 3 -- INVESTMENTS
The number of shares owned, aggregate cost, and net asset value per share of
each Sub-Account's investment in The Palladian Trust and AIT at December 31,
1997 were as follows:
<TABLE>
<CAPTION>
PORTFOLIO INFORMATION
---------------------------------------
NET ASSET
NUMBER OF AGGREGATE VALUE
INVESTMENT PORTFOLIO SHARES COST PER SHARE
- ----------------------------------------------------- ------------ ------------ ---------
<S> <C> <C> <C>
THE PALLADIAN TRUST:
Value.............................................. 392,704 $ 5,037,607 $13.500
Growth............................................. 349,885 4,310,009 11.950
International Growth............................... 321,169 3,399,993 9.710
Global Strategic Income............................ 166,921 1,632,655 9.880
Global Interactive/Telecomm........................ 154,926 1,879,416 13.310
ALLMERICA INVESTMENT TRUST:
Money Market....................................... 453,816 453,816 1.000
</TABLE>
NOTE 4 -- RELATED PARTY TRANSACTIONS
The Company makes a charge of 1.25% per annum based on the average daily net
assets of each Sub-Account at each valuation date for mortality and expense
risks. The Company also charges each Sub-Account .20% per annum based on the
average daily net assets of each Sub-Account for administrative expenses. These
charges are deducted from the daily value of each Sub-Account 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 period ended December 31, 1997, 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
contracts. Commissions are paid to registered representatives of Allmerica
Investments by the Company. As the current series of contracts have a contingent
deferred sales charge, no deduction is made for sales charges at the time of the
sale. For the period ended December 31, 1997, there were no contingent deferred
sales charges applicable to the Separate Account.
SA-5
<PAGE>
FULCRUM SEPARATE ACCOUNT
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 5 -- CONTRACTOWNERS AND SPONSOR TRANSACTIONS
Transactions from contractowners and sponsor were as follows:
<TABLE>
<CAPTION>
PERIOD ENDED DECEMBER 31,
1997
--------------------------
UNITS AMOUNT
------------ ------------
<S> <C> <C>
Value
Issuance of Units.................................................................. 4,551,042 $ 5,043,897
Redemption of Units................................................................ (287,480) (321,773)
------------ ------------
Net increase..................................................................... 4,263,562 $ 4,722,124
------------ ------------
------------ ------------
Growth
Issuance of Units.................................................................. 4,250,561 $ 4,604,045
Redemption of Units................................................................ (286,778) (277,122)
------------ ------------
Net increase..................................................................... 3,963,783 $ 4,326,923
------------ ------------
------------ ------------
International Growth
Issuance of Units.................................................................. 3,716,392 $ 3,627,362
Redemption of Units................................................................ (278,765) (228,624)
------------ ------------
Net increase..................................................................... 3,437,627 $ 3,398,738
------------ ------------
------------ ------------
Global Strategic Income
Issuance of Units.................................................................. 1,704,804 $ 1,719,742
Redemption of Units................................................................ (101,021) (103,515)
------------ ------------
Net increase..................................................................... 1,603,783 $ 1,616,227
------------ ------------
------------ ------------
Global Interactive/Telecomm
Issuance of Units.................................................................. 1,686,841 $ 1,878,628
Redemption of Units................................................................ (94,878) (97,331)
------------ ------------
Net increase..................................................................... 1,591,963 $ 1,781,297
------------ ------------
AIT Money Market
Issuance of Units.................................................................. 3,782,378 $ 3,843,132
Redemption of Units................................................................ (3,342,563) (3,400,245)
------------ ------------
Net increase..................................................................... 439,815 $ 442,887
------------ ------------
------------ ------------
</TABLE>
NOTE 6 -- DIVERSIFICATION REQUIREMENTS
Under the provisions of Section 817(h) of the Internal Revenue Code, a
variable annuity contract, other than a contract issued in connection with
certain types of employee benefit plans, will not be treated as an annuity
contract for federal income tax purposes for any period for which the
investments of the segregated asset account on which the contract is based are
not adequately diversified. The Code provides that the "adequately diversified"
requirement may be met if the underlying investments satisfy either a statutory
safe harbor test or diversification requirements set forth in regulations issued
by the Secretary of The Treasury.
The Internal Revenue Service has issued regulations under Section 817(h) of
the Code. The Company believes that the Separate Account satisfies the current
requirements of the regulations, and it intends that the Separate Account will
continue to meet such requirements.
SA-6
<PAGE>
FULCRUM SEPARATE ACCOUNT
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 7 -- PURCHASES AND SALES OF SECURITIES
Cost of purchases and proceeds from sales of The Palladian Trust shares and
AIT shares during the period ended December 31, 1997 were as follows:
<TABLE>
<CAPTION>
INVESTMENT PORTFOLIO PURCHASES SALES
- ------------------------------------------------------------------- ------------ ------------
<S> <C> <C>
THE PALLADIAN TRUST:
Value............................................................ $ 5,213,150 $ 189,250
Growth........................................................... 4,433,659 133,429
International Growth............................................. 3,544,366 143,726
Global Strategic Income.......................................... 1,727,133 96,857
Global Interactive/Telecomm...................................... 1,925,959 50,301
ALLMERICA INVESTMENT TRUST:
Money Market..................................................... 3,371,476 2,917,660
------------ ------------
Totals......................................................... $ 20,215,743 $ 3,531,223
------------ ------------
------------ ------------
</TABLE>
NOTE 8 -- SUBSEQUENT EVENTS
Effective February 12, 1998, Allmerica Investment Management Company, Inc.
(AIMCO) assumed the function of Manager for The Palladian Trust (Trust),
replacing Palladian Advisors, Inc. (PAI). AIMCO's advisory agreement will remain
in effect past June 11, 1998, only if approved by shareholders of the Trust.
AIMCO is an indirect, wholly-owned subsidiary of AFC.
PAI had agreed to limit operating expenses and reimburse those expenses to
the extent that each Portfolio's "other expenses" (i.e., expenses other than
management fees) exceeded certain expense limitations. In January of 1998, PAI
advised the Board of Trustees of the Trust that it did not have sufficient
assets to make the required payment under the expense limitation. On January 28,
1998, a group (consisting of Allmerica Financial Life Insurance and Annuity
Company and certain principals of PAI and entities selling the variable
contracts) offered to make payment of the full amount due under the expense
limitation. The Board of Trustees accepted the offer, and the Trust has been
fully reimbursed for amounts owed under the 1997 expense limitation agreement.
The expense limitations in effect for 1998 have been modified with respect to
certain portfolios of the Trust and these payments are to be made by AIMCO.
SA-7
<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 Authorizing
Establishment of Registrant dated June 13, 1996
was previously filed in Registrant's initial
Registration Statement on September 4, 1996, and
is incorporated by reference herein.
EXHIBIT 2 Not Applicable. Pursuant to Rule 26a-2, the
Insurance Company may hold the assets of the
Registrant NOT pursuant to a trust indenture or
other such instrument.
EXHIBIT 3 Sales Agreement was previously filed on April 30,
1998 in Post-Effective Amendment No. 2 and is
incorporated by reference herein.
EXHIBIT 4 Amended Specifications Page is filed herewith.
Contract Form was previously filed in
Registrant's initial Registration Statement on
September 4, 1996, and is incorporated by
reference herein.
EXHIBIT 5 Amended Application Form is filed herewith.
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 BFDS Agreements for lockbox and mailroom services
were previously filed on April 30, 1998 in
Post-Effective Amendment No. 2 and are
incorporated by reference herein.
EXHIBIT 9 Opinion of Counsel is filed herewith.
EXHIBIT 10 Consent of Independent Accountants is filed
herewith.
EXHIBIT 11 None.
EXHIBIT 12 None.
<PAGE>
EXHIBIT 13 Not Applicable.
EXHIBIT 14 Not Applicable.
EXHIBIT 15 (a) Participation Agreement with Palladian
Trust is filed herewith.
(b) Participation Agreement with Allmerica
Investment Trust was previously filed on
April 30, 1998 in Post-Effective Amendment
No. 2 and is incorporated by reference
herein.
(c) Participation Agreement with AIM Variable
Insurance Funds, Inc. is filed herewith.
(d) Participation Agreement with Delaware
Group Premium Fund, Inc. and first
amendment were previously filed in
Registration Statement No. 33-44830,
Post-Effective Amendment No. 14 and are
incorporated by reference herein. Second
Amendment to Participation Agreement
with Delaware Group Premium Fund, Inc.
is filed herewith.
(e) Participation Agreement with Lazard
Retirement Series, Inc. is filed herewith.
(f) Participation Agreement with MFS Variable
Insurance Trust is filed herewith.
(g) Participation Agreement with Oppenheimer
Variable Account Funds is filed herewith.
ITEM 25. DIRECTORS AND OFFICERS OF THE DEPOSITOR
The principal business address of all the following Directors and
Officers is:
440 Lincoln Street
Worcester, Massachusetts 01653
DIRECTORS AND PRINCIPAL OFFICERS OF THE COMPANY
NAME AND POSITION PRINCIPAL OCCUPATION(S) DURING
WITH COMPANY PAST FIVE YEARS
------------ ---------------
Bruce C. Anderson Director of First Allmerica since
Director 1996; Vice President, First Allmerica
since 1984
Abigail M. Armstrong Secretary of First Allmerica since
Secretary and Counsel 1996; Counsel, First Allmerica since
1991
Robert E. Bruce Director and Chief Information Officer
Director and Chief of First Allmerica since 1997; Vice
Information Officer President of First Allmerica since
1995; Corporate Manager, Digital
Equipment Corporation 1979 to 1995
John P. Kavanaugh Director and Chief Investment Officer
Director, Vice President and of First Allmerica since 1996; Vice
Chief Investment Officer President, First Allmerica since 1991
John F. Kelly 1996; Senior Vice President, First
Director, Vice President and Allmerica since 1986; General Counsel,
General Counsel First Allmerica since 1981; Assistant
Secretary, First Allmerica since 1991
J. Barry May Director of First Allmerica since
Director 1996; Director and
<PAGE>
President, The Hanover Insurance
Company since 1996; Vice President,
The Hanover Insurance Company, 1993 to
1996; General Manager, The Hanover
Insurance Company 1989 to 1993
James R. McAuliffe Director of First Allmerica since
Director 1996; Director of Citizens Insurance
Company of America since 1992,
President since 1994, and CEO since
1996; Vice President, First Allmerica
1982 to 1994; Chief Investment
Officer, First Allmerica 1986 to 1994
John F. O'Brien Director, Chairman of the Board,
Director, Chairman of the Board, President and Chief Executive Officer,
President and Chief Executive Officer First Allmerica since 1989
Edward J. Parry, III Director and Chief Financial Officer
Director, Vice President, of First Allmerica since 1996; Vice
Chief Financial Officer President and Treasurer, First
and Treasurer Allmerica since 1993; Assistant Vice
President 1992 to 1993
Richard M. Reilly Director of First Allmerica since
Director and Vice President 1996; Vice President, First Allmerica
since 1990; Director, Allmerica
Investments, Inc. since 1990; Director
and President, Allmerica Investment
Management Services, Inc. since 1990
Robert P. Restrepo, Jr. Chief Executive Officer of Travelers
Director Property & Casualty Company 1996-1998;
Senior Vice President of Aetna Life &
Casualty Company 1993-1996
Eric A. Simonsen Director of First Allmerica since
Director and Vice President 1996; Vice President, First Allmerica
since 1990; Chief Financial Officer,
First Allmerica 1990 to 1996
Phillip E. Soule Director of First Allmerica since
Director and Vice President 1996; Vice President, First Allmerica
since 1987
ITEM 26. PERSONS UNDER COMMON CONTROL WITH REGISTRANT
See attached organization chart.
<TABLE>
<CAPTION>
<S><C>
Allmerica Financial Corporation
Delaware
| | | | | | |
______________________________________________________________________________________________________________
Financial 100% 100% 100% 100% 100% 100%
Profiles, Inc. Allmerica, Inc. Allmerica First Allmerica AFC Capital Allmerica First Sterling
Funding Corp. Financial Life Trust I Services Limited
Insurance Corporation
Company
California Massachusetts Massachusetts Massachusetts Delaware Massachusetts Bermuda
| |
30% _______________________________________________ _____________
| | |
100% 100% 100%
Logan Wells SMA First Sterling
Water Company, Financial Corp. Reinsurance
Inc. Company
Limited
New Jersey Massachusetts Bermuda
|
______________________________________________________________________________________________________________________
| | | | | |
70% 100% 99.2% 100% 100% 100%
Allmerica Sterling Risk Allmerica Allmerica Allmerica Allmerica
Property Management Trust Investments, Financial Financial Life
& Casualty Services, Inc. Company, N.A. Inc. Investment Insurance and
Companies, Inc. Management Annuity Company
Services, Inc.
Federally
Delaware Delaware Chartered Massachusetts Massachusetts Delaware
|
___________________________________________________________________________ ______|_______
| | | | |
100% 100% 100% 100% 100%
APC The Hanover Allmerica Citizens Somerset
Funding Corp. Insurance Financial Insurance Square, Inc.
Company Insurance Company of
Brokers, Inc. Illinois
Massachusetts New Hampshire Massachusetts Illinois Massachusetts
|
______________________________________________________________________________________________________________________
| | | | |
100% 100% 100% 100% 82.5% 100%
Allmerica Allmerica The Hanover Hanover Texas Citizens Massachusetts
Financial Plus 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
</TABLE>
<TABLE>
<CAPTION>
<S><C>
Allmerica Financial Corporation
Delaware
| | | | | | |
_______________________________________________________________________________________________________________________
Financial 100% 100% 100% 100% 100% 100%
Profiles, Inc. Allmerica, Inc. Allmerica First Allmerica AFC Capital Allmerica First Sterling
Funding Corp. Financial Life Trust I Services Limited
Insurance Corporation
Company
California Massachusetts Massachusetts Massachusetts Delaware Massachusetts Bermuda
| |
_____________________________________________________________________________________________________________________
| | | | |
100% 100% 100% 100% 100%
Allmerica Allmerica Allmerica Allmerica Allmerica
Investment Asset Financial Services Asset Benefits
Management Management, Insurance Management, Inc.
Company, Inc. Inc. Agency, Inc. Limited
Massachusetts Massachusetts Massachusetts Bermuda Florida
________________ _________________________________
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
Alliance Investment Trust Securities
Insurance Trust
Company
Massachusetts Massachusetts
New Hampshire Massachusetts
|
_______________
|
100% -------------- Affiliated Management Investment Companies
Lloyds
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
AAM AAM
Growth & High
Income Fund Yield Fund,
L.P. L.L.C.
Delaware Massachusetts
-------------- L.P. or L.L.C. established for the benefit of
First Allmerica, Allmerica
Financial Life, Hanover and
Citizens
</TABLE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
NAME ADDRESS TYPE OF BUSINESS
---- ------- ----------------
AAM Equity Fund 440 Lincoln Street Massachusetts Grantor
Worcester MA 01653 Trust
AAM Growth & Income Fund, 440 Lincoln Street Limited Partnership
L.P. Worcester MA 01653
AFC Capital Trust I 440 Lincoln Street Statutory Business Trust
Worcester MA 01653
Allmerica Asset Management 440 Lincoln Street Investment advisory
Limited Worcester MA 01653 services
Allmerica Asset Management, 440 Lincoln Street Investment advisory
Inc. Worcester MA 01653 services
Allmerica Benefits, Inc. 440 Lincoln Street Non-insurance medical
Worcester MA 01653 services
Allmerica Equity Index Pool 440 Lincoln Street Massachusetts Grantor
<PAGE>
Worcester MA 01653 Trust
Allmerica Financial Alliance 100 North Parkway Multi-line property and
Insurance Company Worcester MA 01605 casualty insurance
Allmerica Financial Benefit 100 North Parkway Multi-line property and
Insurance Company Worcester MA 01605 casualty insurance
Allmerica Financial 440 Lincoln Street Holding Company
Corporation Worcester MA 01653
Allmerica Financial Insurance 440 Lincoln Street Insurance Broker
Brokers, Inc. Worcester MA 01653
Allmerica Financial Life 440 Lincoln Street Life insurance, accident
Insurance and Annuity Company Worcester MA 01653 and health insurance,
(formerly known as SMA Life annuities, variable
Assurance Company) annuities and variable
life insurance
Allmerica Financial Services 440 Lincoln Street Insurance Agency
Insurance Agency, Inc. Worcester MA 01653
Allmerica Funding Corp. 440 Lincoln Street Special purpose funding
Worcester MA 01653 vehicle for commercial
paper
Allmerica, Inc. 440 Lincoln Street Common employer for
Worcester MA 01653 Allmerica Financial
Corporation entities
Allmerica Financial 440 Lincoln Street Investment advisory
Investment Management Worcester MA 01653 services
Services, Inc.
(formerly known as Allmerica
Institutional Services, Inc.)
Allmerica Investment 440 Lincoln Street Investment advisory
Management Company, Inc. Worcester MA 01653 services
Allmerica Investments, Inc. 440 Lincoln Street Securities, retail
Worcester MA 01653 broker-dealer
Allmerica Investment Trust 440 Lincoln Street Investment Company
Worcester MA 01653
Allmerica Plus Insurance 440 Lincoln Street Insurance Agency
Agency, Inc. Worcester MA 01653
Allmerica Property & Casualty 440 Lincoln Street Holding Company
Companies, Inc. Worcester MA 01653
Allmerica Securities Trust 440 Lincoln Street Investment Company
Worcester MA 01653
Allmerica Services 440 Lincoln Street Internal administrative
Corporation Worcester MA 01653 services provider to
Allmerica Financial
Corporation entities
Allmerica Trust Company, N.A. 440 Lincoln Street Limited purpose national
Worcester MA 01653 trust company
AMGRO, Inc. 100 North Parkway Premium financing
Worcester MA 01605
<PAGE>
APC Funding Corp. 440 Lincoln Street Special purpose funding
Worcester MA 01653 vehicle for commercial
paper
Citizens Corporation 440 Lincoln Street Holding Company
Worcester MA 01653
Citizens Insurance Company of 645 West Grand River Multi-line property and
America Howell MI 48843 casualty insurance
Citizens Insurance Company of 333 Pierce Road Multi-line property and
Illinois Itasca IL 60143 casualty insurance
Citizens Insurance Company of 3950 Priority Way Multi-line property and
the Midwest South Drive, casualty insurance
Suite 200
Indianapolis IN
46280
Citizens Insurance Company of 8101 N. High Street Multi-line property and
Ohio P.O. Box 342250 casualty insurance
Columbus OH 43234
Citizens Management, Inc. 645 West Grand River Services management
Howell MI 48843 company
Financial Profiles 5421 Avenida Encinas Computer software company
Carlsbad, CA 92008
First Allmerica Financial 440 Lincoln Street Life, pension, annuity,
Life Insurance Company Worcester MA 01653 accident and health
(formerly State Mutual Life insurance company
Assurance Company of America)
First Sterling Limited 440 Lincoln Street Holding Company
Worcester MA 01653
First Sterling Reinsurance 440 Lincoln Street Reinsurance Company
Company Limited Worcester MA 01653
Greendale Special Placements 440 Lincoln Street Massachusetts Grantor
Fund Worcester MA 01653 Trust
The Hanover American 100 North Parkway Multi-line property and
Insurance Company Worcester MA 01605 casualty insurance
The Hanover Insurance Company 100 North Parkway Multi-line property and
Worcester MA 01605 casualty insurance
Hanover Texas Insurance 801 East Campbell Attorney-in-fact for
Management Company, Inc. Road Hanover Lloyd's Insurance
Richardson TX 75081 Company
Hanover Lloyd's Insurance 801 East Campbell Multi-line property and
Company Road casualty insurance
Richardson TX 75081
Lloyds Credit Corporation 440 Lincoln Street Premium financing service
Worcester MA 01653 franchises
Logan Wells Water Company, 603 Heron Drive Water Company serving
Inc. Bridgeport NJ 08014 land development
investment
Massachusetts Bay Insurance 100 North Parkway Multi-line property and
Company Worcester MA 01605 casualty insurance
SMA Financial Corp. 440 Lincoln Street Holding Company
Worcester MA 01653
<PAGE>
Somerset Square, Inc. 440 Lincoln Street Real estate holding
Worcester MA 01653 company
Sterling Risk Management 440 Lincoln Street Risk management services
Services, Inc. Worcester MA 01653
ITEM 27. NUMBER OF CONTRACT OWNERS
As of June 30, 1998, there were 43 Contract holders of qualified Contracts
and 248 Contract holders of non-qualified Contracts.
ITEM 28. INDEMNIFICATION
Article VIII of the Bylaws of Allmerica Financial Life Insurance and
Annuity Company (the Depositor) state: Each Director and each Officer
of the Corporation, whether or not in office, (and his executors or
administrators), shall be indemnified or reimbursed by the Corporation
against all expenses actually and necessarily incurred by him in the
defense or reasonable settlement of any action, suit, or proceeding in
which he is made a party by reason of his being or having been a
Director or Officer of the Corporation, including any sums paid in
settlement or to discharge judgement, except in relation to matters as
to which he shall be finally adjudged in such action, suit or
proceeding to be liable for negligence or misconduct in the performance
of his duties as such Director or Officer; and the foregoing right of
indemnification or reimbursement shall not affect any other rights to
which he may be entitled under the Articles of Incorporation, any
statute, bylaw, agreement, vote of stockholders, or otherwise.
ITEM 29. PRINCIPAL UNDERWRITERS
(a) Allmerica Investments, Inc. also acts as principal underwriter for
the following:
- VEL Account, VEL II Account, Inheiritage Account, Separate
Accounts VA-A, VA-B, VA-C, VA-G, VA-H, VA-K, Allmerica Select
Separate Account II, Group VEL Account, Separate Account KG,
Separate Account KGC, Fulcrum Separate Account, Fulcrum
Variable Life Separate Account, Allmerica Select Separate
Account of Allmerica Financial Life Insurance and Annuity
Company
- Inheiritage Account, VEL II Account, Separate Account I,
Separate Account VA-K, Separate Account VA-P, Group VEL
Account, Separate Account KG, Separate Account KGC, Fulcrum
Separate Account, Fulcrum Variable Life Separate Account,
and Allmerica Select Separate Account of First Allmerica
Financial Life Insurance Company.
- Allmerica Investment Trust
(b) The Principal Business Address of each of the following Directors
and Officers of Allmerica Investments, Inc. is:
440 Lincoln Street
Worcester, Massachusetts 01653
NAME POSITION OR OFFICE WITH UNDERWRITER
---- -----------------------------------
Abigail M. Armstrong Secretary and Counsel
Emil J. Aberizk, Jr. Vice President
Edward T. Berger Vice President and Chief Compliance Officer
Richard F. Betzler, Jr. Vice President
Philip J. Coffey Vice President
<PAGE>
Thomas P. Cunningham Vice President, Chief Financial Officer and
Controller
Philip L. Heffernan Vice President
John F. Kelly Director
Daniel Mastrototaro Vice President
William F. Monroe, Jr. Vice President
David J. Mueller Vice President
John F. O'Brien Director
Stephen Parker President, Director and Chief Executive
Officer
Edward J. Parry, III Treasurer
Richard M. Reilly Director
Eric A. Simonsen Director
Mark G. Steinberg Senior Vice President
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
Each account, book or other document required to be maintained by
Section 31(a) of the 1940 Act and Rules 31a-1 to 31a-3 thereunder are
maintained by the Company at 440 Lincoln Street, Worcester, Massachusetts.
ITEM 31. MANAGEMENT SERVICES
The Company provides daily unit value calculations and related services
for the Company's separate accounts.
ITEM 32. UNDERTAKINGS
(a) Subject to the terms and conditions of Section 15(d) of the
Securities Exchange Act of 1934, the undersigned registrant hereby
undertakes to file with the Securities and Exchange Commission
("SEC") such supplementary and periodic information, documents, and
reports as may be prescribed by any rule or regulation of the SEC
heretofore or hereafter duly adopted pursuant to authority
conferred in that section.
(b) The Registrant hereby undertakes to include in the prospectus a
postcard that the applicant can remove to send for a Statement of
Additional Information.
(c) The Registrant hereby undertakes to deliver a Statement of Additional
Information promptly upon written or oral request, according to the
requirements of Form N-4.
(d) Insofar as indemnification for liability arising under the 1933 Act
may be permitted to Directors, Officers and Controlling Persons of
Registrant under any registration statement, underwriting agreement
or otherwise, Registrant has been advised that, in the opinion of
the SEC, such indemnification is against public policy as expressed
in the 1933 Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other
than the payment by Registrant of expenses incurred or paid by a
Director, Officer or Controlling Person of Registrant in the
successful defense of any action, suit or proceeding) is asserted
by such Director, Officer or Controlling Person in connection with
the securities being registered, Registrant will, unless in the
opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public
policy as expressed in the 1933 Act and will be governed by the
final adjudication of such issue.
<PAGE>
(e) The Company hereby represents that the aggregate fees and charges
under the Contracts are reasonable in relation to the services
rendered, expenses expected to be incurred, and risks assumed by the
Company.
ITEM 33. REPRESENTATIONS CONCERNING WITHDRAWAL RESTRICTIONS ON SECTION 403(b)
PLANS AND UNDER THE TEXAS OPTIONAL RETIREMENT PROGRAM
Registrant, a separate account of Allmerica Financial Life Insurance and
Annuity Company ("Company"), states that it is (a) relying on Rule 6c-7
under the 1940 Act with respect to withdrawal restrictions under the Texas
Optional Retirement Program ("Program") and (b) relying on the "no-action"
letter (Ref. No. IP-6-88) issued on November 28, 1988 to the American
Council of Life Insurance, in applying the withdrawal restrictions of
Internal Revenue Code Section 403(b)(11). Registrant has taken the
following steps in reliance on the letter:
1. Appropriate disclosures regarding the redemption restrictions imposed
by the Program and by Section 403(b)(11) have been included in the
prospectus of each registration statement used in connection with the
offer of the Company's variable contracts.
2. Appropriate disclosures regarding the redemption restrictions imposed
by the Program and by Section 403(b)(11) have been included in sales
literature used in connection with the offer of the Company's
variable contracts.
3. Sales Representatives who solicit participants to purchase the
variable contracts have been instructed to specifically bring the
redemption restrictions imposed by the Program and by Section
403(b)(11) to the attention of potential participants.
4. A signed statement acknowledging the participant's understanding of
(I) the restrictions on redemption imposed by the Program and by
Section 403(b)(11) and (ii) the investment alternatives available
under the employer's arrangement will be obtained from each
participant who purchases a variable annuity contract prior to or at
the time of purchase.
Registrant hereby represents that it will not act to deny or limit a
transfer request except to the extent that a Service-Ruling or written
opinion of counsel, specifically addressing the fact pattern involved and
taking into account the terms of the applicable employer plan, determines
that denial or limitation is necessary for the variable annuity contracts
to meet the requirements of the Program or of Section 403(b). Any
transfer request not so denied or limited will be effected as
expeditiously as possible.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940 the Registrant certifies that it meets all the requirements
for effectiveness of this Registration Statement pursuant to Rule 485(b) under
the Securities Act of 1933 and has duly caused this Registration Statement to be
signed on its behalf by the undersigned, thereto duly authorized, in the City of
Worcester, and Commonwealth of Massachusetts on the 15th day of July, 1998.
FULCRUM SEPARATE ACCOUNT OF
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
By: /s/ Abigail M. Armstrong
Abigail M. Armstrong, Secretary
Pursuant to the requirements of the Securities Act of 1933, this Amendment to
the Registration Statement has been signed by the following persons in the
capacities and on the date indicated.
Signatures Title Date
/s/ John F. O'Brien Director and Chairman of July 15, 1998
John F. O'Brien the Board
/s/ Bruce C. Anderson Director
Bruce C. Anderson
/s/ Robert E. Bruce Director and Chief Information
Robert E. Bruce Officer
/s/ John P. Kavanaugh Director, Vice President and
John P. Kavanaugh Chief Investment Officer
/s/ John F. Kelly Director, Vice President and
John F. Kelly General Counsel
/s/ J. Barry May Director
J. Barry May
/s/ James R. McAuliffe Director
James R. McAuliffe
/s/ Edward J. Parry III Director, Vice President, Chief
Edward J. Parry III Financial Officer and Treasurer
/s/ Richard M. Reilly Director, President and
Richard M. Reilly Chief Executive Officer
/s/ Robert P. Restrepo, Director
Jr.
Robert P. Restrepo, Jr.
/s/ Eric A. Simonsen Director and Vice President
Eric A. Simonsen
/s/ Phillip E. Soule Director
Phillip E. Soule
<PAGE>
EXHIBIT TABLE
Exhibit 4 Amended Specifications Page
Exhibit 5 Amended Application Form
Exhibit 9 Opinion of Counsel
Exhibit 10 Consent of Independent Accountants
Exhibit 15(a) Participation Agreement with The Palladian Trust
Exhibit 15(c) Participation Agreement with AIM Variable
Insurance Funds, Inc.
Exhibit 15(d) Second Amendment to Participation Agreement
with Delaware Group Premium Fund, Inc.
Exhibit 15(e) Participation Agreement with Lazard Retirement
Series, Inc.
Exhibit 15(f) Participation Agreement with MFS Variable
Insurance Trust
Exhibit 15(g) Participation Agreement with Oppenheimer Variable
Account Funds
<PAGE>
SPECIFICATIONS
<TABLE>
<S> <C>
Annuitant: FULCRUM TEST Contract Number: FN00101121
- ---------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------
Issue Date: 07/16/1998 Contract Type: Non-Qualified
Annuitant Sex: Male Annuitant Date of Birth: 05/05/1955
Owner: FULCRUM TEST Owner Date of Birth: 05/05/1955
Joint Owner: Joint Owner Date of Birth:
Annuity Date: 05/01/2040 Primary Beneficiary:
Contingent Beneficiary:
- ---------------------------------------------------------------------------------------
Minimum Fixed Account Guaranteed Interest Rate: 3% Minimum Additional Payment: $500
Minimum Guarantee Period Account Interest Rate: 3% Minimum Guarantee Period Account
with Market Value Adjustment
Allocation: $1,000
Death Benefit Effective Annual Yield: 5% Minimum Withdrawal Amount: $100
Minimum Annuity Benefit Payment: $50 Minimum Accumulated Value After
Withdrawal: $1,000
Maximum Alternative Annuity Date: No later than the first of the month preceding
the Annuitant's 90th birthday and within life
expectancy
Surrender Charge Table*:
Years Measured From Surrender Charge as a
Date of Payment Percent of the Payments
To Date of Withdrawal Withdrawn
-------------------------------------------------------------------
Less than: 1 7%
2 6%
3 5%
4 4%
5 3%
6 2%
7 1%
Thereafter 0%
</TABLE>
*The Mortality and Expense Risk Charge, Administrative Charge and Contract fee
found below are additional annual expenses that apply to the contract.
Withdrawal without Surrender Charge: 15%
Mortality and Expense Risk Charge: 1.25% on an annual basis of the daily value
of the Sub-Account assets.
Administrative Charge: .20% on an annual basis of the daily value of the
Sub-Account assets.
Contract Fee: $30, if the Accumulated Value is less than $100,000.
Principal Office: 440 Lincoln Street, Worcester, Massachusetts 01653
(1-800-917-1909)
FORM A8025FF.VT-96 3
<PAGE>
SPECIFICATIONS (continued)
Annuitant: JASON VERMONT Contract Number: FQ00101115
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
Initial Net Payment: $2,000.00
Initial Net Payment Allocation:
VARIABLE SUB-ACCOUNTS
20.0% Global Interactive / Telecomm Portfolio
Oppenheimer Aggressive Growth Fund
10.0% MFS Emerging Growth Series
Small Cap Value Series
Lazard Retirement International Equity Portfolio
International Growth Portfolio
10.0% PBHG Select 20 Portfolio
Growth Portfolio
10.0% Value Portfolio
AIM V.I. Value Fund
10.0% MFS Growth With Income Series
Oppenheimer Growth & Income Fund
Delaware Series
10.0% Strategic Income Portfolio
Money Market Fund
FIXED ACCOUNT
10.0% Initial Interest Rate: 4.500%
GUARANTEE PERIOD ACCOUNTS WITH MARKET VALUE ADJUSTMENT
Guaranteed
Guarantee Interest Expiration
Period Rate Date
--------- -------- ----------
10.0% 3 years 4.550% 07/30/2001
10.0% 5 years 4.850% 07/30/2003
6 years
7 years
8 years
9 years
10 years
----
100% TOTAL
FORM A8025FF.VT-964 4
<PAGE>
[LOGO] ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
440 Lincoln Street, Worcester, MA 01653
1 ANNUITANT
PLEASE PRINT CLEARLY
Name (First, MI, Last)
_______________________________________________________
Street Address Apt.
_______________________________________________________
City State Zip
_______________________________________________________
Daytime Telephone / / Male Date of Birth
( ) / / Female / /
_______________________________________________________
Social Security #_________________________
PLEASE PRINT CLEARLY
2 OWNER COMPLETE THIS SECTION ONLY IF (CHECK ONE):
/ / The owner is other than the annuitant
/ / This is a joint owner with the annuitant.
Name (First, MI, Last)
_______________________________________________________
Street Address Apt.
_______________________________________________________
City State Zip
_______________________________________________________
Daytime Telephone Date of Birth Date of Trust
( ) / / / /
_______________________________________________________
Social Security/Tax I.D. #_____________________________
3 BENEFICIARY
Primary Relationship to Annuitant
_______________________________________________________
Contingent Relationship to Annuitant
_______________________________________________________
4 TYPE OF PLAN
/ / Nonqualified / / 403(b) TSA*
/ / Nonqualified Def. Comp. / / 408(b) IRA
/ / 401(a) Pension/Profit Sharing* / / 408(k) SEP-IRA*
/ / 401(k) Profit Sharing* / / 457 DEF. COMP.
*ATTACH REQUIRED ADDITIONAL FORMS
5 INITIAL PAYMENT
Initial Payment $ _______MAKE CHECK PAYABLE TO ALLMERICA FINANCIAL.
If IRA or SEP-IRA application, the applicant has received
a Disclosure Buyer's Guide and this payment is a (check one):
/ / Rollover / / Trustee to Trustee Transfer
/ / Regular or SEP-IRA Payment for Tax Year ________
6 ALLOCATION OF PAYMENTS
_____% Global Interactive/Telecomm Portfolio
_____% Oppenheimer Aggressive Growth Fund
_____% MFS Emerging Growth Series
_____% Small Cap Value Series
_____% Lazard Retirement International Equity Portfolio
_____% International Growth Portfolio
_____% Growth Portfolio
_____% Value Portfolio
_____% AIM V.I. Value Fund
_____% MFS Growth With Income Series
_____% Oppenheimer Growth & Income Fund
_____% Delaware Series
_____% Strategic Income Portfolio
_____% Money Market Fund
_____% Fixed Account
_____% _______________________
GUARANTEE PERIOD ACCOUNTS
($1,000 MINIMUM PER ACCOUNT)
________% 3 Year ________% 8 Year
________% 5 Year ________% 9 Year
________% 6 Year ________% 10 Year
________% 7 Year
(All allocations above must total 100%)
_____________________________________________________________________
PRINCIPAL EQUITY PROTECTOR (PEP)
/ / Allocate a portion of my initial payment to the
________ year GPA such that, at the end of the guarantee
period, the GPA will have grown to an amount equal to
the total initial payment assuming no withdrawals or trans-
fers of any kind. The remaining balance will be applied as
indicated above.
_____________________________________________________________________
/ / I elect Automatic Account Rebalancing among the above
accounts (excluding Fixed and Guarantee Period
Accounts) starting on the 16th day after issue date and
continuing every:
/ / 1 / / 2 / / 3 / / 6 / / 12 Months
_____________________________________________________________________
NOTE: If the contract applied for provides for a full refund
of the initial payment under its "Right to Examine" provi-
sion, that portion of each payment not allocated to the Fixed
Account will be allocated solely to the Money Market Fund
during its first 15 days. Reallocation will then be made as
specified.
7 REPLACEMENT
Will the proposed contract replace or change any existing
annuity or insurance policy?
/ / NO
/ / YES (If yes, list company name and policy number)
________________________________________________________________
8 TELEPHONE TRANSFER
I/We authorize and direct Allmerica Financial Life Insurance and Annuity
Company to accept telephone instructions from any person who can furnish
proper identification to effect transfers and future payment allocation
changes. I/We agree to hold harmless and indemnify Allmerica Financial Life
Insurance and Annuity Company and its affiliates and their collective
directors, officers, employees and agents against any claim arising from
such action.
/ / I/We do not accept this telephone transfer privilege.
1139 (11/96) (9/98)
<PAGE>
9 DOLLAR COST AVERAGING
Please transfer $___________ ($100 minimum)
CHECK ONE SOURCE ACCOUNT:
FROM: / / Fixed Account / / Strategic Income Portfolio
/ / Money Market Fund
EVERY: / / 1 / / 2 / / 3 / / 6 / / 12 Months
TO: $________ Global Interactive/Telecomm Portfolio
$________ Oppenheimer Aggressive Growth Fund
$________ MFS Emerging Growth Series
$________ Small Cap Value Series
$________ Lazard Retirement International Equity Portfolio
$________ International Growth Portfolio
$________ Growth Portfolio
$________ Value Portfolio
$________ AIM V.I. Value Fund
$________ MFS Growth With Income Series
$________ Oppenheimer Growth & Income Fund
$________ Delaware Series
$________ Strategic Income Portfolio
$________ Money Market Fund
$________ _______________________
Dollar Cost Averaging begins on the 16th day after the
issue date and ends when the source account value is
exhausted.
DOLLAR COST AVERAGING INTO THE FIXED OR GUARANTEE PERIOD
ACCOUNTS IS NOT AVAILABLE.
10 MONTHLY AUTOMATIC PAYMENTS (MAP)
/ / I wish to authorize monthly automatic deductions from
my checking account for application to this contract.
ATTACH COMPLETED MAP APPLICATION (FORM 1968) AND VOIDED CHECK.
11 SYSTEMATIC WITHDRAWALS
Please withdraw $___________($100 minimum)
Starting 16 days after issue, or _____ /_____ /_____,
whichever is later, and then,
EVERY: / / 1 / / 2 / / 3 / / 6 / / 12 Months
________ % From _______________________________________
________ % From _______________________________________
________ % From _______________________________________
________ % From _______________________________________
________ % From _______________________________________
PLEASE / / Do Not Withhold Federal Income Taxes
/ / Do Withhold at 10% or _______ (% or $)
Systematic withdrawals are not available from the
Guarantee Period Accounts.
/ / I wish to use Electronic Funds Transfer (Direct
Deposit). I authorize the Company to correct electroni-
cally any overpayments or erroneous credits made to
my account.
ATTACH A VOIDED CHECK.
12 OPTIONAL REMITTANCE REMINDERS
/ / I wish to receive periodic reminders that I can include
with future remittances.
ATTACH COMPLETED REQUEST FOR PAYMENT REMINDERS (FORM SML-1203)
<TABLE>
<S> <C>
13 REMARKS
________________________________________________________________________________________________________________________
________________________________________________________________________________________________________________________
14 SIGNATURES
I/We represent to the best of my/our knowledge and belief that the statements made in this application are true and
complete. I/We agree to all terms and conditions as shown on the front and back. It is indicated and agreed that the
only statements which are to be construed as the basis of the contract are those contained in this application. I/We
acknowledge receipt of a current prospectus describing the contract applied for. I/WE UNDERSTAND THAT ALL PAYMENTS
AND VALUES BASED ON THE VARIABLE ACCOUNTS MAY FLUCTUATE AND ARE NOT GUARANTEED AS TO DOLLAR AMOUNT; AND ALL PAYMENTS
AND VALUES BASED ON THE GUARANTEE PERIOD ACCOUNTS ARE SUBJECT TO A MARKET VALUE ADJUSTMENT FORMULA, THE OPERATION OF
WHICH MAY RESULT IN EITHER AN UPWARD OR DOWNWARD ADJUSTMENT. I/We understand that unless I/we elect otherwise, the
Annuity Date will be the earlier of the date, if any, selected by the Owner, or the later of the Annuitant's 85th
birthday or the birthday following the tenth contract anniversary, not to exceed age 90.
_______________________________________________________ __________________________________________________________
Signature of Owner Signed at (City and State) Date
_______________________________________________________
Signature of Joint Owner
15 REGISTERED REPRESENTATIVE / DEALER INFORMATION
Does the contract applied for replace an existing annuity or life insurance policy? / / Yes (attach replacement forms
as required) / / No
I certify that the information provided by the owner has been accurately recorded; a current prospectus was delivered;
no written sales materials other than those approved by the Principal Office were used; and I have reasonable grounds
to believe the purchase of the contract applied for is suitable for the owner.
__________
( )
___________________________________________________________________ __________ __________________________________
Signature of Registered Representative Comm. Code Telephone
_________________________
_________________________________________________ _________________________ _______________________________________
Printed Name of Registered Representative B/D Client Acct. # Printed Name of Broker/Dealer
( )
______________________________________________________________________________ __________________________________
Branch Office Street Address for Contract Delivery Telephone
</TABLE>
<PAGE>
August 26, 1998
Allmerica Financial Life Insurance and Annuity Company
440 Lincoln Street
Worcester, MA 01653
RE: FULCRUM SEPARATE ACCOUNT OF ALLMERICA FINANCIAL
LIFE INSURANCE AND ANNUITY COMPANY
FILE #'S: 333-11377 AND 811-7799
Gentlemen:
In my capacity as Attorney of Allmerica Financial Life Insurance and Annuity
Company (the "Company"), I have participated in the preparation of the
Post-Effective Amendment to the Registration Statement for 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
contracts.
I am of the following opinion:
1. Fulcrum Separate Account is a separate account of the Company validly
existing pursuant to the Delaware Insurance Code and the regulations issued
thereunder.
2. The assets held in Fulcrum Separate Account are not chargeable with
liabilities arising out of any other business the Company may conduct.
3. The individual and group variable annuity contracts, when issued in
accordance with the Prospectus contained in the Registration Statement and
upon compliance with applicable local law, will be legal and binding
obligations of the Company in accordance with their terms and when sold
will be legally issued, fully paid and non-assessable.
In arriving at the foregoing opinion, I have made such examination of law and
examined such records and other documents as in my judgment are necessary or
appropriate.
I hereby consent to the filing of this opinion as an exhibit to the
Post-Effective Amendment to the Registration Statement for Fulcrum Separate
Account filed under the Securities Act of 1933.
Very truly yours,
/s/ Lynn Gelinas
Lynn Gelinas
Attorney
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Statement of Additional Information
constituting part of this Post-Effective Amendment No. 3 to the Registration
Statement of the Fulcrum Separate Account of Allmerica Financial Life Insurance
and Annuity Company on Form N-4 of our report dated February 3, 1998, relating
to the financial statements of Allmerica Financial Life Insurance and Annuity
Company, and our report dated March 25, 1998, relating to the financial
statements of the Fulcrum Separate Account 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/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Boston, Massachusetts
August 26, 1998
<PAGE>
PARTICIPATION AGREEMENT
Among
THE PALLADIAN TRUST
ALLMERICA INVESTMENT MANAGEMENT COMPANY, INC.
and
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
DATED AS OF
April 9, 1998
<PAGE>
TABLE OF CONTENTS
-----------------
Page
----
ARTICLE I. Purchase of Fund Shares 4
ARTICLE II Representations and Warranties 5
ARTICLE III Prospectuses, Reports to Shareholders
and Proxy Statements, Voting 6
ARTICLE IV Sales Material and Information 8
ARTICLE V Fees and Expenses 9
ARTICLE VI Diversification 9
ARTICLE VII Potential Conflicts 10
ARTICLE VIII Indemnification 11
ARTICLE IX. Applicable Law 15
ARTICLE X Termination 15
ARTICLE XI Notices 16
ARTICLE XII Miscellaneous 17
SCHEDULE A Separate Accounts and Variable Products A-1
SCHEDULE B Portfolios of The Palladian Trust B-1
SCHEDULE C Proxy Voting Procedures C-1
2
<PAGE>
THIS AGREEMENT, made and entered into as of the 9th day of April, 1998 by and
among: ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY (hereinafter the
"Company"), a Delaware corporation, on its own behalf and on behalf of each
separate account of the Company set forth on Schedule A hereto, as may be
amended from time to time (each such account hereinafter referred to as the
"Account"); THE PALLADIAN TRUST, an unincorporated Massachusetts business trust
(hereinafter the "Fund"), and ALLMERICA INVESTMENT MANAGEMENT COMPANY, INC.
(hereinafter the "Adviser"), a Massachusetts corporation
WHEREAS, the Fund engages in business as an open-end management investment
company and is available to act as (i) the investment vehicle for separate
accounts established by insurance companies for individual and group life
insurance policies and annuity contracts with variable accumulation and/or
pay-out provisions (hereinafter referred to individually and/or collectively as
"Variable Products") and (ii) the investment vehicle for certain qualified
pension and retirement plans (hereinafter "Qualified Plans"); and
WHEREAS, insurance companies desiring to utilize the Fund as an investment
vehicle under their Variable Products enter into participation agreements with
the Fund and the Adviser (the "Participating Insurance Companies");
WHEREAS, shares of the Fund are divided into several series of shares,
each representing the interest in a particular managed portfolio of securities
and other assets (each such series hereinafter referred to as a "Portfolio"),
any one or more of which may be made available under this Agreement, as may be
amended from time to time by mutual agreement of the parties hereto; and
WHEREAS, the Fund has received for an order from the Securities and
Exchange Commission, granting Participating Insurance Companies and Variable
Insurance Product separate accounts exemptions from the provisions of Sections
9(a), 13(a), 15(a), and 15(b) of the Investment Company Act of 1940, as amended
(hereinafter the "1940 Act"), and Rules 6e-2(b)(15) and 6e-3(T)(b)(l5)
thereunder, to the extent necessary to permit shares of the Fund to be sold to
and held by separate accounts of both affiliated and unaffiliated life insurance
companies and Qualified Plans (hereinafter the "Shared Funding Exemptive
Order"); and
WHEREAS, the Fund is registered as an open-end management investment
company under the 1940 Act and its shares are registered under the Securities
Act of 1933, as amended (hereinafter the "1933 Act"); and
WHEREAS, the Adviser is duly registered as an investment adviser under the
Investment Advisers Act of 1940, as amended, and any applicable state securities
laws and manages each of the certain portfolios of the Fund and retains
Sub-Advisers for the daily investment and reinvestment of the assets of each
portfolio; and
WHEREAS, the Company has registered or will register certain
Variable Products under the 1933 Act; and
WHEREAS, each Account is a duly organized, validly existing segregated
asset account, established by resolution or under authority of the Board of
Directors of the Company, to set aside and invest assets attributable to the
aforesaid Variable Products, and the Company has registered or will register
each Account as a unit investment trust under the 1940 Act; and
3
<PAGE>
WHEREAS, to the extent permitted by applicable insurance laws and
regulations, the Company intends to purchase, on behalf of each Account, shares
in the Portfolios set forth in Schedule B attached to this Agreement, to fund
certain of the aforesaid Variable Insurance Products and the Fund is authorized
to sell such shares to each such Account at net asset value;
NOW, THEREFORE, in consideration of their mutual promises, the parties
hereto agree as follows:
ARTICLE I. Purchase of Fund Shares
1.1. The Fund agrees to make available for purchase by the Company shares
of the Fund and shall execute orders placed for each Account on a daily basis at
the net asset value next computed after receipt by the Fund or its designee of
such order. For purposes of this Section 1.1, the Company shall be the designee
of the Fund for receipt of such orders from each Account and receipt by such
designee of an order prior to the close of regular trading on the New York Stock
Exchange ("NYSE") shall constitute receipt by the Fund; provided that the Fund
receives notice of such order by 10:00 a.m. Eastern time on the next following
Business Day. `Business Day" shall mean any day on which the New York Stock
Exchange is open for trading and on which the Fund calculates its net asset
value pursuant to the rules of the Securities and Exchange Commission.
1.2. The Fund, so long as this Agreement is in effect, agrees to make its
shares available indefinitely for purchase at the applicable net asset value per
share by the Company and its Accounts on those days on which the Fund calculates
its net asset value pursuant to rules of the Securities and Exchange Commission
and the Fund shall use reasonable efforts to calculate such net asset value on
each day which the New York Stock Exchange is open for trading. Notwithstanding
the foregoing, the Board of Trustees of the Fund (hereinafter the "Board") may
refuse to permit the Fund to sell shares of any Portfolio to any person, or
suspend or terminate the offering of shares of any Portfolio if such action is
required by law or by regulatory authorities having jurisdiction or is, in the
sole discretion of the Board acting in good faith and in light of their
fiduciary duties under federal and any applicable state laws, necessary in the
best interests of the shareholders of such Portfolio.
1.3. The Fund agrees that shares of the Fund will be sold only to
Participating Insurance Companies and their separate accounts and to certain
Qualified Plans. No shares of any Portfolio will be sold to the general public.
1.4. The Fund agrees to redeem for cash, on the Company's request, any
full or fractional shares of the Fund held by the Company, executing such
requests on a daily basis at the net asset value next computed after receipt by
the Fund or its designee of the request for redemption. For purposes of this
Section 1.4, the Company shall be the designee of the Fund for receipt of
requests for redemption from each Account and receipt by such designee of a
request prior to the close of regular trading on the NYSE shall constitute
receipt by the Fund, provided that the Fund receives notice of such request for
redemption on the next following Business Day.
1.5. The Company agrees that purchases and redemptions of Portfolio shares
offered by the then current prospectus of the Fund shall be made in accordance
with the provisions of such prospectus.
4
<PAGE>
1.6. The Company shall pay for Fund shares no later than the next Business
Day after an order to purchase Fund shares is made in accordance with the
provisions of Section 1.1 hereof Payment shall be in federal funds transmitted
by wire.
1.7. Issuance and transfer of the Fund's shares will be by book entry
only. Stock certificates will not be issued to the Company or any Account.
Shares ordered from the Fund will be recorded in an appropriate title for each
Account or the appropriate subaccount of each Account.
1.9. The Fund shall furnish same day notice (by wire or telephone,
followed by written confirmation) to the Company of any income, dividends or
capital gain distributions payable on the Fund's shares. The Company hereby
elects to receive all such income dividends and capital gain distributions as
are payable on the Portfolio shares in additional shares of that Portfolio, The
Company reserves the right to revoke this election and to receive all such
income dividends and capital gain distributions in cash. The Fund shall notify
the Company of the number of shares so issued as payment of such dividends and
distributions.
1.10. The Fund shall make the net asset value per share for each Portfolio
available to the Company on a daily basis as soon as reasonably practical after
the net asset value per share is calculated (normally by 6:30 p.m. Eastern time)
and shall use its best efforts to make such net asset value per share available
by 7:00 p.m. Eastern time.
ARTICLE II. Representations and Warranties
2.1. The Company represents and warrants that the Variable Products are or
will be registered under the 1933 Act; that the Variable Products will be issued
and sold in compliance in all material respects with all applicable federal and
state laws, and that the sale of the Variable Products shall comply in all
material respects with state insurance suitability requirements. The Company
further represents and warrants that it is an insurance company duly organized
and in good standing under applicable law, that it has legally and validly
established each Account as a segregated asset account under the Massachusetts
Insurance Code, and that it has registered or, prior to any issuance or sale of
the Variable Products, will register each Account as a unit investment trust in
accordance with the provisions of the 1940 Act to serve as a segregated
investment account for the Variable Products.
2.2. The Fund represents and warrants that Fund shares sold pursuant to
this Agreement shall be registered under the 1933 Act, duly authorized for
issuance and sold in compliance with the laws of the Commonwealth of
Massachusetts and all applicable federal and state securities laws, and that the
Fund is and shall make every effort to remain registered under the 1940 Act. The
Fund shall amend the registration statement for its shares under the 1933 Act
and the 1940 Act from time to time as required in order to effect the continuous
offering of its shares. The Fund shall register and qualify the shares for sale
in accordance with the laws of the various states only if and to the extent
deemed advisable by the Fund.
2.3. The Fund represents that it is currently qualified as a Regulated
Investment Company under Subchapter M of the Internal Revenue Code of 1986, as
amended (the "Code"), and that it will make every effort to maintain such
qualification (under Subchapter M or any successor or similar provision) and
that it will notify the Company promptly upon having a reasonable basis for
believing that it has ceased to so qualify or that it might not so qualify in
the future.
5
<PAGE>
2.4. The Company represents that the Variable Products are currently
treated as life insurance policies or annuity contracts under applicable
provisions of the Code, that it will make every effort to maintain such
treatment, and that it will notify the Fund immediately upon having a reasonable
basis for believing that the Variable Products have ceased to be so treated or
that they might not be so treated in the future.
2.5. The Fund represents that to the extent that it decides to finance
distribution expenses pursuant to Rule 12b-1 under the 1940 Act, the Fund
undertakes to have its board of Trustees, a majority of whom are not interested
persons of the Fund, formulate and approve any plan under Rule 12b-1 to finance
distribution expenses.
2.6. The Fund makes no representation as to whether any aspect of its
operations (including, but not limited to, fees and expenses and investment
policies) complies with the insurance laws or regulations of the various states.
2.7. The Fund represents that it is lawfully organized and validly
existing under the laws of the Commonwealth of Massachusetts and that it does
and will comply in all material respects with the 1940 Act.
2.8. The Adviser represents and warrants that it is and shall remain duly
registered in all material respects under all applicable federal and state
securities laws and that it will perform its obligations for the Fund in
compliance in all material respects with the laws of its state of domicile and
any applicable state and federal securities laws.
2.9. The Fund represents and warrants that its Trustees, officers,
employees, and other individuals/entities dealing with the money and/or
securities of the Fund are and shall continue to be at all times covered by a
blanket fidelity bond or similar coverage for the benefit of the Fund in an
amount not less than the minimal coverage as required currently by Rule 17g-(1)
of the 1940 Act or related provisions as may be promulgated from time to time.
The aforesaid blanket fidelity bond shall include coverage for larceny and
embezzlement and shall be issued by a reputable bonding company.
2.10. The Company represents and warrants that all of its directors,
officers, employees, investment advisers, and other individuals/entities dealing
with the money and/or securities of the Fund are covered by a blanket fidelity
bond or similar coverage, in an amount not less $5 million. The aforesaid, which
includes coverage for larceny and embezzlement, shall be issued by a reputable
bonding company. The Company agrees to make all reasonable efforts to see that
this bond or another bond containing these provisions is always in effect, and
agrees to notify the Fund promptly in writing in the event that such coverage no
longer applies.
ARTICLE III. Prospectuses, Reports to Shareholders and Proxy Statements; Voting
3.1. The Fund or its designee shall provide the Company with as many
printed copies of the Fund's current prospectus and statement of additional
information as the Company may reasonably request. If requested by the Company,
in lieu of providing printed copies, the Fund shall provide camera-ready film or
computer diskettes containing the Fund's prospectus and statement of additional
information, and such other assistance as is reasonably necessary in order for
the Company once each year (or more frequently if the prospectus and/or
statement of additional information for the Fund is amended during the year) to
have the prospectus for the Variable Products and the Fund's prospectus
6
<PAGE>
printed together in one document, and to have the statement of additional
information for the Fund and the statement of additional information for the
Variable Products printed together in one document. Alternatively, the Company
may print the Fund's prospectus and/or its statement of additional information
in combination with other fund companies' prospectuses and statements of
additional information.
3.2. Except as provided in this Section 3.2., all expenses of printing and
distributing Fund prospectuses and statements of additional information shall be
the expense of the Company. For any prospectuses and statements of additional
information provided by the Company to the existing owners of Variable Products
who currently own shares of one or more of the Fund's Portfolios, in order to
update disclosure as required by the 1933 Act and/or the 1940 Act, the cost of
printing shall be borne by the Fund. If the Company chooses to receive
camera-ready film or computer diskettes in lieu of receiving printed copies of
the Fund's prospectus, the Fund will reimburse the Company in an amount equal to
the product of x and y where x is the number of such prospectuses distributed to
owners of the Variable Products who currently own shares of one or more of the
Fund's Portfolios, and y is the Fund's per unit cost of typesetting and printing
the Fund's prospectus. The same procedures shall be followed with respect to the
Fund's statement of additional information, The Company agrees to provide the
Fund or its designee with such information as may be reasonably requested by the
Fund to assure that the Fund's expenses do not include the cost of printing any
prospectuses or statements of additional information other than those actually
distributed to existing owners of the Variable Products.
3.3. The Funds statement of additional information shall be obtainable
from the Fund, the Company or such other person as the Fund may designate, as
agreed upon by the parties.
3.4. The Fund, at its expense, shall provide the Company with copies of
its proxy statements, reports to shareholders, and other communications (except
for prospectuses and statements of additional information, which are covered in
section 3.1) to shareholders in such quantity as the Company shall reasonably
require for distribution to contract owners. The Fund or its designee shall bear
the cost of printing, duplicating, and mailing of these documents to current
contract owners, and the Company shall bear the cost for such documents used for
purposes other than distribution to current contract owners.
3.5. If and to the extent required by law the Company shall:
(i) solicit voting instructions from contract owners;
(ii) vote the Fund shares in accordance with instructions received
from contract owners; and
(iii) vote Fund shares for which no instructions have been received
in the same proportion as Fund shares of such Portfolio for
which instructions have been received,
so long as and to the extent that the Securities and Exchange Commission
continues to interpret the 1940 Act to require pass-through voting privileges
for variable contract owners. The Company reserves the right to vote Fund shares
held in any segregated asset account in its own right, to the extent permitted
by law. The Fund and the Company shall follow the procedures, and shall have the
corresponding responsibilities, for the handling of proxy and voting instruction
solicitations, as set forth in Schedule C attached hereto and incorporated
herein by reference. Participating Insurance Companies shall be responsible for
ensuring that each of their separate accounts participating in the Fund
calculates voting
7
<PAGE>
privileges in a manner consistent with the standards set forth on Schedule C,
which standards will also be provided to the other Participating Insurance
Companies, if any.
3.6. The Fund will comply with all provisions of the 1940 Act requiring
voting by shareholders, including Sections 16(a) and, if and when applicable,
16(b). Further, the Fund will act in accordance with the Securities and Exchange
Commission's interpretation of the requirements of Section 16(a) with respect to
periodic elections of trustees and with whatever rules the Commission may
promulgate with respect thereto.
3.7. The Fund shall use reasonable efforts to provide Fund prospectuses,
reports to shareholders, proxy materials and other Fund communications (or
camera-ready equivalents) to the Company sufficiently in advance of the
Company's mailing dates to enable the Company to complete, at reasonable cost,
the printing, assembling and/or distribution of the communications in accordance
with applicable laws and regulations.
ARTICLE IV. Sales Material and Information
4.1. The Company shall furnish, or shall cause to be furnished, to the
Fund or its designee, each piece of sales literature or other promotional
material in which the Fund or the Adviser(s) is named, at least fifteen Business
Days prior to its use. No such material shall be used if the Fund or its
designee reasonably objects to such use within fifteen Business Days after
receipt of such material.
4.2. The Company shall not give any information or make any
representations or statements on behalf of the Fund or concerning the Fund in
connection with the sale of the Variable Products other than the information or
representations contained in the registration statement or prospectus for the
Fund shares, as such registration statement and prospectus may be amended or
supplemented from time to time, or in reports or proxy statements for the Fund,
or in sales literature or other promotional material approved by the Fund or its
designee, except with the permission of the Fund.
4.3. The Fund or its designee shall furnish, or shall cause to be
furnished, to the Company or its designee, each piece of sales literature or
other promotional material in which the Company and/or its separate account(s)
is named at least fifteen Business Days prior to its use. No such material shall
be used if the Company or its designee reasonably objects to such use within
fifteen Business Days after receipt of such material.
4.4. The Fund and the Adviser shall not give any information or make any
representations on behalf of the Company or concerning the Company, each
Account, or the Variable Products, other than the information or representations
contained in a registration statement or prospectus for the Variable Products,
as such registration statement and prospectus may be amended or supplemented
from time to time, or in published reports for each Account which are in the
public domain or approved by the Company for distribution to contract owners, or
in sales literature or other promotional material approved by the Company or its
designee, except with the permission of the Company.
4.5. The Fund will provide to the Company at least one complete copy of
all registration statements, prospectuses, statements of additional information,
reports, proxy statements, sales literature and other promotional materials,
applications for exemptions, requests for no-action letters, and all amendments
to any of the above, that relate to the Fund or its shares, which are relevant
to the Company or the Variable Products.
8
<PAGE>
4.6. The Company will provide to the Fund at least one complete copy of
all registration statements, prospectuses, statements of additional information,
reports, solicitations for voting instructions, sales literature and other
promotional materials, applications for exemptions, requests for no action
letters, and all amendments to any of the above, that relate to the investment
in the Fund under the Variable Products.
4.7. For purposes of this Article IV, the phrase "sales literature or
other promotional material" includes, but is not limited to, any of the
following that refer to the Fund or any affiliate of the Fund: advertisements
(such as material published, or designed for use in, a newspaper, magazine, or
other periodical, radio, television, telephone or tape recording, videotape
display, signs or billboards, motion pictures, or other public media), sales
literature (i.e., any written communication distributed or made generally
available to customers or the public, including brochures, circulars, research
reports, market letters, form letters, seminar texts, reprints or excerpts of
any other advertisement, sales literature, or published article), educational or
training materials or other communications distributed or made generally
available to some or all agents or employees, and registration statements,
prospectuses, statements of additional information, shareholder reports, and
proxy materials.
ARTICLE V. Fees and Expenses
5.1. The Fund shall pay no fee or other compensation to the Company under
this Agreement, except that if the Fund or any Portfolio adopts and implements a
plan pursuant to Rule 12b-l to finance distribution expenses, then the Fund may
make payments to the Company for the Variable Products if and in amounts agreed
to in writing.
5.2. All expenses incident to performance by the Fund under this Agreement
shall be paid by the Fund, other than expenses assumed by the Adviser under the
Management Agreement between the Fund and the Adviser or by another party. The
Fund shall see to it that all its shares are registered and authorized for
issuance in accordance with applicable federal law and, if and to the extent
deemed advisable by the Fund, in accordance with applicable state laws prior to
their sale. The Fund shall bear the expenses for the cost of registration and
qualification of the Fund's shares, preparation and filing of the Fund's
prospectus and registration statement, proxy materials and reports, setting the
prospectus in type, setting in type and printing the proxy materials and reports
to shareholders (including the costs of printing a prospectus that constitutes
an annual report), the preparation of all statements and notices required by any
federal or state law, and all taxes on the issuance or transfer of the Fund's
shares.
ARTICLE VI. Diversification
6.1. The Fund will at all times invest money from the Variable Products in
such a manner as to ensure that the Variable Products will be treated as
variable contracts under the Code and the regulations issued thereunder. Without
limiting the scope of the foregoing, the Fund will at all times comply with
Section 817(h) of the Code and Treasury Regulation 1.817-5, relating to the
diversification requirements for variable annuity, endowment, or life insurance
contracts and any amendments or other modifications to such Section or
Regulations. In the event of a breach of this Article VI by the Fund, it will
take all reasonable steps (a) to notify Company of such breach and (b) to
adequately diversify the Fund so as to achieve compliance within the grace
period afforded by Regulation 1.817-5.
ARTICLE VII. Potential Conflicts
9
<PAGE>
7.1. The Board will monitor the Fund for the existence of any material
irreconcilable conflict between the interests of the contract owners of all
separate accounts investing in the Fund. An irreconcilable material conflict may
arise for a variety of reasons, including: (a) an action by any state insurance
regulatory authority; (b) a change in applicable federal or state insurance,
tax, or securities laws or regulations, or a public ruling, private letter
ruling, no-action or interpretative letter, or any similar action by insurance,
tax, or securities regulatory authorities; (c) an administrative or judicial
decision in any relevant proceeding; (d) the manner in which the investments of
any Portfolio are being managed; (e) a difference in voting instructions given
by Variable Insurance Product owners; or (f) a decision by a Participating
Insurance Company to disregard the voting instructions of contract owners. The
Board shall promptly inform the Company if it determines that an irreconcilable
material conflict exists and the implications thereof.
7.2. Each of the Company and the Adviser will report any potential or
existing conflicts of which it is aware to the Board. Each of the Company and
the Adviser will assist the Board in carrying out its responsibilities under SEC
rules and regulations. The Adviser, and the participating insurance companies
and participating qualified plans will at least annually submit to the Board
such reports, materials, or data as the Board may reasonably request so that the
Board may fully carry out the obligations imposed upon by the conditions
contained in the Shared Funding Exemptive Order, and said reports, materials,
and data will be submitted more frequently if deemed appropriate by the Board.
7.3. If it is determined by a majority of the Board, or a majority of its
members who are not "interested persons" of the Fund, the Adviser or the Company
as that term is defined in the 1940 Act (hereinafter "disinterested members"),
that a material irreconcilable conflict exists, the Company and other
Participating Insurance Companies shall, at their expense and to the extent
reasonably practicable (as determined by a majority of the disinterested
directors), take whatever steps are necessary to remedy or eliminate the
irreconcilable material conflict, up to and including: (1) withdrawing the
assets allocable to some or all of the separate accounts from the Fund or any
Portfolio and reinvesting such assets in a different investment medium,
including (but not limited to) another Portfolio of the Fund, or submitting the
question whether such segregation should be implemented to a vote of all
affected contract owners and, as appropriate, segregating the assets of any
appropriate group (i.e., annuity contract owners, life insurance policy owners,
or variable contract owners of one or more Participating Insurance Companies)
that votes in favor of such segregation, or offering to the affected contract
owners the option of making such a change; and (2) establishing a new registered
management investment company or managed separate account.
7.4. If a material irreconcilable conflict arises because of a decision by
the Company to disregard contract owner voting instructions and that decision
represents a minority position or would preclude a majority vote, the Company
may be required, at the Fund's election, to withdraw the affected Account's
investment in the Fund and terminate this Agreement with respect to such Account
(at the Company's expense); provided, however that such withdrawal and
termination shall be limited to the extent required by the foregoing material
irreconcilable conflict as determined by a majority of the disinterested members
of the Board.
7.5. If a material irreconcilable conflict arises because a particular
state insurance regulator's decision applicable to the Company conflicts with
the majority of other state regulators, then the Company will withdraw the
affected Account's investment in the Fund and terminate this Agreement with
respect to such Account within six months after the Board informs the Company in
writing that it has determined that such decision has created an irreconcilable
material conflict; provided, however, that such withdrawal and termination shall
be limited to the extent required by the foregoing material
10
<PAGE>
irreconcilable conflict as determined by a majority of the disinterested members
of the Board. Until the end of the foregoing six month period, the Fund shall
continue to accept and implement orders by the Company for the purchase (and
redemption) of shares of the Fund.
7.6. For purposes of Sections 7.3 through 7.5 of this Agreement, a
majority of the disinterested members of the Board shall determine whether any
proposed action adequately remedies any irreconcilable material conflict, but in
no event will the Fund be required to establish a new funding medium for the
Variable Products. The Company shall not be required by Section 7.3 to establish
a new funding medium for the Variable Products if an offer to do so has been
declined by vote of a majority of contract owners materially adversely affected
by the irreconcilable material conflict.
7.7. If and to the extent that Rule 6e-2 and Rule 6e-3(T) are amended, or
Rule 6e-3 is adopted, to provide exemptive relief from any provision of the 1940
Act or the rules promulgated thereunder with respect to mixed or shared funding,
or if the Fund obtains a Shared Exemptive Order which requires provisions that
are materially different from the provisions of this Agreement, then (a) the
Fund and/or the Participating Insurance Companies, as appropriate, shall take
such steps as may be necessary to comply with Rules 6e-2 and 6e-3(T), as
amended, and Rule 6e-3, as adopted, or to the terms of the Shared Exemptive
Order, to the extent applicable; and (b) Sections 3.4, 3.5, 7.1, 7.2, 7.3, 7.4,
and 7.5 of this Agreement shall continue in effect only to the extent that terms
and conditions substantially identical to such Sections are contained in such
Rule(s) as so amended or adopted.
ARTICLE VIII. Indemnification
8.1. Indemnification By The Company
8.1(a) The Company agrees to indemnify and hold harmless the Fund and the
Adviser, each of their respective officers, employees, and Trustees or
Directors, and each person, if any, who controls the Fund or the Adviser within
the meaning of Section 15 of the 1933 Act (collectively, the "Indemnified
Parties" and individually, "Indemnified Party," for purposes of this Section
8.1) against any and all losses, claims, damages, liabilities (including amounts
paid in settlement with the written consent of the Company) or litigation
(including legal and other expenses), to which the Indemnified Parties may
become subject under any statute, regulation, at common law or otherwise,
insofar as such losses, claims, damages, liabilities or expenses (or actions in
respect thereof) or settlements are related to the sale or acquisition of the
Fund's shares or the Variable Products and:
(i) arise out of or are based upon any untrue statements or alleged untrue
statements of any material fact contained in the registration statement or
prospectus for the Variable Products or contained in the Variable Products
or sales literature for the Variable Products (or any amendment or
supplement to any of the foregoing), or arise out of or are based upon the
omission or the alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not
misleading, provided that this agreement to indemnify shall not apply as
to any Indemnified Party if such statement or omission or such alleged
statement or omission was made in reliance upon and in conformity with
information furnished to the Company by or on behalf of the Fund for use
in the registration statement or prospectus for the Variable Products or
in the Variable Products or sales literature (or any amendment or
supplement) or otherwise for use in connection with the sale of the
Variable Products or Fund shares; or
11
<PAGE>
(ii) arise out of or as a result of statements or representations (other
than statements or representations contained in the registration
statement, prospectus or sales literature of the Fund not supplied by the
Company, or persons under its control and other than statements or
representations authorized by the Fund or an Adviser) or unlawful conduct
of the Company or persons under its control, with respect to the sale or
distribution of the Variable Products or Fund shares; or
(iii) arise out of or as a result of any untrue statement or alleged
untrue statement of a material fact contained in a registration statement,
prospectus, or sales literature of the Fund or any amendment thereof or
supplement thereto or the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the
statements therein not misleading, if such a statement or omission was
made in reliance upon and in conformity with information furnished to the
Fund by or on behalf of the Company; or
(iv) arise as a result of any failure by the Company to provide the
services and furnish the materials under the terms of this Agreement; or
(v) arise out of or result from any material breach of any representation
and/or warranty made by the Company in this Agreement or arise out of or
result from any other material breach of this Agreement by the Company, as
limited by and in accordance with the provisions of Sections 8.1(b) and
8.1(c) hereof.
8.1(b). The Company shall not be liable under this indemnification
provision with respect to any losses, claims, damages, liabilities or litigation
incurred or assessed against an Indemnified Party as such may arise from such
Indemnified Party's willful misfeasance, bad faith, or gross negligence in the
performance of such Indemnified Party's duties or by reason of such Indemnified
Party's reckless disregard of obligations or duties under this Agreement.
8.1(c). The Company shall not be liable under this indemnification
provision with respect to any claim made against an Indemnified Party unless
such Indemnified Party shall have notified the Company in writing within a
reasonable time after the summons or other first legal process giving
information of the nature of the claim shall have been served upon such
Indemnified Party (or after such Indemnified Party shall have received notice of
such service on any designated agent), but failure to notify the Company of any
such claim shall not relieve the Company from any liability which it may have to
the Indemnified Party against whom such action is brought otherwise than on
account of this indemnification provision. In case any such action is brought
against the Indemnified Parties, the Company shall be entitled to participate,
at its own expense, in the defense of such action. The Company also shall be
entitled to assume the defense thereof, with counsel satisfactory to the party
named in the action. After notice from the Company to such party of the
Company's election to assume the defense thereof, the Indemnified Party shall
bear the fees and expenses of any additional counsel retained by it, and the
Company will not be liable to such party under this Agreement for any legal or
other expenses subsequently incurred by such party independently in connection
with the defense thereof other than reasonable costs of investigation.
8.1(d). The Indemnified Parties will promptly notify the Company of the
commencement of any litigation or proceedings against them in connection with
the issuance or sale of the Fund shares or the Variable Products or the
operation of the Fund.
12
<PAGE>
8.2. Indemnification by the Adviser
8.2(a). The Adviser agrees, with respect to each Portfolio that it
manages, to indemnify and hold harmless the Company, each of its directors,
officers, and employees, and each person, if any, who controls the Company
within the meaning of Section 15 of the 1933 Act (collectively, the "Indemnified
Parties" and individually, "Indemnified Party," for purposes of this Section
8.2) against any and all losses, claims, damages, liabilities (including amounts
paid in settlement with the written consent of the Adviser) or litigation
(including legal and other expenses) to which the Indemnified Parties may become
subject under any statute, regulation, at common law or otherwise, insofar as
such losses, claims, damages, liabilities or expenses (or actions in respect
thereof) or settlements are related to the sale or acquisition of shares of the
Portfolio that it manages or the Variable Products and:
(i)arise out of or are based upon any untrue statement or alleged untrue
statement of any material fact contained in the registration statement or
prospectus or sales literature of the Fund (or any amendment or supplement
to any of the foregoing), or arise out of or are based upon the omission
or the alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading,
provided that this agreement to indemnify shall not apply as to any
Indemnified Party if such statement or omission or such alleged statement
or omission was made in reliance upon and in conformity with information
furnished to the Fund by or on behalf of the Company for use in the
registration statement or prospectus for the Fund or in sales literature
(or any amendment or supplement) or otherwise for use in connection with
the sale of the Variable Products or Portfolio shares; or
(ii) arise out of or as a result of statements or representations (other
than statements or representations contained in the registration
statement, prospectus or sales literature for the Variable Products not
supplied by the Fund or persons under its control and other than
statements or representations authorized by the Company) or unlawful
conduct of the Fund, Adviser(s) or persons under their control, with
respect to the sale or distribution of the Variable Products or Portfolio
shares; or
(iii) arise out of or as a result of any untrue statement or alleged
untrue statement of a material fact contained in a registration statement,
prospectus, or sales literature covering the Variable Products, or any
amendment thereof or supplement thereto, or the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statement or statements therein not misleading, if
such statement or omission was made in reliance upon information furnished
to the Company by or on behalf of the Fund; or
(iv) arise as a result of any failure by the Fund to provide the services
and furnish the materials under the terms of this Agreement; or
(v) arise out of or result from any material breach of any representation
and/or warranty made by the Adviser in this Agreement or arise out of or
result from any other material breach of this Agreement by the Adviser; as
limited by and in accordance with the provisions of Sections 8.2(b) and
8.2(c) hereof.
8.2(b). The Adviser shall not be liable under this indemnification
provision with respect to any losses, claims, damages, liabilities or litigation
incurred or assessed against an Indemnified Party as such may arise from such
Indemnified Party's willful misfeasance, bad faith, or gross negligence in the
13
<PAGE>
performance of such Indemnified Party's duties or by reason of such Indemnified
Party's reckless disregard of obligations and duties under this Agreement.
8.2(c). The Adviser shall not be liable under this indemnification
provision with respect to any claim made against an Indemnified Party unless
such Indemnified Party shall have notified the Adviser in writing within a
reasonable time after the summons or other first legal process giving
information of the nature of the claim shall have been served upon such
Indemnified Party (or after such Indemnified Party shall have received notice of
such service on any designated agent), but failure to notify the Adviser of any
such claim shall not relieve the Adviser from any liability which it may have to
the Indemnified Party against whom such action is brought otherwise than on
account of this indemnification provision. In case any such action is brought
against the Indemnified Parties, the Adviser will be entitled to participate, at
its own expense, in the defense thereof The Adviser also shall be entitled to
assume the defense thereof, with counsel satisfactory to the party named in the
action. After notice from the Adviser to such party of the Adviser's election to
assume the defense thereof, the Indemnified Party shall bear the fees and
expenses of any additional counsel retained by it, and the Adviser will not be
liable to such party under this Agreement for any legal or other expenses
subsequently incurred by such party independently in connection with the defense
thereof other than reasonable costs of investigation.
8.2(d). The Company agrees promptly to notify the Adviser of the
commencement of any litigation or proceedings against it or any of its officers
or directors in connection with the issuance or sale of the Variable Products or
the operation of each Account.
8.3. Indemnification by the Fund
8.3(a). The Fund agrees to indemnify and hold harmless the Company, and
each of its directors and officers and each person, if any, who controls the
Company within the meaning of Section 15 of the 1933 Act (hereinafter
collectively, the "Indemnified Parties" and individually, "Indemnified Party,"
for purposes of this Section 8.3) against any and all losses, claims, damages,
liabilities (including amounts paid in settlement with the written consent of
the Fund) or litigation (including legal and other expenses) to which the
Indemnified Parties may become subject under any statute, regulation, at common
law or otherwise, insofar as such losses, claims, damages, liabilities or
expenses (or actions in respect thereof), litigation or settlements result from
the gross negligence, bad faith or willful misconduct of the Board or any member
thereof, are related to the operations of the Fund and:
(i) arise as a result of any failure by the Fund to provide the services
and furnish the materials under the terms of this Agreement; or
(ii) arise out of or result from any material breach of any representation
and/or warranty made by the Fund in this Agreement or arise out of or
result from any other material breach of this Agreement by the Fund, as
limited and in accordance with the provisions of Sections 8.3(b) and
8.3(a);
8.3(b). The Fund shall not be liable under this indemnification provision
with respect to any losses, claims, damages, liabilities or litigation incurred
or assessed against an Indemnified Party as may arise from such Indemnified
Party's gross negligence, bad faith, or willful misconduct the performance of
such Indemnified Party's duties or by reason of such Indemnified Party's
reckless disregard of obligations and duties under this Agreement.
14
<PAGE>
8.3(c). The Fund shall not be liable under this indemnification provision
with respect to any claim made against an Indemnified Party unless such
Indemnified Party shall have notified the Fund in writing within a reasonable
time after the summons or other first legal process giving information of the
nature of the claim shall have been served upon such Indemnified Party (or after
such Indemnified Party shall have received notice of such service on any
designated agent), but failure to notify the Fund of any such claim shall not
relieve the Fund from any liability which it may have to the Indemnified Party
against whom such action is brought otherwise than on account of this
indemnification provision. In case any such action is brought against the
Indemnified Parties, the Fund will be entitled to participate, at its own
expense, in the defense thereof The Fund also shall be entitled to assume the
defense thereof, with counsel satisfactory to the party named in the action.
After notice from the Fund to such party of the Fund's election to assume the
defense thereof, the Indemnified Party shall bear the fees and expenses of any
additional counsel retained by it, and the Fund will not be liable to such party
under this Agreement for any legal or other expenses subsequently incurred by
such party independently in connection with the defense thereof other than
reasonable costs of investigation.
8.3(d). The Company agrees promptly to notify the Fund of the commencement
of any litigation or proceedings against it or any of its respective officers or
directors in connection with this Agreement, the issuance or sale of the
Variable Products, with respect to the operation of either Account, or the sale
or acquisition of shares of the Fund.
ARTICLE IX. Applicable Law
9.1. This Agreement shall be construed and the provisions hereof
interpreted under and in accordance with the laws of the Commonwealth of
Massachusetts.
9.2. This Agreement shall be subject to the provisions of the 1933, 1934
and 1940 Acts, and the rules and regulations and rulings thereunder, including
such exemptions from those statutes, rules and regulations as the Securities and
Exchange Commission may grant (including, but not limited to, the Shared Funding
Exemptive Order) and the terms hereof shall be interpreted and construed in
accordance therewith.
ARTICLE X. Termination
10.1. This Agreement shall continue in full force and effect until the
first to occur of:
10.1(a) termination by any party for any reason by at least sixty (60)
days advance written notice delivered to the other parties; or
10.1(b) termination by the Company by written notice to the Fund and the
Adviser with respect to any Portfolio based upon the Company's determination
that shares of such Portfolio are not reasonably available to meet the
requirements of the Variable Products; or
10.1(c) termination by the Company by written notice to the Fund and the
Adviser with respect to any Portfolio in the event any of the Portfolio's shares
are not registered, issued or sold in accordance with applicable state and/or
federal law or such law precludes the use of such shares as the underlying
investment media of the Variable Products issued or to be issued by the Company;
or
10.1(d) termination by the Company by written notice to the Fund and the
Adviser with respect to any Portfolio in the event that such Portfolio ceases to
qualify as a Regulated Investment Company
15
<PAGE>
under Subchapter M of the Code or under any successor or similar provision, or
if the Company reasonably believes that the Fund may fail to so qualify; or
10.1(e) termination by the Company by written notice to the Fund and the
Adviser with respect to any Portfolio in the event that such Portfolio fails to
meet the diversification requirements specified in Article VI hereof; or
10.1(f) termination by the Fund by written notice to the Company if the
Fund shall determine, in its sole judgment exercised in good faith, that the
Company and/or its affiliated companies has suffered a material adverse change
in its business, operations, financial condition or prospects since the date of
this Agreement or is the subject of material adverse publicity, or
10.1(g) termination by the Company by written notice to the Fund and the
Adviser, if the Company shall determine, in its sole judgment exercised in good
faith, that either the Fund or the Adviser has suffered a material adverse
change in its business, operations, financial condition or prospects since the
date of this Agreement or is the subject of material adverse publicity; or
10.2. Notwithstanding any termination of this Agreement, the Fund shall,
at the option of the Company, continue to make available additional shares of
the Fund pursuant to the terms and conditions of this Agreement, for all
Variable Products in effect on the effective date of termination of this
Agreement (hereinafter referred to as "Existing Variable Products").
Specifically, without limitation, the owners of the Existing Variable Products
shall be permitted to direct reallocation of investments in the Portfolios of
the Fund, redemption of investments in the Portfolios of the Fund and/or
investment in the Portfolios of the Fund upon the making of additional purchase
payments under the Existing Variable Products. The parties agree that this
Section 10.2 shall not apply to any termination under Article VII and the effect
of such Article VII termination shall be governed by Article VII of this
Agreement.
10.3. The provisions of Article VIII Indemnification shall survive any
termination of this Agreement pursuant to this Article X Termination.
10.4. The Company shall not redeem Fund shares attributable to the
Variable Products (as distinct from Fund shares attributable to the Company's
assets held in the Account) except (i) as necessary to implement contract owner
initiated or approved transactions, or (ii) as required by state and/or federal
laws or regulations or judicial or other legal precedent of general application
(hereinafter referred to as a "Legally Required Redemption") or (iii) as
permitted by an order of the Securities and Exchange Commission pursuant to
Section 26(b) of the 1940 Act. Upon request, the Company will promptly furnish
to the Fund the opinion of counsel for the Company (which counsel shall be
reasonably satisfactory to the Fund) to the effect that any redemption pursuant
to clause (ii) above is a Legally Required Redemption. Furthermore, except in
cases where permitted under the terms of the Variable Products, the Company
shall not prevent contract owners from allocating payments to a Portfolio that
was otherwise available under the Variable Products without first giving the
Fund 90 days prior written notice of its intention to do so.
ARTICLE XI. Notices
Any notice shall be sufficiently given when hand delivered or sent by
registered or certified mail to the other party at the address of such party set
forth below or at such other address as such party may from time to time specify
in writing to the other party.
16
<PAGE>
If to the Fund:
The Palladian Trust
440 Lincoln Street
Worcester, MA 01653
Attention:George M. Boyd, Esq
If to Adviser:
Allmerica Investment Management Company, Inc.
440 Lincoln Street
Worcester, MA 01653
Attention: Abigail M. Armstrong, Esq.
If to the Company:
Allmerica Financial Life Insurance and Annuity Company
440 Lincoln Street
Worcester, Massachusetts 01653
Attention:Richard M. Reilly, President
ARTICLE XII. Miscellaneous
12.1. A copy of the Fund's Agreement and Declaration of Trust, as may be
amended from time to time, is on file with the Secretary of the Commonwealth of
Massachusetts. Notice is hereby given that this instrument is executed by the
Fund's Trustees as Trustees and not individually, and the Fund's obligations
under this Agreement are not binding upon any of the Trustees or Shareholders of
the Fund, but are binding only upon the assets and property of the Fund.
12.2. Subject to the requirements of legal process and regulatory
authority, each party hereto shall treat as confidential the names and addresses
of the owners of the Variable Products and all information reasonably identified
as confidential in writing by any other party hereto and, except as permitted by
this Agreement, shall not disclose, disseminate or utilize such names and
addresses and other confidential information until such time as it may come into
the public domain without the express written consent of the affected party.
12.3. The captions in this Agreement are included for convenience of
reference only and in no way define or delineate any of the provisions hereof or
otherwise affect their construction or effect.
12.4. This Agreement may be executed simultaneously in two or more
counterparts, each of which taken together shall constitute one and the same
instrument.
12.5. If any provision of this Agreement shall be held or made invalid by
a court decision, statute, rule or otherwise, the remainder of the Agreement
shall not be affected thereby.
12.6. Each party hereto shall cooperate with each other party and all
appropriate governmental authorities (including without limitation the
Securities and Exchange Commission, the National Association of Securities
Dealers and state insurance regulators) and shall permit such authorities
reasonable access to its books and records in connection with any investigation
or inquiry relating to this
17
<PAGE>
Agreement or the transactions contemplated hereby. Notwithstanding the
generality of the foregoing, each party hereto further agrees to furnish the
California Insurance Commissioner with any information or reports in connection
with services provided under this Agreement which such Commissioner may request
in order to ascertain whether the insurance operations of the Company are being
conducted in a manner consistent with the California Insurance Regulations and
any other applicable law or regulations.
12.7. The rights, remedies and obligations contained in this Agreement are
cumulative and are in addition to any and all rights, remedies and obligations
at law or in equity, which the parties hereto are entitled to under state and
federal laws.
12.8. This Agreement or any of the rights and obligations hereunder may
not be assigned by any party without the prior written consent of all parties
hereto; provided, however, that the Adviser may assign this Agreement or any
rights or obligations hereunder to any affiliate of or company controlled by or
under common control with the Adviser, if such assignee is duly licensed and
registered to perform the obligations of the Adviser under this Agreement.
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to be
executed in its name and on its behalf by its duly authorized representative and
its seal to be hereunder affixed hereto as of the date specified above.
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
By: /s/ Richard M. Reilly
-------------------------------
Name: Richard M. Reilly
Title: President
THE PALLADIAN TRUST
By: /s/ Thomas P. Cunningham
-------------------------------
Name: Thomas P. Cunningham
Title: Treasurer
ALLMERICA INVESTMENT MANAGEMENT COMPANY, INC.
By: /s/ Richard F. Betzler, Jr.
-------------------------------
Name: Richard F. Betzler, Jr.
Title: Vice President
18
<PAGE>
SCHEDULE A
SEPARATE ACCOUNTS AND VARIABLE PRODUCTS
- --------------------------------------------------------------------------------
Variable Life Products
Separate Account Product Name 1933 Act # 1940 Act #
- ---------------- ------------ ---------- ----------
Fulcrum Variable Life Fulcrum SPVUL 333-15569 811-07913
Separate Account
Variable Annuity Products
Separate Account Product Name 1933 Act # 1940 Act #
- ---------------- ------------ ---------- ----------
Fulcrum Separate Account Fulcrum Annuity 333-11377 811-7799
- --------------------------------------------------------------------------------
<PAGE>
SCHEDULE B
Portfolios of
THE PALLADIAN TRUST
Value Portfolio
Growth Portfolio
International Growth Portfolio
Global Strategic Income Portfolio
Global Interactive/Telecomm Portfolio
<PAGE>
SCHEDULE C
PROXY VOTING PROCEDURES
The following is a list of procedures and corresponding responsibilities for the
handling of proxies and voting instructions relating to the Fund. The defined
terms herein shall have the meanings assigned in the Participation Agreement
except that the term "Company" shall also include the department or third party
assigned by the Company to perform the steps delineated below.
o The proxy proposals are given to the Company by the Fund as early as
possible before the date set by the Fund for the shareholder meeting to
enable the Company to consider and prepare for the solicitation of voting
instructions from owners of the Variable Products and to facilitate the
establishment of tabulation procedures. At this time the Fund will inform
the Company of the Record, Mailing and Meeting dates. This will be done
verbally approximately two months before meeting.
o Promptly after the Record Date, the Company will perform a "tape run," or
other activity, which will generate the names, addresses and number of
units which are attributed to each contract owner/policyholder (the
"Customer") as of the Record Date. Allowance should be made for account
adjustments made after this date that could affect the status of the
Customers' accounts as of the Record Date.
Note: The number of proxy statements is determined by the activities
described above. The Company will use its best efforts to call in the
number of Customers to the Fund, as soon as possible, but no later than
two weeks after the Record Date.
o The Fund's Annual Report must be sent to each Customer by the Company
either before or together with the Customers' receipt of voting
instruction solicitation material. The Fund will provide the last Annual
Report to the Company pursuant to the terms of Section 3.43 of the
Agreement to which this Schedule relates.
o The text and format for the Voting Instruction Cards ("Cards" or "Card")
is provided to the Company by the Fund. The Company, at its expense, shall
produce and personalize the Voting Instruction Cards. The Fund or its
affiliate must approve the Card before it is printed. Allow approximately
2-4 business days for printing information on the Cards. Information
commonly found on the Cards includes:
o name (legal name as found on account registration)
o address
o fund or account number
o coding to state number of units
o individual Card number for use in tracking and verification of votes
(already on Cards as printed by the Fund).
(This and related steps may occur later in the chronological process due to
possible uncertainties relating to the proposals.)
<PAGE>
o During this time, the Fund will develop, produce and pay for the Notice of
Proxy and the Proxy Statement (one document). Printed and folded notices
and statements will be sent to Company for insertion into envelopes
(envelopes and return envelopes are provided and paid for by the Company).
Contents of envelope sent to Customers by the Company will include:
o Voting Instruction Card(s)
o One proxy notice and statement (one document)
o return envelope (postage pre-paid by Company) addressed to the
Company or its tabulation agent
o "urge buckslip" - optional, but recommended. (This is a small,
single sheet of paper that requests Customers to vote as quickly as
possible and that their vote is important. One copy will be supplied
by the Fund.)
o cover letter - optional, supplied by Company and reviewed and
approved in advance by the Fund.
o The above contents should be received by the Company approximately 3-5
business days before mail date. Individual in charge at Company reviews
and approves the contents of the mailing package to ensure correctness and
completeness. Copy of this approval sent to the Fund.
o Package mailed by the Company.
* The Fund must allow at least a 15-day solicitation time to the
Company as the shareowner. (A 5-week period is recommended.)
Solicitation time is calculated as calendar days from (but not
including,) the meeting, counting backwards.
o Collection and tabulation of Cards begins. Tabulation usually takes place
in another department or another vendor depending on process used. An
often used procedure is to sort Cards on arrival by proposal into vote
categories of all yes, no, or mixed replies, and to begin data entry.
Note: Postmarks are not generally needed. A need for postmark information
would be due to an insurance company's internal procedure and has not been
required by the Fund in the past.
o Signatures on Card checked against legal name on account registration
which was printed on the Card. Note: For Example, if the account
registration is under "John A. Smith, Trustee," then that is the exact
legal name to be printed on the Card and is the signature needed on the
Card.
o If Cards are mutilated, or for any reason are illegible or are not signed
properly, they are sent back to Customer with an explanatory letter and a
new Card and return envelope. The mutilated or illegible Card is
disregarded and considered to be not received for purposes of vote
tabulation. Any Cards that have been "kicked out" (e.g. mutilated,
illegible) of the procedure are "hand verified," i.e., examined as to why
they did not complete the system. Any questions on those Cards are usually
remedied individually.
o There are various control procedures used to ensure proper tabulation of
votes and accuracy of that tabulation. The most prevalent is to sort the
Cards as they first arrive into categories depending upon their vote; an
estimate of how the vote is progressing may then be calculated. If the
initial estimates and the actual vote do not coincide, then an internal
audit of that vote should occur. This may entail a recount.
<PAGE>
o The actual tabulation of votes is done in units which is then converted to
shares. (It is very important that the Fund receives the tabulations
stated in terms of a percentage and the number of shares.) The Fund must
review and approve tabulation format.
o Final tabulation in shares is verbally given by the Company to the Fund on
the morning of the meeting not later than 10:00 am. Eastern time. The Fund
may request an earlier deadline if reasonable and if required to calculate
the vote in time for the meeting.
o A Certification of Mailing and Authorization to Vote Shares will be
required from the Company as well as an original copy of the final vote.
The Fund will provide a standard form for each Certification.
o The Company will be required to box and archive the Cards received from
the Customers. In the event that any vote is challenged or if otherwise
necessary for legal, regulatory, or accounting purposes, the Fund will be
permitted reasonable access to such Cards.
o All approvals and "signing-off may be done orally, but must always be
followed up in writing.
<PAGE>
PARTICIPATION AGREEMENT
BY AND AMONG
AIM VARIABLE INSURANCE FUNDS, INC.,
A I M DISTRIBUTORS, INC.
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY,
ON BEHALF OF ITSELF AND
ITS SEPARATE ACCOUNTS,
AND
ALLMERICA INVESTMENTS, INC.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
DESCRIPTION PAGE
- ----------- ----
Section 1. Available Funds. . . . . . . . . . . . . . . . . . . . . . . . . . . . .2
1.1 Availability.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2
1.2 Addition, Deletion or Modification of Funds. . . . . . . . . . . . . . .2
1.3 No Sales to the General Public . . . . . . . . . . . . . . . . . . . . .2
Section 2. Processing Transactions. . . . . . . . . . . . . . . . . . . . . . . . .3
2.1 Timely Pricing and Orders. . . . . . . . . . . . . . . . . . . . . . . .3
2.2 Timely Payments. . . . . . . . . . . . . . . . . . . . . . . . . . . . .3
2.3 Applicable Price . . . . . . . . . . . . . . . . . . . . . . . . . . . .3
2.4 Dividends and Distributions. . . . . . . . . . . . . . . . . . . . . . .4
2.5 Book Entry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4
Section 3. Costs and Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . .4
3.1 General. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4
3.2 Parties To Cooperate . . . . . . . . . . . . . . . . . . . . . . . . . .4
Section 4. Legal Compliance . . . . . . . . . . . . . . . . . . . . . . . . . . . .5
4.1 Tax Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5
4.2 Insurance and Certain Other Laws . . . . . . . . . . . . . . . . . . . .7
4.3 Securities Laws. . . . . . . . . . . . . . . . . . . . . . . . . . . . .8
4.4 Notice of Certain Proceedings and Other Circumstances. . . . . . . . . .9
4.5 LIFE COMPANY To Provide Documents; Information About AVIF. . . . . . . .9
4.6 AVIF To Provide Documents; Information About LIFE COMPANY. . . . . . . 10
Section 5. Mixed and Shared Funding . . . . . . . . . . . . . . . . . . . . . . . 12
5.1 General. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
5.2 Disinterested Directors. . . . . . . . . . . . . . . . . . . . . . . . 12
5.3 Monitoring for Material Irreconcilable Conflicts . . . . . . . . . . . 12
5.4 Conflict Remedies. . . . . . . . . . . . . . . . . . . . . . . . . . . 13
5.5 Notice to LIFE COMPANY . . . . . . . . . . . . . . . . . . . . . . . . 14
5.6 Information Requested by Board of Directors. . . . . . . . . . . . . . 14
5.7 Compliance with SEC Rules. . . . . . . . . . . . . . . . . . . . . . . 15
5.8 Other Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Section 6. Termination. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
6.1 Events of Termination. . . . . . . . . . . . . . . . . . . . . . . . . 15
6.2 Notice Requirement for Termination . . . . . . . . . . . . . . . . . . 16
6.3 Funds To Remain Available. . . . . . . . . . . . . . . . . . . . . . . 17
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
DESCRIPTION PAGE
- ----------- ----
6.4 Survival of Warranties and Indemnifications. . . . . . . . . . . . . . 17
6.5 Continuance of Agreement for Certain Purposes. . . . . . . . . . . . . 17
Section 7. Parties To Cooperate Respecting Termination. . . . . . . . . . . . . . 17
Section 8. Assignment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Section 9. Notices. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Section 10. Voting Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Section 11. Foreign Tax Credits . . . . . . . . . . . . . . . . . . . . . . . . . 19
Section 12. Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
12.1 Of AVIF and AIM by LIFE COMPANY and UNDERWRITER. . . . . . . . . . . . 19
12.2 Of LIFE COMPANY and UNDERWRITER by AVIF and AIM. . . . . . . . . . . . 21
12.3 Effect of Notice . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
12.4 Successors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Section 13. Applicable Law. . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Section 14. Execution in Counterparts . . . . . . . . . . . . . . . . . . . . . . 25
Section 15. Severability. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Section 16. Rights Cumulative . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Section 17. Headings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Section 18. Confidentiality . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Section 19. Trademarks and Fund Names . . . . . . . . . . . . . . . . . . . . . . 26
Section 20. Parties to Cooperate. . . . . . . . . . . . . . . . . . . . . . . . . 27
</TABLE>
ii
<PAGE>
PARTICIPATION AGREEMENT
THIS AGREEMENT, made and entered into as of the 1st day of August, 1998
("Agreement"), by and among AIM Variable Insurance Funds, Inc., a Maryland
corporation ("AVIF"), A I M Distributors, Inc., a Delaware corporation
("AIM") Allmerica Financial Life Insurance and Annuity Company, a Delaware
life insurance company ("LIFE COMPANY"), on behalf of itself and each of its
segregated asset accounts listed in Schedule A hereto, as the parties hereto
may amend from time to time (each, an "Account," and collectively, the
"Accounts"); and Allmerica Investments, Inc., an affiliate of LIFE COMPANY
and the principal underwriter of the Contracts ("UNDERWRITER") (collectively,
the "Parties").
WITNESSETH THAT:
WHEREAS, AVIF is registered with the Securities and Exchange Commission
("SEC") as an open-end management investment company under the Investment
Company Act of 1940, as amended (the "1940 Act"); and
WHEREAS, AVIF currently consists of thirteen separate series ("Series"),
shares ("Shares") of each of which are registered under the Securities Act of
1933, as amended (the "1933 Act") and are currently sold to one or more
separate accounts of life insurance companies to fund benefits under variable
annuity contracts and variable life insurance contracts; and
WHEREAS, AVIF will make Shares of each Series listed on Schedule A
hereto as the Parties hereto may amend from time to time (each a "Fund";
reference herein to "AVIF" includes reference to each Fund, to the extent the
context requires) available for purchase by the Accounts; and
WHEREAS, LIFE COMPANY will be the issuer of certain variable annuity
contracts and variable life insurance contracts ("Contracts") as set forth
on Schedule A hereto, as the Parties hereto may amend from time to time,
which Contracts (hereinafter collectively, the "Contracts"), if required by
applicable law, will be registered under the 1933 Act; and
WHEREAS, LIFE COMPANY will fund the Contracts through the Accounts, each
of which may be divided into two or more subaccounts ("Subaccounts";
reference herein to an "Account" includes reference to each Subaccount
thereof to the extent the context requires); and
WHEREAS, LIFE COMPANY will serve as the depositor of the Accounts, each
of which is registered as a unit investment trust investment company under
the 1940 Act (or exempt therefrom), and the security interests deemed to be
issued by the Accounts under the Contracts will be registered as securities
under the 1933 Act (or exempt therefrom); and
1
<PAGE>
WHEREAS, to the extent permitted by applicable insurance laws and
regulations, LIFE COMPANY intends to purchase Shares in one or more of the
Funds on behalf of the Accounts to fund the Contracts; and
WHEREAS, UNDERWRITER is a broker-dealer registered with the SEC under
the Securities Exchange Act of 1934 ("1934 Act") and a member in good
standing of the National Association of Securities Dealers, Inc. ("NASD");
WHEREAS, AIM is a broker-dealer registered with the SEC under the
Securities Exchange Act of 1934 ("1934 Act") and a member in good standing of
the National Association of Securities Dealers, Inc. ("NASD");
NOW, THEREFORE, in consideration of the mutual benefits and promises
contained herein, the Parties hereto agree as follows:
SECTION 1. AVAILABLE FUNDS
1.1 AVAILABILITY.
AVIF will make Shares of each Fund available to LIFE COMPANY for
purchase and redemption at net asset value and with no sales charges, subject
to the terms and conditions of this Agreement. The Board of Directors of
AVIF may refuse to sell Shares of any Fund to any person, or suspend or
terminate the offering of Shares of any Fund if such action is required by
law or by regulatory authorities having jurisdiction or if, in the sole
discretion of the Directors acting in good faith and in light of their
fiduciary duties under federal and any applicable state laws, such action is
deemed in the best interests of the shareholders of such Fund.
1.2 ADDITION, DELETION OR MODIFICATION OF FUNDS.
The Parties hereto may agree, from time to time, to add other Funds to
provide additional funding media for the Contracts, or to delete, combine, or
modify existing Funds, by amending Schedule A hereto. Upon such amendment to
Schedule A, any applicable reference to a Fund, AVIF, or its Shares herein
shall include a reference to any such additional Fund. Schedule A, as
amended from time to time, is incorporated herein by reference and is a part
hereof.
1.3 NO SALES TO THE GENERAL PUBLIC.
AVIF represents and warrants that no Shares of any Fund have been or
will be sold to the general public.
2
<PAGE>
SECTION 2. PROCESSING TRANSACTIONS
2.1 TIMELY PRICING AND ORDERS.
(a) AVIF or its designated agent will use its best efforts to provide
LIFE COMPANY with the net asset value per Share for each Fund by 6:00 p.m.
Central Time on each Business Day. As used herein, "Business Day" shall mean
any day on which (i) the New York Stock Exchange is open for regular trading,
(ii) AVIF calculates the Fund's net asset value, and (iii) LIFE COMPANY is
open for business.
(b) LIFE COMPANY will use the data provided by AVIF each Business Day
pursuant to paragraph (a) immediately above to calculate Account unit values
and to process transactions that receive that same Business Day's Account
unit values. LIFE COMPANY will perform such Account processing the same
Business Day, and will place corresponding orders to purchase or redeem
Shares with AVIF by 9:00 a.m. Central Time the following Business Day;
PROVIDED, however, that AVIF shall provide additional time to LIFE COMPANY
in the event that AVIF is unable to meet the 6:00 p.m. time stated in
paragraph (a) immediately above. Such additional time shall be equal to the
additional time that AVIF takes to make the net asset values available to
LIFE COMPANY.
(c) With respect to payment of the purchase price by LIFE COMPANY and
of redemption proceeds by AVIF, LIFE COMPANY and AVIF shall net purchase and
redemption orders with respect to each Fund and shall transmit one net
payment per Fund in accordance with Section 2.2, below.
(d) If AVIF provides materially incorrect Share net asset value
information (as determined under SEC guidelines), LIFE COMPANY shall be
entitled to an adjustment to the number of Shares purchased or redeemed to
reflect the correct net asset value per Share. Any material error in the
calculation or reporting of net asset value per Share, dividend or capital
gain information shall be reported promptly upon discovery to LIFE COMPANY.
2.2 TIMELY PAYMENTS.
LIFE COMPANY will wire payment for net purchases to a custodial account
designated by AVIF by 1:00 p.m. Central Time on the same day as the order for
Shares is placed, to the extent practicable. AVIF will wire payment for net
redemptions to an account designated by LIFE COMPANY by 1:00 p.m. Central
Time on the same day as the Order is placed, to the extent practicable, but
in any event within five (5) calendar days after the date the order is placed
in order to enable LIFE COMPANY to pay redemption proceeds within the time
specified in Section 22(e) of the 1940 Act or such shorter period of time as
may be required by law.
2.3 APPLICABLE PRICE.
(a) Share purchase payments and redemption orders that result from
purchase payments, premium payments, surrenders and other transactions under
Contracts (collectively,
3
<PAGE>
"Contract transactions") and that LIFE COMPANY receives prior to the close of
regular trading on the New York Stock Exchange on a Business Day will be
executed at the net asset values of the appropriate Funds next computed after
receipt by AVIF or its designated agent of the orders. For purposes of this
Section 2.3(a), LIFE COMPANY shall be the designated agent of AVIF for
receipt of orders relating to Contract transactions on each Business Day and
receipt by such designated agent shall constitute receipt by AVIF; PROVIDED
that AVIF receives notice of such orders by 9:00 a.m. Central Time on the
next following Business Day or such later time as computed in accordance with
Section 2.1(b) hereof.
(b) All other Share purchases and redemptions by LIFE COMPANY
will be effected at the net asset values of the appropriate Funds next
computed after receipt by AVIF or its designated agent of the order therefor,
and such orders will be irrevocable.
2.4 DIVIDENDS AND DISTRIBUTIONS.
AVIF will furnish notice by wire or telephone (followed by written
confirmation) on or prior to the payment date to LIFE COMPANY of any income
dividends or capital gain distributions payable on the Shares of any Fund.
LIFE COMPANY hereby elects to reinvest all dividends and capital gains
distributions in additional Shares of the corresponding Fund at the
ex-dividend date net asset values until LIFE COMPANY otherwise notifies AVIF
in writing, it being agreed by the Parties that the ex-dividend date and the
payment date with respect to any dividend or distribution will be the same
Business Day. LIFE COMPANY reserves the right to revoke this election and to
receive all such income dividends and capital gain distributions in cash.
2.5 BOOK ENTRY.
Issuance and transfer of AVIF Shares will be by book entry only. Stock
certificates will not be issued to LIFE COMPANY. Shares ordered from AVIF
will be recorded in an appropriate title for LIFE COMPANY, on behalf of its
Account.
SECTION 3. COSTS AND EXPENSES
3.1 GENERAL.
Except as otherwise specifically provided in Schedule C, attached hereto
and made a part hereof, each Party will bear, or arrange for others to bear,
all expenses incident to its performance under this Agreement.
3.2 PARTIES TO COOPERATE.
Each Party agrees to cooperate with the others, as applicable, in
arranging to print, mail and/or deliver, in a timely manner, combined or
coordinated prospectuses or other materials of AVIF and the Accounts.
4
<PAGE>
SECTION 4. LEGAL COMPLIANCE
4.1 TAX LAWS.
(a) AVIF represents and warrants that each Fund is currently
qualified as a regulated investment company ("RIC") under Subchapter M of the
Internal Revenue Code of 1986, as amended (the "Code"), and represents that
it will use its best efforts to qualify and to maintain qualification of each
Fund as a RIC. AVIF will notify LIFE COMPANY immediately upon having a
reasonable basis for believing that a Fund has ceased to so qualify or that
it might not so qualify in the future.
(b) AVIF represents that it will use its best efforts to comply and
to maintain each Fund's compliance with the diversification requirements set
forth in Section 817(h) of the Code and Section 1.817-5(b) of the regulations
under the Code. AVIF will notify LIFE COMPANY immediately upon having a
reasonable basis for believing that a Fund has ceased to so comply or that a
Fund might not so comply in the future. In the event of a breach of this
Section 4.1(b) by AVIF, it will take all reasonable steps to adequately
diversify the Fund so as to achieve compliance within the grace period
afforded by Section 1.817-5 of the regulations under the Code.
(c) LIFE COMPANY agrees that if the Internal Revenue Service ("IRS")
asserts in writing in connection with any governmental audit or review of
LIFE COMPANY or, to LIFE COMPANY's knowledge, of any Participant, that any
Fund has failed to comply with the diversification requirements of Section
817(h) of the Code or LIFE COMPANY otherwise becomes aware of any facts that
could give rise to any claim against AVIF or its affiliates as a result of
such a failure or alleged failure:
(i) LIFE COMPANY shall promptly notify AVIF of such assertion or
potential claim (subject to the Confidentiality provisions
of Section 18 as to any Participant);
(ii) LIFE COMPANY shall consult with AVIF as to how to minimize
any liability that may arise as a result of such failure or
alleged failure;
(iii) LIFE COMPANY shall use its best efforts to minimize any
liability of AVIF or its affiliates resulting from such
failure, including, without limitation, demonstrating,
pursuant to Treasury Regulations Section 1.817-5(a)(2), to
the Commissioner of the IRS that such failure was
inadvertent;
(iv) LIFE COMPANY shall permit AVIF, its affiliates and their
legal and accounting advisors to participate in any
conferences, settlement discussions or other administrative
or judicial proceeding or contests (including judicial
appeals thereof) with the IRS, any Participant or any other
claimant regarding any claims that could give rise to
liability to AVIF or its affiliates as a result of such a
failure or alleged failure; PROVIDED, however, that LIFE
COMPANY will retain control of the conduct of such
conferences discussions, proceedings, contests or appeals;
5
<PAGE>
(v) any written materials to be submitted by LIFE COMPANY to the
IRS, any Participant or any other claimant in connection
with any of the foregoing proceedings or contests
(including, without limitation, any such materials to be
submitted to the IRS pursuant to Treasury Regulations
Section 1.817-5(a)(2)), (a) shall be provided by LIFE
COMPANY to AVIF (together with any supporting information or
analysis); subject to the confidentiality provisions of
Section 18, at least ten (10) business days or such shorter
period to which the Parties hereto agree prior to the day on
which such proposed materials are to be submitted, and (b)
shall not be submitted by LIFE COMPANY to any such person
without the express written consent of AVIF which shall not
be unreasonably withheld;
(vi) LIFE COMPANY shall provide AVIF or its affiliates and their
accounting and legal advisors with such cooperation as AVIF
shall reasonably request (including, without limitation, by
permitting AVIF and its accounting and legal advisors to
review the relevant books and records of LIFE COMPANY) in
order to facilitate review by AVIF or its advisors of any
written submissions provided to it pursuant to the preceding
clause or its assessment of the validity or amount of any
claim against its arising from such a failure or alleged
failure;
(vii) LIFE COMPANY shall not with respect to any claim of the IRS
or any Participant that would give rise to a claim against
AVIF or its affiliates (a) compromise or settle any claim,
(b) accept any adjustment on audit, or (c) forego any
allowable administrative or judicial appeals, without the
express written consent of AVIF or its affiliates, which
shall not be unreasonably withheld, PROVIDED that LIFE
COMPANY shall not be required, after exhausting all
administrative penalties, to appeal any adverse judicial
decision unless AVIF or its affiliates shall have provided
an opinion of independent counsel to the effect that a
reasonable basis exists for taking such appeal; and PROVIDED
FURTHER that the costs of any such appeal shall be borne
equally by the Parties hereto; and
(viii) AVIF and its affiliates shall have no liability as a result
of such failure or alleged failure if LIFE COMPANY fails to
comply with any of the foregoing clauses (i) through (vii),
and such failure could be shown to have materially
contributed to the liability.
Should AVIF or any of its affiliates refuse to give its written consent
to any compromise or settlement of any claim or liability hereunder, LIFE
COMPANY may, in its discretion, authorize AVIF or its affiliates to act in
the name of LIFE COMPANY in, and to control the conduct of, such conferences,
discussions, proceedings, contests or appeals and all administrative
6
<PAGE>
or judicial appeals thereof, and in that event AVIF or its affiliates shall
bear the fees and expenses associated with the conduct of the proceedings
that it is so authorized to control; PROVIDED, that in no event shall LIFE
COMPANY have any liability resulting from AVIF's refusal to accept the
proposed settlement or compromise with respect to any failure caused by AVIF.
As used in this Agreement, the term "affiliates" shall have the same meaning
as "affiliated person" as defined in Section 2(a)(3) of the 1940 Act.
(d) LIFE COMPANY represents and warrants that the Contracts
currently are and will be treated as annuity contracts or life insurance
contracts under applicable provisions of the Code and that it will use its
best efforts to maintain such treatment; LIFE COMPANY will notify AVIF
immediately upon having a reasonable basis for believing that any of the
Contracts have ceased to be so treated or that they might not be so treated
in the future.
(e) LIFE COMPANY represents and warrants that each Account is a
"segregated asset account" and that interests in each Account are offered
exclusively through the purchase of or transfer into a "variable contract,"
within the meaning of such terms under Section 817 of the Code and the
regulations thereunder. LIFE COMPANY will use its best efforts to continue
to meet such definitional requirements, and it will notify AVIF immediately
upon having a reasonable basis for believing that such requirements have
ceased to be met or that they might not be met in the future. 4.2
INSURANCE AND CERTAIN OTHER LAWS.
(a) AVIF will use its best efforts to comply with any applicable
state insurance laws or regulations, to the extent specifically requested in
writing by LIFE COMPANY, including, the furnishing of information not
otherwise available to LIFE COMPANY which is required by state insurance law
to enable LIFE COMPANY to obtain the authority needed to issue the Contracts
in any applicable state.
(b) LIFE COMPANY represents and warrants that (i) it is an insurance
company duly organized, validly existing and in good standing under the laws
of the State of Delaware and has full corporate power, authority and legal
right to execute, deliver and perform its duties and comply with its
obligations under this Agreement, (ii) it has legally and validly established
and maintains each Account as a segregated asset account under Section 2932
of the Delaware Insurance Law and the regulations thereunder, and (iii) the
Contracts comply in all material respects with all other applicable federal
and state laws and regulations.
(c) AVIF represents and warrants that it is a corporation duly
organized, validly existing, and in good standing under the laws of the State
of Maryland and has full power, authority, and legal right to execute,
deliver, and perform its duties and comply with its obligations under this
Agreement.
7
<PAGE>
4.3 SECURITIES LAWS.
(a) LIFE COMPANY represents and warrants that (i) interests in each
Account pursuant to the Contracts will be registered under the 1933 Act to
the extent required by the 1933 Act, (ii) the Contracts will be duly
authorized for issuance and sold in compliance with all applicable federal
and state laws, including, without limitation, the 1933 Act, the 1934 Act,
the 1940 Act and Delaware law, (iii) each Account is and will remain
registered under the 1940 Act, to the extent required by the 1940 Act, (iv)
each Account does and will comply in all material respects with the
requirements of the 1940 Act and the rules thereunder, to the extent
required, (v) each Account's 1933 Act registration statement relating to the
Contracts, together with any amendments thereto, will at all times comply in
all material respects with the requirements of the 1933 Act and the rules
thereunder, (vi) LIFE COMPANY will amend the registration statement for its
Contracts under the 1933 Act and for its Accounts under the 1940 Act from
time to time as required in order to effect the continuous offering of its
Contracts or as may otherwise be required by applicable law, and (vii) each
Account Prospectus will at all times comply in all material respects with the
requirements of the 1933 Act and the rules thereunder.
(b) AVIF represents and warrants that (i) Shares sold pursuant to
this Agreement will be registered under the 1933 Act to the extent required
by the 1933 Act and duly authorized for issuance and sold in compliance with
Maryland law, (ii) AVIF is and will remain registered under the 1940 Act to
the extent required by the 1940 Act, (iii) AVIF will amend the registration
statement for its Shares under the 1933 Act and itself under the 1940 Act
from time to time as required in order to effect the continuous offering of
its Shares, (iv) AVIF does and will comply in all material respects with the
requirements of the 1940 Act and the rules thereunder, (v) AVIF's 1933 Act
registration statement, together with any amendments thereto, will at all
times comply in all material respects with the requirements of the 1933 Act
and rules thereunder, and (vi) AVIF's Prospectus will at all times comply in
all material respects with the requirements of the 1933 Act and the rules
thereunder.
(c) AVIF will at its expense register and qualify its Shares for sale
in accordance with the laws of any state or other jurisdiction if and to the
extent reasonably deemed advisable by AVIF.
(d) AVIF currently does not intend to make any payments to finance
distribution expenses pursuant to Rule 12b-1 under the 1940 Act or otherwise,
although it reserves the right to make such payments in the future. To the
extent that it decides to finance distribution expenses pursuant to Rule
12b-1, AVIF undertakes to have its Board of Directors, a majority of whom are
not "interested" persons of the Fund, formulate and approve any plan under
Rule 12b-1 to finance distribution expenses.
(e) AVIF represents and warrants that all of its trustees, officers,
employees, investment advisers, and other individuals/entities having access
to the funds and/or securities of the Fund are and continue to be at all
times covered by a blanket fidelity bond or similar coverage for the benefit
of the Fund in an amount not less than the minimal coverage as required
currently by Rule 17g-(1) of the 1940 Act or related provisions as may be
promulgated from time to time. The aforesaid bond includes coverage for
larceny and embezzlement and is issued by a reputable bonding company.
8
<PAGE>
4.4 NOTICE OF CERTAIN PROCEEDINGS AND OTHER CIRCUMSTANCES.
(a) AVIF will immediately notify LIFE COMPANY of (i) the issuance by
any court or regulatory body of any stop order, cease and desist order, or
other similar order with respect to AVIF's registration statement under the
1933 Act or AVIF Prospectus, (ii) any request by the SEC for any amendment to
such registration statement or AVIF Prospectus that may affect the offering
of Shares of AVIF, (iii) the initiation of any proceedings for that purpose
or for any other purpose relating to the registration or offering of AVIF's
Shares, or (iv) any other action or circumstances that may prevent the lawful
offer or sale of Shares of any Fund in any state or jurisdiction, including,
without limitation, any circumstances in which (a) such Shares are not
registered and, in all material respects, issued and sold in accordance with
applicable state and federal law, or (b) such law precludes the use of such
Shares as an underlying investment medium of the Contracts issued or to be
issued by LIFE COMPANY. AVIF will make every reasonable effort to prevent
the issuance, with respect to any Fund, of any such stop order, cease and
desist order or similar order and, if any such order is issued, to obtain the
lifting thereof at the earliest possible time.
(b) LIFE COMPANY will immediately notify AVIF of (i) the issuance by
any court or regulatory body of any stop order, cease and desist order, or
other similar order with respect to each Account's registration statement
under the 1933 Act relating to the Contracts or each Account Prospectus, (ii)
any request by the SEC for any amendment to such registration statement or
Account Prospectus that may affect the offering of Shares of AVIF, (iii) the
initiation of any proceedings for that purpose or for any other purpose
relating to the registration or offering of each Account's interests pursuant
to the Contracts, or (iv) any other action or circumstances that may prevent
the lawful offer or sale of said interests in any state or jurisdiction,
including, without limitation, any circumstances in which said interests are
not registered and, in all material respects, issued and sold in accordance
with applicable state and federal law. LIFE COMPANY will make every
reasonable effort to prevent the issuance of any such stop order, cease and
desist order or similar order and, if any such order is issued, to obtain the
lifting thereof at the earliest possible time.
4.5 LIFE COMPANY TO PROVIDE DOCUMENTS; INFORMATION ABOUT AVIF.
(a) LIFE COMPANY will provide to AVIF or its designated agent at
least one (1) complete copy of all SEC registration statements, Account
Prospectuses, reports, any preliminary and final voting instruction
solicitation material, applications for exemptions, requests for no-action
letters, and all amendments to any of the above, that relate to each Account
or the Contracts, contemporaneously with the filing of such document with the
SEC or other regulatory authorities.
(b) LIFE COMPANY will provide to AVIF or its designated agent at
least one (1) complete copy of each piece of sales literature or other
promotional material in which AVIF or any of its affiliates is named, at
least five (5) Business Days prior to its use or such shorter period as the
Parties hereto may, from time to time, agree upon. No such material shall be
used if AVIF or its designated agent objects to such use within five (5)
Business Days after receipt of such
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material or such shorter period as the Parties hereto may, from time to time,
agree upon. AVIF hereby designates AIM as the entity to receive such sales
literature, until such time as AVIF appoints another designated agent by
giving notice to LIFE COMPANY in the manner required by Section 9 hereof.
(c) Neither LIFE COMPANY nor any of its affiliates, will give any
information or make any representations or statements on behalf of or
concerning AVIF or its affiliates in connection with the sale of the
Contracts other than (i) the information or representations contained in the
registration statement, including the AVIF Prospectus contained therein,
relating to Shares, as such registration statement and AVIF Prospectus may be
amended from time to time; or (ii) in reports or proxy materials for AVIF; or
(iii) in published reports for AVIF that are in the public domain and
approved by AVIF for distribution; or (iv) in sales literature or other
promotional material approved by AVIF, except with the express written
permission of AVIF.
(d) LIFE COMPANY shall adopt and implement procedures reasonably
designed to ensure that information concerning AVIF and its affiliates that
is intended for use only by brokers or agents selling the Contracts (I.E.,
information that is not intended for distribution to Participants) ("broker
only materials") is so used, and neither AVIF nor any of its affiliates shall
be liable for any losses, damages or expenses relating to the improper use of
such broker only materials.
(e) For the purposes of this Section 4.5, the phrase "sales
literature or other promotional material" includes, but is not limited to,
advertisements (such as material published, or designed for use in, a
newspaper, magazine, or other periodical, radio, television, telephone or
tape recording, videotape display, signs or billboards, motion pictures, or
other public media, (E.G., on-line networks such as the Internet or other
electronic messages), sales literature (I.E., any written communication
distributed or made generally available to customers or the public, including
brochures, circulars, research reports, market letters, form letters, seminar
texts, reprints or excerpts of any other advertisement, sales literature, or
published article), educational or training materials or other communications
distributed or made generally available to some or all agents or employees,
registration statements, prospectuses, statements of additional information,
shareholder reports, and proxy materials and any other material constituting
sales literature or advertising under the NASD rules, the 1933 Act or the
1940 Act.
4.6 AVIF TO PROVIDE DOCUMENTS; INFORMATION ABOUT LIFE COMPANY.
(a) AVIF will provide to LIFE COMPANY at least one (1) complete copy
of all SEC registration statements, AVIF Prospectuses, reports, any
preliminary and final proxy material, applications for exemptions, requests
for no-action letters, and all amendments to any of the above, that relate to
AVIF or the Shares of a Fund, contemporaneously with the filing of such
document with the SEC or other regulatory authorities.
(b) AVIF will provide to LIFE COMPANY a camera ready copy of all
AVIF prospectuses and printed copies, in an amount specified by LIFE COMPANY,
of AVIF statements of additional information, proxy materials, periodic
reports to shareholders and other materials
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required by law to be sent to Participants who have allocated any Contract
value to a Fund. AVIF will provide such copies to LIFE COMPANY in a timely
manner so as to enable LIFE COMPANY, as the case may be, to print and
distribute such materials within the time required by law to be furnished to
Participants.
(c) AVIF will provide to LIFE COMPANY or its designated agent at
least one (1) complete copy of each piece of sales literature or other
promotional material in which LIFE COMPANY, or any of its respective
affiliates is named, or that refers to the Contracts, at least five (5)
Business Days prior to its use or such shorter period as the Parties hereto
may, from time to time, agree upon. No such material shall be used if LIFE
COMPANY or its designated agent objects to such use within five (5) Business
Days after receipt of such material or such shorter period as the Parties
hereto may, from time to time, agree upon. LIFE COMPANY shall receive all
such sales literature until such time as it appoints a designated agent by
giving notice to AVIF in the manner required by Section 9 hereof.
(d) Neither AVIF nor any of its affiliates will give any information
or make any representations or statements on behalf of or concerning LIFE
COMPANY, each Account, or the Contracts other than (i) the information or
representations contained in the registration statement, including each
Account Prospectus contained therein, relating to the Contracts, as such
registration statement and Account Prospectus may be amended from time to
time; or (ii) in published reports for the Account or the Contracts that are
in the public domain and approved by LIFE COMPANY for distribution; or (iii)
in sales literature or other promotional material approved by LIFE COMPANY or
its affiliates, except with the express written permission of LIFE COMPANY.
(e) AVIF shall cause its principal underwriter to adopt and implement
procedures reasonably designed to ensure that information concerning LIFE
COMPANY, and its respective affiliates that is intended for use only by
brokers or agents selling the Contracts (I.E., information that is not
intended for distribution to Participants) ("broker only materials") is so
used, and neither LIFE COMPANY, nor any of its respective affiliates shall be
liable for any losses, damages or expenses relating to the improper use of
such broker only materials.
(f) For purposes of this Section 4.6, the phrase "sales literature or
other promotional material" includes, but is not limited to, advertisements
(such as material published, or designed for use in, a newspaper, magazine,
or other periodical, radio, television, telephone or tape recording,
videotape display, signs or billboards, motion pictures, or other public
media, (E.G., on-line networks such as the Internet or other electronic
messages), sales literature (I.E., any written communication distributed or
made generally available to customers or the public, including brochures,
circulars, research reports, market letters, form letters, seminar texts,
reprints or excerpts of any other advertisement, sales literature, or
published article), educational or training materials or other communications
distributed or made generally available to some or all agents or employees,
registration statements, prospectuses, statements of additional information,
shareholder reports, and proxy materials and any other material constituting
sales literature or advertising under the NASD rules, the 1933 Act or the
1940 Act.
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SECTION 5. MIXED AND SHARED FUNDING
5.1 GENERAL.
The SEC has granted an order to AVIF exempting it from certain
provisions of the 1940 Act and rules thereunder so that AVIF may be available
for investment by certain other entities, including, without limitation,
separate accounts funding variable annuity contracts or variable life
insurance contracts, separate accounts of insurance companies unaffiliated
with LIFE COMPANY, and trustees of qualified pension and retirement plans
(collectively, "Mixed and Shared Funding"). The Parties recognize that the
SEC has imposed terms and conditions for such orders that are substantially
identical to many of the provisions of this Section 5. Sections 5.2 through
5.8 below shall apply pursuant to such an exemptive order granted to AVIF.
AVIF hereby notifies LIFE COMPANY that, in the event that AVIF implements
Mixed and Shared Funding, it may be appropriate to include in the prospectus
pursuant to which a Contract is offered disclosure regarding the potential
risks of Mixed and Shared Funding.
5.2 DISINTERESTED DIRECTORS.
AVIF agrees that its Board of Directors shall at all times consist of
directors a majority of whom (the "Disinterested Directors") are not
interested persons of AVIF within the meaning of Section 2(a)(19) of the 1940
Act and the rules thereunder and as modified by any applicable orders of the
SEC, except that if this condition is not met by reason of the death,
disqualification, or bona fide resignation of any director, then the
operation of this condition shall be suspended (a) for a period of forty-five
(45) days if the vacancy or vacancies may be filled by the Board;(b) for a
period of sixty (60) days if a vote of shareholders is required to fill the
vacancy or vacancies; or (c) for such longer period as the SEC may prescribe
by order upon application.
5.3 MONITORING FOR MATERIAL IRRECONCILABLE CONFLICTS.
AVIF agrees that its Board of Directors will monitor for the existence
of any material irreconcilable conflict between the interests of the
Participants in all separate accounts of life insurance companies utilizing
AVIF ("Participating Insurance Companies"), including each Account, and
participants in all qualified retirement and pension plans investing in AVIF
("Participating Plans"). LIFE COMPANY agrees to inform the Board of
Directors of AVIF of the existence of or any potential for any such material
irreconcilable conflict of which it is aware. The concept of a "material
irreconcilable conflict" is not defined by the 1940 Act or the rules
thereunder, but the Parties recognize that such a conflict may arise for a
variety of reasons, including, without limitation:
(a) an action by any state insurance or other regulatory authority;
(b) a change in applicable federal or state insurance, tax or
securities laws or regulations, or a public ruling, private letter ruling,
no-action or interpretative letter, or any similar action by insurance, tax
or securities regulatory authorities;
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(c) an administrative or judicial decision in any relevant proceeding;
(d) the manner in which the investments of any Fund are being managed;
(e) a difference in voting instructions given by variable annuity
contract and variable life insurance contract Participants or by Participants
of different Participating Insurance Companies;
(f) a decision by a Participating Insurance Company to disregard the
voting instructions of Participants; or
(g) a decision by a Participating Plan to disregard the voting
instructions of Plan participants.
Consistent with the SEC's requirements in connection with exemptive
orders of the type referred to in Section 5.1 hereof, LIFE COMPANY will
assist the Board of Directors in carrying out its responsibilities by
providing the Board of Directors with all information reasonably necessary
for the Board of Directors to consider any issue raised, including
information as to a decision by LIFE COMPANY to disregard voting instructions
of Participants. LIFE COMPANY's responsibilities in connection with the
foregoing shall be carried out with a view only to the interests of
Participants.
5.4 CONFLICT REMEDIES.
(a) It is agreed that if it is determined by a majority of the
members of the Board of Directors or a majority of the Disinterested
Directors that a material irreconcilable conflict exists, LIFE COMPANY will,
if it is a Participating Insurance Company for which a material
irreconcilable conflict is relevant, at its own expense and to the extent
reasonably practicable (as determined by a majority of the Disinterested
Directors), take whatever steps are necessary to remedy or eliminate the
material irreconcilable conflict, which steps may include, but are not
limited to:
(i) withdrawing the assets allocable to some or all of the
Accounts from AVIF or any Fund and reinvesting such assets
in a different investment medium, including another Fund of
AVIF, or submitting the question whether such segregation
should be implemented to a vote of all affected Participants
and, as appropriate, segregating the assets of any
particular group (E.G., annuity Participants, life insurance
Participants or all Participants) that votes in favor of
such segregation, or offering to the affected Participants
the option of making such a change; and
(ii) establishing a new registered investment company of the type
defined as a "management company" in Section 4(3) of the
1940 Act or a new separate account that is operated as a
management company.
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(b) If the material irreconcilable conflict arises because of LIFE
COMPANY's decision to disregard Participant voting instructions and that
decision represents a minority position or would preclude a majority vote,
LIFE COMPANY may be required, at AVIF's election, to withdraw each Account's
investment in AVIF or any Fund. No charge or penalty will be imposed as a
result of such withdrawal. Any such withdrawal must take place within six
(6) months after AVIF gives notice to LIFE COMPANY that this provision is
being implemented, and until such withdrawal AVIF shall continue to accept
and implement orders by LIFE COMPANY for the purchase and redemption of
Shares of AVIF.
(c) If a material irreconcilable conflict arises because a particular
state insurance regulator's decision applicable to LIFE COMPANY conflicts
with the majority of other state regulators, then LIFE COMPANY will withdraw
each Account's investment in AVIF within six (6) months after AVIF's Board of
Directors informs LIFE COMPANY that it has determined that such decision has
created a material irreconcilable conflict, and until such withdrawal AVIF
shall continue to accept and implement orders by LIFE COMPANY for the
purchase and redemption of Shares of AVIF. No charge or penalty will be
imposed as a result of such withdrawal.
(d) LIFE COMPANY agrees that any remedial action taken by it in
resolving any material irreconcilable conflict will be carried out at its
expense and with a view only to the interests of Participants.
(e) For purposes hereof, a majority of the Disinterested Directors
will determine whether or not any proposed action adequately remedies any
material irreconcilable conflict. In no event, however, will AVIF or any of
its affiliates be required to establish a new funding medium for any
Contracts. LIFE COMPANY will not be required by the terms hereof to establish
a new funding medium for any Contracts if an offer to do so has been declined
by vote of a majority of Participants materially adversely affected by the
material irreconcilable conflict.
5.5 NOTICE TO LIFE COMPANY.
AVIF will promptly make known in writing to LIFE COMPANY the Board of
Directors' determination of the existence of a material irreconcilable
conflict, a description of the facts that give rise to such conflict and the
implications of such conflict.
5.6 INFORMATION REQUESTED BY BOARD OF DIRECTORS.
LIFE COMPANY and AVIF (or its investment adviser) will at least annually
submit to the Board of Directors of AVIF such reports, materials or data as
the Board of Directors may reasonably request so that the Board of Directors
may fully carry out the obligations imposed upon it by the provisions hereof
or any exemptive order granted by the SEC to permit Mixed and Shared
Funding, and said reports, materials and data will be submitted at any
reasonable time deemed appropriate by the Board of Directors. All reports
received by the Board of Directors of potential or existing conflicts, and
all Board of Directors actions with regard to determining the existence of a
conflict, notifying Participating Insurance Companies and Participating Plans
of a conflict, and determining whether any proposed action adequately
remedies a conflict, will be
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properly recorded in the minutes of the Board of Directors or other
appropriate records, and such minutes or other records will be made available
to the SEC upon request.
5.7 COMPLIANCE WITH SEC RULES.
If, at any time during which AVIF is serving as an investment medium for
variable life insurance Contracts, 1940 Act Rules 6e-3(T) or, if applicable,
6e-2 are amended or Rule 6e-3 is adopted to provide exemptive relief with
respect to Mixed and Shared Funding, AVIF agrees that it will comply with the
terms and conditions thereof and that the terms of this Section 5 shall be
deemed modified if and only to the extent required in order also to comply
with the terms and conditions of such exemptive relief that is afforded by
any of said rules that are applicable.
5.8 OTHER REQUIREMENTS.
AVIF will require that each Participating Insurance Company and
Participating Plan enter into an agreement with AVIF that contains in
substance the same provisions as are set forth in Sections 4.1(b), 4.1(d),
4.3(a), 4.4(b), 4.5(a), 5, and 10 of this Agreement.
SECTION 6. TERMINATION
6.1 EVENTS OF TERMINATION.
Subject to Section 6.4 below, this Agreement will terminate as to a Fund:
(a) at the option of any party, with or without cause with respect to
the Fund, upon six (6) months advance written notice to the other parties,
or, if later, upon receipt of any required exemptive relief from the SEC,
unless otherwise agreed to in writing by the parties; or
(b) at the option of AVIF upon institution of formal proceedings
against LIFE COMPANY or its affiliates by the NASD, the SEC, any state
insurance regulator or any other regulatory body regarding LIFE COMPANY's
obligations under this Agreement or related to the sale of the Contracts, the
operation of each Account, or the purchase of Shares, if, in each case, AVIF
reasonably determines that such proceedings, or the facts on which such
proceedings would be based, have a material likelihood of imposing material
adverse consequences on the Fund with respect to which the Agreement is to be
terminated; or
(c) at the option of LIFE COMPANY upon institution of formal
proceedings against AVIF, its principal underwriter, or its investment
adviser by the NASD, the SEC, or any state insurance regulator or any other
regulatory body regarding AVIF's obligations under this Agreement or related
to the operation or management of AVIF or the purchase of AVIF Shares, if, in
each case, LIFE COMPANY reasonably determines that such proceedings, or the
facts on
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which such proceedings would be based, have a material likelihood of imposing
material adverse consequences on LIFE COMPANY, or the Subaccount
corresponding to the Fund with respect to which the Agreement is to be
terminated; or
(d) at the option of any Party in the event that (i) the Fund's
Shares are not registered and, in all material respects, issued and sold in
accordance with any applicable federal or state law, or (ii) such law
precludes the use of such Shares as an underlying investment medium of the
Contracts issued or to be issued by LIFE COMPANY; or
(e) upon termination of the corresponding Subaccount's investment in
the Fund pursuant to Section 5 hereof; or
(f) at the option of LIFE COMPANY if the Fund ceases to qualify as a
RIC under Subchapter M of the Code or under successor or similar provisions,
or if LIFE COMPANY reasonably believes that the Fund may fail to so qualify;
or
(g) at the option of LIFE COMPANY if the Fund fails to comply with
Section 817(h) of the Code or with successor or similar provisions, or if
LIFE COMPANY reasonably believes that the Fund may fail to so comply; or
(h) at the option of AVIF if the Contracts issued by LIFE COMPANY
cease to qualify as annuity contracts or life insurance contracts under the
Code (other than by reason of the Fund's noncompliance with Section 817(h) or
Subchapter M of the Code) or if interests in an Account under the Contracts
are not registered, where required, and, in all material respects, are not
issued or sold in accordance with any applicable federal or state law; or
(i) upon another Party's material breach of any provision of this
Agreement.
6.2 NOTICE REQUIREMENT FOR TERMINATION.
No termination of this Agreement will be effective unless and until the
Party terminating this Agreement gives prior written notice to the other
Party to this Agreement of its intent to terminate, and such notice shall set
forth the basis for such termination. Furthermore:
(a) in the event that any termination is based upon the provisions of
Sections 6.1(a) or 6.1(e) hereof, such prior written notice shall be given
at least six (6) months in advance of the effective date of termination
unless a shorter time is agreed to by the Parties hereto;
(b) in the event that any termination is based upon the provisions of
Sections 6.1(b) or 6.1(c) hereof, such prior written notice shall be given
at least ninety (90) days in advance of the effective date of termination
unless a shorter time is agreed to by the Parties hereto; and
(c) in the event that any termination is based upon the provisions of
Sections 6.1(d), 6.1(f), 6.1(g), 6.1(h) or 6.1(i) hereof, such prior
written notice shall be given as soon as possible
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within twenty-four (24) hours after the terminating Party learns of the event
causing termination to be required.
6.3 FUNDS TO REMAIN AVAILABLE.
Notwithstanding any termination of this Agreement, AVIF will, at the
option of LIFE COMPANY, continue to make available additional shares of the
Fund pursuant to the terms and conditions of this Agreement, for all
Contracts in effect on the effective date of termination of this Agreement
(hereinafter referred to as "Existing Contracts"). Specifically, without
limitation, the owners of the Existing Contracts will be permitted to
reallocate investments in the Fund (as in effect on such date), redeem
investments in the Fund and/or invest in the Fund upon the making of
additional purchase payments under the Existing Contracts. The parties agree
that this Section 6.3 will not apply to any terminations under Section 5 and
the effect of such terminations will be governed by Section 5 of this
Agreement.
6.4 SURVIVAL OF WARRANTIES AND INDEMNIFICATIONS.
All warranties and indemnifications will survive the termination of this
Agreement.
6.5 CONTINUANCE OF AGREEMENT FOR CERTAIN PURPOSES.
If any Party terminates this Agreement with respect to any Fund pursuant
to Sections 6.1(b), 6.1(c), 6.1(d), 6.1(f), 6.1(g), 6.1(h) or 6.1(i) hereof,
this Agreement shall nevertheless continue in effect as to any Shares of that
Fund that are outstanding as of the date of such termination (the "Initial
Termination Date"). This continuation shall extend to the earlier of the
date as of which an Account owns no Shares of the affected Fund or a date
(the "Final Termination Date") six (6) months following the Initial
Termination Date, except that LIFE COMPANY may, by written notice shorten
said six (6) month period in the case of a termination pursuant to Sections
6.1(d), 6.1(f), 6.1(g), 6.1(h) or 6.1(i).
SECTION 7. PARTIES TO COOPERATE RESPECTING TERMINATION
The Parties hereto agree to cooperate and give reasonable assistance to
one another in taking all necessary and appropriate steps for the purpose of
ensuring that an Account owns no Shares of a Fund after the Final Termination
Date with respect thereto, or, in the case of a termination pursuant to
Section 6.1(a), the termination date specified in the notice of termination.
Such steps may include combining the affected Account with another Account,
substituting other mutual fund shares for those of the affected Fund, or
otherwise terminating participation by the Contracts in such Fund.
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SECTION 8. ASSIGNMENT
This Agreement may not be assigned by any Party, except with the written
consent of each other Party.
SECTION 9. NOTICES
Notices and communications required or permitted by Section 9 hereof
will be given by means mutually acceptable to the Parties concerned. Each
other notice or communication required or permitted by this Agreement will be
given to the following persons at the following addresses and facsimile
numbers, or such other persons, addresses or facsimile numbers as the Party
receiving such notices or communications may subsequently direct in writing:
AIM VARIABLE INSURANCE FUNDS, INC.
A I M DISTRIBUTORS, INC.
11 Greenway Plaza, Suite 100
Houston, Texas 77046
Facsimile: (713) 993-9185
Attn: Nancy L. Martin, Esq.
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
440 Lincoln Street
Worcester, Massachusetts 01653
Facsimile: (508) 855-6641
Attn: Richard M. Reilly, President
ALLMERICA INVESTMENTS, INC.
440 Lincoln Street
Worcester, Massachusetts 01653
Facsimile: (508) 855-6641
Attn: Stephen Parker
SECTION 10. VOTING PROCEDURES
Subject to the cost allocation procedures set forth in Section 3 hereof,
LIFE COMPANY will distribute all proxy material furnished by AVIF to
Participants to whom pass-through voting privileges are required to be
extended and will solicit voting instructions from Participants. LIFE COMPANY
will vote Shares in accordance with timely instructions received from
Participants. LIFE COMPANY will vote Shares that are (a) not attributable to
Participants to whom pass-through voting privileges are extended, or (b)
attributable to Participants, but for which no timely
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instructions have been received, in the same proportion as Shares for which
said instructions have been received from Participants, so long as and to the
extent that the SEC continues to interpret the 1940 Act to require pass
through voting privileges for Participants. Neither LIFE COMPANY nor any of
its affiliates will in any way recommend action in connection with or oppose
or interfere with the solicitation of proxies for the Shares held for such
Participants. LIFE COMPANY reserves the right to vote shares held in any
Account in its own right, to the extent permitted by law. LIFE COMPANY shall
be responsible for assuring that each of its Accounts holding Shares
calculates voting privileges in a manner consistent with that of other
Participating Insurance Companies or in the manner required by the Mixed and
Shared Funding exemptive order obtained by AVIF. AVIF will notify LIFE
COMPANY of any changes of interpretations or amendments to Mixed and Shared
Funding exemptive order it has obtained. AVIF will comply with all
provisions of the 1940 Act requiring voting by shareholders, and in
particular, AVIF either will provide for annual meetings (except insofar as
the SEC may interpret Section 16 of the 1940 Act not to require such
meetings) or will comply with Section 16(c) of the 1940 Act (although AVIF is
not one of the trusts described in Section 16(c) of that Act) as well as with
Sections 16(a) and, if and when applicable, 16(b). Further, AVIF will act in
accordance with the SEC's interpretation of the requirements of Section 16(a)
with respect to periodic elections of directors and with whatever rules the
SEC may promulgate with respect thereto.
SECTION 11. FOREIGN TAX CREDITS
AVIF agrees to consult in advance with LIFE COMPANY concerning any
decision to elect or not to elect pursuant to Section 853 of the Code to pass
through the benefit of any foreign tax credits to its shareholders.
SECTION 12. INDEMNIFICATION
12.1 OF AVIF AND AIM BY LIFE COMPANY AND UNDERWRITER.
(a) Except to the extent provided in Sections 12.1(b) and 12.1(c),
below, LIFE COMPANY and UNDERWRITER agree to indemnify and hold harmless
AVIF, AIM, their affiliates, and each person, if any, who controls AVIF, AIM,
or their affiliates within the meaning of Section 15 of the 1933 Act and each
of their respective directors and officers, (collectively, the "Indemnified
Parties" for purposes of this Section 12.1) against any and all losses,
claims, damages, liabilities (including amounts paid in settlement with the
written consent of LIFE COMPANY and UNDERWRITER) or actions in respect
thereof (including, to the extent reasonable, legal and other expenses), to
which the Indemnified Parties may become subject under any statute,
regulation, at common law or otherwise; PROVIDED, the Account owns shares of
the Fund and insofar as such losses, claims, damages, liabilities or actions:
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(i) arise out of or are based upon any untrue statement or
alleged untrue statement of any material fact contained in
any Account's 1933 Act registration statement, any Account
Prospectus, the Contracts, or sales literature or
advertising for the Contracts (or any amendment or
supplement to any of the foregoing), or arise out of or are
based upon the omission or the alleged omission to state
therein a material fact required to be stated therein or
necessary to make the statements therein not misleading;
PROVIDED, that this agreement to indemnify shall not apply
as to any Indemnified Party if such statement or omission or
such alleged statement or omission was made in reliance upon
and in conformity with information furnished to LIFE COMPANY
or UNDERWRITER by or on behalf of AVIF or AIM for use in any
Account's 1933 Act registration statement, any Account
Prospectus, the Contracts, or sales literature or
advertising or otherwise for use in connection with the sale
of Contracts or Shares (or any amendment or supplement to
any of the foregoing); or
(ii) arise out of or as a result of any other statements or
representations (other than statements or representations
contained in AVIF's 1933 Act registration statement, AVIF
Prospectus, sales literature or advertising of AVIF, or any
amendment or supplement to any of the foregoing, not
supplied for use therein by or on behalf of LIFE COMPANY,
UNDERWRITER or their respective affiliates and on which
such persons have reasonably relied) or the negligent,
illegal or fraudulent conduct of LIFE COMPANY, UNDERWRITER
or their respective affiliates or persons under their
control (including, without limitation, their employees and
"persons associated with a member," as that term is defined
in paragraph (q) of Article I of the NASD's By-Laws), in
connection with the sale or distribution of the Contracts or
Shares; or
(iii) arise out of or are based upon any untrue statement or
alleged untrue statement of any material fact contained in
AVIF's 1933 Act registration statement, AVIF Prospectus,
sales literature or advertising of AVIF, or any amendment or
supplement to any of the foregoing, or the omission or
alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements
therein not misleading if such a statement or omission was
made in reliance upon and in conformity with information
furnished to AVIF, AIM or their affiliates by or on behalf
of LIFE COMPANY, UNDERWRITER or their respective affiliates
for use in AVIF's 1933 Act registration statement, AVIF
Prospectus, sales literature or advertising of AVIF, or any
amendment or supplement to any of the foregoing; or
(iv) arise as a result of any failure by LIFE COMPANY or
UNDERWRITER to perform the obligations, provide the services
and furnish the materials
20
<PAGE>
required of them under the terms of this Agreement,
or any material breach of any representation and/or
warranty made by LIFE COMPANY or UNDERWRITER in this
Agreement or arise out of or result from any other
material breach of this Agreement by LIFE COMPANY
or UNDERWRITER; or
(v) arise as a result of failure by the Contracts issued by LIFE
COMPANY to qualify as annuity contracts or life insurance
contracts under the Code, otherwise than by reason of any
Fund's failure to comply with Subchapter M or Section 817(h)
of the Code.
(b) Neither LIFE COMPANY nor UNDERWRITER shall be liable under this
Section 12.1 with respect to any losses, claims, damages, liabilities or
actions to which an Indemnified Party would otherwise be subject by reason of
willful misfeasance, bad faith, or gross negligence in the performance by
that Indemnified Party of its duties or by reason of that Indemnified Party's
reckless disregard of obligations or duties (i) under this Agreement, or (ii)
to AVIF or AIM.
(c) Neither LIFE COMPANY nor UNDERWRITER shall be liable under this
Section 12.1 with respect to any action against an Indemnified Party unless
AVIF or AIM shall have notified LIFE COMPANY and UNDERWRITER in writing
within a reasonable time after the summons or other first legal process
giving information of the nature of the action shall have been served upon
such Indemnified Party (or after such Indemnified Party shall have received
notice of such service on any designated agent), but failure to notify LIFE
COMPANY and UNDERWRITER of any such action shall not relieve LIFE COMPANY and
UNDERWRITER from any liability which they may have to the Indemnified Party
against whom such action is brought otherwise than on account of this Section
12.1. Except as otherwise provided herein, in case any such action is
brought against an Indemnified Party, LIFE COMPANY and UNDERWRITER shall be
entitled to participate, at their own expense, in the defense of such action
and also shall be entitled to assume the defense thereof, with counsel
approved by the Indemnified Party named in the action, which approval shall
not be unreasonably withheld. After notice from LIFE COMPANY or UNDERWRITER
to such Indemnified Party of LIFE COMPANY's or UNDERWRITER's election to
assume the defense thereof, the Indemnified Party will cooperate fully with
LIFE COMPANY and UNDERWRITER and shall bear the fees and expenses of any
additional counsel retained by it, and neither LIFE COMPANY nor UNDERWRITER
will be liable to such Indemnified Party under this Agreement for any legal
or other expenses subsequently incurred by such Indemnified Party
independently in connection with the defense thereof, other than reasonable
costs of investigation.
12.2 OF LIFE COMPANY AND UNDERWRITER BY AVIF AND AIM.
(a) Except to the extent provided in Sections 12.2(c), 12.2(d) and
12.2(e), below, AVIF and AIM agree to indemnify and hold harmless LIFE
COMPANY, UNDERWRITER, their respective affiliates, and each person, if any,
who controls LIFE COMPANY, UNDERWRITER or their respective affiliates within
the meaning of Section 15 of the 1933 Act and each of their respective
directors and officers, (collectively, the "Indemnified Parties" for purposes
of this
21
<PAGE>
Section 12.2) against any and all losses, claims, damages, liabilities
(including amounts paid in settlement with the written consent of AVIF and/or
AIM) or actions in respect thereof (including, to the extent reasonable,
legal and other expenses), to which the Indemnified Parties may become
subject under any statute, regulation, at common law, or otherwise; PROVIDED,
the Account owns shares of the Fund and insofar as such losses, claims,
damages, liabilities or actions:
(i) arise out of or are based upon any untrue statement or
alleged untrue statement of any material fact contained in
AVIF's 1933 Act registration statement, AVIF Prospectus or
sales literature or advertising of AVIF (or any amendment or
supplement to any of the foregoing), or arise out of or are
based upon the omission or the alleged omission to state
therein a material fact required to be stated therein or
necessary to make the statements therein not misleading;
PROVIDED, that this agreement to indemnify shall not apply
as to any Indemnified Party if such statement or omission or
such alleged statement or omission was made in reliance upon
and in conformity with information furnished to AVIF or its
affiliates by or on behalf of LIFE COMPANY, UNDERWRITER or
their respective affiliates for use in AVIF's 1933 Act
registration statement, AVIF Prospectus, or in sales
literature or advertising or otherwise for use in connection
with the sale of Contracts or Shares (or any amendment or
supplement to any of the foregoing); or
(ii) arise out of or as a result of any other statements or
representations (other than statements or representations
contained in any Account's 1933 Act registration statement,
any Account Prospectus, sales literature or advertising for
the Contracts, or any amendment or supplement to any of the
foregoing, not supplied for use therein by or on behalf of
AVIF, AIM or their affiliates and on which such persons have
reasonably relied) or the negligent, illegal or fraudulent
conduct of AVIF, AIM or their affiliates or persons under
their control (including, without limitation, their
employees and "persons associated with a member" as that
term is defined in Section (q) of Article I of the NASD
By-Laws), in connection with the sale or distribution of
AVIF Shares; or
(iii) arise out of or are based upon any untrue statement or
alleged untrue statement of any material fact contained in
any Account's 1933 Act registration statement, any Account
Prospectus, sales literature or advertising covering the
Contracts, or any amendment or supplement to any of the
foregoing, or the omission or alleged omission to state
therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, if
such statement or omission was made in reliance upon and in
conformity with information furnished to LIFE COMPANY,
UNDERWRITER or their respective affiliates by or on behalf
of AVIF or AIM for use in any Account's 1933 Act
registration statement,
22
<PAGE>
any Account Prospectus, sales literature or advertising
covering the Contracts, or any amendment or supplement to
any of the foregoing; or
(iv) arise as a result of any failure by AVIF to perform the
obligations, provide the services and furnish the materials
required of it under the terms of this Agreement, or any
material breach of any representation and/or warranty made
by AVIF in this Agreement or arise out of or result from any
other material breach of this Agreement by AVIF.
(b) Except to the extent provided in Sections 12.2(c), 12.2(d) and
12.2(e) hereof, AVIF and AIM agree to indemnify and hold harmless the
Indemnified Parties from and against any and all losses, claims, damages,
liabilities (including amounts paid in settlement thereof with, the written
consent of AVIF and/or AIM) or actions in respect thereof (including, to the
extent reasonable, legal and other expenses) to which the Indemnified Parties
may become subject directly or indirectly under any statute, at common law or
otherwise, insofar as such losses, claims, damages, liabilities or actions
directly or indirectly result from or arise out of the failure of any Fund
to operate as a regulated investment company in compliance with (i)
Subchapter M of the Code and regulations thereunder, or (ii) Section 817(h)
of the Code and regulations thereunder, including, without limitation, any
income taxes and related penalties, rescission charges, liability under state
law to Participants asserting liability against LIFE COMPANY pursuant to the
Contracts, the costs of any ruling and closing agreement or other settlement
with the IRS, and the cost of any substitution by LIFE COMPANY of Shares of
another investment company or portfolio for those of any adversely affected
Fund as a funding medium for each Account that LIFE COMPANY reasonably deems
necessary or appropriate as a result of the noncompliance.
(c) Neither AVIF nor AIM shall be liable under this Section 12.2 with
respect to any losses, claims, damages, liabilities or actions to which an
Indemnified Party would otherwise be subject by reason of willful
misfeasance, bad faith, or gross negligence in the performance by that
Indemnified Party of its duties or by reason of such Indemnified Party's
reckless disregard of its obligations and duties (i) under this Agreement, or
(ii) to LIFE COMPANY, UNDERWRITER, each Account or Participants.
(d) Neither AVIF nor AIM shall be liable under this Section 12.2 with
respect to any action against an Indemnified Party unless the Indemnified
Party shall have notified AVIF and/or AIM in writing within a reasonable time
after the summons or other first legal process giving information of the
nature of the action shall have been served upon such Indemnified Party (or
after such Indemnified Party shall have received notice of such service on
any designated agent), but failure to notify AVIF or AIM of any such action
shall not relieve AVIF or AIM from any liability which it may have to the
Indemnified Party against whom such action is brought otherwise than on
account of this Section 12.2. Except as otherwise provided herein, in case
any such action is brought against an Indemnified Party, AVIF and/or AIM will
be entitled to participate, at its own expense, in the defense of such action
and also shall be entitled to assume the defense thereof (which shall
include, without limitation, the conduct of any ruling request and closing
agreement or other settlement proceeding with the IRS), with counsel approved
by the
23
<PAGE>
Indemnified Party named in the action, which approval shall not be
unreasonably withheld. After notice from AVIF and/or AIM to such Indemnified
Party of AVIF's or AIM's election to assume the defense thereof, the
Indemnified Party will cooperate fully with AVIF and AIM and shall bear the
fees and expenses of any additional counsel retained by it, and AVIF and AIM
will not be liable to such Indemnified Party under this Agreement for any
legal or other expenses subsequently incurred by such Indemnified Party
independently in connection with the defense thereof, other than reasonable
costs of investigation.
(e) In no event shall AVIF or AIM be liable under the indemnification
provisions contained in this Agreement to any individual or entity,
including, without limitation, LIFE COMPANY, UNDERWRITER or any other
Participating Insurance Company or any Participant, with respect to any
losses, claims, damages, liabilities or expenses that arise out of or result
from (i) a breach of any representation, warranty, and/or covenant made by
LIFE COMPANY or UNDERWRITER hereunder or by any Participating Insurance
Company under an agreement containing substantially similar representations,
warranties and covenants; (ii) the failure by LIFE COMPANY or any
Participating Insurance Company to maintain its segregated asset account
(which invests in any Fund) as a legally and validly established segregated
asset account under applicable state law and as a duly registered unit
investment trust under the provisions of the 1940 Act (unless exempt
therefrom); or (iii) the failure by LIFE COMPANY or any Participating
Insurance Company to maintain its variable annuity or life insurance
contracts (with respect to which any Fund serves as an underlying funding
vehicle) as annuity contracts or life insurance contracts under applicable
provisions of the Code.
12.3 EFFECT OF NOTICE.
Any notice given by the indemnifying Party to an Indemnified Party
referred to in Sections 12.1(c) or 12.2(d) above of participation in or
control of any action by the indemnifying Party will in no event be deemed to
be an admission by the indemnifying Party of liability, culpability or
responsibility, and the indemnifying Party will remain free to contest
liability with respect to the claim among the Parties or otherwise.
12.4 SUCCESSORS.
A successor by law of any Party shall be entitled to the benefits of the
indemnification contained in this Section 12.
SECTION 13. APPLICABLE LAW
This Agreement will be construed and the provisions hereof interpreted
under and in accordance with Maryland law, without regard for that state's
principles of conflict of laws.
24
<PAGE>
SECTION 14. EXECUTION IN COUNTERPARTS
This Agreement may be executed simultaneously in two or more
counterparts, each of which taken together will constitute one and the same
instrument.
SECTION 15. SEVERABILITY
If any provision of this Agreement is held or made invalid by a court
decision, statute, rule or otherwise, the remainder of this Agreement will
not be affected thereby.
SECTION 16. RIGHTS CUMULATIVE
The rights, remedies and obligations contained in this Agreement are
cumulative and are in addition to any and all rights, remedies and
obligations, at law or in equity, that the Parties are entitled to under
federal and state laws.
SECTION 17. HEADINGS
The Table of Contents and headings used in this Agreement are for
purposes of reference only and shall not limit or define the meaning of the
provisions of this Agreement.
SECTION 18. CONFIDENTIALITY
AVIF acknowledges that the identities of the customers of LIFE COMPANY
or any of its affiliates (collectively, the "LIFE COMPANY Protected Parties"
for purposes of this Section 18), information maintained regarding those
customers, and all computer programs and procedures or other information
developed by the LIFE COMPANY Protected Parties or any of their employees or
agents in connection with LIFE COMPANY's performance of its duties under this
Agreement are the valuable property of the LIFE COMPANY Protected Parties.
AVIF agrees that if it comes into possession of any list or compilation of
the identities of or other information about the LIFE COMPANY Protected
Parties' customers, or any other information or property of the LIFE COMPANY
Protected Parties, other than such information as may be independently
developed or compiled by AVIF from information supplied to it by the LIFE
COMPANY Protected Parties' customers who also maintain accounts directly with
AVIF, AVIF will hold such information or property in confidence and refrain
from using, disclosing or distributing any of such information or other
property except: (a) with LIFE COMPANY's prior written consent; or (b) as
required by law or judicial process. LIFE COMPANY acknowledges that the
identities of the customers of AVIF or any of its affiliates (collectively,
the "AVIF Protected Parties" for purposes of this Section 18), information
maintained regarding those customers, and all computer programs and
procedures or other information developed by the AVIF Protected Parties or
any of their employees or agents in connection with AVIF's performance of
its duties under this Agreement
25
<PAGE>
are the valuable property of the AVIF Protected Parties. LIFE COMPANY agrees
that if it comes into possession of any list or compilation of the identities
of or other information about the AVIF Protected Parties' customers or any
other information or property of the AVIF Protected Parties, other than such
information as may be independently developed or compiled by LIFE COMPANY
from information supplied to it by the AVIF Protected Parties' customers who
also maintain accounts directly with LIFE COMPANY, LIFE COMPANY will hold
such information or property in confidence and refrain from using, disclosing
or distributing any of such information or other property except: (a) with
AVIF's prior written consent; or (b) as required by law or judicial process.
Each party acknowledges that any breach of the agreements in this Section 18
would result in immediate and irreparable harm to the other parties for which
there would be no adequate remedy at law and agree that in the event of such
a breach, the other parties will be entitled to equitable relief by way of
temporary and permanent injunctions, as well as such other relief as any
court of competent jurisdiction deems appropriate.
SECTION 19. TRADEMARKS AND FUND NAMES
(a) A I M Management Group Inc. ("AIM" or "licensor"), an affiliate
of AVIF, owns all right, title and interest in and to the name, trademark
and service mark "AIM" and such other tradenames, trademarks and service
marks as may be set forth on Schedule B, as amended from time to time by
written notice from AIM to LIFE COMPANY (the "AIM licensed marks" or the
"licensor's licensed marks") and is authorized to use and to license other
persons to use such marks. LIFE COMPANY and its affiliates are hereby granted
a non-exclusive license to use the AIM licensed marks in connection with LIFE
COMPANY's performance of the services contemplated under this Agreement,
subject to the terms and conditions set forth in this Section 19.
(b) The grant of license to LIFE COMPANY and its affiliates ( the
"licensee") shall terminate automatically upon termination of this Agreement.
Upon automatic termination, the licensee shall cease to use the licensor's
licensed marks, except that LIFE COMPANY shall have the right to continue to
service any outstanding Contracts bearing any of the AIM licensed marks.
Upon AIM's elective termination of this license, LIFE COMPANY and its
affiliates shall immediately cease to issue any new annuity or life insurance
contracts bearing any of the AIM licensed marks and shall likewise cease any
activity which suggests that it has any right under any of the AIM licensed
marks or that it has any association with AIM, except that LIFE COMPANY shall
have the right to continue to service outstanding Contracts bearing any of
the AIM licensed marks.
(c) The licensee shall obtain the prior written approval of the
licensor for the public release by such licensee of any materials bearing the
licensor's licensed marks. The licensor's approvals shall not be
unreasonably withheld.
(d) During the term of this grant of license, a licensor may request
that a licensee submit samples of any materials bearing any of the licensor's
licensed marks which were previously approved by the licensor but, due to
changed circumstances, the licensor may wish to
26
<PAGE>
reconsider. If, on reconsideration, or on initial review, respectively, any
such samples fail to meet with the written approval of the licensor, then the
licensee shall immediately cease distributing such disapproved materials. The
licensor's approval shall not be unreasonably withheld, and the licensor,
when requesting reconsideration of a prior approval, shall assume the
reasonable expenses of withdrawing and replacing such disapproved materials.
The licensee shall obtain the prior written approval of the licensor for the
use of any new materials developed to replace the disapproved materials, in
the manner set forth above.
(e) The licensee hereunder: (i) acknowledges and stipulates that, to
the best of the knowledge of the licensee, the licensor's licensed marks are
valid and enforceable trademarks and/or service marks and that such licensee
does not own the licensor's licensed marks and claims no rights therein other
than as a licensee under this Agreement; (ii) agrees never to contend
otherwise in legal proceedings or in other circumstances; and (iii)
acknowledges and agrees that the use of the licensor's licensed marks
pursuant to this grant of license shall inure to the benefit of the licensor.
SECTION 20. PARTIES TO COOPERATE
Each party to this Agreement will cooperate with each other party and
all appropriate governmental authorities (including, without limitation, the
SEC, the NASD and state insurance regulators) and will permit each other and
such authorities reasonable access to its books and records (including copies
thereof) in connection with any investigation or inquiry relating to this
Agreement or the transactions contemplated hereby.
------------------------
27
<PAGE>
IN WITNESS WHEREOF, the Parties have caused this Agreement to be
executed in their names and on their behalf by and through their duly
authorized officers signing below.
AIM VARIABLE INSURANCE FUNDS, INC.
Attest: ________________________ By: _________________________
Name: ________________________ Name: Robert H. Graham
Title ________________________ Title: President
A I M DISTRIBUTORS, INC.
Attest: ________________________ By: _________________________
Name: ________________________ Name: Michael J. Cemo
Title: ________________________ Title: President
ALLMERICA FINANCIAL LIFE INSURANCE
AND ANNUITY COMPANY, on behalf of itself
and its separate accounts
Attest: By: /s/ Richard M. Reilly
------------------------ ---------------------------
Name: Name: Richard M. Reilly
------------------------ ------------------------
Title: Title: Vice President
------------------------ ------------------------
ALLMERICA INVESTMENTS, INC.
Attest: By: /s/ Stephen Parker
------------------------ ---------------------------
Name: Name: Stephen Parker
------------------------ ------------------------
Title: Title: President
------------------------ ------------------------
28
<PAGE>
SCHEDULE A
FUNDS AVAILABLE UNDER THE CONTRACTS
- - AIM VARIABLE INSURANCE FUNDS, INC.
AIM V.I. Value Fund
SEPARATE ACCOUNTS UTILIZING THE FUNDS
Fulcrum Account of Allmerica Financial Life
Insurance and Annuity Company
Fulcrum Variable Life Account of Allmerica Financial Life
Insurance and Annuity Company
CONTRACTS FUNDED BY THE SEPARATE ACCOUNTS
29
<PAGE>
SCHEDULE B
- - AIM VARIABLE INSURANCE FUNDS, INC.
AIM V.I. Value Fund
- - AIM and Design
[AIM Logo]
30
<PAGE>
SCHEDULE C
EXPENSE ALLOCATIONS
LIFE COMPANY AVIF / AIM
preparing and filing the Account's preparing and filing the Fund's
registration statement registration statement
text composition for Account text composition for Fund prospectuses
prospectuses and supplements and supplements
text alterations of prospectuses text alterations of prospectuses
(Account) and supplements (Account) (Fund) and supplements (Fund)
printing Account and Fund a cameraready Fund prospectus
prospectuses and supplements
text composition and printing Account text composition and printing Fund
SAIs SAIs
mailing and distributing Account SAIs mailing and distributing Fund SAIs to
to policy owners upon request by policy owners upon request by policy
policy owners owners
mailing and distributing prospectuses
(Account and Fund) and supplements
(Account and Fund) to policy owners
of record as required by Federal
Securities Laws and to prospective
purchasers
text composition (Account), printing, text composition of annual and semi-
mailing, and distributing annual and annual reports (Fund)
semi-annual reports for Account (Fund
and Account as, applicable)
text composition, printing, mailing, text composition, printing, mailing,
distributing, and tabulation of proxy distributing and tabulation of proxy
statements and voting instruction statements and voting instruction
solicitation materials to policy solicitation materials to policy
owners with respect to proxies related owners with respect to proxies related
to the Account to the Fund
preparation, printing and distributing
sales material and advertising
relating to the Funds, insofar as such
materials relate to the Contracts and
filing such materials with and
obtaining approval from, the SEC, the
NASD, any state insurance regulatory
authority, and any other appropriate
regulatory authority, to the extent
required
31
<PAGE>
Amendment to Schedules 1, 2 and 3 of the Participation Agreement
among
Delaware Group Premium Fund, Inc.
Delaware Distributors, Inc.
Allmerica Financial Life Insurance and Annuity Company
And
First Allmerica Financial Life Insurance Company
WHEREAS, Delaware Group Premium Fund, Inc., Delaware Distributors, Inc.,
Allmerica Financial Life Insurance and Annuity Company (formerly SMA Life
Assurance Company) and First Allmerica Financial Life Insurance Company
(formerly State Mutual Life Assurance Company of America) entered into a
Participation Agreement on December 23, 1991 ("Participation Agreement"); and
WHEREAS, the Participation Agreement provides for the amendment of Schedules 1,
2 and 3 thereto by mutual written consent of the parties from time to time in
accordance with the provisions of Article XI thereof, and the parties now wish
to amend and restate in their entirety Schedules 1, 2 and 3; and
WHEREAS, Delaware Distributors, Inc. has assigned the Participation Agreement to
its affiliate, Delaware Distributors, L.P. in accordance with section 10.1(m) of
said Agreement.
NOW, THEREFORE, the parties do hereby agree:
1. To replace Schedules 1, 2 and 3 of the Participation Agreement and any
amendments thereto with the attached Schedules 1, 2 and 3 dated August 1,
1998.
2. All terms and conditions of the Participation Agreement and Schedules
thereto shall continue in full force and effect except as modified
hereby.
In witness whereof, each of the parties has caused this agreement to be executed
in its name and on its behalf by its duly authorized representatives as of the
date specified below.
DELAWARE DISTRIBUTORS, L.P.
DELAWARE GROUP PREMIUM FUND, INC. By: DELAWARE DISTRIBUTORS, INC.
(General Partner)
By: By:
------------------------ ------------------------
Name: Wayne A. Stork Name: David K. Downes
Title: Chairman Title: Executive Vice President,
Chief Operating Officer, Chief
Financial Officer
Date: Date:
------------------------ ------------------------
ALLMERICA FINANCIAL LIFE INSURANCE FIRST ALLMERICA FINANCIAL LIFE
AND ANNUITY COMPANY INSURANCE COMPANY
By: /s/ Richard M. Reilly By: /s/ Richard M. Reilly
------------------------ ------------------------
Name: Richard M. Reilly Name: Richard M. Reilly
Title: President Title: Vice President
Date: August 1, 1998 Date: August 1, 1998
------------------------ ------------------------
SCHEDULE 1
SEPARATE ACCOUNTS OF ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
("AFLIAC") AND FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY ("FAFLIC")
INVESTING IN THE FUND
As of August 1, 1998
Name of Account Date Established
- --------------- ----------------
Separate Account VA-K November 1, 1990
Of AFLIAC
Separate Account VEL June 3, 1987
Of AFLIAC
Separate Account VEL II January 21, 1993
Of AFLIAC
Separate Account VEL III June 13, 1996
Of AFLIAC
Separate Account Inheiritage September 15, 1993
Of AFLIAC
Fulcrum Separate Account June 13, 1996
Of AFLIAC
Fulcrum Variable Life Separate Account June 13, 1996
Of AFLIAC
Separate Account VA-K August 20, 1991
Of FAFLIC
Separate Account VEL II August 20, 1991
Of FAFLIC
Separate Account VEL III June 13, 1996
Of FAFLIC
Separate Account Inheiritage August 20, 1991
Of FAFLIC
Fulcrum Separate Account June 13, 1996
Of FAFLIC
<PAGE>
SCHEDULE 2
Variable Annuity Contracts
And Variable Life Insurance Policies
Supported by Separate Accounts
Listed on Schedule 1
As of August 1, 1998
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
- ------------------------------------------------------
Individual Delaware Medallion Variable Annuity Contracts funded by sub-accounts
of Separate Account VA-K and investing in shares of Delaware Group Premium Fund,
Inc.
Individual ExecAnnuity Plus Annuity Contracts funded by sub-accounts of Separate
Account VA-K and investing in shares of the International Equity Series of
Delaware Group Premium Fund, Inc.
Individual VEL Variable Life Insurance Policies funded by sub-accounts of
Separate Account VEL and investing in shares of the International Equity Series
of Delaware Group Premium Fund, Inc.
Individual VEL II Variable Life Insurance Policies funded by sub-accounts of
Separate Account VEL II and investing in shares of the International Equity
Series of Delaware Group Premium Fund, Inc.
Individual VEL III Variable Life Insurance Policies funded by sub-accounts of
Separate Account VEL III and investing in shares of the International Equity
Series of Delaware Group Premium Fund, Inc.
Individual Inheiritage Variable Life Insurance Policies funded by sub-accounts
of Separate Account Inheiritage and investing in shares of the International
Equity Series of Delaware Group Premium Fund, Inc.
Individual Fulcrum Variable Annuity Contracts funded by sub-accounts of the
Fulcrum Separate Account and investing in shares of Delaware Group Premium Fund,
Inc.
Individual Fulcrum Variable Life Insurance Policies funded by sub-accounts of
Fulcrum Variable Life Separate Account and investing in shares of Delaware Group
Premium Fund, Inc.
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
- ------------------------------------------------
Individual Delaware Medallion Variable Annuity Contracts funded by sub-accounts
of Separate Account VA-K and investing in shares of Delaware Group Premium Fund,
Inc.
Individual ExecAnnuity Plus Annuity Contracts funded by sub-accounts of Separate
Account VA-K and investing in shares of the International Equity Series of
Delaware Group Premium Fund, Inc.
Individual VEL II Variable Life Insurance Policies funded by sub-accounts of
Separate Account VEL II and investing in shares of the International Equity
Series of Delaware Group Premium Fund, Inc.
Individual VEL III Variable Life Insurance Policies funded by sub-accounts of
Separate Account VEL III and investing in shares of the International Equity
Series of Delaware Group Premium Fund, Inc.
Individual Inheiritage Variable Life Insurance Policies funded by sub-accounts
of Separate Account Inheiritage and investing in shares of the International
Equity Series of Delaware Group Premium Fund, Inc.
Individual Fulcrum Variable Annuity Contracts funded by sub-accounts of the
Fulcrum Separate Account and investing in shares of Delaware Group Premium Fund,
Inc.
<PAGE>
SCHEDULE 3
Variable Contracts
Excluded from Section 1.8
As of August 1, 1998
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
- ------------------------------------------------------
Individual Variable Annuity Policies Marketed under the name "ExecAnnuity Plus"
Individual Variable Annuity Policies Marketed under the name "Fulcrum"
Individual Variable Life Insurance Policies Marketed under the name "VEL"
Individual Variable Life Insurance Policies Marketed under the name "VEL Plus"
Individual Variable Life Insurance Policies Marketed under the name "VEL II"
Individual Variable Life Insurance Policies Marketed under the name "Estate
Optimizer"
Individual Variable Life Insurance Policies Marketed under the name
"Inheiritage"
Individual Variable Life Insurance Policies Marketed under the name "Fulcrum
Variable Life (SPVUL)"
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
- ------------------------------------------------
Individual Variable Annuity Policies Marketed under the name "ExecAnnuity Plus"
Individual Variable Annuity Policies Marketed under the name "Fulcrum"
Individual Variable Life Insurance Policies Marketed under the name "VEL II"
Individual Variable Life Insurance Policies Marketed under the name "Estate
Optimizer"
Individual Variable Life Insurance Policies Marketed under the name
"Inheiritage"
<PAGE>
PARTICIPATION AGREEMENT
AMONG
LAZARD RETIREMENT SERIES, INC.
LAZARD ASSET MANAGEMENT
AND
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
DATED AS OF
AUGUST 1, 1998
<PAGE>
TABLE OF CONTENTS
PAGE
ARTICLE I. Purchase of Fund Shares 4
ARTICLE II Representations and Warranties 5
ARTICLE III Prospectuses, Reports to Shareholders
and Proxy Statements, Voting 6
ARTICLE IV Sales Material and Information 8
ARTICLE V Fees and Expenses 9
ARTICLE VI Diversification 9
ARTICLE VII Potential Conflicts 10
ARTICLE VIII Indemnification 11
ARTICLE IX. Applicable Law 15
ARTICLE X Termination 15
ARTICLE XI Notices 16
ARTICLE XII Miscellaneous 17
SCHEDULE A Separate Accounts and Variable Products A -1
SCHEDULE B Portfolios of Lazard Retirement Series, Inc. B -1
SCHEDULE C Proxy Voting Procedures C -1
2
<PAGE>
THIS AGREEMENT, made and entered into as of the 1st day of August, 1998 by and
among: ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY (hereinafter the
"Company"), a Delaware corporation, on its own behalf and on behalf of each
separate account of the Company set forth on Schedule A hereto, as may be
amended from time to time (each such account hereinafter referred to as the
"Account"); LAZARD RETIRMENT SERIES, INC., a Maryland corporation (hereinafter
the "Fund"), and LAZARD ASSET MANAGEMENT (hereinafter the "Adviser"), a division
of Lazard Freres & Co. LLC, a New York limited liability company
WHEREAS, the Fund engages in business as an open-end management
investment company and is available to act as (i) the investment vehicle for
separate accounts established by insurance companies for individual and group
life insurance policies and annuity contracts with variable accumulation
and/or pay-out provisions (hereinafter referred to individually and/or
collectively as "Variable Products") and (ii) the investment vehicle for
certain qualified pension and retirement plans (hereinafter "Qualified
Plans"); and
WHEREAS, insurance companies desiring to utilize the Fund as an
investment vehicle under their Variable Products enter into participation
agreements with the Fund and the Adviser (the "Participating Insurance
Companies");
WHEREAS, shares of the Fund are divided into several series of shares,
each representing the interest in a particular managed portfolio of
securities and other assets (each such series hereinafter referred to as a
"Portfolio"), any one or more of which may be made available under this
Agreement, as may be amended from time to time by mutual agreement of the
parties hereto; and
WHEREAS, the Fund has received an order from the Securities and Exchange
Commission, granting Participating Insurance Companies and Variable Insurance
Product separate accounts exemptions from the provisions of Sections 9(a),
13(a), 15(a), and 15(b) of the Investment Company Act of 1940, as amended
(hereinafter the "1940 Act"), and Rules 6e-2(b)(15) and 6e-3(T)(b)(15)
thereunder, to the extent necessary to permit shares of the Fund to be sold
to and held by separate accounts of both affiliated and unaffiliated life
insurance companies and Qualified Plans (hereinafter the "Shared Funding
Exemptive Order"); and
WHEREAS, the Fund is registered as an open-end management investment
company under the 1940 Act and its shares are registered under the Securities
Act of 1933, as amended (hereinafter the "1933 Act"); and
WHEREAS, the Adviser is duly registered as an investment adviser under
the Investment Advisers Act of 1940, as amended, and any applicable state
securities laws and manages each of the certain portfolios of the Fund; and
WHEREAS, Allmerica Investments, Inc. (the "Underwriter") is registered
as a broker/dealer under the Securities Exchange Act of 1934, as amended
(hereinafter the "1934 Act"), is a member in good standing of the National
Association of Securities Dealers, Inc. (hereinafter "NASD"); and
WHEREAS, the Company has registered or will register certain Variable
Products under the 1933 Act; and
WHEREAS, each Account is a duly organized, validly existing segregated
asset account, established by resolution or under authority of the Board of
Directors of the Company, to set aside and
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invest assets attributable to the aforesaid Variable Products, and the
Company has registered or will register each Account as a unit investment
trust under the 1940 Act; and
WHEREAS, to the extent permitted by applicable insurance laws and
regulations, the Company intends to purchase, on behalf of each Account,
shares in the Portfolios set forth in Schedule B attached to this Agreement,
to fund certain of the aforesaid Variable Insurance Products and the Fund is
authorized to sell such shares to each such Account at net asset value;
NOW, THEREFORE, in consideration of their mutual promises, the parties
hereto agree as follows:
ARTICLE I. PURCHASE OF FUND SHARES
1.1. The Fund agrees to make available for purchase by the Company
shares of the Fund and shall execute orders placed for each Account on a
daily basis at the net asset value next computed after receipt by the Fund or
its designee of such order. For purposes of this Section 1.1, the Company
shall be the designee of the Fund for receipt of such orders from each
Account and receipt by such designee shall constitute receipt by the Fund;
provided that the Fund receives notice of such order by 9:00 a.m. Eastern
time on the next following Business Day. "Business Day" shall mean any day
on which the New York Stock Exchange is open for trading and on which the
Fund calculates its net asset value pursuant to the rules of the Securities
and Exchange Commission.
1.2. The Fund, so long as this Agreement is in effect, agrees to make
its shares available indefinitely for purchase at the applicable net asset
value per share by the Company and its Accounts on those days on which the
Fund calculates its net asset value pursuant to rules of the Securities and
Exchange Commission and the Fund shall use reasonable efforts to calculate
such net asset value on each day which the New York Stock Exchange is open
for trading. Notwithstanding the foregoing, the Board of Directors of the
Fund (hereinafter the "Board") may refuse to permit the Fund to sell shares
of any Portfolio to any person, or suspend or terminate the offering of
shares of any Portfolio if such action is required by law or by regulatory
authorities having jurisdiction or is, in the sole discretion of the Board
acting in good faith and in light of their fiduciary duties under federal and
any applicable state laws, necessary in the best interests of the
shareholders of such Portfolio.
1.3. The Fund agrees that shares of the Fund will be sold only to
Participating Insurance Companies and their separate accounts and to certain
Qualified Plans. No shares of any Portfolio will be sold to the general
public.
1.4. If the Company's order requests a net redemption resulting in a
payment of redemption proceeds to the Company, the Fund shall use its best
efforts to wire the redemption proceeds to the Company, except as provided
below, within three Business Days or, upon notice to the Company, such longer
period as permitted by the 1940 Act or the rules, orders or regulations
thereunder. If the Company's order requests the redemption of Portfolio
shares valued at or greater than $1 million, the Fund will wire such amount
to the Company within seven days of the order. If the Company's order
requests the application of redemption proceeds from the redemption of
Portfolio shares to the purchase of shares of another Portfolio, the Fund
shall so apply such proceeds the same Business Day that the Company transmits
such order to the Fund.
1.5. The Company agrees that purchases and redemptions of Portfolio
shares offered by the then current prospectus of the Fund shall be made in
accordance with the provisions of such prospectus.
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1.6. The Company shall pay for Fund shares on the next Business Day
after an order to purchase Fund shares is made in accordance with the
provisions of Section 1.1 hereof. Payment shall be in federal funds
transmitted by wire.
1.7. Issuance and transfer of the Fund's shares will be by book entry
only. Stock certificates will not be issued to the Company or any Account.
Shares ordered from the Fund will be recorded in an appropriate title for
each Account or the appropriate subaccount of each Account.
1.9. The Fund shall furnish same day notice (by wire or telephone,
followed by written confirmation) to the Company of any income dividends or
capital gain or other distributions payable on the Fund's shares. The
Company hereby elects to receive all such income dividends and capital gain
distributions as are payable on the Portfolio shares in additional shares of
that Portfolio. The Company reserves the right to revoke, in writing, this
election and to receive all such income dividends and capital gain
distributions in cash. The Fund shall notify the Company of the number of
shares so issued as payment of such dividends and distributions.
1.10. The Fund shall make the net asset value per share for each
Portfolio available to the Company on a daily basis as soon as reasonably
practical after the net asset value per share is calculated (normally by 6:30
p.m. Eastern time) and shall use its commercially reasonable efforts to make
such net asset value per share available by 7:00 p.m. Eastern time. The
Company will make its best efforts to notify the Fund in advance of any
unusually large purchase or redemption orders.
ARTICLE II. REPRESENTATIONS AND WARRANTIES
2.1. The Company represents and warrants that the Variable Products are
or will be registered under the 1933 Act; that the Variable Products will be
issued and sold in compliance in all material respects with all applicable
federal and state laws, and that the sale of the Variable Products shall
comply in all material respects with state insurance suitability
requirements. The Company further represents and warrants that it is an
insurance company duly organized and in good standing under applicable law,
that it has legally and validly established each Account as a segregated
asset account under Section 2932 of the Delaware Insurance Code, and that it
has registered or, prior to any issuance or sale of the Variable Products,
will register each Account as a unit investment trust in accordance with the
provisions of the 1940 Act to serve as a segregated investment account for
the Variable Products.
2.2. The Fund represents and warrants that Fund shares sold pursuant to
this Agreement shall be registered under the 1933 Act, duly authorized for
issuance and sold in compliance with all applicable federal and state
securities laws, and that the Fund is and shall make every effort to remain
registered under the 1940 Act. The Fund shall amend the registration
statement for its shares under the 1933 Act and the 1940 Act from time to
time as required in order to effect the continuous offering of its shares.
The Fund shall register and qualify the shares for sale in accordance with
the laws of the various states only if and to the extent deemed advisable by
the Fund.
2.3. The Fund represents that it is currently qualified as a Regulated
Investment Company under Subchapter M of the Internal Revenue Code of 1986,
as amended (the "Code"), and that it will make every effort to maintain such
qualification (under Subchapter M or any successor or similar provision) and
that it will notify the Company promptly upon having a reasonable basis for
believing that it has ceased to so qualify or that it might not so qualify in
the future.
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2.4. The Company represents that the Variable Products are currently
treated as life insurance policies or annuity contracts under applicable
provisions of the Code, that it will make every effort to maintain such
treatment, and that it will notify the Fund immediately upon having a
reasonable basis for believing that the Variable Products have ceased to be
so treated or that they might not be so treated in the future.
2.5. The Fund represents that to the extent that it decides to finance
distribution expenses pursuant to Rule 12b-1 under the 1940 Act, the Fund
undertakes to have its Board, a majority of whom are not interested persons
of the Fund, formulate and approve any plan under Rule 12b-1 to finance
distribution expenses.
2.6. The Fund makes no representation as to whether any aspect of its
operations (including, but not limited to, fees and expenses and investment
policies) complies with the insurance laws or regulations of the various
states, except that the Fund represents that the Fund's investment policies,
fees and expenses are and shall at all times remain in material compliance
with the laws of the State of Maryland, and that its operations are and shall
at all times remain in material compliance with the laws of the State of
Maryland to the extent required to perform this Agreement.
2.7. The Fund represents that it is lawfully organized and validly
existing under the laws of the State of Maryland and that it does and will
comply in all material respects with the 1940 Act.
2.8. The Adviser represents and warrants that it is and shall remain
duly registered in all material respects under all applicable federal and
state securities laws and that it will perform its obligations for the Fund
in compliance in all material respects with the laws of its state of domicile
and any applicable state and federal securities laws.
2.9. The Fund represents and warrants that its Directors, officers,
employees, and other individuals/entities dealing with the money and/or
securities of the Fund are and shall continue to be at all times covered by a
blanket fidelity bond or similar coverage for the benefit of the Fund in an
amount not less than the minimal coverage as required currently by Rule
17g-(1) of the 1940 Act or related provisions as may be promulgated from time
to time. The aforesaid blanket fidelity bond shall include coverage for
larceny and embezzlement and shall be issued by a reputable bonding company.
2.10. The Company represents and warrants that all of its directors,
officers, employees, investment advisers, and other individuals/entities
dealing with the money and/or securities of the Fund are covered by a blanket
fidelity bond or similar coverage, in an amount not less $5 million. The
aforesaid, which includes coverage for larceny and embezzlement, shall be
issued by a reputable bonding company. The Company agrees to make all
reasonable efforts to see that this bond or another bond containing these
provisions is always in effect, and agrees to notify the Fund and the
Underwriter promptly in writing in the event that such coverage no longer
applies.
ARTICLE III. PROSPECTUSES, REPORTS TO SHAREHOLDERS AND PROXY STATEMENTS;
VOTING
3.1. The Fund or its designee shall provide the Company with as many
printed copies of the Fund's current prospectus and statement of additional
information as the Company may reasonably request. If requested by the
Company, in lieu of providing printed copies, the Fund shall provide
camera-ready film or computer diskettes containing the Fund's prospectus and
statement of additional information, and such other assistance as is
reasonably necessary in order for the Company once each year (or more
frequently if
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the prospectus and/or statement of additional information for the Fund is
amended during the year) to have the prospectus for the Variable Products and
the Fund's prospectus printed together in one document, and to have the
statement of additional information for the Fund and the statement of
additional information for the Variable Products printed together in one
document. Alternatively, the Company may print the Fund's prospectus and/or
its statement of additional information in combination with other fund
companies' prospectuses and statements of additional information.
3.2. Except as provided in this Section 3.2., all expenses of printing
and distributing Fund prospectuses and statements of additional information
shall be the expense of the Company. For any prospectuses and statements of
additional information provided by the Company to the existing owners of
Variable Products who currently own shares of one or more of the Fund's
Portfolios, in order to update disclosure as required by the 1933 Act and/or
the 1940 Act, the cost of printing shall be borne by the Fund. If the
Company chooses to receive camera-ready film or computer diskettes in lieu of
receiving printed copies of the Fund's prospectus, the Fund will reimburse
the Company in an amount equal to the product of x and y where x is the
number of such prospectuses distributed to owners of the Variable Products
who currently own shares of one or more of the Fund's Portfolios, and y is
the Fund's per unit cost of typesetting and printing the Fund's prospectus.
The same procedures shall be followed with respect to the Fund's statement of
additional information. The Company agrees to provide the Fund or its
designee with such information as may be reasonably requested by the Fund to
assure that the Fund's expenses do not include the cost of printing any
prospectuses or statements of additional information other than those
actually distributed to existing owners of the Variable Products.
3.3. The Fund's statement of additional information shall be obtainable
from the Fund, the Company or such other person as the Fund may designate, as
agreed upon by the parties.
3.4. The Fund, at its expense, shall provide the Company with copies of
its proxy statements, reports to shareholders, and other communications
(except for prospectuses and statements of additional information, which are
covered in section 3.1) to shareholders in such quantity as the Company shall
reasonably require for distributing to contract owners. The Fund or its
designee shall bear the cost of printing, duplicating, and mailing of these
documents to current contract owners, and the Company shall bear the cost for
such documents used for purposes other than distribution to current contract
owners.
3.5. If and to the extent required by law the Company shall:
(i) solicit voting instructions from contract owners;
(ii) vote the Fund shares in accordance with instructions
received from contract
owners; and
(iii) vote Fund shares for which no instructions have been
received in the same proportion as Fund shares of such
Portfolio for which instructions have been received,
so long as and to the extent that the Securities and Exchange Commission
continues to interpret the 1940 Act to require pass-through voting privileges
for variable contract owners. The Company reserves the right to vote Fund
shares held in any segregated asset account in its own right, to the extent
permitted by law. The Fund and the Company shall follow the procedures, and
shall have the corresponding responsibilities, for the handling of proxy and
voting instruction solicitations, as set forth in Schedule C attached hereto
and incorporated herein by reference. Participating Insurance Companies
shall be responsible for ensuring that
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each of their separate accounts participating in the Fund calculates voting
privileges in a manner consistent with the standards set forth on Schedule C,
which standards will also be provided to the other Participating Insurance
Companies, if any.
3.6. The Fund will comply with all provisions of the 1940 Act requiring
voting by shareholders. Further, the Fund will act in accordance with the
Securities and Exchange Commission's interpretation of the requirements of
Section 16(a) with respect to periodic elections of directors and with
whatever rules the Commission may promulgate with respect thereto.
3.7. The Fund shall use reasonable efforts to provide Fund prospectuses,
reports to shareholders, proxy materials and other Fund communications (or
camera-ready equivalents) to the Company sufficiently in advance of the
Company's mailing dates to enable the Company to complete, at reasonable
cost, the printing, assembling and/or distribution of the communications in
accordance with applicable laws and regulations.
ARTICLE IV. SALES MATERIAL AND INFORMATION
4.1. The Company shall furnish, or shall cause to be furnished, to the
Fund or its designee, each piece of sales literature or other promotional
material in which the Fund or the Adviser(s) is named, at least fifteen
Business Days prior to its use. No such material shall be used if the Fund
or its designee reasonably objects to such use within fifteen Business Days
after receipt of such material.
4.2. The Company shall not give any information or make any
representations or statements on behalf of the Fund or concerning the Fund in
connection with the sale of the Variable Products other than the information
or representations contained in the registration statement or prospectus for
the Fund shares, as such registration statement and prospectus may be amended
or supplemented from time to time, or in reports or proxy statements for the
Fund, or in sales literature or other promotional material approved by the
Fund or its designee, except with the permission of the Fund.
4.3. The Fund or its designee shall furnish, or shall cause to be
furnished, to the Company or its designee, each piece of sales literature or
other promotional material in which the Company and/or its separate
account(s) is named at least fifteen Business Days prior to its use. No such
material shall be used if the Company or its designee reasonably objects to
such use within fifteen Business Days after receipt of such material.
4.4. The Fund and the Adviser shall not give any information or make
any representations on behalf of the Company or concerning the Company, each
Account, or the Variable Products, other than the information or
representations contained in a registration statement or prospectus for the
Variable Products, as such registration statement and prospectus may be
amended or supplemented from time to time, or in published reports for each
Account which are in the public domain or approved by the Company for
distribution to contract owners, or in sales literature or other promotional
material approved by the Company or its designee, except with the permission
of the Company.
4.5. The Fund will provide to the Company at least one complete copy of
all registration statements, prospectuses, statements of additional
information, reports, proxy statements, sales literature and other
promotional materials, applications for exemptions, requests for no-action
letters, and all amendments to any of the above, that relate to the Fund or
its shares, which are relevant to the Company or the Variable Products.
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<PAGE>
4.6. The Company will provide to the Fund at least one complete copy of
all registration statements, prospectuses, statements of additional
information, reports, solicitations for voting instructions, sales literature
and other promotional materials, applications for exemptions, requests for no
action letters, and all amendments to any of the above, that relate to the
investment in the Fund under the Variable Products.
4.7. For purposes of this Article IV, the phrase "sales literature or
other promotional material" includes, but is not limited to, any of the
following that refer to the Fund or any affiliate of the Fund: advertisements
(such as material published, or designed for use in, a newspaper, magazine,
or other periodical, radio, television, telephone or tape recording,
videotape display, signs or billboards, motion pictures, or other public
media), sales literature (I.E., any written communication distributed or made
generally available to customers or the public, including brochures,
circulars, research reports, market letters, form letters, seminar texts,
reprints or excerpts of any other advertisement, sales literature, or
published article), educational or training materials or other communications
distributed or made generally available to some or all agents or employees,
and registration statements, prospectuses, statements of additional
information, shareholder reports, and proxy materials.
ARTICLE V. FEES AND EXPENSES
5.1. The Fund shall pay no fee or other compensation to the Company
under this Agreement, except that if the Fund or any Portfolio has adopted
and implemented a plan pursuant to Rule 12b-1 to finance distribution
expenses, then the Underwriter may make payments to the Company or to the
underwriter for the Variable Products if and in amounts agreed to by the
Underwriter in writing.
5.2. All expenses incident to performance by the Fund under this
Agreement shall be paid by the Fund, other than expenses assumed by the
Adviser under the management agreement between the Fund and the Adviser or by
another party. The Fund shall see to it that all its shares are registered
and authorized for issuance in accordance with applicable federal law and, if
and to the extent deemed advisable by the Fund, in accordance with applicable
state laws prior to their sale. The Fund shall bear the expenses for the
cost of registration and qualification of the Fund's shares, preparation and
filing of the Fund's prospectus and registration statement, proxy materials
and reports, setting the prospectus in type, setting in type and printing the
proxy materials and reports to shareholders (including the costs of printing
a prospectus that constitutes an annual report), the preparation of all
statements and notices required by any federal or state law, and all taxes on
the issuance or transfer of the Fund's shares.
ARTICLE VI. DIVERSIFICATION
6.1. The Fund will at all times invest money from the Variable Products
in such a manner as to ensure that the Variable Products will be treated as
variable contracts under the Code and the regulations issued thereunder.
Without limiting the scope of the foregoing, the Fund will at all times
comply with Section 817(h) of the Code and Treasury Regulation 1.817-5,
relating to the diversification requirements for variable annuity, endowment,
or life insurance contracts and any amendments or other modifications to such
Section or Regulations. In the event of a breach of this Article VI by the
Fund, it will take all reasonable steps (a) to notify Company of such breach
and (b) to diversify adequately the Fund so as to achieve compliance within
the grace period afforded by Regulation 1.817-5.
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ARTICLE VII. POTENTIAL CONFLICTS
7.1. An irreconcilable material conflict may arise for a variety of
reasons, including: (a) an action by any state insurance regulatory
authority; (b) a change in applicable federal or state insurance, tax, or
securities laws or regulations, or a public ruling, private letter ruling,
no-action or interpretative letter, or any similar action by insurance, tax,
or securities regulatory authorities; (c) an administrative or judicial
decision in any relevant proceeding; (d) the manner in which the investments
of any Portfolio are being managed; (e) a difference in voting instructions
given by Variable Insurance Product owners; or (f) a decision by a
Participating Insurance Company to disregard the voting instructions of
contract owners. The Board shall promptly inform the Company if it
determines that an irreconcilable material conflict exists and the
implications thereof.
7.2. The Company will report any potential or existing conflicts of
which it is aware to the Board. The Company will assist the Board in
carrying out its responsibilities under SEC rules and regulations and the
conditions of any Shared Funding Exemptive Order obtained by the Fund, by
providing the Board with all information reasonably necessary for the Board
to consider any issues raised. This includes, but is not limited to, an
obligation by the Company to inform the Board whenever contract owner voting
instructions are disregarded.
7.3. If it is determined by a majority of the Board, or a majority of
its disinterested members, that a material irreconcilable conflict exists,
the Company and other Participating Insurance Companies shall, at their
expense and to the extent reasonably practicable (as determined by a majority
of the disinterested directors), take whatever steps are necessary to remedy
or eliminate the irreconcilable material conflict, up to and including: (1)
withdrawing the assets allocable to some or all of the separate accounts from
the Fund or any Portfolio and reinvesting such assets in a different
investment medium, including (but not limited to) another Portfolio of the
Fund, or submitting the question whether such segregation should be
implemented to a vote of all affected contract owners and, as appropriate,
segregating the assets of any appropriate group (I.E., annuity contract
owners, life insurance policy owners, or variable contract owners of one or
more Participating Insurance Companies) that votes in favor of such
segregation, or offering to the affected contract owners the option of making
such a change; and (2) establishing a new registered management investment
company or managed separate account.
7.4. If a material irreconcilable conflict arises because of a decision
by the Company to disregard contract owner voting instructions and that
decision represents a minority position or would preclude a majority vote,
the Company may be required, at the Fund's election, to withdraw the affected
Account's investment in the Fund and terminate this Agreement with respect to
such Account (at the Company's expense); provided, however that such
withdrawal and termination shall be limited to the extent required by the
foregoing material irreconcilable conflict as determined by a majority of the
disinterested members of the Board.
7.5. If a material irreconcilable conflict arises because a particular
state insurance regulator's decision applicable to the Company conflicts with
the majority of other state regulators, then the Company will withdraw the
affected Account's investment in the Fund and terminate this Agreement with
respect to such Account within six months after the Board informs the Company
in writing that it has determined that such decision has created an
irreconcilable material conflict; provided, however, that such withdrawal and
termination shall be limited to the extent required by the foregoing material
irreconcilable conflict as determined by a majority of the disinterested
members of the Board. Until the end of the foregoing six
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month period, the Underwriter and Fund shall continue to accept and implement
orders by the Company for the purchase (and redemption) of shares of the Fund.
7.6. For purposes of Sections 7.3 through 7.5 of this Agreement, a
majority of the disinterested members of the Board shall determine whether
any proposed action adequately remedies any irreconcilable material conflict,
but in no event will the Fund be required to establish a new funding medium
for the Variable Products. The Company shall not be required by Section 7.3
to establish a new funding medium for the Variable Products if an offer to do
so has been declined by vote of a majority of contract owners materially
adversely affected by the irreconcilable material conflict.
7.7. If and to the extent that Rule 6e-2 and Rule 6e-3(T) are amended,
or Rule 6e-3 is adopted, to provide exemptive relief from any provision of
the 1940 Act or the rules promulgated thereunder with respect to mixed or
shared funding, then (a) the Fund and/or the Participating Insurance
Companies, as appropriate, shall take such steps as may be necessary to
comply with Rules 6e-2 and 6e-3(T), as amended, and Rule 6e-3, as adopted, or
to the terms of the Shared Exemptive Order, to the extent applicable; and
(b) Sections 3.4, 3.5, 7.1, 7.2, 7.3, 7.4, and 7.5 of this Agreement shall
continue in effect only to the extent that terms and conditions substantially
identical to such Sections are contained in such Rule(s) as so amended or
adopted.
ARTICLE VIII. INDEMNIFICATION
8.1. INDEMNIFICATION BY THE COMPANY
8.1(a) The Company agrees to indemnify and hold harmless the Fund and
the Adviser, each of their respective officers, employees, and Directors,
and each person, if any, who controls the Fund or the Adviser within the
meaning of Section 15 of the 1933 Act (collectively, the "Indemnified
Parties" and individually, "Indemnified Party," for purposes of this Section
8.1) against any and all losses, claims, damages, liabilities (including
amounts paid in settlement with the written consent of the Company) or
litigation (including legal and other expenses), to which the Indemnified
Parties may become subject under any statute, regulation, at common law or
otherwise, insofar as such losses, claims, damages, liabilities or expenses
(or actions in respect thereof) or settlements are related to the sale or
acquisition of the Fund's shares or the Variable Products and:
(i) arise out of or are based upon any untrue statements or
alleged untrue statements of any material fact contained in the
registration statement or prospectus for the Variable Products or
contained in the Variable Products or sales literature for the
Variable Products (or any amendment or supplement to any of the
foregoing), or arise out of or are based upon the omission or the
alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not
misleading, provided that this agreement to indemnify shall not
apply as to any Indemnified Party if such statement or omission or
such alleged statement or omission was made in reliance upon and in
conformity with information furnished to the Company by or on
behalf of the Fund for use in the registration statement or
prospectus for the Variable Products or in the Variable Products or
sales literature (or any amendment or supplement) or otherwise for
use in connection with the sale of the Variable Products or Fund
shares; or
(ii) arise out of or as a result of statements or representations
(other than statements or representations contained in the
registration statement, prospectus or sales literature of the Fund
not supplied by the Company, or
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persons under its control and other
than statements or representations authorized by the Fund or an
Adviser) or unlawful conduct of the Company or persons under its
control, with respect to the sale or distribution of the Variable
Products or Fund shares; or
(iii) arise out of or as a result of any untrue statement or
alleged untrue statement of a material fact contained in a
registration statement, prospectus, or sales literature of the Fund
or any amendment thereof or supplement thereto or the omission or
alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not
misleading, if such a statement or omission was made in reliance
upon and in conformity with information furnished to the Fund by or
on behalf of the Company; or
(iv) arise as a result of any failure by the Company to provide
the services and furnish the materials under the terms of this
Agreement; or
(v) arise out of or result from any material breach of any
representation and/or warranty made by the Company in this
Agreement or arise out of or result from any other material breach
of this Agreement by the Company, as limited by and in accordance
with the provisions of Sections 8.1(b) and 8.1(c) hereof.
8.1(c). The Company shall not be liable under this indemnification
provision with respect to any claim made against an Indemnified Party unless
such Indemnified Party shall have notified the Company in writing within a
reasonable time after the summons or other first legal process giving
information of the nature of the claim shall have been served upon such
Indemnified Party (or after such Indemnified Party shall have received notice
of such service on any designated agent), but failure to notify the Company
of any such claim shall not relieve the Company from any liability which it
may have to the Indemnified Party against whom such action is brought
otherwise than on account of this indemnification provision. In case any
such action is brought against the Indemnified Parties, the Company shall be
entitled to participate, at its own expense, in the defense of such action.
The Company also shall be entitled to assume the defense thereof, with
counsel satisfactory to the party named in the action. After notice from the
Company to such party of the Company's election to assume the defense
thereof, the Indemnified Party shall bear the fees and expenses of any
additional counsel retained by it, and the Company will not be liable to such
party under this Agreement for any legal or other expenses subsequently
incurred by such party independently in connection with the defense thereof
other than reasonable costs of investigation.
8.1(d). The Indemnified Parties will promptly notify the Company of the
commencement of any litigation or proceedings against them in connection with
the issuance or sale of the Fund shares or the Variable Products or the
operation of the Fund.
8.2. INDEMNIFICATION BY THE ADVISER
8.2(a). The Adviser agrees, with respect to each Portfolio that it
manages, to indemnify and hold harmless the Company, each of its directors,
officers, and employees, and each person, if any, who controls the Company
within the meaning of Section 15 of the 1933 Act (collectively, the
"Indemnified Parties" and
12
<PAGE>
individually, "Indemnified Party," for purposes of this Section 8.2) against
any and all losses, claims, damages, liabilities (including amounts paid in
settlement with the written consent of the Adviser) or litigation (including
legal and other expenses) to which the Indemnified Parties may become subject
under any statute, regulation, at common law or otherwise, insofar as such
losses, claims, damages, liabilities or expenses (or actions in respect
thereof) or settlements are related to the sale or acquisition of shares of
the Portfolio that it manages or the Variable Products and:
(i) arise out of or are based upon any untrue statement or alleged
untrue statement of any material fact contained in the registration
statement or prospectus or sales literature of the Fund (or any
amendment or supplement to any of the foregoing), or arise out of
or are based upon the omission or the alleged omission to state
therein a material fact required to be stated therein or necessary
to make the statements therein not misleading, provided that this
agreement to indemnify shall not apply as to any Indemnified Party
if such statement or omission or such alleged statement or omission
was made in reliance upon and in conformity with information
furnished to the Fund by or on behalf of the Company for use in the
registration statement or prospectus for the Fund or in sales
literature (or any amendment or supplement) or otherwise for use in
connection with the sale of the Variable Products or Portfolio
shares; or
(ii) arise out of or as a result of statements or representations
(other than statements or representations contained in the
registration statement, prospectus or sales literature for the
Variable Products not supplied by the Fund or persons under its
control and other than statements or representations authorized by
the Company) or unlawful conduct of the Fund, Adviser(s) or
Underwriter or persons under their control, with respect to the
sale or distribution of the Variable Products or Portfolio shares; or
(iii) arise out of or as a result of any untrue statement or
alleged untrue statement of a material fact contained in a
registration statement, prospectus, or sales literature covering
the Variable Products, or any amendment thereof or supplement
thereto, or the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make
the statement or statements therein not misleading, if such
statement or omission was made in reliance upon information
furnished to the Company by or on behalf of the Fund; or
(iv) arise as a result of any failure by the Fund to provide the
services and furnish the materials under the terms of this
Agreement; or
(v) arise out of or result from any material breach of any
representation and/or warranty made by the Adviser in this
Agreement or arise out of or result from any other material breach
of this Agreement by the Adviser; as limited by and in accordance
with the provisions of Sections 8.2(b) and 8.2(c) hereof.
8.2(c). An Adviser shall not be liable under this indemnification
provision with respect to any claim made against an Indemnified Party unless
such Indemnified Party shall have notified the Adviser in writing within a
reasonable time after the summons or other first legal process giving
information of the nature of
13
<PAGE>
the claim shall have been served upon such Indemnified Party (or after such
Indemnified Party shall have received notice of such service on any
designated agent), but failure to notify the Adviser of any such claim shall
not relieve the Adviser from any liability which it may have to the
Indemnified Party against whom such action is brought otherwise than on
account of this indemnification provision. In case any such action is
brought against the Indemnified Parties, the Adviser will be entitled to
participate, at its own expense, in the defense thereof. The Adviser also
shall be entitled to assume the defense thereof, with counsel satisfactory to
the party named in the action. After notice from the Adviser to such party of
the Adviser's election to assume the defense thereof, the Indemnified Party
shall bear the fees and expenses of any additional counsel retained by it,
and the Adviser will not be liable to such party under this Agreement for any
legal or other expenses subsequently incurred by such party independently in
connection with the defense thereof other than reasonable costs of
investigation.
8.2(d). The Company agrees promptly to notify the Adviser of the
commencement of any litigation or proceedings against it or any of its
officers or directors in connection with the issuance or sale of the Variable
Products or the operation of each Account.
8.3. INDEMNIFICATION BY THE FUND
8.3(a). The Fund agrees to indemnify and hold harmless the Company, and
each of its directors and officers and each person, if any, who controls the
Company within the meaning of Section 15 of the 1933 Act (hereinafter
collectively, the "Indemnified Parties" and individually, "Indemnified
Party," for purposes of this Section 8.3) against any and all losses, claims,
damages, liabilities (including amounts paid in settlement with the written
consent of the Fund) or litigation (including legal and other expenses) to
which the Indemnified Parties may become subject under any statute,
regulation, at common law or otherwise, insofar as such losses, claims,
damages, liabilities or expenses (or actions in respect thereof), litigation
or settlements result from the gross negligence, bad faith or willful
misconduct of the Board or any member thereof, are related to the operations
of the Fund and:
(i) arise as a result of any failure by the Fund to provide the
services and furnish the materials under the terms of this
Agreement; or
(ii) arise out of or result from any material breach of any
representation and/or warranty made by the Fund in this
Agreement or arise out of or result from any other material
breach of this Agreement by the Fund, as limited and in
accordance with the provisions of Sections 8.3(b) and
8.3(a);
8.3(b). The Fund shall not be liable under this indemnification
provision with respect to any losses, claims, damages, liabilities or
litigation incurred or assessed against an Indemnified Party as may arise
from such Indemnified Party's gross negligence, bad faith, or willful
misconduct the performance of such Indemnified Party's duties or by reason of
such Indemnified Party's reckless disregard of obligations and duties under
this Agreement.
8.3(c). The Fund shall not be liable under this indemnification
provision with respect to any claim made against an Indemnified Party unless
such Indemnified Party shall have notified the Fund in writing within a
reasonable time after the summons or other first legal process giving
information of the nature of the claim shall have been served upon such
Indemnified Party (or after such Indemnified Party shall have received notice
of such service on any designated agent), but failure to notify the Fund of
any such claim shall not relieve the Fund from any liability which it may
have to the Indemnified Party against whom such action is brought otherwise
than on account of this indemnification provision. In case any such action is
14
<PAGE>
brought against the Indemnified Parties, the Fund will be entitled to
participate, at its own expense, in the defense thereof. The Fund also shall
be entitled to assume the defense thereof, with counsel satisfactory to the
party named in the action. After notice from the Fund to such party of the
Fund's election to assume the defense thereof, the Indemnified Party shall
bear the fees and expenses of any additional counsel retained by it, and the
Fund will not be liable to such party under this Agreement for any legal or
other expenses subsequently incurred by such party independently in
connection with the defense thereof other than reasonable costs of
investigation.
ARTICLE IX. APPLICABLE LAW
9.1. This Agreement shall be construed and the provisions hereof
interpreted under and in accordance with the laws of the State of New York.
9.2. This Agreement shall be subject to the provisions of the 1933,
1934 and 1940 Acts, and the rules and regulations and rulings thereunder,
including such exemptions from those statutes, rules and regulations as the
Securities and Exchange Commission may grant (including, but not limited to,
the Shared Funding Exemptive Order) and the terms hereof shall be interpreted
and construed in accordance therewith.
ARTICLE X. TERMINATION
10.1. This Agreement shall continue in full force and effect until the
first to occur of:
10.1(a) termination by any party for any reason by at least sixty (60)
days advance written notice delivered to the other parties; or
10.1(b) termination by the Company by written notice to the Fund and
the Adviser with respect to any Portfolio based upon the Company's
determination that shares of such Portfolio are not reasonably available to
meet the requirements of the Variable Products; or
10.1(c) termination by the Company by written notice to the Fund and
the Adviser with respect to any Portfolio in the event any of the Portfolio's
shares are not registered, issued or sold in accordance with applicable state
and/or federal law or such law precludes the use of such shares as the
underlying investment media of the Variable Products issued or to be issued
by the Company; or
10.1(d) termination by the Company by written notice to the Fund and
the Adviser with respect to any Portfolio in the event that such Portfolio
ceases to qualify as a Regulated Investment Company under Subchapter M of the
Code or under any successor or similar provision, or if the Company
reasonably believes that the Fund may fail to so qualify; or
10.1(e) termination by the Company by written notice to the Fund and
the Adviser with respect to any Portfolio in the event that such Portfolio
fails to meet the diversification requirements specified in Article VI
hereof; or
15
<PAGE>
10.1(f) termination by the Fund by written notice to the Company if
the Fund shall determine, in its sole judgment exercised in good faith, that
the Company and/or its affiliated companies has suffered a material adverse
change in its business, operations, financial condition or prospects since
the date of this Agreement or is the subject of material adverse publicity, or
10.1(g) termination by the Company by written notice to the Fund and
the Adviser, if the Company shall determine, in its sole judgment exercised
in good faith, that either the Fund or the Adviser has suffered a material
adverse change in its business, operations, financial condition or prospects
since the date of this Agreement or is the subject of material adverse
publicity; or
10.2. Notwithstanding any termination of this Agreement, the Fund
shall, at the option of the Company, continue to make available additional
shares of the Fund pursuant to the terms and conditions of this Agreement,
for all Variable Products in effect on the effective date of termination of
this Agreement (hereinafter referred to as "Existing Variable Products").
Specifically, without limitation, the owners of the Existing Variable
Products shall be permitted to direct reallocation of investments in the
Portfolios of the Fund, redemption of investments in the Portfolios of the
Fund and/or investment in the Portfolios of the Fund upon the making of
additional purchase payments under the Existing Variable Products. The
parties agree that this Section 10.2 shall not apply to any termination under
Article VII and the effect of such Article VII termination shall be governed
by Article VII of this Agreement.
10.3. The Company shall not redeem Fund shares attributable to the
Variable Products (as distinct from Fund shares attributable to the Company's
assets held in the Account) except (i) as necessary to implement contract
owner initiated or approved transactions, or (ii) as required by state and/or
federal laws or regulations or judicial or other legal precedent of general
application (hereinafter referred to as a "Legally Required Redemption") or
(iii) as permitted by an order of the Securities and Exchange Commission
pursuant to Section 26(b) of the 1940 Act. Upon request, the Company will
promptly furnish to the Fund the opinion of counsel for the Company (which
counsel shall be reasonably satisfactory to the Fund) to the effect that any
redemption pursuant to clause (ii) above is a Legally Required Redemption.
Furthermore, except in cases where permitted under the terms of the Variable
Products, the Company shall not prevent contract owners from allocating
payments to a Portfolio that was otherwise available under the Variable
Products without first giving the Fund 90 days prior written notice of its
intention to do so.
ARTICLE XI. NOTICES
Any notice shall be sufficiently given when hand delivered or sent by
registered or certified mail to the other party at the address of such party
set forth below or at such other address as such party may from time to time
specify in writing to the other party.
If to the Fund:
Lazard Asset Management
30 Rockefeller Plaza
New York, New York 10112
Attn: Steven Swain
If to Adviser:
Lazard Asset Management
30 Rockefeller Plaza
New York, New York 10112
Attn: Steven Swain
16
<PAGE>
If to the Company:
Allmerica Financial Life Insurance and Annuity Company
440 Lincoln Street
Worcester, Massachusetts 01653
Attention: Richard M. Reilly, President
ARTICLE XII. MISCELLANEOUS
12.1. A copy of the Fund's Articles of Incorporation, as may be
amended from time to time, is on file with the Secretary of the State of
Maryland. Notice is hereby given that this instrument is executed by the
Fund's Officer or Officers and not individually, and the Fund's obligations
under this Agreement are not binding upon any of the Directors or
Shareholders of the Fund, but are binding only upon the assets and property
of the Fund.
12.2. Subject to the requirements of legal process and regulatory
authority, each party hereto shall treat as confidential the names and
addresses of the owners of the Variable Products and all information
reasonably identified as confidential in writing by any other party hereto
and, except as permitted by this Agreement, shall not disclose, disseminate
or utilize such names and addresses and other confidential information until
such time as it may come into the public domain without the express written
consent of the affected party.
12.3. The captions in this Agreement are included for convenience of
reference only and in no way define or delineate any of the provisions hereof
or otherwise affect their construction or effect.
12.4. This Agreement may be executed simultaneously in two or more
counterparts, each of which taken together shall constitute one and the same
instrument.
12.5. If any provision of this Agreement shall be held or made invalid
by a court decision, statute, rule or otherwise, the remainder of the
Agreement shall not be affected thereby.
12.6. Each party hereto shall cooperate with each other party and all
appropriate governmental authorities (including without limitation the
Securities and Exchange Commission, the National Association of Securities
Dealers and state insurance regulators) and shall permit such authorities
reasonable access to its books and records in connection with any
investigation or inquiry relating to this Agreement or the transactions
contemplated hereby. Notwithstanding the generality of the foregoing, each
party hereto further agrees to furnish the California Insurance Commissioner
with any information or reports in connection with services provided under
this Agreement which such Commissioner may request in order to ascertain
whether the insurance operations of the Company are being conducted in a
manner consistent with the California Insurance Regulations and any other
applicable law or regulations.
12.7. The rights, remedies and obligations contained in this Agreement
are cumulative and are in addition to any and all rights, remedies and
obligations at law or in equity, which the parties hereto are entitled to
under state and federal laws.
12.8. This Agreement or any of the rights and obligations hereunder may
not be assigned by any party without the prior written consent of all parties
hereto; provided, however, that the Adviser may assign
17
<PAGE>
this Agreement or any rights or obligations hereunder to any affiliate of or
company controlled by or under common control with the Adviser, if such
assignee is duly licensed and registered to perform the obligations of the
Adviser under this Agreement.
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to
be executed in its name and on its behalf by its duly authorized
representative and its seal to be hereunder affixed hereto as of the date
specified above.
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
By: /s/ Richard M. Reilly
----------------------------
NAME: Richard M. Reilly
TITLE: President
LAZARD RETIREMENT SERIES, INC.
By:
----------------------------
NAME:
TITLE:
LAZARD ASSET MANAGEMENT
By:
----------------------------
NAME:
TITLE:
18
<PAGE>
SCHEDULE A
SEPARATE ACCOUNTS AND VARIABLE PRODUCTS
VARIABLE LIFE PRODUCTS
<TABLE>
<CAPTION>
SEPARATE ACCOUNT PRODUCT NAME 1933 ACT # 1940 ACT #
- ---------------- ------------ ---------- ----------
<S> <C> <C> <C>
Fulcrum Variable Life Separate
Account Fulcrum SPVUL 333-15569 811-07913
</TABLE>
VARIABLE ANNUITY PRODUCTS
<TABLE>
<CAPTION>
SEPARATE ACCOUNT PRODUCT NAME 1933 ACT # 1940 ACT #
- ---------------- ------------ ---------- ----------
<S> <C> <C> <C>
Fulcrum Separate Account Fulcrum Annuity 333-11377 811-7799
</TABLE>
<PAGE>
SCHEDULE B
PORTFOLIOS OF
LAZARD RETIREMENT SERIES, INC.
Lazard Retirement Bantam Value Portfolio
Lazard Retirement Emerging Markets Portfolio
Lazard Retirement Equity Portfolio
Lazard Retirement Global Equity Portfolio
Lazard Retirement International Equity Portfolio
Lazard Retirement International Fixed-Income Portfolio
Lazard Retirement International Small Cap Portfolio
Lazard Retirement Small Cap Portfolio
Lazard Retirement Strategic Yield Portfolio
<PAGE>
SCHEDULE C
PROXY VOTING PROCEDURES
The following is a list of procedures and corresponding responsibilities for the
handling of proxies and voting instructions relating to the Fund. The defined
terms herein shall have the meanings assigned in the Participation Agreement
except that the term "Company" shall also include the department or third party
assigned by the Company to perform the steps delineated below.
. The proxy proposals are given to the Company by the Fund as early
as possible before the date set by the Fund for the shareholder
meeting to enable the Company to consider and prepare for the
solicitation of voting instructions from owners of the Variable
Products and to facilitate the establishment of tabulation
procedures. At this time the Fund will inform the Company of the
Record, Mailing and Meeting dates. This will be done orally
approximately two months, or such shorter time as may be necessary,
before meeting.
. Promptly after the Record Date, the Company will perform a "tape
run," or other activity, which will generate the names, addresses
and number of units which are attributed to each contract
owner/policyholder (the "Customer") as of the Record Date.
Allowance should be made for account adjustments made after this
date that could affect the status of the Customers' accounts as of
the Record Date.
Note: The number of proxy statements is determined by the
activities described above. The Company will use its best efforts
to call in the number of Customers to the Fund , as soon as
possible, but no later than two weeks after the Record Date.
. The Fund's Annual Report must be sent to each Customer by the
Company either before or together with the Customers' receipt of
voting, instruction solicitation material. The Fund will provide
the last Annual Report to the Company pursuant to the terms of
Section 3.43 of the Agreement to which this Schedule relates.
. The text and format for the Voting Instruction Cards ("Cards" or
"Card") is provided to the Company by the Fund. The Company, at
its expense, shall produce and personalize the Voting Instruction
Cards. The Fund or its affiliate must approve the Card before it
is printed. Allow approximately 2-4 business days for printing
information on the Cards. Information commonly found on the Cards
includes:
. name (legal name as found on account registration)
. address
. fund or account number
. coding to state number of units
. individual Card number for use in tracking and verification of
votes (already on Cards as printed by the Fund).
(This and related steps may occur later in the chronological process due to
possible uncertainties relating to the proposals.)
<PAGE>
. During this time, the Fund will develop, produce and pay for the
Notice of Proxy and the Proxy Statement (one document). Printed
and folded notices and statements will be sent to Company for
insertion into envelopes (envelopes and return envelopes are
provided and paid for by the Company). Contents of envelope sent to
Customers by the Company will include:
. Voting Instruction Card(s)
. One proxy notice and statement (one document)
. return envelope (postage pre-paid by Company) addressed to the
Company or its tabulation agent
. "urge buckslip" - optional, but recommended. (This is a
small, single sheet of paper that requests Customers to vote
as quickly as possible and that their vote is important. One
copy will be supplied by the Fund.)
. cover letter - optional, supplied by Company and reviewed and
approved in advance by the Fund.
. The above contents should be received by the Company approximately
3-5 business days before mail date. Individual in charge at
Company reviews and approves the contents of the mailing package to
ensure correctness and completeness. Copy of this approval sent to
the Fund.
. Package mailed by the Company.
* The Fund must allow at least a 15-day solicitation time to the
Company as the shareowner. (A 5-week period is recommended.)
Solicitation time is calculated as calendar days from (but NOT
including,) the meeting, counting backwards.
. Collection and tabulation of Cards begins. Tabulation usually
takes place in another department or another vendor depending on
process used. An often used procedure is to sort Cards on arrival
by proposal into vote categories of all yes, no, or mixed replies,
and to begin data entry.
Note: Postmarks are not generally needed. A need for postmark
information would be due to an insurance company's internal
procedure and has not been required by the Fund in the past.
. Signatures on Card checked against legal name on account
registration which was printed on the Card. Note: For Example, if
the account registration is under "John A. Smith, Trustee," then
that is the exact legal name to be printed on the Card and is the
signature needed on the Card.
. If Cards are mutilated, or for any reason are illegible or are not
signed properly, they are sent back to Customer with an explanatory
letter and a new Card and return envelope. The mutilated or
illegible Card is disregarded and considered to be NOT RECEIVED for
purposes of vote tabulation. Any Cards that have been "kicked out"
(e.g. mutilated, illegible) of the procedure are "hand verified,"
i.e., examined as to why they did not complete the system. Any
questions on those Cards are usually remedied individually.
. There are various control procedures used to ensure proper
tabulation of votes and accuracy of that tabulation. The most
prevalent is to sort the Cards as they first arrive into categories
depending upon their vote; an estimate of how the vote is
progressing may then be calculated. If the initial estimates and
the actual vote do not coincide, then an internal audit of that
vote should occur. This may entail a recount.
<PAGE>
. The actual tabulation of votes is done in units which is then
converted to shares. (It is very important that the Fund receives
the tabulations stated in terms of a percentage and the number of
SHARES.) The Fund must review and approve tabulation format.
. Final tabulation in shares is verbally given by the Company to the
Fund on the morning of the meeting not later than 10:00 a.m.
Eastern time. The Fund may request an earlier deadline if
reasonable and if required to calculate the vote in time for the
meeting.
. A Certification of Mailing and Authorization to Vote Shares will be
required from the Company as well as an original copy of the final
vote. The Fund will provide a standard form for each Certification.
. The Company will be required to box and archive the Cards received
from the Customers. In the event that any vote is challenged or if
otherwise necessary for legal, regulatory, or accounting purposes,
the Fund will be permitted reasonable access to such Cards.
. All approvals and "signing-off' may be done orally, but must always
be followed up in writing.
<PAGE>
PARTICIPATION AGREEMENT
AMONG
MFS VARIABLE INSURANCE TRUST,
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
AND
MASSACHUSETTS FINANCIAL SERVICES COMPANY
THIS AGREEMENT, made and entered into this 1st day of August 1998, by
and among MFS VARIABLE INSURANCE TRUST, a Massachusetts business trust (the
"Trust"), ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY, a Delaware
corporation (the "Company") on its own behalf and on behalf of each of the
segregated asset accounts of the Company set forth in Schedule A hereto, as
may be amended from time to time (the "Accounts"), and MASSACHUSETTS
FINANCIAL SERVICES COMPANY, a Delaware corporation ("MFS").
WHEREAS, the Trust is registered as an open-end management investment
company under the Investment Company Act of 1940, as amended (the "1940
Act"), and its shares are registered or will be registered under the
Securities Act of 1933, as amended (the "1933 Act");
WHEREAS, shares of beneficial interest of the Trust are divided into
several series of shares, each representing the interests in a particular
managed pool of securities and other assets;
WHEREAS, the series of shares of the Trust offered by the Trust to the
Company and the Accounts are set forth on Schedule A attached hereto (each, a
"Portfolio," and, collectively, the "Portfolios");
WHEREAS, MFS is duly registered as an investment adviser under the
Investment Advisers Act of 1940, as amended, and any applicable state
securities law, and is the Trust's investment adviser;
WHEREAS, the Company will issue certain variable annuity and/or variable
life insurance contracts (individually, the "Policy" or, collectively, the
"Policies") which, if required by applicable law, will be registered under
the 1933 Act;
WHEREAS, the Accounts are duly organized, validly existing segregated
asset accounts, established by resolution of the Board of Directors of the
Company, to set aside and invest assets attributable to the aforesaid
variable annuity and/or variable life insurance contracts that are allocated
to the Accounts (the Policies and the Accounts covered by this Agreement, and
each corresponding Portfolio covered by this Agreement in which the Accounts
invest, is specified in Schedule A attached hereto as may be modified from
time to time);
WHEREAS, the Company has registered or will register the Accounts as
unit investment trusts under the 1940 Act (unless exempt therefrom);
WHEREAS, MFS Fund Distributors, Inc. (the "Underwriter") is registered
as a broker-dealer with the Securities and Exchange Commission (the "SEC")
under the Securities Exchange Act of 1934, as
<PAGE>
amended (hereinafter the "1934 Act"), and is a member in good standing of the
National Association of Securities Dealers, Inc. (the "NASD");
WHEREAS, Allmerica Investments, Inc., the underwriter for the individual
variable annuity and the variable life policies, is registered as a
broker-dealer with the SEC under the 1934 Act and is a member in good
standing of the NASD; and
WHEREAS, to the extent permitted by applicable insurance laws and
regulations, the Company intends to purchase shares in one or more of the
Portfolios specified in Schedule A attached hereto (the "Shares") on behalf
of the Accounts to fund the Policies, and the Trust intends to sell such
Shares to the Accounts at net asset value;
NOW, THEREFORE, in consideration of their mutual promises, the Trust,
MFS, and the Company agree as follows:
ARTICLE I. SALE OF TRUST SHARES
1.1. The Trust agrees to sell to the Company those Shares which the
Accounts order (based on orders placed by Policy holders on that
Business Day, as defined below) and which are available for purchase by
such Accounts, executing such orders on a daily basis at the net asset
value next computed after receipt by the Trust or its designee of the
order for the Shares. For purposes of this Section 1.1, the Company
shall be the designee of the Trust for receipt of such orders from
Policy owners and receipt by such designee shall constitute receipt by
the Trust; PROVIDED that the Trust receives notice of such orders by
9:30 a.m. New York time on the next following Business Day. "Business
Day" shall mean any day on which the New York Stock Exchange, Inc. (the
"NYSE") is open for trading and on which the Trust calculates its net
asset value pursuant to the rules of the SEC.
1.2. The Trust agrees to make the Shares available indefinitely for
purchase at the applicable net asset value per share by the Company and
the Accounts on those days on which the Trust calculates its net asset
value pursuant to rules of the SEC and the Trust shall calculate such
net asset value on each day which the NYSE is open for trading.
Notwithstanding the foregoing, the Board of Trustees of the Trust (the
"Board") may refuse to sell any Shares to the Company and the Accounts,
or suspend or terminate the offering of the Shares if such action is
required by law or by regulatory authorities having jurisdiction or is,
in the sole discretion of the Board acting in good faith and in light
of its fiduciary duties under federal and any applicable state laws,
necessary in the best interest of the Shareholders of such Portfolio.
1.3. The Trust and MFS agree that the Shares will be sold only to
insurance companies which have entered into participation agreements
with the Trust and MFS (the "Participating Insurance Companies") and
their separate accounts, qualified pension and retirement plans and MFS
or its affiliates. The Trust and MFS will not sell Trust shares to any
insurance company or separate account unless an agreement containing
provisions substantially the same as Articles III and VII of this
Agreement is in effect to govern such sales. The Company will not
resell the Shares except to the Trust or its agents.
1.4. The Trust agrees to redeem for cash, on the Company's request,
any full or fractional Shares held by the Accounts (based on orders
placed by Policy owners on that Business Day),
-2-
<PAGE>
executing such requests on a daily basis at the net asset value next
computed after receipt by the Trust or its designee of the request for
redemption. For purposes of this Section 1.4, the Company shall be the
designee of the Trust for receipt of requests for redemption from
Policy owners and receipt by such designee shall constitute receipt by
the Trust; provided that the Trust receives notice of such request for
redemption by 9:30 a.m. New York time on the next following Business
Day.
1.5. Each purchase, redemption and exchange order placed by the
Company shall be placed separately for each Portfolio and shall not be
netted with respect to any Portfolio. However, with respect to payment
of the purchase price by the Company and of redemption proceeds by the
Trust, the Company and the Trust shall net purchase and redemption
orders with respect to each Portfolio and shall transmit one net
payment for all of the Portfolios in accordance with Section 1.6
hereof.
1.6. In the event of net purchases, the Company shall pay for the
Shares by 2:00 p.m. New York time on the next Business Day after an
order to purchase the Shares is made in accordance with the provisions
of Section 1.1. hereof. In the event of net redemptions, the Trust
shall pay the redemption proceeds by 2:00 p.m. New York time on the
next Business Day after an order to redeem the shares is made in
accordance with the provisions of Section 1.4. hereof. All such
payments shall be in federal funds transmitted by wire.
1.7. Issuance and transfer of the Shares will be by book entry only.
Stock certificates will not be issued to the Company or the Accounts.
The Shares ordered from the Trust will be recorded in an appropriate
title for the Accounts or the appropriate subaccounts of the Accounts.
1.8. The Trust shall furnish same day notice (by wire or telephone
followed by written confirmation) to the Company of any dividends or
capital gain distributions payable on the Shares. The Company hereby
elects to receive all such dividends and distributions as are payable
on a Portfolio's Shares in additional Shares of that Portfolio. The
Trust shall notify the Company of the number of Shares so issued as
payment of such dividends and distributions.
1.9. The Trust or its custodian shall make the net asset value per
share for each Portfolio available to the Company on each Business Day
as soon as reasonably practical after the net asset value per share is
calculated and shall use its best efforts to make such net asset value
per share available by 6:30 p.m. New York time. In the event that the
Trust is unable to meet the 6:30 p.m. time stated herein, it shall
provide additional time for the Company to place orders for the
purchase and redemption of Shares. Such additional time shall be equal
to the additional time which the Trust takes to make the net asset
value available to the Company. If the Trust provides materially
incorrect share net asset value information, the Trust shall make an
adjustment to the number of shares purchased or redeemed for the
Accounts to reflect the correct net asset value per share. Any
material error in the calculation or reporting of net asset value per
share, dividend or capital gains information shall be reported promptly
upon discovery to the Company.
ARTICLE II. CERTAIN REPRESENTATIONS, WARRANTIES AND COVENANTS
2.1. The Company represents and warrants that the Policies are or will
be registered under the 1933 Act or are exempt from or not subject to
registration thereunder, and that the Policies will be issued, sold,
and distributed in compliance in all material respects with all
applicable state and federal laws, including without limitation the
1933 Act, the Securities Exchange Act of 1934, as
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amended (the "1934 Act"), and the 1940 Act. The Company further
represents and warrants that it is an insurance company duly organized
and in good standing under applicable law and that it has legally and
validly established the Account as a segregated asset account under
applicable law and has registered or, prior to any issuance or sale of
the Policies, will register the Accounts as unit investment trusts in
accordance with the provisions of the 1940 Act (unless exempt
therefrom) to serve as segregated investment accounts for the Policies,
and that it will maintain such registration for so long as any Policies
are outstanding. The Company shall amend the registration statements
under the 1933 Act for the Policies and the registration statements
under the 1940 Act for the Accounts from time to time as required in
order to effect the continuous offering of the Policies or as may
otherwise be required by applicable law. The Company shall register
and qualify the Policies for sales in accordance with the securities
laws of the various states only if and to the extent deemed necessary
by the Company.
2.2. The Company represents and warrants that the Policies are
currently and at the time of issuance will be treated as life
insurance, endowment or annuity contract under applicable provisions of
the Internal Revenue Code of 1986, as amended (the "Code"), that it
will maintain such treatment and that it will notify the Trust or MFS
immediately upon having a reasonable basis for believing that the
Policies have ceased to be so treated or that they might not be so
treated in the future.
2.3. The Company represents and warrants that Allmerica Investments,
Inc., the underwriter for the individual variable annuity and the
variable life policies, is a member in good standing of the NASD and is
a registered broker-dealer with the SEC. The Company represents and
warrants that the Company and Allmerica Investments, Inc. will sell and
distribute such policies in accordance in all material respects with
all applicable state and federal securities laws, including without
limitation the 1933 Act, the 1934 Act, and the 1940 Act.
2.4. The Trust and MFS represent and warrant that the Shares sold
pursuant to this Agreement shall be registered under the 1933 Act, duly
authorized for issuance and sold in compliance with the laws of The
Commonwealth of Massachusetts and all applicable federal and state
securities laws and that the Trust is and shall remain registered under
the 1940 Act. The Trust shall amend the registration statement for its
Shares under the 1933 Act and the 1940 Act from time to time as
required in order to effect the continuous offering of its Shares. The
Trust shall register and qualify the Shares for sale in accordance with
the laws of the various states only if and to the extent deemed
necessary by the Trust.
2.5. MFS represents and warrants that the Underwriter is a member in
good standing of the NASD and is registered as a broker-dealer with the
SEC. The Trust and MFS represent that the Trust and the Underwriter
will sell and distribute the Shares in accordance in all material
respects with all applicable state and federal securities laws,
including without limitation the 1933 Act, the 1934 Act, and the 1940
Act.
2.6. The Trust represents that it is lawfully organized and validly
existing under the laws of The Commonwealth of Massachusetts and that
it does and will comply in all material respects with the 1940 Act and
any applicable regulations thereunder.
2.7. MFS represents and warrants that it is and shall remain duly
registered under all applicable federal securities laws and that it
shall perform its obligations for the Trust in compliance in all
material respects with any applicable federal securities laws and with
the securities laws of The
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Commonwealth of Massachusetts. MFS represents and warrants that it is
not subject to state securities laws other than the securities laws of
The Commonwealth of Massachusetts and that it is exempt from
registration as an investment adviser under the securities laws of The
Commonwealth of Massachusetts.
2.8. No less frequently than annually, the Company shall submit to
the Board such reports, material or data as the Board may reasonably
request so that it may carry out fully the obligations imposed upon it
by the conditions contained in the exemptive application pursuant to
which the SEC has granted exemptive relief to permit mixed and shared
funding (the "Mixed and Shared Funding Exemptive Order").
ARTICLE III. PROSPECTUS AND PROXY STATEMENTS; VOTING
3.1. At least annually, the Trust or its designee shall provide the
Company, free of charge, with as many copies of the current prospectus
(describing only the Portfolios listed in Schedule A hereto) for the
Shares as the Company may reasonably request for distribution to
existing Policy owners whose Policies are funded by such Shares. The
Trust or its designee shall provide the Company, at the Company's
expense, with as many copies of the current prospectus for the Shares
as the Company may reasonably request for distribution to prospective
purchasers of Policies. If requested by the Company in lieu thereof,
the Trust or its designee shall provide such documentation (including a
"camera ready" copy of the new prospectus as set in type or, at the
request of the Company, as a diskette in the form sent to the financial
printer) and other assistance as is reasonably necessary in order for
the parties hereto once each year (or more frequently if the prospectus
for the Shares is supplemented or amended) to have the prospectus for
the Policies and the prospectus for the Shares printed together in one
document; the expenses of such printing to be apportioned between (a)
the Company and (b) the Trust or its designee in proportion to the
number of pages of the Policy and Shares' prospectuses, taking account
of other relevant factors affecting the expense of printing, such as
covers, columns, graphs and charts; the Trust or its designee to bear
the cost of printing the Shares' prospectus portion of such document
for distribution to owners of existing Policies funded by the Shares
and the Company to bear the expenses of printing the portion of such
document relating to the Accounts; PROVIDED, however, that the Company
shall bear all printing expenses of such combined documents where used
for distribution to prospective purchasers or to owners of existing
Policies not funded by the Shares. In the event that the Company
requests that the Trust or its designee provides the Trust's prospectus
in a "camera ready" or diskette format, the Trust shall be responsible
for providing the prospectus in the format in which it or MFS is
accustomed to formatting prospectuses and shall bear the expense of
providing the prospectus in such format (E.G., typesetting expenses),
and the Company shall bear the expense of adjusting or changing the
format to conform with any of its prospectuses.
3.2. The prospectus for the Shares shall state that the statement of
additional information for the Shares is available from the Trust or
its designee. The Trust or its designee, at its expense, shall print
and provide such statement of additional information to the Company (or
a master of such statement suitable for duplication by the Company) for
distribution to any owner of a Policy funded by the Shares. The Trust
or its designee, at the Company's expense, shall print and provide such
statement to the Company (or a master of such statement suitable for
duplication by the Company) for distribution to a prospective purchaser
who requests such statement or to an owner of a Policy not funded by
the Shares.
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3.3. The Trust or its designee shall provide the Company free of
charge copies, if and to the extent applicable to the Shares, of the
Trust's proxy materials, reports to Shareholders and other
communications to Shareholders in such quantity as the Company shall
reasonably require for distribution to Policy owners.
3.4. Notwithstanding the provisions of Sections 3.1, 3.2, and 3.3
above, or of Article V below, the Company shall pay the expense of
printing or providing documents to the extent such cost is considered a
distribution expense. Distribution expenses would include by way of
illustration, but are not limited to, the printing of the Shares'
prospectus or prospectuses for distribution to prospective purchasers
or to owners of existing Policies not funded by such Shares.
3.5. The Trust hereby notifies the Company that it may be appropriate
to include in the prospectus pursuant to which a Policy is offered
disclosure regarding the potential risks of mixed and shared funding.
3.6. If and to the extent required by law, the Company shall:
(a) solicit voting instructions from Policy owners;
(b) vote the Shares in accordance with instructions received
from Policy owners; and
(c) vote the Shares for which no instructions have been
received in the same proportion as the Shares of such
Portfolio for which instructions have been received from
Policy owners;
so long as and to the extent that the SEC continues to interpret the
1940 Act to require pass through voting privileges for variable
contract owners. The Company will in no way recommend action in
connection with or oppose or interfere with the solicitation of proxies
for the Shares held for such Policy owners. The Company reserves the
right to vote shares held in any segregated asset account in its own
right, to the extent permitted by law. Participating Insurance
Companies shall be responsible for assuring that each of their separate
accounts holding Shares calculates voting privileges in the manner
required by the Mixed and Shared Funding Exemptive Order. The Trust and
MFS will notify the Company of any changes of interpretations or
amendments to the Mixed and Shared Funding Exemptive Order.
ARTICLE IV. SALES MATERIAL AND INFORMATION
4.1. The Company shall furnish, or shall cause to be furnished, to
the Trust or its designee, each piece of sales literature or other
promotional material in which the Trust, MFS, any other investment
adviser to the Trust, or any affiliate of MFS are named, at least three
(3) Business Days prior to its use. No such material shall be used if
the Trust, MFS, or their respective designees reasonably objects to
such use within three (3) Business Days after receipt of such material.
4.2. The Company shall not give any information or make any
representations or statement on behalf of the Trust, MFS, any other
investment adviser to the Trust, or any affiliate of MFS or concerning
the Trust or any other such entity in connection with the sale of the
Policies other than the information or representations contained in the
registration statement, prospectus or statement of
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additional information for the Shares, as such registration statement,
prospectus and statement of additional information may be amended or
supplemented from time to time, or in reports or proxy statements for
the Trust, or in sales literature or other promotional material
approved by the Trust, MFS or their respective designees, except with
the permission of the Trust, MFS or their respective designees. The
Trust, MFS or their respective designees each agrees to respond to any
request for approval on a prompt and timely basis. The Company shall
adopt and implement procedures reasonably designed to ensure that
information concerning the Trust, MFS or any of their affiliates which
is intended for use only by brokers or agents selling the Policies
(I.E., information that is not intended for distribution to Policy
owners or prospective Policy owners) is so used, and neither the Trust,
MFS nor any of their affiliates shall be liable for any losses, damages
or expenses relating to the improper use of such broker only materials.
4.3. The Trust or its designee shall furnish, or shall cause to be
furnished, to the Company or its designee, each piece of sales
literature or other promotional material in which the Company and/or
the Accounts is named, at least three (3) Business Days prior to its
use. No such material shall be used if the Company or its designee
reasonably objects to such use within three (3) Business Days after
receipt of such material.
4.4. The Trust and MFS shall not give, and agree that the Underwriter
shall not give, any information or make any representations on behalf
of the Company or concerning the Company, the Accounts, or the Policies
in connection with the sale of the Policies other than the information
or representations contained in a registration statement, prospectus,
or statement of additional information for the Policies, as such
registration statement, prospectus and statement of additional
information may be amended or supplemented from time to time, or in
reports for the Accounts, or in sales literature or other promotional
material approved by the Company or its designee, except with the
permission of the Company. The Company or its designee agrees to
respond to any request for approval on a prompt and timely basis. The
parties hereto agree that this Section 4.4. is neither intended to
designate nor otherwise imply that MFS is an underwriter or distributor
of the Policies.
4.5. The Company and the Trust (or its designee in lieu of the
Company or the Trust, as appropriate) will each provide to the other at
least one complete copy of all registration statements, prospectuses,
statements of additional information, reports, proxy statements, sales
literature and other promotional materials, applications for
exemptions, requests for no-action letters, and all amendments to any
of the above, that relate to the Policies, or to the Trust or its
Shares, prior to or contemporaneously with the filing of such document
with the SEC or other regulatory authorities. The Company and the
Trust shall also each promptly inform the other of the results of any
examination by the SEC (or other regulatory authorities) that relates
to the Policies, the Trust or its Shares, and the party that was the
subject of the examination shall provide the other party with a copy of
relevant portions of any "deficiency letter" or other correspondence or
written report regarding any such examination.
4.6. The Trust and MFS will provide the Company with as much notice
as is reasonably practicable of any proxy solicitation for any
Portfolio, and of any material change in the Trust's registration
statement, particularly any change resulting in change to the
registration statement or prospectus or statement of additional
information for any Account. The Trust and MFS will cooperate with the
Company so as to enable the Company to solicit proxies from Policy
owners or to make changes to its prospectus, statement of additional
information or registration statement, in an orderly manner. The Trust
and MFS will make reasonable efforts to attempt to have changes
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affecting Policy prospectuses become effective simultaneously with the
annual updates for such prospectuses.
4.7. For purpose of this Article IV and Article VIII, the phrase
"sales literature or other promotional material" includes but is not
limited to advertisements (such as material published, or designed for
use in, a newspaper, magazine, or other periodical, radio, television,
telephone or tape recording, videotape display, signs or billboards,
motion pictures, or other public media), and sales literature (such as
brochures, circulars, reprints or excerpts or any other advertisement,
sales literature, or published articles), distributed or made generally
available to customers or the public, educational or training materials
or communications distributed or made generally available to some or
all agents or employees.
ARTICLE V. FEES AND EXPENSES
5.1. The Trust shall pay no fee or other compensation to the Company
under this Agreement, and the Company shall pay no fee or other
compensation to the Trust, except that if the Trust or any Portfolio
adopts and implements a plan pursuant to Rule 12b-1 under the 1940 Act
to finance distribution and Shareholder servicing expenses, then,
subject to obtaining any required exemptive orders or regulatory
approvals, the Trust may make payments to the Company or to the
underwriter for the Policies if and in amounts agreed to by the Trust
in writing. Each party, however, shall, in accordance with the
allocation of expenses specified in Articles III and V hereof,
reimburse other parties for expenses initially paid by one party but
allocated to another party. In addition, nothing herein shall prevent
the parties hereto from otherwise agreeing to perform, and arranging
for appropriate compensation for, other services relating to the Trust
and/or to the Accounts.
5.2. The Trust or its designee shall bear the expenses for the cost
of registration and qualification of the Shares under all applicable
federal and state laws, including preparation and filing of the Trust's
registration statement, and payment of filing fees and registration
fees; preparation and filing of the Trust's proxy materials and reports
to Shareholders; setting in type and printing its prospectus and
statement of additional information (to the extent provided by and as
determined in accordance with Article III above); setting in type and
printing the proxy materials and reports to Shareholders (to the extent
provided by and as determined in accordance with Article III above);
the preparation of all statements and notices required of the Trust by
any federal or state law with respect to its Shares; all taxes on the
issuance or transfer of the Shares; and the costs of distributing the
Trust's prospectuses and proxy materials to owners of Policies funded
by the Shares and any expenses permitted to be paid or assumed by the
Trust pursuant to a plan, if any, under Rule 12b-1 under the 1940 Act.
The Trust shall not bear any expenses of marketing the Policies.
5.3. The Company shall bear the expenses of distributing the Shares'
prospectus or prospectuses in connection with new sales of the Policies
and of distributing the Trust's Shareholder reports to Policy owners.
The Company shall bear all expenses associated with the registration,
qualification, and filing of the Policies under applicable federal
securities and state insurance laws; the cost of preparing, printing
and distributing the Policy prospectus and statement of additional
information; and the cost of preparing, printing and distributing
annual individual account statements for Policy owners as required by
state insurance laws.
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ARTICLE VI. DIVERSIFICATION AND RELATED LIMITATIONS
6.1. The Trust and MFS represent and warrant that each Portfolio of
the Trust will meet the diversification requirements of Section 817 (h)
(1) of the Code and Treas. Reg. 1.817-5, relating to the
diversification requirements for variable annuity, endowment, or life
insurance contracts, as they may be amended from time to time (and any
revenue rulings, revenue procedures, notices, and other published
announcements of the Internal Revenue Service interpreting these
sections), as if those requirements applied directly to each such
Portfolio.
6.2. The Trust and MFS represent that each Portfolio will elect to be
qualified as a Regulated Investment Company under Subchapter M of the
Code and that they will maintain such qualification (under Subchapter M
or any successor or similar provision).
ARTICLE VII. POTENTIAL MATERIAL CONFLICTS
7.1. The Trust agrees that the Board, constituted with a majority of
disinterested trustees, will monitor each Portfolio of the Trust for
the existence of any material irreconcilable conflict between the
interests of the variable annuity contract owners and the variable life
insurance policy owners of the Company and/or affiliated companies
("contract owners") investing in the Trust. The Board shall have the
sole authority to determine if a material irreconcilable conflict
exists, and such determination shall be binding on the Company only if
approved in the form of a resolution by a majority of the Board, or a
majority of the disinterested trustees of the Board. The Board will
give prompt notice of any such determination to the Company.
7.2. The Company agrees that it will be responsible for assisting the
Board in carrying out its responsibilities under the conditions set
forth in the Trust's exemptive application pursuant to which the SEC
has granted the Mixed and Shared Funding Exemptive Order by providing
the Board, as it may reasonably request, with all information necessary
for the Board to consider any issues raised and agrees that it will be
responsible for promptly reporting any potential or existing conflicts
of which it is aware to the Board including, but not limited to, an
obligation by the Company to inform the Board whenever contract owner
voting instructions are disregarded. The Company also agrees that, if
a material irreconcilable conflict arises, it will at its own cost
remedy such conflict up to and including (a) withdrawing the assets
allocable to some or all of the Accounts from the Trust or any
Portfolio and reinvesting such assets in a different investment medium,
including (but not limited to) another Portfolio of the Trust, or
submitting to a vote of all affected contract owners whether to
withdraw assets from the Trust or any Portfolio and reinvesting such
assets in a different investment medium and, as appropriate,
segregating the assets attributable to any appropriate group of
contract owners that votes in favor of such segregation, or offering to
any of the affected contract owners the option of segregating the
assets attributable to their contracts or policies, and (b)
establishing a new registered management investment company and
segregating the assets underlying the Policies, unless a majority of
Policy owners materially adversely affected by the conflict have voted
to decline the offer to establish a new registered management
investment company.
7.3. A majority of the disinterested trustees of the Board shall
determine whether any proposed action by the Company adequately
remedies any material irreconcilable conflict. In the event that the
Board determines that any proposed action does not adequately remedy
any material irreconcilable conflict, the Company will withdraw from
investment in the Trust each of the Accounts designated by the
disinterested trustees and terminate this Agreement within six (6)
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months after the Board informs the Company in writing of the foregoing
determination; PROVIDED, HOWEVER, that such withdrawal and termination
shall be limited to the extent required to remedy any such material
irreconcilable conflict as determined by a majority of the
disinterested trustees of the Board.
7.4. If and to the extent that Rule 6e-2 and Rule 6e-3(T) are
amended, or Rule 6e-3 is adopted, to provide exemptive relief from any
provision of the 1940 Act or the rules promulgated thereunder with
respect to mixed or shared funding (as defined in the Mixed and Shared
Funding Exemptive Order) on terms and conditions materially different
from those contained in the Mixed and Shared Funding Exemptive Order,
then (a) the Trust and/or the Participating Insurance Companies, as
appropriate, shall take such steps as may be necessary to comply with
Rule 6e-2 and 6e-3(T), as amended, and Rule 6e-3, as adopted, to the
extent such rules are applicable; and (b) Sections 3.5, 3.6, 7.1, 7.2,
7.3 and 7.4 of this Agreement shall continue in effect only to the
extent that terms and conditions substantially identical to such
Sections are contained in such Rule(s) as so amended or adopted.
ARTICLE VIII. INDEMNIFICATION
8.1. INDEMNIFICATION BY THE COMPANY
The Company agrees to indemnify and hold harmless the Trust, MFS,
any affiliates of MFS, and each of their respective directors/trustees,
officers and each person, if any, who controls the Trust or MFS within
the meaning of Section 15 of the 1933 Act, and any agents or employees
of the foregoing (each an "Indemnified Party," or collectively, the
"Indemnified Parties" for purposes of this Section 8.1) against any and
all losses, claims, damages, liabilities (including amounts paid in
settlement with the written consent of the Company) or expenses
(including reasonable counsel fees) to which any Indemnified Party may
become subject under any statute, regulation, at common law or
otherwise, insofar as such losses, claims, damages, liabilities or
expenses (or actions in respect thereof) or settlements are related to
the sale or acquisition of the Shares or the Policies and:
(a) arise out of or are based upon any untrue statement or
alleged untrue statement of any material fact contained in
the registration statement, prospectus or statement of
additional information for the Policies or contained in the
Policies or sales literature or other promotional material
for the Policies (or any amendment or supplement to any of
the foregoing), or arise out of or are based upon the
omission or the alleged omission to state therein a material
fact required to be stated therein or necessary to make the
statements therein not misleading PROVIDED that this
agreement to indemnify shall not apply as to any Indemnified
Party if such statement or omission or such alleged
statement or omission was made in reasonable reliance upon
and in conformity with information furnished to the Company
or its designee by or on behalf of the Trust or MFS for use
in the registration statement, prospectus or statement of
additional information for the Policies or in the Policies
or sales literature or other promotional material (or any
amendment or supplement) or otherwise for use in connection
with the sale of the Policies or Shares; or
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(b) arise out of or as a result of statements or representations
(other than statements or representations contained in the
registration statement, prospectus, statement of additional
information or sales literature or other promotional
material of the Trust not supplied by the Company or its
designee, or persons under its control and on which the
Company has reasonably relied) or wrongful conduct of the
Company or persons under its control, with respect to the
sale or distribution of the Policies or Shares; or
(c) arise out of any untrue statement or alleged untrue
statement of a material fact contained in the registration
statement, prospectus, statement of additional information,
or sales literature or other promotional literature of the
Trust, or any amendment thereof or supplement thereto, or
the omission or alleged omission to state therein a material
fact required to be stated therein or necessary to make the
statement or statements therein not misleading, if such
statement or omission was made in reliance upon information
furnished to the Trust by or on behalf of the Company; or
(d) arise out of or result from any material breach of any
representation and/or warranty made by the Company in this
Agreement or arise out of or result from any other material
breach of this Agreement by the Company; or
(e) arise as a result of any failure by the Company to provide
the services and furnish the materials under the terms of
this Agreement;
as limited by and in accordance with the provisions of this Article VIII.
8.2. INDEMNIFICATION BY THE TRUST
The Trust agrees to indemnify and hold harmless the Company and
each of its directors and officers and each person, if any, who
controls the Company within the meaning of Section 15 of the 1933 Act,
and any agents or employees of the foregoing (each an "Indemnified
Party," or collectively, the "Indemnified Parties" for purposes of this
Section 8.2) against any and all losses, claims, damages, liabilities
(including amounts paid in settlement with the written consent of the
Trust) or expenses (including reasonable counsel fees) to which any
Indemnified Party may become subject under any statute, at common law
or otherwise, insofar as such losses, claims, damages, liabilities or
expenses (or actions in respect thereof) or settlements are related to
the sale or acquisition of the Shares or the Policies and:
(a) arise out of or are based upon any untrue statement or
alleged untrue statement of any material fact contained in
the registration statement, prospectus, statement of
additional information or sales literature or other
promotional material of the Trust (or any amendment or
supplement to any of the foregoing), or arise out of or are
based upon the omission or the alleged omission to state
therein a material fact required to be stated therein or
necessary to make the statement therein not misleading,
PROVIDED that this agreement to indemnify shall not apply as
to any Indemnified Party if such statement or omission or
such alleged statement or omission was made in reasonable
reliance upon and in conformity with information furnished
to the Trust, MFS, the Underwriter or their respective
designees by or on
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behalf of the Company for use in the registration
statement, prospectus or statement of additional
information for the Trust or in sales literature
or other promotional material for the Trust (or any
amendment or supplement) or otherwise for use in
connection with the sale of the Policies or Shares; or
(b) arise out of or as a result of statements or representations
(other than statements or representations contained in the
registration statement, prospectus, statement of additional
information or sales literature or other promotional
material for the Policies not supplied by the Trust, MFS,
the Underwriter or any of their respective designees or
persons under their respective control and on which any such
entity has reasonably relied) or wrongful conduct of the
Trust or persons under its control, with respect to the sale
or distribution of the Policies or Shares; or
(c) arise out of any untrue statement or alleged untrue
statement of a material fact contained in the registration
statement, prospectus, statement of additional information,
or sales literature or other promotional literature of the
Accounts or relating to the Policies, or any amendment
thereof or supplement thereto, or the omission or alleged
omission to state therein a material fact required to be
stated therein or necessary to make the statement or
statements therein not misleading, if such statement or
omission was made in reliance upon information furnished to
the Company by or on behalf of the Trust, MFS or the
Underwriter; or
(d) arise out of or result from any material breach of any
representation and/or warranty made by the Trust in this
Agreement (including a failure, whether unintentional or in
good faith or otherwise, to comply with the diversification
requirements specified in Article VI of this Agreement) or
arise out of or result from any other material breach of
this Agreement by the Trust; or
(e) arise out of or result from the materially incorrect or
untimely calculation or reporting of the daily net asset
value per share or dividend or capital gain distribution
rate; or
(f) arise as a result of any failure by the Trust to provide the
services and furnish the materials under the terms of the
Agreement;
as limited by and in accordance with the provisions of this Article VIII.
8.3. In no event shall the Trust be liable under the indemnification
provisions contained in this Agreement to any individual or entity,
including without limitation, the Company, or any Participating Insurance
Company or any Policy holder, with respect to any losses, claims, damages,
liabilities or expenses that arise out of or result from (i) a breach of
any representation, warranty, and/or covenant made by the Company hereunder
or by any Participating Insurance Company under an agreement containing
substantially similar representations, warranties and covenants; (ii) the
failure by the Company or any Participating Insurance Company to maintain
its segregated asset account (which invests in any Portfolio) as a legally
and validly established segregated asset account under applicable state law
and as a duly registered unit investment trust under the provisions of the
1940 Act (unless exempt therefrom); or (iii) the failure by the Company or
any Participating Insurance Company to maintain its variable annuity and/or
variable life insurance
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<PAGE>
contracts (with respect to which any Portfolio serves as an underlying
funding vehicle) as life insurance, endowment or annuity contracts under
applicable provisions of the Code.
8.4. Neither the Company nor the Trust shall be liable under the
indemnification provisions contained in this Agreement with respect to
any losses, claims, damages, liabilities or expenses to which an
Indemnified Party would otherwise be subject by reason of such
Indemnified Party's willful misfeasance, willful misconduct, or gross
negligence in the performance of such Indemnified Party's duties or by
reason of such Indemnified Party's reckless disregard of obligations and
duties under this Agreement.
8.5. Promptly after receipt by an Indemnified Party under this Section
8.5. of notice of commencement of any action, such Indemnified Party
will, if a claim in respect thereof is to be made against the
indemnifying party under this section, notify the indemnifying party of
the commencement thereof; but the omission so to notify the indemnifying
party will not relieve it from any liability which it may have to any
Indemnified Party otherwise than under this section. In case any such
action is brought against any Indemnified Party, and it notified the
indemnifying party of the commencement thereof, the indemnifying party
will be entitled to participate therein and, to the extent that it may
wish, assume the defense thereof, with counsel satisfactory to such
Indemnified Party. After notice from the indemnifying party of its
intention to assume the defense of an action, the Indemnified Party
shall bear the expenses of any additional counsel obtained by it, and
the indemnifying party shall not be liable to such Indemnified Party
under this section for any legal or other expenses subsequently incurred
by such Indemnified Party in connection with the defense thereof other
than reasonable costs of investigation.
8.6. Each of the parties agrees promptly to notify the other parties
of the commencement of any litigation or proceeding against it or any of
its respective officers, directors, trustees, employees or 1933 Act
control persons in connection with the Agreement, the issuance or sale
of the Policies, the operation of the Accounts, or the sale or
acquisition of Shares.
8.7. A successor by law of the parties to this Agreement shall be
entitled to the benefits of the indemnification contained in this
Article VIII. The indemnification provisions contained in this Article
VIII shall survive any termination of this Agreement.
ARTICLE IX. APPLICABLE LAW
9.1. This Agreement shall be construed and the provisions hereof
interpreted under and in accordance with the laws of The Commonwealth of
Massachusetts.
9.2. This Agreement shall be subject to the provisions of the 1933,
1934 and 1940 Acts, and the rules and regulations and rulings
thereunder, including such exemptions from those statutes, rules and
regulations as the SEC may grant and the terms hereof shall be
interpreted and construed in accordance therewith.
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<PAGE>
ARTICLE X. NOTICE OF FORMAL PROCEEDINGS
The Trust, MFS, and the Company agree that each such party shall
promptly notify the other parties to this Agreement, in writing, of the
institution of any formal proceedings brought against such party or its
designees by the NASD, the SEC, or any insurance department or any other
regulatory body regarding such party's duties under this Agreement or related
to the sale of the Policies, the operation of the Accounts, or the purchase
of the Shares.
ARTICLE XI. TERMINATION
11.1. This Agreement shall terminate with respect to the Accounts, or
one, some, or all Portfolios:
(a) at the option of any party upon six (6) months' advance
written notice to the other parties; or
(b) at the option of the Company to the extent that the Shares
of Portfolios are not reasonably available to meet the
requirements of the Policies or are not "appropriate funding
vehicles" for the Policies, as reasonably determined by the
Company. Without limiting the generality of the foregoing,
the Shares of a Portfolio would not be "appropriate funding
vehicles" if, for example, such Shares did not meet the
diversification or other requirements referred to in Article
VI hereof; or if the Company would be permitted to disregard
Policy owner voting instructions pursuant to Rule 6e-2 or
6e-3(T) under the 1940 Act. Prompt notice of the election
to terminate for such cause and an explanation of such cause
shall be furnished to the Trust by the Company; or
(c) at the option of the Trust or MFS upon institution of formal
proceedings against the Company by the NASD, the SEC, or any
insurance department or any other regulatory body regarding
the Company's duties under this Agreement or related to the
sale of the Policies, the operation of the Accounts, or the
purchase of the Shares; provided that the party terminating
this Agreement under this provision shall give notice of
such termination to the other parties to this Agreement; or
(d) at the option of the Company upon institution of formal
proceedings against the Trust by the NASD, the SEC, or any
state securities or insurance department or any other
regulatory body regarding the Trust's or MFS' duties under
this Agreement or related to the sale of the Shares;
provided that the party terminating this Agreement under
this provision shall give notice of such termination to the
other parties to this Agreement; or
(e) at the option of the Company, the Trust or MFS upon receipt
of any necessary regulatory approvals and/or the vote of the
Policy owners having an interest in the Accounts (or any
subaccounts) to substitute the shares of another investment
company for the corresponding Portfolio Shares in accordance
with the terms of the Policies for which those Portfolio
Shares had been selected to serve as the underlying
investment media. The Company will give thirty (30) days'
prior
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<PAGE>
written notice to the Trust of the Date of any proposed
vote or other action taken to replace the Shares; or
(f) termination by either the Trust or MFS by written notice to
the Company, if either one or both of the Trust or MFS
respectively, shall determine, in their sole judgment
exercised in good faith, that the Company has suffered a
material adverse change in its business, operations,
financial condition, or prospects since the date of this
Agreement or is the subject of material adverse publicity;
or
(g) termination by the Company by written notice to the Trust
and MFS, if the Company shall determine, in its sole
judgment exercised in good faith, that the Trust or MFS has
suffered a material adverse change in this business,
operations, financial condition or prospects since the date
of this Agreement or is the subject of material adverse
publicity; or
(h) at the option of any party to this Agreement, upon another
party's material breach of any provision of this Agreement;
or
(i) upon assignment of this Agreement, unless made with the
written consent of the parties hereto.
11.2. The notice shall specify the Portfolio or Portfolios, Policies and,
if applicable, the Accounts as to which the Agreement is to be terminated.
11.3. It is understood and agreed that the right of any party hereto to
terminate this Agreement pursuant to Section 11.1(a) may be exercised for
cause or for no cause.
11.4. Except as necessary to implement Policy owner initiated
transactions, or as required by state insurance laws or regulations, the
Company shall not redeem the Shares attributable to the Policies (as
opposed to the Shares attributable to the Company's assets held in the
Accounts), and the Company shall not prevent Policy owners from allocating
payments to a Portfolio that was otherwise available under the Policies,
until thirty (30) days after the Company shall have notified the Trust of
its intention to do so.
11.5. Notwithstanding any termination of this Agreement, the Trust and
MFS shall, at the option of the Company, continue to make available
additional shares of the Portfolios pursuant to the terms and conditions of
this Agreement, for all Policies in effect on the effective date of
termination of this Agreement (the "Existing Policies"), except as
otherwise provided under Article VII of this Agreement. Specifically,
without limitation, the owners of the Existing Policies shall be permitted
to transfer or reallocate investment under the Policies, redeem investments
in any Portfolio and/or invest in the Trust upon the making of additional
purchase payments under the Existing Policies.
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<PAGE>
ARTICLE XII. NOTICES
Any notice shall be sufficiently given when sent by registered or
certified mail, overnight courier or facsimile to the other party at the
address of such party set forth below or at such other address as such party
may from time to time specify in writing to the other party.
If to the Trust:
MFS VARIABLE INSURANCE TRUST
500 Boylston Street
Boston, Massachusetts 02116
Facsimile No.: (617) 954-6624
Attn: Stephen E. Cavan, Secretary
If to the Company:
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
440 Lincoln Street
Worcester, MA 01653
Facsimile No.: (508) 853-6332
Attn: Richard M. Reilly, President
If to MFS:
MASSACHUSETTS FINANCIAL SERVICES COMPANY
500 Boylston Street
Boston, Massachusetts 02116
Facsimile No.: (617) 954-6624
Attn: Stephen E. Cavan, General Counsel
ARTICLE XIII. MISCELLANEOUS
13.1. Subject to the requirement of legal process and regulatory
authority, each party hereto shall treat as confidential the names and
addresses of the owners of the Policies and all information reasonably
identified as confidential in writing by any other party hereto and, except
as permitted by this Agreement or as otherwise required by applicable law
or regulation, shall not disclose, disseminate or utilize such names and
addresses and other confidential information without the express written
consent of the affected party until such time as it may come into the
public domain.
13.2. The captions in this Agreement are included for convenience of
reference only and in no way define or delineate any of the provisions
hereof or otherwise affect their construction or effect.
13.3. This Agreement may be executed simultaneously in one or more
counterparts, each of which taken together shall constitute one and the
same instrument.
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<PAGE>
13.4. If any provision of this Agreement shall be held or made invalid by
a court decision, statute, rule or otherwise, the remainder of the
Agreement shall not be affected thereby.
13.5. The Schedule attached hereto, as modified from time to time, is
incorporated herein by reference and is part of this Agreement.
13.6. Each party hereto shall cooperate with each other party in
connection with inquiries by appropriate governmental authorities
(including without limitation the SEC, the NASD, and state insurance
regulators) relating to this Agreement or the transactions contemplated
hereby.
13.7. The rights, remedies and obligations contained in this Agreement
are cumulative and are in addition to any and all rights, remedies and
obligations, at law or in equity, which the parties hereto are entitled to
under state and federal laws.
13.8. A copy of the Trust's Declaration of Trust is on file with the
Secretary of State of The Commonwealth of Massachusetts. The Company
acknowledges that the obligations of or arising out of this instrument are
not binding upon any of the Trust's trustees, officers, employees, agents
or shareholders individually, but are binding solely upon the assets and
property of the Trust in accordance with its proportionate interest
hereunder. The Company further acknowledges that the assets and
liabilities of each Portfolio are separate and distinct and that the
obligations of or arising out of this instrument are binding solely upon
the assets or property of the Portfolio on whose behalf the Trust has
executed this instrument. The Company also agrees that the obligations of
each Portfolio hereunder shall be several and not joint, in accordance with
its proportionate interest hereunder, and the Company agrees not to proceed
against any Portfolio for the obligations of another Portfolio.
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<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement
to be executed in its name and on its behalf by its duly authorized
representative and its seal to be hereunder affixed hereto as of the date
specified above.
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
/s/ Richard M. Reilly
-----------------------------------------------------
By its authorized officer,
By: Richard M. Reilly
--------------------------------------
Title: President
-----------------------------------
MFS VARIABLE INSURANCE TRUST,
ON BEHALF OF THE PORTFOLIOS
By its authorized officer and not individually,
By: /s/ James R. Bordewick, Jr.
--------------------------------------
James R. Bordewick, Jr.
Assistant Secretary
MASSACHUSETTS FINANCIAL SERVICES COMPANY
By its authorized officer,
By: /s/ Jeffrey L. Shames
--------------------------------------
Jeffrey L. Shames
Chairman and Chief Executive Officer
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<PAGE>
As of August 1, 1998
SCHEDULE A
ACCOUNTS, POLICIES AND PORTFOLIOS
SUBJECT TO THE PARTICIPATION AGREEMENT
- -------------------------------------------------------------------------------
NAME OF SEPARATE
ACCOUNT AND DATE POLICIES FUNDED PORTFOLIOS
ESTABLISHED BY BOARD OF BY SEPARATE ACCOUNT APPLICABLE TO POLICIES
DIRECTORS
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
FULCRUM ACCOUNT OF VARIABLE ANNUITY MFS EMERGING GROWTH
ALLMERICA FINANCIAL LIFE MFS GROWTH WITH INCOME
INSURANCE AND ANNUITY
COMPANY
'33 ACT #: 333-11377
'40 ACT #811-7799
FULCRUM VARIABLE LIFE VARIABLE LIFE
ACCOUNT OF ALLMERICA
FINANCIAL LIFE INSURANCE
AND ANNUITY COMPANY
'33 ACT #333-15569
'40 ACT #: 811-07913
- -------------------------------------------------------------------------------
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<PAGE>
PARTICIPATION AGREEMENT
AMONG
OPPENHEIMER VARIABLE ACCOUNT FUNDS
OPPENHEIMERFUNDS, INC.
AND
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
DATED AS OF
AUGUST 1, 1998
<PAGE>
TABLE OF CONTENTS
PAGE
----
ARTICLE I. Purchase of Fund Shares 4
ARTICLE II Representations and Warranties 5
ARTICLE III Prospectuses, Reports to Shareholders
and Proxy Statements, Voting 6
ARTICLE IV Sales Material and Information 8
ARTICLE V Fees and Expenses 9
ARTICLE VI Diversification 9
ARTICLE VII Potential Conflicts 9
ARTICLE VIII Indemnification 11
ARTICLE IX. Applicable Law 15
ARTICLE X Termination 15
ARTICLE XI Notices 16
ARTICLE XII Miscellaneous 17
SCHEDULE A Separate Accounts and Variable Products A -1
SCHEDULE B Portfolios of Oppenheimer Variable Account Funds B -1
SCHEDULE C Proxy Voting Procedures C -1
<PAGE>
THIS AGREEMENT, made and entered into as of the 1st day of August, 1998 by
and among: ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(hereinafter the "Company"), a Delaware corporation, on its own behalf and on
behalf of each separate account of the Company set forth on Schedule A
hereto, as may be amended from time to time (each such account hereinafter
referred to as the "Account"); OPPENHEIMER VARIABLE ACCOUNT FUNDS, an
unincorporated Massachusetts business trust (hereinafter the "Fund"), and
OPPENHEIMERFUNDS, INC. (hereinafter the "Adviser"), a Colorado corporation
WHEREAS, the Fund engages in business as an open-end
management investment company and is available to act as (i) the investment
vehicle for separate accounts established by insurance companies for
individual and group life insurance policies and annuity contracts with
variable accumulation and/or pay-out provisions (hereinafter referred to
individually and/or collectively as "Variable Products") and (ii) the
investment vehicle for certain qualified pension and retirement plans
(hereinafter "Qualified Plans"); and
WHEREAS, insurance companies desiring to utilize the Fund as
an investment vehicle under their Variable Products enter into participation
agreements with the Fund and the Adviser (the "Participating Insurance
Companies");
WHEREAS, shares of the Fund are divided into several series of
shares, each representing the interest in a particular managed portfolio of
securities and other assets (each such series hereinafter referred to as a
"Portfolio"), any one or more of which may be made available under this
Agreement, as may be amended from time to time by mutual agreement of the
parties hereto; and
WHEREAS, the Fund has obtained an order from the Securities
and Exchange Commission, granting Participating Insurance Companies and
Variable Insurance Product separate accounts exemptions from the provisions
of Sections 9(a), 13(a), 15(a), and 15(b) of the Investment Company Act of
1940, as amended (hereinafter the "1940 Act"), and Rules 6e-2(b)(15) and
6e-3(T)(b)(15) thereunder, to the extent necessary to permit shares of the
Fund to be sold to and held by separate accounts of both affiliated and
unaffiliated life insurance companies (hereinafter the "Shared Funding
Exemptive Order"); and
WHEREAS, the Fund is registered as an open-end management
investment company under the 1940 Act and its shares are registered under the
Securities Act of 1933, as amended (hereinafter the "1933 Act"); and
WHEREAS, the Adviser is duly registered as an investment
adviser under the Investment Advisers Act of 1940, as amended, and any
applicable state securities laws and manages each of the portfolios of the
Fund; and
WHEREAS, Allmerica Investments, Inc. (the "Underwriter") is
registered as a broker/dealer under the Securities Exchange Act of 1934, as
amended (hereinafter the "1934 Act"), is a member in good standing of the
National Association of Securities Dealers, Inc. (hereinafter the "NASD"); and
WHEREAS, the Company has registered or will register certain
Variable Products under the 1933 Act; and
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<PAGE>
WHEREAS, each Account is a duly organized, validly existing
segregated asset account, established by resolution or under authority of the
Board of Directors of the Company, to set aside and invest assets
attributable to the aforesaid Variable Products, and the Company has
registered or will register each Account as a unit investment trust under the
1940 Act; and
WHEREAS, to the extent permitted by applicable insurance laws
and regulations, the Company intends to purchase, on behalf of each Account,
shares in the Portfolios set forth in Schedule B attached to this Agreement,
to fund certain of the aforesaid Variable Insurance Products and the Fund is
authorized to sell such shares to each such Account at net asset value;
NOW, THEREFORE, in consideration of their mutual promises, the
parties hereto agree as follows:
ARTICLE I. PURCHASE OF FUND SHARES
1.1. The Fund agrees to make available for purchase by the
Company shares of the Fund and shall execute orders placed for each Account
on a daily basis at the net asset value next computed after receipt by the
Fund or its designee of such order. For purposes of this Section 1.1, the
Company shall be the designee of the Fund for receipt of such orders from
each Account and receipt by such designee shall constitute receipt by the
Fund; provided that the Fund receives notice of such order by 9:30 a.m.
Eastern time on the next following Business Day. "Business Day" shall mean
any day on which the New York Stock Exchange is open for trading and on which
the Fund calculates its net asset value pursuant to the rules of the
Securities and Exchange Commission.
1.2. The Fund, so long as this Agreement is in effect, agrees
to make its shares available indefinitely for purchase at the applicable net
asset value per share by the Company and its Accounts on those days on which
the Fund calculates its net asset value pursuant to rules of the Securities
and Exchange Commission and the Fund shall use reasonable efforts to
calculate such net asset value on each day which the New York Stock Exchange
is open for trading. Notwithstanding the foregoing, the Board of Trustees of
the Fund (hereinafter the "Board") may refuse to permit the Fund to sell
shares of any Portfolio to any person, or suspend or terminate the offering
of shares of any Portfolio if such action is required by law or by regulatory
authorities having jurisdiction or is, in the sole discretion of the Board
acting in good faith and in light of their fiduciary duties under federal and
any applicable state laws, in the best interests of the shareholders of such
Portfolio.
1.3. The Fund agrees that shares of the Fund will be sold
only to (i) Participating Insurance Companies and their separate accounts,
(ii) to certain Qualified Plans, or (iii) to such other persons as are
permitted under applicable provisions of the Internal Revenue Code of 1986,
as amended (the "Code") and regulations promulgated thereunder, the sale of
which will not impair the tax treatment currently afforded the Variable
Products.
1.4. The Fund agrees to redeem for cash, on the Company's
request, any full or fractional shares of the Fund held by the Company,
executing such requests on a daily basis at the net asset value next computed
after receipt by the Fund or its designee of the request for redemption. For
purposes of this Section 1.4, the Company shall be the designee of the Fund
for receipt of requests for redemption from each Account and receipt by such
designee shall constitute receipt by the Fund, provided that the Fund
receives notice of such request for redemption by 9:30 a.m. Eastern time on
the next following Business Day.
4
<PAGE>
1.5. The Company agrees that purchases and redemptions of
Portfolio shares offered by the then current prospectus of the Fund shall be
made in accordance with the provisions of such prospectus.
1.6. The Company shall pay for Fund shares on the next
Business Day after an order to purchase Fund shares is made in accordance
with the provisions of Section 1.1 hereof. Payment shall be in federal funds
transmitted by wire.
1.7. Issuance and transfer of the Fund's shares will be by
book entry only. Stock certificates will not be issued to the Company or any
Account. Shares ordered from the Fund will be recorded in an appropriate
title for each Account or the appropriate subaccount of each Account.
1.9. The Fund shall furnish same day notice (by fax, e-mail
or telephone, followed by written confirmation, if by telephone) to the
Company of any income, dividends or capital gain distributions payable on the
Fund's shares. The Company hereby elects to receive all such income
dividends and capital gain distributions as are payable on the Portfolio
shares in additional shares of that Portfolio. The Company reserves the
right to revoke this election upon 60 days written notice and to receive all
such income dividends and capital gain distributions in cash. The Fund shall
notify the Company of the number of shares so issued as payment of such
dividends and distributions.
1.10. The Fund shall make the net asset value per share for
each Portfolio available to the Company on a daily basis as soon as
reasonably practical after the net asset value per share is calculated
(normally by 6:30 p.m. Eastern time) and shall use its best efforts to make
such net asset value per share available by 7:00 p.m. Eastern time.
ARTICLE II. REPRESENTATIONS AND WARRANTIES
2.1. The Company represents and warrants that the Variable
Products are or will be registered under the 1933 Act; that the Variable
Products will be issued and sold in compliance in all material respects with
all applicable federal and state laws, and that the sale of the Variable
Products shall comply in all material respects with state insurance
suitability requirements. The Company further represents and warrants that
it is an insurance company duly organized and in good standing under
applicable law, that it has legally and validly established each Account as a
segregated asset account under Section 2932 of the Delaware Insurance Code,
and that it has registered or, prior to any issuance or sale of the Variable
Products, will register each Account as a unit investment trust in accordance
with the provisions of the 1940 Act to serve as a segregated investment
account for the Variable Products.
2.2. The Fund represents and warrants that Fund shares sold
pursuant to this Agreement shall be registered under the 1933 Act, duly
authorized for issuance and sold in compliance with the laws of the
Commonwealth of Massachusetts and all applicable federal and state securities
laws, and that the Fund is and shall make every reasonable effort to remain
registered under the 1940 Act. The Fund shall amend the registration
statement for its shares under the 1933 Act and the 1940 Act from time to
time as required in order to effect the continuous offering of its shares.
The Fund shall register and qualify the shares for sale in accordance with
the laws of the various states only if and to the extent deemed advisable by
the Fund.
2.3. The Fund represents that it is currently qualified as a
Regulated Investment Company under Subchapter M of the Code, and that it will
make every effort to maintain such qualification (under Subchapter M or any
successor or similar provision) and that it will notify the Company promptly
upon having a reasonable basis for believing that it has ceased to so qualify
or that it might not so qualify in the future.
5
<PAGE>
2.4. The Company represents that the Variable Products are
currently treated as life insurance policies or annuity contracts under
applicable provisions of the Code, that it will make every effort to maintain
such treatment, and that it will notify the Fund immediately upon having a
reasonable basis for believing that the Variable Products have ceased to be
so treated or that they might not be so treated in the future.
2.5. The Fund represents that its board of Trustees, a
majority of whom are not interested persons of the Fund, has approved the
Fund's plans under Rule 12b-1 to finance distribution expenses.
2.6. The Fund represents that it is lawfully organized and
validly existing under the laws of the Commonwealth of Massachusetts and that
it does and will comply in all material respects with the 1940 Act.
2.7. The Adviser represents and warrants that it is and shall
remain duly registered in all material respects under all applicable federal
and state securities laws and that it will perform its obligations for the
Fund in compliance in all material respects with the laws of its state of
domicile and any applicable state and federal securities laws.
2.8. The Fund represents and warrants that its Trustees,
officers, employees, and other individuals/entities dealing with the money
and/or securities of the Fund are and shall continue to be at all times
covered by a blanket fidelity bond or similar coverage for the benefit of the
Fund in an amount not less than the minimal coverage as required currently by
Rule 17g-(1) of the 1940 Act or related provisions as may be promulgated from
time to time. The aforesaid blanket fidelity bond shall include coverage for
larceny and embezzlement and shall be issued by a reputable bonding company.
2.9. The Company represents and warrants that all of its
directors, officers, employees, investment advisers, and other
individuals/entities dealing with the money and/or securities of the Fund are
covered by a blanket fidelity bond or similar coverage, in an amount not less
$5 million. The aforesaid, which includes coverage for larceny and
embezzlement, shall be issued by a reputable bonding company. The Company
agrees to make all reasonable efforts to see that this bond or another bond
containing these provisions is always in effect, and agrees to notify the
Fund and the Underwriter promptly in writing in the event that such coverage
no longer applies.
ARTICLE III. PROSPECTUSES, REPORTS TO SHAREHOLDERS AND PROXY STATEMENTS;
VOTING
3.1. The Fund or its designee shall provide the Company with
as many printed copies of the Fund's current prospectus as the Company may
reasonably request. If requested by the Company, in lieu of providing
printed copies, the Fund shall provide camera-ready film or computer
diskettes containing the Fund's prospectus, and such other assistance as is
reasonably necessary in order for the Company once each year (or more
frequently if the prospectus for the Fund is amended during the year) to have
the prospectus for the Variable Products and the Fund's prospectus printed
together in one document. Alternatively, the Company may print the Fund's
prospectus in combination with other fund companies' prospectuses.
3.2. Except as provided in this Section 3.2., all expenses of
printing and distributing Fund prospectuses shall be the expense of the
Company. For any prospectuses provided by the Company to the existing owners
of Variable Products who currently own shares of one or more of the Fund's
Portfolios, in
6
<PAGE>
order to update disclosure as required by the 1933 Act and/or the 1940 Act,
the cost of printing shall be borne by the Fund. If the Company chooses to
receive camera-ready film or computer diskettes in lieu of receiving printed
copies of the Fund's prospectus, the Fund will reimburse the Company in an
amount equal to the product of x and y where x is the number of such
prospectuses distributed to owners of the Variable Products who currently own
shares of one or more of the Fund's Portfolios, and y is the Fund's per unit
cost of typesetting and printing the Fund's prospectus. The Company agrees
to provide the Fund or its designee with such information as may be
reasonably requested by the Fund to assure that the Fund's expenses do not
include the cost of printing any prospectuses other than those actually
distributed to existing owners of the Variable Products.
3.3. The Fund prospectus shall state that the statement of
additional information for the Fund is available from the Fund or its
designee. The Fund or its designee, at its expense, shall print and provide
such statement of additional information to the Company (or a master of such
statement suitable for duplication by the Company) for distribution to any
owner of a contract funded by the Fund. The Fund or its designee, at the
Company's expense, shall print and provide such statement to the Company (or
a master of such statement suitable for duplication by the Company) for
distribution to a prospective purchaser who requests such statement or to an
owner of a contract not funded by the Fund.
3.4. The Fund, at its expense, shall provide the Company with
copies of its proxy statements, reports to shareholders, and other
communications (except for prospectuses, which are covered in Section 3.1) to
shareholders in such quantity as the Company shall reasonably require for
distribution to contract owners. The Fund or its designee shall bear the
cost of printing, duplicating, and mailing of these documents to current
contract owners, and the Company shall bear the cost for such documents used
for purposes other than distribution to current contract owners.
3.5. If and to the extent required by law the Company shall:
(i) solicit voting instructions from contract owners;
(ii) vote the Fund shares in accordance with instructions received
from contract owners; and
(iii) vote Fund shares for which no instructions have been received
in the same proportion as Fund shares of such Portfolio for
which instructions have been received,
so long as and to the extent that the Securities and Exchange Commission
continues to interpret the 1940 Act to require pass-through voting privileges
for variable contract owners. The Company reserves the right to vote Fund
shares held in any segregated asset account in its own right, to the extent
permitted by law. The Fund and the Company shall follow the procedures, and
shall have the corresponding responsibilities, for the handling of proxy and
voting instruction solicitations, as set forth in Schedule C attached hereto
and incorporated herein by reference. Participating Insurance Companies
shall be responsible for ensuring that each of their separate accounts
participating in the Fund calculates voting privileges in a manner consistent
with the standards set forth on Schedule C, which standards will also be
provided to the other Participating Insurance Companies, if any.
3.6. The Fund will comply with all provisions of the 1940 Act requiring
voting by shareholders, and in particular the Fund will either provide for
annual meetings or comply with Section 16(c) of the 1940 Act (although the
Fund is not one of the trusts described in Section 16(c) of that Act) as well
as with
7
<PAGE>
Sections 16(a) and, if and when applicable, 16(b). Further, the Fund will
act in accordance with the Securities and Exchange Commission's
interpretation of the requirements of Section 16(a) with respect to periodic
elections of trustees and with whatever rules the Commission may promulgate
with respect thereto.
3.7. The Fund shall use reasonable efforts to provide Fund prospectuses,
reports to shareholders, proxy materials and other Fund communications (or
camera-ready equivalents) to the Company sufficiently in advance of the
Company's mailing dates to enable the Company to complete, at reasonable
cost, the printing, assembling and/or distribution of the communications in
accordance with applicable laws and regulations.
3.8. In the event the Company or its agent shall receive requests for
the Fund's Prospectus, statement of additional information or annual or
semi-annual report, the Company shall send the requested document within
three business days of receipt of such request, by first-class mail or other
means to ensure prompt delivery, or as otherwise required by Rule 498 under
the Securities Act of 1933 or any successor provision, at the Company's
expense.
ARTICLE IV. SALES MATERIAL AND INFORMATION
4.1. The Company shall furnish, or shall cause to be furnished, to the
Adviser or its designee, each piece of sales literature or other promotional
material in which the Fund or the Adviser(s) is named, at least fifteen
Business Days prior to its use. No such material shall be used if the Fund
or its designee reasonably objects to such use within fifteen Business Days
after receipt of such material.
4.2. The Company shall not give any information or make any
representations or statements on behalf of the Fund or concerning the Fund in
connection with the sale of the Variable Products other than the information
or representations contained in the registration statement or prospectus for
the Fund shares, as such registration statement and prospectus may be amended
or supplemented from time to time, or in reports or proxy statements for the
Fund, or in sales literature or other promotional material approved by the
Fund or its designee, except with the permission of the Fund.
4.3. The Fund or its designee shall furnish, or shall cause to be
furnished, to the Company or its designee, each piece of sales literature or
other promotional material in which the Company and/or its separate
account(s) is named at least fifteen Business Days prior to its use. No such
material shall be used if the Company or its designee reasonably objects to
such use within fifteen Business Days after receipt of such material.
4.4. The Fund and the Adviser shall not give any information or make
any representations on behalf of the Company or concerning the Company, each
Account, or the Variable Products, other than the information or
representations contained in a registration statement or prospectus for the
Variable Products, as such registration statement and prospectus may be
amended or supplemented from time to time, or in published reports for each
Account which are in the public domain or approved by the Company for
distribution to contract owners, or in sales literature or other promotional
material approved by the Company or its designee, except with the permission
of the Company.
4.5. The Fund will provide to the Company at least one complete copy of
all registration statements, prospectuses, statements of additional
information, reports, proxy statements, sales literature and other
promotional materials, applications for exemptions, requests for no-action
letters, and all amendments to any of the above, that relate to the Fund or
its shares, which are relevant to the Company or the Variable Products.
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4.6. The Company will provide to the Fund at least one complete copy of
all registration statements, prospectuses, statements of additional
information, reports, solicitations for voting instructions, sales literature
and other promotional materials, applications for exemptions, requests for
no-action letters, and all amendments to any of the above, that relate to the
investment in the Fund under the Variable Products.
4.7. For purposes of this Article IV, the phrase "sales literature or
other promotional material" includes, but is not limited to, any of the
following that refer to the Fund or any affiliate of the Fund: advertisements
(such as material published, or designed for use in, a newspaper, magazine,
or other periodical, radio, television, telephone or tape recording,
videotape display, signs or billboards, motion pictures, or other public
media), sales literature (I.E., any written or electronic communication
distributed or made generally available to customers or the public, including
brochures, circulars, research reports, market letters, form letters, seminar
texts, reprints or excerpts of any other advertisement, sales literature, or
published article), educational or training materials or other communications
distributed or made generally available to some or all agents or employees,
and registration statements, prospectuses, statements of additional
information, shareholder reports, and proxy materials.
ARTICLE V. FEES AND EXPENSES
5.1. The Fund shall pay no fee or other compensation to the Company
under this Agreement.
5.2. All expenses incident to performance by each party of their
respective duties under this Agreement shall be paid by that party, other
than expenses assumed by the Adviser under the Management Agreement between
the Fund and the Adviser or by another party. The Fund shall see to it that
all its shares are registered and authorized for issuance in accordance with
applicable federal law and, if and to the extent deemed advisable by the
Fund, in accordance with section 2.2 hereof. The Fund shall bear the
expenses for the cost of registration and qualification of the Fund's shares,
preparation and filing of the Fund's prospectus and registration statement,
proxy materials and reports, setting the prospectus in type, setting in type
and printing the proxy materials and reports to shareholders (including the
costs of printing a prospectus that constitutes an annual report), the
preparation of all statements and notices required by any federal or state
law, and all applicable taxes on the issuance or transfer of the Fund's
shares to the Company.
ARTICLE VI. DIVERSIFICATION
6.1. The Fund will at all times invest money from the Variable Products
in such a manner as to ensure that the Variable Products will be treated as
variable contracts under the Code and the regulations issued thereunder.
Without limiting the scope of the foregoing, the Fund will at all times
comply with Section 817(h) of the Code and Treasury Regulation 1.817-5,
relating to the diversification requirements for variable annuity, endowment,
or life insurance contracts and any amendments or other modifications to such
Section or Regulations. In the event of a breach of this Article VI by the
Fund, it will take all reasonable steps (a) to notify Company of such breach
and (b) to adequately diversify the Fund so as to achieve compliance within
the grace period afforded by Regulation 1.817-5.
ARTICLE VII. POTENTIAL CONFLICTS
7.1. The Board will monitor the Fund for the existence of any material
irreconcilable conflict between the interests of the contract owners of all
separate accounts investing in the Fund. An material
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<PAGE>
irreconclable conflict may arise for a variety of reasons, including: (a) an
action by any state insurance regulatory authority; (b) a change in
applicable federal or state insurance, tax, or securities laws or
regulations, or a public ruling, private letter ruling, no-action or
interpretative letter, or any similar action by insurance, tax, or securities
regulatory authorities; (c) an administrative or judicial decision in any
relevant proceeding; (d) the manner in which the investments of any Portfolio
are being managed; (e) a difference in voting instructions given by Variable
Insurance Product owners; or (f) a decision by a Participating Insurance
Company to disregard the voting instructions of contract owners. The Board
shall promptly inform the Company if it determines that an material
irreconclable conflict exists and the implications thereof.
7.2. The Company will report any potential or existing conflicts of
which it is aware to the Board. The Company will assist the Board in
carrying out its responsibilities under SEC rules and regulations and the
conditions of any Shared Funding Exemptive Order obtained by the Fund, by
providing the Board with all information reasonably necessary for the Board
to consider any issues raised. This includes, but is not limited to, an
obligation by the Company to inform the Board whenever contract owner voting
instructions are disregarded, by confirming in writing, at the Fund's
request, that the Company is unaware of any such potential or existing
material irreconclable conflicts, and, upon request, submitting to the Board
at least annually (or more frequently if deemed appropriate by the Board)
such reports, materials or data as the Board may reasonably request so that
the Board may fully carry out the duties imposed upon it as delineated in the
Shared Funding Exemptive Order.
7.3. If it is determined by a majority of the Board, or a majority of
its disinterested members, that a material irreconcilable conflict exists,
the Company and other Participating Insurance Companies shall, at their
expense and to the extent reasonably practicable (as determined by a majority
of the disinterested directors), take whatever steps are necessary to remedy
or eliminate the material irreconclable conflict, up to and including: (1)
withdrawing the assets allocable to some or all of the separate accounts from
the Fund or any Portfolio and reinvesting such assets in a different
investment medium, including (but not limited to) another Portfolio of the
Fund, or submitting the question whether such segregation should be
implemented to a vote of all affected contract owners and, as appropriate,
segregating the assets of any appropriate group (I.E., annuity contract
owners, life insurance policy owners, or variable contract owners of one or
more Participating Insurance Companies) that votes in favor of such
segregation, or offering to the affected contract owners the option of making
such a change; and (2) establishing a new registered management investment
company or managed separate account.
7.4. If a material irreconcilable conflict arises because of a decision
by the Company to disregard contract owner voting instructions and that
decision represents a minority position or would preclude a majority vote,
the Company may be required, at the Fund's election, to withdraw the affected
Account's investment in the Fund and terminate this Agreement with respect to
such Account (at the Company's expense); provided, however that such
withdrawal and termination shall be limited to the extent required by the
foregoing material irreconcilable conflict as determined by a majority of the
disinterested members of the Board.
7.5. If a material irreconcilable conflict arises because a particular
state insurance regulator's decision applicable to the Company conflicts with
the majority of other state regulators, then the Company will withdraw the
affected Account's investment in the Fund and terminate this Agreement with
respect to such Account within six months after the Board informs the Company
in writing that it has determined that such decision has created an material
irreconclable conflict; provided, however, that such withdrawal and
termination shall be limited to the extent required by the foregoing material
irreconcilable conflict as determined by a majority of the disinterested
members of the Board. Until the end of the foregoing six
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<PAGE>
month period, the Underwriter and Fund shall continue to accept and implement
orders by the Company for the purchase (and redemption) of shares of the
Fund, subject to applicable regulations.
7.6. For purposes of Sections 7.3 through 7.5 of this Agreement, a
majority of the disinterested members of the Board shall determine whether
any proposed action adequately remedies any material irreconclable conflict,
but in no event will the Fund be required to establish a new funding medium
for the Variable Products. The Company shall not be required by Section 7.3
to establish a new funding medium for the Variable Products if an offer to do
so has been declined by vote of a majority of contract owners materially
adversely affected by the material irreconclable conflict.
7.7. If and to the extent that Rule 6e-2 and Rule 6e-3(T) are amended,
or Rule 6e-3 is adopted, to provide exemptive relief from any provision of
the 1940 Act or the rules promulgated thereunder with respect to mixed or
shared funding, or if the Fund obtains a Shared Exemptive Order which
requires provisions that are materially different from the provisions of this
Agreement, then (a) the Fund and/or the Participating Insurance Companies, as
appropriate, shall take such steps as may be necessary to comply with Rules
6e-2 and 6e-3(T), as amended, and Rule 6e-3, as adopted, or to the terms of
the Shared Exemptive Order, to the extent applicable; and (b) Sections 3.4,
3.5, 7.1, 7.2, 7.3, 7.4, and 7.5 of this Agreement shall continue in effect
only to the extent that terms and conditions substantially identical to such
Sections are contained in such Rule(s) as so amended or adopted.
ARTICLE VIII. INDEMNIFICATION
8.1. INDEMNIFICATION BY THE COMPANY
8.1(a) The Company agrees to indemnify and hold harmless the Fund and
the Adviser, each of their respective officers, employees, and Trustees or
Directors, and each person, if any, who controls the Fund or the Adviser
within the meaning of Section 15 of the 1933 Act (collectively, the
"Indemnified Parties" and individually, "Indemnified Party," for purposes of
this Section 8.1) against any and all losses, claims, damages, liabilities
(including amounts paid in settlement with the written consent of the
Company) or litigation (including legal and other expenses), to which the
Indemnified Parties may become subject under any statute, regulation, at
common law or otherwise, insofar as such losses, claims, damages, liabilities
or expenses (or actions in respect thereof) or settlements are related to the
sale or acquisition of the Fund's shares or the Variable Products and:
(i) arise out of or are based upon any untrue statements or alleged untrue
statements of any material fact contained in the registration statement or
prospectus for the Variable Products or contained in the Variable Products
or sales literature for the Variable Products (or any amendment or
supplement to any of the foregoing), or arise out of or are based upon the
omission or the alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not
misleading, provided that this agreement to indemnify shall not apply as to
any Indemnified Party if such statement or omission or such alleged
statement or omission was made in reliance upon and in conformity with
information furnished to the Company by or on behalf of the Fund for use in
the registration statement or prospectus for the Variable Products or in
the Variable Products or sales literature (or any amendment or supplement)
or otherwise for use in connection with the sale of the Variable Products
or Fund shares; or
(ii) arise out of or as a result of statements or representations (other
than statements or representations contained in the registration statement,
prospectus or sales literature of the Fund not supplied by the Company, or
persons under its control and other than statements or
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<PAGE>
representations authorized by the Fund or an Adviser) or unlawful
conduct of the Company or persons under its control, with respect to the
sale or distribution of the Variable Products or Fund shares; or
(iii) arise out of or as a result of any untrue statement or alleged
untrue statement of a material fact contained in a registration statement,
prospectus, or sales literature of the Fund or any amendment thereof or
supplement thereto or the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the
statements therein not misleading, if such a statement or omission was made
in reliance upon and in conformity with information furnished to the Fund
by or on behalf of the Company; or
(iv) arise as a result of any failure by the Company to provide the
services and furnish the materials under the terms of this Agreement; or
(v) arise out of or result from any material breach of any representation
and/or warranty made by the Company in this Agreement or arise out of or
result from any other material breach of this Agreement by the Company, as
limited by and in accordance with the provisions of Sections 8.1(b) and
8.1(c) hereof.
8.1(b). The Company shall not be liable under this indemnification
provision with respect to any losses, claims, damages, liabilities or
litigation incurred or assessed against an Indemnified Party as such may
arise from such Indemnified Party's willful misfeasance, bad faith, or gross
negligence in the performance of such Indemnified Party's duties or by reason
of such Indemnified Party's reckless disregard of obligations or duties under
this Agreement.
8.1(c). The Company shall not be liable under this indemnification
provision with respect to any claim made against an Indemnified Party unless
such Indemnified Party shall have notified the Company in writing within a
reasonable time after the summons or other first legal process giving
information of the nature of the claim shall have been served upon such
Indemnified Party (or after such Indemnified Party shall have received notice
of such service on any designated agent), but failure to notify the Company
of any such claim shall not relieve the Company from any liability which it
may have to the Indemnified Party against whom such action is brought
otherwise than on account of this indemnification provision. In case any
such action is brought against the Indemnified Parties, the Company shall be
entitled to participate, at its own expense, in the defense of such action.
The Company also shall be entitled to assume the defense thereof, with
counsel satisfactory to the party named in the action. After notice from the
Company to such party of the Company's election to assume the defense
thereof, the Indemnified Party shall bear the fees and expenses of any
additional counsel retained by it, and the Company will not be liable to such
party under this Agreement for any legal or other expenses subsequently
incurred by such party independently in connection with the defense thereof
other than reasonable costs of investigation.
8.1(d). The Indemnified Parties will promptly notify the Company of the
commencement of any litigation or proceedings against them in connection with
the issuance or sale of the Fund shares or the Variable Products or the
operation of the Fund.
8.2. INDEMNIFICATION BY THE ADVISER
8.2(a). The Adviser agrees, with respect to each Portfolio that it
manages, to indemnify and hold harmless the Company, each of its directors,
officers, and employees, and each person, if any, who controls
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<PAGE>
the Company within the meaning of Section 15 of the 1933 Act (collectively,
the "Indemnified Parties" and individually, "Indemnified Party," for purposes
of this Section 8.2) against any and all losses, claims, damages, liabilities
(including amounts paid in settlement with the written consent of the
Adviser) or litigation (including legal and other expenses) to which the
Indemnified Parties may become subject under any statute, regulation, at
common law or otherwise, insofar as such losses, claims, damages, liabilities
or expenses (or actions in respect thereof) or settlements are related to the
sale or acquisition of shares of the Portfolio that it manages or the
Variable Products and:
(i) arise out of or are based upon any untrue statement or alleged untrue
statement of any material fact contained in the registration statement or
prospectus or sales literature of the Fund (or any amendment or supplement
to any of the foregoing), or arise out of or are based upon the omission or
the alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading,
provided that this agreement to indemnify shall not apply as to any
Indemnified Party if such statement or omission or such alleged statement
or omission was made in reliance upon and in conformity with information
furnished to the Fund by or on behalf of the Company for use in the
registration statement or prospectus for the Fund or in sales literature
(or any amendment or supplement) or otherwise for use in connection with
the sale of the Variable Products or Portfolio shares; or
(ii) arise out of or as a result of statements or representations (other
than statements or representations contained in the registration statement,
prospectus or sales literature for the Variable Products not supplied by
the Fund or persons under its control and other than statements or
representations authorized by the Company) or unlawful conduct of the Fund,
Adviser(s) or Underwriter or persons under their control, with respect to
the sale or distribution of the Variable Products or Portfolio shares; or
(iii) arise out of or as a result of any untrue statement or alleged
untrue statement of a material fact contained in a registration statement,
prospectus, or sales literature covering the Variable Products, or any
amendment thereof or supplement thereto, or the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statement or statements therein not misleading, if
such statement or omission was made in reliance upon information furnished
to the Company by or on behalf of the Fund; or
(iv) arise as a result of any material failure by the Adviser to provide
the services and furnish the materials under the terms of this Agreement;
or
(v) arise out of or result from any material breach of any representation
and/or warranty made by the Adviser in this Agreement or arise out of or
result from any other material breach of this Agreement by the Adviser; as
limited by and in accordance with the provisions of Sections 8.2(b) and
8.2(c) hereof.
8.2(b). The Adviser shall not be liable under this indemnification
provision with respect to any losses, claims, damages, liabilities or
litigation incurred or assessed against an Indemnified Party as such may
arise from such Indemnified Party's willful misfeasance, bad faith, or gross
negligence in the performance of such Indemnified Party's duties or by reason
of such Indemnified Party's reckless disregard of obligations and duties
under this Agreement.
8.2(c). The Adviser shall not be liable under this indemnification
provision with respect to any claim made against an Indemnified Party unless
such Indemnified Party shall have notified the Adviser in
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writing within a reasonable time after the summons or other first legal
process giving information of the nature of the claim shall have been served
upon such Indemnified Party (or after such Indemnified Party shall have
received notice of such service on any designated agent), but failure to
notify the Adviser of any such claim shall not relieve the Adviser from any
liability which it may have to the Indemnified Party against whom such action
is brought otherwise than on account of this indemnification provision. In
case any such action is brought against the Indemnified Parties, the Adviser
will be entitled to participate, at its own expense, in the defense thereof.
The Adviser also shall be entitled to assume the defense thereof, with
counsel satisfactory to the party named in the action. After notice from the
Adviser to such party of the Adviser's election to assume the defense
thereof, the Indemnified Party shall bear the fees and expenses of any
additional counsel retained by it, and the Adviser will not be liable to such
party under this Agreement for any legal or other expenses subsequently
incurred by such party independently in connection with the defense thereof
other than reasonable costs of investigation.
8.2(d). The Company agrees promptly to notify the Adviser of the
commencement of any litigation or proceedings against it or any of its
officers or directors in connection with the issuance or sale of the Variable
Products or the operation of each Account.
8.3. INDEMNIFICATION BY THE FUND
8.3(a). The Fund agrees to indemnify and hold harmless the Company, and
each of its directors and officers and each person, if any, who controls the
Company within the meaning of Section 15 of the 1933 Act (hereinafter
collectively, the "Indemnified Parties" and individually, "Indemnified
Party," for purposes of this Section 8.3) against any and all losses, claims,
damages, liabilities (including amounts paid in settlement with the written
consent of the Fund) or litigation (including legal and other expenses) to
which the Indemnified Parties may become subject under any statute,
regulation, at common law or otherwise, insofar as such losses, claims,
damages, liabilities or expenses (or actions in respect thereof), litigation
or settlements result from the gross negligence, bad faith or willful
misconduct of the Board or any member thereof, are related to the operations
of the Fund and:
(i) arise as a result of any material failure by the Fund to provide
the services and furnish the materials under the terms of this
Agreement; or
(ii) arise out of or result from any material breach of any
representation and/or warranty made by the Fund in this Agreement
or arise out of or result from any other material breach of
thisAgreement by the Fund, as limited and in accordance with the
provisions of Sections 8.3(b) and 8.3(a);
8.3(b). The Fund shall not be liable under this indemnification
provision with respect to any losses, claims, damages, liabilities or
litigation incurred or assessed against an Indemnified Party as may arise
from such Indemnified Party's gross negligence, bad faith, or willful
misconduct the performance of such Indemnified Party's duties or by reason of
such Indemnified Party's reckless disregard of obligations and duties under
this Agreement.
8.3(c). The Fund shall not be liable under this indemnification
provision with respect to any claim made against an Indemnified Party unless
such Indemnified Party shall have notified the Fund in writing within a
reasonable time after the summons or other first legal process giving
information of the nature of the claim shall have been served upon such
Indemnified Party (or after such Indemnified Party shall have received notice
of such service on any designated agent), but failure to notify the Fund of
any such claim shall not relieve the Fund from any liability which it may
have to the Indemnified Party against whom such
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<PAGE>
action is brought otherwise than on account of this indemnification
provision. In case any such action is brought against the Indemnified
Parties, the Fund will be entitled to participate, at its own expense, in the
defense thereof. The Fund also shall be entitled to assume the defense
thereof, with counsel satisfactory to the party named in the action. After
notice from the Fund to such party of the Fund's election to assume the
defense thereof, the Indemnified Party shall bear the fees and expenses of
any additional counsel retained by it, and the Fund will not be liable to
such party under this Agreement for any legal or other expenses subsequently
incurred by such party independently in connection with the defense thereof
other than reasonable costs of investigation.
8.3(d). The Company agrees promptly to notify the Fund of the
commencement of any litigation or proceedings against it or any of its
respective officers or directors in connection with this Agreement, the
issuance or sale of the Variable Products, with respect to the operation of
either Account, or the sale or acquisition of shares of the Fund.
ARTICLE IX. APPLICABLE LAW
9.1. This Agreement shall be construed and the provisions hereof
interpreted under and in accordance with the laws of the Commonwealth of
Massachusetts.
9.2. This Agreement shall be subject to the provisions of the 1933,
1934 and 1940 Acts, and the rules and regulations and rulings thereunder,
including such exemptions from those statutes, rules and regulations as the
Securities and Exchange Commission may grant (including, but not limited to,
the Shared Funding Exemptive Order) and the terms hereof shall be interpreted
and construed in accordance therewith.
ARTICLE X. TERMINATION
10.1. This Agreement shall continue in full force and effect until the
first to occur of:
10.1(a) termination by any party for any reason by at least sixty (60)
days advance written notice delivered to the other parties; or
10.1(b) termination by the Company by written notice to the Fund and
the Adviser with respect to any Portfolio based upon the Company's
determination that shares of such Portfolio are not reasonably available to
meet the requirements of the Variable Products; or
10.1(c) termination by the Company by written notice to the Fund and
the Adviser with respect to any Portfolio in the event any of the Portfolio's
shares are not registered, issued or sold in accordance with applicable state
and/or federal law or such law precludes the use of such shares as the
underlying investment media of the Variable Products issued or to be issued
by the Company; or
10.1(d) termination by the Company by written notice to the Fund and
the Adviser with respect to any Portfolio in the event that such Portfolio
ceases to qualify as a Regulated Investment Company under Subchapter M of the
Code or under any successor or similar provision, or if the Company
reasonably believes that the Fund may fail to so qualify; or
10.1(e) termination by the Company by written notice to the Fund and
the Adviser with respect to any Portfolio in the event that such Portfolio
fails to meet the diversification requirements specified in Article VI
hereof; or
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10.1(f) termination by the Fund and/or the Adviser by written notice
to the Company if (i) the Fund and/or the Adviser shall determine, in its
sole judgment exercised in good faith, that the Company and/or its affiliated
companies has suffered a material adverse change in its business, operations,
financial condition or prospects since the date of this Agreement, is the
subject of material adverse publicity, (ii) upon institution of formal
proceedings against the Company by the NASD, the Securities and Exchange
Commission, any state insurance regulator or any other regulatory body
regarding the Company's duties under this Agreement or related to the sale of
the Variable Products, the administration of the Variable Products, the
operation of the Account, or the purchase of Fund shares, which would have a
material adverse effect on the Company's ability to perform its obligations
under this Agreement, (iii) upon a determination by a majority of the Board,
or a majority of the disinterested Board members, that an material
irreconclable conflict exists among the interests of (a) all contract owners
of variable insurance products of all separate accounts or (b) the interests
of the Participating Insurance Companies investing in the Fund as delineated
in Article VII hereof, or (iv) upon the Company's material breach of any
provision of this Agreement.
10.1(g) termination by the Company by written notice to the Fund and
the Adviser, if the Company shall determine, in its sole judgment exercised
in good faith, that either the Fund or the Adviser has suffered a material
adverse change in its business, operations, financial condition or prospects
since the date of this Agreement or is the subject of material adverse
publicity; or
10.2. Notwithstanding any termination of this Agreement, the Fund
shall, at the option of the Company, continue to make available additional
shares of the Fund pursuant to the terms and conditions of this Agreement,
for all Variable Products in effect on the effective date of termination of
this Agreement (hereinafter referred to as "Existing Variable Products").
Specifically, without limitation, the owners of the Existing Variable
Products shall be permitted to direct reallocation of investments in the
Portfolios of the Fund, redemption of investments in the Portfolios of the
Fund and/or investment in the Portfolios of the Fund upon the making of
additional purchase payments under the Existing Variable Products. The
parties agree that this Section 10.2 shall not apply to any termination under
Article VII and the effect of such Article VII termination shall be governed
by Article VII of this Agreement.
10.3. The Company shall not redeem Fund shares attributable to the
Variable Products (as distinct from Fund shares attributable to the Company's
assets held in the Account) except (i) as necessary to implement contract
owner initiated or approved transactions, or (ii) as required by state and/or
federal laws or regulations or judicial or other legal precedent of general
application (hereinafter referred to as a "Legally Required Redemption") or
(iii) as permitted by an order of the Securities and Exchange Commission
pursuant to Section 26(b) of the 1940 Act. Upon request, the Company will
promptly furnish to the Fund the opinion of counsel for the Company (which
counsel shall be reasonably satisfactory to the Fund) to the effect that any
redemption pursuant to clause (ii) above is a Legally Required Redemption.
Furthermore, except in cases where permitted under the terms of the Variable
Products, the Company shall not prevent contract owners from allocating
payments to a Portfolio that was otherwise available under the Variable
Products without first giving the Fund 90 days prior written notice of its
intention to do so.
ARTICLE XI. NOTICES
Any notice shall be sufficiently given when hand delivered or sent by
registered or certified mail to the other party at the address of such party
set forth below or at such other address as such party may from time to time
specify in writing to the other party.
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If to the Fund:
Oppenheimer Variable Account Funds
6803 South Tuscon Way
Englewood, CO 80112
Attn: George Bowen, Vice President, Secretary and Treasurer
If to the Adviser:
OppenheimerFunds, Inc.
2 World Trade Center
Suite 3400
New York, NY 10048-0203
Attn: Andrew J. Donohue, Esq.
Executive Vice President and General Counsel
If to the Company:
Allmerica Financial Life Insurance and Annuity Company
440 Lincoln Street
Worcester, Massachusetts 01653
Attention: Richard M. Reilly, President
ARTICLE XII. MISCELLANEOUS
12.1. A copy of the Fund's Declaration of Trust, as may be amended
from time to time, is on file with the Secretary of the Commonwealth of
Massachusetts. Notice is hereby given that this instrument is executed by
the Fund's Trustees as Trustees and not individually, and the Fund's
obligations under this Agreement are not binding upon any of the Trustees or
Shareholders of the Fund, but bind only the Fund and the Fund's property; the
Company and the Adviser each represent that it has notice of the provisions
of the Declaration of Trust of the Fund disclaiming shareholder and trustee
liability for acts or obligations of the Trust.
12.2. Subject to the requirements of legal process and regulatory
authority, each party hereto shall treat as confidential the names and
addresses of the owners of the Variable Products and all information
reasonably identified as confidential in writing by any other party hereto
and, except as permitted by this Agreement, shall not disclose, disseminate
or utilize such names and addresses and other confidential information until
such time as it may come into the public domain without the express written
consent of the affected party.
12.3. The captions in this Agreement are included for convenience of
reference only and in no way define or delineate any of the provisions hereof
or otherwise affect their construction or effect.
12.4. This Agreement may be executed simultaneously in two or more
counterparts, each of which taken together shall constitute one and the same
instrument.
12.5. If any provision of this Agreement shall be held or made invalid
by a court decision, statute, rule or otherwise, the remainder of the
Agreement shall not be affected thereby.
12.6. Each party hereto shall cooperate with each other party and all
appropriate governmental authorities (including without limitation the
Securities and Exchange Commission, the National Association of Securities
Dealers and state insurance regulators) and shall permit such authorities
reasonable access to
17
<PAGE>
its books and records in connection with any investigation or inquiry
relating to this Agreement or the transactions contemplated hereby.
Notwithstanding the generality of the foregoing, each party hereto further
agrees to furnish the California Insurance Commissioner with any information
or reports in connection with services provided under this Agreement which
such Commissioner may request in order to ascertain whether the insurance
operations of the Company are being conducted in a manner consistent with the
California Insurance Regulations and any other applicable law or regulations.
12.7. The rights, remedies and obligations contained in this Agreement
are cumulative and are in addition to any and all rights, remedies and
obligations at law or in equity, which the parties hereto are entitled to
under state and federal laws.
12.8. This Agreement or any of the rights and obligations hereunder may
not be assigned by any party without the prior written consent of all parties
hereto; provided, however, that the Adviser may assign this Agreement or any
rights or obligations hereunder to any affiliate of or company controlled by
or under common control with the Adviser, if such assignee is duly licensed
and registered to perform the obligations of the Adviser under this Agreement.
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to
be executed in its name and on its behalf by its duly authorized
representative and its seal to be hereunder affixed hereto as of the date
specified above.
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
By: /s/ Richard M. Reilly
----------------------------------
NAME: Richard M. Reilly
TITLE: President
OPPENHEIMER VARIABLE ACCOUNT FUNDS
By:
----------------------------------
NAME:
TITLE:
OPPENHEIMERFUNDS, INC.
By:
----------------------------------
NAME:
TITLE:
18
<PAGE>
SCHEDULE A
SEPARATE ACCOUNTS AND VARIABLE PRODUCTS
- -------------------------------------------------------------------------------
VARIABLE LIFE PRODUCTS
SEPARATE ACCOUNT PRODUCT NAME 1933 ACT # 1940 ACT #
---------------- ------------ ---------- ----------
Fulcrum Variable Life Separate
Account Fulcrum SPVUL 333-15569 811-07913
VARIABLE ANNUITY PRODUCTS
SEPARATE ACCOUNT PRODUCT NAME 1933 ACT # 1940 ACT #
---------------- ------------ ---------- ----------
Fulcrum Separate Account Fulcrum Annuity 333-11377 811-7799
- -------------------------------------------------------------------------------
A-1
<PAGE>
SCHEDULE B
PORTFOLIOS OF
OPPENHEIMER VARIABLE ACCOUNT FUNDS
Oppenheimer Aggressive Growth Fund
Oppenheimer Growth & Income Fund
B-1
<PAGE>
SCHEDULE C
PROXY VOTING PROCEDURES
The following is a list of procedures and corresponding responsibilities for
the handling of proxies and voting instructions relating to the Fund. The
defined terms herein shall have the meanings assigned in the Participation
Agreement except that the term "Company" shall also include the department or
third party assigned by the Company to perform the steps delineated below.
. The proxy proposals are given to the Company by the Fund as early as
possible before the date set by the Fund for the shareholder meeting to
enable the Company to consider and prepare for the solicitation of voting
instructions from owners of the Variable Products and to facilitate the
establishment of tabulation procedures. At this time the Fund will inform
the Company of the Record, Mailing and Meeting dates. This will be done
verbally approximately two months before meeting.
. Promptly after the Record Date, the Company will perform a "tape run," or
other activity, which will generate the names, addresses and number of
units which are attributed to each contract owner/policyholder (the
"Customer") as of the Record Date. Allowance should be made for account
adjustments made after this date that could affect the status of the
Customers' accounts as of the Record Date.
Note: The number of proxy statements is determined by the activities
described above. The Company will use its best efforts to call in the
number of Customers to the Fund , as soon as possible, but no later than
two weeks after the Record Date.
. The Fund's Annual Report must be sent to each Customer by the Company
either before or together with the Customers' receipt of voting instruction
solicitation material. The Fund will provide the last Annual Report to the
Company pursuant to the terms of Section 3.43 of the Agreement to which
this Schedule relates.
. The text and format for the Voting Instruction Cards ("Cards" or "Card") is
provided to the Company by the Fund. The Company, at its expense, shall
produce and personalize the Voting Instruction Cards. The Fund or its
affiliate must approve the Card before it is printed. Allow approximately
2-4 business days for printing information on the Cards. Information
commonly found on the Cards includes:
. name (legal name as found on account registration)
. address
. fund or account number
. coding to state number of units
. individual Card number for use in tracking and verification of
votes (already on Cards as printed by the Fund).
(This and related steps may occur later in the chronological process due to
possible uncertainties relating to the proposals.)
C-1
<PAGE>
. During this time, the Fund will develop, produce and pay for the Notice of
Proxy and the Proxy Statement (one document). Printed and folded notices
and statements will be sent to Company for insertion into envelopes
(envelopes and return envelopes are provided and paid for by the Company).
Contents of envelope sent to Customers by the Company will include:
. Voting Instruction Card(s)
. One proxy notice and statement (one document)
. return envelope (postage pre-paid by Company) addressed to the
Company or its tabulation agent
. "urge buckslip" - optional, but recommended. (This is a small,
single sheet of paper that requests Customers to vote as quickly as
possible and that their vote is important. One copy will be
supplied by the Fund.)
. cover letter - optional, supplied by Company and reviewed and
approved in advance by the Fund.
. The above contents should be received by the Company approximately 3-5
business days before mail date. Individual in charge at Company reviews
and approves the contents of the mailing package to ensure correctness and
completeness. Copy of this approval sent to the Fund.
. Package mailed by the Company, which shall complete and sign the Fund's
Affidavit of Mailing.
* The Fund must allow at least a 15-day solicitation time to the
Company as the shareowner. (A 5-week period is recommended.)
Solicitation time is calculated as calendar days from (but NOT
including,) the meeting, counting backwards.
. Collection and tabulation of Cards begins. Tabulation usually takes place
in another department or another vendor depending on process used. An
often used procedure is to sort Cards on arrival by proposal into vote
categories of all yes, no, or mixed replies, and to begin data entry.
Note: Postmarks are not generally needed. A need for postmark information
would be due to an insurance company's internal procedure and has not been
required by the Fund in the past.
. Signatures on Card checked against legal name on account registration which
was printed on the Card.
Note: For Example, if the account registration is under "John A. Smith,
Trustee," then that is the exact legal name to be printed on the Card and
is the signature needed on the Card.
. If Cards are mutilated, or for any reason are illegible or are not signed
properly, they are sent back to Customer with an explanatory letter and a
new Card and return envelope. The mutilated or illegible Card is
disregarded and considered to be NOT RECEIVED for purposes of vote
tabulation. Any Cards that have been "kicked out" (e.g. mutilated,
illegible) of the procedure are "hand verified," i.e., examined as to why
they did not complete the system. Any questions on those Cards are usually
remedied individually.
. There are various control procedures used to ensure proper tabulation of
votes and accuracy of that tabulation. The most prevalent is to sort the
Cards as they first arrive into categories depending upon their vote; an
estimate of how the vote is progressing may then be calculated. If the
initial estimates and the actual vote do not coincide, then an internal
audit of that vote should occur. This may entail a recount.
C-3
<PAGE>
. The actual tabulation of votes is done in units which is then converted to
shares. (It is very important that the Fund receives the tabulations stated
in terms of a percentage and the number of SHARES.) The Fund must review
and approve tabulation format.
. Final tabulation in shares is verbally given by the Company to the Fund on
the morning of the meeting not later than 10:00 a.m. Eastern time. The
Fund may request an earlier deadline if reasonable and if required to
calculate the vote in time for the meeting.
. A Certification of Mailing and Authorization to Vote Shares will be
required from the Company as well as an original copy of the final vote.
The Fund will provide a standard form for each Certification.
. The Company will be required to box and archive the Cards received from the
Customers. In the event that any vote is challenged or if otherwise
necessary for legal, regulatory, or accounting purposes, the Fund will be
permitted reasonable access to such Cards.
. All approvals and "signing-off" may be done orally, but must always be
followed up in writing.
C-4
