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File Nos. 333-16929
811-07947
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
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(Exact Name of Trust)
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
440 Lincoln Street
Worcester, MA 01653
(508) 855-1000
(Registrant's telephone number including area code)
FIRST ALLMERICA FINANCIAL LIFE INSURANCE 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 November 2, 1998 pursuant to paragraph (b) of Rule 485
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60 days after filing pursuant to paragraph (a)(1) of Rule 485
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on (date) pursuant to paragraph (a)(1) of Rule 485
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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 ("1940
Act"), Registrant has registered an indefinite amount of its securities under
the Securities Act of 1933 ("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 PROSPECTUSES A AND B OF
ITEMS CALLED FOR BY FORM N-4
FORM N-4 ITEM NO. CAPTION IN PROSPECTUSES A AND B
- ----------------- -------------------------------
1 . . . . . . . . . . . .Cover Page
2 . . . . . . . . . . . .Special Terms
3 . . . . . . . . . . . .Summary; Annual and Transaction Expenses
4 . . . . . . . . . . . .Condensed Financial Information; Performance
Information
5 . . . . . . . . . . . . May 1, 1998 Prospectus:
Description of the Company, the Variable Account
the Palladian-SM- Trust and Allmerica
Investment Trust
September 1, 1998 Prospectus:
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
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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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FULCRUM SEPARATE ACCOUNT
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
SUPPLEMENT TO PROSPECTUS DATED SEPTEMBER 1, 1998
***
Effective November 2, 1998, one additional Sub-Account will be available under
the Contract. The Sub-Account will invest exclusively in shares of the PBHG
Select 20 Portfolio of the PBHG Insurance Series Fund, Inc. As such, the
following information supplements the corresponding sections of the Prospectus.
Please consult the Prospectus for the full text of each supplemented section.
The following is added to the list of investment portfolios under the second
paragraph of page 1 of the Prospectus:
PBHG INSURANCE SERIES FUND, INC.
PBHG Select 20 Portfolio
The fourth paragraph on page 1 of the Prospectus is revised as follows:
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-, OPPENHEIMER VARIABLE
ACCOUNT FUNDS AND PBHG INSURANCE SERIES FUND, INC. 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.
The definition of "SUB-ACCOUNT" on page 5 of the Prospectus is amended to
include the new portfolio as follows:
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"), a corresponding fund
of Oppenheimer Variable Account Funds ("Oppenheimer"), or a corresponding
portfolio of PBHG Insurance Series Fund, Inc. ("PBHG").
The definition of "UNDERLYING FUNDS (OR FUNDS)" on pages 5 and 6 of the
Prospectus is revised to add "PBHG Select 20 Portfolio of PBHG" at the end of
the paragraph.
The number "fourteen" is changed to "fifteen" in the second sentence under "WHAT
ARE MY INVESTMENT CHOICES?" on page 8 of the Prospectus and the following is
added as the seventh Fund in the second sentence:
- - PBHG Select 20 Portfolio
Managed by Pilgrim Baxter & Associates, Ltd.
The following is added to the list after the International Growth Portfolio in
the first paragraph under "WHO ARE THE INVESTMENT ADVISERS?" on page 10 of the
Prospectus.
PBHG Select 20 Portfolio Pilgrim Baxter & Associates, Ltd.
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The following information on the PBHG Select 20 Portfolio is added to the
UNDERLYING FUND EXPENSES table on page 14 of the Prospectus:
PBHG Select 20 Portfolio................... 0.85% 0.35% 1.20%(12)
(12) Because the financial statements for the PBHG Select 20 Portfolio reflect
operating results for a period of less than 10 months, Other Expenses is
based on estimated amounts for the current fiscal year ending December 31,
1998. The adviser to PBHG Select 20 Portfolio has agreed to waive or limit
the management fees or to assume other expenses of the portfolio to the
extent necessary to limit the Total Fund Expenses to not more than 1.20% of
the average daily net assets of the portfolio through December 31, 1998.
Absent such fee waivers/expense reimbursements, the Management Fees, Other
Expenses and Total Fund Expenses for the PBHG Select 20 Portfolio are
expected to be 0.85%, 0.37% and 1.22%, respectively.
The following cumulative expense information is added to Examples 1 and 2 on
page 16 of the Prospectus:
(1)
FUND 1 YEAR 3 YEARS 5 YEARS 10 YEARS
---- ------ ------- ------- --------
PBHG SELECT 20 PORTFOLIO............... $88 $129 $171 $302
(2)
FUND 1 YEAR 3 YEARS 5 YEARS 10 YEARS
---- ------ ------- ------- --------
PBHG SELECT 20 PORTFOLIO............... $27 $84 $143 $302
The paragraph following the table under "CONDENSED FINANCIAL INFORMATION" on
page 21 of the Prospectus is amended to read as follows:
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, PBHG Select 20 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.
The following summary of PBHG Insurance Series Fund, Inc. is inserted as the
last paragraph under "DESCRIPTION OF THE COMPANY, THE VARIABLE ACCOUNT AND THE
UNDERLYING FUNDS" on page 26 of the Prospectus:
PBHG INSURANCE SERIES FUND, INC. PBHG Insurance Series Fund, Inc. ("PBHG") is an
open-end, management investment company registered with the SEC under the 1940
Act, which was incorporated in Maryland in 1997. Pilgrim Baxter & Associates,
Ltd. ("Pilgrim Baxter") is the investment adviser for the PBHG Select 20
Portfolio. Pilgrim Baxter is a professional investment management firm and
registered investment adviser that, along with its predecessors, has been in
business since 1982. Pilgrim Baxter currently has discretionary management
authority with respect to over $11 billion in assets and provides advisory
services to pension and profit-sharing plans, charitable institutions,
corporations, trusts, and other investment companies. The principal business
address of Pilgrim Baxter is 825 Duportail Road, Wayne, Pennsylvania 19087.
The following summary of the investment objective and policies of the PBHG
Select 20 Portfolio is inserted as the seventh summary under "INVESTMENT
OBJECTIVES AND POLICIES" on page 27 of the Prospectus:
PBHG SELECT 20 PORTFOLIO-seeks long-term growth of capital. The portfolio
invests primarily in equity securities of a limited number of larger
capitalization companies (no more than 20 issuers) that, in Pilgrim Baxter's
opinion, have a strong earnings growth outlook and potential for capital
appreciation.
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The first paragraph under "CHARGES AND DEDUCTIONS" on page 37 of the Prospectus
is revised in its entirety to read as follows:
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, Oppenheimer and PBHG.
The last paragraph titled "OTHER CHARGES" under "A. VARIABLE ACCOUNT
DEDUCTIONS" on pages 37 and 38 of the Prospectus is revised in its entirety as
follows:
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, Oppenheimer and PBHG contain
additional information concerning expenses of the Funds.
"PBHG" is added after "Oppenheimer" in the fifth sentence of the third paragraph
under "ADDITION, DELETION OR SUBSTITUTION OF INVESTMENTS" on page 48 of the
Prospectus
Supplement Dated November 2, 1998
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FIRST ALLMERICA FINANCIAL LIFE INSURANCE 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 First
Allmerica Financial Life Insurance 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:
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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 FIRST ALLMERICA FINANCIAL LIFE INSURANCE
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
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<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 Contract............................................. 28
C. Transfer Privilege................................................... 28
Automatic Transfers and Automatic Account Rebalancing
Options...................................................... 29
D. Surrender............................................................ 29
E. Withdrawals.......................................................... 30
Systematic Withdrawals......................................... 30
Life Expectancy Distributions.................................. 31
F. Death Benefit........................................................ 31
Death of the Annuitant Prior to the Annuity Date............... 31
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............ 32
G. The Spouse of the Owner as Beneficiary............................... 32
H. Assignment........................................................... 33
I. Electing the Form of Annuity and the Annuity Date.................... 33
J. Description of Variable Annuity Payout Options....................... 34
K. Annuity Benefit Payments............................................. 35
The Annuity Unit............................................... 35
Determination of the First and Subsequent Annuity Benefit
Payments..................................................... 35
L. NORRIS Decision...................................................... 36
M. 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.................................................. 37
B. Contract Fee......................................................... 38
C. Premium Taxes........................................................ 38
D. Contingent Deferred Sales Charge..................................... 38
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
</TABLE>
3
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<TABLE>
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GUARANTEE PERIOD ACCOUNTS.................................................. 42
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....................................... 45
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)........................................... 47
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
</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............................................................... 3
ANNUITY BENEFIT PAYMENTS................................................... 4
EXCHANGE OFFER............................................................. 6
PERFORMANCE INFORMATION.................................................... 7
TAX-DEFERRED ACCUMULATION.................................................. 12
FINANCIAL STATEMENTS....................................................... F-1
</TABLE>
4
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SPECIAL TERMS
ACCUMULATED VALUE: the sum of the value of all Accumulation Units in the
Sub-Accounts and of the value of all accumulations in the Fixed Account and
Guarantee Period Accounts then credited to the Contract, on any date before the
Annuity Date.
ACCUMULATION UNIT: a measure of the Owner's interest in a Sub-Account before
annuity benefit payments begin.
ANNUITANT: the person designated in the Contract upon whose life annuity benefit
payments are to be made.
ANNUITY DATE: the date on which annuity benefit payments begin.
ANNUITY UNIT: a measure of the value of the periodic annuity benefit payments
under the Contract.
FIXED ACCOUNT: the part of the Company's General Account that guarantees
principal and a fixed minimum interest rate and to which all or a portion of a
payment or transfer under this Contract may be allocated.
FIXED ANNUITY PAYOUT: an Annuity payout option providing for annuity benefit
payments which remain fixed in amount throughout the annuity benefit payment
period selected.
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; 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, First Allmerica Financial
Life Insurance 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
<PAGE>
- -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."
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
<PAGE>
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 "C. 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 in New York where not permitted under 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."
10
<PAGE>
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, 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. 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; 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 "F.
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. If you cancel the Contract, you will receive a refund of the greater
of (1) 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),
11
<PAGE>
or (2) your entire payment. In New York, you will receive a refund equal to your
entire payment. See "B. Right to Revoke Contract."
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>
CONTINGENT DEFERRED SALES CHARGE: 0-1 7%
This charge may be assessed upon surrender, withdrawal or annuitization under any 2 6%
commutable period certain option or a non-commutable period certain option of less than 3 5%
ten years. The charge is a percentage of payments applied to the amount surrendered (in 4 4%
excess of any amount that is without a surrender charge) within the indicated time 5 3%
period. 6 2%
7 1%
Thereafter 0%
TRANSFER CHARGE: None
The Company currently makes no charge for transfers, and guarantees that the first 12
transfers in a Contract year will not be subject to a transfer charge. For each
subsequent transfer, the Company reserves the right to assess a charge, guaranteed
never to exceed $25, to reimburse the Company for the costs of processing the transfer.
ANNUAL CONTRACT FEE: $30
The $30 Contract fee is deducted annually and upon surrender when Accumulated Value is
less than $100,000. The Contract fee is currently waived for Contracts issued to and
maintained by the trustee of a 401(k) plan.
VARIABLE ACCOUNT ANNUAL EXPENSES:
(on an annual basis as a percentage of average daily net assets)
Mortality and Expense Risk Charge: 1.25%
Administrative Expense Charge: 0.20%
---------
Total Annual Expenses: 1.45%
---------
---------
</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 also 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 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. 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.
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
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
FULCRUM SEPARATE ACCOUNT
<TABLE>
<CAPTION>
SUB-ACCOUNT 1997
- ------------------------------------------------------------------------------------- ---------
<S> <C>
GLOBAL INTERACTIVE/TELECOMM PORTFOLIO
Unit Value:
Beginning of Period................................................................ 0
End of Period...................................................................... 1.105
Number of Units Outstanding at End of Period (in thousands).......................... 211
INTERNATIONAL GROWTH PORTFOLIO
Unit Value:
Beginning of Period................................................................ 0
End of Period...................................................................... 0.881
Number of Units Outstanding at End of Period (in thousands).......................... 85
GROWTH PORTFOLIO
Unit Value:
Beginning of Period................................................................ 0
End of Period...................................................................... 0.867
Number of Units Outstanding at End of Period (in thousands).......................... 313
VALUE PORTFOLIO
Unit Value:
Beginning of Period................................................................ 0
End of Period...................................................................... 1.049
Number of Units Outstanding at End of Period (in thousands).......................... 483
STRATEGIC INCOME PORTFOLIO
Unit Value:
Beginning of Period................................................................ 0
End of Period...................................................................... 0.998
Number of Units Outstanding at End of Period (in thousands).......................... 41
MONEY MARKET FUND
Unit Value:
Beginning of Period................................................................ 0
End of Period...................................................................... 1.010
Number of Units Outstanding at End of Period (in thousands).......................... 8
</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, originally organized under the laws of Massachusetts in 1844 as a
mutual life insurance company and formerly known as State Mutual Life Assurance
Company of America, converted to a stock life insurance company on October 16,
1995, and adopted its present name. The Company is the fifth oldest life
insurance company in America. As of December 31, 1997, the Company and its
subsidiaries had over $16.3 billion in combined assets, and over $43.8 billion
in life insurance in force. The Company is a wholly owned subsidiary of
Allmerica Financial Corporation ("AFC"). The Company's principal office is
located at 440 Lincoln Street, Worcester, MA 01653, Telephone 508-855-1000
("Principal Office").
The Company is subject to the laws of the Commonwealth of Massachusetts
governing insurance companies, to regulation by the Commissioner of Insurance of
Massachusetts, and to the insurance laws and regulations of other states and
jurisdictions in which it is licensed to operate.
The Company is a charter member of the Insurance Marketplace Standards
Association ("IMSA"). Companies that belong to IMSA subscribe to a rigorous set
of standards that cover the various aspects of sales and service for
individually sold life insurance and annuities. IMSA members have adopted
policies and procedures that demonstrate a commitment to honesty, fairness and
integrity in all customer contacts involving sales and service of individual
life insurance and annuity products.
THE VARIABLE ACCOUNT
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
23
<PAGE>
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 Massachusetts 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 Agreement with the previous portfolio manager.
The latter rate varies based on prior performance. After the
24
<PAGE>
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.
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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.
Initial net payments (or subsequent net payments received during the Contract's
first fifteen days) to a New York Contract will be invested as requested and no
portion allocated to an account other than the Money Market Fund will be
invested in that Fund. Under Contracts issued in all other states, 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 CONTRACT
An Owner may revoke the Contract at any time within ten days after receipt of
the Contract and receive a refund. In order to revoke the Contract, the Owner
must mail or deliver the Contract to the agent through whom the Contract was
purchased, to the Principal Office at 440 Lincoln Street, Worcester, MA 01653,
or to an authorized representative. Mailing or delivery must occur within 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) any amounts allocated to the Fixed and Guarantee Period
Accounts and the Accumulated Value of amounts allocated to the Sub-Accounts,
plus any amounts deducted under the Contract or by the Underlying Funds for
taxes, charges or fees. However, under Contracts issued in New York, the Company
will provide a refund equal to the Owner's gross payments.
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. 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.
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Transfers to a Guarantee Period Account must be at least $1,000. If the amount
to be transferred to a Guarantee Period Account is less than $1,000, the Company
may transfer that amount to the Sub-Account which invests in the Money Market
Fund.
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.
D. SURRENDER
At any time prior to the Annuity Date, the Owner may surrender the Contract and
receive its Surrender Value. The Owner must return the Contract and a signed,
written request for surrender, satisfactory to the Company, to the Principal
Office. The amount payable to the Owner upon surrender will be based on the
Contract's Accumulated Value as of the Valuation Date on which the request and
the Contract are received at the Principal Office.
Before the Annuity Date, a contingent deferred sales charge may be deducted when
a Contract is surrendered if payments have been credited to the Contract during
the last 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 Amount is the commuted
value of any unpaid installments, computed on the basis of the assumed interest
rate incorporated in such annuity benefit payments. No contingent deferred sales
charge is imposed after the Annuity Date.
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Any amount surrendered is normally payable within seven days following the
Company's receipt of the surrender request. The Company reserves the right to
defer surrenders and withdrawals of amounts in each Sub-Account in any period
during which (1) trading on the New York Stock Exchange is restricted as
determined by the SEC or such Exchange is closed for other than weekends and
holidays, (2) the SEC has by order permitted such suspension, or (3) an
emergency, as determined by the SEC, exists such that disposal of portfolio
securities or valuation of assets of each separate account is not reasonably
practicable.
The right is reserved by the Company to defer surrenders and withdrawals of
amounts allocated to the Company's Fixed Account and Guarantee Period Accounts
for a period not to exceed six months.
The surrender rights of Owners who are participants under Section 403(b) plans
or who are participants in the Texas Optional Retirement Program ("Texas ORP")
are restricted; see "Tax-Sheltered Annuities" and "Texas Optional Retirement
Program."
For important tax consequences which may result from surrender, see "FEDERAL TAX
CONSIDERATIONS."
E. WITHDRAWALS
At any time prior to the Annuity Date, 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 "D. Surrender."
After the Annuity Date, only Contracts under which future variable annuity
benefit payments are limited to a specified period may be withdrawn. A
withdrawal after the Annuity Date will result in cancellation of a number of
Annuity Units equivalent in value to the amount withdrawn.
For important restrictions on withdrawals which are applicable to Owners who are
participants under Section 403(b) plans or under the Texas ORP, see
"Tax-Sheltered Annuities" and "Texas Optional Retirement Program."
For important tax consequences which may result from surrender and withdrawals,
see "FEDERAL TAX CONSIDERATIONS."
SYSTEMATIC WITHDRAWALS. The Owner may elect an automatic schedule of
withdrawals (systematic withdrawals) from amounts in the Sub-Accounts and/or the
Fixed Account on a monthly, bi-monthly, quarterly, semi-annual or annual basis.
Systematic withdrawals from Guarantee Period Accounts are not available. The
minimum amount of each withdrawal is $100, and will be subject to any applicable
withdrawal charges. If elected at the time of purchase, the Owner must designate
in writing the specific dollar amount of each withdrawal and the percentage of
this amount which should be taken from each designated Sub-Account and/
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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 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 Owner may elect monthly, bi-monthly, quarterly, semi-annual, or
annual distributions, and may terminate the LED option at any time. LED will
cease automatically on the maximum Annuity Date permitted under the Contract at
which time an annuity option must be chosen.
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."
F. DEATH BENEFIT
In the event that the Annuitant, Owner or Joint Owner, if applicable, dies while
the Contract is in force, the Company will pay the Beneficiary a death benefit,
except where the Contract is continued in force as provided in "G. 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 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.
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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. 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; 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.
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.
G. 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.
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H. 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."
I. 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 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.
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J. 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.
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.
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K. 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 (six or more years under New York Contracts), 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 (less than six years under New York Contracts), 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 "L. 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
(six or more years under New York Contracts) 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 (less than six years under New York Contracts), the Surrender Value less
premium taxes, if any, is used rather than the Accumulated Value. The dollar
amount of the first variable annuity benefit payment is then divided by the
value of an Annuity Unit of the selected Sub-Accounts to determine the number of
Annuity Units represented by the first payment. This number of Annuity Units
remains fixed under all annuity options except the joint and two-thirds survivor
annuity option. For each subsequent payment, the dollar amount of the variable
annuity benefit payment is determined by multiplying this fixed number of
Annuity Units by the value of an Annuity Unit on the applicable Valuation Date.
After the first benefit payment, the dollar amount of each periodic variable
annuity benefit payment will vary with subsequent variations in the value of the
Annuity Unit of the selected Sub-Accounts. The dollar amount of each fixed
amount annuity benefit payment is fixed and will not change, except under the
joint and two-thirds survivor annuity option.
From time to time, the Company may offer Owners both fixed and variable annuity
rates more favorable than those contained in the Contract. Any such rates will
be applied uniformly to all Owners of the same class.
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For an illustration of a variable annuity benefit payment calculation using a
hypothetical example, see "ANNUITY BENEFIT PAYMENTS" in the SAI.
L. 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.
M. 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:
(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.
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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 phase. 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.
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
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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. Currently, the Contract fee is waived for contracts issued to and
maintained by the trustee of a 401(k) plan. The Company reserves the right to
impose a Contract fee on such contracts in the future but only with respect to
Contracts issued after the date of its decision to apply the fee to 401(k)
contracts. 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.
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.
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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. The Company will waive the
contingent deferred sales charge in the event that the Owner (or the Annuitant,
if the Owner is not an individual) becomes physically disabled after the issue
date of the Contract and before attaining age 65. Under New York Contracts, the
disability also must exist for a continuous period of at least 4 months. The
Company may require proof of such disability and continuing disability,
including written confirmation of receipt and approval of any claim for Social
Security Disability Benefits and reserves the right to obtain an examination by
a licensed physician of its choice and at its expense. In addition, except in
New York where not 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; or (3) 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.
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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-advisors; and the spouses, children and
other legal dependants (under age 21) of such eligible persons.
In addition, from time to time the Company may reduce the amount of the
contingent deferred sales, the period during which it applies, or both, and/or
credit additional amounts on the Contract when the Contract is sold to
individuals or groups of individuals in a manner that reduces sales expenses.
The Company will consider (1) the size and type of group; (2) the total amount
of payments to be received and the manner in which payments are remitted; (3)
the purpose for which the Contract is being purchased and whether that purpose
makes it likely that costs and expenses will be reduced; (4) other transactions
where sales expenses are likely to be reduced; or (5) the level of commissions
paid to selling broker-dealers or certain financial institutions with respect to
contracts within the same group or class (for example, broker-dealers who offer
the Contract in connection with financial planning services offered on a
fee-for-service basis). Finally, where permitted by 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):
<TABLE>
<S> <C>
Where (1) The Accumulated Value as of the Valuation Date coincident with or
is: next following the date of receipt of the request for withdrawal,
reduced by total gross payments not previously withdrawn (Cumulative
Earnings).
Where (2) 15% of the Accumulated Value as of the Valuation Date coincident with
is: or next following the date of receipt of the request for withdrawal,
reduced by the total amount of any prior withdrawals made in the same
calendar year to which no contingent deferred sales charge was
applied.
Where (3) The amount calculated under the Company's life expectancy
is: distribution (see Life Expectancy Distributions,) whether or not the
withdrawal was part of such distribution (applies only if the
Annuitant is also an Owner).
</TABLE>
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For example, an 81-year-old Owner/Annuitant with an Accumulated Value of
$15,000, of which $1,000 is Cumulative Earnings, would have a 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 "D. Surrender" and "E.
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 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.
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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 "C. 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. 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, the Company will transfer
monies out of the renewed Guarantee Period Account without application of a
Market Value Adjustment if the Owner's request is received within ten days of
the renewal date.
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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 "F. 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 "D. Surrender" and "E. Withdrawals." In addition, the following provisions
also apply to withdrawals from a Guarantee Period Account: (1) a Market Value
Adjustment will apply to all withdrawals, including Withdrawals Without
Surrender Charge, unless made at the end of the Guarantee Period; and (2) the
Company reserves the right to defer payments of amounts withdrawn from a
Guarantee Period Account for up to six months from the date it receives the
withdrawal request. If deferred for 30 days or more, the Company will pay
interest on the amount deferred at a rate of at least 3%.
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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 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.
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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.
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
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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 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
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<PAGE>
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 Contract."
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 (QUALIFIED CONTRACTS ONLY)
Loans are available to Owners of TSA Contracts (i.e., Contracts issued under
Section 403(b) of the Code and to Contracts issued to plans qualified under
Sections 401(a) and 401(k) of the Code. Loans are subject to provisions of the
Code and to applicable qualified retirement plan rules. Tax advisors and plan
fiduciaries should be consulted prior to exercising loan privileges.
Loaned amounts will first be withdrawn from Sub-Account and Fixed Account values
on a pro-rata basis until exhausted. Thereafter, any additional amounts will be
withdrawn from the Guarantee Period Accounts (pro-
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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 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
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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 commission amounts based on payments plus ongoing annual compensation of
up to 1% of Accumulated Value. To the extent permitted by NASD rules,
promotional incentives or payments may also be provided to such broker-dealers
based on sales volumes, the assumption of wholesaling functions, or other
sales-related criteria. Additional payments may be made for other services not
directly related to the sale of the Contract, including the recruitment and
training of personnel, production of promotional literature, and similar
services.
The Company intends to recoup commissions and other sales expenses through a
combination of anticipated contingent deferred sales charges and profits from
the Company's General Account. Commissions paid on the Contract, including
additional incentives or payments, do not result in any additional charge to
Owners or to the Variable Account. Any contingent deferred sales charges
assessed on the Contract will be retained by the Company.
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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.
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APPENDIX A
MORE INFORMATION ABOUT THE FIXED ACCOUNT
Because of exemption and exclusionary provisions in the securities laws,
interests in the Fixed Account are not generally subject to regulation under the
provisions of the Securities Act of 1933 or the Investment Company Act of 1940.
Disclosures regarding the fixed portion of the annuity contract and the Fixed
Account may be subject to the provisions of the Securities Act of 1933
concerning the accuracy and completeness of statements made in the Prospectus.
The disclosures in this APPENDIX A have not been reviewed by the 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.
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 of the Owner's Account,
based on hypothetical Accumulated Values.
<TABLE>
<CAPTION>
HYPOTHETICAL WITHDRAWAL SURRENDER
CONTRACT ACCUMULATED WITHOUT SURRENDER CHARGE SURRENDER
YEAR VALUE CHARGE AMOUNT PERCENTAGE CHARGE
- --------------- ------------ ----------------- ---------------- -----------
<S> <C> <C> <C> <C>
1 $ 54,000.00 $ 8,100.00 7% $ 3,213.00
2 58,320.00 8,748.00 6% 2,974.32
3 62,985.60 12,985.60 5% 2,500.00
4 68,024.45 18,024.45 4% 2,000.00
5 73,466.40 23,466.40 3% 1,500.00
6 79,343.72 29,343.72 2% 1,000.00
7 85,691.21 35,691.21 1% 500.00
8 92,546.51 42,546.51 0% 0.00
</TABLE>
WITHDRAWALS
Assume a payment of $50,000 is made on the issue date and no additional payments
are made. Assume that the Withdrawal Without Surrender Charge is equal to the
greater of 15% of the current Accumulated Value or the accumulated earnings in
the Contract and there are withdrawals as detailed below. The table below
presents examples of the surrender charge resulting from withdrawals, based on
hypothetical Accumulated Values.
<TABLE>
<CAPTION>
HYPOTHETICAL WITHDRAWAL SURRENDER
CONTRACT ACCUMULATED WITHOUT SURRENDER CHARGE SURRENDER
YEAR VALUE WITHDRAWALS CHARGE AMOUNT PERCENTAGE CHARGE
- --------------- ------------ ------------ ----------------- ---------------- -----------
<S> <C> <C> <C> <C> <C>
1 $ 54,000.00 $ 0.00 $ 8,100.00 7% $ 0.00
2 58,320.00 0.00 8,748.00 6% 0.00
3 62,985.60 0.00 12,985.60 5% 0.00
4 68,024.45 30,000.00 18,024.45 4% 479.02
5 41,066.40 10,000.00 6,159.96 3% 115.20
6 33,551.72 5,000.00 5,032.76 2% 0.00
7 30,835.85 10,000.00 4,625.38 1% 53.75
8 22,502.72 15,000.00 3,375.41 0% 0.00
</TABLE>
PART 2: MARKET VALUE ADJUSTMENT
The market value factor is: [(1+i)/(1+j)](n/365) - 1
The following examples assume:
1. The payment was allocated to a ten-year Guarantee Period Account with a
Guaranteed Interest Rate of 8%.
2. The date of surrender is seven years (2555 days) from the expiration date.
3. The value of the Guarantee Period Account is equal to $62,985.60 at the end
of three years.
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)] to the power of n/365 - 1
= [(1+.08)/(1+.10)] to the power of 2555/365 - 1
= (.98182) to the power of 7 - 1
= -.12054
The market value = the market value factor multiplied by the withdrawal
adjustment
= -.12054 X $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)] to the power of n/365 - 1
= [(1+.08)/(1+.07)] to the power of 2555/365 - 1
= (1.0093) to the power of 7 - 1
= .06694
The market value = the market value factor multiplied by the withdrawal
adjustment
= .06694 X $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)] to the power of n/365 - 1
= [(1+.08)/(1+.11)] to the power of 2555/365 - 1
= (.97297) to the power of 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 (-.17454 X $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)] to the power of n/365 - 1
= [(1+.08)/(1+.06)] to the power of 2555/365 - 1
= (1.01887) to the power of 7 - 1
= .13981
The market value = Minimum of the market value factor multiplied by the
adjustment withdrawal or the excess interest earned over 3%
= Minimum of (.13981 X $62,985.60 or $8,349.25)
= Minimum of ($8,806.02 or $8,349.25)
= $8,349.25
</TABLE>
B-3
<PAGE>
PROSPECTUS SUPPLEMENT
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
FULCRUM SEPARATE ACCOUNT
SUPPLEMENT TO
PROSPECTUS DATED MAY 1, 1998
SEPTEMBER 1, 1998
This Supplement replaces the prior supplement dated July 15, 1998.
Effective September 1, 1998:
- - the name of The Palladian Trust was changed to "The Fulcrum Trust."
- - Pilgrim Baxter Analytic Investors, Inc. has replaced Stonehill Capital
Management, Inc. as Portfolio Manager for The Growth Portfolio of the
Trust.
- - the name of the Global Strategic Income Portfolio has been changed to the
"Strategic Income Portfolio" and its investment objective has been changed
to the following: "The 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."
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE 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 First
Allmerica Financial Life Insurance Company ("Company") to individuals and
businesses in connection with retirement plans which may or may not qualify for
special federal income tax treatment. (For information about the tax status when
used with a particular type of plan, see "FEDERAL TAX CONSIDERATIONS.")
Participation in a group contract will be accounted for by the issuance of a
certificate describing the individual's interest under the group contract.
Participation in an individual contract will be evidenced by the issuance of an
individual contract. Certificates and individual contracts are referred to
collectively herein as the "Contract(s)." The following is a summary of
information about these Contracts. More detailed information can be found under
the referenced captions in this Prospectus.
Contract values may accumulate on a variable basis in the Contract's Variable
Account, known as the Fulcrum Separate Account. The Assets of the Variable
Account are divided into Sub-Accounts, each investing exclusively in shares of
one series of an underlying investment company. The following portfolios of The
Palladian-SM- Trust are offered under the Contract:
VALUE PORTFOLIO
GROWTH PORTFOLIO
INTERNATIONAL GROWTH PORTFOLIO
GLOBAL STRATEGIC INCOME PORTFOLIO
GLOBAL INTERACTIVE/TELECOMM PORTFOLIO
The following series of Allmerica Investment Trust is offered under the
Contract:
MONEY MARKET FUND
In most jurisdictions, values also may be allocated on a fixed basis to the
Fixed Account, which is part of the Company's General Account, and, during the
accumulation period, to one or more of the Guarantee Period Accounts. Amounts
allocated to the Fixed Account earn interest at a guaranteed rate for one year
from the date allocated. Amounts allocated to a Guarantee Period Account earn a
fixed rate of interest for the duration of the applicable Guarantee Period. The
interest earned is guaranteed if held for the entire Guarantee Period. If
removed prior to the end of the Guarantee Period, the value may be increased or
decreased by a Market Value Adjustment. Amounts allocated to the Guarantee
Period Accounts in the accumulation phase are held in the Company's Separate
Account GPA.
Additional information is contained in a Statement of Additional Information
("SAI") dated May 1, 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
ALLMERICA INVESTMENT TRUST AND THE PALLADIAN TRUST. THE GLOBAL STRATEGIC INCOME
PORTFOLIO MAY INVEST IN HIGHER YIELDING, LOWER RATED DEBT SECURITIES (SEE
"INVESTMENT OBJECTIVES AND POLICIES"). INVESTORS SHOULD RETAIN A COPY OF THIS
PROSPECTUS FOR FUTURE REFERENCE.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
DATED MAY 1, 1998
<PAGE>
THE CONTRACTS ARE OBLIGATIONS OF FIRST ALLMERICA FINANCIAL LIFE INSURANCE
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
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
STATEMENT OF ADDITIONAL INFORMATION TABLE OF CONTENTS...................... 4
SPECIAL TERMS.............................................................. 5
SUMMARY.................................................................... 7
ANNUAL AND TRANSACTION EXPENSES............................................ 12
CONDENSED FINANCIAL INFORMATION............................................ 19
PERFORMANCE INFORMATION.................................................... 20
DESCRIPTION OF THE COMPANY, THE VARIABLE ACCOUNT,
THE PALLADIAN-SM- TRUST AND ALLMERICA INVESTMENT TRUST.................... 21
INVESTMENT OBJECTIVES AND POLICIES......................................... 23
DESCRIPTION OF THE CONTRACT................................................ 24
A. Payments............................................................. 24
B. Right to Revoke Contract............................................. 25
C. Transfer Privilege................................................... 25
Automatic Transfers and Automatic Account Rebalancing
Options...................................................... 25
D. Surrender............................................................ 26
E. Withdrawals.......................................................... 27
Systematic Withdrawals......................................... 27
Life Expectancy Distributions.................................. 28
F. Death Benefit........................................................ 28
Death of the Annuitant Prior to the Annuity Date............... 28
Death of an Owner Who is Not Also the Annuitant Prior to the
Annuity Date................................................. 29
Payment of the Death Benefit Prior to the Annuity Date......... 29
Death of the Annuitant On or After the Annuity Date............ 29
G. The Spouse of the Owner as Beneficiary............................... 29
H. Assignment........................................................... 29
I. Electing the Form of Annuity and the Annuity Date.................... 30
J. Description of Variable Annuity Payout Options....................... 30
K. Annuity Benefit Payments............................................. 31
The Annuity Unit............................................... 31
Determination of the First and Subsequent Annuity Benefit
Payments..................................................... 31
L. NORRIS Decision...................................................... 32
M. Computation of Values................................................. 33
The Accumulation Unit.......................................... 33
Net Investment Factor.......................................... 33
CHARGES AND DEDUCTIONS..................................................... 33
A. Variable Account Deductions.......................................... 34
Mortality and Expense Risk Charge.............................. 34
Administrative Expense Charge.................................. 34
Other Charges.................................................. 34
B. Contract Fee......................................................... 34
C. Premium Taxes........................................................ 35
D. Contingent Deferred Sales Charge..................................... 35
Charge for Surrender and Withdrawals........................... 36
Reduction or Elimination of Withdrawal Charge.................. 36
Withdrawal Without Surrender Charge............................ 37
Surrenders..................................................... 38
Charge at the Time Annuity Benefit Payments Begin.............. 38
E. Transfer Charge...................................................... 38
</TABLE>
3
<PAGE>
<TABLE>
<S> <C>
GUARANTEE PERIOD ACCOUNTS.................................................. 39
FEDERAL TAX CONSIDERATIONS................................................. 41
A. Qualified and Non-Qualified Contracts................................ 41
B. Taxation of the Contracts in General................................. 42
Withdrawals Prior to Annuitization............................. 42
Annuity Payouts After Annuitization............................ 42
Penalty on Distribution........................................ 42
Assignments or Transfers....................................... 42
Non-Natural Owners............................................. 43
Deferred Compensation Plans of State and Local Governments and
Tax-Exempt Organizations..................................... 43
C. Tax Withholding...................................................... 43
D. Provisions Applicable to Qualified Employer Plans.................... 43
Corporate and Self-Employed Pension and Profit Sharing Plans... 43
Individual Retirement Annuities................................ 44
Tax-Sheltered Annuities........................................ 44
Texas Optional Retirement Program.............................. 44
REPORTS.................................................................... 44
LOANS (QUALIFIED CONTRACTS ONLY)........................................... 44
ADDITION, DELETION OR SUBSTITUTION OF INVESTMENTS.......................... 45
CHANGES TO COMPLY WITH LAW AND AMENDMENTS.................................. 46
VOTING RIGHTS.............................................................. 46
DISTRIBUTION............................................................... 46
LEGAL MATTERS.............................................................. 47
FURTHER INFORMATION........................................................ 47
APPENDIX A -- MORE INFORMATION ABOUT THE FIXED ACCOUNT..................... A-1
APPENDIX B -- SURRENDER CHARGES AND THE MARKET VALUE ADJUSTMENT............ B-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............................................................... 3
ANNUITY BENEFIT PAYMENTS................................................... 4
EXCHANGE OFFER............................................................. 5
PERFORMANCE INFORMATION.................................................... 6
TAX-DEFERRED ACCUMULATION.................................................. 12
FINANCIAL STATEMENTS....................................................... F-1
</TABLE>
4
<PAGE>
SPECIAL TERMS
ACCUMULATED VALUE: the sum of the value of all Accumulation Units in the
Sub-Accounts and of the value of all accumulations in the Fixed Account and
Guarantee Period Accounts then credited to the Contract, on any date before the
Annuity Date.
ACCUMULATION UNIT: a measure of the Owner's interest in a Sub-Account before
annuity benefit payments begin.
ANNUITANT: the person designated in the Contract upon whose life annuity benefit
payments are to be made.
ANNUITY DATE: the date on which annuity benefit payments begin.
ANNUITY UNIT: a measure of the value of the periodic annuity benefit payments
under the Contract.
FIXED ACCOUNT: the part of the Company's General Account that guarantees
principal and a fixed minimum interest rate and to which all or a portion of a
payment or transfer under this Contract may be allocated.
FIXED ANNUITY PAYOUT: an Annuity payout option providing for annuity benefit
payments which remain fixed in amount throughout the annuity benefit payment
period selected.
GENERAL ACCOUNT: all the assets of the Company other than those held in a
separate account.
GUARANTEE PERIOD: the number of years that a Guaranteed Interest Rate is
credited.
GUARANTEE PERIOD ACCOUNT: an account which corresponds to a Guaranteed Interest
Rate for a specified Guarantee Period and is supported by assets in a
non-unitized separate account.
GUARANTEED INTEREST RATE: the annual effective rate of interest after daily
compounding credited to a Guarantee Period Account.
MARKET VALUE ADJUSTMENT: a positive or negative adjustment assessed if any
portion of a Guarantee Period Account is withdrawn or transferred prior to the
end of its Guarantee Period.
OWNER: the person, persons or entity entitled to exercise the rights and
privileges under the Contract. Joint Owners are permitted if one of the two is
the Annuitant.
SUB-ACCOUNT: a subdivision of the Variable Account. Each Sub-Account available
under the Contract invests exclusively in the shares of a corresponding
portfolio of The Palladian-SM- Trust or fund of Allmerica Investment Trust.
SURRENDER VALUE: the Accumulated Value of the Contract on full surrender after
application of any Contract fee, contingent deferred sales charge, and Market
Value Adjustment.
UNDERLYING FUNDS (OR FUNDS): the portfolios of The Palladian-SM- Trust and the
fund of Allmerica Investment Trust which are offered under the Contract. These
are: the Value Portfolio, Growth Portfolio, International Growth Portfolio,
Global Strategic Income Portfolio, and Global Interactive/Telecomm Portfolio of
The Palladian-SM- Trust, and the Money Market Fund of Allmerica Investment
Trust.
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,
5
<PAGE>
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
<PAGE>
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
<PAGE>
WHO ARE THE KEY PERSONS UNDER THE CONTRACT?
The Contract is between you, (the "Owner"), and us, First Allmerica Financial
Life Insurance 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 Funds, the Guarantee
Period Accounts, and the Fixed Account.
You have a choice of six Funds:
- -Value Portfolio of The Palladian-SM- Trust
Managed by GAMCO Investors, Inc.
- -Growth Portfolio of The Palladian-SM- Trust
Managed by Stonehill Capital Management, Inc.
- -International Growth Portfolio of The Palladian-SM- Trust
Managed by Bee & Associates Incorporated
- -Global Strategic Income Portfolio of The Palladian-SM- Trust
Managed by Allmerica Asset Management, Inc.
- -Global Interactive/Telecomm Portfolio of The Palladian-SM- Trust
Managed by GAMCO Investors, Inc.
- -Money Market Fund of Allmerica Investment Trust
Managed by Allmerica Asset Management, Inc.
This range of investment choices enables you to allocate your money among the
Funds to meet your particular investment needs. For a more detailed description
of the Funds, see "INVESTMENT OBJECTIVES AND POLICIES."
GUARANTEE PERIOD ACCOUNTS. Assets supporting the guarantees under the Guarantee
Period Accounts are held in the Company's Separate Account GPA, a non-unitized
insulated separate account. Values and benefits calculated on the basis of
Guarantee Period Account allocations, however, are obligations of the Company's
General Account. Amounts allocated to a Guarantee Period Account earn a
Guaranteed Interest Rate declared by the Company. The level of the Guaranteed
Interest Rate depends on the number of years of the Guarantee Period selected.
The Company may offer up to nine Guarantee Periods ranging from two to ten years
in duration. Once declared, the Guaranteed Interest Rate will not change during
the duration of the Guarantee Period. If amounts allocated to a Guarantee Period
Account are transferred, surrendered or applied to any annuity option at any
time other than the day following the last day of the applicable Guarantee
Period, a Market Value Adjustment will apply that may increase or decrease the
account's value. For more information
8
<PAGE>
about the Guarantee Period Accounts and the Market Value Adjustment, see
"GUARANTEE PERIOD ACCOUNTS."
FIXED ACCOUNT. The Fixed Account is part of the General Account which consists
of all the Company's assets other than those allocated to the Variable Account
and any other separate account. Allocations to the Fixed Account are guaranteed
as to principal and a minimum rate of interest. Additional excess interest may
be declared periodically at the Company's discretion. Furthermore, the initial
rate in effect on the date an amount is allocated to the Fixed Account will be
guaranteed for one year from that date. For more information about the Fixed
Account, see APPENDIX A, "MORE INFORMATION ABOUT THE FIXED ACCOUNT."
WHO ARE THE INVESTMENT ADVISERS?
THE PALLADIAN-SM- TRUST. Allmerica Financial Investment Management Services,
Inc. ("AFIMS"), an affiliate of the Company, serves as overall manager of The
Palladian-SM- Trust and is responsible for administrative and general
supervisory services to the Portfolios. The Palladian-SM- Trust and AFIMS have
entered into Sub-Adviser Agreements with certain investment advisers for
investment management services for the Portfolios.
The Portfolio Managers of the five Portfolios of The Palladian-SM- Trust are as
follows:
<TABLE>
<CAPTION>
PORTFOLIO PORTFOLIO MANAGER
- --------------------------------------------- ---------------------------------------------
<S> <C>
Value Portfolio GAMCO Investors, Inc.
Growth Portfolio Stonehill Capital Management, Inc.
International Growth Portfolio Bee & Associates Incorporated
Global Strategic Income Portfolio Allmerica Asset Management, Inc.
Global Interactive/Telecomm Portfolio GAMCO Investors, Inc.
</TABLE>
The Portfolio Managers (other than Allmerica Asset Management, Inc.) are not
affiliated with the Company or the Trust.
ALLMERICA INVESTMENT TRUST. AFIMS is the investment manager of Allmerica
Investment Trust and, subject to the direction of its Board of Trustees, handles
the day-to-day affairs of the Trust. AFIMS has entered into a Sub-Adviser
Agreement with its affiliate, Allmerica Asset Management, Inc., for investment
management services for the Money Market Fund.
For more information, see "DESCRIPTION OF THE COMPANY, THE VARIABLE ACCOUNT, THE
PALLADIAN-SM- TRUST AND ALLMERICA INVESTMENT TRUST."
CAN I MAKE TRANSFERS AMONG THE FUNDS?
Yes. Prior to the Annuity Date, you may transfer among the 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 "C. 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
9
<PAGE>
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 in New York where not permitted under state law, you may
withdraw all or a portion of your money without a surrender charge if, after the
Contract is issued, you are admitted to a medical care facility, become disabled
or are diagnosed with a fatal illness. For details and restrictions, see
"Reduction or Elimination of Surrender Charge."
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, 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. 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 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 "F.
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
10
<PAGE>
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. If you cancel the Contract, you will receive a refund of the greater
of (1) 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), or (2) your entire payment. In New York,
you will receive a refund equal to your entire payment. See "B. Right to Revoke
Contract."
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).
11
<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 "Premium Taxes."
<TABLE>
<CAPTION>
YEARS FROM
CONTRACT CHARGES DATE OF PAYMENT CHARGE
- --------------------------------------------------------------------------------------- --------------- ---------
<S> <C> <C>
CONTINGENT DEFERRED SALES CHARGE: 0-1 7%
This charge may be assessed upon surrender, withdrawal or annuitization under any 2 6%
commutable period certain option or a noncommutable period certain option of less than 3 5%
ten years. The charge is a percentage of payments applied to the amount surrendered (in 4 4%
excess of any amount that is without a surrender charge) within the indicated time 5 3%
period. 6 2%
7 1%
Thereafter 0%
TRANSFER CHARGE: None
The Company currently makes no charge for transfers, and guarantees that the first 12
transfers in a Contract year will not be subject to a transfer charge. For each
subsequent transfer, the Company reserves the right to assess a charge, guaranteed
never to exceed $25, to reimburse the Company for the costs of processing the transfer.
ANNUAL CONTRACT FEE: $30
The $30 Contract fee is deducted annually and upon surrender when Accumulated Value is
less than $100,000. The Contract fee is currently waived for Contracts issued to and
maintained by the trustee of a 401(k) plan.
VARIABLE ACCOUNT ANNUAL EXPENSES:
(on an annual basis as a percentage of average daily net assets)
Mortality and Expense Risk Charge: 1.25%
Administrative Expense Charge: 0.20%
---------
Total Annual Expenses: 1.45%
---------
---------
</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 for
1997. However, a performance-based management fee is provided for under the
Management Agreements for the Portfolios of The Palladian-SM- Trust (the
"Portfolios"). The base fee is 2.00%, but the actual fee may vary from between
0.00% to
12
<PAGE>
4.00%, depending on a Portfolio's performance. Because of the possibility of
wide variations in the management fees from year-to-year, hypothetical expense
information assuming fees of 0.00%, 2.00% and 4.00%, is also shown below under
"MORE INFORMATION ABOUT PERFORMANCE FEES."
<TABLE>
<CAPTION>
OTHER EXPENSES
(AFTER ANY
MANAGEMENT APPLICABLE TOTAL FUND
FUND FEES REIMBURSEMENT) EXPENSES
- ------------------------------------------------ --------------- ----------------- -------------
<S> <C> <C> <C>
Value Portfolio................................. 0.14%(1) 1.00%(2) 1.14%
Growth Portfolio................................ 0.20%(1) 1.00%(2) 1.20%
International Growth Portfolio.................. 0.58%(1) 1.20%(2) 1.78%
Global Strategic Income Portfolio............... 0.40%(3) 1.20%(2) 1.60%
Global Interactive/Telecomm Portfolio........... 0.27%(1) 1.20%(2) 1.47%
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: 1.00% for the Value
Portfolio, 1.00% for the Growth Portfolio, 1.20% for the International Growth
Portfolio, 1.20% for the Global Strategic Income Portfolio, and 1.20% for the
Global Interactive/Telecomm 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: 4.75% for the Value
Portfolio, 6.12% for the Growth Portfolio, 7.11% for the International Growth
Portfolio, 6.68% for the Global Strategic Income Portfolio, and 7.26% for the
Global Interactive/Telecomm Portfolio.
(3) The actual management fee for the Global 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 Palladian-SM- Trust ("Board") which was held on April 9, 1998, the Board
approved a new Portfolio Management Agreement with Allmerica Asset Management,
Inc. ("AAM"). The Portfolio Management Agreement is subject to the approval of
shareholders at a meeting scheduled to be held no later than June 8, 1998. The
Portfolio Management 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 Management
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 two
important limitations. First, until June 8, 1998, when the Portfolio Management
Agreement is to be presented at a shareholder meeting for approval, the fee will
be calculated at the lesser of the following two rates: (1) 0.80%; and (2) the
rate that would have applied under the old advisory agreement. The latter rate
varies based on prior performance, but as noted above was 0.41% for 1997.
Second, 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 Palladian-SM- 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.
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.
13
<PAGE>
(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:
<TABLE>
<CAPTION>
FUND 1 YEAR 3 YEARS 5 YEARS 10 YEARS
---------------------------------------- ------ ------- ------- --------
<S> <C> <C> <C> <C>
Value Portfolio......................... $88 $127 $168 $296
Growth Portfolio........................ $88 $129 $171 $302
International Growth Portfolio.......... $94 $146 $199 $357
Global Strategic Income Portfolio....... $92 $141 $191 $341
Global Interactive/Telecomm Portfolio... $91 $137 $184 $328
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>
Value Portfolio......................... $27 $ 82 $140 $296
Growth Portfolio........................ $27 $ 84 $143 $302
International Growth Portfolio.......... $33 $101 $171 $357
Global Strategic Income Portfolio....... $31 $ 96 $163 $341
Global Interactive/Telecomm Portfolio... $30 $ 92 $156 $328
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 noncommutable period certain option of ten years
or longer.
MORE INFORMATION ABOUT PERFORMANCE FEES
The tables below show the expenses of the Portfolios of The Palladian-SM- Trust
as if the Portfolios paid performance based management fees of 0%, 2%, and 4%,
respectively.
A performance-based management fee is currently in effect for the Portfolios of
The Palladian-SM- Trust, other than the Global Strategic Income Portfolio. The
base fee is 2.00%, but the actual fee may vary from between 0.00% to 4.00%,
depending on the Portfolio's performance. The base fee of 2.00% will be paid if
the Portfolio's performance (net of all fees and expenses, including the
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 Portfolio's
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 Portfolio's performance is more than 3.0 percentage points
lower than the applicable benchmark index; see the prospectus of The
Palladian-SM- Trust for more details. Because of this variation, expense
information assuming fees of 0.00%, 2.00% and 4.00% is shown below. The fee,
however, could be any figure between 0.00% and 4.00%. In 1997, the actual
14
<PAGE>
management fees were 0.14% for the Value Portfolio, 0.20% for the Growth
Portfolio, 0.58% for the International Growth Portfolio, and 0.27% for the
Global Interactive/Telecomm 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 set 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
one Portfolio -- the Global Strategic Income Portfolio. That Portfolio has
retained Allmerica Asset Management Inc. ("AAM") as Portfolio Manager effective
April 13, 1998. The Portfolio Management 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 Management
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. For more information, see Footnote 3, below,
and the prospectus for The Palladian-SM- Trust.
EXAMPLE 1 -- ASSUMING ADVISORY FEE OF 0.00% FOR THE PORTFOLIOS OF THE
PALLADIAN-SM- TRUST.
(For the fee to be 0.00% a Portfolio's performance, net of all fees and
expenses, would have to be more than 3.0 percentage points below the benchmark
index.)
<TABLE>
<CAPTION>
OTHER EXPENSES
(AFTER ANY TOTAL
MANAGEMENT APPLICABLE OPERATING
FUND FEES REIMBURSEMENT) EXPENSES
- ------------------------------------------------- --------------- ----------------- -----------
<S> <C> <C> <C>
Value Portfolio.................................. 0.00%(1) 1.00%(2) 1.00%
Growth Portfolio................................. 0.00%(1) 1.00%(2) 1.00%
International Growth Portfolio................... 0.00%(1) 1.20%(2) 1.20%
Global Strategic Income Portfolio................ 0.00%(3) 1.20%(2) 1.20%
Global Interactive/Telecomm Portfolio............ 0.00%(1) 1.20%(2) 1.20%
Money Market Fund................................ 0.27% 0.08% 0.35%(4)
</TABLE>
EXAMPLE 2 -- ASSUMING ADVISORY FEE OF 2.00% FOR THE PORTFOLIOS OF THE
PALLADIAN-SM- TRUST.
(For the fee to be 2.00%, a Portfolio's performance, net of all fees and
expenses, would have to be between 1.5 and 3.0 percentage points higher than the
benchmark index.)
<TABLE>
<CAPTION>
OTHER EXPENSES
(AFTER ANY TOTAL
MANAGEMENT APPLICABLE OPERATING
FUND FEES REIMBURSEMENT) EXPENSES
- ------------------------------------------------- --------------- ----------------- -----------
<S> <C> <C> <C>
Value Portfolio.................................. 2.00%(1) 1.00%(2) 3.00%
Growth Portfolio................................. 2.00%(1) 1.00%(2) 3.00%
International Growth Portfolio................... 2.00%(1) 1.20%(2) 3.20%
Global Strategic Income Portfolio................ 2.00%(3) 1.20%(2) 3.20%
Global Interactive/Telecomm Portfolio............ 2.00%(1) 1.20%(2) 3.20%
Money Market Fund................................ 0.27% 0.08% 0.35%(4)
</TABLE>
15
<PAGE>
EXAMPLE 3 -- ASSUMING ADVISORY FEE OF 4.00% FOR THE PORTFOLIOS OF THE
PALLADIAN-SM- TRUST.
(For the fee to be 4.00%, a Portfolio's performance, net of all fees and
expenses, would have to be at least 7.5 percentage points higher than the
benchmark index.)
<TABLE>
<CAPTION>
OTHER EXPENSES
(AFTER ANY TOTAL
MANAGEMENT APPLICABLE OPERATING
FUND FEES REIMBURSEMENT) EXPENSES
- ------------------------------------------------- --------------- ----------------- -----------
<S> <C> <C> <C>
Value Portfolio.................................. 4.00%(1) 1.00%(2) 5.00%
Growth Portfolio................................. 4.00%(1) 1.00%(2) 5.00%
International Growth Portfolio................... 4.00%(1) 1.20%(2) 5.20%
Global Strategic Income Portfolio................ 4.00%(3) 1.20%(2) 5.20%
Global Interactive/Telecomm Portfolio............ 4.00%(1) 1.20%(2) 5.20%
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) 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:
1.00% for the Value Portfolio, 1.00% for the Growth Portfolio, 1.20% for the
International Growth Portfolio, 1.20% for the Global Strategic Income Portfolio,
and 1.20% for the Global Interactive/Telecomm 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 4.75% for the Value Portfolio, 6.12% for the Growth Portfolio, 7.11% for
the International Growth Portfolio, 6.68% for the Global Strategic Income
Portfolio, and 7.26% for the Global Interactive/Telecomm Portfolio.
(3) The actual management fee for the Global 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 Palladian-SM- Trust ("Board") which was held on April 9, 1998, the Board
approved a new Portfolio Management Agreement with Allmerica Asset Management,
Inc. ("AAM"). The Portfolio Management Agreement is subject to the approval of
shareholders at a meeting scheduled to be held no later than June 8, 1998. The
Portfolio Management 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 Management
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 two
important limitations. First, until June 8, 1998, when the Portfolio Management
Agreement is to be presented at a shareholder meeting for approval, the fee will
be calculated at the lesser of the following two rates: (1) 0.80%; and (2) the
rate that would have applied under the old advisory Agreement. The latter rate
varies based on prior performance, but as noted above was 0.41% for 1997.
Second, 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 Palladian-SM- 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.
EXAMPLES BASED ON HYPOTHETICAL PERFORMANCE FEES OF THE PORTFOLIOS OF THE
PALLADIAN-SM- 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
16
<PAGE>
the advisory fee of the five Portfolios of The Palladian-SM- Trust may vary from
0.00% to 4.00% depending on performance, three separate examples are provided:
Example (1) assumes that no advisory fee is paid for each of the five
Portfolios; Example (2) assumes that the advisory fee for the five Portfolios is
paid at the annual rate of 2.00%; and Example (3) assumes that the advisory fee
is paid at the annual rate of 4.00%.
(1) IF, AT THE END OF THE APPLICABLE PERIOD, YOU SURRENDER THE CONTRACT OR
ANNUITIZE* UNDER A COMMUTABLE PERIOD CERTAIN OPTION OR A NON-COMMUTABLE PERIOD
CERTAIN OPTION OF LESS THAN TEN YEARS, OR ANY FIXED PERIOD CERTAIN OPTION, YOU
WOULD PAY THE FOLLOWING EXPENSES ON A $1,000 INVESTMENT, ASSUMING A 5% ANNUAL
RETURN ON ASSETS:
EXAMPLE 1 -- ASSUMING ADVISORY FEE OF 0.00% FOR THE PORTFOLIOS OF THE
PALLADIAN-SM- TRUST
<TABLE>
<CAPTION>
FUND 1 YEAR 3 YEARS 5 YEARS 10 YEARS
---------------------------------------- ------ ------- ------- --------
<S> <C> <C> <C> <C>
Value Portfolio......................... $86 $123 $161 $283
Growth Portfolio........................ $86 $123 $161 $283
International Growth Portfolio.......... $88 $129 $171 $302
Global Strategic Income Portfolio....... $88 $129 $171 $302
Global Interactive/Telecomm Portfolio... $88 $129 $171 $302
Money Market Fund....................... $80 $105 $130 $216
</TABLE>
EXAMPLE 2 -- ASSUMING ADVISORY FEE OF 2.00% FOR THE PORTFOLIOS OF THE
PALLADIAN-SM- TRUST
<TABLE>
<CAPTION>
FUND 1 YEAR 3 YEARS 5 YEARS 10 YEARS
---------------------------------------- ------ ------- ------- --------
<S> <C> <C> <C> <C>
Value Portfolio......................... $105 $180 $255 $462
Growth Portfolio........................ $105 $180 $255 $462
International Growth Portfolio.......... $107 $185 $263 $478
Global Strategic Income Portfolio....... $107 $185 $263 $478
Global Interactive/Telecomm Portfolio... $107 $185 $263 $478
Money Market Fund....................... $ 80 $105 $130 $216
</TABLE>
EXAMPLE 3 -- ASSUMING ADVISORY FEE OF 4.00% FOR THE PORTFOLIOS OF THE
PALLADIAN-SM- TRUST
<TABLE>
<CAPTION>
FUND 1 YEAR 3 YEARS 5 YEARS 10 YEARS
---------------------------------------- ------ ------- ------- --------
<S> <C> <C> <C> <C>
Value Portfolio......................... $124 $233 $340 $609
Growth Portfolio........................ $124 $233 $340 $609
International Growth Portfolio.......... $126 $239 $348 $623
Global Strategic Income Portfolio....... $126 $239 $348 $623
Global Interactive/Telecomm Portfolio... $126 $239 $348 $623
Money Market Fund....................... $80 $105 $130 $216
</TABLE>
17
<PAGE>
(2) IF, AT THE END OF THE APPLICABLE TIME PERIOD, YOU ANNUITIZE* UNDER A LIFE
OPTION OR A NON-COMMUTABLE PERIOD CERTAIN OPTION OF TEN YEARS OR LONGER, OR IF
YOU DO NOT SURRENDER OR ANNUITIZE THE CONTRACT, YOU WOULD PAY THE FOLLOWING
EXPENSES ON A $1,000 INVESTMENT, ASSUMING A 5% ANNUAL RETURN ON ASSETS:
EXAMPLE 1 -- ASSUMING ADVISORY FEE OF 0.00% FOR THE PORTFOLIOS OF THE
PALLADIAN-SM- TRUST
<TABLE>
<CAPTION>
FUND 1 YEAR 3 YEARS 5 YEARS 10 YEARS
---------------------------------------- ------ ------- ------- --------
<S> <C> <C> <C> <C>
Value Portfolio......................... $25 $78 $133 $283
Growth Portfolio........................ $25 $78 $133 $283
International Growth Portfolio.......... $27 $84 $143 $302
Global Strategic Income Portfolio....... $27 $84 $143 $302
Global Interactive/Telecomm Portfolio... $27 $84 $143 $302
Money Market Fund....................... $19 $58 $100 $216
</TABLE>
EXAMPLE 2 -- ASSUMING ADVISORY FEE OF 2.00% FOR THE PORTFOLIOS OF THE
PALLADIAN-SM- TRUST
<TABLE>
<CAPTION>
FUND 1 YEAR 3 YEARS 5 YEARS 10 YEARS
---------------------------------------- ------ ------- ------- --------
<S> <C> <C> <C> <C>
Value Portfolio......................... $45 $136 $228 $462
Growth Portfolio........................ $45 $136 $228 $462
International Growth Portfolio.......... $47 $142 $238 $478
Global Strategic Income Portfolio....... $47 $142 $238 $478
Global Interactive/Telecomm Portfolio... $47 $142 $238 $478
Money Market Fund....................... $19 $ 58 $100 $216
</TABLE>
EXAMPLE 3 -- ASSUMING ADVISORY FEE OF 4.00% FOR THE PORTFOLIOS OF THE
PALLADIAN-SM- TRUST*(1)
<TABLE>
<CAPTION>
FUND 1 YEAR 3 YEARS 5 YEARS 10 YEARS
---------------------------------------- ------ ------- ------- --------
<S> <C> <C> <C> <C>
Value Portfolio......................... $65 $193 $316 $609
Growth Portfolio........................ $65 $193 $316 $609
International Growth Portfolio.......... $67 $198 $325 $623
Global Strategic Income Portfolio....... $67 $198 $325 $623
Global Interactive/Telecomm Portfolio... $67 $198 $325 $623
Money Market Fund....................... $19 $ 58 $100 $216
</TABLE>
- ------------------------
(1) In order to have a 5% annual return and a management fee of 4%, the
performance of the Portfolios of The Palladian-SM- Trust would have to be 9%
before the deduction of the 4% fee resulting in performance of 5% and the
benchmark index would have to decrease at least 2.5 percentage points (meaning
the Portfolio's performance after fees and expenses was at least 7.5 percentage
points better than the benchmark index.
As required in rules promulgated under the Investment Company Act of 1940 (the
"1940 Act"), the Contract fee is reflected in the examples by a method to show
the "average" impact on an investment in the Variable Account. The total
Contract fees collected are divided by the total average net assets attributable
to the Contracts. The resulting percentage is 0.075%, and the amount of the
Contract fee is assumed to be $0.75 in the examples. The Contract fee is
deducted only when the Accumulated Value is less than $100,000. Lower costs
apply to Contracts issued to a 401(k) plan.
* The Contract fee is not deducted after annuitization. No contingent deferred
sales charge is assessed at the time of annuitization under an option including
a life contingency or under a noncommutable period certain option of ten years
or longer.
18
<PAGE>
CONDENSED FINANCIAL INFORMATION
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
FULCRUM SEPARATE ACCOUNT
<TABLE>
<CAPTION>
SUB-ACCOUNT 1997
- ------------------------------------------------------------------------------------- ---------
<S> <C>
VALUE PORTFOLIO
Unit Value:
Beginning of Period................................................................ 0
End of Period...................................................................... 1.049
Number of Units Outstanding at End of Period (in thousands).......................... 483
GROWTH PORTFOLIO
Unit Value:
Beginning of Period................................................................ 0
End of Period...................................................................... 0.867
Number of Units Outstanding at End of Period (in thousands).......................... 313
INTERNATIONAL GROWTH PORTFOLIO
Unit Value:
Beginning of Period................................................................ 0
End of Period...................................................................... 0.881
Number of Units Outstanding at End of Period (in thousands).......................... 85
GLOBAL STRATEGIC INCOME PORTFOLIO
Unit Value:
Beginning of Period................................................................ 0
End of Period...................................................................... 0.998
Number of Units Outstanding at End of Period (in thousands).......................... 41
GLOBAL INTERACTIVE/TELECOMM PORTFOLIO
Unit Value:
Beginning of Period................................................................ 0
End of Period...................................................................... 1.105
Number of Units Outstanding at End of Period (in thousands).......................... 211
MONEY MARKET FUND
Unit Value:
Beginning of Period................................................................ 0
End of Period...................................................................... 1.010
Number of Units Outstanding at End of Period (in thousands).......................... 8
</TABLE>
19
<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
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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,
THE PALLADIAN-SM- TRUST, AND ALLMERICA INVESTMENT TRUST
THE COMPANY
The Company, originally organized under the laws of Massachusetts in 1844 as a
mutual life insurance company and formerly known as State Mutual Life Assurance
Company of America, converted to a stock life insurance company on October 16,
1995, and adopted its present name. The Company is the fifth oldest life
insurance company in America. As of December 31, 1997, the Company and its
subsidiaries had over $16.3 billion in combined assets, and over $43.8 billion
in life insurance in force. The Company is a wholly owned subsidiary of
Allmerica Financial Corporation ("AFC"). The Company's principal office is
located at 440 Lincoln Street, Worcester, MA 01653, Telephone 508-855-1000
("Principal Office").
The Company is subject to the laws of the Commonwealth of Massachusetts
governing insurance companies, to regulation by the Commissioner of Insurance of
Massachusetts, and to the insurance laws and regulations of other states and
jurisdictions in which it is licensed to operate.
The Company is a charter member of the Insurance Marketplace Standards
Association ("IMSA"). Companies that belong to IMSA subscribe to a rigorous set
of standards that cover the various aspects of sales and service for
individually sold life insurance and annuities. IMSA members have adopted
policies and procedures that demonstrate a commitment to honesty, fairness and
integrity in all customer contacts involving sales and service of individual
life insurance and annuity products.
THE VARIABLE ACCOUNT
The Fulcrum Separate Account (the "Variable Account") is a separate investment
account of the Company with six Sub-Accounts. The assets used to fund the
variable portions of the Contracts are set aside in Sub-Accounts kept separate
from the general assets of the Company. Each Sub-Account is administered and
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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 Massachusetts law, the assets of the Variable
Account may not be charged with any liabilities arising out of any other
business of the Company.
The Variable Account was authorized by vote of the Board of Directors of the
Company on June 13, 1996. The Variable Account meets the definition of "separate
account" under federal securities laws and is registered with the SEC as a unit
investment trust under the 1940 Act. This registration does not involve the
supervision of management or investment practices or policies of the Variable
Account by the SEC.
The Company reserves the right, subject to compliance with applicable law, to
change the names of the Variable Account and the Sub-Accounts.
THE PALLADIAN-SM- TRUST. The Palladian-SM- Trust was established as a
Massachusetts business trust on September 8, 1993, and is registered with the
SEC as a management investment company. Five investment portfolios (the
"Portfolios") are currently available under the Contract. The assets of each
Portfolio are held separate from the assets of the other Portfolios. Each
Portfolio operates as a separate investment vehicle and the income or losses of
one Portfolio have no effect on the investment performance of another Portfolio.
Shares of The Palladian-SM- Trust are not offered to the general public, but
solely to separate accounts of insurance companies for the purpose of providing
a vehicle for the investment of assets.
Allmerica Financial Investment Management Services, Inc. ("AFIMS") serves as
overall manager of The Palladian-SM- Trust and is responsible for general
investment supervisory services to the Portfolios. The Palladian-SM- Trust and
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 Palladian-SM- Trust and their respective Portfolio
Managers are as follows:
<TABLE>
<CAPTION>
PORTFOLIO PORTFOLIO MANAGER
- --------------------------------------------- ---------------------------------------------
<S> <C>
The Value Portfolio GAMCO Investors, Inc.
The Growth Portfolio Stonehill Capital Management, Inc.
The International Growth Portfolio Bee & Associates Incorporated
The Global Strategic Income Portfolio Allmerica Asset Management, Inc.
The Global Interactive/Telecomm Portfolio GAMCO Investors, 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 Palladian-SM- 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 one Portfolio
- -- the Global Strategic Income Portfolio.
Other than for the Global Strategic Income 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
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provides for 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,
Allmerica Asset Management, Inc. ("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.
Other than the expenses specifically assumed by AFIMS under the Management
Agreement, all expenses incurred in the operation of the Trust are borne by it,
including fees and expenses associated with the registration and qualification
of the Trust's shares under the Securities Act of 1933 ("1933 Act") other fees
payable to the SEC, independent public accountant, legal and custodian fees,
association membership dues, taxes, interest, insurance premiums, brokerage
commissions, fees and expenses of the Trustees who are not affiliated with First
Allmerica and its affiliates and subsidiaries, expenses for proxies,
prospectuses, reports to shareholders and other expenses.
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.
INVESTMENT OBJECTIVES AND POLICIES
A summary of investment objectives of each of the Funds is set forth below. More
detailed information regarding the investment objectives, restrictions and
risks, expenses paid by the Funds, and other relevant information regarding the
Funds may be found in the prospectuses of The Palladian-SM- Trust and Allmerica
Investment Trust which accompany this Prospectus and should be read carefully
before investing. The Statements of Additional Information of the Trusts are
available upon request. There can be no assurance that the investment objectives
of the Funds can be achieved or that the value of a Contract will equal or
exceed the aggregate amount of the payments made under the Contract.
VALUE PORTFOLIO -- seeks to make money for investors by investing primarily in
companies that the Portfolio Manager believes are undervalued and that by virtue
of anticipated developments may, in the Portfolio Manager's judgment, achieve
significant capital appreciation.
GROWTH PORTFOLIO -- seeks to make money for investors by investing primarily in
securities selected for their long-term growth prospects.
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INTERNATIONAL GROWTH PORTFOLIO -- seeks to make money for investors by investing
internationally for long-term capital appreciation, primarily in equity
securities.
GLOBAL STRATEGIC INCOME PORTFOLIO -- seeks to make money for investors by
investing for high current income and capital appreciation in a variety of
domestic and foreign fixed-income securities.
GLOBAL INTERACTIVE/TELECOMM PORTFOLIO -- seeks to make money for investors
primarily by investing globally in equity securities of companies engaged in the
development, manufacture or sale of interactive and/ or telecommunications
services and products.
MONEY MARKET FUND -- seeks to obtain maximum current income consistent with the
preservation of capital and liquidity. Allmerica Asset Management, Inc. is the
Sub-Advisor of the Money Market Fund.
If there is a material change in the investment policy of a Fund, the Owner will
be notified of the change. If the Owner has Accumulated Value allocated to that
Fund, he or she may have the Accumulated Value reallocated without charge to
another Fund or to the Fixed Account or a Guarantee Period Account, where
available, on written request received by the Company within 60 days of the
later of (1) the effective date of such change in the investment policy, or (2)
the receipt of the notice of the Owner's right to transfer.
DESCRIPTION OF THE CONTRACT
A. PAYMENTS
The Company's underwriting requirements, which include receipt of the initial
payment and allocation instructions by the Company at its Principal Office, must
be met before a contract can be issued. These requirements also may include the
proper completion of an application; however, where permitted, the Company may
issue a contract without completion of an application for certain classes of
annuity contracts. Payments are to be made payable to the Company. A net payment
is equal to the payment received less the amount of any applicable premium tax.
The initial net payment will be credited to the Contract as of the date that all
issue requirements are properly met. If all issue requirements are not complied
with within five business days of the Company's receipt of the initial payment,
the payment will be returned unless the Owner specifically consents to the
holding of the initial payment until completion of any outstanding issue
requirements. Subsequent payments will be credited as of the Valuation Date
received at the Principal Office.
Payments are not limited as to frequency and number, but there are certain
limitations as to amount. Currently, the initial payment must be at least
$25,000. Under a salary deduction or monthly automatic payment plan, the minimum
initial payment is $50. In all cases, each subsequent payment must be at least
$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.
Initial net payments (or subsequent net payments received during the Contract's
first fifteen days) to a New York Contract will be invested as requested and no
portion allocated to an account other than the Money Market Fund will be
invested in that Fund. Under Contracts issued in all other states, 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
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<PAGE>
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 CONTRACT
An Owner may revoke the Contract at any time within ten days after receipt of
the Contract and receive a refund. In order to revoke the Contract, the Owner
must mail or deliver the Contract to the agent through whom the Contract was
purchased, to the Principal Office at 440 Lincoln Street, Worcester, MA 01653,
or to an authorized representative. Mailing or delivery must occur within 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) any amounts allocated to the Fixed and Guarantee Period
Accounts and the Accumulated Value of amounts allocated to the Sub-Accounts,
plus any amounts deducted under the Contract or by the Underlying Funds for
taxes, charges or fees. However, under Contracts issued in New York, the Company
will provide a refund equal to the Owner's gross payments.
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. 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.
Transfers to a Guarantee Period Account must be at least $1,000. If the amount
to be transferred to a Guarantee Period Account is less than $1,000, the Company
may transfer that amount to the Sub-Account which invests in the Money Market
Fund.
AUTOMATIC TRANSFERS (DOLLAR COST AVERAGING) AND AUTOMATIC ACCOUNT REBALANCING
OPTIONS. The Owner may elect automatic transfers of a predetermined dollar
amount, not less than $100, on a periodic basis (monthly, bi-monthly, quarterly,
semi-annually or annually) from the Global Strategic 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.
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<PAGE>
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 transfer. 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.
D. SURRENDER
At any time prior to the Annuity Date, the Owner may surrender the Contract and
receive its Surrender Value. The Owner must return the Contract and a signed,
written request for surrender, satisfactory to the Company, to the Principal
Office. The amount payable to the Owner upon surrender will be based on the
Contract's Accumulated Value as of the Valuation Date on which the request and
the Contract are received at the Principal Office.
Before the Annuity Date, a contingent deferred sales charge may be deducted when
a Contract is surrendered if payments have been credited to the Contract during
the last 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 Amount is the commuted
value of any unpaid installments, computed on the basis of the assumed interest
rate incorporated in such annuity benefit payments. No contingent deferred sales
charge is imposed after the Annuity Date.
Any amount surrendered is normally payable within seven days following the
Company's receipt of the surrender request. The Company reserves the right to
defer surrenders and withdrawals of amounts in each Sub-Account in any period
during which (1) trading on the New York Stock Exchange is restricted as
determined by the SEC or such Exchange is closed for other than weekends and
holidays, (2) the SEC has by order permitted such suspension, or (3) an
emergency, as determined by the SEC, exists such that disposal of portfolio
securities or valuation of assets of each separate account is not reasonably
practicable.
The right is reserved by the Company to defer surrenders and withdrawals of
amounts allocated to the Company's Fixed Account and Guarantee Period Accounts
for a period not to exceed six months.
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."
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For important tax consequences which may result from surrender, see "FEDERAL TAX
CONSIDERATIONS."
E. 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 "D. Surrender."
After the Annuity Date, only Contracts under which future variable annuity
benefit payments are limited to a specified period may be withdrawn. A
withdrawal after the Annuity Date will result in cancellation of a number of
Annuity Units equivalent in value to the amount withdrawn.
For important restrictions on withdrawals which are applicable to Owners who are
participants under Section 403(b) plans or under the Texas ORP, see
"Tax-Sheltered Annuities" and "Texas Optional Retirement Program."
For important tax consequences which may result from surrender and withdrawals,
see "FEDERAL TAX CONSIDERATIONS."
SYSTEMATIC WITHDRAWALS. The Owner may elect an automatic schedule of
withdrawals (systematic withdrawals) from amounts in the Sub-Accounts and/or the
Fixed Account on a monthly, bi-monthly, quarterly, semi-annual or annual basis.
Systematic withdrawals from Guarantee Period Accounts are not available. The
minimum amount of each withdrawal is $100, and will be subject to any applicable
withdrawal charges. If elected at the time of purchase, the Owner must designate
in writing the specific dollar amount of each withdrawal and the percentage of
this amount which should be taken from each designated Sub-Account and/or the
Fixed Account. Systematic withdrawals then will begin on the 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.
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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 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 Owner may elect monthly, bi-monthly, quarterly, semi-annual, or
annual distributions, and may terminate the LED option at any time. LED will
cease automatically on the maximum Annuity Date permitted under the Contract at
which time an annuity option must be chosen.
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."
F. DEATH BENEFIT
In the event that the Annuitant, Owner or Joint Owner, if applicable, dies while
the Contract is in force, the Company will pay the Beneficiary a death benefit,
except where the Contract is continued in force as provided in "G. 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 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 date, increased for
subsequent payment 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. 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 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.
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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.
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.
G. 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.
H. 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."
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I. 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 is selected, Accumulated Value
will be transferred to the Fixed Account of the Company, and the annuity benefit
payments will be fixed in amount. See APPENDIX A, "MORE INFORMATION ABOUT THE
FIXED ACCOUNT."
Under a variable annuity payout, a payment equal to the value of the fixed
number of Annuity Units in the Sub-Accounts is made monthly, quarterly,
semiannually or annually. Since the value of an Annuity Unit in a Sub-Account
will reflect the investment performance of the Sub-Account, the amount of each
annuity benefit payment will vary.
The annuity option selected must produce an initial payment of at least $50 (a
lower amount may be required in some states). The Company reserves the right to
increase this minimum amount. If the annuity options selected does not produce
an initial payment which meets this minimum, a single payment will be made. Once
the Company begins making annuity benefit payments, the Annuitant cannot make
withdrawals or surrender the annuity benefit, except in the case where a
commutable "period certain" option has been elected. Only beneficiaries entitled
to receive remaining payments for a "period certain" may elect to instead
receive a lump sum settlement.
If the Owner does not elect otherwise, a variable life annuity with periodic
payments for ten years guaranteed will be purchased. Changes in either the
Annuity Date or annuity option can be made up to one month prior to the Annuity
Date.
J. DESCRIPTION OF VARIABLE ANNUITY PAYOUT OPTIONS
The Company provides the variable annuity payout options described below.
Currently, variable annuity payout options may be funded through the
Sub-Accounts investing in the Value Portfolio, the Growth Portfolio, the
International Growth Portfolio and the Global Strategic Income Portfolio. The
Company also provides these same annuity payout options funded through the Fixed
Account (fixed annuity payout option). Regardless of how payments were allocated
during the accumulation period, any of the variable annuity options or the
fixed-amount options may be selected, or any of the variable annuity options may
be selected in combination with any of the fixed-amount annuity options. Other
annuity options may be offered by the Company.
VARIABLE LIFE ANNUITY WITH PAYMENTS GUARANTEED FOR TEN YEARS. This variable
annuity is payable periodically during the lifetime of the payee with the
guarantee that if the payee should die before all payments have been made, the
remaining annuity benefit payments will continue to the Beneficiary.
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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.
PERIOD CERTAIN VARIABLE ANNUITY. This variable annuity has periodic payments
for a stipulated number of years ranging from one to 30. This option may be
commutable, that is, the payee reserves the right to receive a lump sum in place
of installments, or it becomes noncommutable. The payee must reserve this right
at the time benefits begin.
It should be noted that the period certain option does not involve a life
contingency. In the computation of the payments under this option, the Company
charges for annuity rate guarantees, which guarantees include a factor for
mortality risks. Although not contractually required to do so, the Company
currently follows a practice of permitting persons receiving payments under the
period certain option to elect to convert to a variable annuity payout involving
a life contingency. The Company may discontinue or change this practice at any
time, but not with respect to election of the option made prior to the date of
any change in this practice. See "FEDERAL TAX CONSIDERATIONS" for a discussion
of the possible adverse tax consequences of selecting a period certain option.
K. 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
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month, which is the date the payment is to be received by the Annuitant, and
currently are based on unit values as of the 15th day of the preceding month.
The Contract provides annuity rates which determine the dollar amount of the
first periodic payment under each form of annuity for each $1,000 of applied
value. For life option and noncommutable period certain options of ten or more
years (six or more years under New York Contracts), 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 (less than six years under New York Contracts), 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
(six or more under New York Contracts) 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 (less than six years under New York Contracts), the Surrender Value less
premium taxes, if any, is used rather than the Accumulated Value. The dollar
amount of the first variable annuity benefit payment is then divided by the
value of an Annuity Unit of the selected Sub-Accounts to determine the number of
Annuity Units represented by the first payment. This number of Annuity Units
remains fixed under all annuity options except the joint and two-thirds survivor
annuity option. For each subsequent payment, the dollar amount of the variable
annuity benefit payment is determined by multiplying this fixed number of
Annuity Units by the value of an Annuity Unit on the applicable Valuation Date.
After the first benefit payment, the dollar amount of each periodic variable
annuity benefit payment will vary with subsequent variations in the value of the
Annuity Unit of the selected Sub-Accounts. The dollar amount of each fixed
amount annuity benefit payment is fixed and will not change, except under the
joint and two-thirds survivor annuity option.
From time to time, the Company may offer Owners both fixed and variable annuity
rates more favorable than those contained in the Contract. Any such rates will
be applied uniformly to all Owners of the same class.
For an illustration of a variable annuity benefit payment calculation using a
hypothetical example, see "ANNUITY BENEFIT PAYMENTS" in the SAI.
L. 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
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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.
M. COMPUTATION OF VALUES
THE ACCUMULATION UNIT. Each net payment is allocated to the accounts selected
by the Owner. Allocations to the Sub-Accounts are credited to the Contract in
the form of Accumulation Units. Accumulation Units are credited separately for
each Sub-Account. The number of Accumulation Units of each Sub-Account credited
to the Contract is equal to the portion of the net payment allocated to the
Sub-Account, divided by the dollar value of the applicable Accumulation Unit as
of the Valuation Date the payment is received at the Principal Office. The
number of Accumulation Units resulting from each payment will remain fixed
unless changed by a subsequent split of Accumulation Unit value, a transfer, a
withdrawal, or surrender. The dollar value of an Accumulation Unit of each
Sub-Account varies from Valuation Date to Valuation Date based on the investment
experience of that Sub-Account and will reflect the investment performance,
expenses and charges of its Funds. The value of an Accumulation Unit was set at
$1.00 on the first Valuation Date for each Sub-Account.
Allocations to Guarantee Period Accounts and the Fixed Account are not converted
into Accumulation Units, but are credited interest at a rate periodically set by
the Company. See APPENDIX B.
The Accumulated Value under the Contract is determined by (1) multiplying the
number of Accumulation Units in each Sub-Account by the value of an Accumulation
Unit of that Sub-Account on the Valuation Date, (2) adding the products, and (3)
adding the amount of the accumulations in the Fixed Account and Guarantee Period
Accounts, if any.
NET INVESTMENT FACTOR. The Net Investment Factor is an index that measures the
investment performance of a Sub-Account from one Valuation Period to the next.
This factor is equal to 1.000000 plus the result from dividing (1) by (2) and
subtracting (3) and (4) where:
(1) is the investment income of a Sub-Account for the Valuation Period,
including realized or unrealized capital gains and losses during the
Valuation Period, adjusted for provisions made for taxes, if any;
(2) is the value of that Sub-Account's assets at the beginning of the
Valuation Period;
(3) is a charge for mortality and expense risks equal to 1.25% on an annual
basis of the daily value of the Sub-Account's assets; and
(4) is an administrative charge of 0.20% on an annual basis of the daily
value of the Sub-Account's assets.
The dollar value of an Accumulation Unit as of a given Valuation Date is
determined by multiplying the dollar value of the corresponding Accumulation
Unit as of the immediately preceding Valuation Date by the appropriate net
investment factor.
For an illustration of Accumulation Unit calculation using a hypothetical
example see the SAI.
CHARGES AND DEDUCTIONS
Deductions under the Contract and charges against the assets of the Sub-Accounts
are described below. Other deductions and expenses paid out of the assets of the
Funds are described in the prospectuses and SAIs of The Palladian-SM- Trust and
Allmerica Investment Trust.
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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 phase. 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.
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 The
Palladian-SM- Trust and Allmerica Investment Trust contain additional
information concerning expenses of the Funds.
B. CONTRACT FEE
A $30 Contract fee currently is deducted on the Contract anniversary date and
upon full surrender of the Contract when the Accumulated Value is less than
$100,000. Currently, the Contract fee is waived for contracts issued to and
maintained by the trustee of a 401(k) plan. The Company reserves the right to
impose a Contract fee on such contracts in the future but only with respect to
Contracts issued after the date of its decision to apply the fee to 401(k)
contracts. 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
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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.
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.
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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 CHARGES. The Company will waive the
contingent deferred sales charge in the event that the Owner (or the Annuitant,
if the Owner is not an individual) becomes physically disabled after the issue
date of the Contract and before attaining age 65. Under New York Contracts, the
disability also must exist for a continuous period of at least 4 months. The
Company may require proof of such disability and continuing disability,
including written confirmation of receipt and approval of any claim for Social
Security Disability Benefits and reserves the right to obtain an examination by
a licensed physician of its choice and at its expense. In addition, except in
New York where not 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; or (3) commencing one year after issue of the Contract, is confined to
a hospice or receives home health services, with certification from a licensed
physician that the confinement to the hospice or receipt of home health care
services is expected to continue until death.
For purposes of the above provision, "medical care facility" means any
state-licensed facility or, in a state that does not require licensing, a
facility that is operating pursuant to state law, providing medically necessary
inpatient care which is prescribed 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.
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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-advisors; and the spouses, children and
other legal dependants (under age 21) of such eligible persons.
In addition, from time to time the Company may reduce the amount of the
contingent deferred sales, the period during which it applies, or both, and/or
credit additional amounts on the Contract when the Contract is sold to
individuals or groups of individuals in a manner that reduces sales expenses.
The Company will consider (1) the size and type of group; (2) the total amount
of payments to be received and the manner in which payments are remitted; (3)
the purpose for which the Contract is being purchased and whether that purpose
makes it likely that costs and expenses will be reduced; (4) other transactions
where sales expenses are likely to be reduced; or (5) the level of commissions
paid to selling broker-dealers or certain financial institutions with respect to
contracts within the same group or class (for example, broker-dealers who offer
the Contract in connection with financial planning services offered on a
fee-for-service basis). Finally, where permitted by 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):
<TABLE>
<S> <C>
Where (1) The Accumulated Value as of the Valuation Date coincident with or
is: next following the date of receipt of the request for withdrawal,
reduced by total gross payments not previously withdrawn ("Cumulative
Earnings")
Where (2) 15% of the Accumulated Value as of the Valuation Date coincident with
is: or next following the date of receipt of the request for withdrawal,
reduced by the total amount of any prior withdrawals made in the same
calendar year to which no contingent deferred sales charge was
applied.
Where (3) The amount calculated under the Company's life expectancy
is: distribution (see "Life Expectancy Distributions,") whether or not
the withdrawal was part of such distribution (applies only if the
Annuitant is also an Owner)
</TABLE>
For example, an 81-year-old Owner/Annuitant with an Accumulated Value of
$15,000, of which $1,000 is Cumulative Earnings, would have a 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).
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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 "D. Surrender" and "E.
Withdrawals" under "DESCRIPTION OF CONTRACT," and see "FEDERAL TAX
CONSIDERATIONS."
CHARGE AT THE TIME ANNUITY BENEFIT PAYMENTS BEGIN. If any commutable period
certain option or a non-commutable period certain option for less than ten years
is chosen, a contingent deferred sales charge will be deducted from the
Accumulated Value of the Contract if the Annuity Date occurs at any time when
the surrender charge would still apply had the Contract been surrendered on the
Annuity Date.
No contingent deferred sales charge is imposed at the time of annuitization in
any Contract year under an option involving a life contingency or for any
non-commutable period certain option for ten years or more. A Market Value
Adjustment, however, may apply. See "GUARANTEE PERIOD ACCOUNTS."
If an owner of a fixed annuity contract issued by the Company wishes to elect a
variable annuity option, the Company may permit such owner to exchange, at the
time of annuitization, the fixed contract for the Contract offered in this
Prospectus. The proceeds of the fixed contract, minus any contingent deferred
sales charge applicable under the fixed contract if a period certain option is
chosen, will be applied towards the variable annuity option desired by the
Owner. The number of Annuity Units under the option will be calculated using the
Annuity Unit values as of the 15th of the month preceding the Annuity Date.
E. TRANSFER CHARGE
The Company currently makes no charge for processing transfers. The Company
guarantees that the first 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 "C. Transfer Privilege."
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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. 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, the Company will transfer
monies out of the renewed Guarantee Period Account without application of a
Market Value Adjustment if the Owner's request is received within ten days of
the renewal date.
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 "F. 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
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<PAGE>
Adjustment. The Market Value Adjustment will be determined by multiplying the
amount taken from each Guarantee Period Account before deduction of any
Surrender Charge by the market value factor. The market value factor for each
Guarantee Period Account is equal to:
[(1+i)/(1+j)](n/365) - 1
where: i is the Guaranteed Interest Rate expressed as a decimal (for
example: 3% = 0.03) being credited to the current Guarantee Period;
j is the new Guaranteed Interest Rate, expressed as a decimal, for a
Guarantee Period with a duration equal to the number of years
remaining in the current Guarantee Period, rounded to the next
higher number of whole years. If that rate is not available, the
Company will use a suitable rate or index allowed by the Department
of Insurance; and
n is the number of days remaining from the effective Valuation Date to
the end of the current Guarantee Period.
Based on the application of this formula, the value of a Guarantee Period
Account will increase after the Market Value Adjustment is applied if the then
current market rates are lower than the rate being credited to the Guarantee
Period Account. Similarly, the value of a Guarantee Period Account will decrease
after the Market Value Adjustment is applied if the then current market rates
are higher than the rate being credited to the Guarantee Period Account. The
Market Value Adjustment is limited, however, so that even if the account value
is decreased after application of a Market Value Adjustment, it will equal or
exceed the Owner's principal plus 3% earnings per year less applicable Contract
fees. Conversely, if the then current market rates are lower and the account
value is increased after the Market Value Adjustment is applied, the increase in
value also is affected by the minimum guaranteed rate of 3% such that the amount
that will be added to the Guarantee Period Account is limited to the difference
between the amount earned and the 3% minimum guaranteed earnings. For examples
of how the Market Value Adjustment works, see APPENDIX B.
PROGRAM TO PROTECT PRINCIPAL AND PROVIDE GROWTH POTENTIAL. Under this feature,
the Owner elects a Guarantee Period and one or more Sub-Accounts. The Company
will then compute the proportion of the initial payment that must be allocated
to the Guarantee Period selected, assuming no transfers or withdrawals, in order
to ensure that on the last day of the Guarantee Period it will equal the amount
of the entire initial payment. The required amount then will be allocated to the
preselected Guarantee Period Account and the remaining balance to the other
investment options selected by the Owner in accordance with the procedures
described in "A. Payments."
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 "D. Surrender" and "E. Withdrawals." In addition, the following provisions
also apply to withdrawals from a Guarantee Period Account: (1) a Market Value
Adjustment will apply to all withdrawals, including Withdrawals Without
Surrender Charge, unless made at the end of the Guarantee Period; and (2) the
Company reserves the right to defer payments of amounts withdrawn from a
Guarantee Period Account for up to six months from the date it receives the
withdrawal request. If deferred for 30 days or more, the Company will pay
interest on the amount deferred at a rate of at least 3%.
In the event that a Market Value Adjustment applies to a withdrawal of a portion
of the value of a Guarantee Period Account, it will be calculated on the amount
requested and deducted or added to the amount remaining in the Guarantee Period
Account. If the entire amount in a Guarantee Period Account is requested, the
adjustment will be made to the amount payable. If a contingent deferred sales
charge applies to the withdrawal, it will be calculated as set forth under "D.
Contingent Deferred Sales Charge" after application of the Market Value
Adjustment.
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<PAGE>
FEDERAL TAX CONSIDERATIONS
The effect of federal income taxes on the value of a Contract, on withdrawals or
surrenders, on annuity benefit payments, and on the economic benefit to the
Owner, Annuitant, or beneficiary depends upon a variety of factors. The
following discussion is based upon the Company's understanding of current
federal income tax laws as they are interpreted as of the date of this
Prospectus. No representation is made regarding the likelihood of continuation
of current federal income tax laws or of current interpretations by the IRS. In
addition, this discussion does not address state or local tax consequences that
may be associated with this Contract.
IT SHOULD BE RECOGNIZED THAT THE FOLLOWING DISCUSSION OF FEDERAL INCOME TAX
ASPECTS OF AMOUNTS RECEIVED UNDER VARIABLE ANNUITY CONTRACTS IS NOT EXHAUSTIVE,
DOES NOT PURPORT TO COVER ALL SITUATIONS, AND IS NOT INTENDED AS TAX ADVICE. A
QUALIFIED TAX ADVISER ALWAYS SHOULD BE CONSULTED WITH REGARD TO THE APPLICATION
OF LAW TO INDIVIDUAL CIRCUMSTANCES.
The Company intends to make a charge for any effect which the income, assets, or
existence of the Contract, the Variable Account or the Sub-Accounts may have
upon its tax. The Variable Account presently is not subject to tax, but the
Company reserves the right to assess a charge for taxes should the Variable
Account at any time become subject to tax. Any charge for taxes will be assessed
on a fair and equitable basis in order to preserve equity among classes of
Owners and with respect to each separate account as though that separate account
were a separate taxable entity.
The Variable Account is considered a part of and taxed with the operations of
the Company. The Company is taxed as a life insurance company under Subchapter L
of the Internal Revenue Code (the "Code"). The Company files a consolidated tax
return with its affiliates.
The IRS has issued regulations relating to the diversification requirements for
variable annuity and variable life insurance contracts under Section 817(h) of
the Code. The regulations provide that the investments of a segregated asset
account underlying a variable annuity contract are diversified adequately if no
more than 55% of the value of its assets is represented by any one investment,
no more than 70% by any two investments, no more than 80% by any three
investments, and no more than 90% by any four investments. If the investments
are not adequately diversified, the income on a contract, for any taxable year
of the owner, would be treated as ordinary income received or accrued by the
owner. It is anticipated that the Portfolios of the PalladianK Trust and the
Money Market Fund of Allmerica Investment Trust will comply with the current
diversification requirements. In the event that future IRS regulations and/or
rulings would require Contract modifications in order to remain in compliance
with the diversification standards, the Company will make reasonable efforts to
comply, and it reserves the right to make such changes as it deems appropriate
for that purpose.
A. QUALIFIED AND NON-QUALIFIED CONTRACTS
From a federal tax viewpoint there are two types of variable annuity contracts:
"qualified" contracts and "non-qualified" contracts. A qualified contract is one
that is purchased in connection with a retirement plan which meets the
requirements of Sections 401, 403, or 408 of the Code, while a non-qualified
contract is one that is not purchased in connection with one of the indicated
retirement plans. The tax treatment for certain withdrawals or surrenders will
vary, depending on whether they are made from a qualified contract or a non-
qualified contract. For more information on the tax provisions applicable to
qualified contracts, see "D. Provisions Applicable to Qualified Employer Plans"
below.
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<PAGE>
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.
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
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<PAGE>
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 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
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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 or Surrender."
Eligible employers that meet specified criteria may establish simplified
employee pension plans (SEP-IRAs) or SIMPLE IRA plans for their employees using
the employees IRAs. Employer contributions that may be made to such plans are
larger than the amounts that may be contributed to regular IRAs and may be
deductible to the employer.
TAX-SHELTERED ANNUITIES ("TSAS"). Under the provisions of Section 403(b) of the
Code, payments made to annuity contracts purchased for employees under annuity
plans adopted by public school systems and certain organizations which are tax
exempt under Section 501(c)(3) of the Code are excludable from the gross income
of such employees to the extent that total annual payments do not exceed the
maximum contribution permitted under the Code. Purchasers of TSA Contracts
should seek competent advice as to eligibility, limitations on permissible
payments and other tax consequences associated with the Contracts.
Withdrawals or other distributions attributable to salary reduction
contributions (including earnings thereon) made to a TSA contract after December
31, 1988, may not begin before the employee attains age 59, separates from
service, dies or becomes disabled. In the case of hardship, an Owner may
withdraw amounts contributed by salary reduction, but not the earnings on such
amounts. Even though a distribution may be permitted under these rules (e.g.,
for hardship or after separation from service), it may be subject to a 10%
penalty tax as a premature distribution, in addition to income tax.
TEXAS OPTIONAL RETIREMENT PROGRAM. Distributions under a TSA Contract issued to
participants in the Texas Optional Retirement Program may not be received except
in the case of the participant's death, retirement or termination of employment
in the Texas public institutions of higher education. These additional
restrictions are imposed under the Texas Government Code and a prior opinion of
the Texas Attorney General.
REPORTS
The Owner is sent a report semi-annually which states certain financial
information about the Funds. The Company also will furnish an annual report to
the Owner containing a statement of his or her account, including unit values
and other information as required by applicable law, rules and regulations.
LOANS (QUALIFIED CONTRACTS ONLY)
Loans are available to Owners of TSA Contracts (i.e., Contracts issued under
Section 403(b) of the Code and to Contracts issued to plans qualified under
Sections 401(a) and 401(k) of the Code. Loans are subject to provisions of the
Code and to applicable qualified retirement plan rules. Tax advisors and plan
fiduciaries should be consulted prior to exercising loan privileges.
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Loaned amounts will first be withdrawn from Sub-Account and Fixed Account values
on a pro-rata basis until exhausted. Thereafter, any additional amounts will be
withdrawn from the Guarantee Period Accounts (pro-rata by duration and LIFO
(last-in, first-out) within each duration), subject to any applicable Market
Value Adjustments. The maximum loan amount will be determined under the
Company's maximum loan formula. The minimum loan amount is $1,000. Loans will be
secured by a security interest in the Contract and the amount borrowed will be
transferred to a loan asset account within the Company's General Account, where
it will accrue interest at a specified rate below the then-current loan rate.
Generally, loans must be repaid within five years or less, and repayments must
be made quarterly and in substantially equal amounts. Repayments will be
allocated pro rata in accordance with the most recent payment allocation, except
that any allocations to a Guarantee Period Account will instead be allocated to
the Money Market Fund.
ADDITION, DELETION OR SUBSTITUTION OF INVESTMENTS
The Company reserves the right, subject to applicable law, to make additions to,
deletions from, or substitutions for the shares that are held in the
Sub-Accounts or that the Sub-Accounts may purchase. If the shares of any Fund
are no longer available for investment or if in the Company's judgment further
investment in any Fund should become inappropriate in view of the purposes of
the Variable Account or the affected Sub-Account, the Company may redeem the
shares of that Fund and substitute shares of another registered open-end
management company. The Company will not substitute any shares attributable to a
Contract interest in a Sub-Account without notice to the Owner and prior
approval of the SEC and state insurance authorities, to the extent required by
the 1940 Act or other applicable law. The Variable Account may, to the extent
permitted by law, purchase other securities for other contracts or permit a
conversion between contracts upon request by the Owner.
The Company also reserves the right to establish additional sub-accounts of the
Variable Account, each of which would invest in shares corresponding to a new
fund or in shares of another investment company having a specified investment
objective. Subject to applicable law and any required SEC approval, the Company
may, in its sole discretion, establish new sub-accounts or eliminate one or more
Sub-Accounts if marketing needs, tax considerations or investment conditions
warrant. Any new sub-accounts may be made available to existing Owners on a
basis to be determined by the Company.
Shares of the Funds also are issued to variable accounts of the Company and its
affiliates which issue variable life contracts ("mixed funding"). Shares of the
Funds are also issued to other unaffiliated insurance companies ("shared
funding"). Shares of the Funds may be offered to certain qualified retirement
plans. It is conceivable that in the future such mixed funding, shared funding
or sales to qualified plans may be disadvantageous for variable life owners,
variable annuity owners or plan participants. Although the Company and the
Trustees of The Palladian-SM- Trust and of Allmerica Investment Trust do not
currently foresee any such disadvantages to variable life insurance owners,
variable annuity owners or plan participants, the Company and the respective
Trustees intend to monitor events in order to identify any material conflicts
and to determine what action, if any, should be taken in response thereto. If
the Trustees were to conclude that separate funds should be established for
variable life and variable annuity separate accounts, the Company may be
required to bear the attendant expenses.
If any of these substitutions or changes are made, the Company may, by
appropriate endorsement, change the Contract to reflect the substitution or
change and will notify Owners of all such changes. If the Company deems it to be
in the best interest of Owners, and subject to any approvals that may be
required under applicable law, the Variable Account or any Sub-Accounts may be
operated as a management company under the 1940 Act, may be deregistered under
the 1940 Act if registration is no longer required, or may be combined with
other sub-accounts or other separate accounts of the Company.
The Company reserves the right, subject to compliance with applicable law, to
(1) transfer assets from the Variable Account or Sub-Accounts to another of the
Company's separate accounts or sub-accounts having assets of the same class, (2)
to operate the Variable Account or any Sub-Account as a management investment
45
<PAGE>
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 commission amounts based on payments plus ongoing annual compensation of
up to 1% of Accumulated 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.
46
<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.
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.
47
<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.
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 of the Owner's Account,
based on hypothetical Accumulated Values.
<TABLE>
<CAPTION>
HYPOTHETICAL WITHDRAWAL SURRENDER
CONTRACT ACCUMULATED WITHOUT SURRENDER CHARGE SURRENDER
YEAR VALUE CHARGE AMOUNT PERCENTAGE CHARGE
- --------------- ------------ ----------------- ---------------- -----------
<S> <C> <C> <C> <C>
1 $ 54,000.00 $ 8,100.00 7% $ 3,213.00
2 58,320.00 8,748.00 6% 2,974.32
3 62,985.60 12,985.60 5% 2,500.00
4 68,024.45 18,024.45 4% 2,000.00
5 73,466.40 23,466.40 3% 1,500.00
6 79,343.72 29,343.72 2% 1,000.00
7 85,691.21 35,691.21 1% 500.00
8 92,546.51 42,546.51 0% 0.00
</TABLE>
WITHDRAWALS
Assume a payment of $50,000 is made on the issue date and no additional payments
are made. Assume that the Withdrawal Without Surrender Charge is equal to the
greater of 15% of the current Accumulated Value or the accumulated earnings in
the contract and there are withdrawals as detailed below. The table below
presents examples of the surrender charge resulting from withdrawals, based on
hypothetical Accumulated Values.
<TABLE>
<CAPTION>
HYPOTHETICAL WITHDRAWAL SURRENDER
CONTRACT ACCUMULATED WITHOUT SURRENDER CHARGE SURRENDER
YEAR VALUE WITHDRAWALS CHARGE AMOUNT PERCENTAGE CHARGE
- --------------- ------------ ------------ ----------------- ---------------- -----------
<S> <C> <C> <C> <C> <C>
1........... $ 54,000.00 $0.00 $ 8,100.00 7% $ 0.00
2........... 58,320.00 0.00 8,748.00 6% 0.00
3........... 62,985.60 0.00 12,985.60 5% 0.00
4........... 68,024.45 30,000.00 18,024.45 4% 479.02
5........... 41,066.40 10,000.00 6,159.96 3% 115.20
6........... 33,551.72 5,000.00 5,032.76 2% 0.00
7........... 30,835.85 10,000.00 4,625.38 1% 53.75
8........... 22,502.72 15,000.00 3,375.41 0% 0.00
</TABLE>
PART 2: MARKET VALUE ADJUSTMENT
The market value factor is: [(1+i)/(1+j)](n/365) - 1
The following examples assume:
1. The payment was allocated to a ten-year Guarantee Period Account with a
Guaranteed Interest Rate of 8%.
2. The date of surrender is seven years (2555 days) from the expiration date.
3. The value of the Guarantee Period Account is equal to $62,985.60 at the end
of three years.
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)] to the power of n/365 - 1
= [(1+.08)/(1+.10)] to the power of 2555/365 - 1
= (.98182) to the power of 7 - 1
= -.12054
The market value = the market value factor multiplied by the withdrawal
adjustment
= -.12054 X $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)] to the power of n/365 - 1
= [(1+.08)/(1+.07)] to the power of 2555/365 - 1
= (1.0093) to the power of 7 - 1
= .06694
The market value = the market value factor multiplied by the withdrawal
adjustment
= .06694 X $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)] to the power of n/365 - 1
= [(1+.08)/(1+.11)] to the power of 2555/365 - 1
= (.97297) to the power of 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 (-.17454 X $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)] to the power of n/365 - 1
= [(1+.08)/(1+.06)] to the power of 2555/365 - 1
= (1.01887) to the power of 7 - 1
= .13981
The market value = Minimum of the market value factor multiplied by the
adjustment withdrawal or the excess interest earned over 3%
= Minimum of (.13981 X $62,985.60 or $8,349.25)
= Minimum of ($8,806.02 or $8,349.25)
= $8,349.25
</TABLE>
B-3
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE 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
NOVEMBER 2, 1998 ("THE PROSPECTUS"). THE PROSPECTUS MAY BE OBTAINED FROM
ANNUITY CLIENT SERVICES, FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY, 440
LINCOLN STREET, WORCESTER, MASSACHUSETTS 01653, TELEPHONE (800) 917-1909.
DATED NOVEMBER 2, 1998
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
GENERAL INFORMATION AND HISTORY . . . . . . . . . . . . . . . . . . . . . . 2
TAXATION OF THE CONTRACT, THE VARIABLE ACCOUNT
AND THE COMPANY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
SERVICES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
UNDERWRITERS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
ANNUITY BENEFIT PAYMENTS. . . . . . . . . . . . . . . . . . . . . . . . . . 4
EXCHANGE OFFER. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
PERFORMANCE INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . 7
TAX-DEFERRED ACCUMULATION . . . . . . . . . . . . . . . . . . . . . . . . .12
FINANCIAL STATEMENTS. . . . . . . . . . . . . . . . . . . . . . . . . . . F-1
</TABLE>
GENERAL INFORMATION AND HISTORY
The Fulcrum Separate Account (the "Variable Account") is a separate
investment account of First Allmerica Financial Life Insurance Company (the
"Company") authorized by vote of its Board of Directors on June 13, 1996.
The Company, organized under the laws of Massachusetts in 1844, is the fifth
oldest life insurance company in America. As of December 31, 1997, the
Company and its subsidiaries had over $16.3 billion in combined assets and
over $43.8 billion of life insurance in force. Effective October 16, 1995,
the Company converted from a mutual life insurance company, known as State
Mutual Life Assurance Company of America, to a stock life insurance company
and adopted its present name. The company is a wholly owned subsidiary of
Allmerica Financial Corporation ("AFC"). The Company's 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 Commonwealth of Massachusetts
governing insurance companies and to regulation by the Commissioner of
Insurance of Massachusetts. In addition, the Company is subject to the
insurance laws and regulations of other states and jurisdictions in which it
is licensed to operate.
Currently, fifteen (six 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"), Oppenheimer Variable Account Funds ("Oppenheimer") and PBHG
Insurance Series Fund, Inc. ("PBHG"). Fulcrum and the Trust are managed by
Allmerica Financial Investment Management Services, Inc. ("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. PBHG is managed by Pilgrim Baxter &
Associates, Ltd.
Fulcrum, the Trust, AVIF, DGPF, Lazard, the MFS Trust, Oppenheimer and PBHG
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
2
<PAGE>
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. One
portfolio of PBHG is available under the Contract: PBHG Select 20 Portfolio.
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 Underling 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 three 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
Price Waterhouse LLP, independent accountants, given on the authority
of said firm as experts in auditing and accounting.
The financial statements of the Company included herein should be considered
only as bearing on the ability of the Company to meet its obligations under
the Contract.
UNDERWRITERS
Allmerica Investments, Inc. ("Allmerica Investments"), a registered
broker-dealer under the Securities Exchange Act of 1934 and a member of the
National Association of Securities Dealers, Inc. ("NASD"), serves as
principal underwriter and general distributor for the Contract pursuant to a
contract with Allmerica 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.
3
<PAGE>
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, 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 $58,354.18 and $8,392.41 in 1997.
Sales of these contracts began in 1997.
ANNUITY BENEFIT PAYMENTS
The method by which the Accumulated Value under the Contract is determined is
described in detail under "Computation of Values" in the Prospectus.
ILLUSTRATION OF ACCUMULATION UNIT CALCULATION USING HYPOTHETICAL EXAMPLE.
The Accumulation Unit calculation for a daily Valuation Period may be
illustrated by the following hypothetical example: Assume that the assets of
a Sub-Account at the beginning of a one-day Valuation Period were $5,000,000;
that the value of an Accumulation Unit on the previous date was $1.135000;
and that during the Valuation Period, the investment income and net realized
and unrealized capital gains exceed net realized and unrealized capital
losses by $1,675. The Accumulation Unit Value at the end of the current
Valuation Period would be calculated as follows:
<TABLE>
<S> <C>
(1) Accumulation Unit Value -- Previous Valuation Period. . . . . . . . . . . . . $ 1.135000
(2) Value of Assets -- Beginning of Valuation Period. . . . . . . . . . . . . . . $ 5,000,000
(3) Excess of Investment Income and Net Gains Over Capital losses . . . . . . . . $ 1,675
(4) Adjusted Gross Investment Rate for the Valuation Period (3) divided by (2). . . . 0.000335
(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
</TABLE>
4
<PAGE>
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 BENEFIT PAYMENT CALCULATION USING
HYPOTHETICAL EXAMPLE. The determination of the Annuity Unit value and the
variable annuity benefit payment may be illustrated by the following
hypothetical example: Assume an Annuitant has 40,000 Accumulation Units in a
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 on 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 issued
by its subsidiary, Allmerica Financial Life Insurance and Annuity Company
("AFLIAC"), described below, to exchange their contracts at net asset value
for the variable annuity Contract described in the Prospectus, which is
issued on Form No. A3025-96 or a state variation thereof ("new Contract").
The Company reserves the right to suspend this exchange offer at any time.
This offer applies to the exchange of Elective Payment Variable Annuity
contracts issued by AFLIAC 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 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 or its subsidiary. 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
7
<PAGE>
various topics of interest to Owners and prospective Owners. These topics
may include the relationship between sectors of the economy and the economy
as a whole and its effect on various securities markets, investment
strategies and techniques (such as value investing, market timing, dollar
cost averaging, asset allocation, constant ratio transfer and account
rebalancing), the advantages and disadvantages of investing in tax-deferred
and taxable investments, customer profiles and hypothetical purchase and
investment scenarios, financial management and tax and retirement planning,
and investment alternatives to certificates of deposit and other financial
instruments, including comparisons between the Contract and the
characteristics of and market for such financial instruments. Total return
data may be advertised based on the period of time that an Underlying
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 3.89%
International Growth Portfolio . . . . . . . . . . . . . . . N/A (17.15%)
Growth Portfolio . . . . . . . . . . . . . . . . . . . . . . N/A (18.54%)
Value Portfolio. . . . . . . . . . . . . . . . . . . . . . . N/A (1.40%)
Strategic Income Portfolio . . . . . . . . . . . . . . . . . N/A (6.15%)
Money Market Fund. . . . . . . . . . . . . . . . . . . . . . N/A (5.06%)
</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 10.47%
International Growth Portfolio . . . . . . . . . . . . . . . N/A (11.90%)
Growth Portfolio . . . . . . . . . . . . . . . . . . . . . . N/A (13.39%)
Value Portfolio. . . . . . . . . . . . . . . . . . . . . . . N/A 4.84%
Strategic Income Portfolio . . . . . . . . . . . . . . . . . N/A (0.21%)
Money Market Fund. . . . . . . . . . . . . . . . . . . . . . N/A 0.95%
</TABLE>
* The inception dates for the Sub-Accounts are: 9/30/97 for the Value, Growth
and Global Interactive/Telecomm Portfolios and 10/3/97 for the International
Growth and Strategic Income Portfolios and the Money Market Fund.
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
the Sub-Accounts did not commence operations until on or after September 1,
1998: Oppenheimer Aggressive Growth Fund, MFS Emerging Growth Series, Small
Cap Value Series, Lazard Retirement International Equity Portfolio, PBHG
Select 20 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
INCEPTION OF
FOR YEAR UNDERLYING
SUB-ACCOUNT ENDED 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 Portfolio N/A N/A N/A
International Growth Portfolio (12.22%) N/A (4.61%)
PBHG Select 20 Portfolio N/A N/A (6.07%)
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
INCEPTION OF
FOR YEAR UNDERLYING
SUB-ACCOUNT ENDED 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 Equity Portfolio N/A N/A N/A
International Growth Portfolio (6.67%) N/A (1.74%)
PBHG Select 20 Portfolio N/A N/A (0.12%)
Growth Portfolio 8.60% N/A 8.09%
</TABLE>
11
<PAGE>
<TABLE>
<S> <C> <C> <C>
Value Portfolio 30.40% N/A 22.70%
AIM V.I. Value Fund 21.88% N/A 18.00%
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; 10/9/95 for the MFS Growth With Income Series; and
9/25/97 for the PBHG Select 20 Portfolio.
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
</TABLE>
12
<PAGE>
<TABLE>
<S> <C> <C> <C>
20 Years 233,048 165,137 133,476
30 Years 503,133 335,021 218,082
</TABLE>
This chart compares the accumulation of a $50,000 initial investment into a
non-qualified annuity contract with a conventional savings plan.
Contributions to the non-qualified annuity contract and the conventional
savings plan are made after tax. Only the gain in the non-qualified annuity
contract will be subject to income tax in a taxable lump sum withdrawal. The
chart assumes a 37.1% federal marginal tax rate and an 8% annual return. The
37.1% federal marginal tax is based on a marginal tax rate of 36%,
representative of the target market, adjusted to reflect a decrease of $3 of
itemized deductions for each $100 of income over $117,950. Tax rates are
subject to change as is the tax-deferred treatment of the Contract. Income
on non-qualified annuity contracts is taxed as ordinary income upon
withdrawal. A 10% tax penalty may apply to early withdrawals. See "Federal
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 First Allmerica Financial Life
Insurance Company and for its Fulcrum Separate Account.
13
<PAGE>
FIRST ALLMERICA
FINANCIAL LIFE
INSURANCE COMPANY
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholder of
First Allmerica Financial Life Insurance 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 First
Allmerica Financial Life Insurance Company and its subsidiaries at December 31,
1997 and 1996, and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 1997, 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>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
(IN MILLIONS) 1997 1996 1995
----------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
REVENUES
Premiums................................... $2,311.0 $2,236.3 $2,222.8
Universal life and investment product
policy fees............................... 237.3 197.2 172.4
Net investment income...................... 641.8 670.8 710.5
Net realized investment gains.............. 76.5 66.8 19.1
Realized gain from sale of mutual fund
processing business....................... -- -- 20.7
Other income............................... 117.6 108.4 109.3
--------- --------- ---------
Total revenues......................... 3,384.2 3,279.5 3,254.8
--------- --------- ---------
BENEFITS, LOSSES AND EXPENSES
Policy benefits, claims, losses and loss
adjustment expenses....................... 2,004.6 1,957.0 2,010.3
Policy acquisition expenses................ 425.1 470.1 470.9
Loss from cession of disability income
business.................................. 53.9 -- --
Other operating expenses................... 523.7 503.2 468.7
--------- --------- ---------
Total benefits, losses and expenses.... 3,007.3 2,930.3 2,949.9
--------- --------- ---------
Income before federal income taxes......... 376.9 349.2 304.9
--------- --------- ---------
FEDERAL INCOME TAX EXPENSE (BENEFIT)
Current.................................... 83.3 96.8 119.7
Deferred................................... 14.2 (15.7) (37.0)
--------- --------- ---------
Total federal income tax expense....... 97.5 81.1 82.7
--------- --------- ---------
Income before minority interest................ 279.4 268.1 222.2
Minority interest.............................. (79.4) (74.6) (73.1)
--------- --------- ---------
Income before extraordinary item............... 200.0 193.5 149.1
Extraordinary item -- demutualization
expenses...................................... -- -- (12.1)
--------- --------- ---------
Net income..................................... $ 200.0 $ 193.5 $ 137.0
--------- --------- ---------
--------- --------- ---------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-1
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A 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
$6,992.8 and $7,279.1)............................. $ 7,253.5 $ 7,461.5
Equity securities at fair value (cost of $341.1 and
$327.9)............................................ 479.0 473.1
Mortgage loans...................................... 567.5 650.1
Real estate......................................... 50.3 120.7
Policy loans........................................ 141.9 132.4
Other long term investments......................... 148.3 128.8
---------- ----------
Total investments............................... 8,640.5 8,966.6
---------- ----------
Cash and cash equivalents............................. 213.9 175.9
Accrued investment income............................. 141.8 148.6
Deferred policy acquisition costs..................... 965.5 822.7
---------- ----------
Reinsurance receivables:
Future policy benefits.............................. 307.1 102.8
Outstanding claims, losses and loss adjustment
expenses........................................... 626.7 663.8
Unearned premiums................................... 32.9 46.2
Other............................................... 73.5 62.8
---------- ----------
Total reinsurance receivables................... 1,040.2 875.6
---------- ----------
Deferred federal income taxes......................... -- 66.9
Premiums, accounts and notes receivable............... 554.4 533.0
Other assets.......................................... 373.0 304.4
Closed block assets................................... 806.7 810.8
Separate account assets............................... 9,755.4 6,233.0
---------- ----------
Total assets.................................... $22,491.4 $18,937.5
---------- ----------
---------- ----------
LIABILITIES
Policy liabilities and accruals:
Future policy benefits.............................. $ 2,598.5 $ 2,613.7
Outstanding claims, losses and loss adjustment
expenses........................................... 2,825.0 2,944.1
Unearned premiums................................... 846.8 822.5
Contractholder deposit funds and other policy
liabilities........................................ 1,852.7 2,060.4
---------- ----------
Total policy liabilities and accruals........... 8,123.0 8,440.7
---------- ----------
Expenses and taxes payable............................ 662.6 617.5
Reinsurance premiums payable.......................... 37.7 31.4
Short term debt....................................... 33.0 38.4
Deferred federal income taxes......................... 12.9 --
Long term debt........................................ 2.6 2.7
Closed block liabilities.............................. 885.6 899.4
Separate account liabilities.......................... 9,749.7 6,227.2
---------- ----------
Total liabilities............................... 19,507.1 16,257.3
---------- ----------
Minority interest..................................... 748.9 784.0
Commitments and contingencies (Notes 13 and 18)
SHAREHOLDER'S EQUITY
Common stock, $10 par value, 1 million shares
authorized, 500,000 shares issued and outstanding... 5.0 5.0
Additional paid in capital............................ 453.7 392.4
Unrealized appreciation on investments, net........... 209.3 131.4
Retained earnings..................................... 1,567.4 1,367.4
---------- ----------
Total shareholder's equity...................... 2,235.4 1,896.2
---------- ----------
Total liabilities and shareholder's equity...... $22,491.4 $18,937.5
---------- ----------
---------- ----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-2
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A 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 1995
----------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
COMMON STOCK
Balance at beginning of period............. $ 5.0 $ 5.0 $ --
Demutualization transaction................ -- -- 5.0
--------- --------- ---------
Balance at end of period................... 5.0 5.0 5.0
--------- --------- ---------
ADDITIONAL PAID-IN-CAPITAL
Balance at beginning of period............. 392.4 392.4 --
Contributed from parent.................... 61.3 -- 392.4
--------- --------- ---------
Balance at end of period................... 453.7 392.4 392.4
--------- --------- ---------
RETAINED EARNINGS
Balance at beginning of period............. 1,367.4 1,173.9 1,071.4
Net income prior to demutualization........ -- -- 93.2
--------- --------- ---------
1,367.4 1,173.9 1,164.6
Demutualization transaction................ -- -- (34.5)
Net income subsequent to demutualization... 200.0 193.5 43.8
--------- --------- ---------
Balance at end of period................... 1,567.4 1,367.4 1,173.9
--------- --------- ---------
NET UNREALIZED APPRECIATION ON INVESTMENTS
Balance at beginning of period............. 131.4 153.0 (79.0)
Effect of transfer of securities from
held-to-maturity to available-for-sale:
Net appreciation on available-for-sale
debt securities........................ -- -- 22.4
Provision for deferred federal income taxes
and minority interest..................... -- -- (9.6)
--------- --------- ---------
-- -- 12.8
--------- --------- ---------
Net appreciation (depreciation) on
available for sale securities............. 170.9 (35.1) 466.0
(Benefit) provision for deferred federal
income taxes.............................. (59.8) 11.8 (163.1)
Minority interest.......................... (33.2) 1.7 (83.7)
--------- --------- ---------
209.3 (21.6) 219.2
--------- --------- ---------
Balance at end of period................... 209.3 131.4 153.0
--------- --------- ---------
Total shareholder's equity............. $2,235.4 $1,896.2 $1,724.3
--------- --------- ---------
--------- --------- ---------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-3
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
(IN MILLIONS) 1997 1996 1995
-------------------------------------------- ---------- ---------- ----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.............................. $ 200.0 $ 193.5 $ 137.0
Adjustments to reconcile net income to
net cash provided by operating
activities:
Minority interest................... 79.4 74.6 73.1
Net realized gains.................. (77.8) (66.8) (39.8)
Net amortization and depreciation... 31.6 44.7 57.7
Deferred federal income taxes....... 14.2 (15.7) (37.0)
Change in deferred acquisition
costs............................... (189.7) (73.9) (38.4)
Change in premiums and notes
receivable, net of reinsurance...... (15.1) (16.8) (42.0)
Change in accrued investment
income.............................. 7.1 16.7 7.0
Change in policy liabilities and
accruals, net....................... (134.9) (184.3) 116.2
Change in reinsurance receivable.... 27.2 123.8 (75.6)
Change in expenses and taxes
payable............................. 49.4 26.0 7.5
Separate account activity, net...... -- 5.2 (0.1)
Loss from cession of disability
income business..................... 53.9 -- --
Payment related to cession of
disability income business.......... (207.0) -- --
Other, net.......................... 20.4 38.5 (33.8)
---------- ---------- ----------
Net cash (used in) provided by
operating activities......... (141.3) 165.5 131.8
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from disposals and maturities
of available-for-sale fixed
maturities............................. 2,947.9 3,985.8 2,738.4
Proceeds from disposals of
held-to-maturity fixed maturities...... -- -- 271.3
Proceeds from disposals of equity
securities............................. 162.7 228.7 120.0
Proceeds from disposals of other
investments............................ 116.3 99.3 40.5
Proceeds from mortgages matured or
collected.............................. 204.7 176.9 230.3
Purchase of available-for-sale fixed
maturities............................. (2,596.0) (3,771.1) (3,273.3)
Purchase of equity securities........... (67.0) (90.9) (254.0)
Purchase of other investments........... (175.0) (168.0) (24.8)
Proceeds from sale of mutual fund
processing business.................... -- -- 32.9
Capital expenditures.................... (15.3) (12.8) (14.1)
Other investing activities, net......... 1.3 4.3 4.7
---------- ---------- ----------
Net cash provided by (used in)
investing activities................ 579.6 452.2 (128.1)
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Deposits and interest credited to
contractholder deposit funds........... 457.6 268.7 445.8
Withdrawals from contractholder deposit
funds.................................. (647.1) (905.0) (1,069.9)
Change in short term debt............... (5.4) 10.4 (4.8)
Change in long term debt................ (0.1) (0.1) 0.2
Dividends paid to minority
shareholders........................... (9.4) (3.9) (4.1)
Additional paid in capital.............. 0.1 -- 392.4
Payments to policyholders' membership
interests.............................. -- -- (27.9)
Subsidiary treasury stock purchased, at
cost................................... (195.0) (42.0) (20.9)
---------- ---------- ----------
Net cash used in financing
activities................... (399.3) (671.9) (289.2)
---------- ---------- ----------
Net change in cash and cash equivalents..... 39.0 (54.2) (285.5)
Net change in cash held in the Closed
Block...................................... (1.0) (6.5) (17.6)
Cash and cash equivalents, beginning of
period..................................... 175.9 236.6 539.7
---------- ---------- ----------
Cash and cash equivalents, end of period.... $ 213.9 $ 175.9 $ 236.6
---------- ---------- ----------
---------- ---------- ----------
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid........................... $ 3.6 $ 18.6 $ 4.1
Income taxes paid....................... $ 66.3 $ 72.0 $ 90.6
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-4
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
First Allmerica Financial Life Insurance Company ("FAFLIC", or the "Company")
was organized as a mutual life insurance company until October 16, 1995. FAFLIC
converted to a stock life insurance company pursuant to a plan of reorganization
effective October 16, 1995 and became a wholly owned subsidiary of Allmerica
Financial Corporation ("AFC"). The consolidated financial statements have been
prepared as if FAFLIC were organized as a stock life insurance company for all
periods presented. Thus, generally accepted accounting principles for stock life
insurance companies have been applied retroactively for all periods presented.
The consolidated financial statements of FAFLIC include the accounts of
Allmerica Financial Life Insurance and Annuity Company ("AFLIAC"), its wholly
owned life insurance subsidiary, non-insurance subsidiaries (principally
brokerage and investment advisory subsidiaries), and Allmerica Property and
Casualty Companies, Inc. (a 65.78%-owned non-insurance holding company). The
Closed Block assets and liabilities at December 31, 1997 and 1996, and its
results of operations subsequent to demutualization are presented in the
consolidated financial statements as single line items. Unless specifically
stated, all disclosures contained herein supporting the consolidated financial
statements at December 31, 1997 and 1996, and the years then ended exclude the
Closed Block related amounts. All significant intercompany accounts and
transactions have been eliminated.
Minority interest relates to the Company's investment in Allmerica P&C (APY) and
its only significant subsidiary, The Hanover Insurance Company ("Hanover").
Hanover's 82.5%-owned subsidiary is Citizens Corporation, the holding company
for Citizens Insurance Company of America ("Citizens"). Minority interest also
includes an amount related to the minority interest in Citizens Corporation.
APY and a wholly-owned subsidiary of AFC merged on July 16, 1997. Through the
merger, AFC acquired all of the outstanding common stock of Allmerica P&C that
it did not already own in exchange for cash and stock. The merger has been
accounted for as a purchase. A total of $90.6 million, representing the excess
of the purchase price over the fair values of the net assets acquired, net of
deferred taxes, has been allocated to goodwill and is being amortized over a
40-year period. Additional information pertaining to the merger agreement is
included in Note 2, significant transactions.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amount of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
B. CLOSED BLOCK
As of October 16, 1995, the Company established and began operating a closed
block (the "Closed Block") for the benefit of the participating policies
included therein, consisting of certain individual life insurance participating
policies, individual deferred annuity contracts and supplementary contracts not
involving life contingencies which were in force on October 16, 1995; such
policies constitute the "Closed Block Business". The purpose of the Closed Block
is to protect the policy dividend expectations of such FAFLIC dividend paying
policies and contracts after the demutualization. Unless the Commissioner
consents to an earlier termination, the Closed Block will continue to be in
effect until the date none of the Closed Block policies are in force. On October
16, 1995, FAFLIC, allocated to the Closed Block, assets in an amount that is
expected to produce cash flows which, together with future revenues from the
Closed Block Business, are reasonably sufficient to support the Closed Block
Business, including provision for payment of policy
F-5
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
benefits, certain future expenses and taxes and for continuation of policyholder
dividend scales in effect in 1994 so long as the experience underlying such
dividend scales continues. The Company expects that the factors underlying such
experience will fluctuate in the future and policyholder dividend scales for
Closed Block Business will be set accordingly.
Although the assets and income allocated to the Closed Block inure solely to the
benefit of the holders of policies included in the Closed Block, the excess of
Closed Block liabilities over Closed Block assets at October 16, 1995 measured
on a GAAP basis represent the expected future post-tax income from the Closed
Block which may be recognized in income over the period the policies and
contracts in the Closed Block remain in force.
If the actual income from the Closed Block in any given period equals or exceeds
the expected income for such period as determined at October 16, 1995, the
expected income would be recognized in income for that period. Further, any
excess of the actual income over the expected income would also be recognized in
income to the extent that the aggregate expected income for all prior periods
exceeded the aggregate actual income. Any remaining excess of actual income over
expected income would be accrued as a liability for policyholder dividends in
the Closed Block to be paid to the Closed Block policyholders. This accrual for
future dividends effectively limits the actual Closed Block income recognized in
income to the Closed Block income expected to emerge from operation of the
Closed Block as determined as of October 16, 1995.
If, over the period the policies and contracts in the Closed Block remain in
force, the actual income from the Closed Block is less than the expected income
from the Closed Block, only such actual income (which could reflect a loss)
would be recognized in income. If the actual income from the Closed Block in any
given period is less than the expected income for that period and changes in
dividends scales are inadequate to offset the negative performance in relation
to the expected performance, the income inuring to shareholders of the Company
will be reduced. If a policyholder dividend liability had been previously
established in the Closed Block because the actual income to the relevant date
had exceeded the expected income to such date, such liability would be reduced
by this reduction in income (but not below zero) in any periods in which the
actual income for that period is less than the expected income for such period.
C. 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.
In November 1995, the Financial Accounting Standards Board ("FASB") issued a
Special Report, A GUIDE TO IMPLEMENTATION OF STATEMENT 115 ON ACCOUNTING FOR
CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES, which permitted companies to
reclassify securities, where appropriate, based on the new guidance. As a
result, the Company transferred securities with amortized cost and fair value of
$696.4 million and $725.6 million, respectively, from the held-to-maturity
category to the available-for-sale category, which resulted in a net increase in
shareholder's equity of $12.8 million.
Marketable equity securities and debt securities are classified as
available-for-sale. Available-for-sale securities are carried at fair value,
with the unrealized gains and losses, net of tax, reported in a separate
component of shareholders' equity. The amortized cost of debt securities is
adjusted for amortization of premiums and accretion of discounts to maturity.
Such amortization is included in investment income.
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 the Company to be realized on transfers
F-6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
of mortgage loans to real estate (upon foreclosure), on the disposition or
settlement of mortgage loans and on mortgage loans which the Company believes
may not be collectible in full. In establishing reserves, the Company 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 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.
D. 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, investment and loan
commitments, and interest rate futures contracts. 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.
Derivative financial instruments are accounted for under three different
methods: fair value accounting, deferral accounting and accrual accounting.
Interest rate swap contracts used to hedge interest rate risk are accounted for
using a combination of the fair value method and accrual method, with changes in
fair value reported in unrealized gains and losses in equity consistent with the
underlying hedged security, and the net payment or receipt on the swaps reported
in net investment income. Foreign currency swap contracts used to hedge foreign
currency exchange risk are accounted for using a combination of the fair value
method and accrual method, with changes in fair value reported in unrealized
gains and losses in equity consistent with the underlying hedged security, and
the net payment or receipt on the swaps reported in net investment income.
Futures contracts used to hedge interest rate risk are accounted for using the
deferral method, with gains and losses deferred in unrealized gains and losses
in equity and recognized in earnings in conjunction with the earnings
recognition of the underlying hedged item. Other swap contracts entered into for
investment purposes are accounted for using the fair value method, with changes
in fair value reported in realized investment gains and losses in earnings.
E. 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.
F. 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.
Property and casualty, group life and group health insurance business
acquisition costs are deferred and amortized over the terms of the insurance
policies. Acquisition
F-7
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
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 life product and property and casualty line
of business 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.
G. PROPERTY AND EQUIPMENT
Property, equipment and leasehold improvements are stated at cost, less
accumulated depreciation and amortization. Depreciation is provided using the
straight-line or accelerated method over the estimated useful lives of the
related assets which generally range from 3 to 30 years. Amortization of
leasehold improvements is provided using the straight-line method over the
lesser of the term of the leases or the estimated useful life of the
improvements.
H. 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.
I. POLICY LIABILITIES AND ACCRUALS
Future policy benefits are liabilities for life, health and annuity products.
Such liabilities are established in amounts adequate to meet the estimated
future obligations of policies in force. The liabilities associated with
traditional life insurance products are computed using the net level premium
method for individual life and annuity policies, and are based upon estimates as
to future investment yield, mortality and withdrawals that include provisions
for adverse deviation. Future policy benefits for individual life insurance and
annuity policies are computed using interest rates ranging from 2 1/2% to 6% for
life insurance and 2% to 9 1/2% for annuities. Estimated liabilities are
established for group life and health policies that contain experience rating
provisions. 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. Liabilities for
outstanding claims, losses and loss adjustment expenses are estimates of
payments to be made on property and casualty and health insurance for reported
losses and estimates of losses incurred but not reported. These liabilities are
determined using case basis evaluations and statistical analyses and represent
estimates of the ultimate cost of all losses incurred but not paid. These
estimates are continually reviewed and adjusted as necessary; such adjustments
are reflected in
F-8
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
current operations. Estimated amounts of salvage and subrogation on unpaid
property and casualty losses are deducted from the liability for unpaid claims.
Premiums for property and casualty, group life, and 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 such as guaranteed investment contracts, deposit
administration funds and immediate participation guarantee funds 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.
J. PREMIUM AND FEE REVENUE AND RELATED EXPENSES
Premiums for individual life and health insurance and individual and group
annuity products, excluding universal life and investment-related products, are
considered revenue when due. Property and casualty and group life, 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 products consist of net
investment income, and mortality, administration and surrender charges assessed
against the fund values. Related benefit expenses include universal life benefit
claims 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.
K. POLICYHOLDER DIVIDENDS
Prior to demutualization, certain life, health and annuity insurance policies
contained dividend payment provisions that enabled the policyholder to
participate in the earnings of the Company. The amount of policyholders'
dividends was determined annually by the Board of Directors. The aggregate
amount of policyholders' dividends was related to the actual interest,
mortality, morbidity and expense experience for the year and the Company's
judgment as to the appropriate level of statutory surplus to be retained. Upon
demutualization, certain participating individual life insurance policies and
individual annuity and supplemental contracts were transferred to the Closed
Block. The Closed Block was funded to protect the dividend expectations of such
policies and contracts. Accordingly, these policies no longer participate in the
earnings and surplus of the Open Block. Subsequent to demutualization, the
Company ceased issuance of participating policies.
Prior to demutualization, the participating life insurance in force was 16.2% of
the face value of total life insurance in force at December 31, 1994. The
premiums on participating life, health and annuity policies were 11.3% and 6.4%
of total life, health and annuity statutory premiums prior to demutualization in
1995 and 1994, respectively. Total policyholders' dividends were $23.3 million
and $32.8 million prior to demutualization in 1995 and 1994, respectively.
F-9
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
L. FEDERAL INCOME TAXES
AFC, its life insurance subsidiaries, FAFLIC, 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. APY and its subsidiaries will be included in the AFC consolidated return
as part of the 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,
APY 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.
M. 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.
N. RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the current year
presentation.
F-10
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
2. SIGNIFICANT TRANSACTIONS
On February 3, 1997, AFC Capital Trust (the "Trust"), a subsidiary business
trust of AFC, issued $300 million Series A Capital Securities, which pay
cumulative dividends at a rate of 8.207% semiannually commencing August 15,
1997. The Trust exists for the sole purpose of issuing the Capital Securities
and investing the proceeds thereof in an equivalent amount of 8.207% Junior
Subordinated Deferrable Interest Debentures due 2027 of AFC (the "Subordinated
Debentures"). Through certain guarantees, the Subordinated Debentures and the
terms of related agreements, AFC has irrevocably and unconditionally guaranteed
the obligations of the Trust under the Capital Securities. Net proceeds from the
offering of approximately $296.3 million are intended to fund a portion of the
acquisition of the 24.2 million publicly-held shares of APY pursuant to an
Agreement and Plan of Merger dated February 19, 1997.
The merger of APY and a wholly-owned subsidiary of AFC was consummated on July
16, 1997. Through the merger, AFC acquired all of the outstanding common stock
of APY that FAFLIC did not already own in exchange for cash of $425.6 million
and approximately 9.7 million shares of AFC stock valued at $372.5 million. At
consummation of this transaction AFC owned 59.5% through FAFLIC and 40.5%
directly.
The merger has been accounted for as a purchase by AFC. Total consideration of
approximately $798.1 million has been allocated to the minority interest in the
assets and liabilities based on estimates of their fair values. The minority
interest acquired totaled $703.5 million. A total of $90.6 million representing
the excess of the purchase price over the fair values of the net assets
acquired, net of deferred taxes, has been allocated to goodwill and is being
amortized over a 40-year period.
The pushdown of goodwill to APY resulted in an increase to the consolidated
equity of FAFLIC of $61.3 million as additional paid in capital. The effects of
this transaction on the 1997 results of the Company are as follows:
<TABLE>
<CAPTION>
INCREASE (DECREASE)
-------------------
<S> <C>
Revenue.................................................... $ (6.7)
-----
-----
Realized capital gains included in revenue................. $ (4.9)
-----
-----
Net income................................................. $ (6.1)
-----
-----
Unrealized appreciation on investments..................... $ 4.4
-----
-----
</TABLE>
In December 1997, APY redeemed 5,735.3 shares of its issued and outstanding
common stock owned by AFC for $195 million in cash and securities. The effect of
this transaction was to increase FAFLIC's ownership of APY by 6.3%.
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.
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.
Pursuant to the plan of reorganization effective October 16, 1995, AFC issued
37.5 million shares of its common stock to eligible policyholders. AFC also
issued 12.6 million shares of its common stock at a price of
F-11
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
$21.00 per share in a public offering, resulting in net proceeds of $248.0
million, and issued Senior Debentures in the principal amount of $200.0 million
which resulted in net proceeds of $197.2 million. AFC contributed $392.4 million
of these proceeds to FAFLIC.
Effective March 31, 1995, the Company entered into an agreement with TSSG, a
division of First Data Corporation, pursuant to which the Company sold its
mutual fund processing business and agreed not to engage in this business for
four years after that date. In accordance with this agreement, the Company
received proceeds of $32.1 million. A gain of $13.5 million, net of taxes of
$7.2 million, was recorded in March 1995. Additionally, the Company received a
non-recurring $3.1 million contingent payment, net of taxes of $1.7 million, in
1996, related to the aforementioned sale.
3. INVESTMENTS
A. SUMMARY OF INVESTMENTS
The Company accounts for its investments, all of which are classified as
available-for-sale, in accordance with 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....... $ 265.3 $ 9.5 $ 0.9 $ 273.9
States and political subdivisions....... 2,200.6 78.3 3.1 2,275.8
Foreign governments..................... 110.8 8.5 2.2 117.1
Corporate fixed maturities.............. 4,041.6 175.1 12.2 4,204.5
Mortgage-backed securities.............. 374.5 9.7 2.0 382.2
--------- ---------- ----------- --------
Total fixed maturities.................. $ 6,992.8 $281.1 $ 20.4 $7,253.5
--------- ---------- ----------- --------
--------- ---------- ----------- --------
Equity securities....................... $ 341.1 $141.9 $ 4.0 $ 479.0
--------- ---------- ----------- --------
--------- ---------- ----------- --------
<CAPTION>
1996
-----------------------------------------------
GROSS GROSS
DECEMBER 31 AMORTIZED UNREALIZED UNREALIZED FAIR
(IN MILLIONS) COST (1) GAINS LOSSES VALUE
- ---------------------------------------- --------- ---------- ----------- --------
<S> <C> <C> <C> <C>
U.S. Treasury securities and U.S.
government and agency securities....... $ 273.6 $ 9.3 $ 1.6 $ 281.3
States and political subdivisions....... 2,236.9 48.5 7.7 2,277.7
Foreign governments..................... 108.0 7.3 -- 115.3
Corporate fixed maturities.............. 4,277.5 140.3 15.7 4,402.1
Mortgage-backed securities.............. 383.1 4.7 2.7 385.1
--------- ---------- ----------- --------
Total fixed maturities.................. $ 7,279.1 $210.1 $ 27.7 $7,461.5
--------- ---------- ----------- --------
--------- ---------- ----------- --------
Equity securities....................... $ 327.9 $148.9 $ 3.7 $ 473.1
--------- ---------- ----------- --------
--------- ---------- ----------- --------
</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 general account liabilities of
AFLIAC for New York policyholders, claimants and creditors. At December 31,
1997, the amortized cost and market
F-12
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
value of assets on deposit were $276.8 million and $291.7 million, respectively.
At December 31, 1996, the amortized cost and market value of assets on deposit
were $284.9 million and $292.2 million, respectively.
In addition, fixed maturities, excluding those securities on deposit in New
York, with an amortized cost of $105.1 million and $98.0 million were on deposit
with various state and governmental authorities at December 31, 1997 and 1996,
respectively.
There were no contractual fixed maturity investment commitments at December 31,
1997 and 1996, respectively.
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................. $ 464.5 $ 467.7
Due after one year through five years... 2,142.9 2,225.7
Due after five years through ten
years.................................. 2,137.3 2,217.1
Due after ten years..................... 2,248.1 2,343.0
--------- --------
Total................................... $ 6,992.8 $7,253.5
--------- --------
--------- --------
</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............................. $1,894.8 $27.6 $ 16.2
Equity securities............................ $ 145.5 $55.8 $ 1.3
1996
Fixed maturities............................. $2,432.8 $19.3 $ 30.5
Equity securities............................ $ 228.1 $56.1 $ 1.3
1995
Fixed maturities............................. $1,612.3 $23.7 $ 33.0
Equity securities............................ $ 122.2 $23.1 $ 6.9
</TABLE>
F-13
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
Unrealized gains and losses on available-for-sale and other securities, are
summarized as follows:
<TABLE>
<CAPTION>
EQUITY
SECURITIES
FOR THE YEARS ENDED DECEMBER 31 FIXED AND OTHER
(IN MILLIONS) MATURITIES (1) TOTAL
- ------------------------------------------------------------ ---------- ----------- -------
<S> <C> <C> <C>
1997
Net appreciation, beginning of year......................... $ 71.3 $ 60.1 $ 131.4
Net appreciation (depreciation) on available-for-sale
securities.............................................. 83.2 (5.9) 77.3
Appreciation due to AFC purchase of minority interest of
Allmerica P&C........................................... 50.7 59.6 110.3
Net depreciation from the effect on deferred policy
acquisition costs and on policy liabilities............. (16.7) -- (16.7)
Provision for deferred federal income taxes and minority
interest................................................ (65.9) (27.1) (93.0)
---------- ----------- -------
51.3 26.6 77.9
---------- ----------- -------
Net appreciation, end of year............................... $122.7 $ 86.6 $ 209.3
---------- ----------- -------
---------- ----------- -------
1996
Net appreciation, beginning of year......................... $108.7 $ 44.3 $ 153.0
Net (depreciation) appreciation on available-for-sale
securities.............................................. (94.1) 35.9 (58.2)
Net appreciation from the effect on deferred policy
acquisition costs and on policy liabilities............. 23.1 -- 23.1
Provision for deferred federal income taxes and minority
interest................................................ 33.6 (20.1) 13.5
---------- ----------- -------
(37.4) 15.8 (21.6)
---------- ----------- -------
Net appreciation, end of year............................. $ 71.3 $ 60.1 $ 131.4
---------- ----------- -------
---------- ----------- -------
1995
Net appreciation (depreciation), beginning of year.......... $(89.4) $ 10.4 $ (79.0)
Effect of transfer of securities between classifications:
Net appreciation on available-for-sale securities......... 29.2 -- 29.2
Net depreciation from the effect of accounting change on
deferred policy acquisition costs and on policy
liabilities............................................. (6.8) -- (6.8)
Provision for deferred federal income taxes and minority
interest................................................ (9.6) -- (9.6)
---------- ----------- -------
12.8 -- 12.8
---------- ----------- -------
Net appreciation on available-for-sale securities........... 465.4 87.5 552.9
Net depreciation from the effect on deferred policy
acquisition costs and on policy liabilities................ (86.9) (86.9)
Provision for deferred federal income taxes and minority
interest................................................... (193.2) (53.6) (246.8)
---------- ----------- -------
185.3 33.9 219.2
---------- ----------- -------
Net appreciation, end of year............................... $108.7 $ 44.3 $ 153.0
---------- ----------- -------
---------- ----------- -------
</TABLE>
(1) Includes net appreciation on other investments of $1.8 million, $0.6
million, and 2.2 million in 1997, 1996 and 1995, respectively.
B. MORTGAGE LOANS AND REAL ESTATE
FAFLIC's mortgage loans and real estate are diversified by property type and
location. Real estate investments have been obtained primarily through
foreclosure. Mortgage loans are collateralized by the related properties and
generally are no more than 75% of the property's value at the time the original
loan is made.
F-14
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
The carrying values of mortgage loans and real estate investments net of
applicable reserves were as follows:
<TABLE>
<CAPTION>
DECEMBER 31
(IN MILLIONS) 1997 1996
- ---------------------------------------- ------ --------
<S> <C> <C>
Mortgage loans.......................... $567.5 $ 650.1
Real estate:
Held for sale......................... 50.3 110.4
Held for production of income......... -- 10.3
------ --------
Total real estate................... 50.3 120.7
------ --------
Total mortgage loans and real estate.... $617.8 $ 770.8
------ --------
------ --------
</TABLE>
Reserves for mortgage loans were $20.7 million and $19.6 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 $54.7 million were written down to the estimated fair value less cost
to sell of $50.3 million, and a net realized investment loss of $4.4 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 and 1995, non-cash
investing activities included real estate acquired through foreclosure of
mortgage loans, which had a fair value of $0.9 million and $26.1 million,
respectively.
At December 31, 1997, contractual commitments to extend credit under commercial
mortgage loan agreements amounted to approximately $39.4 million, of which $10.0
million related to the Closed Block. These commitments generally expire within
one year.
Mortgage loans and real estate investments comprised the following property
types and geographic regions:
<TABLE>
<CAPTION>
DECEMBER 31
(IN MILLIONS) 1997 1996
- ---------------------------------------- ------ --------
<S> <C> <C>
Property type:
Office building....................... $265.1 $ 317.1
Residential........................... 66.6 95.4
Retail................................ 132.8 177.0
Industrial/warehouse.................. 107.2 124.8
Other................................. 66.8 91.0
Valuation allowances.................. (20.7) (34.5)
------ --------
Total................................... $617.8 $ 770.8
------ --------
------ --------
Geographic region:
South Atlantic........................ 173.4 227.0
Pacific............................... 152.8 154.4
East North Central.................... 102.0 119.2
Middle Atlantic....................... 73.8 112.6
West South Central.................... 34.9 41.6
New England........................... 46.9 50.9
Other................................. 54.7 99.6
Valuation allowances.................. (20.7) (34.5)
------ --------
Total................................... $617.8 $ 770.8
------ --------
------ --------
</TABLE>
F-15
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
At December 31, 1997, scheduled mortgage loan maturities were as follows: 1998
- -- $136.4 million; 1999 -- $70.8 million; 2000 -- $129.2 million; 2001 -- $26.4
million; 2002 -- $29.9 million; and $174.8 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 consolidated balance sheets and
changes thereto are shown below.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED BALANCE AT
DECEMBER 31 BALANCE AT DECEMBER
(IN MILLIONS) JANUARY 1 ADDITIONS DEDUCTIONS 31
- ------------------------- ---------- --------- ---------- ----------
<S> <C> <C> <C> <C>
1997
Mortgage loans........... $19.6 $ 2.5 $ 1.4 $20.7
Real estate.............. 14.9 6.0 20.9 --
----- --------- ----- -----
Total................ $34.5 $ 8.5 $22.3 $20.7
----- --------- ----- -----
----- --------- ----- -----
1996
Mortgage loans........... $33.8 $ 5.5 $19.7 $19.6
Real estate.............. 19.6 -- 4.7 14.9
----- --------- ----- -----
Total................ $53.4 $ 5.5 $24.4 $34.5
----- --------- ----- -----
----- --------- ----- -----
1995
Mortgage loans........... $47.2 $ 1.5 $14.9 $33.8
Real estate.............. 22.9 (0.6) 2.7 19.6
----- --------- ----- -----
Total................ $70.1 $ 0.9 $17.6 $53.4
----- --------- ----- -----
----- --------- ----- -----
</TABLE>
The carrying value of impaired loans was $30.5 million and $33.6 million, with
related reserves of $13.8 million and $11.9 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 $30.8 million, $50.4 million
and $117.9 million, with related interest income while such loans were impaired
of $3.2 million, $5.8 million and $9.3 million as of December 31, 1997, 1996 and
1995, respectively.
D. FUTURES CONTRACTS
The Company purchases long futures contracts and sells short futures contracts
on margin to hedge against interest rate fluctuations associated with the sale
of Guaranteed Investment Contracts ("GICs"). The Company is exposed to interest
rate risk from the time of sale of the GIC until the receipt of the deposit and
purchase of the underlying asset to back the liability. The Company's exposure
to credit risk under futures contracts is limited to the margin deposited with
the broker. The Company only trades futures contracts with nationally recognized
brokers, which the Company believes have adequate capital to ensure that there
is minimal danger of default. The Company does not require collateral or other
securities to support financial instruments with credit risk.
There were no futures contracts outstanding at December 31, 1997, and $(33.0)
million notional amount of short contracts at December 31, 1996. The notional
amounts of the contracts represent the extent of the
F-16
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
Company's investment but not the future cash requirements, as the Company
generally settles open positions prior to maturity. The fair value of futures
contracts outstanding were $(32.4) million at December 31, 1996.
Gains and losses on hedge contracts related to interest rate fluctuations are
deferred and recognized in income over the period being hedged corresponding to
related guaranteed investment contracts. If instruments being hedged by futures
contracts are disposed, any unamortized gains or losses on such contracts are
included in the determination of the gain or loss from the disposition. There
were no deferred hedging gains (losses) in 1997. Deferred hedging gains were
$0.5 million and $5.6 million in 1996 and 1995, respectively. Gains and losses
on hedge contracts that are deemed ineffective by the Company are realized
immediately.
A reconciliation of the notional amount of futures contracts is as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
(IN MILLIONS) 1997 1996 1995
- --------------------------------------------- ------ ------ ------
<S> <C> <C> <C>
Contracts outstanding, beginning of year..... $(33.0) $ 74.7 $126.6
New contracts................................ (0.2) (1.1) 349.2
Contracts terminated......................... 33.2 (106.6) (401.1)
------ ------ ------
Contracts outstanding, end of year........... -- $(33.0) $ 74.7
------ ------ ------
------ ------ ------
</TABLE>
E. FOREIGN CURRENCY SWAP CONTRACTS
The Company enters into foreign currency swap contracts to hedge exposure to
currency risk on foreign fixed maturity investments. Interest and principal
related to foreign fixed maturity investments payable in foreign currencies, at
current exchange rates, are exchanged for the equivalent payment translated at a
specific currency exchange rate. The Company's maximum exposure to counterparty
credit risk is the difference between the foreign currency exchange rate, as
agreed upon in the swap contract, and the foreign currency spot rate on the date
of the exchange. The fair values of the foreign currency swap contracts
outstanding were $0.1 million and $(9.2) million at December 31, 1997 and 1996,
respectively. Changes in the fair value of contracts are reported in unrealized
gains or losses, consistent with the reporting for the underlying hedged
security. The Company does not require collateral or other security to support
financial instruments with credit risk.
The difference between amounts paid and received on foreign currency swap
contracts is reflected in the net investment income related to the underlying
assets and is not material in 1997, 1996 and 1995. Any gain or loss on the
termination of swap contracts is deferred and recognized with any gain or loss
on the hedged transaction. The Company had no deferred gains or losses on
foreign currency swap contracts.
A reconciliation of the notional amount of swap contracts is as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
(IN MILLIONS) 1997 1996 1995
- --------------------------------------------- ------ ------ ------
<S> <C> <C> <C>
Contracts outstanding, beginning of year..... $ 68.6 $104.6 $118.7
New contracts................................ 5.0 -- --
Contracts expired............................ (18.2) (36.0) --
Contracts terminated......................... -- -- (14.1)
------ ------ ------
Contracts outstanding, end of year........... $ 55.4 $ 68.6 $104.6
------ ------ ------
------ ------ ------
</TABLE>
Expected maturities of foreign currency swap contracts are $25.0 million in
1999, $11.6 million in 2000 and $18.8 million thereafter. There are no expected
maturities of foreign currency swap contracts in 1998, 2001 and 2002.
F-17
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
F. INTEREST RATE SWAP CONTRACTS
The Company enters into interest rate swap contracts to hedge exposure to
interest rate fluctuations. Under these swap contracts, the Company agrees to
exchange, at specified intervals, the difference between fixed and floating
interest amounts calculated on an agreed-upon notional principal amount. As with
foreign currency swap contracts, the primary risk associated with these
transactions is the inability of the counterparty to meet its obligation. The
Company regularly assesses the financial strength of its counterparties and
generally enters into forward or swap agreements with counterparties rated "A"
or better by the nationally recognized rating agencies. Because the underlying
principal of swap contracts is not exchanged, the Company's maximum exposure to
counterparty credit risk is the difference in payments exchanged, which at
December 31, 1997 was not material to the Company. The Company does not require
collateral or other security to support financial instruments with credit risk.
The net amount receivable or payable is recognized over the life of the swap
contract as an adjustment to net investment income. The (decrease) or increase
in net investment income related to interest rate swap contracts was $(0.4)
million, $0.6 million and $0.7 million for the years ended December 31, 1997,
1996 and 1995, respectively. The fair values of interest rate swap contracts
outstanding were $(2.3) million at December 31, 1997. There were no interest
rate contracts outstanding at December 31, 1996. Changes in the fair value of
contracts are reported as an unrealized gain or loss, consistent with the
underlying hedged security. Any gain or loss on the termination of interest rate
swap contracts accounted for as hedges are deferred and recognized with the gain
or loss on the hedged transaction. The Company had no deferred gain or loss on
interest rate swap contracts in 1997 or 1996.
A reconciliation of the notional amount of interest rate and other swap
contracts is as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
(IN MILLIONS) 1997 1996 1995
- --------------------------------------------- ------ ------ ------
<S> <C> <C> <C>
Contracts outstanding, beginning of year..... $ 5.0 $ 17.5 $ 22.8
New contracts................................ 244.7 63.6 --
Contracts expired............................ (5.6) (17.5) (5.3)
------ ------ ------
Contracts outstanding, end of year........... $244.1 $ 63.6 $ 17.5
------ ------ ------
------ ------ ------
</TABLE>
Expected maturities of interest rate swap contracts outstanding at December 31,
1997 are as follows: $5.0 million in 1998, and $239.1 million in 2000 and
thereafter. There are no expected maturities of interest rate contracts in 1999.
G. OTHER SWAP CONTRACTS
The Company enters into security return-linked swap contracts and insurance
portfolio-linked swap contracts for investment purposes. Under the security
return-linked contracts, the Company agrees to exchange cash flows according to
the performance of a specified security or portfolio of securities. Under the
insurance portfolio-linked swap contracts, the Company agrees to exchange cash
flows according to the performance of a specified underwriter's portfolio of
insurance business. As with interest rate swap contracts, the primary risk
associated with these transactions is the inability of the counterparty to meet
its obligation. The Company regularly assesses the financial strength of its
counterparties and generally enters into forward or swap agreements with
counterparties rated "A" or better by the nationally recognized rating agencies.
Because the underlying principal of swap contracts is not exchanged, the
Company's maximum exposure to counterparty credit risk is the difference in
payments exchanged, which at December 31, 1997, were not material to the
Company. Swap contracts also subject the Company to market risk associated with
changes in interest rates. The Company does not require collateral or other
security to support financial instruments with credit risk.
F-18
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
The swap contracts are marked to market with any gain or loss recognized
currently. The net amount receivable or payable under these contracts is
recognized when the contracts are marked to market. The fair values of swap
contracts outstanding were $(0.1) million and $0.1 million at December 31, 1997
and 1996, respectively. The net decrease in realized investment gains related to
other swap contracts was $(1.6) million for the year ended December 31, 1997.
There were no realized investment gains on other swap contracts recognized in
1996 and 1995.
A reconciliation of the notional amount of other swap contracts is as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
(IN MILLIONS) 1997 1996 1995
- --------------------------------------------- ------ ------ ------
<S> <C> <C> <C>
Contracts outstanding, beginning of year..... $ 58.6 $ -- $ --
New contracts................................ 192.1 58.6 --
Contracts expired............................ (211.6) -- --
Contracts terminated......................... (24.1) -- --
------ ------ ------
Contracts outstanding, end of year........... $ 15.0 $ 58.6 $ --
------ ------ ------
------ ------ ------
</TABLE>
Expected maturities of other swap contracts outstanding at December 31, 1997 are
as follows: $10 million in 1999 and $5 million in 2001. There are no expected
maturities of such other swap contracts in 1998, 2000, or 2002.
H. OTHER
At December 31, 1997, FAFLIC had no concentration of investments in a single
investee exceeding 10% of shareholder's equity, except for investments with the
U.S. Treasury with a carrying value of $262.5 million.
4. INVESTMENT INCOME AND GAINS AND LOSSES
A. NET INVESTMENT INCOME
The components of net investment income were as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
(IN MILLIONS) 1997 1996 1995
- --------------------------------------------- ------ ------ ------
<S> <C> <C> <C>
Fixed maturities............................. $541.9 $553.8 $555.1
Mortgage loans............................... 57.5 69.5 97.0
Equity securities............................ 10.6 11.1 13.2
Policy loans................................. 10.9 10.3 20.3
Real estate.................................. 20.1 40.8 48.7
Other long-term investments.................. 12.4 19.9 7.5
Short-term investments....................... 12.8 10.6 21.2
------ ------ ------
Gross investment income...................... 666.2 716.0 763.0
Less investment expenses..................... (24.4) (45.2) (52.5)
------ ------ ------
Net investment income........................ $641.8 $670.8 $710.5
------ ------ ------
------ ------ ------
</TABLE>
At December 31, 1997, mortgage loans on non-accrual status were $3.6 million
which were all restructured loans. There were no fixed maturities which were 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 investments, had no impact in 1997, and reduced net income by $0.5
million and $0.6 million in 1996 and 1995, respectively.
F-19
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
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 $40.3 million, $51.3 million and $98.9 million at December 31,
1997, 1996 and 1995, respectively. Interest income on restructured mortgage
loans that would have been recorded in accordance with the original terms of
such loans amounted to $3.9 million, $7.7 million and $11.1 million in 1997,
1996 and 1995, respectively. Actual interest income on these loans included in
net investment income aggregated $4.2 million, $4.5 million and $7.1 million in
1997, 1996 and 1995, respectively.
There were no fixed maturities or mortgage loans which were non-income producing
for the twelve months ended December 31, 1997.
Included in other long-term investments is income from limited partnerships of
$7.8 million, $13.7 million and $0.1 million in 1997, 1996 and 1995
respectively.
B. REALIZED INVESTMENT GAINS AND LOSSES
Realized gains (losses) on investments were as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
(IN MILLIONS) 1997 1996 1995
- --------------------------------------------- ------ ------ ------
<S> <C> <C> <C>
Fixed maturities............................. $ 14.7 $ (9.7) $ (7.0)
Mortgage loans............................... (1.2) (2.4) 1.4
Equity securities............................ 53.6 54.8 16.2
Real estate.................................. 12.8 21.1 5.3
Other........................................ (3.4) 3.0 3.2
------ ------ ------
Net realized investment gains................ $ 76.5 $ 66.8 $ 19.1
------ ------ ------
------ ------ ------
</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. Fair values of
interest rate futures were not material at December 31, 1997 and 1996.
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.
F-20
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
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.
POLICY LOANS
The carrying amount reported in the consolidated balance sheets approximates
fair value since policy loans have no defined maturity dates and are inseparable
from the insurance contracts.
REINSURANCE RECEIVABLES
The carrying amount reported in the consolidated balance sheets approximates
fair value.
INVESTMENT CONTRACTS (WITHOUT MORTALITY FEATURES)
Fair values for the Company's liabilities under guaranteed investment type
contracts are estimated using discounted cash flow calculations using current
interest rates for similar contracts with maturities consistent with those
remaining for the contracts being valued. Other liabilities are based on
surrender values.
DEBT
The carrying value of short-term debt reported in the balance sheet approximates
fair value. The fair value of long-term debt was estimated using market quotes,
when available, and, when not available, discounted cash flow analyses.
F-21
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
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.................. $ 213.9 $ 213.9 $ 175.9 $ 175.9
Fixed maturities........................... 7,253.5 7,253.5 7,461.5 7,461.5
Equity securities.......................... 479.0 479.0 473.1 473.1
Mortgage loans............................. 567.5 597.0 650.1 675.7
Policy loans............................... 141.9 141.9 132.4 132.4
--------- -------- --------- --------
$ 8,655.8 $8,685.3 $ 8,893.0 $8,918.6
--------- -------- --------- --------
--------- -------- --------- --------
FINANCIAL LIABILITIES
Guaranteed investment contracts............ $ 985.2 $1,004.7 $ 1,101.3 $1,119.2
Supplemental contracts without life
contingencies............................ 22.4 22.4 23.1 23.1
Dividend accumulations..................... 87.8 87.8 87.3 87.3
Other individual contract deposit funds.... 57.9 55.7 76.9 74.3
Other group contract deposit funds......... 714.8 715.5 789.1 788.3
Individual annuity contracts............... 907.4 882.2 935.6 911.7
Short-term debt............................ 33.0 33.0 38.4 38.4
Long-term debt............................. 2.6 2.6 2.7 2.7
--------- -------- --------- --------
$ 2,811.1 $2,803.9 $ 3,054.4 $3,045.0
--------- -------- --------- --------
--------- -------- --------- --------
</TABLE>
6. CLOSED BLOCK
Included in other income in the Consolidated Statement of Income for 1997 and
1996 is a net pre-tax contribution from the Closed Block of $9.1 million and
$8.6 million, respectively. Summarized financial information of the Closed Block
as of December 31, 1997 and 1996 and for the period ended December 31, 1997 and
1996 is as follows:
<TABLE>
<CAPTION>
DECEMBER 31
(IN MILLIONS) 1997 1996
- ----------------------------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
Assets
Fixed maturities, at fair value (amortized cost of $400.1 and $397.2, respectively).......... $ 412.9 $ 403.9
Mortgage loans............................................................................... 112.0 114.5
Policy loans................................................................................. 218.8 230.2
Cash and cash equivalents.................................................................... 25.1 24.1
Accrued investment income.................................................................... 14.1 14.3
Deferred policy acquisition costs............................................................ 18.2 21.1
Other assets................................................................................. 5.6 2.7
--------- ---------
Total assets............................................................................... $ 806.7 $ 810.8
--------- ---------
--------- ---------
Liabilities
Policy liabilities and accruals.............................................................. $ 875.1 $ 883.4
Other liabilities............................................................................ 10.4 16.0
--------- ---------
Total liabilities.......................................................................... $ 885.5 $ 899.4
--------- ---------
--------- ---------
</TABLE>
F-22
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
<TABLE>
<CAPTION>
DECEMBER 31
(IN MILLIONS) 1997 1996
- ----------------------------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
Revenues
Premiums..................................................................................... $ 58.3 $ 61.7
Net investment income........................................................................ 53.4 52.6
Realized investment loss..................................................................... 1.3 (0.7)
--------- ---------
Total revenues................................................................................. 113.0 113.6
--------- ---------
Benefits and expenses
Policy benefits.............................................................................. 100.5 101.2
Policy acquisition expenses.................................................................. 3.0 3.2
Other operating expenses..................................................................... 0.4 0.6
--------- ---------
Total benefits and expenses.................................................................... 103.9 105.0
--------- ---------
Contribution from the Closed Block............................................................. $ 9.1 $ 8.6
--------- ---------
--------- ---------
Cash flows
Cash flows from operating activities:
Contribution from the Closed Block......................................................... $ 9.1 $ 8.6
Initial cash transferred to the Closed Block............................................... -- --
Change in deferred policy acquisition costs, net........................................... 2.9 3.4
Change in premiums and other receivables................................................... -- 0.2
Change in policy liabilities and accruals.................................................. (11.6) (13.9)
Change in accrued investment income........................................................ 0.2 2.3
Deferred Taxes............................................................................. (5.1) 1.0
Change in other assets..................................................................... (2.9) (1.6)
Change in expenses and taxes payable....................................................... (2.0) 1.7
Other, net................................................................................. (1.2) 1.4
--------- ---------
Net cash (used in) provided by operating activities............................................ (10.6) 3.1
--------- ---------
Cash flows from investing activities:
Sales, maturities and repayments of investments............................................ 161.6 188.1
Purchases of investments................................................................... (161.4) (196.9)
Other, net................................................................................. 11.4 12.2
--------- ---------
Net cash provided by (used in) investing activities............................................ 11.6 3.4
--------- ---------
Net increase in cash and cash equivalents...................................................... 1.0 6.5
Cash and cash equivalents, beginning of year................................................... 24.1 17.6
--------- ---------
Cash and cash equivalents, end of year......................................................... $ 25.1 $ 24.1
--------- ---------
--------- ---------
</TABLE>
On October 16, 1995, there were no valuation allowances transferred to the
Closed Block on mortgage loans. There are no valuation allowances on mortgage
loans in the Closed Block at December 31, 1997 or 1996, respectively.
Many expenses related to Closed Block operations are charged to operations
outside the Closed Block; accordingly, the contribution from the Closed Block
does not represent the actual profitability of the Closed Block operations.
Operating costs and expenses outside of the Closed Block are, therefore,
disproportionate to the business outside the Closed Block.
F-23
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
7. DEBT
Short- and long-term debt consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31
(IN MILLIONS) 1997 1996
- ------------------------------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
Short-Term
Commercial paper............................................................................... $ 33.0 $ 37.8
Other.......................................................................................... -- 0.6
--------- ---------
Total short-term debt............................................................................ $ 33.0 $ 38.4
--------- ---------
--------- ---------
Long-term debt................................................................................... $ 2.6 $ 2.7
--------- ---------
--------- ---------
</TABLE>
FAFLIC issues commercial paper primarily to manage imbalances between operating
cash flows and existing commitments. Commercial paper borrowing arrangements are
supported by various lines of credit. At December 31, 1997, the weighted average
interest rate for outstanding commercial paper was approximately 5.8%.
At December 31, 1997, AFC had approximately $140.0 million in committed lines of
credit provided by U.S. banks, of which $107.2 million was available for
borrowing. These lines of credit generally have terms of less than one year, and
require the Company to pay annual commitment fees limited to 0.07% of the
available credit. Interest that would be charged for usage of these lines of
credit is based upon negotiated arrangements.
During 1996, the Company utilized repurchase agreements to finance certain
investments. These repurchase agreements were settled by the end of 1996.
In October, 1995, AFC issued $200.0 million face amount of Senior Debentures for
proceeds of $197.2 million net of discounts and issuance costs. These securities
have an effective interest rate of 7.65%, and mature on October 16, 2025.
Interest is payable semiannually on October 15 and April 15 of each year. The
Senior Debentures are subject to certain restrictive covenants, including
limitations on issuance of or disposition of stock of restricted subsidiaries
and limitations on liens. AFC is in compliance with all covenants. The primary
source of cash for repayment of the debt by AFC is dividends from FAFLIC and
APY.
Interest expense was $3.6 million, $16.8 million and $4.3 million in 1997, 1996
and 1995, respectively. Interest paid on the credit agreement during 1997 was
approximately $2.8 million. Interest expense during 1996 also included $11.0
million related to interest payments on repurchase agreements. All interest
expense is recorded in other operating expenses.
8. 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 consolidated statements of income is shown below:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
(IN MILLIONS) 1997 1996 1995
- ------------------------------------------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Federal income tax expense (benefit)
Current............................................................................ $ 83.3 $ 96.8 $ 119.7
Deferred........................................................................... 14.2 (15.7) (37.0)
--------- --------- ---------
Total................................................................................ $ 97.5 $ 81.1 $ 82.7
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-24
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
The federal income taxes attributable to the consolidated results of operations
are different from the amounts determined by multiplying income before federal
income taxes by the expected federal income tax rate. The sources of the
difference and the tax effects of each were as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
(IN MILLIONS) 1997 1996 1995
- ------------------------------------------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Expected federal income tax expense.................................................. $ 131.8 $ 122.3 $ 105.6
Tax-exempt interest................................................................ (37.9) (35.3) (32.2)
Differential earnings amount....................................................... - (10.2) (7.6)
Dividend received deduction........................................................ (3.2) (1.6) (4.0)
Changes in tax reserve estimates................................................... 7.8 4.7 19.3
Other, net......................................................................... (1.0) 1.2 1.6
--------- --------- ---------
Federal income tax expense........................................................... $ 97.5 $ 81.1 $ 82.7
--------- --------- ---------
--------- --------- ---------
</TABLE>
Until conversion to a stock life insurance company, FAFLIC, as a mutual company,
reduced its deduction for policyholder dividends by the differential earnings
amount. This amount was computed, for each tax year, by multiplying the average
equity base of the FAFLIC/AFLIAC consolidated group, as determined for tax
purposes, by the estimate of an excess of an imputed earnings rate over the
average mutual life insurance companies' earnings rate. The differential
earnings amount for each tax year was subsequently recomputed when actual
earnings rates were published by the Internal Revenue Service (IRS). The
differential earnings amount included in 1996 related to an adjustment for the
1994 tax year based on the actual mutual life insurance companies' earnings rate
issued by the IRS in 1996. As a stock life company, FAFLIC is no longer required
to reduce its policyholder dividend deduction by the differential earnings
amount.
The deferred income tax liability (asset) represents the tax effects of
temporary differences attributable to the Company's consolidated federal tax
return group. As a result of the purchase discussed in Note 2, all companies
will file a single consolidated federal income tax return for tax years ending
on and after December 31, 1997. Deferred tax amounts presented for 1996 reflect
the combination of the former FAFLIC/ AFLIAC consolidated group with the former
APY consolidated group. Its components were as follows:
<TABLE>
<CAPTION>
DECEMBER 31
(IN MILLIONS) 1997 1996
- --------------------------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
Deferred tax (assets) liabilities
AMT carryforwards.......................................................................... $ (15.6) $ (16.3)
Loss reserve discounting................................................................... (391.6) (355.1)
Deferred acquisition costs................................................................. 291.8 249.4
Employee benefit plans..................................................................... (48.0) (41.4)
Investments, net........................................................................... 175.4 128.5
Bad debt reserve........................................................................... (14.3) (26.2)
Other, net................................................................................. 15.2 (5.8)
--------- ---------
Deferred tax (asset) liability, net.......................................................... $ 12.9 $ (66.9)
--------- ---------
--------- ---------
</TABLE>
Gross deferred income tax assets totaled $469.5 million and $444.8 million at
December 31, 1997 and 1996, respectively. Gross deferred income tax liabilities
totaled $482.4 million and $377.9 million at December 31, 1997 and 1996,
respectively.
The Company believes, based on the its 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. At December 31, 1997, there are available alternative
minimum tax credit carryforwards of $15.6 million.
F-25
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
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 FAFLIC/ AFLIAC consolidated
group's federal income tax returns through 1991. The IRS has also examined the
former Allmerica P&C consolidated group's federal income tax returns through
1991. The Company has appealed certain adjustments proposed by the IRS with
respect to the federal income tax returns for 1989, 1990, and 1991 for both the
FAFLIC/AFLIAC consolidated group as well as the former Allmerica P&C
consolidated group. Also, certain adjustments proposed by the IRS with respect
to FAFLIC/AFLIAC's federal income tax returns for 1982 and 1983 remain
unresolved. If upheld, these adjustments would result in additional payments;
however, the Company will vigorously defend its position with respect to these
adjustments. 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.
9. PENSION PLANS
FAFLIC provides retirement benefits to substantially all of its employees under
three separate defined benefit pension plans. Effective January 1, 1995, the
Company adopted a defined benefit cash balance formula, under which the Company
annually provides an allocation to each eligible employee based on a percentage
of that employee's salary, similar to a defined contribution plan arrangement.
The 1997 and 1996 allocations were based on 7.0% of each eligible employee's
salary. In addition to the cash balance allocation, certain transition group
employees, who have met specified age and service requirements as of December
31, 1994, are eligible for a grandfathered benefit based primarily on the
employees' years of service and compensation during their highest five
consecutive plan years of employment. The Company's policy for the plans is to
fund at least the minimum amount required by the Employee Retirement Income
Security Act of 1974.
Components of net pension expense were as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
(IN MILLIONS) 1997 1996 1995
- -------------------------------------------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Service cost -- benefits earned during the year....................................... $ 19.9 $ 19.0 $ 19.7
Interest accrued on projected benefit obligations..................................... 23.5 21.9 21.1
Actual return on assets............................................................... (64.0) (42.2) (89.3)
Net amortization and deferral......................................................... 29.0 9.3 66.1
--------- --------- ---------
Net pension expense................................................................... $ 8.4 $ 8.0 $ 17.6
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-26
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
The following table summarizes the combined status of the three pension plans.
At December 31, 1997 and 1996 the plans' assets exceeded their projected benefit
obligations.
<TABLE>
<CAPTION>
DECEMBER 31
(IN MILLIONS) 1997 1996
- ----------------------------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested benefit obligation.................................................................... $ 332.6 $ 308.9
Unvested benefit obligation.................................................................. 7.5 6.6
--------- ---------
Accumulated benefit obligation................................................................. $ 340.1 $ 315.5
--------- ---------
--------- ---------
Pension liability included in Consolidated Balance Sheets:
Projected benefit obligation................................................................. $ 370.4 $ 344.2
Plan assets at fair value.................................................................... 395.5 347.8
--------- ---------
Plan assets greater (less) than projected benefit obligation............................... 25.1 3.6
Unrecognized net (gain) loss from past experience............................................ (44.9) (9.1)
Unrecognized prior service benefit........................................................... (13.9) (11.5)
Unamortized transition asset................................................................. (26.2) (24.7)
--------- ---------
Net pension liability.......................................................................... $ (59.9) $ (41.7)
--------- ---------
--------- ---------
</TABLE>
As a result of AFC's purchase of the minority shares of APY, certain pension
liabilities were reduced by $11.7 million to reflect their fair value as of the
purchase date.
Determination of the projected benefit obligations was based on a weighted
average discount rate of 7.0% in 1997 and 1996 and the assumed long-term rate of
return on plan assets was 9.0%. The actuarial present value of the projected
benefit obligations was determined using assumed rates of increase in future
compensation levels ranging from 5.0% to 5.5%. Plan assets are invested
primarily in various separate accounts and the general account of FAFLIC. The
plans also hold stock of AFC.
The Company has three separate defined contribution 401(k) plans for its
employees. The Company matches employee elective 401(k) contributions, up to a
maximum percentage determined annually by the Board of Directors. During 1997
and 1996, the Company matched 50% of employees' contributions up to 6.0% of
eligible compensation. The total expenses related to these plans were $3.3
million and $5.5 million, in 1997 and 1996, respectively. In addition to these
plans, the Company has a defined contribution plan for substantially all of its
agents. The Plan expense in 1997 and 1996, was $2.8 million and $2.0 million,
respectively.
On January 1, 1998, substantially all of the aforementioned defined benefit and
defined contribution 401k plans were merged with the existing benefit plans of
FAFLIC. The transfer of benefit plans will not have a material impact on the
results of operations or financial position of the Company.
10. OTHER POSTRETIREMENT BENEFIT PLANS
In addition to the Company's pension plans, the Company currently provides
postretirement medical and death benefits to certain full-time employees and
dependents, under several plans sponsored by FAFLIC, Hanover, and Citizens.
Generally, employees become eligible at age 55 with at least 15 years of
service. Spousal coverage is generally provided for up to two years after death
of the retiree. Benefits include hospital, major medical, and a payment at death
equal to retirees' final compensation up to certain limits. Effective January 1,
1996, the Company revised these benefits so as to establish limits on future
benefit payments and to restrict eligibility to current employees. The medical
plans have varying copayments and deductibles, depending on the plan. These
plans are unfunded.
F-27
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
The plan changes, effective January 1, 1996, resulted in a negative plan
amendment (change in eligibility and medical benefits) of $26.8 million and
curtailment (no future increases in life insurance) of $5.3 million. The
negative plan amendment will be amortized as prior service cost over the average
number of years to full eligibility (approximately 9 years or $3.0 million per
year). Of the $5.3 million curtailment gain, $3.3 million has been deducted from
unrecognized loss and $2.0 million has been recorded as a reduction of the net
periodic postretirement benefit expense.
The plans' funded status reconciled with amounts recognized in the Company's
consolidated balance sheet were as follows:
<TABLE>
<CAPTION>
DECEMBER 31
(IN MILLIONS) 1997 1996
- ---------------------------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees.................................................................................... $ 40.7 $ 40.4
Fully eligible active plan participants..................................................... 7.0 7.5
Other active plan participants.............................................................. 24.1 24.4
--------- ---------
71.8 72.3
Plan assets at fair value..................................................................... -- --
--------- ---------
Accumulated postretirement benefit obligation in excess of plan assets........................ 71.8 72.3
Unrecognized prior service benefit............................................................ 15.3 23.8
Unrecognized loss............................................................................. (0.8) (5.0)
--------- ---------
Accrued postretirement benefit costs.......................................................... $ 86.3 $ 91.1
--------- ---------
--------- ---------
</TABLE>
The components of net periodic postretirement benefit expense were as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
(IN MILLIONS) 1997 1996 1995
- ---------------------------------------------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Service cost............................................................................ $ 3.0 $ 3.2 $ 4.2
Interest cost........................................................................... 4.6 4.6 6.9
Amortization of gain.................................................................... (2.8) (2.8) (0.5)
--------- --------- ---------
Net periodic postretirement benefit expense............................................. $ 4.8 $ 5.0 $ 10.6
--------- --------- ---------
--------- --------- ---------
</TABLE>
As a result of AFC's purchase of the minority shares of APY, certain
postretirement liabilities were reduced by $6.1 million to reflect their fair
value as of the purchase date.
For purposes of measuring the accumulated postretirement benefit obligation at
December 31, 1997, health care costs were assumed to increase 8.0% in 1998,
declining thereafter until the ultimate rate of 5.5% is reached in 2001 and
remains at that level thereafter. The health care cost trend rate assumption has
a significant effect on the amounts reported. For example, increasing the
assumed health care cost trend rates by one percentage point in each year would
increase the accumulated postretirement benefit obligation at December 31, 1997
by $4.9 million, and the aggregate of the service and interest cost components
of net periodic postretirement benefit expense for 1997 by $0.6 million.
The weighted-average discount rate used in determining the accumulated
postretirement benefit obligation was 7.0% at December 31, 1997 and 1996.
As described in Note 9, all of the postretirement benefit plans of the Company
were merged with the existing plans of FAFLIC, effective January 1, 1998.
F-28
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
11. DIVIDEND RESTRICTIONS
Massachusetts, Delaware, New Hampshire and Michigan have enacted laws governing
the payment of dividends to stockholders by insurers. These laws affect the
dividend paying ability of FAFLIC, AFLIAC, Hanover and Citizens, respectively.
Dividends from FAFLIC and APY (from Hanover) to AFC will be the primary source
of cash for repayment of the debt and capital securities by AFC and payment of
dividends to AFC stockholders.
Massachusetts' statute limits the dividends an insurer may pay in any twelve
month period, without the prior permission of the Commonwealth of Massachusetts
Insurance Commissioner, to the greater of (i) 10% of its statutory policyholder
surplus as of the preceding December 31 or (ii) the individual company's
statutory net gain from operations for the preceding calendar year (if such
insurer is a life company), or its net income for the preceding calendar year
(if such insurer is not a life company). In addition, under Massachusetts law,
no domestic insurer shall pay a dividend or make any distribution to its
shareholders from other than unassigned funds unless the Commissioner shall have
approved such dividend or distribution. No dividends were declared nor paid
during 1997,1996 or 1995. During 1998, FAFLIC could pay dividends of $196.3
million to AFC without prior approval of the Commissioner. On January 12, 1998
FAFLIC declared a dividend of $50 million to AFC of which $18 million was paid
in February, 1998.
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. No dividends were paid by AFLIAC to FAFLIC during
1997, 1996 or 1995. During 1998, AFLIAC could pay dividends of $33.9 million to
FAFLIC without prior approval.
Pursuant to New Hampshire's statute, the maximum dividends and other
distributions that an insurer may pay in any twelve month period, without the
prior approval of the New Hampshire Insurance Commissioner, is limited to 10% of
such insurer's statutory policyholder surplus as of the preceding December 31.
Hanover declared dividends to Allmerica P&C totaling $120.0 million, 105.0
million and 40.0 million during 1997, 1996 and 1995, respectively. During 1998,
the maximum dividend and other distributions that could be paid to Allmerica P&C
by Hanover, without prior approval of the Insurance Commissioner, was
approximately $127.6 million.
Pursuant to Michigan's statute, the maximum dividends and other distributions
that an insurer may pay in any twelve month period, without prior approval of
the Michigan Insurance Commissioner, is limited to the greater of 10% of
policyholders' surplus as of December 31 of the immediately preceding year or
the statutory net income less realized gains, for the immediately preceding
calendar year. Citizens Insurance paid dividends to Citizens Corporation
totaling $6.3 million and $3.0 million during 1996 and 1995, respectively. No
dividends were paid by Citizens Insurance during 1997. During, 1998, Citizens
Insurance could pay dividends of $86.9 million to Citizens Corporation without
prior approval.
F-29
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
12. SEGMENT INFORMATION
The Company offers financial products and services in two major areas: Risk
Management and Retirement and Asset Accumulation. Within these broad areas, the
Company conducts business principally in five operating segments.
The Risk Management group includes two segments: Regional Property and Casualty
and Corporate Risk Management Services.
The Regional Property and Casualty segment includes property and casualty
insurance products, such as automobile insurance, homeowners insurance,
commercial multiple-peril insurance, and workers' compensation insurance. These
products are offered by Allmerica P&C through its operating subsidiaries,
Hanover and Citizens. Substantially all of the Regional Property and Casualty
segment's earnings are generated in Michigan and the Northeast (Connecticut,
Massachusetts, New York, New Jersey, New Hampshire, Rhode Island, Vermont and
Maine). The Corporate Risk Management Services segment includes group life and
health insurance products and services which assist employers in administering
employee benefit programs and in managing the related risks.
The Retirement and Asset Accumulation group includes three segments: Allmerica
Financial Services, Institutional Services and Allmerica Asset Management. The
Allmerica Financial Services segment includes variable annuities, variable
universal life-type, traditional and health insurance products distributed via
retail channels to individuals across the country. The Institutional Services
segment includes primarily group retirement products such as 401(k) plans,
tax-sheltered annuities and GIC contracts which are distributed to institutions
across the country via work-site marketing and other arrangements. Allmerica
Asset Management is a Registered Investment Advisor which provides investment
advisory services primarily to affiliates and to other institutions, such as
insurance companies and pension plans.
Summarized below is financial information with respect to business segments for
the year ended and as of December 31.
<TABLE>
<CAPTION>
DECEMBER 31
(IN MILLIONS) 1997 1996 1995
- --------------------------------------------------------------------------- ---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Risk Management
Regional Property and Casualty......................................... $ 2,275.3 $ 2,196.6 $ 2,109.0
Corporate Risk Management.............................................. 396.3 361.5 328.5
---------- ---------- ----------
Subtotal............................................................... 2,671.6 2,558.1 2,437.5
Retirement and Asset Accumulation
Allmerica Financial Services........................................... 470.6 450.9 487.1
Institutional Services................................................. 243.4 270.7 330.2
Allmerica Asset Management............................................. 8.7 8.8 4.4
---------- ---------- ----------
Subtotal............................................................... 722.7 730.4 821.7
Eliminations............................................................. (10.1) (8.7) (4.4)
---------- ---------- ----------
Total...................................................................... $ 3,384.2 $ 3,279.8 $ 3,254.8
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
F-30
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
<TABLE>
<CAPTION>
DECEMBER 31
(IN MILLIONS) 1997 1996 1995
- --------------------------------------------------------------------------- ---------- ---------- ----------
Income from continuing operations before income taxes:
<S> <C> <C> <C>
Risk Management
Regional Property and Casualty......................................... $ 206.4 $ 197.7 $ 206.3
Corporate Risk Management.............................................. 19.3 20.7 18.3
---------- ---------- ----------
Subtotal............................................................... 225.7 218.4 224.6
Retirement and Asset Accumulation
Allmerica Financial Services........................................... 87.4 76.9 35.2
Institutional Services................................................. 62.4 52.8 42.8
Allmerica Asset Management............................................. 1.4 1.1 2.3
---------- ---------- ----------
Subtotal............................................................... 151.2 130.8 80.3
---------- ---------- ----------
Total...................................................................... $ 376.9 $ 349.2 $ 304.9
---------- ---------- ----------
---------- ---------- ----------
Identifiable assets:
Risk Management
Regional Property and Casualty......................................... $ 5,710.4 $ 5,703.9 $ 5,741.8
Corporate Risk Management.............................................. 568.8 522.1 458.9
---------- ---------- ----------
Subtotal............................................................... 6,279.2 6,226.0 6,200.7
Retirement and Asset Accumulation
Allmerica Financial Services........................................... 12,049.6 8,822.4 7,218.6
Institutional Services................................................. 4,158.5 3,886.7 4,280.9
Allmerica Asset Management............................................. 4.1 2.4 2.1
---------- ---------- ----------
Subtotal............................................................... 16,212.2 12,711.5 11,501.6
---------- ---------- ----------
Total...................................................................... $ 22,491.4 $ 18,937.5 $ 17,702.3
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
13. LEASE COMMITMENTS
Rental expenses for operating leases, principally with respect to buildings,
amounted to $33.6 million, $34.9 million and $36.4 million in 1997, 1996 and
1995, respectively. At December 31, 1997, future minimum rental payments under
non-cancelable operating leases were approximately $72.5 million, payable as
follows: 1998 -- $24.8 million; 1999 -- $19.8 million; 2000 -- $13.6 million;
2001 -- $7.9 million; and $6.4 million thereafter. It is expected that, in the
normal course of business, leases that expire will be renewed or replaced by
leases on other property and equipment; thus, it is anticipated that future
minimum lease commitments will not be less than the amounts shown for 1998.
14. REINSURANCE
In the normal course of business, the Company seeks to reduce the loss that may
arise from catastrophes or other 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, ACCOUNTING AND
REPORTING FOR REINSURANCE OF SHORT DURATION AND LONG DURATION CONTRACTS.
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
F-31
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
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 Company is subject to concentration of risk with respect to reinsurance
ceded to various residual market mechanisms. As a condition to the ability to
conduct certain business in various states, the Company is required to
participate in various residual market mechanisms and pooling arrangements which
provide various insurance coverages to individuals or other entities that are
otherwise unable to purchase such coverage voluntarily provided by private
insurers. These market mechanisms and pooling arrangements include the
Massachusetts Commonwealth Automobile Reinsurers ("CAR"), the Maine Workers'
Compensation Residual Market Pool ("MWCRP") and the Michigan Catastrophic Claims
Association ("MCCA"). At December 31, 1997, CAR was the only reinsurer which
represented 10% or more of the Company's reinsurance business. As a servicing
carrier in Massachusetts, the Company cedes a significant portion of its private
passenger and commercial automobile premiums to CAR. Net premiums earned and
losses and loss adjustment expenses ceded to CAR in 1997, 1996 and 1995 were
$32.3 million and $28.2 million, $38.0 million and $21.8 million, and $49.1
million and $33.7 million, respectively.
The Company ceded to MCCA premiums earned and losses and loss adjustment
expenses in 1997, 1996 and 1995 of $9.8 million and $(0.8) million, $50.5
million and $(52.9) million, and $66.8 million and $62.9 million, respectively.
Because the MCCA is supported by assessments permitted by statute, and all
amounts billed by the Company to CAR, MWCRP and MCCA have been paid when due,
the Company believes that it has no significant exposure to uncollectible
reinsurance balances.
The effects of reinsurance were as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
(IN MILLIONS) 1997 1996 1995
- ------------------------------------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Life and accident and health insurance premiums:
Direct....................................................................... $ 417.4 $ 389.1 $ 438.9
Assumed...................................................................... 110.7 87.8 71.0
Ceded........................................................................ (170.1) (138.9) (150.3)
--------- --------- ---------
Net premiums................................................................... $ 358.0 $ 338.0 $ 359.6
--------- --------- ---------
--------- --------- ---------
Property and casualty premiums written:
Direct....................................................................... $ 2,068.5 $ 2,039.7 $ 2,039.4
Assumed...................................................................... 103.1 108.7 125.0
Ceded........................................................................ (179.8) (234.0) (279.1)
--------- --------- ---------
Net premiums................................................................... $ 1,991.8 $ 1,914.4 $ 1,885.3
--------- --------- ---------
--------- --------- ---------
Property and casualty premiums earned:
Direct....................................................................... $ 2,046.2 $ 2,018.5 $ 2,021.7
Assumed...................................................................... 102.0 112.4 137.7
Ceded........................................................................ (195.1) (232.6) (296.2)
--------- --------- ---------
Net premiums................................................................... $ 1,953.1 $ 1,898.3 $ 1,863.2
--------- --------- ---------
--------- --------- ---------
Life insurance and other individual policy benefits, claims, losses and loss
adjustment expenses:
Direct....................................................................... $ 656.4 $ 606.5 $ 741.0
Assumed...................................................................... 61.6 44.9 38.5
Ceded........................................................................ (158.8) (77.8) (69.5)
--------- --------- ---------
Net policy benefits, claims, losses and loss adjustment expenses............... $ 559.2 $ 573.6 $ 710.0
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-32
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
(IN MILLIONS) 1997 1996 1995
- ------------------------------------------------------------------------------- --------- --------- ---------
Property and casualty benefits, claims, losses and loss adjustment expenses:
<S> <C> <C> <C>
Direct....................................................................... $ 1,464.9 $ 1,299.8 $ 1,383.3
Assumed...................................................................... 101.2 85.8 146.1
Ceded........................................................................ (120.6) (2.2) (229.1)
--------- --------- ---------
Net policy benefits, claims, losses, and loss adjustment expenses.............. $ 1,445.5 $ 1,383.4 $ 1,300.3
--------- --------- ---------
--------- --------- ---------
</TABLE>
15. DEFERRED POLICY ACQUISITION COSTS
The following reflects changes to the deferred policy acquisition asset:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
(IN MILLIONS) 1997 1996 1995
- ---------------------------------------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Balance at beginning of year...................................................... $ 822.7 $ 735.7 $ 802.8
Acquisition expenses deferred................................................... 617.7 560.8 504.8
Amortized to expense during the year............................................ (476.0) (483.5) (470.3)
Adjustment to equity during the year............................................ (11.1) 9.7 (50.4)
Transferred to the Closed Block................................................. -- -- (24.8)
Adjustment for cession of term life insurance................................... -- -- (26.4)
Adjustment for cession of disability income insurance........................... (38.6) -- --
Adjustment for revision of universal and variable universal life insurance
mortality assumptions......................................................... 50.8 -- --
--------- --------- ---------
Balance at end of year............................................................ $ 965.5 $ 822.7 $ 735.7
--------- --------- ---------
--------- --------- ---------
</TABLE>
At October 1, 1997, the Company revised the mortality assumptions for universal
life and variable universal life product lines. These revisions resulted in a
$50.8 million recapitalization of deferred policy acquisition costs.
16. LIABILITIES FOR OUTSTANDING CLAIMS, LOSSES AND LOSS ADJUSTMENT EXPENSES
The Company regularly updates its estimates of liabilities for outstanding
claims, losses and loss adjustment expenses as new information becomes available
and further events occur which may impact the resolution of unsettled claims for
its property and casualty and its accident and health lines of business. 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
$533.6 million, $471.7 million and $446.9 million at December 31, 1997, 1996 and
1995, respectively. Accident and health claim liabilities were re-estimated for
all prior years and were decreased by $0.2 million and $0.6 million in 1997 and
1996, respectively, and increased by $17.6 million in 1995. Unfavorable
development in the accident and health business during 1995 was primarily due to
reserve strengthening and adverse experience in the Company's individual
disability line of business. Effective October 1, 1997, the Company ceded
substantially all of its individual disability income line of business, under a
100% coinsurance agreement to Metropolitan Life Insurance Company. At December
31, 1997, the individual disability income reserves ceded under this agreement
were $249.0 million, representing 46.7% of the Company's total accident and
health reserves.
F-33
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
The following table provides a reconciliation of the beginning and ending
property and casualty reserve for unpaid losses and loss adjustment expenses
(LAE):
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
(IN MILLIONS) 1997 1996 1995
- ------------------------------------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Reserve for losses and LAE, beginning of the year.............................. $ 2,744.1 $ 2,896.0 $ 2,821.7
Incurred losses and LAE, net of reinsurance recoverable:
Provision for insured events of the current year............................. 1,564.1 1,513.3 1,427.3
Decrease in provision for insured events of prior years...................... (127.9) (141.4) (137.6)
--------- --------- ---------
Total incurred losses and LAE.................................................. 1,436.2 1,371.9 1,289.7
--------- --------- ---------
Payments, net of reinsurance recoverable:
Losses and LAE attributable to insured events of current year................ 775.1 759.6 652.2
Losses and LAE attributable to insured events of prior years................. 732.1 627.6 614.3
--------- --------- ---------
Total payments................................................................. 1,507.2 1,387.2 1,266.5
--------- --------- ---------
Change in reinsurance recoverable on unpaid losses............................. (50.2) (136.6) 51.1
--------- --------- ---------
Other(1) (7.5) -- --
--------- --------- ---------
Reserve for losses and LAE, end of year........................................ $ 2,615.4 $ 2,744.1 $ 2,896.0
--------- --------- ---------
--------- --------- ---------
</TABLE>
(1) Includes purchase accounting adjustments.
As part of an ongoing process, the property and casualty reserves have been
re-estimated for all prior accident years and were decreased by $127.9 million,
$141.4 million and $137.6 million in 1997, 1996 and 1995, respectively.
The decrease in favorable development on prior years' reserves of $13.5 million
in 1997 results primarily from a $24.6 million decrease in favorable development
at Hanover to $58.4 million, partially offset by an $11.1 million increase in
favorable development at Citizens to $69.5 million. The decrease in Hanover's
favorable development of $24.6 million in 1997 reflects a decrease in favorable
development of $25.0 million, to $17.4 million in the personal automobile line,
as well as a decrease in favorable development of $8.5 million, to unfavorable
development of $2.8 million in the commercial multiple peril line. These
decreases were partially offset by an increase in favorable development in the
workers' compensation line of $11.5 million, to $28.8 million. The increase in
favorable development at Citizens in 1997 reflects improved severity in the
workers' compensation line where favorable development increased $13.9 million,
to $35.7 million and in the commercial multiple peril line where favorable
development increased $7.0 million to $4.3 million, partially offset by less
favorable development in the personal automobile line, where favorable
development decreased $10.5 million to $22.5 million in 1997.
The increase in favorable development on prior years' reserves of $3.8 million
in 1996 results primarily from an $11.4 million increase in favorable
development at Citizens. The increase in Citizens' favorable development of
$11.4 million in 1996 reflects improved severity in the personal automobile
line, where favorable development increased $28.6 million to $33.0 million in
1996, partially offset by less favorable development in the workers'
compensation line of $10.9 million Hanover's favorable development, including
voluntary and involuntary pools, decreased $7.7 million in 1996 to $82.9
million, primarily attributable to a decrease in favorable development in the
workers' compensation line of $19.8 million. Favorable development in the
personal automobile line also decreased $4.7 million, to $42.4 million in 1996.
These decreases were offset by increases in favorable development of $1.9
million and $5.6 million, to $12.6 million and $5.7 million, in the commercial
automobile and commercial multiple peril lines, respectively. Favorable
development in other lines increased by $8.8 million, primarily as a result of
environmental reserve strengthening in 1995. Favorable development in Hanover's
voluntary and involuntary pools increased $3.7 million to $4.1 million during
1996.
F-34
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
Citizens' favorable development in 1997 primarily reflects a modest shift over
the past few years of the workers' compensation business to Western and Northern
Michigan, which have demonstrated more favorable loss experience than Eastern
Michigan.
Citizens' favorable development in 1996 and 1995 primarily reflects the
initiatives taken by the Company to manage medical costs in both the automobile
and workers' compensation lines, as well as the impact of the Michigan Supreme
Court ruling on workers' compensation indemnity payments in 1995, which
decreases the maximum amount to be paid for indemnity cases on all existing and
future claims.
Hanover's favorable development from 1995 to 1997 primarily reflects favorable
legislation related to workers' compensation, improved safety features in
automobiles, improved driving habits and a moderation of medical costs and
inflation.
In 1995, Hanover's favorable development was primarily attributable to a
re-estimate of reserves with respect to certain types of workers' compensation
policies including large deductibles and excess of loss policies. In addition,
during 1995 Hanover refined its estimation of unallocated loss adjustment
expenses which increased favorable development in that year.
This favorable development reflects the Regional Property and Casualty
subsidiaries' reserving philosophy consistently applied over these periods.
Due to the nature of the business written by the Regional Property and Casualty
subsidiaries, the exposure to environmental liabilities is relatively small and
therefore their reserves are relatively small compared to other types of
liabilities. Loss and LAE reserves related to environmental damage and toxic
tort liability, included in the total reserve for losses and LAE were $53.1
million and $50.8 million, net of reinsurance of $15.7 million and $20.2 million
at the end of 1997 and 1996, respectively. The Regional Property and Casualty
subsidiaries do not specifically underwrite policies that include this coverage,
but as case law expands policy provisions and insurers' liability beyond the
intended coverage, the Regional Property and Casualty subsidiaries may be
required to defend such claims. Due to their unusual nature and absence of
historical claims data, reserves for these claims are not determined using
historical experience to project future losses. The Company estimated its
ultimate liability for these claims based upon currently known facts, reasonable
assumptions where the facts are not known, current law and methodologies
currently available. Although these claims are not material, their existence
gives rise to uncertainty and is discussed because of the possibility, however
remote, that they may become material. The Company believes that,
notwithstanding the evolution of case law expanding liability in environmental
claims, recorded reserves related to these claims for environmental liability
are adequate. In addition, the Company is not aware of any litigation or pending
claims that may result in additional material liabilities in excess of recorded
reserves. The environmental liability could be revised in the near term if the
estimates used in determining the liability are revised.
17. MINORITY INTEREST
The Company's interest in Allmerica P&C is represented by ownership of 65.8%,
59.5% and 58.3% of the outstanding shares of common stock at December 31, 1997,
1996 and 1995, respectively. Earnings and shareholder's equity attributable to
minority shareholders are included in minority interest in the consolidated
financial statements.
F-35
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
18. 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 AFC 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 seek to be certified as a class. The case is in
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.
On June 23, 1995, the governor of Maine approved a legislative settlement for
the Maine Workers' Compensation Residual Market Pool deficit for the years 1988
through 1992. The settlement provides for an initial funding of $220.0 million
toward the deficit. The insurance carriers were liable for $65.0 million and
employers would contribute $110.0 million payable through surcharges on premiums
over the course of the next ten years. The major insurers are responsible for
90% of the $65.0 million. Hanover's allocated share of the settlement is
approximately $4.2 million, which was paid in December 1995. The remainder of
the deficit of $45.0 million will be paid by the Maine Guaranty Fund, payable in
quarterly contributions over ten years. A group of smaller carriers filed
litigation to appeal the settlement. Although the Company believes that adequate
reserves have been established for any additional liability, there can be no
assurance that the appeal will be resolved on a basis which is satisfactory to
the Company.
The Company has been named a defendant in various other 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 consolidated 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.
RESIDUAL MARKETS
The Company is required to participate in residual markets in various states.
The results of the residual markets are not subject to the predictability
associated with the Company's own managed business, and are significant to the
workers' compensation line of business and both the private passenger and
commercial automobile lines of business.
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
F-36
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
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.
19. STATUTORY FINANCIAL INFORMATION
The Company and its insurance subsidiaries are 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, postretirement benefit costs are based on
different assumptions and reflect a different method of adoption, 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 1995
- ------------------------------------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Statutory net income (Combined)
Property and Casualty Companies.............................................. $ 190.3 $ 155.3 $ 155.3
Life and Health Companies.................................................... 191.2 133.3 134.3
Statutory Shareholder's Surplus (Combined)
Property and Casualty Companies.............................................. $ 1,279.8 $ 1,201.6 $ 1,128.4
Life and Health Companies.................................................... 1,221.3 1,120.1 965.6
</TABLE>
F-37
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of First Allmerica Financial Life Insurance
Company and Policyowners of the Fulcrum Separate Account of First Allmerica
Financial Life Insurance 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 First Allmerica Financial Life Insurance Company at December 31,
1997, the results of each of their operations and the changes in each of
their net assets for the periods indicated, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of First Allmerica Financial Life Insurance 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 AIT
VALUE GROWTH GROWTH STRATEGIC INCOME INTERACTIVE/TELECOMM MONEY MARKET
--------- --------- ------------ ---------------- -------------------- ------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS (NOTES 3 AND 7):
Investment in shares of Allmerica
Investment Trust................. $ -- $ -- $ -- $ -- $ -- $ 8,360
Investments in shares of The
Palladian Trust.................. 506,964 271,207 75,245 40,825 233,244 --
--------- --------- ------------ ---------------- ---------- ------------
Total assets..................... 506,964 271,207 75,245 40,825 233,244 8,360
LIABILITIES: -- -- -- -- -- --
--------- --------- ------------ ---------------- ---------- ------------
Net assets....................... $ 506,964 $ 271,207 $ 75,245 $ 40,825 $ 233,244 $ 8,360
--------- --------- ------------ ---------------- ---------- ------------
--------- --------- ------------ ---------------- ---------- ------------
Net asset distribution by category:
Qualified variable annuity
policies....................... $ 202,147 $ 84,269 $ 30,542 $ 10,975 $ 89,259 $ --
Non-qualified variable annuity
policies....................... 304,150 186,938 44,703 29,850 143,985 8,360
Value of annuitant mortality
fluctuation reserve............ 667 -- -- -- -- --
--------- --------- ------------ ---------------- ---------- ------------
$ 506,964 $ 271,207 $ 75,245 $ 40,825 $ 233,244 $ 8,360
--------- --------- ------------ ---------------- ---------- ------------
--------- --------- ------------ ---------------- ---------- ------------
Qualified units outstanding,
December 31, 1997................ 192,747 97,247 34,652 10,994 80,771 --
Net asset value per qualified unit,
December 31, 1997................ $1.048769 $0.866544 $0.881383 $0.998272 $ 1.105093 $1.009859
Non-qualified units outstanding,
December 31, 1997................ 290,641 215,728 50,719 29,902 130,291 8,278
Net asset value per non-qualified
unit, December 31, 1997.......... $1.048769 $0.866544 $0.881383 $0.998272 $ 1.105093 $1.009859
</TABLE>
The accompanying notes are an integral part of these financial statements.
SA-1
<PAGE>
FULCRUM SEPARATE ACCOUNT
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
INTERNATIONAL AIT
VALUE GROWTH GROWTH GLOBAL GLOBAL MONEY MARKET
FOR THE FOR THE FOR THE STRATEGIC INCOME INTERACTIVE/TELECOMM FOR THE
PERIOD PERIOD PERIOD FOR THE FOR THE PERIOD
9/30/97* 9/30/97* 10/3/97* PERIOD 10/3/97* PERIOD 9/30/97* 10/3/97*
TO 12/31/97 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> <C>
INVESTMENT INCOME:
Dividends........................ $ 3,179 $ -- $ 365 $ 453 $ 709 $ 107
----------- ----------- ----------- ----- ------- -----
EXPENSES (NOTE 4):
Mortality and expense risk
fees........................... 1,321 707 215 115 533 25
Administrative expense fees...... 159 85 26 14 64 3
----------- ----------- ----------- ----- ------- -----
Total expenses................. 1,480 792 241 129 597 28
----------- ----------- ----------- ----- ------- -----
Net investment income (loss)... 1,699 (792) 124 324 112 79
----------- ----------- ----------- ----- ------- -----
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS:
Realized gain distributions from
portfolio sponsors............. 28,456 -- 196 189 11,087 --
Net realized gain (loss) from
sales of investments........... 18 (102) (42) 8 68 --
----------- ----------- ----------- ----- ------- -----
Net realized gain (loss)....... 28,474 (102) 154 197 11,155 --
Net unrealized gain (loss)....... (14,124) (35,717) (9,550) (472) 3,297 --
----------- ----------- ----------- ----- ------- -----
Net realized and unrealized
gain (loss).................. 14,350 (35,819) (9,396) (275) 14,452 --
----------- ----------- ----------- ----- ------- -----
Net increase (decrease) in net
assets from operations....... $ 16,049 $ (36,611) $ (9,272) $ 49 $ 14,564 $ 79
----------- ----------- ----------- ----- ------- -----
----------- ----------- ----------- ----- ------- -----
</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>
VALUE GROWTH
PERIOD PERIOD INTERNATIONAL GLOBAL AIT
FROM FROM GROWTH STRATEGIC INCOME GLOBAL MONEY MARKET
9/30/97* 9/30/97* PERIOD FROM PERIOD FROM INTERACTIVE/TELECOMM PERIOD FROM
TO TO 10/3/97* TO 10/3/97* TO PERIOD FROM 10/3/97* TO
12/31/97 12/31/97 12/31/97 12/31/97 9/30/97* TO 12/31/97 12/31/97
--------- --------- ------------ ---------------- -------------------- ------------
<S> <C> <C> <C> <C> <C> <C>
INCREASE IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss)... $ 1,699 $ (792) $ 124 $ 324 $ 112 $ 79
Net realized gain (loss)....... 28,474 (102) 154 197 11,155 --
Net unrealized gain (loss)..... (14,124) (35,717) (9,550) (472) 3,297 --
--------- --------- ------------ ------- -------- ------
Net increase (decrease) in net
assets from operations....... 16,049 (36,611) (9,272) 49 14,564 79
--------- --------- ------------ ------- -------- ------
FROM CAPITAL TRANSACTIONS (NOTE
5):
Net purchase payments.......... 488,996 306,757 83,313 42,089 216,875 8,292
Withdrawals.................... (1,658) (788) (521) (443) (866) --
Other transfers from (to) the
General Account of First
Allmerica Financial Life
Insurance Company
(Sponsor).................... 3,577 1,849 1,725 (870) 2,671 (11)
--------- --------- ------------ ------- -------- ------
Net increase in net assets from
capital transactions......... 490,915 307,818 84,517 40,776 218,680 8,281
--------- --------- ------------ ------- -------- ------
Net increase in net assets..... 506,964 271,207 75,245 40,825 233,244 8,360
NET ASSETS:
Beginning of period.............. -- -- -- -- -- --
--------- --------- ------------ ------- -------- ------
End of period.................... $506,964 $271,207 $ 75,245 $ 40,825 $ 233,244 $ 8,360
--------- --------- ------------ ------- -------- ------
--------- --------- ------------ ------- -------- ------
</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 First Allmerica Financial Life Insurance Company (the Company). The
Company is a wholly-owned subsidiary of Allmerica Financial Corporation (AFC).
The Separate Account was established on July 2, 1997 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. 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. 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.
ANNUITANT MORTALITY FLUCTUATION RESERVE -- A strengthening reserve is
required for doing business in the State of New York. The purpose of the reserve
is to provide for future mortality experience which is less favorable than that
assumed in pricing the annuity. This reserve is funded by the Company.
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................................. 37,553 $521,088 $13.500
Growth................................ 22,695 306,924 11.950
International Growth.................. 7,749 84,795 9.710
Global Strategic Income............... 4,132 41,297 9.880
Global Interactive/Telecomm........... 17,524 229,947 13.310
ALLMERICA INVESTMENT TRUST:
Money Market.......................... 8,360 8,360 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 the Company, 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 deducted from 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............................... 486,272 $ 493,827
Redemption of Units............................. (2,884) (2,912)
------------ ------------
Net increase.................................. 483,388 $ 490,915
------------ ------------
------------ ------------
Growth
Issuance of Units............................... 314,013 $ 308,899
Redemption of Units............................. (1,038) (1,081)
------------ ------------
Net increase.................................. 312,975 $ 307,818
------------ ------------
------------ ------------
International Growth
Issuance of Units............................... 85,995 $ 85,089
Redemption of Units............................. (624) (572)
------------ ------------
Net increase.................................. 85,371 $ 84,517
------------ ------------
------------ ------------
Global Strategic Income
Issuance of Units............................... 42,271 $ 42,154
Redemption of Units............................. (1,375) (1,378)
------------ ------------
Net increase.................................. 40,896 $ 40,776
------------ ------------
------------ ------------
Global Interactive/Telecomm
Issuance of Units............................... 213,343 $ 221,039
Redemption of Units............................. (2,281) (2,359)
------------ ------------
Net increase.................................. 211,062 $ 218,680
------------ ------------
------------ ------------
AIT Money Market
Issuance of Units............................... 8,290 $ 8,292
Redemption of Units............................. (12) (11)
------------ ------------
Net increase.................................. 8,278 $ 8,281
------------ ------------
------------ ------------
</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 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........................................... $ 524,013 $ 2,943
Growth.......................................... 308,114 1,088
International Growth............................ 85,390 553
Global Strategic Income......................... 42,790 1,501
Global Interactive/Telecomm..................... 232,633 2,754
ALLMERICA INVESTMENT TRUST:
Money Market.................................... 8,400 40
------------ ------------
Totals............................................ $ 1,201,340 $ 8,879
------------ ------------
------------ ------------
</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 First Allmerica Financial Life Insurance
Company
Financial Statements for Fulcrum Separate Account of First Allmerica
Financial Life Insurance Company
Financial Statements Included in Part C
None
(b) EXHIBITS
EXHIBIT 1 Vote of Board of Directors of the Company Authorizing
Establishment of Registrant dated June 13, 1996 was previously
filed in Registrant's initial Registration Statement on November
27, 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. 1 and is incorporated by reference
herein.
EXHIBIT 4 Amended Specifications Page was previously filed on August 27,
1998 in Post-Effective Amendment No. 2 and is incorporated by
reference herein. Contract Form was previously filed in
Registrant's initial Registration Statement on November 27,
1996, and is incorporated by reference herein.
EXHIBIT 5 Form of Amended Application was previously filed on August 27,
1998 in Post-Effective Amendment No. 2 and is incorporated by
reference herein. Application Form was previously filed in
Registrant's initial Registration Statement on November 27,
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 November 27, 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. 1 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 The Palladian Trust was
previously filed on August 27, 1998 in Post-Effective
Amendment No. 2 and is incorporated by reference herein.
(b) Participation Agreement between the Company and Allmerica
Investment Trust was previously filed on April 30, 1998 in
Post-Effective Amendment No. 1 and is incorporated by
reference herein.
(c) Participation Agreement with AIM Variable Insurance Funds,
Inc. was previously filed on August 27, 1998 in Post-
Effective Amendment No. 2 and is incorporated by reference
herein.
(d) Participation Agreement with Delaware Group Premium Fund,
Inc. and first amendment were previously filed in
Registration Statement No. 33-71054, Post-Effective
Amendment No. 9 and are incorporated by reference herein.
Second Amendment to Participation Agreement with Delaware
Group Premium Fund, Inc. was previously filed on August 27,
1998 in Post-Effective Amendment No. 2 and is incorporated
by reference herein.
(e) Participation Agreement with Lazard Retirement Series, Inc.
was previously filed on August 27, 1998 in Post-Effective
Amendment No. 2 and is incorporated by reference herein.
(f) Participation Agreement with MFS Variable Insurance Trust
was previously filed on August 27, 1998 in Post-Effective
Amendment No. 2 and is incorporated by reference herein.
(g) Participation Agreement with Oppenheimer Variable Account
Funds was previously filed on August 27, 1998 in Post-
Effective Amendment No. 2 and is incorporated by reference
herein.
(h) Participation Agreement with PBHG Insurance Series Fund,
Inc. 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
<TABLE>
<CAPTION>
NAME AND POSITION PRINCIPAL OCCUPATION(S) DURING
WITH COMPANY PAST FIVE YEARS
<S> <C>
Bruce C. Anderson Director of First Allmerica since 1996; Vice
Director and Vice President President, First Allmerica since 1984
Abigail M. Armstrong Secretary of First Allmerica since 1996; Counsel,
Secretary and Counsel First Allmerica since 1991
Warren E. Barnes Vice President and Corporate Controller of First
Vice President and Allmerica since 1997; Vice President of Allmerica
Corporate Controller Trust Company since 1997; Vice President and Co-
Controller, First Allmerica 1997; Vice President and
Assistant Controller, First Allmerica 1996 to 1997;
Assistant Vice President and Assistant Controller,
First Allmerica 1995 to 1996; Assistant Vice
President Corporate Accounting and Reporting, First
Allmerica 1993 to 1995
Robert E. Bruce Director and Chief Information Officer of First
Director, Vice President and Allmerica since 1997; Vice President of First
Chief Information Officer Allmerica since 1995; Corporate Manager, Digital
Equipment Corporation 1979 to 1995
John P. Kavanaugh Director and Chief Investment Officer of First
Director, Vice President and Allmerica since 1996; Vice President, First
Chief Investment Officer Allmerica since 1991
John F. Kelly Director of First Allmerica since 1996; Senior Vice
Director, Senior Vice President, President, First Allmerica since 1986; General
General Counsel and Assistant Secretary Counsel, First Allmerica since 1981; Assistant
Secretary, First Allmerica since 1991
J. Barry May Director of First Allmerica since 1996; Director and
Director 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
<PAGE>
James R. McAuliffe Director of First Allmerica since 1996; Director of
Director Citizens Insurance Company of America since 1992;
President since 1994, and CEO since 1996; Vice President,
First Allmerica 1982 to 1994 and Chief Investment Officer,
First Allmerica 1986 to 1994
John F. O'Brien Director, Chairman of the Board, President and
Director, Chairman of the Board, Chief Executive Officer, First Allmerica since 1989
President and Chief Executive Officer
Edward J. Parry, III Director and Chief Financial Officer of First
Director, Vice President, Allmerica since 1996; Vice President and
Chief Financial Officer and Treasurer Treasurer, First Allmerica since 1993; Assistant
Vice President, 1992 to 1993
Richard M. Reilly Director of First Allmerica since 1996; Vice
Director and Vice President President, First Allmerica since 1990; Director,
Allmerica Investments, Inc. since 1990; Director
and President, Allmerica Investment Management
Company, Inc. since 1990
Robert P. Restrepo, Jr. Chief Executive Officer of Travelers Property &
Director and Vice President Casualty Company 1996-1998; Senior Vice
President of Aetna Life & Casualty Company
1993-1996
Eric A. Simonsen Director of First Allmerica since 1996; Vice
Director and Vice President President, First Allmerica since 1990; Chief
Financial Officer, First Allmerica 1990 to 1996
Phillip E. Soule Director of First Allmerica since 1996; Vice
Director and Vice President President, First Allmerica since 1987
</TABLE>
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%
The Hanover Allmerica Citizens Somerset
Insurance Financial Insurance Square, Inc.
Company Insurance Company of
Brokers, Inc. Illinois
Massachusetts New Hampshire Massachusetts Illinois Massachusetts
|
______________________________________________________________________________________________________________________
| | | | |
100% 100% 100% 100% 83% 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>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
<TABLE>
<CAPTION>
NAME ADDRESS TYPE OF BUSINESS
<S> <C> <C>
AAM Equity Fund 440 Lincoln Street Massachusetts Grantor Trust
Worcester MA 01653
AAM Growth & Income Fund, L.P. 440 Lincoln Street Limited Partnership
Worcester MA 01653
AFC Capital Trust I 440 Lincoln Street Statutory Business Trust
Worcester MA 01653
Allmerica Asset Management Limited 440 Lincoln Street Investment advisory services
Worcester MA 01653
<PAGE>
Allmerica Asset Management, Inc. 440 Lincoln Street Investment advisory services
Worcester MA 01653
Allmerica Benefits, Inc. 440 Lincoln Street Non-insurance medical services
Worcester MA 01653
Allmerica Equity Index Pool 440 Lincoln Street Massachusetts Grantor Trust
Worcester MA 01653
Allmerica Financial Alliance Insurance 100 North Parkway Multi-line property and casualty
Company Worcester MA 01605 insurance
Allmerica Financial Benefit Insurance 100 North Parkway Multi-line property and casualty
Company Worcester MA 01605 insurance
Allmerica Financial Corporation 440 Lincoln Street Holding Company
Worcester MA 01653
Allmerica Financial Insurance Brokers, 440 Lincoln Street Insurance Broker
Inc. Worcester MA 01653
Allmerica Financial Life Insurance and 440 Lincoln Street Life insurance, accident and
Annuity Company (formerly known Worcester MA 01653 health insurance, annuities,
as SMA Life Assurance Company) variable annuities and
variable life insurance
Allmerica Financial Services Insurance 440 Lincoln Street Insurance Agency
Agency, Inc. Worcester MA 01653
Allmerica Funding Corp. 440 Lincoln Street Special purpose funding vehicle
Worcester MA 01653 for commercial paper
Allmerica, Inc. 440 Lincoln Street Common employer for Allmerica
Worcester MA 01653 Financial Corporation entities
Allmerica Financial Investment 440 Lincoln Street Investment advisory services
Management Services, Inc. Worcester MA 01653
(formerly known as Allmerica
Institutional Services, Inc. and
440 Financial Group of Worcester, Inc.)
Allmerica Investment Management 440 Lincoln Street Investment advisory services
Company, Inc. Worcester MA 01653
Allmerica Investments, Inc. 440 Lincoln Street Securities, retail broker-dealer
Worcester MA 01653
Allmerica Investment Trust 440 Lincoln Street Investment Company
Worcester MA 01653
Allmerica Plus Insurance Agency, Inc. 440 Lincoln Street Insurance Agency
Worcester MA 01653
<PAGE>
Allmerica Property & Casualty 440 Lincoln Street Holding Company
Companies, Inc. Worcester MA 01653
Allmerica Securities Trust 440 Lincoln Street Investment Company
Worcester MA 01653
Allmerica Services Corporation 440 Lincoln Street Internal administrative services
Worcester MA 01653 provider to Allmerica Financial
Corporation entities
Allmerica Trust Company, N.A. 440 Lincoln Street Limited purpose national trust
Worcester MA 01653 company
AMGRO, Inc. 100 North Parkway Premium financing
Worcester MA 01605
Citizens Corporation 440 Lincoln Street Holding Company
Worcester MA 01653
Citizens Insurance Company of America 645 West Grand River Multi-line property and casualty
Howell MI 48843 insurance
Citizens Insurance Company of Illinois 333 Pierce Road Multi-line property and casualty
Itasca IL 60143 insurance
Citizens Insurance Company of the 3950 Priority Way South Multi-line property and casualty
Midwest Drive, Suite 200 insurance
Indianapolis IN 46280
Citizens Insurance Company of Ohio 8101 N. High Street Multi-line property and casualty
P.O. Box 342250 insurance
Columbus OH 43234
Citizens Management, Inc. 645 West Grand River Services management company
Howell MI 48843
Financial Profiles 5421 Avenida Encinas Computer software company
Carlsbad, CA 92008
First Allmerica Financial Life 440 Lincoln Street Life, pension, annuity, accident
Insurance Company (formerly State Worcester MA 01653 and health insurance company
Mutual Life Assurance Company of
America)
First Sterling Limited 440 Lincoln Street Holding Company
Worcester MA 01653
First Sterling Reinsurance Company 440 Lincoln Street Reinsurance Company
Limited Worcester MA 01653
Greendale Special Placements Fund 440 Lincoln Street Massachusetts Grantor Trust
Worcester MA 01653
The Hanover American Insurance 100 North Parkway Multi-line property and casualty
Company Worcester MA 01605 insurance
<PAGE>
The Hanover Insurance Company 100 North Parkway Multi-line property and casualty
Worcester MA 01605 insurance
Hanover Texas Insurance Management 801 East Campbell Road Attorney-in-fact for Hanover
Company, Inc. Richardson TX 75081 Lloyd's Insurance Company
Hanover Lloyd's Insurance Company 801 East Campbell Road Multi-line property and casualty
Richardson TX 75081 insurance
Lloyds Credit Corporation 440 Lincoln Street Premium financing service
Worcester MA 01653 franchises
Logan Wells Water Company, Inc. 603 Heron Drive Water Company serving land
Bridgeport NJ 08014 development investment
Massachusetts Bay Insurance Company 100 North Parkway Multi-line property and casualty
Worcester MA 01605 insurance
SMA Financial Corp. 440 Lincoln Street Holding Company
Worcester MA 01653
Somerset Square, Inc. 440 Lincoln Street Real estate holding company
Worcester MA 01653
Sterling Risk Management Services, Inc. 440 Lincoln Street Risk management services
Worcester MA 01653
</TABLE>
ITEM 27. NUMBER OF CONTRACT OWNERS
As of September 30, 1998 there were 40 Contract holders of qualified
Contracts and 39 Contract holders of non-qualified Contracts.
ITEM 28. INDEMNIFICATION
Article VIII of the Bylaws of First Allmerica Financial Life Insurance
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, VA-P, Allmerica
Select Separate Account II, Group VEL Account, Separate
Account KG, Separate Account KGC, Fulcrum Separate Account,
Fulcrum Variable Life Separate Account, Allmerica Select
Separate Account of Allmerica Financial Life Insurance and
Annuity Company
<PAGE>
- Inheiritage Account, VEL II Account, Separate Account I, Separate
Account VA-K, Separate Account VA-P, Group VEL Account, Separate
Account KG, Separate Account KGC, Fulcrum Separate Account,
and Allmerica Select Separate Account of First Allmerica
Financial Life Insurance Company.
- Allmerica Investment Trust
(b) The Principal Business Address of each of the following Directors and
Officers of Allmerica Investments, Inc. is:
440 Lincoln Street
Worcester, Massachusetts 01653
<TABLE>
<CAPTION>
NAME POSITION OR OFFICE WITH UNDERWRITER
<S> <C>
Abigail M. Armstrong Secretary and Counsel
Emil J. Aberizk, Jr. Vice President
Edward T. Berger Vice President and Chief Compliance Officer
Richard F. Betzler, Jr. Vice President
Philip J. Coffey Vice President
Thomas P. Cunningham Vice President, Chief Financial Officer and Controller
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
</TABLE>
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
Each account, book or other document required to be maintained by Section 31(a)
of the Investment Company Act of 1940 and Rules 31a-1 to 31a-3 thereunder are
maintained by the Company at 440 Lincoln Street, Worcester, Massachusetts.
ITEM 31. MANAGEMENT SERVICES
The Company provides daily unit value calculations and related services for
the Company's separate accounts.
<PAGE>
ITEM 32. UNDERTAKINGS
(a) Subject to the terms and conditions of Section 15(d) of the Securities
Exchange Act of 1934, the undersigned registrant hereby undertakes to
file with the Securities and Exchange Commission ("SEC") such
supplementary and periodic information, documents, and reports as may
be prescribed by any rule or regulation of the SEC heretofore or
hereafter duly adopted pursuant to authority conferred in that
section.
(b) The Registrant hereby undertakes to include in the prospectus a
postcard that the applicant can remove to send for a Statement of
Additional Information.
(c) The Registrant hereby undertakes to deliver a Statement of Additional
Information promptly upon written or oral request, according to the
requirements of Form N-4.
(d) Insofar as indemnification for liability arising under the 1933 Act
may be permitted to Directors, Officers and Controlling Persons of
Registrant under any registration statement, underwriting agreement or
otherwise, Registrant has been advised that, in the opinion of the
SEC, such indemnification is against public policy as expressed in the
1933 Act and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment
by Registrant of expenses incurred or paid by a Director, Officer or
Controlling Person of Registrant in the successful defense of any
action, suit or proceeding) is asserted by such Director, Officer or
Controlling Person in connection with the securities being registered,
Registrant will, unless in the opinion of its counsel the matter has
been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the 1933 Act and will be
governed by the final adjudication of such issue.
(e) The Company hereby 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 First Allmerica Financial Life Insurance
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.
<PAGE>
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 of 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
1st day of October, 1998.
FULCRUM SEPARATE ACCOUNT OF
FIRST ALLMERICA FINANCIAL LIFE INSURANCE 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.
<TABLE>
<CAPTION>
Signatures Title Date
<S> <C> <C>
/s/ John F. O Brien Director, President and Chief Executive October 1, 1998
- ----------------------
John F. O Brien Officer
/s/ Bruce C. Anderson Director and Vice President
- ----------------------
Bruce C. Anderson
/s/ Warren E. Barnes Vice President and
- ----------------------
Warren E. Barnes Corporate Controller
/s/ Robert E. Bruce Director, Vice President and Chief
- ----------------------
Robert E. Bruce Information Officer
/s/ John P. Kavanaugh Director, Vice President and
- ----------------------
John P. Kavanaugh Chief Investment Officer
/s/ John F. Kelly Director, Senior 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 and Vice President
- ----------------------
Richard M. Reilly
/s/ Robert P. Restrepo, Jr. Director and Vice President
- ----------------------
Robert P. Restrepo, Jr.
/s/ Eric A. Simonsen Director and Vice President
- ----------------------
Eric A. Simonsen
/s/ Phillip E. Soule Director and Vice President
- ----------------------
Phillip E. Soule
</TABLE>
<PAGE>
EXHIBIT TABLE
Exhibit 9 Opinion of Counsel
Exhibit 10 Consent of Independent Accountants
Exhibit 15(h) Participation Agreement with PBHG Insurance Series Fund, Inc.
<PAGE>
October 1, 1998
First Allmerica Financial Life Insurance Company
440 Lincoln Street
Worcester, MA 01653
RE: FULCRUM SEPARATE ACCOUNT OF FIRST ALLMERICA FINANCIAL
LIFE INSURANCE COMPANY
FILE #'S: 333-16929 AND 811-07947
Gentlemen:
In my capacity as Attorney of First Allmerica Financial Life Insurance 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 Massachusetts 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 Prospectuses 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 Fulcrum Separate Account of First Allmerica Financial Life
Insurance Company on Form N-4 of our report dated February 3, 1998, relating to
the financial statements of First Allmerica Financial Life Insurance Company,
and our report dated March 25, 1998, relating to the financial statements of
Fulcrum Separate Account of First Allmerica Financial Life Insurance 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
October 14, 1998
<PAGE>
FUND PARTICIPATION AGREEMENT
THIS AGREEMENT made as of the 1st day of August, 1998, by and between the
PBHG INSURANCE SERIES FUND, INC. ("FUND"), a Maryland corporation, PILGRIM
BAXTER & ASSOCIATES, LTD. ("Adviser"), a Delaware corporation, and FIRST
ALLMERICA FINANCIAL LIFE INSURANCE COMPANY ("LIFE COMPANY"), a life insurance
company organized under the laws of the State of Massachusetts, on its own
behalf and on behalf of each separate account of the LIFE COMPANY set forth on
Schedule B hereto, as may be amended from time to time.
WHEREAS, FUND is registered with the Securities and Exchange Commission
("SEC") under the Investment Company Act of 1940, as amended (the "'40 Act"), as
an open-end, diversified management investment company; and
WHEREAS, FUND is organized as a series fund comprised of several Portfolios
("Portfolios"), with those currently available being listed on Appendix A
hereto; and
WHEREAS, FUND was organized to act as the funding vehicle for certain
variable life insurance and/or variable annuity contracts ("Variable Contracts")
offered by life insurance companies through separate accounts ("Separate
Accounts") of such life insurance companies ("Participating Insurance
Companies"); and
WHEREAS, FUND may also offer its shares to certain qualified pension and
retirement plans ("Qualified Plans"); and
WHEREAS, FUND has received an order from the SEC, granting Participating
Insurance Companies and their separate accounts exemptions from the provisions
of Sections 9(a), 13(a), 15(a) and 15(b) of the '40 Act, and Rules 6e-2(b)(15)
and 6e-3(T)(b)(15) thereunder, to the extent necessary to permit shares of the
Portfolios of the FUND to be sold to and held by Variable Contract separate
accounts of both affiliated and unaffiliated Participating Insurance Companies
and Qualified Plans ("Exemptive Order"); and
WHEREAS, LIFE COMPANY has established or will establish one or more
separate accounts ("Separate Accounts") to offer Variable Contracts and is
desirous of having FUND as one of the underlying funding vehicles for such
Variable Contracts; and
1
<PAGE>
WHEREAS, ADVISER is registered with the SEC as an investment adviser under
the Investment Advisers Act of 1940 and as a broker-dealer under the Securities
Exchange Act of 1934, as amended and acts as the FUND's investment adviser; and
WHEREAS, to the extent permitted by applicable insurance laws and
regulations, LIFE COMPANY intends to purchase shares of FUND to fund the
aforementioned Variable Contracts and FUND is authorized to sell such shares to
LIFE COMPANY at net asset value;
NOW, THEREFORE, in consideration of their mutual promises, LIFE COMPANY,
FUND, and ADVISER agree as follows:
Article I. SALE OF FUND SHARES
-------------------
1.1 FUND, so long as this Agreement is in effect, agrees to make
available in accordance with the terms of this Agreement to the Separate
Accounts of LIFE COMPANY shares of the selected Portfolios as listed on Appendix
B for investment of purchase payments of Variable Contracts allocated to the
designated Separate Accounts as provided in FUND's Registration Statement.
1.2 FUND agrees to sell to LIFE COMPANY those shares of the selected
Portfolios of FUND which LIFE COMPANY orders, executing such orders on a daily
basis at the net asset value next computed after receipt by FUND or its designee
of the order for the shares of FUND. For purposes of this Section 1.2, LIFE
COMPANY shall be the designee of FUND for receipt of such orders from the
designated Separate Account and receipt by such designee shall constitute
receipt by FUND; provided that LIFE COMPANY receives the order by the earlier of
(i) 4:00 p.m. New York time or (ii) the close of trading on the floor of the New
York Stock Exchange and FUND receives notice from LIFE COMPANY by telephone or
facsimile (or by such other means as FUND and LIFE COMPANY may agree in writing)
of such order by 9:00 a.m. New York time on the next following Business Day.
"Business Day" shall mean any day on which the New York Stock Exchange is open
for trading and on which FUND calculates its net asset value pursuant to the
rules of the SEC.
1.3 FUND agrees to redeem on LIFE COMPANY's request, any full or
fractional shares of FUND held by LIFE COMPANY, executing such requests on a
daily basis at the net asset value next computed after receipt by FUND or its
designee of the request for redemption, in accordance with the provisions of
this agreement and FUND's Registration Statement. For purposes of this Section
1.3, LIFE COMPANY shall be the designee of FUND for receipt of requests for
redemption from the designated Separate Account and receipt by such designee
shall constitute receipt by FUND; provided that
2
<PAGE>
LIFE COMPANY receives the request for redemption by the earlier of (i) 4:00
p.m. New York time or (ii) the close of trading on the floor of the New York
Stock Exchange and FUND receives notice from LIFE COMPANY by telephone or
facsimile (or by such other means as FUND and LIFE COMPANY may agree in
writing) of such request for redemption by 9:00 a.m. New York time on the
next following Business Day.
1.4 FUND shall furnish promptly (electronically or by telephone, followed
by written confirmation), notice to LIFE COMPANY of any income dividends or
capital gain distributions payable on the shares of any Portfolio of FUND. LIFE
COMPANY hereby elects to receive all such income dividends and capital gain
distributions as are payable on a Portfolio's shares in additional shares of the
Portfolio. LIFE COMPANY reserves the right to revoke this election and to
receive all such income dividends and capital gain distributions in cash. FUND
shall notify LIFE COMPANY or its designee of the number of shares so issued as
payment of such dividends and distributions.
1.5 FUND shall make the net asset value per share for the selected
Portfolio(s) available to LIFE COMPANY on a daily basis as soon as reasonably
practicable after the net asset value per share is calculated but shall use its
best efforts to make such net asset value available by 7:00 p.m. New York time.
If FUND provides LIFE COMPANY with materially incorrect share net asset value
information through no fault of LIFE COMPANY, LIFE COMPANY on behalf of the
Separate Accounts, shall be entitled to an adjustment to the number of shares
purchased or redeemed to reflect the correct share net asset value. Any
material error in the calculation of net asset value per share, dividend or
capital gain information shall be reported promptly upon discovery to LIFE
COMPANY.
1.6 At the end of each Business Day, LIFE COMPANY shall use the
information described in Section 1.5 to calculate Separate Account unit values
for the day. Using these unit values, LIFE COMPANY shall process each such
Business Day's Separate Account transactions based on requests and premiums
received by it by the close of trading on the floor of the New York Stock
Exchange (currently 4:00 p.m. New York time) to determine the net dollar amount
of FUND shares which shall be purchased or redeemed at that day's closing net
asset value per share. The net purchase or redemption orders so determined
shall be transmitted to FUND by LIFE COMPANY by 9:00 a.m. New York Time on the
Business Day next following LIFE COMPANY's receipt of such requests and premiums
in accordance with the terms of Sections 1.2 and 1.3 hereof.
1.7 If LIFE COMPANY's order requests the purchase of FUND shares, LIFE
COMPANY shall pay for such purchase by wiring federal funds to FUND or its
designated custodial account on the day the order is transmitted by LIFE
COMPANY. If LIFE COMPANY's order requests a net redemption resulting in a
payment of
3
<PAGE>
redemption proceeds to LIFE COMPANY, FUND shall use its best efforts to wire
the redemption proceeds to LIFE COMPANY on the same Business Day, unless
doing so would require FUND to dispose of Portfolio securities or otherwise
incur additional costs. In any event, proceeds shall be wired to LIFE
COMPANY within three Business Days or such longer period permitted by the '40
Act or the rules, orders or regulations thereunder and FUND shall notify the
person designated in writing by LIFE COMPANY as the recipient for such notice
of such delay by 3:00 p.m. New York Time the same Business Day that LIFE
COMPANY transmits the redemption order to FUND.
1.8 FUND agrees that all shares of the Portfolios of FUND will be sold
only to Participating Insurance Companies which have agreed to participate in
FUND to fund their Separate Accounts and/or to Qualified Plans, all in
accordance with the requirements of Section 817(h) of the Internal Revenue Code
of 1986, as amended ("Code") and Treasury Regulation 1.817-5. Shares of the
Portfolios of FUND will not be sold directly to the general public.
1.9 FUND may refuse to sell shares of any Portfolio to any person, or
suspend or terminate the offering of the shares of or liquidate any Portfolio of
FUND if such action is required by law or by regulatory authorities having
jurisdiction or is, in the sole discretion of the Board of Directors of the FUND
(the "Board"), acting in good faith and in light of its duties under federal and
any applicable state laws, deemed necessary, desirable or appropriate and in the
best interests of the shareholders of such Portfolios.
1.10 Issuance and transfer of Portfolio shares will be by book entry only.
Stock certificates will not be issued to LIFE COMPANY or the Separate Accounts.
Shares ordered from Portfolio will be recorded in appropriate book entry titles
for the Separate Accounts.
Article II. REPRESENTATIONS AND WARRANTIES
------------------------------
2.1 LIFE COMPANY represents and warrants that it is an insurance
company duly organized and in good standing under the laws of the State of
Massachusetts and that it has legally and validly established each Separate
Account as a segregated asset account under such laws, and that Allmerica
Investments, Inc., the principal underwriter for the Variable Contracts, is
registered as a broker-dealer under the Securities Exchange Act of 1934 (the
"'34 Act").
2.2 LIFE COMPANY represents and warrants that it has registered or, prior
to any issuance or sale of the Variable Contracts, will register each Separate
Account as a unit investment trust ("UIT") in accordance with the provisions of
the '40 Act and cause each Separate Account to remain so registered to serve as
a segregated asset account for the Variable Contracts, unless an exemption from
registration is available.
4
<PAGE>
2.3 LIFE COMPANY represents and warrants that the Variable Contracts will
be registered under the Securities Act of 1933 (the "'33 Act") unless an
exemption from registration is available prior to any issuance or sale of the
Variable Contracts and that the Variable Contracts will be issued and sold in
compliance in all material respects with all applicable federal and state laws
and further that the sale of the Variable Contracts shall comply in all material
respects with applicable state insurance law suitability requirements.
2.4 LIFE COMPANY represents and warrants that the Variable Contracts are
currently and at the time of issuance will be treated as life insurance,
endowment or annuity contracts under applicable provisions of the Code, that it
will maintain such treatment and that it will notify FUND immediately upon
having a reasonable basis for believing that the Variable Contracts have ceased
to be so treated or that they might not be so treated in the future.
2.5 FUND represents and warrants that the Fund shares offered and sold
pursuant to this Agreement will be registered under the '33 Act and sold in
accordance with all applicable federal and state laws, and FUND shall be
registered under the '40 Act prior to and at the time of any issuance or sale of
such shares. FUND, subject to Section 1.9 above, shall amend its registration
statement under the '33 Act and the '40 Act from time to time as required in
order to effect the continuous offering of its shares. FUND shall register and
qualify its shares for sale in accordance with the laws of the various states
only if and to the extent deemed advisable by FUND.
2.6. 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 '40 Act.
2.7 FUND represents and warrants that each Portfolio will comply with the
diversification requirements set forth in Section 817(h) of the Code, and the
rules and regulations thereunder, including without limitation Treasury
Regulation 1.817-5, and will notify LIFE COMPANY immediately upon having a
reasonable basis for believing any Portfolio has ceased to comply or might not
so comply and will immediately take all reasonable steps to adequately diversify
the Portfolio to achieve compliance.
2.8 FUND represents and warrants that each Portfolio invested in by the
Separate Account intends to elect to be treated as a "regulated investment
company" under Subchapter M of the Code, and to qualify for such treatment for
each taxable year and will notify LIFE COMPANY immediately upon having a
reasonable basis for believing it has ceased to so qualify or might not so
qualify in the future.
5
<PAGE>
2.9 ADVISER represents and warrants that it is and will remain duly
registered and licensed in all material respects under all applicable federal
and state securities laws and shall perform its obligations hereunder in
compliance in all material respects with any applicable state and federal laws.
Article III. PROSPECTUS AND PROXY STATEMENTS
-------------------------------
3.1 FUND shall prepare and be responsible for filing with the SEC and any
state regulators requiring such filing all shareholder reports, notices, proxy
materials (or similar materials such as voting instruction solicitation
materials), prospectuses and statements of additional information of FUND. FUND
shall bear the costs of registration and qualification of shares of the
Portfolios, preparation and filing of the documents listed in this Section 3.1
and all taxes and filing fees to which an issuer is subject on the issuance and
transfer of its shares.
3.2 At least annually, FUND or its designee shall provide LIFE COMPANY,
free of charge, with as many copies of the current prospectus for the shares of
the Portfolios as LIFE COMPANY may reasonably request for distribution to
existing Variable Contract owners whose Variable Contracts are funded by such
shares. FUND or its designee shall provide LIFE COMPANY, at LIFE COMPANY's
expense, with as many copies of the current prospectus for the shares as LIFE
COMPANY may reasonably request for distribution to prospective purchasers of
Variable Contracts. If requested by LIFE COMPANY in lieu thereof, FUND 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 LIFE 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 a year (or more
frequently if the prospectus for the shares is supplemented or amended) to have
the prospectus for the Variable Contracts and the prospectus for the FUND shares
printed together in one document. The expenses of such printing will be
apportioned between (a) LIFE COMPANY and (b) FUND in proportion to the number of
pages of the Variable Contract and FUND's prospectus, taking account of other
relevant factors affecting the expense of printing, such as covers, columns,
graphs and charts; FUND to bear the cost of printing the FUND's prospectus
portion of such document for distribution only to owners of existing Variable
Contracts funded by the FUND's shares and LIFE COMPANY to bear the expense of
printing the portion of such documents relating to the Separate Account;
provided, however, LIFE COMPANY shall bear all printing expenses of such
combined documents where used for distribution to prospective purchasers or to
owners of existing Variable Contracts not funded by the FUND's shares. In the
event that LIFE COMPANY requests that FUND or its designee provide FUND's
prospectus in a "camera ready" or diskette format, FUND shall be responsible for
providing the prospectus in the format in which it is accustomed to formatting
prospectuses and shall bear the expense of providing the prospectus in such
6
<PAGE>
format (e.g. typesetting expenses), and LIFE COMPANY shall bear the expense of
adjusting or changing the format to conform with any of its prospectuses.
3.3 FUND will provide LIFE COMPANY with at least one complete copy of all
prospectuses, statements of additional information, annual and semi-annual
reports, proxy statements, exemptive applications and all amendments or
supplements to any of the above that relate to the Portfolios promptly after the
filing of each such document with the SEC or other regulatory authority. LIFE
COMPANY will provide FUND with at least one complete copy of all prospectuses,
statements of additional information, annual and semi-annual reports, proxy
statements, exemptive applications and all amendments or supplements to any of
the above that relate to a Separate Account promptly after the filing of each
such document with the SEC or other regulatory authority.
3.4 The prospectus for the Portfolios shall state that the Statement of
Additional Information for the Portfolios is available from FUND or its
designee. FUND or its designee, at its expense, shall print and provide such
statement of additional information to LIFE COMPANY (or a master of such
statement suitable for duplication by LIFE COMPANY) for distribution to any
owner of a Variable Contract funded by the Portfolios. FUND or its designee, at
LIFE COMPANY's expense, shall print and provide such statement to LIFE COMPANY
(or a master of such statement suitable for duplication by LIFE COMPANY) for
distribution to a prospective purchaser who requests such statement or to an
owner of a Variable Contract not funded by the Portfolio.
3.5 FUND, at its expense, shall provide LIFE COMPANY with copies of its
proxy statements, reports to shareholders, and other communications (except for
prospectus and statements of additional information, which are covered above) to
shareholders in such quantity as LIFE COMPANY shall reasonably require for
distributing to contract owners. FUND or its designee shall bear the reasonable
cost of printing, duplicating, and mailing of these documents to current
contract owners.
Article IV. SALES MATERIALS
---------------
4.1 LIFE COMPANY will furnish, or will cause to be furnished, to FUND and
ADVISER, each piece of sales literature or other promotional material in which
FUND or ADVISER is named, at least fifteen (15) Business Days prior to its
intended use. No such material will be used if FUND or ADVISER objects to its
use in writing within ten (10) Business Days after receipt of such material.
7
<PAGE>
4.2 FUND and ADVISER will furnish, or will cause to be furnished, to LIFE
COMPANY, each piece of sales literature or other promotional material in which
LIFE COMPANY or its Separate Accounts are named, at least fifteen (15) Business
Days prior to its intended use. No such material will be used if LIFE COMPANY
objects to its use in writing within ten (10) Business Days after receipt of
such material.
4.3 FUND and its affiliates and agents shall not give any information or
make any representations on behalf of LIFE COMPANY or concerning LIFE COMPANY,
the Separate Accounts, or the Variable Contracts issued by LIFE COMPANY, other
than the information or representations contained in a registration statement or
prospectus for such Variable Contracts, as such registration statement and
prospectus may be amended or supplemented from time to time, or in reports of
the Separate Accounts or reports prepared for distribution to owners of such
Variable Contracts, or in sales literature or other promotional material
approved by LIFE COMPANY or its designee, except with the written permission of
LIFE COMPANY.
4.4 LIFE COMPANY and its affiliates and agents shall not give any
information or make any representations on behalf of FUND or concerning FUND
other than the information or representations contained in a registration
statement or prospectus for FUND, as such registration statement and prospectus
may be amended or supplemented from time to time, or in sales literature or
other promotional material approved by FUND or its designee, except with the
written permission of FUND.
4.5 For purposes of this Agreement, the phrase "sales literature or other
promotional material" or words of similar import include, without limitation,
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 (such as any written communication distributed or made
generally available to customers or the public, including brochures, circulars,
research reports, market letters, form letters, seminar texts, or reprints or
excerpts of any other advertisement, sales literature, or published article),
educational or training materials or other communications distributed or made
generally available to some or all agents or employees, registration statements,
prospectuses, statements of additional information, shareholder reports and
proxy materials, and any other material constituting sales literature or
advertising under National Association of Securities Dealers, Inc. ("NASD")
rules, the '40 Act or the '33 Act.
8
<PAGE>
Article V. POTENTIAL CONFLICTS
-------------------
5.1 The parties acknowledge that FUND has filed an application with the
SEC to request an order granting relief from various provisions of the '40 Act
and the rules thereunder to the extent necessary to permit FUND shares to be
sold to and held by Variable Contract separate accounts of both affiliated and
unaffiliated Participating Insurance Companies and Qualified Plans. It is
anticipated that the Exemptive Order, when and if issued, shall require FUND and
each Participating Insurance Company to comply with conditions and undertakings
substantially as provided in this Section 5. If the Exemptive Order imposes
conditions materially different from those provided for in this Section 5, the
conditions and undertakings imposed by the Exemptive Order shall govern this
Agreement and the parties hereto agree to amend this Agreement consistent with
the Exemptive Order. The Fund will not enter into a participation agreement with
any other Participating Insurance Company unless it imposes the same conditions
and undertakings as are imposed on LIFE COMPANY hereby.
5.2 The Board will monitor FUND for the existence of any material
irreconcilable conflict between the interests of Variable Contract owners of all
separate accounts investing in FUND. An irreconcilable material conflict may
arise for a variety of reasons, which may include: (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 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 FUND are being managed;
(e) a difference in voting instructions given by Variable Contract owners; (f) a
decision by a Participating Insurance Company to disregard the voting
instructions of Variable Contract owners and (g) if applicable, a decision by a
Qualified Plan to disregard the voting instructions of plan participants.
5.3 LIFE COMPANY will report any potential or existing conflicts, of which
it is aware, to the Board. LIFE COMPANY will be responsible for assisting the
Board in carrying out its duties in this regard by providing the Board with all
information reasonably necessary for the Board to consider any issues raised.
The responsibility includes, but is not limited to, an obligation by the LIFE
COMPANY to inform the Board whenever it has determined to disregard Variable
Contract owner voting instructions. These responsibilities of LIFE COMPANY
will be carried out with a view only to the interests of the Variable Contract
owners.
5.4 If a majority of the Board or majority of its disinterested Directors,
determines that a material irreconcilable conflict exists affecting LIFE
COMPANY, LIFE COMPANY, at its expense and to the extent reasonably practicable
(as determined by
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a majority of the Board's disinterested Directors), will take any steps
necessary to remedy or eliminate the irreconcilable material conflict,
including; (a) withdrawing the assets allocable to some or all of the
Separate Accounts from FUND or any Portfolio thereof and reinvesting those
assets in a different investment medium, which may include another Portfolio
of FUND, or another investment company; (b) submitting the question as to
whether such segregation should be implemented to a vote of all affected
Variable Contract owners and as appropriate, segregating the assets of any
appropriate group (i.e variable annuity or variable life insurance Contract
owners of one or more Participating Insurance Companies) that votes in favor
of such segregation, or offering to the affected Variable Contract owners the
option of making such a change; and (c) establishing a new registered
management investment company (or series thereof) or managed separate
account. If a material irreconcilable conflict arises because of LIFE
COMPANY's decision to disregard Variable Contract owner voting instructions,
and that decision represents a minority position or would preclude a majority
vote, LIFE COMPANY may be required, at the election of FUND, to withdraw the
Separate Account's investment in FUND, and no charge or penalty will be
imposed as a result of such withdrawal. The responsibility to take such
remedial action shall be carried out with a view only to the interests of the
Variable Contract owners and shall be limited to the extent required by the
foregoing irreconcilable material conflict as determined by a majority of the
disinterested members of the Board.
For the purposes of this Section 5.4, a majority of the disinterested
members of the Board shall determine whether or not any proposed action
adequately remedies any irreconcilable material conflict but in no event will
FUND or ADVISER (or any other investment adviser of FUND) be required to
establish a new funding medium for any Variable Contract. Further, LIFE COMPANY
shall not be required by this Section 5.4 to establish a new funding medium for
any Variable Contracts if any offer to do so has been declined by a vote of a
majority of Variable Contract owners materially and adversely affected by the
irreconcilable material conflict.
5.5 The Board's determination of the existence of an irreconcilable
material conflict and its implications shall be made known promptly and in
writing to LIFE COMPANY.
5.6 No less than annually, LIFE COMPANY shall submit to the Board such
reports, materials or data as the Board may reasonably request so that the Board
may fully carry out its obligations. Such reports, materials, and data shall be
submitted more frequently if deemed appropriate by the Board.
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Article VI. VOTING
------
6.1 LIFE COMPANY will provide pass-through voting privileges to all
Variable Contract owners so long as the SEC continues to interpret the '40 Act
as requiring pass-through voting privileges for Variable Contract owners.
Accordingly, LIFE COMPANY, where applicable, will vote shares of the Portfolio
held in its Separate Accounts in a manner consistent with voting instructions
timely received from its Variable Contract owners. LIFE COMPANY will be
responsible for assuring that each of its Separate Accounts that participates in
FUND calculates voting privileges in a manner consistent with other
Participating Insurance Companies or the Exemptive Order. LIFE COMPANY will vote
shares for which it has not received timely voting instructions, as well as
shares it owns, in the same proportion as its votes those shares for which it
has received voting instructions.
6.2 If and to the extent Rule 6e-2 and Rule 6e-3(T) are amended, or if
Rule 6e-3 is adopted, to provide exemptive relief from any provision of the
'40 Act or the rules thereunder with respect to mixed and shared funding on
terms and conditions materially different from any exemptions granted in the
Exemptive Order, then FUND, and/or the Participating Insurance Companies, as
appropriate, shall take such steps as may be necessary to comply with Rule
6e-2 and Rule 6e-3(T), as amended, and Rule 6e-3, as adopted, to the extent
such Rules are applicable.
Article VII. INDEMNIFICATION
---------------
7.1 INDEMNIFICATION BY LIFE COMPANY. LIFE COMPANY agrees to indemnify
and hold harmless FUND, ADVISER and each of their directors, principals,
officers, employees and agents and each person, if any, who controls FUND or
ADVISER within the meaning of Section 15 of the '33 Act (collectively, the
"Indemnified Parties" for purposes of this Article VII) against any and all
losses, claims, damages, liabilities (including amounts paid in settlement with
the written consent of LIFE COMPANY, which consent shall not be unreasonably
withheld) 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 FUND's shares or the Variable Contracts and:
(a) 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 Contracts or contained in the
Variable 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
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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 by or on behalf
of FUND for use in the registration statement or prospectus for the
Variable Contracts or in the Variable Contracts or sales literature
(or any amendment or supplement) or otherwise for use in connection
with the sale of the Variable Contracts or FUND 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 or sales literature of FUND not supplied by LIFE
COMPANY, or persons under its control) or wrongful conduct of LIFE
COMPANY or persons under its control, with respect to the sale or
distribution of the Variable Contracts or FUND shares; or
(c) arise out of any untrue statement or alleged untrue statement of a
material fact contained in a registration statement, prospectus, or
sales literature of 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 statement or omission or
such alleged statement or omission was made in reliance upon and in
conformity with information furnished to FUND by or on behalf of LIFE
COMPANY; or
(d) arise as a result of any failure by LIFE COMPANY to provide
substantially the services and furnish the materials under the terms
of this Agreement; or
(e) arise out of or result from any material breach of any representation
and/or warranty made by LIFE COMPANY in this Agreement or arise out of
or result from any other material breach of this Agreement by LIFE
COMPANY.
7.2 LIFE 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 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.
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<PAGE>
7.3 LIFE 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 LIFE 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 LIFE COMPANY of any
such claim shall not relieve LIFE 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 an Indemnified Party, LIFE COMPANY shall be entitled to participate at
its own expense in the defense of such action. LIFE COMPANY also shall be
entitled to assume the defense thereof, with counsel satisfactory to the party
named in the action. After notice from LIFE COMPANY to such party of LIFE
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 LIFE
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.
7.4 INDEMNIFICATION BY ADVISER. ADVISER agrees to indemnify and hold
harmless LIFE COMPANY and each of its directors, officers, employees, and agents
and each person, if any, who controls LIFE COMPANY within the meaning of Section
15 of the '33 Act (collectively, the "Indemnified Parties" for the purposes of
this Article VII) against any and all losses, claims, damages, liabilities
(including amounts paid in settlement with the written consent of ADVISER which
consent shall not be unreasonably withheld) or litigation (including legal and
other expenses) to which the Indemnified Parties may become subject under any
statute, or regulation, at common law or otherwise, insofar as such losses,
claims, damages, liabilities or expenses (or actions in respect thereof) or
settlements are related to the sale or acquisition of FUND's shares or the
Variable Contracts 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
or prospectus or sales literature of 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 ADVISER or FUND
by or on behalf of
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LIFE COMPANY for use in the registration statement or prospectus for
FUND or in sales literature (or any amendment or supplement) or
otherwise for use in connection with the sale of the Variable
Contracts or FUND 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 or sales literature for the Variable Contracts
not supplied by ADVISER or persons under its control) or wrongful
conduct of FUND or ADVISER or persons under their control, with
respect to the sale or distribution of the Variable Contracts or FUND
shares; or
(c) arise out of any untrue statement or alleged untrue statement of a
material fact contained in a registration statement, prospectus, or
sales literature covering the Variable Contracts, or any amendment
thereof or supplement thereto or the omission or alleged omission to
state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, 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 for inclusion therein by or on behalf of FUND; or
(d) arise as a result of (i) a failure by FUND to provide substantially
the services and furnish the materials under the terms of this
Agreement; or (ii) a failure by a Portfolio(s) invested in by the
Separate Account to comply with the diversification requirements of
Section 817(h) of the Code; or (iii) a failure by a Portfolio(s)
invested in by the Separate Account to qualify as a "regulated
investment company" under Subchapter M of the Code; or
(e) arise out of or result from any material breach of any representation
and/or warranty made by ADVISER in this Agreement or arise out of or
result from any other material breach of this Agreement by ADVISER.
7.5 ADVISER shall not be liable under this indemnification provision with
respect to any losses, claims, damages, liabilities or litigation to which an
Indemnified Party would otherwise be subject by reason of such Indemnified
Party's willful misfeasance, bad faith, or 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.
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7.6 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 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 ADVISER of any such claim shall not relieve
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,
ADVISER shall be entitled to participate at its own expense in the defense
thereof. ADVISER also shall be entitled to assume the defense thereof, with
counsel satisfactory to the party named in the action. After notice from
ADVISER to such party of 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 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.
Article VIII. TERM; TERMINATION
-----------------
8.1 This Agreement shall be effective as of the date hereof and shall
continue in force until terminated in accordance with the provisions herein.
8.2 This Agreement shall terminate in accordance with the following
provisions:
(a) At the option of LIFE COMPANY or FUND at any time from the date hereof
upon 60 days' notice, unless a shorter time is agreed to by the
parties;
(b) At the option of LIFE COMPANY, if FUND shares are not reasonably
available to meet the requirements of the Variable Contracts as
determined by LIFE COMPANY. Prompt notice of election to terminate
shall be furnished by LIFE COMPANY, said termination to be effective
ten days after receipt of notice unless FUND makes available a
sufficient number of shares to reasonably meet the requirements of the
Variable Contracts within said ten-day period;
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(c) At the option of LIFE COMPANY, upon the institution of formal
proceedings against FUND by the SEC, the NASD, or any other regulatory
body, the expected or anticipated ruling, judgment or outcome of which
would, in LIFE COMPANY's reasonable judgment, materially impair FUND's
ability to meet and perform FUND's obligations and duties hereunder.
Prompt notice of election to terminate shall be furnished by LIFE
COMPANY with said termination to be effective upon receipt of notice;
(d) At the option of FUND, upon the institution of formal proceedings
against LIFE COMPANY by the SEC, the NASD, or any other regulatory
body, the expected or anticipated ruling, judgment or outcome of which
would, in FUND's reasonable judgment, materially impair LIFE
COMPANY's ability to meet and perform its obligations and duties
hereunder. Prompt notice of election to terminate shall be furnished
by FUND with said termination to be effective upon receipt of notice;
(e) In the event FUND's shares are not registered, issued or sold in
accordance with applicable state or federal law, or such law precludes
the use of such shares as the underlying investment medium of Variable
Contracts issued or to be issued by LIFE COMPANY. Termination shall
be effective upon receipt of notice by LIFE COMPANY;
(f) At the option of FUND if the Variable Contracts cease to qualify as
annuity contracts or life insurance contracts, as applicable, under
the Code, or if FUND reasonably believes that the Variable Contracts
may fail to so qualify. Termination shall be effective upon receipt
of notice by LIFE COMPANY;
(g) At the option of LIFE COMPANY, upon FUND's breach of any material
provision of this Agreement, which breach has not been cured to the
satisfaction of LIFE COMPANY within ten days after written notice of
such breach is delivered to FUND;
(h) At the option of FUND, upon LIFE COMPANY's breach of any material
provision of this Agreement, which breach has not been cured to the
satisfaction of FUND within ten days after written notice of such
breach is delivered to LIFE COMPANY;
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(i) At the option of FUND, if the Variable Contracts are not registered,
issued or sold in accordance with applicable federal and/or state law.
Termination shall be effective immediately upon receipt of notice by
LIFE COMPANY;
(j) In the event this Agreement is assigned without the prior written
consent of LIFE COMPANY, FUND, and ADVISER, termination shall be
effective immediately upon receipt of notice;
(k) At the option of LIFE COMPANY 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 LIFE COMPANY reasonably believes that the
FUND may fail to so qualify. Termination shall be effective
immediately upon receipt of notice;
(l) At the option of LIFE COMPANY with respect to any Portfolio in the
event that such Portfolio fails to meet the diversification
requirements specified in Article 2.6. Termination shall be effective
immediately upon receipt of notice.
8.3 Notwithstanding any termination of this Agreement pursuant to Section
8.2 hereof, FUND shall, at the option of LIFE COMPANY, continue to make
available additional FUND shares, as provided below, pursuant to the terms and
conditions of this Agreement, for all Variable Contracts in effect on the
effective date of termination of this Agreement (hereinafter referred to as
"Existing Contracts"). Specifically, without limitation, if LIFE COMPANY so
elects, the owners of the Existing Contracts or LIFE COMPANY, whichever shall
have legal authority to do so, shall be permitted to reallocate investments in
FUND, redeem investments in FUND and/or invest in FUND upon the payment of
additional premiums under the Existing Contracts. In the event of a termination
of this Agreement pursuant to Section 8.2 hereof, LIFE COMPANY, as promptly as
is practicable under the circumstances, shall notify FUND AND ADVISER whether
LIFE COMPANY elects to have FUND continue to make FUND shares available after
such termination. If FUND shares continue to be made available after such
termination, the provisions of this Agreement shall remain in effect and
thereafter either FUND or LIFE COMPANY may terminate the Agreement, as so
continued pursuant to this Section 8.3, upon sixty (60) days prior written
notice to the other party.
8.4 Except as necessary to implement Variable Contract owner initiated
transactions, or as required by state insurance laws or regulations, LIFE
COMPANY shall not redeem the shares attributable to the Variable Contracts (as
opposed to the
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shares attributable to LIFE COMPANY's assets held in the Separate Accounts),
and LIFE COMPANY shall not prevent Variable Contract owners from allocating
payments to a Portfolio that was otherwise available under the Variable
Contracts until thirty (30) days after the LIFE COMPANY shall have notified
FUND of its intention to do so.
Article IX. NOTICES
-------
Any notice hereunder shall be given by registered or certified mail return
receipt requested 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 FUND:
PBHG Insurance Series Fund, Inc.
825 Duportail Road
Wayne, PA 19087
Attention: Mr. Brian F. Bereznak
With a copy to:
PBHG Insurance Series Fund, Inc.
825 Duportail Road
Wayne, PA 19087
Attention: John M. Zerrr, Esq.
If to the ADVISER:
Pilgrim Baxter & Associates, Ltd.
825 Duportail Road
Wayne, PA 19087
Attention: Mr. Eric C. Schneider
With a copy to:
Pilgrim Baxter & Associates, Ltd.
825 Duportail Road
Wayne, PA 19087
Attention: John M. Zerrr, Esq.
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If to LIFE COMPANY:
First Allmerica Financial Life Insurance Company
440 Lincoln Street
Worcester, MA 01653
Attention: Richard M. Reilly, President
Notice shall be deemed given on the date of receipt by the addressee as
evidenced by the return receipt.
Article X. MISCELLANEOUS
-------------
10.1 The captions in this Agreement are included for convenience of
reference only and in no way define or delineate any of the provisions hereof or
otherwise affect their construction or effect.
10.2 This Agreement may be executed simultaneously in two or more
counterparts, each of which taken together shall constitute one and the same
instrument.
10.3 If any provision of this Agreement shall be held or made invalid by a
court decision, statute, rule or otherwise, the remainder of the Agreement shall
not be affected thereby.
10.4 This Agreement shall be construed and the provisions hereof
interpreted under and in accordance with the laws of the Commonwealth of
Pennsylvania. It shall also be subject to the provisions of the federal
securities laws and the rules and regulations thereunder and to any orders of
the SEC granting exemptive relief therefrom and the conditions of such orders.
10.5 It is understood and expressly stipulated that neither the
shareholders of shares of any Portfolio nor the Directors or officers of FUND or
any Portfolio shall be personally liable hereunder. No Portfolio shall be
liable for the liabilities of any other Portfolio. All persons dealing with
FUND or a Portfolio must look solely to the property of FUND or that Portfolio,
respectively, for enforcement of any claims against FUND or that Portfolio. It
is also understood that each of the Portfolios shall be deemed to be entering
into a separate Agreement with LIFE COMPANY so that it is as if each of the
Portfolios had signed a separate Agreement with LIFE COMPANY and that a single
document is being signed simply to facilitate the execution and administration
of the Agreement.
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10.6 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 Contracts and all information reasonably
identified as confidential in writing by any other party hereto and, except as
permitted by this Agreement, shall not disclose, disseminate or utilize such
names and addresses and other confidential information until such time as the
confidential information may come into the public domain without fault of the
parties hereto.
10.7 Each party shall cooperate with each other party and all appropriate
governmental authorities (including without limitation the SEC, the NASD and
state insurance regulators) and shall permit such authorities reasonable access
to its books and records in connection with any investigation or inquiry
relating to this Agreement or the transactions contemplated hereby.
10.8 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.
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10.9 No provision of this Agreement may be amended or modified in any
manner except by a written agreement properly authorized and executed by FUND,
ADVISER and the LIFE COMPANY.
IN WITNESS WHEREOF, the parties have caused their duly authorized officers
to execute this Fund Participation Agreement as of the date and year first above
written.
PBHG INSURANCE SERIES FUND, INC.
By: /s/ Brian F. Berznak
---------------------------------------
Name: Brian F. Bereznak
Title: V.P.
PILGRIM BAXTER & ASSOCIATES, LTD.
By: /s/ Eric C. Schneider
---------------------------------------
Name: Eric C. Schneider
Title: CFO
FIRST ALLMERICA FINANCIAL LIFE
INSURANCE COMPANY
By: /s/ Richard M. Reilly
---------------------------------------
Name: Richard M. Reilly
Title: V.P.
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APPENDIX A
PBHG INSURANCE SERIES FUND, INC. - PORTFOLIOS
- ---------------------------------------------
PBHG Growth II Portfolio
PBHG Large Cap Growth Portfolio
PBHG Technology & Communications Portfolio
PBHG Select 20 Portfolio*
PBHG Large Cap Value Portfolio
PBHG Small Cap Value Portfolio
* Shares not available for sale until November 1, 1998.
<PAGE>
APPENDIX B
SEPARATE ACCOUNTS SELECTED PORTFOLIOS
- ----------------- -------------------
Fulcrum Account of First Allmerica Financial PBHG Select 20 Portfolio*
Life Insurance Company
* Shares not available for sale until November 1, 1998.
