<PAGE>
File Nos. 333-16929
811-7947
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Post-Effective Amendment No. 4
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 5
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 May 1, 1999 pursuant to paragraph (b) of Rule 485
----
60 days after filing pursuant to paragraph (a)(1) of
---- Rule 485
on (date) pursuant to paragraph (a)(1) of Rule 485
----
this post-effective amendment designates a new effective
---- date for a previously filed post-effective amendment
VARIABLE ANNUITY POLICIES
Pursuant to Reg. Section 270.24f-2 of the Investment Company Act of 1940
("1940 Act"), Registrant hereby declares that 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, 1998 was filed on or
before March 30, 1999.
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CROSS REFERENCE SHEET SHOWING LOCATION IN PROSPECTUS OF
ITEMS CALLED FOR BY FORM N-4
<TABLE>
<CAPTION>
Form N-4 Item No. Caption In Prospectus
- ----------------- ---------------------
<S> <C>
1.............................Cover Page
2.............................Special Terms
3.............................Summary of Fees and Expenses; Summary of Contract Features
4.............................Condensed Financial Information; Performance Information
5.............................Description of the Companies, the Variable Accounts and the Underlying Funds
6.............................Charges and Deductions
7.............................Description of the Contract
8.............................Electing the Form of Annuity and the Annuity Date; Description of Variable
Annuity Payout Options; Annuity Benefit Payments
9.............................Death Benefit
10.............................Payments; Computation of Values; Distribution
11.............................Surrender; Withdrawals; Charge for Surrender and Withdrawals; Withdrawal
Without Surrender Charge; Texas Optional Retirement Program
12.............................Federal Tax Considerations
13.............................Legal Matters
14.............................Statement of Additional Information-Table of Contents
Form N-4 Item No Caption In Statement Of Additional Information
- -----------------------------------------------------------------------------
15.............................Cover Page
16.............................Table of Contents
17.............................General Information and History
18.............................Services
19.............................Underwriters
20.............................Underwriters
21.............................Performance Information
22.............................Annuity Benefit Payments
23.............................Financial Statements
</TABLE>
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
WORCESTER, MASSACHUSETTS
FLEXIBLE PAYMENT DEFERRED VARIABLE AND FIXED ANNUITY
CONTRACTS
FULCRUM FUND VARIABLE ANNUITY CONTRACTS
This Prospectus provides important information about
The Fulcrum Fund variable annuity contract issued by
Allmerica Financial Life Insurance and Annuity
Company (in all jurisdictions except Hawaii and New
York) and First Allmerica Financial Life Insurance
Company in New York and Hawaii. The contract is a
flexible payment tax- deferred combination variable
and fixed annuity offered on both a group and
individual basis.
The Variable Account, known as the Fulcrum Separate
Account is subdivided into Sub- Accounts. Each
Sub-Account offered under this contract invests
exclusively in shares of one of the following
PLEASE READ THIS investment portfolios:
PROSPECTUS CAREFULLY
BEFORE INVESTING AND
KEEP IT FOR FUTURE
REFERENCE.
<TABLE>
<CAPTION>
THE FULCRUM TRUST LAZARD RETIREMENT SERIES, INC.
-------------------------------------------------- --------------------------------------------------
<C> <S> <C>
ANNUITIES INVOLVE Global Interactive/Telecomm Portfolio Lazard Retirement International Equity Portfolio
RISKS INCLUDING International Growth Portfolio
POSSIBLE LOSS OF Growth Portfolio MFS-REGISTERED TRADEMARK- VARIABLE INSURANCE
PRINCIPAL. Value Portfolio TRUST-SM-
Strategic Income Portfolio -------------------------------
MFS-Registered Trademark- Emerging Growth Series
ALLMERICA INVESTMENT TRUST MFS-Registered Trademark- Growth With Income
------------------------- Series
Money Market Fund
OPPENHEIMER VARIABLE ACCOUNT FUNDS
AIM VARIABLE INSURANCE FUNDS, INC. -----------------------------------
--------------------------------- Oppenheimer Aggressive Growth Fund/VA
AIM V.I. Value Fund Oppenheimer Main Street Growth & Income Fund/VA
DELAWARE GROUP PREMIUM FUND, INC. PBHG INSURANCE SERIES FUND, INC.
--------------------------------- --------------------------------
Small Cap Value Series PBHG Select 20 Portfolio
Delaware Balanced Series
</TABLE>
The Fixed Account is part of the Company's General
Account and pays an interest rate guaranteed for
one year from the time a payment is received. The
Guarantee Period Accounts offer fixed rates of
interest for specified periods ranging from 2 to
10 years. A Market Value Adjustment is applied to
payments removed from a Guarantee Period Account
before the end of the specified period. The Market
Value Adjustment may be positive or negative.
Payments allocated to a Guarantee Period Account
are held in the Company's Separate Account GPA
(except in California where they may be allocated
THIS ANNUITY IS to the General Account).
NOT: A Statement of Additional Information dated May 1,
- A BANK DEPOSIT OR 1999 containing more information about this
OBLIGATION; annuity is on file with the Securities and
- FEDERALLY INSURED; Exchange Commission and is incorporated by
- ENDORSED BY ANY reference into this Prospectus. A copy may be
BANK OR obtained free of charge by completing the attached
GOVERNMENTAL request card or by calling Allmerica Investments,
AGENCY. Inc., at 1-800-917-1909. The Table of Contents of
the Statement of Additional Information is listed
on page 3 of this Prospectus.
This Prospectus and the Statement of Additional
Information can also be obtained from the
Securities and Exchange Commission's website
(http://www.sec.gov).
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT
APPROVED OR DISAPPROVED THESE SECURITIES OR
DETERMINED THAT THE INFORMATION IS TRUTHFUL OR
COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
DATED MAY 1, 1999
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
SPECIAL TERMS.............................................................. 4
SUMMARY OF FEES AND EXPENSES............................................... 6
SUMMARY OF CONTRACT FEATURES............................................... 15
PERFORMANCE INFORMATION.................................................... 21
DESCRIPTION OF THE COMPANIES, THE VARIABLE ACCOUNTS, AND THE UNDERLYING
FUNDS..................................................................... 22
INVESTMENT OBJECTIVES AND POLICIES......................................... 25
DESCRIPTION OF THE CONTRACT................................................ 27
A. Payments............................................................. 27
B. Right to Cancel Individual Retirement Annuity........................ 27
C. Right to Cancel All Other Contracts.................................. 28
D. Transfer Privilege................................................... 28
Automatic Transfers and Automatic Account Rebalancing
Options...................................................... 28
E. Surrender............................................................ 29
F. Withdrawals.......................................................... 30
Systematic Withdrawals......................................... 30
Life Expectancy Distributions.................................. 31
G. 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
H. The Spouse of the Owner as Beneficiary............................... 32
I. Assignment........................................................... 33
J. Electing the Form of Annuity and the Annuity Date.................... 33
K. Description of Variable Annuity Payout Options....................... 34
L. Annuity Benefit Payments............................................. 35
Determination of the First Variable Annuity Benefit Payment.... 35
The Annuity Unit............................................... 35
Determination of the Number of Annuity Units................... 36
Dollar Amount of Subsequent Variable Annuity Benefit
Payments..................................................... 36
M. Optional Minimum Guaranteed Annuity Payout Rider...................... 36
N. NORRIS Decision...................................................... 38
O. Computation of Values................................................ 38
The Accumulation Unit.......................................... 38
Net Investment Factor.......................................... 39
CHARGES AND DEDUCTIONS..................................................... 39
A. Variable Account Deductions.......................................... 39
Mortality and Expense Risk Charge.............................. 39
Administrative Expense Charge.................................. 40
Other Charges.................................................. 40
B. Contract Fee......................................................... 40
C. Optional Minimum Guaranteed Annuity Payout Rider Charge.............. 40
D. Premium Taxes........................................................ 41
E. Surrender Charge..................................................... 41
Charge for Surrender and Withdrawals........................... 42
Reduction or Elimination of Surrender Charge and Additional
Amounts Credited............................................. 42
Withdrawal Without Surrender Charge............................ 43
Surrenders..................................................... 44
Charge at the Time Annuity Benefit Payments Begin.............. 44
F. Transfer Charge...................................................... 44
GUARANTEE PERIOD ACCOUNTS.................................................. 45
</TABLE>
2
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<TABLE>
<S> <C>
FEDERAL TAX CONSIDERATIONS................................................. 47
A. Qualified and Non-Qualified Contracts................................ 48
B. Taxation of the Contracts in General................................. 48
Withdrawals Prior to Annuitization............................. 48
Annuity Payouts After Annuitization............................ 48
Penalty on Distribution........................................ 48
Assignments or Transfers....................................... 49
Nonnatural Owners.............................................. 49
Deferred Compensation Plans of State and Local Governments
and Tax-Exempt Organizations................................. 49
C. Tax Withholding...................................................... 49
D. Provisions Applicable to Qualified Employer Plans.................... 50
Corporate and Self Employed Pension and Profit Sharing Plans... 50
Individual Retirement Annuities................................ 50
Tax-Sheltered Annuities........................................ 50
Texas Optional Retirement Program.............................. 51
STATEMENTS AND REPORTS..................................................... 51
LOANS (QUALIFIED CONTRACTS ONLY)........................................... 51
ADDITION, DELETION OR SUBSTITUTION OF INVESTMENTS.......................... 51
CHANGES TO COMPLY WITH LAW AND AMENDMENTS.................................. 52
VOTING RIGHTS.............................................................. 52
DISTRIBUTION............................................................... 53
SERVICE AND DISTRIBUTION FEES.............................................. 53
LEGAL MATTERS.............................................................. 54
YEAR 2000 COMPLIANCE....................................................... 54
FURTHER INFORMATION........................................................ 55
APPENDIX A -- MORE INFORMATION ABOUT THE FIXED ACCOUNT..................... A-1
APPENDIX B -- SURRENDER CHARGES AND THE MARKET VALUE ADJUSTMENT............ B-1
APPENDIX C -- THE DEATH BENEFIT............................................ C-1
APPENDIX D -- CONDENSED FINANCIAL INFORMATION.............................. D-1
STATEMENT OF ADDITIONAL INFORMATION
TABLE OF CONTENTS
GENERAL INFORMATION AND HISTORY............................................ 2
TAXATION OF THE CONTRACT, THE VARIABLE ACCOUNT AND THE COMPANY............. 3
SERVICES................................................................... 3
UNDERWRITERS............................................................... 3
ANNUITY BENEFIT PAYMENTS................................................... 4
EXCHANGE OFFER............................................................. 5
PERFORMANCE INFORMATION.................................................... 7
TAX-DEFERRED ACCUMULATION.................................................. 12
FINANCIAL STATEMENTS....................................................... F-1
</TABLE>
3
<PAGE>
SPECIAL TERMS
ACCUMULATED VALUE: the total value of all Accumulation Units in the Sub-Accounts
plus the value of all accumulations in the Fixed Account and Guarantee Period
Accounts credited to the Contract, on any date before the Annuity Date.
ACCUMULATION UNIT: a unit of measure used to calculate the value of 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. This date may
not be greater than the first day of the month before the Annuitant's 90th
birthday.
ANNUITY UNIT: a unit of measure used to calculate the value of the periodic
annuity benefit payments under the Contract.
COMPANY: unless otherwise specified, any reference to the "Company" shall refer
exclusively to Allmerica Financial Life Insurance and Annuity Company for
contracts issued in all jurisdictions except Hawaii and New York and exclusively
to First Allmerica Financial Life Insurance Company for contracts issued in
Hawaii and New York.
FIXED ACCOUNT: an investment option under the Contract that guarantees principal
and a fixed minimum interest rate and which is part of the Company's General
Account.
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.
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 (OR YOU): 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 investing 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 Variable Insurance Trust (the "MFS Trust"), a
corresponding fund of Oppenheimer Variable Account Funds ("Oppenheimer"), or a
corresponding portfolio of PBHG Insurance Series Fund, Inc. ("PBHG").
4
<PAGE>
SURRENDER VALUE: the Accumulated Value of the Contract on full surrender after
application of any Contract fee, surrender charge, and Market Value Adjustment.
UNDERLYING FUNDS (OR FUNDS): Global Interactive/Telecomm Portfolio,
International Growth Portfolio, Growth Portfolio, Value Portfolio and Strategic
Income Portfolio of The Fulcrum Trust; Money Market Fund of Allmerica Investment
Trust; AIM V.I. Value Fund of AVIF; Delaware Balanced Series and Small Cap Value
Series of DGPF; Lazard Retirement International Equity Portfolio of Lazard; MFS
Emerging Growth Series and MFS Growth With Income Series of the MFS Trust;
Oppenheimer Aggressive Growth Fund/VA and Oppenheimer Main Street Growth &
Income Fund/VA of Oppenheimer; and PBHG Select 20 Portfolio of PBHG.
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 an Underlying Fund's portfolio securities such
that the current unit value of the Sub-Accounts may be materially affected.
VARIABLE ACCOUNT: the Fulcrum Separate 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
Underlying Funds.
5
<PAGE>
SUMMARY OF FEES AND EXPENSES
There are certain fees and expenses that you will bear under the Fulcrum Fund
Contract. The purpose of the following tables is to assist you in understanding
these fees and expenses. The tables show (1) charges under your Contract, (2)
annual expenses of the Sub-Accounts, and (3) annual 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 "D. Premium
Taxes."
<TABLE>
<CAPTION>
YEARS FROM DATE
(1) CONTRACT CHARGES OF PAYMENT CHARGE
- ----------------------------------------------------------------- ---------------- -----------
<S> <C> <C>
SURRENDER CHARGE:* 0-1 7%
This charge may be assessed upon surrender, withdrawal or 2 6%
annuitization under any commutable period certain option or a 3 5%
noncommutable period certain option of less than ten years. The 4 4%
charge is a percentage of payments applied to the amount 5 3%
surrendered (in excess of any amount that is free of surrender 6 2%
charge) within the indicated time period. 7 1%
More than 7 0%
TRANSFER CHARGE: None
The Company currently makes no charge for transfers, and
guarantees that the first 12 transfers in a Contact year will
not be subject to a transfer charge. For each subsequent
transfer, the Company reserves the right to assess a charge,
guaranteed never to exceed $25, to reimburse the Company for the
costs of processing the transfer.
ANNUAL CONTRACT FEE: $ 30
The $30 Contract fee is deducted annually and upon surrender
when Accumulated Value is less than $100,000. The Contract fee
is currently waived for Contracts issued to and maintained by
the trustee of a 401(k) plan.
OPTIONAL RIDER CHARGES:
(The annual charge is deducted on a monthly basis at the end of
each month.)
On an annual basis as a percentage of Accumulated Value, the
charge is:
Optional Minimum Guaranteed Annuity Payout Rider with a 0.25%
ten-year waiting period:
Optional Minimum Guaranteed Annuity Payout Rider with a 0.15%
fifteen-year waiting period:
(2) ANNUAL SUB-ACCOUNT 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>
* From time to time the Company may allow a reduction of the surrender charge,
the period during which the charges apply, or both, and/or credit additional
amounts on Contracts when (1) Contracts are sold to individuals or groups of
individuals in a manner which reduces sales expenses, or (2) where the Owner or
the Annuitant on the date of issue is within certain classes of eligible
persons. For more information, see "REDUCTION OR ELIMINATION OF SURRENDER CHARGE
AND ADDITIONAL AMOUNTS CREDITED."
6
<PAGE>
(3) ANNUAL 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
1998. 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 from year-to-year,
hypothetical expense information assuming fees of 0.00%, 2.00% and 4.00%, is
shown below under "MORE INFORMATION ABOUT PERFORMANCE FEES OF THE FULCRUM
TRUST."
<TABLE>
<CAPTION>
TOTAL FUND
MANAGEMENT FEE OTHER EXPENSES EXPENSES
(AFTER ANY (AFTER ANY (AFTER ANY WAIVERS/
FUND VOLUNTARY WAIVERS) REIMBURSEMENTS) REIMBURSEMENTS)
- ------------------------------------ ------------------- ----------------- -------------------
<S> <C> <C> <C>
Global Interactive/Telecomm
Portfolio.......................... 1.96%(1) 1.50%(2) 3.46%
Oppenheimer Aggressive Growth
Fund/VA............................ 0.69% 0.02% 0.71%
MFS Emerging Growth Series.......... 0.75% 0.10% 0.85%
Small Cap Value Series.............. 0.75% 0.10% 0.85%(5)
Lazard Retirement International
Equity Portfolio................... 0.75% 0.50%(6)(7) 1.25%
International Growth Portfolio...... 0.05%(1) 1.50%(2) 1.55%
PBHG Select 20 Portfolio............ 0.84% 0.36% 1.20%(8)
Growth Portfolio.................... 0.00%(3) 1.20%(2) 1.20%
Value Portfolio..................... 0.30%(1) 1.20%(2) 1.50%
AIM V.I. Value Fund................. 0.61% 0.05% 0.66%
MFS Growth With Income Series....... 0.75% 0.13% 0.88%
Oppenheimer Main Street Growth &
Income Fund/VA..................... 0.74% 0.05% 0.79%
Delaware Balanced Series............ 0.65% 0.10% 0.75%(5)
Strategic Income Portfolio.......... 0.67%(1) 1.50%(2) 2.17%
Money Market Fund................... 0.26% 0.06% 0.32%(4)
</TABLE>
(1) A performance based advisory fee is in effect, which fee may vary anywhere
from 0.00% to 4.00%.
(2) These numbers have been restated to reflect the expense limitations in
effect during 1999. (Different expense limitations were in effect during 1998.)
AFIMS has voluntarily agreed to limit operating expenses and reimburse those
expenses to the extent that the Portfolio's "Other Expenses" during 1999 (i.e.,
expenses other than management fees) exceed the following expense limitations
(expressed as an annualized percentage of average daily net assets): 1.50% for
the Global Interactive/Telecomm Portfolio, 1.50% for the International Growth
Portfolio, 1.20% for the Growth Portfolio, 1.20% for the Value Portfolio, and
1.50% for the Strategic Income Portfolio. These limitations are in effect
through December 31, 1999. Without the effect of the expense limitations, the
1998 "Other Expenses" ratios would have been the following: 3.69% for the Global
Interactive/Telecomm Portfolio, 5.09% for the International Growth Portfolio,
5.04% for the Growth Portfolio, 3.00% for the Value Portfolio, and 6.49% for the
Strategic Income Portfolio.
(3) Effective August 1, 1998, a new Portfolio Manager, Analytic Investors, Inc.,
is in place for the Growth Portfolio. The Manager and the Portfolio Manager have
voluntarily agreed to limit their fee from August 1, 1998 through July 31, 1999
to the lesser of the following two rates: (1) 0.80%, the rate specified in the
Portfolio Manager Agreement; or (2) the rate that would have applied under the
prior Portfolio Manager Agreement with the prior portfolio manager. The latter
rate varies based on prior performance.
7
<PAGE>
(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 1998.The
limitation may be terminated at any time.
(5) Effective May 1, 1999 through October 31, 1999, Delaware Management Company
has voluntarily agreed to waive its management fees and reimburse Small Cap
Value Series and Delaware Balanced 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, 1999. The declaration of a voluntary expense
limitation does not bind the investment adviser to declare future expense
limitations with respect to these series. Pursuant to a vote of the Fund's
shareholders on March 17, 1999, a new management fee structure based on average
daily net assets was approved. The above ratios have been restated to reflect
the new management fee structure which took effect on May 1, 1999.
(6) Lazard Asset Management, the Portfolio's investment advisor, has voluntarily
agreed to waive its fees and reimburse the Lazard Retirement International
Equity Portfolio if total operating expenses exceed 1.25% of average net assets.
Total portfolio operating expenses prior to waivers and/or reimbursements by the
investment advisor, total 48.67%, annualized, at December 31, 1998.
(7) 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.
(8) Other Expenses are based on amounts for the fiscal year ended December 31,
1998. The adviser to PBHG Select 20 Portfolio has agreed to waive or limit the
management fees and 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. Absent such fee waivers/expense
reimbursements, the Management Fees, Other Expenses and Total Fund Expenses for
the PBHG Select 20 Portfolio were 0.85%, 0.36% and 1.21%, respectively.
The Underlying Fund information above was provided by the Underlying Funds and
was not independently verified by the Company.
EXPENSE EXAMPLES The following examples demonstrate the cumulative expenses
which an Owner would pay at 1, 3, 5, and 10-year intervals, assuming the 1998
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 Securities and Exchange Commission
("SEC"), the Contract fee is reflected in the examples by a method designed 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.
8
<PAGE>
(1)(A) IF, AT THE END OF THE APPLICABLE TIME PERIOD, YOU SURRENDER YOUR CONTRACT
OR ANNUITIZE* UNDER A COMMUTABLE PERIOD CERTAIN OPTION OR A NONCOMMUTABLE PERIOD
CERTAIN OPTION OF LESS THAN TEN YEARS, OR ANY FIXED PERIOD CERTAIN OPTION, YOU
WOULD PAY THE FOLLOWING EXPENSES ON A $1,000 INVESTMENT, ASSUMING A 5% ANNUAL
RETURN ON ASSETS, AND NO RIDER:**
<TABLE>
<CAPTION>
FUND 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ------------------------------------------------------- ----------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Global Interactive/Telecomm Portfolio.................. $ 109 $192 $275 $499
Oppenheimer Aggressive Growth Fund/VA.................. $ 102 $171 $241 $437
MFS Emerging Growth Series............................. $ 85 $119 $154 $268
Small Cap Value Series................................. $ 85 $119 $154 $268
Lazard Retirement International Equity Portfolio....... $ 89 $131 $174 $307
International Growth Portfolio......................... $ 91 $139 $188 $336
PBHG Select 20 Portfolio............................... $ 88 $129 $171 $302
Growth Portfolio....................................... $ 88 $129 $171 $302
Value Portfolio........................................ $ 91 $138 $185 $331
AIM V.I. Value Fund.................................... $ 83 $114 $145 $248
MFS Growth With Income Series.......................... $ 85 $120 $156 $271
Oppenheimer Main Street Growth & Income Fund/VA........ $ 84 $117 $151 $262
Delaware Balanced Series............................... $ 84 $116 $149 $258
Strategic Income Portfolio............................. $ 97 $156 $217 $392
Money Market Fund...................................... $ 80 $104 $128 $213
</TABLE>
(1)(B) IF, AT THE END OF THE APPLICABLE TIME PERIOD, YOU SURRENDER YOUR CONTRACT
OR ANNUITIZE* UNDER A COMMUTABLE PERIOD CERTAIN OPTION OR A NONCOMMUTABLE PERIOD
CERTAIN OPTION OF LESS THAN TEN YEARS, OR ANY FIXED PERIOD CERTAIN OPTION, YOU
WOULD PAY THE FOLLOWING EXPENSES ON A $1,000 INVESTMENT, ASSUMING A 5% ANNUAL
RETURN ON ASSETS, AND ELECTION OF A MINIMUM GUARANTEED ANNUITY PAYOUT RIDER**
WITH A TEN-YEAR WAITING PERIOD:
<TABLE>
<CAPTION>
FUND 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ------------------------------------------------------- ----------- ---------- --------- ---------
<S> <C> <C> <C> <C>
Global Interactive/Telecomm Portfolio.................. $ 112 $199 $286 $518
Oppenheimer Aggressive Growth Fund/VA.................. $ 104 $178 $252 $457
MFS Emerging Growth Series............................. $ 87 $126 $166 $292
Small Cap Value Series................................. $ 87 $126 $166 $292
Lazard Retirement International Equity Portfolio....... $ 91 $138 $185 $331
International Growth Portfolio......................... $ 94 $146 $200 $359
PBHG Select 20 Portfolio............................... $ 90 $136 $183 $326
Growth Portfolio....................................... $ 90 $136 $183 $326
Value Portfolio........................................ $ 93 $145 $197 $354
AIM V.I. Value Fund.................................... $ 85 $121 $157 $274
MFS Growth With Income Series.......................... $ 87 $127 $168 $295
Oppenheimer Main Street Growth & Income Fund/VA........ $ 87 $125 $163 $287
Delaware Balanced Series............................... $ 86 $123 $161 $283
Strategic Income Portfolio............................. $ 100 $163 $228 $414
Money Market Fund...................................... $ 82 $111 $140 $239
</TABLE>
9
<PAGE>
(2)(A) IF, AT THE END OF THE APPLICABLE TIME PERIOD, YOU ANNUITIZE* UNDER A LIFE
OPTION OR A NONCOMMUTABLE PERIOD CERTAIN OPTION OF TEN YEARS OR LONGER, OR IF
YOU DO NOT SURRENDER OR ANNUITIZE THE CONTRACT, YOU WOULD PAY THE FOLLOWING
EXPENSES ON A $1,000 INVESTMENT, ASSUMING A 5% ANNUAL RETURN ON ASSETS AND NO
RIDER:**
<TABLE>
<CAPTION>
FUND 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ------------------------------------------------------- --------- ----------- ----------- ---------
<S> <C> <C> <C> <C>
Global Interactive/Telecomm Portfolio.................. $50 $ 150 $ 249 $499
Oppenheimer Aggressive Growth Fund/VA.................. $42 $ 127 $ 214 $437
MFS Emerging Growth Series............................. $24 $ 73 $ 125 $268
Small Cap Value Series................................. $24 $ 73 $ 125 $268
Lazard Retirement International Equity Portfolio....... $28 $ 85 $ 145 $307
International Growth Portfolio......................... $31 $ 94 $ 160 $336
PBHG Select 20 Portfolio............................... $27 $ 84 $ 143 $302
Growth Portfolio....................................... $27 $ 84 $ 143 $302
Value Portfolio........................................ $30 $ 93 $ 157 $331
AIM V.I. Value Fund.................................... $22 $ 67 $ 116 $248
MFS Growth With Income Series.......................... $24 $ 74 $ 127 $271
Oppenheimer Main Street Growth & Income Fund/VA........ $23 $ 71 $ 122 $262
Delaware Balanced Series............................... $23 $ 70 $ 120 $258
Strategic Income Portfolio............................. $37 $ 112 $ 190 $392
Money Market Fund...................................... $18 $ 57 $ 98 $213
</TABLE>
(2)(B) IF, AT THE END OF THE APPLICABLE TIME PERIOD, YOU ANNUITIZE* UNDER A LIFE
OPTION OR A NONCOMMUTABLE PERIOD CERTAIN OPTION OF TEN YEARS OR LONGER, OR IF
YOU DO NOT SURRENDER OR ANNUITIZE THE CONTRACT, YOU WOULD PAY THE FOLLOWING
EXPENSES ON A $1,000 INVESTMENT, ASSUMING A 5% ANNUAL RETURN ON ASSETS AND
ELECTION OF A MINIMUM GUARANTEED ANNUITY PAYOUT RIDER** WITH A TEN-YEAR WAITING
PERIOD:
<TABLE>
<CAPTION>
FUND 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ------------------------------------------------------- --------- ----------- ---------- ---------
<S> <C> <C> <C> <C>
Global Interactive/Telecomm Portfolio.................. $52 $ 157 $261 $518
Oppenheimer Aggressive Growth Fund/VA.................. $45 $ 135 $226 $457
MFS Emerging Growth Series............................. $26 $ 81 $138 $292
Small Cap Value Series................................. $26 $ 81 $138 $292
Lazard Retirement International Equity Portfolio....... $30 $ 93 $157 $331
International Growth Portfolio......................... $33 $ 101 $172 $359
PBHG Select 20 Portfolio............................... $30 $ 91 $155 $326
Growth Portfolio....................................... $30 $ 91 $155 $326
Value Portfolio........................................ $33 $ 100 $169 $354
AIM V.I. Value Fund.................................... $24 $ 75 $128 $274
MFS Growth With Income Series.......................... $27 $ 82 $139 $295
Oppenheimer Main Street Growth & Income Fund/VA........ $26 $ 79 $135 $287
Delaware Balanced Series............................... $25 $ 78 $133 $283
Strategic Income Portfolio............................. $39 $ 120 $201 $414
Money Market Fund...................................... $21 $ 65 $111 $239
</TABLE>
* The Contract fee is not deducted after annuitization. A surrender charge may
be assessed at the time of annuitization if you elect a noncommutable period
certain option of less than ten years or any commutable period certain option.
No charge is assessed if you elect any life contingency option or a
noncommutable period certain option of ten years or longer.
10
<PAGE>
** If the Minimum Guaranteed Annuity Payout Rider is exercised, you may only
annuitize under a fixed annuity payout option involving a life contingency at
the guaranteed annuity purchase rates listed under the Annuity Option Tables in
your Contract.
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 Growth 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 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 1998, the actual management fees were 1.96% for the Global
Interactive/Telecomm Portfolio, 0.05% for the International Growth Portfolio,
0.00% for the Growth Portfolio, 0.30% for the Value Portfolio and 0.47% for the
Strategic Income 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
one Portfolio -- the Growth Portfolio. Effective August 1, 1998, a new Portfolio
Manager, Analytic Investors, Inc. ("Analytic"), is in place for the Growth
Portfolio. The Manager and the Portfolio Manager have voluntarily agreed to
limit their fee from August 1, 1998 through July 31, 1999 to the lesser of the
following two rates: (1) 0.80%, the rate specified in the Portfolio Manager
Agreement; or (2) the rate that would have applied under the prior Portfolio
Manager Agreement with the prior portfolio manager. The latter rate varies based
on prior performance. 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) 1.50%(2) 1.50%
International Growth Portfolio................... 0.00%(1) 1.50%(2) 1.50%
Growth Portfolio................................. 0.00%(4) 1.20%(2) 1.20%
Value Portfolio.................................. 0.00%(1) 1.20%(2) 1.20%
Strategic Income Portfolio....................... 0.00%(1) 1.50%(2) 1.50%
Money Market Fund................................ 0.26% 0.06% 0.32%(3)
</TABLE>
11
<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) 1.50%(2) 3.50%
International Growth Portfolio................... 2.00%(1) 1.50%(2) 3.50%
Growth Portfolio................................. 2.00%(4) 1.20%(2) 3.20%
Value Portfolio.................................. 2.00%(1) 1.20%(2) 3.20%
Strategic Income Portfolio....................... 2.00%(1) 1.50%(2) 3.50%
Money Market Fund................................ 0.26% 0.06% 0.32%(3)
</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) 1.50%(2) 5.50%
International Growth Portfolio................... 4.00%(1) 1.50%(2) 5.50%
Growth Portfolio................................. 4.00%(4) 1.20%(2) 5.20%
Value Portfolio.................................. 4.00%(1) 1.20%(2) 5.20%
Strategic Income Portfolio....................... 4.00%(1) 1.50%(2) 5.50%
Money Market Fund................................ 0.26% 0.06% 0.32%(3)
</TABLE>
(1) A performance based advisory fee is in effect, which fee may vary anywhere
from 0.00% to 4.00%.
(2) AFIMS has voluntarily agreed to limit operating expenses and reimburse those
expenses to the extent that the Portfolio's "Other Expenses" during 1999 (i.e.,
expenses other than management fees) exceed the following expense limitations
(expressed as an annualized percentage of average daily net assets): 1.50% for
the Global Interactive/Telecomm Portfolio, 1.50% for the International Growth
Portfolio, 1.20% for the Growth Portfolio, 1.20% for the Value Portfolio, and
1.50% for the Strategic Income Portfolio. There were different expense
limitations in effect during 1998. The limitations are in effect through
December 31, 1999. Without the effect of the expense limitations, the 1998
"Other Expenses" ratios would have been the following: 3.69% for the Global
Interactive/Telecomm Portfolio, 5.09% for the International Growth Portfolio,
5.04% for the Growth Portfolio, 3.00% for the Value Portfolio, and 6.49% for the
Strategic Income Portfolio.
(3) 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 1998. The
limitation may be terminated at any time.
(4) Effective August 1, 1998, a new Portfolio Manager, Analytic Investors, Inc.,
is in place for the Growth Portfolio. The Manager and the Portfolio Manager have
voluntarily agreed to limit their fee from August 1, 1998 through July 31, 1999
to the lesser of the following two rates: (1) 0.80%, the rate specified in the
Portfolio Manager Agreement; or (2) the rate that would have applied under the
prior Portfolio Manager Agreement with the prior portfolio manager. The latter
rate varies based on prior performance.
12
<PAGE>
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 NONCOMMUTABLE PERIOD
CERTAIN OPTION OF LESS THAN TEN YEARS, OR ANY FIXED PERIOD CERTAIN OPTION, YOU
WOULD PAY THE FOLLOWING EXPENSES ON A $1,000 INVESTMENT, ASSUMING A 5% ANNUAL
RETURN ON ASSETS:
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.................. $ 91 $ 138 $ 185 $ 331
International Growth Portfolio......................... $ 91 $ 138 $ 185 $ 331
Growth Portfolio....................................... $ 88 $ 129 $ 171 $ 302
Value Portfolio........................................ $ 88 $ 129 $ 171 $ 302
Strategic Income Portfolio............................. $ 91 $ 138 $ 185 $ 331
</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.................. $ 110 $ 193 $ 277 $ 502
International Growth Portfolio......................... $ 110 $ 193 $ 277 $ 502
Growth Portfolio....................................... $ 107 $ 185 $ 263 $ 478
Value Portfolio........................................ $ 107 $ 185 $ 263 $ 478
Strategic Income Portfolio............................. $ 110 $ 193 $ 277 $ 502
</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.................. $ 129 $ 246 $ 360 $ 642
International Growth Portfolio......................... $ 129 $ 246 $ 360 $ 642
Growth Portfolio....................................... $ 126 $ 239 $ 348 $ 623
Value Portfolio........................................ $ 126 $ 239 $ 348 $ 623
Strategic Income Portfolio............................. $ 129 $ 246 $ 360 $ 642
</TABLE>
13
<PAGE>
(2) IF, AT THE END OF THE APPLICABLE TIME PERIOD, YOU ANNUITIZE* UNDER A LIFE
OPTION OR A NONCOMMUTABLE PERIOD CERTAIN OPTION OF TEN YEARS OR LONGER, OR IF
YOU DO NOT SURRENDER OR ANNUITIZE 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.................. $ 30 $ 93 $ 157 $ 331
International Growth Portfolio......................... $ 30 $ 93 $ 157 $ 331
Growth Portfolio....................................... $ 27 $ 84 $ 143 $ 302
Value Portfolio........................................ $ 27 $ 84 $ 143 $ 302
Strategic Income Portfolio............................. $ 30 $ 93 $ 157 $ 331
</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.................. $ 50 $ 151 $ 251 $ 502
International Growth Portfolio......................... $ 50 $ 151 $ 251 $ 502
Growth Portfolio....................................... $ 47 $ 142 $ 238 $ 478
Value Portfolio........................................ $ 47 $ 142 $ 238 $ 478
Strategic Income Portfolio............................. $ 50 $ 151 $ 251 $ 502
</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.................. $ 70 $ 207 $ 337 $ 642
International Growth Portfolio......................... $ 70 $ 207 $ 337 $ 642
Growth Portfolio....................................... $ 67 $ 198 $ 325 $ 623
Value Portfolio........................................ $ 67 $ 198 $ 325 $ 623
Strategic Income Portfolio............................. $ 70 $ 207 $ 337 $ 642
</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 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 surrender charge is
assessed at the time of annuitization under an option including a life
contingency or under a noncommutable period certain option of ten years or
longer.
14
<PAGE>
SUMMARY OF CONTRACT FEATURES
WHAT IS THE FULCRUM FUND VARIABLE ANNUITY?
The Fulcrum Fund Variable Annuity contract ("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 payments that you can receive for life;
- - issue age up to your 90th birthday.
he Contract has two phases: an accumulation phase and, if you choose to
annuitize, an annuity payout phase. During the accumulation phase, you may
allocate your initial payment and any additional payments you choose to make
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. Your 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 you
withdraw money. In addition, during the accumulation phase, your beneficiaries
receive certain protections and guarantees in the event of the Annuitant's
death. See discussion below: "WHAT HAPPENS UPON DEATH DURING THE ACCUMULATION
PHASE?"
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-amount annuity benefit payments with payment amounts guaranteed by
the Company, or a combination of fixed-amount 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 any remaining guaranteed payments
continuing to your beneficiary for ten years in the event that you die before
the end of ten years;
- - periodic payments over a specified number of years (1 to 30); under this
option you may reserve the right to convert remaining payments to a lump-sum
payout by electing a "commutable" option.
15
<PAGE>
An optional Minimum Guaranteed Annuity Payout Rider is available during the
accumulation phase in most jurisdictions for a separate monthly charge. See "M.
Optional Minimum Guaranteed Annuity Payout Rider" under "Description of the
Contract." If elected, the Rider guarantees the Annuitant a minimum amount of
fixed lifetime income during the annuity payout phase, subject to certain
conditions. On each Contract anniversary a Minimum Guaranteed Annuity Payout
Benefit Base is determined. The Minimum Guaranteed Annuity Payout Benefit Base
(less any applicable premium taxes) is the value that will be annuitized should
you exercise the Rider. In order to exercise the Rider, a fixed annuitization
option involving a life contingency must be selected. Annuitization under this
Rider will occur at the guaranteed annuity purchase rates listed under the
Annuity Option Tables in your Contract. The Minimum Guaranteed Annuity Payout
Benefit Base is equal to the greatest of:
(a) the Accumulated Value increased by any positive Market Value Adjustment, if
applicable; or
(b) the Accumulated Value on the effective date of the Rider compounded daily at
the annual rate of 5% plus gross payments made thereafter compounded daily
at the annual rate of 5%, starting on the date each payment is applied,
reduced proportionately to reflect withdrawals; or
(c) the highest Accumulated Value on any Contract anniversary since the Rider
effective date, as determined after positive adjustments have been made for
subsequent payments and any positive Market Value Adjustment, if applicable,
and negative adjustments have been made for subsequent withdrawals.
For each withdrawal described in (b) and (c) above, the proportionate reduction
is calculated by multiplying the (b) or (c) value, whichever is applicable,
determined immediately prior to the withdrawal by the following fraction:
amount of the withdrawal
----------------------------------------------------------
Accumulated Value determined immediately prior to the withdrawal
WHO ARE THE KEY PERSONS UNDER THE CONTRACT?
The Contract is between you, (the "Owner"), and us, Allmerica Financial Life
Insurance and Annuity Company (for contracts issued in all jurisdictions except
Hawaii and New York) or First Allmerica Financial Life Insurance Company (for
contracts issued in Hawaii and New York). 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?
You may allocate payments among the Sub-Accounts investing in the following
Funds, the Guarantee Period Accounts, and the Fixed Account. You have a choice
of fifteen Funds:
- - Global Interactive/Telecomm Portfolio of The Fulcrum Trust
Managed by GAMCO Investors, Inc.
16
<PAGE>
- - Oppenheimer Aggressive Growth Fund/VA
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
- - PBHG Select 20 Portfolio
Managed by Pilgrim Baxter & Associates, Ltd.
- - Growth Portfolio of The Fulcrum Trust
Managed by 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 Main Street Growth & Income Fund/VA
Managed by OppenheimerFunds, Inc.
- - Delaware Balanced 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, except in California where assets are held in the
Company's General 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
17
<PAGE>
of the Guaranteed Interest Rate depends on the number of years of the Guarantee
Period selected. The Company may offer up to nine Guarantee Periods ranging from
two to ten years in duration. Once declared, the Guaranteed Interest Rate will
not change during the duration of the Guarantee Period. If amounts allocated to
a Guarantee Period Account are transferred, surrendered or applied to any
annuity option at any time other than the day following the last day of the
applicable Guarantee Period, a Market Value Adjustment will apply that may
increase or decrease the account's value. For more information about the
Guarantee Period Accounts and the Market Value Adjustment, see "GUARANTEE PERIOD
ACCOUNTS."
The Guarantee Period Accounts may not be available in all states.
FIXED ACCOUNT. The Fixed Account is part of the General Account which consists
of all the Company's assets other than those allocated to the Variable Account
and any other separate account. Allocations to the Fixed Account are guaranteed
as to principal and a minimum rate of interest. Additional excess interest may
be declared periodically at the Company's discretion. Furthermore, the initial
rate in effect on the date an amount is allocated to the Fixed Account is
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 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/VA OppenheimerFunds, Inc.
MFS Emerging Growth Series Massachusetts Financial Services Company
Small Cap Value Series Delaware Management Company
Lazard Retirement International Equity Portfolio Lazard Asset Management
International Growth Portfolio Bee & Associates Incorporated
PBHG Select 20 Portfolio Pilgrim Baxter & Associates, Ltd.
Growth Portfolio 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 Main Street Growth & Income Fund/VA OppenheimerFunds, Inc.
Delaware Balanced 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 COMPANIES, THE VARIABLE ACCOUNTS
AND THE UNDERLYING FUNDS."
CAN I MAKE TRANSFERS AMONG THE ACCOUNTS?
Yes. Prior to the Annuity Date, you may transfer among the Sub-Accounts, the
Guarantee Period Accounts, and the Fixed Account. You will incur no current
taxes on transfers while your money remains in the Contract. See "D. Transfer
Privilege." The first 12 transfers in a Contract year are guaranteed to be free
of a transfer charge. For each subsequent transfer in a Contract year, the
Company does not currently charge but reserves the right to assess a processing
charge guaranteed never to exceed $25 for processing these transfers.
WHAT IF I NEED MY MONEY BEFORE MY ANNUITY PAYOUT PHASE BEGINS?
You may surrender your 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
18
<PAGE>
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 nonnatural person.) A 10% tax penalty may apply to amounts
deemed to be income if you are under age 59 1/2. Additional amounts may be
withdrawn at any time but payments that have not been invested in the Contract
for more than seven years may be subject to a surrender charge. (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, you may withdraw all or a portion of your money without a surrender
charge if, after the Contract is issued and before age 65, you become disabled.
Also, except in New York and New Jersey where not permitted by state law, you
may withdraw money without a surrender charge if, after the Contract is issued,
you are admitted to a medical care facility or diagnosed with a fatal illness.
For details and restrictions, see "Reduction or Elimination of Surrender Charge
and Additional Amounts Credited."
WHAT HAPPENS UPON DEATH DURING THE ACCUMULATION PHASE?
If the Annuitant, Owner or Joint Owner should die before the Annuity Date, a
death benefit will be paid to the beneficiary. Upon the death of the Annuitant
(or an Owner who is also an Annuitant), the death benefit is equal to the
greatest of:
- - The Accumulated Value increased by any positive Market Value Adjustment;
- - Gross payments, compounded daily at the annual rate of 5% (5% compounding not
available in Hawaii and New York), decreased proportionately to reflect
withdrawals; or
- - The death benefit that would have been payable on the most recent Contract
anniversary, increased for subsequent payments and decreased proportionately
for subsequent withdrawals.
This guaranteed death benefit works in the following way assuming no withdrawals
are made. On the first anniversary, the death benefit will be equal to the
greater of (a) the Accumulated Value (increased by any positive Market Value
Adjustment) or (b) gross payments compounded daily at the annual rate of 5%
(except in Hawaii and New York where (b) equals 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 compounded daily at the annual rate of 5% (gross payments in
Hawaii and New York) or (c) the locked-in value of the death benefit at the
first anniversary. The greatest of (a), (b) or (c) will be locked in until the
next Contract anniversary. This calculation will then be repeated on each
anniversary while the Contract remains in force and prior to the Annuity Date.
As noted above, the values of (b) and (c) will be decreased proportionately if
withdrawals are taken.
If an Owner who is not also the Annuitant dies during the accumulation phase,
the death benefit will equal the Accumulated Value of the Contract increased by
any positive Market Value Adjustment.
(If the Annuitant dies after the Annuity Date but before all guaranteed annuity
benefit payments have been made, the remaining payments will be paid to the
beneficiary at least as rapidly as under the annuity option in effect. See "G.
Death Benefit.")
WHAT CHARGES WILL I INCUR UNDER MY CONTRACT?
If the Accumulated Value is less than $100,000 on each Contract anniversary and
upon surrender, the Company will deduct a $30 Contract fee from the Contract.
The Contract fee is waived for Contracts issued to and maintained by a trustee
of a 401(k) plan.
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<PAGE>
Should you decide to surrender the Contract, make withdrawals, or receive
payments under certain annuity payout options, you may be subject to a surrender
charge. If applicable, this charge will be between 1% and 7% of payments
withdrawn, based on when the payments were originally made.
A deduction for state and local premium taxes, if any, may be made as described
under "C. Premium Taxes."
The Company will deduct, on a daily basis, an annual 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 of the Underlying Funds, which accompany
this Prospectus.
Subject to state availability, the Company offers the following optional Rider
that may be elected by the Owner. A separate monthly charge is made for the
Rider which is deducted from the Accumulated Value at the end of each month
within which the Rider has been in effect. The applicable charge is assessed by
multiplying the Accumulated Value on the last day of each month and on the date
the Rider is terminated by 1/12th of the following annual percentage rates:
Minimum Guaranteed Annuity Payout Rider with a ten-year waiting
period. 0.25%
Minimum Guaranteed Annuity Payout Rider with a fifteen-year waiting
period. 0.15%
For a description of this Rider, see "C. Optional Minimum Guaranteed Annuity
Payout Rider Charge" under "CHARGES AND DEDUCTIONS," and "M. Optional Minimum
Guaranteed Annuity Payout Rider" under "DESCRIPTION OF THE CONTRACT."
CAN I EXAMINE THE CONTRACT?
Yes. Your Contract will be delivered to you after your purchase. If you return
the Contract to the Company within ten days of receipt, the Contract will be
canceled. (There may be a longer period in certain states; see the "Right to
Examine" provision on the cover of your Contract.) If you cancel the Contract,
you will receive a refund of any amounts allocated to the Fixed and Guarantee
Period Accounts and the Accumulated Value of any amounts allocated to the
Sub-Accounts (plus any fees or charges that may have been deducted.) However, if
state law requires, or if the Contract was issued as an Individual Retirement
Annuity ("IRA") you will generally receive a refund of your entire payment. (In
certain states this refund may be the greater of (1) your entire payment or (2)
the amounts allocated to the Fixed and Guarantee Period Accounts plus the
Accumulated Value of amounts in the Sub-Accounts, plus any fees or charges
previously deducted.). See "B. Right to Cancel Individual Retirement Annuity"
and "C. Right to Cancel All Other Contracts."
CAN I MAKE FUTURE CHANGES UNDER MY CONTRACT?
You can make several changes 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 designated a beneficiary
irrevocably.
- - You may change your allocation of payments.
- - You may make transfers of accumulated value among your current investments
without any tax consequences.
- - You may cancel the Contract within ten days of delivery (or longer if
required by state law).
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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 (1) the periods that the Sub-Accounts have been in
existence and (2) 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 surrender charge which would be assessed if the
investment were completely withdrawn at the end of the specified period. The
calculation is not adjusted to reflect the deduction of the optional Minimum
Guaranteed Annuity Payout Rider charge. 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 Contract fee and 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
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<PAGE>
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 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, Inc., 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. In addition, relevant broad-based indices and performance from
independent sources may be used to illustrate the performance of certain
contract features.
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 COMPANIES, THE VARIABLE ACCOUNT AND
THE UNDERLYING FUNDS
THE COMPANIES. Allmerica Financial Life Insurance and Annuity Company
("Allmerica Financial") is a life insurance company organized under the laws of
Delaware in July 1974. Its Principal Office is located at 440 Lincoln Street,
Worcester, MA 01653, telephone 508-855-1000. Allmerica Financial is subject to
the laws of the state of Delaware governing insurance companies and to
regulation by the Commissioner of Insurance of Delaware. In addition, Allmerica
Financial is subject to the insurance laws and regulations of other states and
jurisdictions in which it is licensed to operate. As of December 31, 1998,
Allmerica Financial had over $14 billion in assets and over $26 billion of life
insurance in force.
Effective October 1, 1995, Allmerica Financial changed its name from SMA Life
Assurance Company to Allmerica Financial Life Insurance and Annuity Company.
Allmerica Financial is an indirect wholly owned subsidiary of First Allmerica
Financial Life Insurance Company which, in turn, is a wholly owned subsidiary of
Allmerica Financial Corporation ("AFC").
First Allmerica Financial Life Insurance Company ("First Allmerica"), organized
under the laws of Massachusetts in 1844, is among the five oldest life insurance
companies in America. As of December 31, 1998, First Allmerica and its
subsidiaries had over $27 billion in combined assets and over $48 billion of
life insurance in force. Effective October 16, 1995, First Allmerica 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. First Allmerica is a wholly owned subsidiary of AFC. First Allmerica's
principal office ("Principal Office") is located at 440 Lincoln Street,
Worcester MA 01653, telephone 508-855-1000.
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First Allmerica 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, First Allmerica is subject to the insurance laws
and regulations of other states and jurisdictions in which it is licensed to
operate.
Both companies are charter members 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 ACCOUNTS. Each Company maintains a separate account called the
Fulcrum Separate Account (the "Variable Account"). The Variable Accounts were
authorized by votes of the Board of Directors of the Companies on June 13, 1996.
Each Variable Account meets the definition of a "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 or management
of investment practices or policies of the Variable Accounts by the SEC.
The Fulcrum Separate Account is a separate investment account of the Company
with fifteen Sub-Accounts. The assets used to fund the variable portions of the
Contracts are set aside in Sub-Accounts kept separate from the general assets of
the Company. Each Sub-Account is administered and accounted for as part of the
general business of the Company. The income, capital gains, or capital losses of
each Sub-Account, however, are allocated to each Sub-Account, without regard to
any other income, capital gains, or capital losses of the Company. Under
Delaware and 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 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 of The Fulcrum Trust (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 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
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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 Growth
Portfolio. Effective August 1, 1998, a new Portfolio Manager, Analytic
Investors, Inc. ("Analytic"), is in place for the Growth Portfolio. The Manager
and the Portfolio Manager have voluntarily agreed to limit their fee from August
1, 1998 through July 31, 1999 to the lesser of the following two rates: (1)
0.80%, the rate specified in the Portfolio Manager Agreement; or (2) the rate
that would have applied under the prior Portfolio Manager Agreement with the
prior portfolio manager. The latter rate varies based on prior performance.
Other than for 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 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
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. 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 Balanced 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
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<PAGE>
1938. On December 31, 1998, Delaware Management and its affiliates within
Delaware Investments, were supervising in the aggregate more than $45 billion in
assets in the various institutional or separately managed and investment company
accounts.
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 $71 billion as of December 31, 1999.
MFS-REGISTERED TRADEMARK- VARIABLE INSURANCE TRUST-SM-. 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 $97.9 billion on behalf of
approximately 3.7 million investor accounts as of December 31, 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/VA and the Oppenheimer Main Street Growth & Income Fund/VA is
OppenheimerFunds, Inc. ("OppenheimerFunds"), which (including subsidiaries)
advises investment company portfolios having over $95 billion in assets as of
December 31, 1998. OppenheimerFunds has operated as an investment adviser since
1959.
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 $12 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.
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.
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OPPENHEIMER AGGRESSIVE GROWTH FUND/VA -- seeks to achieve capital appreciation
by investing in "growth-type" companies.
MFS-REGISTERED TRADEMARK- 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.
INTERNATIONAL GROWTH PORTFOLIO -- seeks to make money for investors by investing
internationally for long-term capital appreciation, primarily in equity
securities.
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.
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-REGISTERED TRADEMARK- GROWTH WITH INCOME SERIES -- seeks to provide
reasonable current income and long-term growth of capital and income.
OPPENHEIMER MAIN STREET GROWTH & INCOME FUND/VA -- 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 BALANCED 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 -- 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
26
<PAGE>
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 issues a Contract when its underwriting requirements, which include
receipt of the initial payment and allocation instructions by the Company at its
Principal Office are met. 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 and/or signature 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 is credited to the Contract and allocated among the requested accounts
as of the date that all issue requirements are properly met. If all issue
requirements are not completed within five business days of the Company's
receipt of the initial payment, the payment will be returned immediately unless
the Owner specifically consents to the holding of it pending completion of the
outstanding issue requirements. Subsequent payments will be credited as of the
Valuation Date received at the Principal Office, on the basis of accumulation
unit value next determined after receipt.
Payments may be made to the Contract at any time prior to the Annuity Date.
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.
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 may 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 or PIN number. All transfer instructions by telephone are tape
recorded.
B. RIGHT TO CANCEL INDIVIDUAL RETIREMENT ANNUITY
An individual purchasing a Contract intended to qualify as an IRA may cancel the
Contract at any time within ten days after receipt of the Contract and receive a
refund. In order to cancel the Contract, the Owner must mail or deliver the
Contract to the representative through whom the Contract was purchased, to the
Principal Office at 440 Lincoln Street, Worcester, MA 01653, or to any local
office of the Company. Mailing or delivery must occur on or before ten days
after receipt of the Contract for cancellation to be effective.
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Within seven days the Company will provide a refund equal to the greater of (1)
gross payments, or (2) the Accumulated Value plus any amounts deducted under the
Contract or by the Funds for taxes, charges or fees.
The liability of the Variable Account under this provision is limited to the
Owner's Accumulated Value in the Sub-Accounts on the date of cancellation. Any
additional amounts refunded to the Owner will be paid by the Company.
C. RIGHT TO CANCEL ALL OTHER CONTRACTS
An Owner may cancel the Contract at any time within ten days after receipt of
the Contract (or longer if required by state law) and receive a refund. In most
states, the Company will pay the Owner an amount equal to the sum of (1) the
difference between the payment received, including fees, and any amount
allocated to the Variable Account, and (2) the Accumulated Value of amounts
allocated to the Variable Account as of the date the request is received. If the
Contract was purchased as an IRA or issued in a state that requires a full
refund of the initial payment(s), the IRA cancellation right described above
will be used. At the time the Contract is issued, the "Right to Examine"
provision on the cover of the Contract will specifically indicate what the
refund will be and the time period allowed to exercise the right to cancel.
In order to comply with New York regulations concerning the purchase of a new
annuity contract to replace an existing life or annuity contract (a
"replacement"), an Owner who purchases the Contract in New York as a replacement
may cancel within 60 days after receipt. In order to cancel the Contract, the
Owner must mail or deliver it to the Company's Principal Office or to one of its
authorized representatives. The Company will refund an amount equal to the
Surrender Value plus all fees and charges and the Contract will be void from the
beginning.
D. TRANSFER PRIVILEGE
At any time prior to the Annuity Date, the Owner may transfer amounts among
accounts upon written or telephone request to the Company. As of the date of
this Prospectus, transfers may be made to and among all of the available
Sub-Accounts. However, should additional Funds be added to the Contract, the
Company reserves the right to limit the number of Sub-Accounts which may be used
during the life of the Contract. As discussed in "A. Payments" above, a properly
completed authorization form must be on file before telephone requests will be
honored. Transfer values will be effected at the Accumulation Value next
computed after receipt of the transfer order. In Oregon and Massachusetts,
payments and transfers to the Fixed Account are subject to certain restrictions.
See APPENDIX A, "MORE INFORMATION ABOUT THE FIXED ACCOUNT."
Transfers to a Guarantee Period Account must be at least $1,000. If the amount
to be transferred to a Guarantee Period Account is less than $1,000, the Company
may transfer that amount to the Sub-Account which invests in the Money Market
Fund. Transfers from a Guarantee Period Account prior to the expiration of the
Guarantee Period will be subject to a Market Value Adjustment.
The first 12 transfers in a Contract year are guaranteed to be free of any
transfer charge. The Company does not currently charge for additional transfers
but reserves the right to assess a charge, guaranteed never to exceed $25, to
reimburse it for the expense of processing these additional transfers.
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
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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 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. The first automatic transfer or rebalancing and all
subsequent transfers or rebalancing effected in a Contract year under a request
count as one transfer for purposes of the 12 transfers guaranteed to be free of
a transfer charge in each Contract year. Currently, Dollar Cost Averaging and
Automatic Account Rebalancing may not be in effect simultaneously. Either option
may be elected at no additional charge when the Contract is purchased or at a
later date.
E. SURRENDER
At any time prior to the Annuity Date, the Owner may surrender the Contract and
receive its Accumulated Value, less applicable charges and adjusted for any
Market Value Adjustment ("Surrender Amount"). The Owner must return the Contract
and a signed, written request for surrender, satisfactory to the Company, to the
Principal Office. The Surrender Value will be calculated 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 surrender charge may be deducted when a Contract is
surrendered if payments have been credited to the Contract during the last seven
full Contract years. See "CHARGES AND DEDUCTIONS." The Contract fee will be
deducted upon surrender of the Contract.
After the Annuity Date, only Contracts annuitized under a commutable period
certain option may be surrendered. The amount payable is the commuted value of
any unpaid installments, computed on the basis of the assumed interest rate
incorporated in such annuity benefit payments. No surrender 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.
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The Company reserves the right to defer surrenders and withdrawals of amounts
allocated to the Company's Fixed Account and Guarantee Period Accounts for a
period not to exceed six months.
The surrender rights of Owners who are participants under Section 403(b) plans
or who are participants in the Texas Optional Retirement Program ("Texas ORP")
are restricted; see "Tax-Sheltered Annuities" and "Texas Optional Retirement
Program."
For important tax consequences which may result from surrender, see "FEDERAL TAX
CONSIDERATIONS."
F. WITHDRAWALS
At any time prior to the Annuity Date, an Owner may withdraw a portion of the
Accumulated Value of his or her Contract, subject to the limits stated below.
The Owner must submit a signed, written request for withdrawal, satisfactory to
the Company, to 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 surrender 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. Except in New York where no
specific balance is required, no withdrawal will be permitted if the Accumulated
Value remaining under the Contract would be reduced to less than $1,000.
Withdrawals will be paid in accordance with the time limitations described under
"E. Surrender."
After the Annuity Date, only 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
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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 may 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 the Company's life expectancy distribution ("LED") option
by returning a properly signed LED request form to the Principal Office.
The Owner may elect monthly, bi-monthly, quarterly, semi-annual, or annual LED
distributions, and may terminate the LED option at any time. Under contracts
issued in Hawaii and New York, the LED option will terminate automatically on
the maximum Annuity Date permitted under the Contract, at which time an Annuity
Option must be selected.
If an Owner elects the Company's LED option, in each calendar year a fraction of
the Accumulated Value is withdrawn without a surrender charge based on the
Owner's then life expectancy (or the joint life expectancy of the Owner and a
beneficiary.) 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. Under the Company's LED option, 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 nonnatural person, the Owner may elect the LED option based on the
Annuitant's life expectancy.
(Note: this option may not produce annual distributions that meet the definition
of "substantially equal periodic payments" as defined under Code Section 72(t).
As such, the withdrawals may be treated by the Internal Revenue Service (IRS) as
premature distributions from the Contract and may be subject to a 10% federal
tax penalty. Owners seeking distributions over their life under this definition
should consult their tax advisor. For more information, see "FEDERAL TAX
CONSIDERATIONS," "B. Taxation of the Contracts in General." In addition, if the
amount necessary to meet the substantially equal periodic payment definition is
greater than the Company's LED amount, a surrender charge may apply to the
amount in excess of the LED amount.)
The Company may discontinue or change the LED option at any time, but not with
respect to election of the option made prior to the date of any change in the
LED option.
G. DEATH BENEFIT
In the event that the Annuitant, Owner or Joint Owner, if applicable, dies while
the Contract is in force, the Company will pay the Beneficiary a death benefit,
except where the Contract is continued in force as provided below in "H. The
Spouse of the Owner as Beneficiary." The amount of the death benefit and the
time requirements for receipt of payment may vary depending upon whether the
Annuitant or an Owner dies first and whether death occurs prior to or after the
Annuity Date.
DEATH OF THE ANNUITANT PRIOR TO THE ANNUITY DATE. At the death of the Annuitant
(including an Owner who is also the Annuitant), the benefit is equal to the
greatest of (1) the Accumulated Value under the Contract increased by any
positive Market Value Adjustment; (2) gross payments, compounded daily at the
annual rate of 5% starting on the date each payment is applied, decreased
proportionately to reflect withdrawals (except in Hawaii and New York where (b)
equals gross payments decreased proportionately to reflect withdrawals) --
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for each withdrawal, the proportionate reduction is calculated as the death
benefit under this option immediately prior to the withdrawal multiplied by the
withdrawal amount and divided by the Accumulated Value immediately prior to the
withdrawal; or (3) the death benefit that would have been payable on the most
recent Contract anniversary, increased for subsequent payments and decreased
proportionately for subsequent withdrawals.
This guaranteed death benefit works in the following way assuming no withdrawals
are made. On the first anniversary, the death benefit will be equal to the
greater of (a) the Accumulated Value (increased by any positive Market Value
Adjustment) or (b) gross payments compounded daily at the annual rate of 5%
(except in Hawaii and New York where (b) equals 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 compounded daily at the annual rate of 5% (gross payments in
Hawaii and New York) 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. See APPENDIX C, "THE DEATH BENEFIT" for specific examples
of death benefit calculations.
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
generally will be paid to the Beneficiary in one sum within seven business days
of the receipt of due proof of death at the Principal Office unless the Owner
has specified a death benefit annuity option. Instead of payment in one sum, the
Beneficiary may, by written request, elect to:
(1) defer distribution of the death benefit for a period no more than five
years from the date of death; or
(2) receive a life annuity or an annuity for a period certain not extending
beyond the Beneficiary's life expectancy, with annuity benefit payments
beginning one year from the date of death.
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.
H. THE SPOUSE OF THE OWNER AS BENEFICIARY
The Owner's spouse, if named as the sole primary beneficiary, may by written
request continue the Contract in lieu of receiving the amount payable upon death
of the Owner. Upon such election, the spouse will become the
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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 if they have not been invested in
the Contract for more than seven years. All other rights and benefits provided
in the Contract will continue, except that any subsequent spouse of such new
Owner will not be entitled to continue the Contract upon such new Owner's death.
I. ASSIGNMENT
The Contract, other than one sold in connection with certain qualified plans,
may be assigned by the Owner at any time prior to the Annuity Date and while the
Annuitant is alive. The Company will not be deemed to have knowledge of an
assignment unless it is made in writing and filed at the Principal Office. The
Company will not assume responsibility for determining the validity of any
assignment. If an assignment of the Contract is in effect on the Annuity Date,
the Company reserves the right to pay to the assignee, in one sum, that portion
of the Surrender Value of the Contract to which the assignee appears to be
entitled. The Company will pay the balance, if any, in one sum to the Owner in
full settlement of all liability under the Contract. The interest of the Owner
and of any beneficiary will be subject to any assignment.
For important tax liability which may result from assignments, see "FEDERAL TAX
CONSIDERATIONS."
J. ELECTING THE FORM OF ANNUITY AND THE ANNUITY DATE
The Owner selects the Annuity Date. To the extent permitted by state law, 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. In no event will the maximum annuitization age
exceed 90. 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 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 payout option(s) selected do(es)
not produce an initial payment which meet this minimum, a single payment may be
made. Once the Company begins making annuity benefit payments, the Annuitant
cannot make withdrawals
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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 an option, a variable life annuity with periodic
payments guaranteed for ten years will be purchased. Changes in either the
Annuity Date or annuity option can be made up to one month prior to the Annuity
Date.
If the Owner exercises the Minimum Guaranteed Annuity Payout Rider, annuity
benefit payments must be made under a fixed annuity payout option involving a
life contingency and will be determined based on the guaranteed annuity purchase
rates listed under the Annuity Option Tables in the Contract.
K. DESCRIPTION OF VARIABLE ANNUITY PAYOUT OPTIONS
The Company provides the variable annuity payout options described below.
Currently, variable annuity payout options may be funded through the
Sub-Accounts investing in the Value Portfolio, the Growth Portfolio, the
International Growth Portfolio and the Strategic Income Portfolio.
The Company also provides these same annuity payout options funded through the
Fixed Account (fixed annuity payout option). Regardless of how payments were
allocated during the accumulation period, any of the variable annuity options or
the fixed-amount options may be selected, or any of the variable annuity options
may be selected in combination with any of the fixed-amount annuity options.
Other annuity options may be offered by the Company. IRS regulations may not
permit certain of the available annuity options when used in connection with
certain qualified Contracts.
VARIABLE LIFE ANNUITY WITH PAYMENTS GUARANTEED FOR TEN YEARS. This variable
annuity is payable periodically during the lifetime of the payee with the
guarantee that if the payee should die before all payments have been made, the
remaining annuity benefit payments will continue to the Beneficiary.
VARIABLE LIFE ANNUITY PAYABLE PERIODICALLY DURING THE LIFETIME OF THE ANNUITANT
ONLY. This variable annuity is payable during the payee's life. It would be
possible under this option for the payee to receive only one annuity benefit
payment if the payee dies prior to the due date of the second annuity benefit
payment, two annuity benefit payments if the payee dies before the due date of
the third annuity benefit payment, and so on. Payments, however, will continue
during the lifetime of the payee, no matter how long 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 at
annuitization 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
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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 and may be commutable or
noncommutable. A commutable option provides the payee with the right to request
a lump sum payment of an remaining balance after annuity payments have
commenced. Under a noncommutable period certain option, the Annuitant may not
request a lump sum payment.
It should be noted that the period certain option does not involve a life
contingency. In computing payments under this option, the Company deducts a
charge for annuity rate guarantees, which includes a factor for mortality risks.
Although not contractually required to do so, the Company currently follows a
practice of permitting persons receiving payments under the period certain
option to elect to convert to a variable annuity payout involving a life
contingency. The Company may discontinue or change this practice at any time,
but not with respect to election of the option made prior to the date of any
change in this practice. See "FEDERAL TAX CONSIDERATIONS" for a discussion of
the possible adverse tax consequences of selecting a period certain option.
L. ANNUITY BENEFIT PAYMENTS
DETERMINATION OF THE FIRST VARIABLE ANNUITY BENEFIT PAYMENT. The amount of the
first monthly payment depends upon the selected variable annuity option, the sex
(however, see "N. NORRIS Decision" below) and age of the Annuitant, and the
value of the amount applied under the annuity option ("annuity value"). The
Contract provides annuity rates that determine the dollar amount of the first
periodic payment under each variable annuity option for each $1,000 of applied
value. From time to time, the Company may offer its 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.
The dollar amount of the first periodic annuity benefit payment is calculated
based upon the type of annuity option chosen, as follows:
- - For life annuity options and noncommutable period certain options of ten
years or more (six or more years under New York Contracts), the dollar amount
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 dollar
amount is determined by multiplying (1) the Surrender Value less premium
taxes, if any, 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 a death benefit annuity, the annuity value will be the amount of the
death benefit.
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. The Company transmits variable annuity benefit payments
for receipt by the payee by the first of a month. Variable annuity benefit
payments are currently based on unit values as of the 15th day of the preceding
month.
THE ANNUITY UNIT. On and after the Annuity Date, the Annuity Unit is a measure
of the value of the 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 net
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<PAGE>
investment factor of the Sub-Account for the current Valuation Period and
divided by the assumed interest rate for the current Valuation Period The
assumed interest rate, discussed below, is incorporated in the variable annuity
options offered in the Contract.
DETERMINATION OF THE NUMBER OF ANNUITY UNITS. The dollar amount of the first
variable annuity benefit payment is divided by the value of an Annuity Unit of
the selected Sub-Account(s) to determine the number of Annuity Units represented
by the first payment. This number of Annuity Units remains fixed under all
annuity options except the joint and two-thirds survivor annuity option.
DOLLAR AMOUNT OF SUBSEQUENT VARIABLE ANNUITY BENEFIT PAYMENTS. The dollar
amount of each periodic variable annuity benefit payment after the first will
vary with the value of the Annuity Units of the selected Sub-Account(s). The
dollar amount of each subsequent variable annuity benefit payment is determined
by multiplying the fixed number of Annuity Units (derived from the dollar amount
of the first payment, as described above) with respect to a Sub-Account by the
value of an Annuity Unit of that Sub-Account on the applicable Valuation Date.
The variable annuity options offered by the Company are based on a 3.5% assumed
interest rate, which affects the amounts of the variable annuity benefit
payments. Variable annuity benefit payments with respect to a Sub-Account will
increase over periods when the actual net investment result of the Sub-Account
exceeds the equivalent of the assumed interest rate. Variable annuity benefit
payments will decrease over periods when the actual net investment results are
less than the equivalent of the assumed interest rate.
For an illustration of a calculation of a variable annuity benefit payment using
a hypothetical example, see "Annuity Benefit Payments" in the SAI.
If the Owner elects the Minimum Guaranteed Annuity Payout Rider, at
annuitization the annuity benefit payments provided under the Rider (by applying
the guaranteed annuity factors to the Minimum Guaranteed Annuity Payout Benefit
Base), are compared to the payments that would otherwise be available with the
Rider. If annuity benefit payments under the Rider are higher, the Owner may
exercise the Rider, provided that the conditions of the Rider are met. If
annuity benefit payments under the Rider are lower, the Owner may choose not to
exercise the Rider and instead annuitize under current annuity factors. See "M.
Optional Minimum Guaranteed Annuity Payout Rider," below.
M. OPTIONAL MINIMUM GUARANTEED ANNUITY PAYOUT RIDER
An optional Minimum Guaranteed Annuity Payout Rider is available for a separate
monthly charge. The Minimum Guaranteed Annuity Payout Rider guarantees a minimum
amount of fixed annuity lifetime income during the annuity payout phase, subject
to the conditions described below. On each Contract anniversary a Minimum
Guaranteed Annuity Payout Benefit Base is determined. The Minimum Guaranteed
Annuity Payout Benefit Base (less any applicable premium taxes) is the value
that will be annuitized if the Rider is exercised. In order to exercise the
Rider, a fixed annuitization option involving a life contingency must be
selected. Annuitization under this Rider will occur at the guaranteed annuity
purchase rates listed under the Annuity Option Tables in the Contract. The
Minimum Guaranteed Annuity Payout Benefit Base is equal to the greatest of:
(a) the Accumulated Value increased by any positive Market Value Adjustment,
if applicable;or
(b) the Accumulated Value on the effective date of the Rider compounded
daily at the annual rate of 5% plus gross payments made thereafter
compounded daily at the annual rate of 5%, starting on the date each
payment is applied, reduced proportionately to reflect withdrawals; or
(c) the highest Accumulated Value on any Contract anniversary since the
Rider effective date, as determined after positive adjustments have been
made for subsequent payments and any positive
36
<PAGE>
Market Value Adjustment, if applicable, and negative adjustments have
been made for subsequent withdrawals.
For each withdrawal described in (b) and (c) above, the proportionate reduction
is calculated by multiplying the (b) or (c) value, whichever is applicable,
determined immediately prior to the withdrawal by the following fraction:
amount of the withdrawal
----------------------------------------------------------
Accumulated Value determined immediately prior to the withdrawal
CONDITIONS OF ELECTION OF THE MINIMUM GUARANTEED ANNUITY PAYOUT RIDER.
- - The Owner may elect the Minimum Guaranteed Annuity Payout Rider at Contract
issue or at any time thereafter, however, if the Rider is not elected within
thirty days after Contract issue or within thirty days after a Contract
anniversary date, the effective date of the Rider will be the following
Contract anniversary date.
- - The Owner may not elect a Rider with a ten-year waiting period if at the time
of election the Annuitant has reached his or her 78th birthday. The Owner may
not elect a Rider with a fifteen-year waiting period if at the time of
election the Annuitant has reached his or her 73rd birthday.
EXERCISING THE MINIMUM GUARANTEED ANNUITY PAYOUT RIDER.
- - The Owner may only exercise the Minimum Guaranteed Annuity Payout Rider
within thirty days after any Contract anniversary following the expiration of
a ten or fifteen-year waiting period from the effective date of the Rider.
- - The Owner may only annuitize under a fixed annuity payout option involving a
life contingency as provided under "K. Description of Variable Annuity Payout
Options."
- - The Owner may only annuitize at the guaranteed annuity purchase rates listed
under the Annuity Option Tables in the Contract.
TERMINATION OF THE MINIMUM GUARANTEED ANNUITY PAYOUT RIDER.
- - The Owner may not terminate the Minimum Guaranteed Annuity Payout Rider prior
to the seventh Contract anniversary after the effective date of the Rider,
unless such termination occurs on or within thirty days after any Contract
anniversary and in conjunction with the repurchase of a Minimum Guaranteed
Annuity Payout Rider with a waiting period of equal or greater length at its
then current price, if available.
- - After the seventh Contract anniversary from the effective date of the Rider
the Owner may terminate the Rider at any time.
- - The Owner may repurchase a Rider with a waiting period equal to or greater
than the Rider then in force at the new Rider's then current price, if
available, however, repurchase may only occur on or within thirty days of a
Contract anniversary.
- - Other than in the event of a repurchase, once terminated the Rider may not be
purchased again.
- - The Rider will terminate upon surrender of the Contract or the date that a
death benefit is payable if the Contract is not continued under "H. The
Spouse of the Owner as Beneficiary" (see "DESCRIPTION OF THE CONTRACT").
From time to time the Company may illustrate minimum guaranteed income amounts
under the Minimum Guaranteed Annuity Payout Rider for individuals based on a
variety of assumptions, including varying rates of
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<PAGE>
return on the value of the Contract during the accumulation phase, annuity
payout periods, annuity payout options and Minimum Guaranteed Annuity Payout
Rider waiting periods. Any assumed rates of return are for purposes of
illustration only and are not intended as a representation of past or future
investment rates of return.
For example, the illustration below assumes an initial payment of $100,000 for
an Annuitant age 60 (at issue) and exercise of a Minimum Guaranteed Annuity
Payout Rider with a ten-year waiting period. The illustration assumes that no
subsequent payments or withdrawals are made and that the annuity payout option
is a Life Annuity With Payments Guaranteed For 10 Years. The values below have
been computed based on a 5% net rate of return and are the guaranteed minimums
that would be received under the Mimumum Guaranteed Annuity Payout Rider.
The minimum guaranteed benefit base amounts are the values that will be
annuitized. Minimum guaranteed annual income values are based on a fixed annuity
payout.
<TABLE>
<CAPTION>
MINIMUM
CONTRACT GUARANTEED MINIMUM
ANNIVERSARY BENEFIT GUARANTEED
AT EXERCISE BASE ANNUAL INCOME(1)
- ------------- ----------- ----------------
<S> <C> <C>
10 $ 162,889 $ 12,153
15 $ 207,892 $ 17,695
</TABLE>
(1) Other fixed annuity options involving a life contingency other than Life
Annuity With Payments Guaranteed for 10 Years are available. See "K. Description
of Variable Annuity Payout Options."
The Minimum Guaranteed Annuity Payout Rider does not create Accumulated Value or
guarantee performance of any investment option. Because this Rider is based on
conservative actuarial factors, the level of lifetime income that it guarantees
may often be less than the level that would be provided by application of
Accumulated Value at current annuity factors. Therefore, the Rider should be
regarded as a safety net. As described above, withdrawals will reduce the
benefit base.
NOTE: Adding the Minimum Guaranteed Annuity Payout Rider after the issue date
and/or repurchasing the benefit will impact the Program to Protect Principal and
Provide Growth Potential offered under the GPA Accounts since the Minimum
Guaranteed Annuity Payout Rider charges are deducted on a pro-rata basis from
all accounts including the GPA Accounts. See "GUARANTEE PERIOD ACCOUNTS."
N. 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.
O. 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
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<PAGE>
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 A, "MORE INFORMATION ABOUT THE FIXED ACCOUNT" AND
"GUARANTEE PERIOD ACCOUNTS."
The Accumulated Value under the Contract is determined by (1) multiplying the
number of Accumulation Units in each Sub-Account by the value of an Accumulation
Unit of that Sub-Account on the Valuation Date, (2) adding the products, and (3)
adding the amount of the accumulations in the Fixed Account and Guarantee Period
Accounts, if any.
NET INVESTMENT FACTOR. The Net Investment Factor is an index that measures the
investment performance of a Sub-Account from one Valuation Period to the next.
This factor is equal to 1.000000 plus the result from dividing (1) by (2) and
subtracting (3) and (4) where:
(1) is the investment income of a Sub-Account for the Valuation Period,
including realized or unrealized capital gains and losses during the
Valuation Period, adjusted for provisions made for taxes, if any;
(2) is the value of that Sub-Account's assets at the beginning of the
Valuation Period;
(3) is a charge for mortality and expense risks equal to 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 Underlying Funds.
A. VARIABLE ACCOUNT DEDUCTIONS
MORTALITY AND EXPENSE RISK CHARGE. The Company assesses a charge against the
assets of each Sub-Account to compensate for certain mortality and expense risks
its has assumed. The charge is imposed during both the accumulation phase 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 payout option selected), no matter
how long the Annuitant (or other payee) lives and no matter how long all
Annuitants as a class live. Therefore, the mortality charge is deducted during
the annuity payout phase on all contracts, including those that do not involve a
life contingency, even though the Company does not bear direct mortality risk
with respect to variable annuity settlement options that do not involve life
contingencies. The expense risk
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<PAGE>
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.
The mortality and expense risk charge is assessed daily at an annual rate of
1.25% of each Sub-Account's assets. This charge may not be increased. 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 phase and the
annuity payout phase. The daily Administrative Expense Charge is assessed to
help defray administrative expenses actually incurred in the administration of
the Sub-Account, without profits. There is no direct relationship, however,
between the amount of administrative expenses imposed on a given contract and
the amount of expenses actually attributable to that contract.
Deductions for the Contract fee (described 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 include, but
are not limited to, clerical, accounting, actuarial and legal services, rent,
postage, telephone, office equipment and supplies, expenses of preparing and
printing registration statements, expense of preparing and typesetting
prospectuses and the cost of printing prospectuses not allocable to sales
expense, filing and other fees.
OTHER CHARGES. Because the Sub-Accounts purchase shares of the Underlying
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 Underlying Funds contain additional information
concerning expenses of the Funds.
B. CONTRACT FEE
A $30 Contract fee currently is deducted on the Contract anniversary date and
upon full surrender of the Contract when the Accumulated Value is less than
$100,000. The Contract fee is waived for contracts issued to and maintained by
the trustee of a 401(k) plan. Where Contract value has been allocated to more
than one account, a percentage of the total Contract fee will be deducted from
the value in each account. The portion of the charge deducted from each account
will be equal to the percentage which the value in that account bears to the
Accumulated Value under the Contract. The deduction of the Contract fee from a
Sub-Account will result in cancellation of a number of Accumulation Units equal
in value to the percentage of the charge deducted from that account.
Where permitted by law, the Contract fee also may be waived for Contracts where,
on the issue date, either the Owner or the Annuitant is within the following
class of individuals ("eligible persons"): employees and registered
representatives of any 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.
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<PAGE>
C. OPTIONAL MINIMUM GUARANTEED ANNUITY PAYOUT RIDER CHARGE
Subject to state availability, the Company offers an optional Minimum Guaranteed
Annuity Payout Rider that may be elected by the Owner. A separate monthly charge
is made for the Rider. On the last day of each month and on the date the Rider
is terminated, a charge equal to 1/12th of the applicable annual rate (see table
below) is made against the Accumulated Value of the Contract at that time. The
charge is made through a pro-rata reduction of the Accumulated Value of the
Sub-Accounts, the Fixed Account and the Guarantee Period Accounts (based on the
relative value that the Accumulation Units of the Sub-Accounts, the dollar
amounts in the Fixed Account and the dollar amounts in the Guarantee Period
Accounts bear to the total Accumulated Value).
The applicable charge is assessed on the Accumulated Value on the last day of
each month and on the date the Rider is terminated, multiplied by 1/12th of the
following annual percentage rates:
<TABLE>
<S> <C>
Minimum Guaranteed Annuity Payout Rider with ten-year waiting period....... 0.25%
Minimum Guaranteed Annuity Payout Rider with fifteen-year waiting period... 0.15%
</TABLE>
For a description of the Rider, see "M. Optional Minimum Guaranteed Annuity
Payout Rider" under "DESCRIPTION OF THE CONTRACT," above.
D. PREMIUM TAXES
Some states and municipalities impose a premium tax on variable annuity
contracts. State premium taxes currently range up to 3.5%. The Company makes a
charge for state and municipal premium taxes, when applicable, and deducts the
amount paid as a premium tax charge. The current practice of the Company is to
deduct the premium tax charge in one of two ways:
(1) if the premium tax was paid by the Company when payments were received,
the premium tax charge is deducted on a pro-rata basis when withdrawals
are made, upon surrender of the Contract, or when annuity benefit
payments begin (the Company reserves the right instead to deduct the
premium tax charge for these contracts at the time the payments are
received); or
(2) the premium tax charge is deducted in total 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.
E. SURRENDER CHARGE
No charge for sales expense is deducted from payments at the time the payments
are made. A surrender 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 surrender 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 invested in the Contract for more than seven
years; 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 surrender charge,
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<PAGE>
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 surrender charge. If a withdrawal is attributable
all or in part to New Payments, a surrender charge may apply.
CHARGE FOR SURRENDER AND WITHDRAWALS. If a Contract is surrendered, or if New
Payments are withdrawn while the Contract is in force and before the Annuity
Date, a surrender charge may be imposed. The amount of the charge will depend
upon the number of years that any New Payments, 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 oldest New Payment and then from the next oldest 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 Surrender Charge is as follows:
<TABLE>
<CAPTION>
YEARS FROM DATE CHARGE AS PERCENTAGE OF
OF PAYMENT NEW PAYMENTS WITHDRAWN
- ------------------------------ ------------------------------
<S> <C>
0-1 7%
2 6%
3 5%
4 4%
5 3%
6 2%
7 1%
More than 7 0%
</TABLE>
The amount withdrawn equals the amount requested by the Owner plus the surrender
charge, if any. The charge is applied as a percentage of the New Payments
withdrawn, but in no event will the total surrender charge exceed a maximum
limit of 7% of total gross New Payments. Such total charge equals the aggregate
of all applicable surrender charges for surrender, withdrawals, and
annuitization.
REDUCTION OR ELIMINATION OF SURRENDER CHARGE AND ADDITIONAL AMOUNTS
CREDITED. Where permitted by state law, the Company will waive the surrender
charge in the event that an 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 four 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 and New Jersey
where not permitted by state law, the Company will waive the in the event that
an Owner (or the Annuitant, if the Owner is not an individual) is: (1) admitted
to a medical care facility and remains confined there until the later of one
year after the issue date or 90 consecutive days or (2) first diagnosed by a
licensed physician as having a fatal illness after the issue date of the
Contract.
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.
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<PAGE>
Where surrender charges have been waived under any of the situations discussed
above, no additional payments under the Contract will be accepted, unless
required by state law.
In addition, where permitted by state law, the Company may reduce or waive
surrender charges and/or credit additional amounts on Contracts issued where
either the Owner or the Annuitant on the issue date is within the following
class of individuals ("eligible persons"): employees and registered
representatives of any broker-dealer which has entered into a Sales Agreement
with the Company to sell the Contract; employees of the Company, its
subsidiaries and affiliates; officers, directors, trustees and employees of any
of the Funds, investment managers or sub-advisers; and the spouses, children and
other legal dependants (under age 21) of such eligible persons.
In addition, from time to time the Company may reduce the amount of the
surrender charge, the period during which it applies, or both, and/or credit
additional amounts on the Contract when the Contract is sold to individuals or
groups of individuals in a manner that reduces sales expenses. The Company will
consider (1) the size and type of group; (2) the total amount of payments to be
received and the manner in which payments are remitted; (3) the purpose for
which the Contract is being purchased and whether that purpose makes it likely
that costs and expenses will be reduced; (4) other transactions where sales
expenses are likely to be reduced; or (5) the level of commissions paid to
selling broker-dealers or certain financial institutions with respect to
contracts within the same group or class (for example, broker-dealers who offer
the Contract in connection with financial planning services offered on a
fee-for-service basis). Finally, if permitted under state law, surrender 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 surrender 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 surrender
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 surrender charge, if any, on an amount ("Withdrawal Without Surrender
Charge") equal to the greatest of (1), (2) or (3):
Where: (1) is: The Accumulated Value as of the Valuation Date coincident with
or next following the date of receipt of the request for
withdrawal, reduced by total gross payments not previously
withdrawn ("Cumulative Earnings")
Where: (2) is: 15% of the Accumulated Value as of the Valuation Date
coincident with or next following the date of receipt of the
request for withdrawal, reduced by the total amount of any
prior withdrawals made in the same calendar year to which no
surrender charge was applied.
Where: (3) is: The amount calculated under the Company's life expectancy
distribution (see "Life Expectancy Distributions" above)
whether or not the withdrawal was part of such distribution
(applies only if the Annuitant is also an Owner).
For example, an 81-year-old Owner/Annuitant with an Accumulated Value of
$15,000, of which $1,000 is Cumulative Earnings, would have a Withdrawal Without
Surrender Charge of $2,250, which is equal to the greatest of:
(1) Cumulative Earnings ($1,000);
(2) 15% of Accumulated Value ($2,250); or
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<PAGE>
(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 surrender charge, 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 surrender 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 surrender 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 surrender charge. Any such reallocation
will be at the unit values for the Sub-Accounts as of the Valuation Date on
which a written, signed request is received at the Principal Office.
For further information on surrender and withdrawal, including minimum limits on
amount withdrawn and amounts remaining under the Contract in the case of
withdrawal, and important tax considerations, see "E. Surrender" and "F.
Withdrawals" under "DESCRIPTION OF CONTRACT," and see "FEDERAL TAX
CONSIDERATIONS."
CHARGE AT THE TIME ANNUITY BENEFIT PAYMENTS BEGIN. If the Owner chooses a
commutable period certain option or a noncommutable period certain option for
less than ten years (less than six years under New York contracts) , a surrender
charge will be deducted from the Accumulated Value of the Contract if the
Annuity Date occurs at any time when a surrender charge would still apply had
the Contract been surrendered on the Annuity Date.
No surrender charge is imposed at the time of annuitization in any Contract year
under an option involving a life contingency or for any noncommutable period
certain option for ten years or more (six or more years under New York
contracts). 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 surrender charge
applicable under the fixed contract if a period certain option is chosen, will
be applied towards the variable annuity option desired by the Owner. The number
of Annuity Units under the option will be calculated using the Annuity Unit
values as of the 15th of the month preceding the Annuity Date.
F. TRANSFER CHARGE
The Company currently makes no charge for processing transfers. The Company
guarantees that the first 12 transfers in a Contract year will be free of
transfer charge, but reserves the right to assess a charge, guaranteed never to
exceed $25, for each subsequent transfer in a Contract year to reimburse it for
the expense of processing transfers. For more information, see "D. 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, except in California where it is accounted for in the
Company's General 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. Once an interest rate is in effect for a Guarantee Period Account,
however, the Company may not change it during the duration of the Guarantee
Period. In no event will the Guaranteed Interest Rate be less than 3%.
To the extent permitted by law, the Company reserves the right at any time to
offer Guarantee Periods with durations that differ from those which were
available when the Contract initially was issued and to stop accepting new
allocations, transfers or renewals to a particular Guarantee Period.
Owners may allocate net payments or make transfers from any of the Sub-Accounts,
the Fixed Account or an existing Guarantee Period Account to establish a new
Guarantee Period Account at any time prior to the Annuity Date. (In Oregon and
Massachusetts, payments and transfers to the Fixed Account are subject to
certain restrictions. See APPENDIX A.) Transfers from a Guarantee Period Account
on any date other than on the day following the expiration of that Guarantee
Period will be subject to a Market Value Adjustment. The Company establishes a
separate investment account each time the Owner allocates or transfers amounts
to a Guarantee Period Account except that amounts allocated to the same
Guarantee Period on the same day will be treated as one Guarantee Period
Account. The minimum that may be allocated to establish a Guarantee Period
Account is $1,000. If less than $1,000 is allocated, the Company reserves the
right to apply that amount to the Money Market Fund. The Owner may allocate
amounts to any of the Guarantee Periods available.
At least 45 days, but not more than 75 days, prior to the end of a Guarantee
Period, the Company will notify the Owner in writing of the expiration of that
Guarantee Period. At the end of a Guarantee Period the Owner may transfer
amounts to the Sub-Accounts, the Fixed Account or establish a new Guarantee
Period Account of any duration then offered by the Company without a Market
Value Adjustment. If reallocation instructions are not received at the Principal
Office before the end of a Guarantee Period, the account value will be
automatically applied to a new Guarantee Period Account with the same duration
unless (1) less than $1,000 would remain in the Guarantee Period Account on the
expiration date; or (2) the Guarantee Period would extend beyond the Annuity
Date or is no longer available. In such cases, the Guarantee Period Account
value will be transferred to the Money Market Fund. Where amounts have been
automatically renewed into a new Guarantee Period, it is the Company's current
practice to give the Owner an additional 30 days to transfer out of the
Guarantee Period Account without application of a Market Value Adjustment. This
practice may be discontinued or changed at the Company's discretion. Under
Contracts issued in New York, the Company will transfer monies out of the
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
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Value. See "Death Benefit." All other transfers, withdrawals, or a surrender
prior to the end of a Guarantee Period will be subject to a Market Value
Adjustment, which may increase or decrease the account value. Amounts applied
under an annuity option are treated as withdrawals when calculating the Market
Value Adjustment. The Market Value Adjustment will be determined by multiplying
the amount taken from each Guarantee Period Account before deduction of any
Surrender Charge by the market value factor. The market value factor for each
Guarantee Period Account is equal to:
[(1+i)/(1+j)](n/365) - 1
where: i is the Guaranteed Interest Rate expressed as a decimal (for example:
3% = 0.03) being credited to the current Guarantee Period;
j is the new Guaranteed Interest Rate, expressed as a decimal, for a
Guarantee Period with a duration equal to the number of years
remaining in the current Guarantee Period, rounded to the next higher
number of whole years. If that rate is not available, the Company
will use a suitable rate or index allowed by the Department of
Insurance; and
n is the number of days remaining from the effective Valuation Date to
the end of the current Guarantee Period.
Based on the application of this formula, the value of a Guarantee Period
Account will increase after the Market Value Adjustment is applied if the then
current market rates are lower than the rate being credited to the Guarantee
Period Account. Similarly, the value of a Guarantee Period Account will decrease
after the Market Value Adjustment is applied if the then current market rates
are higher than the rate being credited to the Guarantee Period Account. The
Market Value Adjustment is limited, however, so that even if the account value
is decreased after application of a Market Value Adjustment, it will equal or
exceed the Owner's principal plus 3% earnings per year less applicable Contract
fees. Conversely, if the then current market rates are lower and the account
value is increased after the Market Value Adjustment is applied, the increase in
value also is affected by the minimum guaranteed rate of 3% such that the amount
that will be added to the Guarantee Period Account is limited to the difference
between the amount earned and the 3% minimum guaranteed earnings. For examples
of how the Market Value Adjustment works, see APPENDIX B, "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
(including withdrawals made as part of a pro-rata deduction for charges under a
Minimum Guaranteed Annuity Payout Rider purchased or repurchased after issue),
in order to ensure that on the last day of the Guarantee Period, the value in
the Guarantee Period Account will equal the amount of the entire initial
payment. The required amount then will be allocated to the preselected Guarantee
Period Account and the remaining balance to the other investment options
selected by the Owner in accordance with the procedures described in "A.
Payments."
WITHDRAWALS. Prior to the Annuity Date, the Owner may make withdrawals of
amounts held in the Guarantee Period Accounts. Withdrawals from these accounts
will be made in the same manner and be subject to the same rules as set forth
under "E. Surrender" and "F. Withdrawals." In addition, the following provisions
also apply to withdrawals from a Guarantee Period Account: (1) a Market Value
Adjustment will apply to all withdrawals, including Withdrawals Without
Surrender Charge, unless made at the end of the Guarantee Period; and (2) the
Company reserves the right to defer payments of amounts withdrawn from a
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
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adjustment will be made to the amount payable. If a surrender charge applies to
the withdrawal, it will be calculated as set forth under "D. Surrender 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 prescribed by the Treasury Department provide that the
investments of a segregated asset account underlying a variable annuity contract
are adequately diversified if no more than 55% of the value of its assets is
represented by any one investment, no more than 70% by any two investments, no
more than 80% by any three investments, and no more than 90% by any four
investments. Under this section of the Code, if the investments are not
adequately diversified, the Contract will not be treated as an annuity contract,
and therefore the income on the Contract, for any taxable year of the Owner,
would be treated as ordinary income received or accrued by the Owner. It is
anticipated that the Portfolios of the Fund in this Contract 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.
In addition, traditionally in order for a variable annuity contract to qualify
for tax deferral, the Company, and not the variable contract owner, must be
considered to be the owner for tax purposes of the assets in the segregated
asset account underlying the variable annuity contract. In certain
circumstances, however, variable annuity contract owners may now be considered
the owners of these assets for federal income tax purposes. Specifically, the
IRS has stated in published rulings that a variable annuity contract owner may
be considered the owner of segregated account assets if the contract owner
possesses incidents of ownership in those assets, such as the ability to
exercise investment control over the assets. The Treasury Department has also
announced, in connection with the issuance of regulations concerning investment
diversification, that those regulations do not provide guidance governing the
circumstances in which investor control of the investments of a segregated asset
account may cause the investor (i.e., the contract owner), rather than the
insurance company, to be treated as the owner of the assets in the account. This
announcement also states that guidance
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would be issued by way of regulations or rulings on the "extent to which
policyholders may direct their investments to particular sub-accounts without
being treated as owners of the underlying assets." As of the date of this
Prospectus, no such guidance has been issued. The Company therefore additionally
reserves the right to modify the Contract as necessary in order to attempt to
prevent a contract owner from being considered the owner of a pro rata share of
the assets of the segregated asset account underlying the variable annuity
contracts.
A. QUALIFIED AND NON-QUALIFIED CONTRACTS
From a federal tax viewpoint there are two types of variable annuity contracts:
"qualified" contracts and "non-qualified" contracts. A qualified contract is one
that is purchased in connection with a retirement plan which meets the
requirements of Sections 401, 403, or 408 of the Code, while a non-qualified
contract is one that is not purchased in connection with one of the indicated
retirement plans. The tax treatment for certain withdrawals or surrenders will
vary, depending on whether they are made from a qualified contract or a non-
qualified contract. For more information on the tax provisions applicable to
qualified contracts, see "D. Provisions Applicable to Qualified Employer Plans"
below.
B. TAXATION OF THE CONTRACTS IN GENERAL
The Company believes that the Contract described in this Prospectus will, with
certain exceptions (see "Nonnatural Owners" below), be considered an annuity
contract under Section 72 of the Code. Please note, however, if the Owner
chooses an Annuity Date beyond the Owner's 85th birthday, it is possible that
the Contract may not be considered an annuity for tax purposes, and therefore,
the Owner will be taxed on the annual increase in Accumulated Value. The Owner
should consult tax and financial advisors for more information. 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
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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 any LED-type option prior to age 59 1/2. Subsequent Private Letter
Rulings, however, have treated LED-type withdrawal programs as effectively
avoiding the 10% penalty tax. The position of the IRS on this issue is unclear.
ASSIGNMENTS OR TRANSFERS. If the Owner transfers (assigns) the Contract to
another individual as a gift prior to the Annuity Date, the Code provides that
the Owner will incur taxable income at the time of the transfer. An exception is
provided for certain transfers between spouses. The amount of taxable income
upon such taxable transfer is equal to any investment gain in value over the
Owner's cost basis at the time of the transfer. The transfer also is subject to
federal gift tax provisions. Where the Owner and Annuitant are different
persons, the change of ownership of the Contract to the Annuitant on the Annuity
Date, as required under the Contract, is a gift and will be taxable to the Owner
as such; however, the Owner will not incur taxable income. Instead, the
Annuitant will incur taxable income upon receipt of annuity benefit payments as
discussed above.
NONNATURAL OWNERS. As a general rule, deferred annuity contracts owned by
"nonnatural 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.
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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 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 cancel the Contract as described
in this Prospectus. See "B. Right to Cancel Individual Retirement Annuities."
Eligible employers that meet specified criteria may establish simplified
employee pension plans (SEP-IRAs) or SIMPLE IRA plans for their employees using
the employees IRAs. Employer contributions that may be made to such plans are
larger than the amounts that may be contributed to regular IRAs and may be
deductible to the employer.
TAX-SHELTERED ANNUITIES ("TSAS"). Under the provisions of Section 403(b) of the
Code, payments made to annuity contracts purchased for employees under annuity
plans adopted by public school systems and certain organizations which are tax
exempt under Section 501(c)(3) of the Code are excludable from the gross income
of such employees to the extent that total annual payments do not exceed the
maximum contribution permitted under the Code. Purchasers of TSA Contracts
should seek competent advice as to eligibility, limitations on permissible
payments and other tax consequences associated with the Contracts.
Withdrawals or other distributions attributable to salary reduction
contributions (including earnings thereon) made to a TSA contract after December
31, 1988, may not begin before the employee attains age 59 1/2, separates from
service, dies or becomes disabled. In the case of hardship, an Owner may
withdraw amounts
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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.
STATEMENTS AND REPORTS
The Owner is sent a report semi-annually which provides certain financial
information about the Funds. At least annually, but possibly as frequent as
quarterly, the Company will furnish a statement to the Owner containing
information about his or her Contract, including Accumulation Unit Values and
other information as required by applicable law, rules and regulations . The
Company will also send a confirmation statement to Owners each time a
transaction is made affecting the Contract Value. (Certain transactions made
under recurring payment plans such as Dollar Cost Averaging may in the future be
confirmed quarterly rather than by immediate confirmations.) The Owner should
review the information in all statements carefully. All errors or corrections
must be reported to the Company immediately to assure proper crediting to the
Contract. The Company will assume that all transactions are accurately reported
on confirmation statements and quarterly/ annual statements unless the Owner
notifies the Principal Office in writing within 30 days after receipt of the
statement.
LOANS (QUALIFIED CONTRACTS ONLY)
Loaned amounts will first be withdrawn from Sub-Account and Fixed Account values
on a pro-rata basis until exhausted. Thereafter, any additional amounts will be
withdrawn from the Guarantee Period Accounts (pro-rata by duration and LIFO
(last-in, first-out) within each duration), subject to any applicable Market
Value Adjustments. The maximum loan amount will be determined under the
Company's maximum loan formula. The minimum loan amount is $1,000. Loans will be
secured by a security interest in the Contract and the amount borrowed will be
transferred to a loan asset account within the Company's General Account, where
it will accrue interest at a specified rate below the then-current loan rate.
Generally, loans must be repaid within five years or less, and repayments must
be made quarterly and in substantially equal amounts. Repayments will be
allocated pro rata in accordance with the most recent payment allocation, except
that any allocations to a Guarantee Period Account will instead be allocated to
the Money Market Fund.
ADDITION, DELETION OR SUBSTITUTION OF INVESTMENTS
The Company reserves the right, subject to applicable law, to make additions to,
deletions from, or substitutions for the shares that are held in the
Sub-Accounts or that the Sub-Accounts may purchase. If the shares of any Fund
are no longer available for investment or if in the Company's judgment further
investment in any Fund should become inappropriate in view of the purposes of
the Variable Account or the affected Sub-Account, the Company may redeem the
shares of that Fund and substitute shares of another registered open-end
management company. The Company will not substitute any shares attributable to a
Contract interest in a Sub-Account without notice to the Owner and prior
approval of the SEC and state insurance authorities, to the extent required by
the 1940 Act or other applicable law. The Variable Account may, to the extent
permitted by law, purchase other securities for other contracts or permit a
conversion between contracts upon request by the Owner.
The Company also reserves the right to establish additional sub-accounts of the
Variable Account, each of which would invest in shares corresponding to a new
fund or in shares of another investment company having a specified investment
objective. Subject to applicable law and any required SEC approval, the Company
may, in its sole discretion, establish new sub-accounts or eliminate one or more
Sub-Accounts if marketing needs,
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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 Underlying Funds 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 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. Any such changes will apply
uniformly to all Contracts that are affected. You will be given written notice
of such changes.
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.
52
<PAGE>
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 6.5% of payments, to broker-dealers
which sell the Contract. Alternative commission schedules are available with
lower initial commission amounts based on payments, plus ongoing annual
compensation of up to 1% of Contract value. To the extent permitted by NASD
rules, promotional incentives or payments may also be provided to such broker-
dealers based on sales volumes, the assumption of wholesaling functions, or
other sales-related criteria. Additional payments may be made for other services
not directly related to the sale of the Contract, including the recruitment and
training of personnel, production of promotional literature, and similar
services.
The Company intends to recoup commissions and other sales expenses through a
combination of anticipated surrender charges and profits from the Company's
General Account, which may include amounts derived from mortality and expense
risk charges. 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 surrender 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
1-800-917-1909.
SERVICE AND DISTRIBUTION FEES
The Company receives fees from the investment advisers or other service
providers of certain Underlying Funds in return for providing certain services
to Owners. Currently, the Company receives service fees with respect to the AIM
V.I. Value Fund at an annual rate equal to 0.15% of total average quarterly net
assets less than $100 million and 0.20% of total average quarterly net assets of
$100 million or more, the Company receives service fees with respect to the PBHG
Select 20 Portfolio at an annual rate not to exceed 0.20% of the average daily
net asset value of the shares of the portfolio held by the Variable Account.
With respect to the Lazard Retirement International Equity Portfolio, the
Company receives service fees at an annual rate of 0.25% of the average daily
net asset value of the shares of the portfolio held by the Variable Account. The
Company receives service fees with respect to the Oppenheimer Aggressive Growth
Fund and the Oppenheimer Growth & Income Fund at an annual rate of 0.20% of
average net asset value of the shares of the funds held by the Variable Account.
The Company also receives service fees with respect to the MFS Emerging Growth
Series and the MFS Growth With Income Series at an annual rate not to exceed
0.20% of the net asset value of the MFS Trust attributable to contracts offered
by the Company. The Company may in the future render services for which it will
receive compensation from the investment advisers or other service providers of
other Underlying Funds.
53
<PAGE>
Currently, the Company also receives a 12b-1 fee from Lazard of 0.25% as
reimbursement for certain administrative and distribution support services
provided to the Lazard Retirement International Equity Portfolio.
LEGAL MATTERS
There are no legal proceedings pending to which the Variable Account is a party,
or to which the assets of the Variable Account are subject. The Company and the
Principal Underwriter are not involved in any litigation that is of material
importance in relation to their total assets or that relates to the Variable
Account.
YEAR 2000 COMPLIANCE
The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
computer programs that have date-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices or
engage in similar normal business activities.
Based on a third party assessment, the Company determined that significant
portions of its software required modification or replacement to enable its
computer systems to properly process dates beyond December 31, 1999. The Company
is presently completing the process of modifying or replacing existing software
and believes that this action will resolve the Year 2000 issue. However, if such
modifications and conversions are not made, or are not completed timely, or
should there be serious unanticipated interruptions from unknown sources, the
Year 2000 issue could have a material adverse impact on the operations of the
Company. Specifically, the Company could experience, among other things, an
interruption in its ability to collect and process premiums, process claim
payments, safeguard and manage its invested assets, accurately maintain
policyholder information, accurately maintain accounting records, and perform
customer service. Any of these specific events, depending on duration, could
have a material adverse impact on the results of operations and the financial
position of the Company.
The Company has initiated formal communications with all of its suppliers to
determine the extent to which the Company is vulnerable to those third parties'
failure to remediate their own Year 2000 issue. The Company's total Year 2000
project cost and estimates to complete the project include the estimated costs
and time associated with the Company's involvement on a third party's Year 2000
issue, and are based on presently available information. However, there can be
no guarantee that the systems of other companies on which the Company's systems
rely will be timely converted, or that a failure to convert by another company,
or a conversion that is incompatible with the Company's systems, would not have
material adverse effect on the Company. The Company does not believe that it has
material exposure to contingencies related to the Year 2000 issue for the
products it has sold. 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.
The cost of the Year 2000 project will be expensed as incurred and is being
funded primarily through a reallocation of resources from discretionary projects
and a reduction in systems maintenance and support costs. Therefore, the Year
2000 project is not expected to result in any significant incremental technology
cost and is not expected to have a material effect on the results of operations.
The Company and its affiliates have incurred and expensed approximately $54
million related to the assessment, plan development and substantial completion
of the Year 2000 project, through December 31, 1998. The total remaining cost of
the project is estimated between $20-30 million.
54
<PAGE>
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.
55
<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 surrender charge is imposed if such event occurs before the
payments attributable to the surrender or withdrawal have been credited to the
Contract at least seven full contract years.
In Massachusetts, payments and transfers to the Fixed Account are subject to the
following restrictions:
If a Contract is issued prior to the Annuitant's 60th birthday,
allocations to the Fixed Account will be permitted until the Annuitant's
61st birthday. On and after the Annuitant's 61st birthday, no additional
Fixed Account allocations will be accepted. If a Contract is issued on
or after the Annuitant's 60th birthday, up through and including the
Annuitant's 81st birthday, Fixed Account allocations will be permitted
during the first Contract year. On and after the first Contract
anniversary, no additional allocations to the Fixed Account will be
permitted. If a Contract is issued after the Annuitant's 81st birthday,
no payments to the Fixed Account will be permitted at any time.
If an allocation designated as a Fixed Account allocation is received at the
Principal Office during a period when the Fixed Account is not available due to
the limitations outlined above, the monies will be allocated to the Money Market
Fund.
In Oregon, no payment to the Fixed Account will be permitted if a Contract is
issued after the Annuitant's 81st birthday.
To the extent permitted by state law, the Company reserves the right, from time
to time, to credit an enhanced interest rate to certain initial and/or
subsequent payments ("eligible payments") which are deposited into the Fixed
Account under an Automatic Transfer Option (dollar cost averaging election) that
uses the Fixed Account as the source account from which automatic transfers are
then processed. The following are not considered eligible payments: amounts
transferred into the Fixed Account from the Variable Account and/or the
Guarantee Period Accounts; amounts already in the Fixed Account at the time an
eligible payment is deposited and amounts transferred to the Contract from
another annuity contract issued by the Company. The Company reserves the right
to extend the period of time that the enhanced rate will apply. For more
information, please contact your financial representative or call
1-800-917-1909.
A-1
<PAGE>
APPENDIX B
SURRENDER CHARGES AND THE MARKET VALUE ADJUSTMENT
PART 1: SURRENDER CHARGES
FULL SURRENDER
Assume a Payment of $50,000 is made on the issue date and no additional payments
are made. Assume there are no withdrawals and that the Withdrawal Without
Surrender Charge is equal to the greater of 15% of the current Accumulated Value
or the accumulated earnings in the Contract. The table below presents examples
of the surrender charge resulting from a full surrender, based on hypothetical
Accumulated Values.
<TABLE>
<CAPTION>
HYPOTHETICAL WITHDRAWAL WITHOUT SURRENDER
ACCOUNT ACCUMULATED SURRENDER CHARGE CHARGE SURRENDER
YEAR VALUE AMOUNT PERCENTAGE CHARGE
- --------------- ------------ ------------------- ----------------- ----------
<S> <C> <C> <C> <C>
1 $54,000.00 $ 8,100.00 7% $ 3,213.00
2 58,320.00 8,748.00 6% 2,974.32
3 62,985.60 12,985.60 5% 2,500.00
4 68,024.45 18,024.45 4% 2,000.00
5 73,466.40 23,466.40 3% 1,500.00
6 79,343.72 29,343.72 2% 1,000.00
7 85,691.21 35,691.21 1% 500.00
8 92,546.51 42,546.51 0% 0.00
</TABLE>
WITHDRAWAL
Assume a Payment of $50,000 is made on the issue date and no additional payments
are made. Assume that the Withdrawal Without Surrender Charge is equal to the
greater of 15% of the current Accumulated Value or the accumulated earnings in
the contract and there are withdrawals as detailed below. The table below
presents examples of the surrender charge resulting from withdrawals, based on
hypothetical Accumulated Values.
<TABLE>
<CAPTION>
HYPOTHETICAL WITHDRAWAL WITHOUT SURRENDER
ACCOUNT ACCUMULATED SURRENDER CHARGE CHARGE SURRENDER
YEAR VALUE WITHDRAWAL AMOUNT PERCENTAGE CHARGE
- --------------- ------------ ------------ ------------------- ----------------- -----------
<S> <C> <C> <C> <C> <C>
1 $54,000.00 $0.00 $ 8,100.00 7% $ 0.00
2 58,320.00 0.00 8,748.00 6% 0.00
3 62,985.60 0.00 12,985.60 5% 0.00
4 68,024.45 30,000.00 18,024.45 4% 479.02
5 41,066.40 10,000.00 6,159.96 3% 115.20
6 33,551.72 5,000.00 5,032.76 2% 0.00
7 30,835.85 10,000.00 4,625.38 1% 53.75
8 22,502.72 15,000.00 3,375.41 0% 0.00
</TABLE>
PART 2: MARKET VALUE ADJUSTMENT
The market value factor is: [(1+i)/(1+j)](n/365)-1
The following examples assume:
1. The payment was allocated to a ten-year Guarantee Period Account with a
Guaranteed Interest Rate of 8%.
2. The date of surrender is seven years (2,555 days) from the expiration date.
B-1
<PAGE>
3. The value of the Guarantee Period Account is equal to $62,985.60 at the end
of three years.
4. No transfers or withdrawals affecting this Guarantee Period Account have
been made.
5. Surrender charges, if any, are calculated in the same manner as shown in the
examples in Part 1.
NEGATIVE MARKET VALUE ADJUSTMENT (UNCAPPED)
Assume that on the date of surrender, the current rate (j) is 10.00% or 0.10
<TABLE>
<S> <C> <C>
The market value factor = [(1+i)/(1+j)](n/365) -1
= [(1+.08)/(1+.10)](2555/365) -1
= (.98182)(7) -1
= -.12054
The market value adjustment = the market value factor multiplied by the withdrawal
= -.12054X$62,985.60
= -$7,592.11
</TABLE>
POSITIVE MARKET VALUE ADJUSTMENT (UNCAPPED)
Assume that on the date of surrender, the current rate (j) is 7.00% or 0.07
<TABLE>
<S> <C> <C>
The market value factor = [(1+i)/(1+j)](n/365) -1
= [(1+.08)/(1+.07)](2555/365) -1
= (1.0093)(7) -1
= .06694
The market value adjustment = the market value factor multiplied by the withdrawal
= .06694X$62,985.60
= $4,216.26
</TABLE>
NEGATIVE MARKET VALUE ADJUSTMENT (CAPPED)
Assume that on the date of surrender, the current rate (j) is 11.00% or 0.11
<TABLE>
<S> <C> <C>
The market value factor = [(1+i)/(1+j)](n/365) -1
= (1+.08)/(1+.11)](2555/365) -1
= (.97297)(7) -1
= -.17454
The market value adjustment = Minimum of the market value factor multiplied by the
withdrawal or the negative of the excess interest earned
over 3%
= Minimum of (-.17454X$62,985.60 or -$8,349.25)
= Minimum of (-$10,993.51 or -$8,349.25)
= -$8,349.25
</TABLE>
B-2
<PAGE>
POSITIVE MARKET VALUE ADJUSTMENT (CAPPED)
Assume that on the date of surrender, the current rate (j) is 6.00% or 0.06
<TABLE>
<S> <C> <C>
The market value factor = [(1+i)/(1+j)](n/365) -1
= [(1+.08)/(1+.06)](2555/365) -1
= (1.01887)(7) -1
= .13981
The market value adjustment = Minimum of the market value factor multiplied by the
withdrawal or the excess interest earned over 3%
The market value factor = Minimum of (.13981X$62,985.60 or $8,349.25)
= Minimum of ($8,806.02 or $8,349.25)
= $8,349.25
</TABLE>
B-3
<PAGE>
APPENDIX C
THE DEATH BENEFIT
PART 1: DEATH OF THE ANNUITANT
DEATH BENEFIT ASSUMING NO WITHDRAWALS
Assume a payment of $50,000 is made on the issue date and no additional payments
are made. Assume there are no withdrawals and that the Death Benefit Effective
Annual Yield is equal to 5%. The table below presents examples of the Death
Benefit based on the Hypothetical Accumulated Values.
<TABLE>
<CAPTION>
HYPOTHETICAL HYPOTHETICAL
CONTRACT ACCUMULATED MARKET VALUE DEATH DEATH DEATH HYPOTHETICAL
YEAR VALUE ADJUSTMENT BENEFIT (A) BENEFIT (B) BENEFIT (C) DEATH BENEFIT
- ------------- ------------ ------------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
1 $53,000.00 $ 0.00 $53,000.00 $52,500.00 $50,000.00 $ 53,000.00
2 53,530.00 500.00 54,030.00 55,125.00 53,000.00 55,125.00
3 58,883.00 0.00 58,883.00 57,881.25 55,125.00 58,883.00
4 52,994.70 500.00 53,494.70 60,775.31 58,883.00 60,775.31
5 58,294.17 0.00 58,294.17 63,814.08 60,775.31 63,814.08
6 64,123.59 500.00 64,623.59 67,004.78 63,814.08 67,004.78
7 70,535.95 0.00 70,535.95 70,355.02 67,004.78 70,535.95
8 77,589.54 500.00 78,089.54 73,872.77 70,535.95 78,089.54
9 85,348.49 0.00 85,348.49 77,566.41 78,089.54 85,348.49
10 93,883.34 0.00 93,883.34 81,444.73 85,348.49 93,883.34
</TABLE>
Death Benefit (a) is the Accumulated Value increased by any positive Market
Value Adjustment. Death Benefit (b) is the gross payments compounded annually at
5% decreased proportionately to reflect withdrawals. Death Benefit (c) is the
death benefit that would have been payable on the most recent Contract
anniversary, increased for subsequent payments, and decreased proportionately
for subsequent withdrawals.
The Hypothetical Death Benefit is equal to the greatest of Death Benefits (a),
(b), or (c).
DEATH BENEFIT ASSUMING WITHDRAWALS
Assume a payment of $50,000 is made on the issue date and no additional payments
are made. Assume there are withdrawals as detailed in the table below and that
the Death Benefit Effective Annual Yield is equal to 5%. The table below
presents examples of the Death Benefit based on the Hypothetical Accumulated
Value.
<TABLE>
<CAPTION>
HYPOTHETICAL HYPOTHETICAL
CONTRACT ACCUMULATED MARKET VALUE DEATH DEATH DEATH HYPOTHETICAL
YEAR VALUE WITHDRAWALS ADJUSTMENT BENEFIT (A) BENEFIT (B) BENEFIT (C) DEATH BENEFIT
- ------------- ------------ ------------ ------------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
1 $53,000.00 $ 0.00 $ 0.00 $53,000.00 $52,500.00 $50,000.00 $ 53,000.00
2 53,530.00 0.00 500.00 54,030.00 55,125.00 53,000.00 55,125.00
3 3,883.00 50,000.00 0.00 3,883.00 4,171.13 3,972.50 4,171.13
4 3,494.70 0.00 500.00 3,994.70 4,379.68 4,171.13 4,379.68
5 3,844.17 0.00 0.00 3,844.17 4,598.67 4,379.68 4,598.67
6 4,228.59 0.00 500.00 4,728.59 4,828.60 4,598.67 4,828.60
7 4,651.45 0.00 0.00 4,651.45 5,070.03 4,828.60 5,070.03
8 5,116.59 0.00 500.00 5,616.59 5,323.53 5,070.03 5,616.59
9 5,628.25 0.00 0.00 5,628.25 5,589.71 5,616.59 5,628.25
10 691.07 5,000.00 0.00 691.07 712.70 683.44 712.70
</TABLE>
C-1
<PAGE>
Death Benefit (a) is the Accumulated Value increased by any positive Market
Value Adjustment. Death Benefit (b) is the gross payments compounded annually at
5%, decreased proportionately to reflect withdrawals. Death Benefit (c) is the
death benefit that would have been payable on the most recent Contract
anniversary, increased for subsequent payments, and decreased proportionately
for subsequent withdrawals.
The Hypothetical Death Benefit is equal to the greatest of Death Benefits (a),
(b), or (c).
PART 2: DEATH OF THE OWNER WHO IS NOT THE ANNUITANT
Assume a payment of $50,000 is made on the issue date and no additional payments
are made. Assume there are no partial withdrawals. The table below presents
examples of the Death Benefit based on the Hypothetical Accumulated Values.
<TABLE>
<CAPTION>
HYPOTHETICAL HYPOTHETICAL
CONTRACT ACCUMULATED MARKET VALUE HYPOTHETICAL
YEAR VALUE ADJUSTMENT DEATH BENEFIT
- ------------- ------------ ------------- -------------
<S> <C> <C> <C>
1 $53,000.00 $ 0.00 $ 53,000.00
2 53,530.00 500.00 54,030.00
3 58,883.00 0.00 58,883.00
4 52,994.70 500.00 53,494.70
5 58,294.17 0.00 58,294.17
6 64,123.59 500.00 64,623.59
7 70,535.95 0.00 70,535.95
8 77,589.54 500.00 78,089.54
9 85,348.49 0.00 85,348.49
10 93,883.34 0.00 93,883.34
</TABLE>
The Hypothetical Death Benefit is the Accumulated Value increased by any
positive Market Value Adjustment.
C-2
<PAGE>
APPENDIX D
CONDENSED FINANCIAL INFORMATION
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
FULCRUM SEPARATE ACCOUNT
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
---------------------
SUB-ACCOUNT 1998 1997
- --------------------------------------------------------------------------------------------- ---------- ---------
<S> <C> <C>
GLOBAL INTERACTIVE/TELECOMM PORTFOLIO
Unit Value:
Beginning of Period........................................................................ 1.295 0
End of Period.............................................................................. 1.665 1.295
Number of Units Outstanding at End of Period (in thousands).................................. 2,359 1,592
OPPENHEIMER AGGRESSIVE GROWTH FUND/VA
Unit Value:
Beginning of Period........................................................................ 0 0
End of Period.............................................................................. 1.296 0
Number of Units Outstanding at End of Period (in thousands).................................. 3 0
MFS EMERGING GROWTH SERIES
Unit Value:
Beginning of Period........................................................................ 0 0
End of Period.............................................................................. 1.327 0
Number of Units Outstanding at End of Period (in thousands).................................. 23 0
SMALL CAP VALUE SERIES
Unit Value:
Beginning of Period........................................................................ 0 0
End of Period.............................................................................. 1.203 0.000
Number of Units Outstanding at End of Period (in thousands).................................. 92 0
LAZARD RETIREMENT INTERNATIONAL EQUITY PORTFOLIO
Unit Value:
Beginning of Period........................................................................ 0 0
End of Period.............................................................................. 1.118 0
Number of Units Outstanding at End of Period (in thousands).................................. 207 0
INTERNATIONAL GROWTH PORTFOLIO
Unit Value:
Beginning of Period........................................................................ 0.907182 0
End of Period.............................................................................. 0.823 0.907
Number of Units Outstanding at End of Period (in thousands).................................. 3,084 3,438
PBHG SELECT 20 PORTFOLIO
Unit Value:
Beginning of Period........................................................................ 0 0
End of Period.............................................................................. 1.260 0
Number of Units Outstanding at End of Period (in thousands).................................. 201 0
GROWTH PORTFOLIO
Unit Value:
Beginning of Period........................................................................ 1.055 0
End of Period.............................................................................. 1.045 1.055
Number of Units Outstanding at End of Period (in thousands).................................. 4,044 3,964
</TABLE>
D-1
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
---------------------
SUB-ACCOUNT 1998 1997
- --------------------------------------------------------------------------------------------- ---------- ---------
<S> <C> <C>
VALUE PORTFOLIO
Unit Value:
Beginning of Period........................................................................ 1.243 0
End of Period.............................................................................. 1.317 1.243
Number of Units Outstanding at End of Period (in thousands).................................. 5,759 4,264
AIM V.I. VALUE FUND
Unit Value:
Beginning of Period........................................................................ 0 0
End of Period.............................................................................. 1.297 0
Number of Units Outstanding at End of Period (in thousands).................................. 232 0
MFS GROWTH WITH INCOME SERIES
Unit Value:
Beginning of Period........................................................................ 0 0
End of Period.............................................................................. 1.204 0
Number of Units Outstanding at End of Period (in thousands).................................. 165 0
OPPENHEIMER MAIN STREET GROWTH & INCOME FUND/VA
Unit Value:
Beginning of Period........................................................................ 0 0
End of Period.............................................................................. 1.214 0
Number of Units Outstanding at End of Period (in thousands).................................. 277 0
DELAWARE BALANCED SERIES
Unit Value:
Beginning of Period........................................................................ 0 0
End of Period.............................................................................. 1.173 0
Number of Units Outstanding at End of Period (in thousands).................................. 303 0
STRATEGIC INCOME PORTFOLIO
Unit Value:
Beginning of Period........................................................................ 1.028306 0
End of Period.............................................................................. 1.080 1.028
Number of Units Outstanding at End of Period (in thousands).................................. 1,652 1,604
MONEY MARKET FUND
Unit Value:
Beginning of Period........................................................................ 1.032 0
End of Period.............................................................................. 1.073 1.032
Number of Units Outstanding at End of Period (in thousands).................................. 3,109 440
</TABLE>
D-2
<PAGE>
CONDENSED FINANCIAL INFORMATION
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
FULCRUM SEPARATE ACCOUNT
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
--------------------
SUB-ACCOUNT 1998 1997
- ------------------------------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
GLOBAL INTERACTIVE/TELECOMM PORTFOLIO
Unit Value:
Beginning of Period............................................................................ 1.105 0.000
End of Period.................................................................................. 1.420 1.105
Number of Units Outstanding at End of Period (in thousands)...................................... 678 211
OPPENHEIMER AGGRESSIVE GROWTH FUND/VA
Unit Value:
Beginning of Period............................................................................ 0.000 N/A
End of Period.................................................................................. 1.296 N/A
Number of Units Outstanding at End of Period (in thousands)...................................... 0 N/A
MFS EMERGING GROWTH SERIES
Unit Value:
Beginning of Period............................................................................ 0.000 N/A
End of Period.................................................................................. 1.327 N/A
Number of Units Outstanding at End of Period (in thousands)...................................... 0 N/A
SMALL CAP VALUE SERIES
Unit Value:
Beginning of Period............................................................................ 0.000 N/A
End of Period.................................................................................. 1.204 N/A
Number of Units Outstanding at End of Period (in thousands)...................................... 0 N/A
LAZARD RETIREMENT INTERNATIONAL EQUITY PORTFOLIO
Unit Value:
Beginning of Period............................................................................ 0.000 N/A
End of Period.................................................................................. 1.118 N/A
Number of Units Outstanding at End of Period (in thousands)...................................... 0 N/A
INTERNATIONAL GROWTH PORTFOLIO
Unit Value:
Beginning of Period............................................................................ 0.881 0.000
End of Period.................................................................................. 0.800 0.881
Number of Units Outstanding at End of Period (in thousands)...................................... 144 85
PBHG SELECT 20 PORTFOLIO
Unit Value:
Beginning of Period............................................................................ 0.000 N/A
End of Period.................................................................................. 1.260 N/A
Number of Units Outstanding at End of Period (in thousands)...................................... 0 N/A
GROWTH PORTFOLIO
Unit Value:
Beginning of Period............................................................................ 0.867 0.000
End of Period.................................................................................. 0.858 0.867
Number of Units Outstanding at End of Period (in thousands)...................................... 504 313
VALUE PORTFOLIO
Unit Value:
Beginning of Period............................................................................ 1.049 0.000
End of Period.................................................................................. 1.111 1.049
Number of Units Outstanding at End of Period (in thousands)...................................... 1,032 483
</TABLE>
D-3
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
--------------------
SUB-ACCOUNT 1998 1997
- ------------------------------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
AIM V.I. VALUE FUND
Unit Value:
Beginning of Period............................................................................ 0.000 N/A
End of Period.................................................................................. 1.298 N/A
Number of Units Outstanding at End of Period (in thousands)...................................... 0 N/A
MFS GROWTH WITH INCOME SERIES
Unit Value:
Beginning of Period............................................................................ 0.000 N/A
End of Period.................................................................................. 1.204 N/A
Number of Units Outstanding at End of Period (in thousands)...................................... 0 N/A
OPPENHEIMER MAIN STREET GROWTH & INCOME FUND/VA
Unit Value:
Beginning of Period............................................................................ 0.000 N/A
End of Period.................................................................................. 1.214 N/A
Number of Units Outstanding at End of Period (in thousands)...................................... 0 N/A
DELAWARE BALANCED SERIES
Unit Value:
Beginning of Period............................................................................ 0.000 N/A
End of Period.................................................................................. 1.174 N/A
Number of Units Outstanding at End of Period (in thousands)...................................... 0 N/A
STRATEGIC INCOME PORTFOLIO
Unit Value:
Beginning of Period............................................................................ 0.998 0.000
End of Period.................................................................................. 1.048 0.998
Number of Units Outstanding at End of Period (in thousands)...................................... 320 41
MONEY MARKET FUND
Unit Value:
Beginning of Period............................................................................ 1.010 0.000
End of Period.................................................................................. 1.050 1.010
Number of Units Outstanding at End of Period (in thousands)...................................... 16 8
</TABLE>
D-4
<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
INVESTING IN SHARES OF THE FULCRUM TRUST, ALLMERICA INVESTMENT TRUST,
AIM VARIABLE INSURANCE FUNDS, INC., DELAWARE GROUP PREMIUM FUND, INC., LAZARD
RETIREMENT SERIES, INC., MFS VARIABLE INSURANCE TRUST, OPPENHEIMER VARIABLE
ACCOUNT FUNDS AND PBHG INSURANCE SERIES FUND, INC.
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS. IT SHOULD BE READ
IN CONJUNCTION WITH THE PROSPECTUS OF THE FULCRUM SEPARATE ACCOUNT, DATED MAY 1,
1999 ("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 MAY 1, 1999
FAFLIC Fulcrum
<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 among the
five oldest life insurance companies in America. As of December 31, 1998,
the Company and its subsidiaries had over $27 billion in combined assets and
over $48 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, 15 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. Oppenheimer is managed by OppenheimerFunds, Inc. and 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
2
<PAGE>
Trust is available under the Contract: the Money Market Fund. One fund of
AVIF is available under the Contract: the AIM V.I. Value Fund. Two series of
DGPF are available under the Contract: the Delaware Balanced 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/VA and Oppenheimer Main Street
Growth & Income Fund/VA. 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, 1998 and
1997 and for each of the three years in the period ended December 31, 1998, and
the financial statements of Fulcrum Separate Account of the Company as of
December 31, 1998 and for the periods indicated, included in this Statement of
Additional Information constituting part of this Registration Statement, have
been so included in reliance on the reports of PricewaterhouseCoopers LLP,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.
The financial statements of the Company included herein should be considered
only as bearing on the ability of the Company to meet its obligations under
the Contract.
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
3
<PAGE>
organized in 1969 as a wholly owned subsidiary of First Allmerica and
presently is indirectly wholly owned by First Allmerica.
The Contract offered by this Prospectus is offered continuously, and may be
purchased from certain independent broker-dealers which are NASD members and
whose representatives are authorized by applicable law to sell variable
annuity contracts.
All persons selling the Contract are required to be licensed by their
respective state insurance authorities for the sale of variable annuity
contracts. The Company pays commissions, not to exceed 6.5% 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.
No commissions were paid to Allmerica Investments, Inc. during 1998 and 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 surrender 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.
SURRENDER CHARGE COMPUTATION. No surrender charge otherwise applicable to the
Exchanged Contract will be assessed as a result of the exchange. Instead, the
surrender 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 surrender 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.
SURRENDER CHARGE. The surrender 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 surrender 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 surrender 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 cancel the new Contract within the time
permitted, as described in the sections of this Prospectus captioned "Right
to Cancel Individual Retirement Annuity" and "Right to Cancel All Other
Contracts," will have their exchanged contract automatically reinstated as of
the date of cancellation. 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 surrender 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.
7
<PAGE>
PERFORMANCE INFORMATION
Performance information for a Sub-Account may be compared, in reports and
promotional literature, to certain indices described in the Prospectus under
"PERFORMANCE INFORMATION." In addition, the Company may provide advertising,
sales literature, periodic publications or other material information on
various topics of interest to Owners and prospective Owners. These topics
may include the relationship between sectors of the economy and the economy
as a whole and its effect on various securities markets, investment
strategies and techniques (such as value investing, market timing, dollar
cost averaging, asset allocation, constant ratio transfer and account
rebalancing), the advantages and disadvantages of investing in tax-deferred
and taxable investments, customer profiles and hypothetical purchase and
investment scenarios, financial management and tax and retirement planning,
and investment alternatives to certificates of deposit and other financial
instruments, including comparisons between the Contract and the
characteristics of and market for such financial instruments. Total return
data may be advertised based on the period of time that an Underlying
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 surrender 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:
P(1 + T) (n) = ERV
Where: P = a hypothetical initial payment to the Variable
Account of $1,000
T = average annual total return
n = number of years
ERV = the ending redeemable value of the $1,000 payment
at the end of the specified period
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 surrender 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 OF NEW PURCHASE
DATE OF WITHDRAWAL PAYMENTS WITHDRAWN*
<S> <C>
0 - 1 7
2 6
3 5
4 4
5 3
6 2
7 1
More than 7 0
</TABLE>
* Subject to the maximum limit described in the Prospectus.
No surrender 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 surrender 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:
P(1 + T) (n) = EV
Where: P = a hypothetical initial payment to the Variable Account
of $1,000
T = average annual total return
n = number of years
EV = the ending value of the $1,000 payment at the end of
the specified period
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 surrender charge
and assume that the Contract is not surrendered at the end of the periods
shown. The calculation of supplemental total return does not include the
deduction of the $30 annual Contract fee. See Tables 1B and 2B below.
TABLE 1A
AVERAGE ANNUAL TOTAL RETURNS OF SUB-ACCOUNT FOR PERIODS
ENDING DECEMBER 31, 1998
SINCE INCEPTION OF SUB-ACCOUNT
(ASSUMING COMPLETE WITHDRAWAL OF THE INVESTMENT)
<TABLE>
<CAPTION>
SINCE
SUB-ACCOUNT FOR YEAR INCEPTION
INCEPTION ENDED OF SUB-
SUB-ACCOUNT INVESTING IN UNDERLYING FUND DATE 12/31/98 ACCOUNT
----------- -------- ---------
<S> <C> <C> <C>
Global Interactive/Telecomm Portfolio 9/30/97 20.69% 26.48%
Oppenheimer Aggressive Growth Fund/VA 9/1/98 N/A 22.62%
MFS Emerging Growth Series 9/1/98 N/A 25.71%
Small Cap Value Series 9/1/98 N/A 13.36%
Lazard Retirement International Equity 9/1/98 N/A 5.15%
Portfolio
International Growth Portfolio 10/3/97 -14.91% -20.36%
PBHG Select 20 Portfolio 11/2/98 N/A 18.98%
Growth Portfolio 9/30/97 -7.52% -16.36%
Value Portfolio 9/30/97 -1.17% 2.92%
AIM V.I. Value Fund 9/1/98 N/A 22.81%
MFS Growth With Income Series 9/1/98 N/A 13.42%
Oppenheimer Main Street Growth & Income 9/1/98 N/A 14.42%
Fund/VA
Delaware Balanced Series 9/1/98 N/A 10.44%
Strategic Income Portfolio 10/3/97 -1.38% -0.66%
Money Market Fund 10/3/97 -2.24% -0.35%
</TABLE>
10
<PAGE>
TABLE 1B
SUPPLEMENTAL AVERAGE ANNUAL TOTAL RETURNS OF SUB-ACCOUNT
FOR PERIODS ENDING DECEMBER 31, 1998
SINCE INCEPTION OF SUB-ACCOUNT
(ASSUMING NO WITHDRAWAL OF THE INVESTMENT AND NO CONTRACT FEES)
<TABLE>
<CAPTION>
SINCE
SUB-ACCOUNT FOR YEAR INCEPTION
INCEPTION ENDED OF SUB-
SUB-ACCOUNT INVESTING IN UNDERLYING FUND DATE 12/31/98 ACCOUNT
---------------------------------------- ----------- ---------- ---------
<S> <C> <C> <C>
Global Interactive/Telecomm Portfolio 9/30/97 28.52% 32.34%
Oppenheimer Aggressive Growth Fund/VA 9/1/98 N/A 29.63%
MFS Emerging Growth Series 9/1/98 N/A 32.72%
Small Cap Value Series 9/1/98 N/A 20.37%
Lazard Retirement International Equity 9/1/98 N/A 11.81%
Portfolio
International Growth Portfolio 10/3/97 -9.25% -16.44%
PBHG Select 20 Portfolio 11/2/98 N/A 25.99%
Growth Portfolio 9/30/97 -0.94% -11.48%
Value Portfolio 9/30/97 5.96% 8.79%
AIM V.I. Value Fund 9/1/98 N/A 29.82%
MFS Growth With Income Series 9/1/98 N/A 20.43%
Oppenheimer Main Street Growth & Income 9/1/98 N/A 21.43%
Fund/VA
Delaware Balanced Series 9/1/98 N/A 17.43%
Strategic Income Portfolio 10/3/97 5.02% 3.87%
Money Market Fund 10/3/97 4.00% 4.02%
</TABLE>
11
<PAGE>
TABLE 2A
AVERAGE ANNUAL TOTAL RETURNS OF SUB-ACCOUNT
FOR PERIODS ENDING DECEMBER 31, 1998
SINCE INCEPTION OF UNDERLYING FUND
(ASSUMING COMPLETE WITHDRAWAL OF THE INVESTMENT)
<TABLE>
<CAPTION>
UNDERLYING FOR YEAR 10 YEARS
FUND ENDED (OR SINCE
SUB-ACCOUNT INVESTING IN UNDERLYING FUND INCEPTION DATE 12/31/98 5 YEARS INCEPTION IF LESS)
---------------------------------------- -------------- -------- ------- ------------------
<S> <C> <C> <C> <C>
Global Interactive/Telecomm Portfolio 2/1/96 20.69% N/A 19.44%
Oppenheimer Aggressive Growth Fund/VA 8/15/86 4.13% 11.04% 14.45%
MFS Emerging Growth Series 7/24/95 25.33% N/A 24.08%
Small Cap Value Series 12/27/93 -9.86% 12.59% 12.68%
Lazard Retirement International Equity Portfolio 9/1/98 N/A N/A 5.15%
International Growth Portfolio 3/26/96 -14.91% N/A -6.29%
PBHG Select 20 Portfolio 9/25/97 53.22% N/A 40.70%
Growth Portfolio 2/1/96 -7.52% N/A 2.76%
Value Portfolio 2/1/96 -1.17% N/A 14.69%
AIM V.I. Value Fund 5/5/93 23.60% 19.69% 20.02%
MFS Growth With Income Series 10/9/95 13.61% N/A 23.41%
Oppenheimer Main Street Growth & Income Fund/VA 7/5/95 -2.92% N/A 24.52%
Delaware Balanced Series 7/28/88 10.04% 15.05% 12.69%
Strategic Income Portfolio 2/1/96 -1.38% N/A -0.59%
Money Market Fund 4/29/85 -2.24% 3.10% 4.03%
</TABLE>
TABLE 2B
SUPPLEMENTAL AVERAGE ANNUAL TOTAL RETURNS OF SUB-ACCOUNT
FOR PERIODS ENDING DECEMBER 31, 1998
SINCE INCEPTION OF UNDERLYING FUND
(ASSUMING NO WITHDRAWAL OF THE INVESTMENT AND NO CONTRACT FEES)
<TABLE>
<CAPTION>
FOR
UNDERLYING FUND YEAR ENDED 10 YEARS (OR SINCE
SUB-ACCOUNT INVESTING IN UNDERLYING FUND INCEPTION DATE 12/31/98 5 YEARS INCEPTION IF LESS)
---------------------------------------- ---------------- ----------- ------- --------------------
<S> <C> <C> <C> <C>
Global Interactive/Telecomm Portfolio 2/1/96 28.52% N/A 21.43%
Oppenheimer Aggressive Growth Fund/VA 8/15/86 10.73% 11.43% 14.46%
MFS Emerging Growth Series 7/24/95 32.34% N/A 24.77%
Small Cap Value Series 12/27/93 -4.15% 12.96% 12.93%
Lazard Retirement International Equity Portfolio 9/1/98 N/A N/A 11.81%
International Growth Portfolio 3/26/96 -9.25% N/A -4.48%
PBHG Select 20 Portfolio 9/25/97 60.23% N/A 45.04%
Growth Portfolio 2/1/96 -0.94% N/A 4.96%
Value Portfolio 2/1/96 5.96% N/A 16.75%
AIM V.I. Value Fund 5/5/93 30.61% 19.98% 20.17%
MFS Growth With Income Series 10/9/95 20.62% N/A 24.19%
Oppenheimer Main Street Growth & Income Fund/VA 7/5/95 3.24% N/A 25.18%
Delaware Balanced Series 7/28/88 17.01% 15.39% 12.69%
Strategic Income Portfolio 2/1/96 5.02% N/A 1.09%
Money Market Fund 4/29/85 4.00% 3.71% 4.11%
</TABLE>
11
<PAGE>
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, 1998
<TABLE>
<S> <C>
Yield 3.62%
Effective Yield 3.69%
</TABLE>
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, dividing
the difference by the value of the account at the beginning of the same
period to obtain the base period return, and then multiplying the return for
a seven-day base period by (365/7), with the resulting yield carried to the
nearest hundredth of one percent.
The Money Market Sub-Account computes effective yield by compounding the
unannualized base period return by using the formula:
Effective Yield = [(base period return + 1)(365/7)] - 1
The calculations of yield and effective yield reflect the $30 annual Contract
fee.
TAX DEFERRED ACCUMULATION
<TABLE>
<CAPTION>
NON-QUALIFIED CONVENTIONAL
ANNUITY CONTRCT SAVINGS PLAN
After-tax contributions
and tax-deferred earnings
TAXABLE LUMP SUM AFTER-TAX CONTRIBUTIONS
NO WITHDRAWALS WITHDRAWAL AND TAXABLE EARNINGS
-------------- ----------------- -----------------------
<S> <C> <C> <C>
10 Years $107,946 $86,448 $81,693
20 Years 233,048 165,137 133,476
30 Years 503,133 335,021 218,082
</TABLE>
This chart compares the accumulation of a $50,000 initial investment into a
non-qualified annuity contract with a conventional savings plan.
Contributions to the non-qualified annuity contract and the conventional
savings plan are made after tax. Only the gain in the non-qualified annuity
contract will be subject to income tax in a taxable lump sum withdrawal. The
chart assumes a 37.1% federal marginal tax rate and an 8% annual return. The
37.1% federal marginal tax is based on a marginal tax rate of 36%,
representative of the target market, adjusted to reflect a decrease of $3 of
itemized deductions for each $100 of income over $117,950. Tax rates are
subject to change as is the tax-deferred treatment of the Contract. Income
on non-qualified annuity contracts is taxed as ordinary income upon
withdrawal. A 10% tax penalty may apply to early withdrawals. See "Federal
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 surrender charge; and $30 annual Contract fee. The tax-deferred
accumulation would be reduced if these charges were reflected. No implication is
intended
12
<PAGE>
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.
<PAGE>
FIRST ALLMERICA
FINANCIAL LIFE
INSURANCE COMPANY
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
<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, comprehensive income, shareholder's equity
and cash flows present fairly, in all material respects, the financial position
of First Allmerica Financial Life Insurance Company and its subsidiaries (the
"Company") at December 31, 1998 and 1997, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1998, 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/ PRICEWATERHOUSECOOPERS LLP
PricewaterhouseCoopers LLP
Boston, Massachusetts
February 2, 1999, except for paragraph 2 of Note 18 and Note 20,
which are as of March 19, 1999 and April 1, 1999, respectively
<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) 1998 1997 1996
----------------------------------------------- -------- -------- --------
<S> <C> <C> <C>
REVENUES
Premiums................................... $2,303.9 $2,311.0 $2,236.3
Universal life and investment product
policy fees.............................. 296.6 237.3 197.2
Net investment income...................... 613.7 641.8 670.8
Net realized investment gains.............. 62.6 76.5 66.8
Other income............................... 142.6 117.6 108.4
-------- -------- --------
Total revenues......................... 3,419.4 3,384.2 3,279.5
-------- -------- --------
BENEFITS, LOSSES AND EXPENSES
Policy benefits, claims, losses and loss
adjustment expenses...................... 2,050.2 2,004.6 1,957.0
Policy acquisition expenses................ 452.8 425.1 470.1
Sales practice litigation.................. 31.0 -- --
Loss from exiting reinsurance pools........ 25.3 -- --
Loss from cession of disability income
business................................. -- 53.9 --
Restructuring costs........................ 13.0 -- --
Other operating expenses................... 559.0 523.7 503.2
-------- -------- --------
Total benefits, losses and expenses.... 3,131.3 3,007.3 2,930.3
-------- -------- --------
Income before federal income taxes............. 288.1 376.9 349.2
-------- -------- --------
FEDERAL INCOME TAX EXPENSE (BENEFIT)
Current.................................... 67.6 83.3 96.8
Deferred................................... (15.4) 14.2 (15.7)
-------- -------- --------
Total federal income tax expense....... 52.2 97.5 81.1
-------- -------- --------
Income before minority interest................ 235.9 279.4 268.1
Minority interest.......................... (55.0) (79.4) (74.6)
-------- -------- --------
Net income..................................... $ 180.9 $ 200.0 $ 193.5
-------- -------- --------
-------- -------- --------
</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) 1998 1997
-------------------------------------------------------- --------- ---------
<S> <C> <C>
ASSETS
Investments:
Fixed maturities at fair value (amortized cost of
$7,520.8 and $6,992.8)............................. $ 7,683.9 $ 7,253.5
Equity securities at fair value (cost of $253.1 and
$341.1)............................................ 397.1 479.0
Mortgage loans...................................... 562.3 567.5
Real estate......................................... 20.4 50.3
Policy loans........................................ 154.3 141.9
Other long-term investments......................... 142.7 148.3
--------- ---------
Total investments............................... 8,960.7 8,640.5
--------- ---------
Cash and cash equivalents............................. 504.0 213.9
Accrued investment income............................. 141.0 141.8
Deferred policy acquisition costs..................... 1,161.2 965.5
--------- ---------
Reinsurance receivables:
Future policy benefits.............................. 322.6 307.1
Outstanding claims, losses and loss adjustment
expenses........................................... 652.2 626.7
Other............................................... 161.6 106.4
--------- ---------
Total reinsurance receivables................... 1,136.4 1,040.2
--------- ---------
Deferred federal income taxes......................... 19.4 --
Premiums, accounts and notes receivable............... 510.5 554.4
Other assets.......................................... 530.6 373.0
Closed Block assets................................... 803.1 806.7
Separate account assets............................... 13,697.7 9,755.4
--------- ---------
Total assets.................................... $27,464.6 $22,491.4
--------- ---------
--------- ---------
LIABILITIES
Policy liabilities and accruals:
Future policy benefits.............................. $ 2,802.2 $ 2,598.5
Outstanding claims, losses and loss adjustment
expenses........................................... 2,815.9 2,825.0
Unearned premiums................................... 843.2 846.8
Contractholder deposit funds and other policy
liabilities........................................ 2,637.0 1,852.7
--------- ---------
Total policy liabilities and accruals........... 9,098.3 8,123.0
--------- ---------
Expenses and taxes payable............................ 681.9 662.6
Reinsurance premiums payable.......................... 50.2 37.7
Short-term debt....................................... 221.3 33.0
Deferred federal income taxes......................... -- 12.9
Long-term debt........................................ -- 2.6
Closed Block liabilities.............................. 872.0 885.6
Separate account liabilities.......................... 13,691.5 9,749.7
--------- ---------
Total liabilities............................... 24,615.2 19,507.1
--------- ---------
Minority interest..................................... 532.9 748.9
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............................ 444.0 453.7
Accumulated other comprehensive income................ 169.2 209.3
Retained earnings..................................... 1,698.3 1,567.4
--------- ---------
Total shareholder's equity...................... 2,316.5 2,235.4
--------- ---------
Total liabilities and shareholder's equity...... $27,464.6 $22,491.4
--------- ---------
--------- ---------
</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) 1998 1997 1996
----------------------------------------------- -------- -------- --------
<S> <C> <C> <C>
COMMON STOCK................................... $ 5.0 $ 5.0 $ 5.0
-------- -------- --------
ADDITIONAL PAID-IN CAPITAL
Balance at beginning of period............. 453.7 392.4 392.4
Contributed from parent.................... -- 61.3 --
Loss on change of interest -- Allmerica
P&C...................................... (9.7) -- --
-------- -------- --------
Balance at end of period................... 444.0 453.7 392.4
-------- -------- --------
ACCUMULATED OTHER COMPREHENSIVE INCOME
Net unrealized appreciation on investments:
Balance at beginning of period............. 209.3 131.4 153.0
Appreciation (depreciation) during the
period:
Net (depreciation) appreciation on
available-for-sale securities............ (82.4) 170.9 (35.1)
Benefit (provision) for deferred federal
income taxes............................. 28.9 (59.8) 11.8
Minority interest.......................... 13.4 (33.2) 1.7
-------- -------- --------
(40.1) 77.9 (21.6)
-------- -------- --------
Balance at end of period................... 169.2 209.3 131.4
-------- -------- --------
RETAINED EARNINGS
Balance at beginning of period............. 1,567.4 1,367.4 1,173.9
Net income................................. 180.9 200.0 193.5
Dividend to shareholder.................... (50.0) -- --
-------- -------- --------
Balance at end of period................... 1,698.3 1,567.4 1,367.4
-------- -------- --------
Total shareholder's equity............. $2,316.5 $2,235.4 $1,896.2
-------- -------- --------
-------- -------- --------
</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 COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1998 1997 1996
-------------------------------------------- ------ ------ ------
<S> <C> <C> <C>
Net income.................................. $180.9 $200.0 $193.5
------ ------ ------
Other comprehensive income:
Net (depreciation) appreciation on
available-for-sale securities........... (82.4) 170.9 (35.1)
Benefit (provision) for deferred federal
income taxes............................ 28.9 (59.8) 11.8
Minority interest......................... 13.4 (33.2) 1.7
------ ------ ------
Other comprehensive income.............. (40.1) 77.9 (21.6)
------ ------ ------
Comprehensive income...................... $140.8 $277.9 $171.9
------ ------ ------
------ ------ ------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-4
<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) 1998 1997 1996
-------------------------------------------- -------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.............................. $ 180.9 $ 200.0 $ 193.5
Adjustments to reconcile net income to
net cash provided by operating
activities:
Minority interest................... 55.0 79.4 74.6
Net realized gains.................. (62.7) (77.8) (66.8)
Net amortization and depreciation... 20.7 31.6 44.7
Deferred federal income taxes....... (15.4) 14.2 (15.7)
Loss from exiting reinsurance
pools............................... 25.3 -- --
Sales practice litigation expense... 31.0 -- --
Payment related to exiting
reinsurance pools................... (30.3) -- --
Loss from cession of disability
income business..................... -- 53.9 --
Payment related to cession of
disability income business.......... -- (207.0) --
Change in deferred acquisition
costs............................... (185.8) (189.7) (73.9)
Change in premiums and notes
receivable, net of reinsurance
payable............................. 56.7 (15.1) (16.8)
Change in accrued investment
income.............................. 0.8 7.1 16.7
Change in policy liabilities and
accruals, net....................... 168.1 (134.9) (184.3)
Change in reinsurance receivable.... (115.4) 27.2 123.8
Change in expenses and taxes
payable............................. (3.3) 49.4 26.0
Separate account activity, net...... (48.5) -- 5.2
Other, net.......................... (63.8) 20.4 38.5
-------- -------- --------
Net cash provided by (used in)
operating activities................ 13.3 (141.3) 165.5
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from disposals and maturities
of available-for-sale fixed
maturities............................. 1,929.1 2,892.9 3,985.8
Proceeds from disposals of equity
securities............................. 285.3 162.7 228.7
Proceeds from disposals of other
investments............................ 120.8 116.3 99.3
Proceeds from mortgages matured or
collected.............................. 171.2 204.7 176.9
Purchase of available-for-sale fixed
maturities............................. (2,588.4) (2,596.0) (3,771.1)
Purchase of equity securities........... (119.9) (67.0) (90.9)
Purchase of other investments........... (274.4) (175.0) (168.0)
Capital expenditures.................... (0.7) (15.3) (12.8)
Purchase of minority interest in
Citizens Corporation................... (195.9) -- --
Other investing activities, net......... 5.1 1.3 4.3
-------- -------- --------
Net cash (used in) provided by
investing activities................ (667.8) 524.6 452.2
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Deposits and interest credited to
contractholder deposit funds........... 1,419.2 457.6 268.7
Withdrawals from contractholder deposit
funds.................................. (625.0) (647.1) (905.0)
Change in short-term debt............... 188.3 (5.4) 10.4
Change in long-term debt................ (2.6) (0.1) (0.1)
Dividend paid to parent................. (50.0) -- --
Dividends paid to minority
shareholders........................... -- (9.4) (3.9)
Additional paid-in capital.............. -- 0.1 --
Subsidiary treasury stock purchased, at
cost................................... (1.0) (140.0) (42.0)
-------- -------- --------
Net cash provided by (used in)
financing activities................ 928.9 (344.3) (671.9)
-------- -------- --------
Net change in cash and cash equivalents..... 274.4 39.0 (54.2)
Net change in cash held in the Closed
Block...................................... 15.7 (1.0) (6.5)
Cash and cash equivalents, beginning of
period..................................... 213.9 175.9 236.6
-------- -------- --------
Cash and cash equivalents, end of period.... $ 504.0 $ 213.9 $ 175.9
-------- -------- --------
-------- -------- --------
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid............................... $ 7.3 $ 3.6 $ 18.6
Income taxes paid........................... $ 133.5 $ 66.3 $ 72.0
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-5
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
The consolidated financial statements of First Allmerica Financial Life
Insurance Company ("FAFLIC", or the "Company"), a wholly owned subsidiary of
Allmerica Financial Corporation ("AFC"), include the accounts of its wholly
owned life insurance subsidiary Allmerica Financial Life Insurance and Annuity
Company ("AFLIAC"), its non-insurance subsidiaries (principally brokerage and
investment advisory subsidiaries), and Allmerica Property and Casualty
Companies, Inc. ("Allmerica P&C") (a 70.06%-owned non-insurance holding
company). The Closed Block (Note 1B) assets and liabilities at December 31, 1998
and 1997, 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, 1998 and 1997, and the years
then ended exclude the Closed Block related amounts. All significant
intercompany accounts and transactions have been eliminated.
On December 3, 1998, the Company acquired all of the outstanding common stock of
Citizens Corporation (formerly an 82.5% owned non-insurance subsidiary of
Hanover, a wholly owned subsidiary of Allmerica P&C) that it did not already own
in exchange for cash of $195.9 million (Note 3). The acquisition has been
recognized as a purchase. The minority interest acquired totaled $158.5 million.
A total of $40.8 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.
Allmerica P&C 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.
Minority interest relates to the Company's investment in Allmerica P&C and its
only significant subsidiary, The Hanover Insurance Company ("Hanover").
Hanover's wholly 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.
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
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 as of FAFLIC's demutualization 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. 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. 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
benefits, certain future expenses and taxes and for
F-6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
continuation of policyholder dividend scales payable 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 as 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 the inception of the Closed
Block, 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 at inception.
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, "Accounting for Certain Investments in Debt and Equity Securities"
("Statement No. 115"), 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.
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 shareholder's 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 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.
F-7
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
During 1997, the Company adopted a plan to dispose of all real estate assets by
the end of 1998. As of December 31, 1998, there were 7 properties remaining in
the Company's real estate portfolio, all of which are being actively marketed.
As a result of the plan, real estate held by the Company and real estate joint
ventures were written down to the estimated fair value less costs of disposal.
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 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, swap contracts 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. Default swap contracts entered into
for investment purposes are accounted for using the fair value method, with
changes in fair value, if any, reported in realized investment gains and losses
in earnings. Premium paid to the Company on default swap contracts is reported
in net investment income in earnings. 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. Any
ineffective swaps or futures hedges are recognized currently 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 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
F-8
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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, the Company
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 7 1/4%
for life insurance and 2 1/2% 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 ("LAE")
are estimates of payments to be made on property and casualty and health
insurance for reported losses and LAE and estimates of losses and LAE 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 current operations.
Estimated amounts of salvage and subrogation on unpaid property and casualty
losses are deducted from the liability for unpaid claims.
F-9
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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, the Company
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. FEDERAL INCOME TAXES
AFC and its domestic subsidiaries file a consolidated United States federal
income tax return. Entities included within the consolidated group are
segregated into either a life insurance or non-life insurance company subgroup.
The consolidation of these subgroups is subject to certain statutory
restrictions on the percentage of eligible non-life tax losses that can be
applied to offset life company taxable income. Prior to the merger on July 16,
1997, Allmerica P&C and its subsidiaries filed a separate 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 ("Statement
No. 109"). These differences result primarily from loss and LAE reserves, policy
reserves, policy acquisition expenses, and unrealized appreciation or
depreciation on investments.
F-10
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
L. NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("Statement No. 133"), which establishes
accounting and reporting standards for derivative instruments. Statement No. 133
requires that an entity recognize all derivatives as either assets or
liabilities at fair value in the statement of financial position, and
establishes special accounting for the following three types of hedges: fair
value hedges, cash flow hedges, and hedges of foreign currency exposures of net
investments in foreign operations. This statement is effective for fiscal years
beginning after June 15, 1999. The Company is currently assessing the impact of
the adoption of Statement No. 133.
In March 1998, the American Institute of Certified Public Accountants ("AICPA")
issued Statement of Position 98-1, "Accounting for the Cost of Computer Software
Developed or Obtained for Internal Use" ("SoP 98-1"). SoP 98-1 requires that
certain costs incurred in developing internal-use computer software be
capitalized and provides guidance for determining whether computer software is
to be considered for internal use. This statement is effective for fiscal years
beginning after December 15, 1998. In the second quarter, the Company adopted
SoP 98-1 effective January 1, 1998, resulting in an increase in pre-tax income
of $12.4 million through December 31, 1998. The adoption of SOP 98-1 did not
have a material effect on the results of operations or financial position for
the three months ended March 31, 1998.
In December 1997, the AICPA issued Statement of Position 97-3, "Accounting by
Insurance and Other Enterprises for Insurance-Related Assessments" ("SoP 97-3").
SoP 97-3 provides guidance on when a liability should be recognized for guaranty
fund and other assessments and how to measure the liability. This statement
allows for the discounting of the liability if the amount and timing of the cash
payments are fixed and determinable. In addition, it provides criteria for when
an asset may be recognized for a portion or all of the assessment liability or
paid assessment that can be recovered through premium tax offsets or policy
surcharges. This statement is effective for fiscal years beginning after
December 15, 1998. The Company believes that the adoption of this statement will
not have a material effect on the results of operations or financial position.
In June 1997, the FASB issued Statement No. 131, "Disclosures About Segments of
an Enterprise and Related Information" ("Statement No. 131"). 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
adopted Statement No. 131 for the first quarter of 1998, which resulted in
certain segment re-definitions, which have no impact on the consolidation
results of operations. (Note 12)
In June 1997, the FASB also issued Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income" ("Statement No. 130"). Statement No.
130 which establishes 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 adopted
F-11
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Statement No. 130 for the first quarter of 1998, which resulted primarily in
reporting unrealized gains and losses on investments in debt and equity
securities in comprehensive income.
M. RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the current year
presentation.
2. SIGNIFICANT TRANSACTIONS
On December 3, 1998 Citizens Acquisition Corporation, a wholly owned subsidiary
of the Allmerica P&C, completed a cash tender offer to acquire the outstanding
shares of Citizens Corporation common stock that AFC or its subsidiaries did not
already own at a price of $33.25 per share. Approximately 99.8% of publicly held
shares of Citizens Corporation common stock were tendered. On December 14, 1998,
the Company completed a short-form merger, acquiring all shares of common stock
of Citizens Corporation not purchased in its tender offer, through the merger of
its wholly owned subsidiary, Citizens Acquisition Corporation with Citizens
Corporation at a price of $33.25 per share. Total consideration for the
transactions amounted to $195.9 million. The acquisition has been recognized as
a purchase. The minority interest acquired totaled $158.5 million. A total of
$40.8 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 Company's consolidated results of operations include minority interest in
Citizens prior to December 3, 1998. The unaudited pro forma information below
presents consolidated results of operation as if the acquisition had occurred at
the beginning of 1997.
The following unaudited pro forma information is not necessarily indicative of
the consolidated results of operations of the combined Company had the
acquisition occurred at the beginning of 1997, nor is it necessarily indicative
of future results.
<TABLE>
<CAPTION>
(UNAUDITED)
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1998 1997
- ------------------------------------------------------------------------------------------ ---------- ----------
<S> <C> <C>
Revenue................................................................................... $ 3,405.1 $ 3,366.3
---------- ----------
---------- ----------
Net realized capital gains included in revenue............................................ $ 59.8 $ 71.8
---------- ----------
---------- ----------
Income before taxes and minority interest................................................. 272.9 358.0
Income taxes.............................................................................. (47.2) (91.3)
Minority Interest:
Equity in earnings.................................................................... (42.6) (64.1)
---------- ----------
Net income................................................................................ $ 183.1 $ 202.6
---------- ----------
---------- ----------
</TABLE>
On October 29, 1998, the Company announced that had adopted a formal
restructuring plan for its Risk Management business. As part of this initiative,
the Company, in its Corporate Risk Management Services segment, has exited its
accident and health assumed reinsurance pool business, as well as its
administrative services only business. Additionally, it has commenced the
closing of nearly half of its nationwide Corporate Risk Management Services'
sales offices, eliminated certain staff and discontinued certain automation
initiatives. In addition to the aforementioned initiatives in the Corporate Risk
Management Services segment, the Property and Casualty segment is consolidating
its field support activities from fourteen regional branches into three hub
locations. As a result of the Company's restructuring initiative, it recognized
a pretax loss of $13.0 million, in the fourth quarter of 1998. Approximately
$5.5 million of this loss relates to severance and other employee related costs
resulting from the elimination of 339 positions, of which 129 employees had
F-12
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
been terminated as of December 31, 1998. In addition, contract terminations and
lease cancellations resulted in losses of approximately $4.1 million and $3.4
million, respectively. During 1998, the Company made payments of approximately
$1.6 million related to this restructuring initiative.
Effective July 1, 1998, the Company entered into a reinsurance agreement with a
highly rated reinsurer that cedes current and future underwriting losses,
including unfavorable development of prior year reserves, up to a $40.0 million
maximum, of which $19.7 million relating to the Company's accident and health
assumed reinsurance pool business has been utilized as of December 31, 1998.
These pools consist primarily of the Corporate Risk Management Services
segment's assumed stop loss business, small group managed care pools, long-term
disability and long-term care pools, student accident and special risk business.
The agreement is consistent with management's decision to exit this line of
business, which the Company expects to run-off over the next three years. As a
result of this transaction, the Company recognized a $25.3 million pre-tax loss
in the third quarter of 1998.
Effective January 1, 1998, the Company entered into an agreement with a highly
rated reinsurer to reinsure the mortality risk on the universal life and
variable universal life blocks of business. The agreement did not have a
material effect on its results of operations or financial position.
In 1998 and 1997, Allmerica P&C redeemed 3,289.5 and 5,735.3 shares,
respectively, of its issued and outstanding common stock owned by AFC for $125.0
million and $195.0 million, respectively, thereby increasing FAFLIC's ownership
of Allmerica P&C by 4.3% and 6.3%, respectively. The 1998 transaction consisted
of $124.0 million of securities and $1.0 million of cash. The 1997 transaction
consisted of $55.0 million of securities and $140.0 million of cash.
The merger of Allmerica P&C 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 Allmerica P&C 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. 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.
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 funded a portion of the acquisition of
the 24.2 million publicly-held shares of Allmerica P&C pursuant to the merger on
July 16, 1997.
The Company's consolidated results of operations include minority interest in
Allmerica P&C prior to July 16, 1997. The unaudited pro forma information below
presents consolidated results of operations as if the merger and issuance of
Capital Securities had occurred at the beginning of 1996 and reflects
adjustments which include interest expense related to the assumed financing of a
portion of the cash consideration paid and amortization of goodwill.
F-13
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following unaudited pro forma information is not necessarily indicative of
the consolidated results of operations of the combined Company had the merger
and issuance of Capital Securities occurred at the beginning of 1996, nor is it
necessarily indicative of future results.
<TABLE>
<CAPTION>
(UNAUDITED)
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1997 1996
- ------------------------------------------------------------------------------------------ ---------- ----------
<S> <C> <C>
Revenue................................................................................... $ 3,362.7 $ 3,246.4
---------- ----------
---------- ----------
Net realized capital gains included in revenue............................................ $ 63.0 $ 46.7
---------- ----------
---------- ----------
Income before taxes and minority interest................................................. 353.0 311.6
Income taxes.............................................................................. (89.6) (68.7)
Minority Interest:
Equity in earnings.................................................................... (75.5) (67.3)
---------- ----------
Net income................................................................................ $ 187.9 $ 175.6
---------- ----------
---------- ----------
</TABLE>
On April 14, 1997, the Company entered into an agreement in principle to cede
substantially all of the Company's individual disability income line of business
under a 100% coinsurance agreement with a highly rated reinsurer. 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.
3. INVESTMENTS
A. SUMMARY OF INVESTMENTS
The Company accounts for its investments, all of which are classified as
available-for-sale, in accordance with Statement No. 115.
The amortized cost and fair value of available-for-sale fixed maturities and
equity securities were as follows:
<TABLE>
<CAPTION>
1998
--------------------------------------------
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....... $ 192.8 $ 12.0 $ 24.5 $ 180.3
States and political subdivisions....... 2,408.9 83.0 5.2 2,486.7
Foreign governments..................... 107.9 7.7 4.5 111.1
Corporate fixed maturities.............. 4,293.3 167.8 81.9 4,379.2
Mortgage-backed securities.............. 517.9 11.5 2.8 526.6
-------- ---------- ---------- --------
Total fixed maturities.................. $7,520.8 $ 282.0 $ 118.9 $7,683.9
-------- ---------- ---------- --------
-------- ---------- ---------- --------
Equity securities....................... $ 253.1 $ 151.1 $ 7.1 $ 397.1
-------- ---------- ---------- --------
-------- ---------- ---------- --------
</TABLE>
F-14
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
1997
--------------------------------------------
GROSS GROSS
DECEMBER 31, AMORTIZED UNREALIZED UNREALIZED FAIR
(IN MILLIONS) COST (1) GAINS LOSSES VALUE
- ---------------------------------------- -------- ---------- ---------- --------
U.S. Treasury securities and U.S.
government and agency securities....... $ 265.3 $ 9.5 $ 0.9 $ 273.9
<S> <C> <C> <C> <C>
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
-------- ---------- ---------- --------
-------- ---------- ---------- --------
</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,
1998, the amortized cost and market value of assets on deposit in New York were
$268.5 million and $284.1 million, respectively. At December 31, 1997, the
amortized cost and market value of assets on deposit were $276.8 million and
$291.7 million, respectively.
In addition, fixed maturities, excluding those securities on deposit in New
York, with an amortized cost of $105.4 million and $105.1 million were on
deposit with various state and governmental authorities at December 31, 1998 and
1997, respectively.
There were no contractual fixed maturity investment commitments at December 31,
1998 and 1997, 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>
1998
--------------------
DECEMBER 31, AMORTIZED FAIR
(IN MILLIONS) COST VALUE
- ------------------------------------------------------------ --------- --------
<S> <C> <C>
Due in one year or less..................................... $ 384.7 $ 391.5
Due after one year through five years....................... 2,309.4 2,341.2
Due after five years through ten years...................... 2,173.3 2,199.6
Due after ten years......................................... 2,653.4 2,751.6
--------- --------
Total....................................................... $ 7,520.8 $7,683.9
--------- --------
--------- --------
</TABLE>
F-15
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The proceeds from voluntary sales of available-for-sale securities and the gross
realized gains and gross realized losses on those sales were as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, PROCEEDS FROM GROSS GROSS
(IN MILLIONS) VOLUNTARY SALES GAINS LOSSES
- ------------------------------------------------------------ --------------- ------ ------
<S> <C> <C> <C>
1998
Fixed maturities............................................ $ 993.3 $ 18.2 $ 11.9
Equity securities........................................... $ 276.4 $ 76.3 $ 9.6
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
</TABLE>
Unrealized gains and losses on available-for-sale and other securities, are
summarized as follows:
<TABLE>
<CAPTION>
EQUITY
FOR THE YEARS ENDED DECEMBER 31, FIXED SECURITIES
(IN MILLIONS) MATURITIES AND OTHER (1) TOTAL
- ------------------------------------------------------------ ---------- ------------- ------
<S> <C> <C> <C>
1998
Net appreciation, beginning of year......................... $122.6 $ 86.7 $209.3
---------- ------ ------
Net (depreciation) appreciation on available-for-sale
securities................................................. (99.3) 4.4 (94.9)
Appreciation due to Allmerica P&C purchase of minority in
interest of Citizens....................................... 10.7 10.7 21.4
Net appreciation from the effect on deferred policy
acquisition costs and on policy liabilities................ 6.3 -- 6.3
Provision for deferred federal income taxes and minority
interest................................................... 38.7 (11.6) 27.1
---------- ------ ------
(43.6) 3.5 (40.1)
---------- ------ ------
Net appreciation, end of year............................... $ 79.0 $ 90.2 $169.2
---------- ------ ------
---------- ------ ------
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............................... $122.6 $ 86.7 $209.3
---------- ------ ------
---------- ------ ------
</TABLE>
F-16
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
EQUITY
FOR THE YEARS ENDED DECEMBER 31, FIXED SECURITIES
(IN MILLIONS) MATURITIES AND OTHER (1) TOTAL
- ------------------------------------------------------------ ---------- ------------- ------
1996
<S> <C> <C> <C>
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
---------- ------ ------
---------- ------ ------
</TABLE>
(1) Includes net appreciation on other investments of $0.8 million, $1.8
million, and $0.6 million in 1998, 1997, and 1996, 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.
The carrying values of mortgage loans and real estate investments net of
applicable reserves were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
(IN MILLIONS) 1998 1997
- ------------------------------------------------------------ ------ ------
<S> <C> <C>
Mortgage loans.............................................. $562.3 $567.5
Real estate held for sale................................... 20.4 50.3
------ ------
Total mortgage loans and real estate........................ $582.7 $617.8
------ ------
------ ------
</TABLE>
Reserves for mortgage loans were $11.5 million and $20.7 million at December 31,
1998 and 1997, respectively.
During 1997, the Company committed to a plan to dispose of all real estate
assets by the end of 1998. At December 31, 1998, there were 7 properties
remaining in the Company's portfolio, which are being actively marketed. As a
result of the plan, during 1997 real estate assets with a carrying amount of
$54.7 million were written down to the estimated fair value less cost of
disposal 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 1998 and 1997. During 1996,
non-cash investing activities included real estate acquired through foreclosure
of mortgage loans, which had a fair value of $0.9 million.
There were no contractual commitments to extend credit under commercial mortgage
loan agreements at December 31, 1998. These commitments generally expire within
one year.
F-17
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Mortgage loans and real estate investments comprised the following property
types and geographic regions:
<TABLE>
<CAPTION>
DECEMBER 31,
(IN MILLIONS) 1998 1997
- ------------------------------------------------------------ -------- ------
<S> <C> <C>
Property type:
Office building........................................... $304.4 $265.1
Residential............................................... 52.8 66.6
Retail.................................................... 108.5 132.8
Industrial/warehouse...................................... 110.0 107.2
Other..................................................... 18.5 66.8
Valuation allowances...................................... (11.5) (20.7)
-------- ------
Total....................................................... $582.7 $617.8
-------- ------
-------- ------
Geographic region:
South Atlantic............................................ $136.1 $173.4
Pacific................................................... 155.1 152.8
East North Central........................................ 80.5 102.0
Middle Atlantic........................................... 61.2 73.8
West South Central........................................ 54.7 34.9
New England............................................... 60.7 46.9
Other..................................................... 45.9 54.7
Valuation allowances...................................... (11.5) (20.7)
-------- ------
Total....................................................... $582.7 $617.8
-------- ------
-------- ------
</TABLE>
At December 31, 1998, scheduled mortgage loan maturities were as follows: 1999
- -- $84.7 million; 2000 -- $131.6 million; 2001 -- $33.9 million; 2002 -- $28.4
million; 2003 -- $42.5 million; and $241.2 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 1998, 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 DECEMBER 31, BALANCE AT BALANCE AT
(IN MILLIONS) JANUARY 1 PROVISIONS WRITE-OFFS DECEMBER 31
- ------------------------------------------------------------ ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
1998
Mortgage loans.............................................. $20.7 $(6.8) $ 2.4 $11.5
----- ----- ----- -----
----- ----- ----- -----
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
----- ----- ----- -----
----- ----- ----- -----
</TABLE>
F-18
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Provisions on mortgages during 1998 reflect the release of redundant reserves.
Write-offs of $20.9 million to the investment valuation allowance related to
real estate in 1997 primarily reflect write downs to the estimated fair value
less costs to sell pursuant to the aforementioned 1997 plan of disposal.
The carrying value of impaired loans was $22.0 million and $30.5 million, with
related reserves of $6.0 million and $13.8 million as of December 31, 1998 and
1997, respectively. All impaired loans were reserved as of December 31, 1998 and
1997.
The average carrying value of impaired loans was $26.1 million, $30.8 million
and $50.4 million, with related interest income while such loans were impaired
of $3.2 million, $3.2 million and $5.8 million as of December 31, 1998, 1997 and
1996, 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. Futures contract
activity increased significantly in 1998 due to the increase in sale of GICs.
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.
The notional amount of futures contracts outstanding at December 31, 1998 was
$92.7 million. There were no futures contracts outstanding at December 31, 1997.
The notional amounts of the contracts represent the extent of the Company's
investment but not the future cash requirements, as the Company generally
settles open positions prior to maturity. The maturity of all futures contracts
outstanding is less than one year. The fair value of futures contracts
outstanding was $92.5 million at December 31, 1998.
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. Deferred
hedging gains (losses) were $(1.8) million in 1998. There were no deferred
hedging gains or losses in 1997. Gains and losses on hedge contracts that are
deemed ineffective by the Company are realized immediately. There were $0.1
million of gains realized on ineffective hedges in 1998. There was no gain or
loss in 1997 or 1996.
A reconciliation of the notional amount of futures contracts is as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1998 1997 1996
- --------------------------------------------------------------------------------- ----------- --------- ---------
<S> <C> <C> <C>
Contracts outstanding, beginning of year......................................... $ -- $ (33.0) $ 74.7
New contracts.................................................................... 1,117.5 (0.2) (1.1)
Contracts terminated............................................................. (1,024.8) 33.2 (106.6)
----------- --------- ---------
Contracts outstanding, end of year............................................... $ 92.7 $ -- $ (33.0)
----------- --------- ---------
----------- --------- ---------
</TABLE>
E. FOREIGN CURRENCY SWAP CONTRACTS
The Company enters into foreign currency swap contracts with swap counterparties
to hedge foreign currency exposure on specific fixed income securities. Interest
and principal related to foreign fixed income securities payable in foreign
currencies, at current exchange rates, are exchanged for the equivalent payment
in U.S dollars translated at a specific currency exchange rate. The primary risk
associated with these transactions is
F-19
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 nationally
recognized rating agencies. 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, as indicated by the fair value of the contract. The fair values
of the foreign currency swap contracts outstanding were $1.2 million and $1.3
million at December 31, 1998 and 1997, respectively. Changes in the fair value
of contracts are reported as an unrealized gain or loss, consistent with 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 1998, 1997 and 1996. 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 gain or loss on foreign
currency swap contracts in 1998 or 1997.
A reconciliation of the notional amount of foreign currency swap contracts is as
follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1998 1997 1996
- -------------------------------------------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Contracts outstanding, beginning of year.............................................. $ 42.6 $ 47.6 $ 69.4
New contracts......................................................................... -- 5.0 --
Contracts expired..................................................................... -- (10.0) (21.8)
--------- --------- ---------
Contracts outstanding, end of year.................................................... $ 42.6 $ 42.6 $ 47.6
--------- --------- ---------
--------- --------- ---------
</TABLE>
Expected maturities of foreign currency swap contracts outstanding at December
31, 1998 are $24.0 million in 1999, $8.3 million in 2000 and $10.3 million
thereafter. There are no expected maturities of such foreign currency swap
contracts in 2001, 2002 and 2003.
F. INTEREST RATE SWAP CONTRACTS
The Company enters into interest rate swap contracts to hedge exposure to
interest rate fluctuations. Specifically, for floating rate GIC liabilities that
are matched with fixed rate securities, the Company manages the interest rate
risk by hedging with interest rate swap contracts. 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. The use of interest rate swap contracts increased during 1998
due to the increase in floating rate GIC liabilities. 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 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, 1998 was a net
payable of $3.9 million. 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 $(2.8)
million, $(0.4) million and $0.6 million for the years ended December 31, 1998,
1997, and 1996, respectively. The fair value of interest rate swap contracts
outstanding were $(28.3) million and $(2.3) million at December 31, 1998 and
1997, respectively. 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
F-20
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
hedged transaction. The Company had no deferred gain or loss on interest rate
swap contracts in 1998 or 1997. A reconciliation of the notional amount of
interest rate swap contracts is as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1998 1997 1996
- ---------------------------------------------------------------------------------- ---------- --------- ---------
<S> <C> <C> <C>
Contracts outstanding, beginning of year.......................................... $ 244.1 $ 5.0 $ 17.5
New contracts..................................................................... 873.5 244.7 5.0
Contracts expired................................................................. (5.0) (5.6) (17.5)
---------- --------- ---------
Contracts outstanding, end of year................................................ $ 1,112.6 $ 244.1 $ 5.0
---------- --------- ---------
---------- --------- ---------
</TABLE>
Expected maturities of interest rate swap contracts outstanding at December 31,
1998 is $44.0 million in 2000, $234.5 million in 2002, $810.5 million in 2003
and $23.6 million thereafter. There are no expected maturities of interest rate
contracts in 1999 or 2001.
G. OTHER SWAP CONTRACTS
The Company enters into security return-linked 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 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, 1998, was not material to the Company.
The Company does not require collateral or other security to support financial
instruments with credit risk.
In 1998, the Company also entered into credit default swap agreements. Under the
terms of these agreements, the Company assumes the default risk of a specific
high credit quality issuer in exchange for a stated annual premium. In the case
of default, the Company will pay the counterparty par value for a pre-determined
security of the issuer. The primary risk associated with these transactions is
the default risk of the underlying companies. The Company regularly assesses the
financial strength of the underlying companies and generally enters into default
swap agreements for companies rated "A" or better by nationally recognized
rating agencies.
The swap contracts are marked to market with any gain or loss recognized
currently. The fair values of swap contracts outstanding were $(0.1) million at
December 31, 1998 and 1997. The net amount receivable or payable under
security-returned-linked and insurance portfolio-linked swap contracts is
recognized when the contracts are marked to market. The net increase (decrease)
in realized investment gains related to these contracts was $1.1 million in 1998
and $(1.6) million in 1997. There were no realized investment gains or losses on
other swap contracts recognized in 1996.
The stated annual premium under credit default swap contracts is recognized
currently in net investment income. The net increase to investment income
related to credit default swap contracts was $0.2 million in 1998. There was no
investment income recognized in 1997 and 1996.
F-21
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
A reconciliation of the notional amount of other swap contracts is as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1998 1997 1996
- ------------------------------------------------------------------------------------ --------- --------- ---------
<S> <C> <C> <C>
Contracts outstanding, beginning of year............................................ $ 15.0 $ 58.6 $ --
New contracts....................................................................... 266.3 192.1 58.6
Contracts expired................................................................... (26.3) (211.6) --
Contracts terminated................................................................ -- (24.1) --
--------- --------- ---------
Contracts outstanding, end of year.................................................. $ 255.0 $ 15.0 $ 58.6
--------- --------- ---------
--------- --------- ---------
</TABLE>
Expected maturities of other swap contracts outstanding at December 31, 1998 are
as follows: $115.0 million in 1999, $115.0 million in 2000 and $25.0 million in
2001. There are no expected maturities of such other swap contracts in 2002 or
2003.
H. OTHER
At December 31, 1998, FAFLIC had no concentration of investments in a single
investee exceeding 10% of shareholders' equity. 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 $262.4 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) 1998 1997 1996
- ------------------------------------------------------------ ------ ------ ------
<S> <C> <C> <C>
Fixed maturities............................................ $530.8 $541.9 $553.8
Mortgage loans.............................................. 58.3 57.5 69.5
Equity securities........................................... 7.4 10.6 11.1
Policy loans................................................ 11.9 10.9 10.3
Real estate................................................. 7.2 20.1 40.8
Other long-term investments................................. (0.5) 12.4 19.9
Short-term investments...................................... 14.3 12.8 10.6
------ ------ ------
Gross investment income..................................... 629.4 666.2 716.0
Less investment expenses.................................... (15.7) (24.4) (45.2)
------ ------ ------
Net investment income....................................... $613.7 $641.8 $670.8
------ ------ ------
------ ------ ------
</TABLE>
At December 31, 1998, there was one mortgage loan on non-accrual status which
had an outstanding principal balance of $4.3 million. This loan was restructured
and fully impaired. There were no fixed maturities which were on non-accrual
status at December 31, 1998. 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 1998 and 1997, and reduced net income by $0.5
million in 1996.
The payment terms of mortgage loans may from time to time be restructured or
modified. The investment in restructured mortgage loans, based on amortized
cost, amounted to $28.7 million, $40.3 million and $51.3 million at December 31,
1998, 1997 and 1996, respectively. Interest income on restructured mortgage
loans that would have been recorded in accordance with the original terms of
such loans amounted to $3.3 million, $3.9 million and $7.7 million in 1998, 1997
and 1996, respectively. Actual interest income on
F-22
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
these loans included in net investment income aggregated $3.3 million, $4.2
million and $4.5 million in 1998, 1997 and 1996, respectively.
There were no fixed maturities which were non-income producing for the year
ended December 31, 1998. There was one mortgage loan which was non-income
producing for the year ended December 31, 1998, which had an outstanding
principal balance of $4.3 million and was fully impaired.
Included in other long-term investments is a loss from limited partnerships of
$7.5 million in 1998, and income of $7.8 million and $13.7 million in 1997 and
1996, 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) 1998 1997 1996
- ------------------------------------------------------------ --------- --------- ---------
<S> <C> <C> <C>
Fixed maturities............................................ $ (11.8) $ 14.7 $ (9.7)
Mortgage loans.............................................. 8.8 (1.2) (2.4)
Equity securities........................................... 66.6 53.6 54.8
Real estate................................................. 13.7 12.8 21.1
Other....................................................... (14.7) (3.4) 3.0
--------- --------- ---------
Net realized investment gains............................... $ 62.6 $ 76.5 $ 66.8
--------- --------- ---------
--------- --------- ---------
</TABLE>
C. OTHER COMPREHENSIVE INCOME RECONCILIATION
The following table provides a reconciliation of gross unrealized gains to the
net balance shown in the Statement of Comprehensive Income:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1998 1997 1996
- ------------------------------------------------------------ --------- --------- ---------
<S> <C> <C> <C>
Unrealized gains on securities:
Unrealized holding gains arising during period, (net of
taxes and minority interest of $(20.8) million, $123.7
million and $10.7 million in 1998, 1997 and 1996,
respectively).............................................. $ (6.8) $ 115.5 $ (0.7)
Less: reclassification adjustment for gains included in net
income (net of taxes and minority interest of $21.5
million, $30.7 million and $24.2 million in 1998, 1997 and
1996, respectively)........................................ 33.3 37.6 20.9
--------- --------- ---------
Other comprehensive income.................................. $ (40.1) $ 77.9 $ (21.6)
--------- --------- ---------
--------- --------- ---------
</TABLE>
5. FAIR VALUE DISCLOSURES OF FINANCIAL INSTRUMENTS
Statement 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. Included in the fair value of fixed maturities are swap contracts used
to hedge fixed maturities with a fair value of $(27.1) million at December 31,
1998. Fair values of interest rate futures were not material at December 31,
1997.
F-23
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments:
CASH AND CASH EQUIVALENTS
For these short-term investments, the carrying amount approximates fair value.
FIXED MATURITIES
Fair values are based on quoted market prices, if available. If a quoted market
price is not available, fair values are estimated using independent pricing
sources or internally developed pricing models using discounted cash flow
analyses.
EQUITY SECURITIES
Fair values are based on quoted market prices, if available. If a quoted market
price is not available, fair values are estimated using independent pricing
sources or internally developed pricing models.
MORTGAGE LOANS
Fair values are estimated by discounting the future contractual cash flows using
the current rates at which similar loans would be made to borrowers with similar
credit ratings. The fair value of below investment grade mortgage loans are
limited to the lesser of the present value of the cash flows or book value.
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.
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-24
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The estimated fair values of the financial instruments were as follows:
<TABLE>
<CAPTION>
1998 1997
------------------ ------------------
DECEMBER 31, CARRYING FAIR CARRYING FAIR
(IN MILLIONS) VALUE VALUE VALUE VALUE
- ------------------------------------------------------------ -------- -------- -------- --------
<S> <C> <C> <C> <C>
FINANCIAL ASSETS
Cash and cash equivalents................................. $ 504.0 $ 504.0 $ 213.9 $ 213.9
Fixed maturities.......................................... 7,683.9 7,683.9 7,253.5 7,253.5
Equity securities......................................... 397.1 397.1 479.0 479.0
Mortgage loans............................................ 562.3 587.1 567.5 597.0
Policy loans.............................................. 154.3 154.3 141.9 141.9
-------- -------- -------- --------
$9,301.6 $9,326.4 $8,655.8 $8,685.3
-------- -------- -------- --------
-------- -------- -------- --------
FINANCIAL LIABILITIES
Guaranteed investment contracts........................... $1,791.8 $1,830.8 $ 985.2 $1,004.7
Supplemental contracts without life contingencies......... 37.3 37.3 22.4 22.4
Dividend accumulations.................................... 88.4 88.4 87.8 87.8
Other individual contract deposit funds................... 61.6 61.1 57.9 55.7
Other group contract deposit funds........................ 700.4 704.0 714.8 715.5
Individual annuity contracts.............................. 1,110.6 1,073.6 907.4 882.2
Short-term debt........................................... 221.3 221.3 33.0 33.0
Long-term debt............................................ -- -- 2.6 2.6
-------- -------- -------- --------
$4,011.4 $4,016.5 $2,811.1 $2,803.9
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
6. CLOSED BLOCK
Included in other income in the Consolidated Statement of Income in 1998, 1997
and 1996 is a net pre-tax contribution from the Closed Block of $10.4 million,
$9.1 million and $8.6 million, respectively. Summarized financial information of
the Closed Block as of December 31, 1998 and 1997 and for the period ended
December 31, 1998, 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
(IN MILLIONS) 1998 1997
- ------------------------------------------------------------ ------ ------
<S> <C> <C>
Assets
Fixed maturities, at fair value (amortized cost of $399.1
and $400.1, respectively)............................... $414.2 $412.9
Mortgage loans............................................ 136.0 112.0
Policy loans.............................................. 210.9 218.8
Cash and cash equivalents................................. 9.4 25.1
Accrued investment income................................. 14.1 14.1
Deferred policy acquisition costs......................... 15.6 18.2
Other assets.............................................. 2.9 5.6
------ ------
Total assets................................................ $803.1 $806.7
------ ------
------ ------
Liabilities
Policy liabilities and accruals........................... $862.9 $875.1
Other liabilities......................................... 9.1 10.4
------ ------
Total liabilities........................................... $872.0 $885.5
------ ------
------ ------
</TABLE>
F-25
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1998 1997 1996
- ------------------------------------------------------------ -------- -------- --------
<S> <C> <C> <C>
Revenues
Premiums................................................ $ 55.4 $ 58.3 $ 61.7
Net investment income................................... 53.3 53.4 52.6
Realized investment loss................................ 0.1 1.3 (0.7)
-------- -------- --------
Total revenues.............................................. 108.8 113.0 113.6
Benefits and expenses
Policy benefits......................................... 95.0 100.5 101.2
Policy acquisition expenses............................. 2.7 3.0 3.2
Other operating expenses................................ 0.7 0.4 0.6
-------- -------- --------
Total benefits and expenses................................. 98.4 103.9 105.0
-------- -------- --------
Contribution from the Closed Block.......................... $ 10.4 $ 9.1 $ 8.6
-------- -------- --------
-------- -------- --------
Cash flows
Cash flows from operating activities:
Contribution from the Closed Block...................... $ 10.4 $ 9.1 $ 8.6
Change in deferred policy acquisition costs, net........ 2.6 2.9 3.4
Change in premiums and other receivables................ 0.3 -- 0.2
Change in policy liabilities and accruals............... (13.5) (11.6) (13.9)
Change in accrued investment income..................... -- 0.2 2.3
Deferred Taxes.......................................... 0.1 (5.1) 1.0
Change in other assets.................................. 2.4 (2.9) (1.6)
Change in expenses and taxes payable.................... (2.9) (2.0) 1.7
Other, net.............................................. (0.1) (1.2) 1.4
-------- -------- --------
Net cash (used in) provided by operating activities....... (0.7) (10.6) 3.1
Cash flows from investing activities:
Sales, maturities and repayments of investments......... 83.6 161.6 188.1
Purchases of investments................................ (106.5) (161.4) (196.9)
Other, net.............................................. 7.9 11.4 12.2
-------- -------- --------
Net cash provided by (used in) investing activities....... (15.0) 11.6 3.4
-------- -------- --------
Net increase in cash and cash equivalents................... (15.7) 1.0 6.5
Cash and cash equivalents, beginning of year................ 25.1 24.1 17.6
-------- -------- --------
Cash and cash equivalents, end of year...................... $ 9.4 $ 25.1 $ 24.1
-------- -------- --------
-------- -------- --------
</TABLE>
There are no valuation allowances on mortgage loans in the Closed Block at
December 31, 1998, 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-26
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. DEBT
Short and long-term debt consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
(IN MILLIONS) 1998 1997
- ------------------------------------------------------------ ------ -----
<S> <C> <C>
Short-Term
Commercial paper........................................ $ 41.3 $32.6
Borrowings under bank credit facility................... 150.0 --
Repurchase agreements................................... 30.0 --
Other................................................... -- 0.4
------ -----
Total short-term debt....................................... $ 221.3 $33.0
------ -----
------ -----
Long-term debt.............................................. $ -- $ 2.6
------ -----
------ -----
</TABLE>
FAFLIC issues commercial paper primarily to manage imbalances between operating
cash flows and existing commitments. Commercial paper borrowing arrangements are
supported by a credit agreement. At December 31, 1998, the weighted average
interest rate for outstanding commercial paper was approximately 5.34%.
Effective December 4, 1998, the Company entered into a credit agreement that
expired on February 5, 1999. Borrowings under this agreement were unsecured and
incurred interest at a rate per annum equal to the eurodollar rate plus
applicable margin. Borrowings outstanding under this credit facility at December
31, 1998 were $150.0 million.
During 1998 and 1996, the Company utilized repurchase agreements to finance
certain investments. The 1996 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 $7.3 million, $3.6 million and $16.8 million in 1998,
1997 and 1996, respectively. Interest paid on the credit agreement was
approximately $0.7 million in 1998 and $2.8 million in 1997. 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) 1998 1997 1996
- ------------------------------------------------------------ ------- ----- -------
<S> <C> <C> <C>
Federal income tax expense (benefit)
Current................................................. $ 67.6 $83.3 $ 96.8
Deferred................................................ (15.4) 14.2 (15.7)
------- ----- -------
Total....................................................... $ 52.2 $97.5 $ 81.1
------- ----- -------
------- ----- -------
</TABLE>
F-27
<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) 1998 1997 1996
- ------------------------------------------------------------ ------ ------ ------
<S> <C> <C> <C>
Expected federal income tax expense......................... $100.9 $131.8 $122.3
Tax-exempt interest..................................... (38.9) (37.9) (35.3)
Differential earnings amount............................ -- -- (10.2)
Dividend received deduction............................. (5.1) (3.2) (1.6)
Changes in tax reserve estimates........................ 2.3 7.8 4.7
Tax credits............................................. (8.5) (2.7)
Other, net.............................................. 1.5 1.7 1.2
------ ------ ------
Federal income tax expense.................................. $ 52.2 $ 97.5 $ 81.1
------ ------ ------
------ ------ ------
</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 (asset) liability represents the tax effects of
temporary differences attributable to the Company's consolidated federal tax
return group. Its components were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
(IN MILLIONS) 1998 1997
- ------------------------------------------------------------ -------- --------
<S> <C> <C>
Deferred tax (assets) liabilities
AMT carryforwards....................................... $ (16.8) $ (15.6)
Loss reserve discounting................................ (406.6) (391.6)
Deferred acquisition costs.............................. 345.8 291.8
Employee benefit plans.................................. (45.3) (48.0)
Investments, net........................................ 121.7 175.4
Bad debt reserve........................................ (1.8) (14.3)
Litigation reserve...................................... (10.9) --
Other, net.............................................. (5.5) 15.2
-------- --------
Deferred tax (asset) liability, net......................... $ (19.4) $ 12.9
-------- --------
-------- --------
</TABLE>
Gross deferred income tax assets totaled $486.9 million and $469.5 million at
December 31, 1998 and 1997, respectively. Gross deferred income tax liabilities
totaled $467.5 million and $482.4 million at December 31, 1998 and 1997,
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, the Company considered the future reversal of its existing
temporary differences and available tax planning strategies that could be
implemented, if necessary. At December 31, 1998, there are available alternative
minimum tax credit carryforwards of $16.8 million.
F-28
<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 1994. 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 1992,1993 and 1994 for the
FAFLIC/AFLIAC 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 the Company'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
a defined benefit pension plan. This plan is based on a defined benefit cash
balance formula, whereby 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 1998, 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 periodic pension cost were as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1998 1997 1996
- ------------------------------------------------------------ ------- ------- -------
<S> <C> <C> <C>
Service cost -- benefits earned during the year............. $ 19.0 $ 19.9 $ 19.0
Interest cost............................................... 25.5 23.5 21.9
Expected return on plan assets.............................. (34.9) (31.2) (28.3)
Recognized net actuarial loss (gain)........................ 0.4 0.1 (0.4)
Amortization of transition asset............................ (1.8) (1.9) (1.9)
Amortization of prior service cost.......................... (1.7) (2.0) (2.3)
------- ------- -------
Net periodic pension cost................................... $ 6.5 $ 8.4 $ 8.0
------- ------- -------
------- ------- -------
</TABLE>
F-29
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table summarizes the status of the pension plan. At December 31,
1998 and 1997 the plan's assets exceeded its projected benefit obligations.
<TABLE>
<CAPTION>
DECEMBER 31,
(IN MILLIONS) 1998 1997
- ------------------------------------------------------------ ------ ------
<S> <C> <C>
Change in benefit obligations:
Projected benefit obligation at beginning of year....... $370.4 $344.2
Service cost -- benefits earned during the year......... 19.0 19.9
Interest cost........................................... 25.5 23.5
Actuarial losses........................................ 20.4 0.3
Benefits paid........................................... (21.1) (17.5)
------ ------
Projected benefit obligation at end of year............. $414.2 $370.4
------ ------
------ ------
Change in plan assets:
Fair value of plan assets at beginning of year.......... $395.5 $347.8
Actual return on plan assets............................ 67.2 65.2
Benefits paid........................................... (21.1) (17.5)
------ ------
Fair value of plan assets at end of year................ 441.6 395.5
------ ------
Funded status of the plan............................... 27.4 25.1
Unrecognized transition obligation...................... (23.9) (26.2)
Unamortized prior service cost.......................... (11.0) (13.9)
Unrecognized net actuarial gains........................ (54.9) (44.9)
------ ------
Net pension liability............................... $(62.4) $(59.9)
------ ------
------ ------
</TABLE>
As a result of AFC's merger with APY, certain pension liabilities were reduced
by $11.7 million in 1997, to reflect their fair value as of the purchase date.
These pension liabilities were reduced by $10.3 million in 1998, which reflects
fair value, net of applicable amortization. Determination of the projected
benefit obligations was based on a weighted average discount rate of 6.5% and
7.0% in 1998 and 1997, respectively, and the assumed long-term rate of return on
plan assets was 9.0% in both 1998 and 1997. 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. Plan
assets also include 973,262 shares of AFC Common Stock at both December 31, 1998
and 1997, with a market value of $56.3 million and $48.6 million at December 31,
1998 and 1997, respectively.
The Company has a defined contribution 401(k) plan for its employees, whereby
the Company matches employee elective 401(k) contributions, up to a maximum
percentage determined annually by the Board of Directors. During 1998, 1997 and
1996, the Company matched 50% of employees' contributions up to 6.0% of eligible
compensation. The total expenses related to this plan was $5.6 million, $3.3
million and $5.5 million, in 1998, 1997 and 1996, respectively. In addition to
this plan, the Company has a defined contribution plan for substantially all of
its agents. The Plan expense in 1998, 1997 and 1996 was $3.0 million, $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 merger of benefit plans resulted in a $5.9 million change of
interest adjustment to additional paid in capital during 1998. The change of
interest adjustment arose from FAFLIC's forgiveness of certain Allmerica P&C
benefit plan liabilities attributable to Allmerica P&C's minority interest.
F-30
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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. 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.
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) 1998 1997
- ------------------------------------------------------------ ------ ------
<S> <C> <C>
Change in benefit obligation:
Accumulated postretirement benefit obligation at
beginning of year..................................... $ 71.8 $ 72.3
Service cost............................................ 3.1 3.0
Interest cost........................................... 5.1 4.6
Actuarial losses........................................ 7.6 (4.7)
Benefits paid........................................... (3.6) (3.4)
------ ------
Accumulated postretirement benefit obligation at end of
year.................................................. 84.0 71.8
Fair value of plan assets at end of year................ -- --
------ ------
Funded status of the plan............................... (84.0) (71.8)
Unamortized prior service cost.......................... (12.9) (15.3)
Unrecognized net actuarial losses....................... 7.5 0.8
------ ------
Accumulated postretirement benefit costs................ $(89.4) $(86.3)
------ ------
------ ------
</TABLE>
The components of net periodic postretirement benefit expense were as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1998 1997 1996
- ------------------------------------------------------------ ------ ------ ------
<S> <C> <C> <C>
Service cost................................................ $ 3.1 $ 3.0 $ 3.2
Interest cost............................................... 5.1 4.6 4.6
Recognized net actuarial loss (gain)........................ 0.1 (0.1) 0.2
Amortization of prior service cost.......................... (2.4) (2.7) (3.0)
------ ------ ------
Net periodic postretirement benefit cost.................... $ 5.9 $ 4.8 $ 5.0
------ ------ ------
------ ------ ------
</TABLE>
As a result of AFC's merger with APY in 1997, certain postretirement liabilities
were reduced by $6.1 million to reflect their fair value as of the purchase
date. These postretirement liabilities were reduced by $5.4 million in 1998,
which reflects fair value, net of applicable amortization.
F-31
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For purposes of measuring the accumulated postretirement benefit obligation at
December 31, 1998, health care costs were assumed to increase 7.0% in 1999,
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, 1998
by $5.7 million, and the aggregate of the service and interest cost components
of net periodic postretirement benefit expense for 1998 by $0.7 million.
Conversely, decreasing the assumed health care cost trend rates by one
percentage point in each year would decrease the accumulated postretirement
benefit obligation at December 31, 1998 by $5.2 million, and the aggregate of
the service and interest cost components of net periodic postretirement benefit
expense for 1998 by $0.6 million.
The weighted-average discount rate used in determining the accumulated
postretirement benefit obligation was 6.5% and 7.0% at December 31, 1998 and
1997. In addition, the actuarial present value of the accumulated postretirement
benefit obligation was determined using an assumed rate of increase in future
compensation levels of 5.5% for FAFLIC agents.
On January 1, 1998, substantially all of the aforementioned postretirement
medical and death benefits plans were merged with the existing benefit plans of
FAFLIC. The merger of benefit plans resulted in a $3.8 million change of
interest adjustment to additional paid in capital during 1998. The change of
interest adjustment arose from FAFLIC's forgiveness of certain Allmerica P&C
benefit plan liabilities attributable to Allmerica P&C's minority interest.
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 Allmerica P&C (Hanover) are the primary source of cash
flow for AFC.
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. During 1998, FAFLIC paid dividends of
$50.0 million to AFC. No dividends were declared by FAFLIC to AFC during 1997 or
1996 During 1999, FAFLIC could pay dividends of $116.4 million to AFC without
prior approval of the Commissioner.
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 declared by AFLIAC to FAFLIC during
1998, 1997 or 1996. During 1999, AFLIAC could pay dividends of $26.1 million to
FAFLIC without prior approval.
F-32
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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, $125.0 million, $120.0
million and $105.0 million during 1998, 1997 and 1996, respectively. During
1999, the maximum dividend and other distributions that could be paid to
Allmerica P&C by Hanover, without prior approval of the Insurance Commissioner,
is approximately $1.6 million, which considers an extraordinary dividend of
$125.0 million declared on March 12, 1998. The allowable dividend without prior
approval will increase to $126.6 million on March 12, 1999.
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 $200.0 million and $6.3 million during 1998 and 1996, respectively. A
$180.0 million extraordinary dividend was approved by the Commissioner in 1998.
No dividends were declared by Citizens Insurance during 1997. During 1999,
Citizens Insurance can declare no dividends to Citizens Corporation without
prior approval of the Michigan Insurance Commissioner as a result of the $180.0
million extraordinary dividend declared on December 21, 1998.
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 four operating segments.
Effective January 1, 1998, the Company adopted Statement No. 131. Upon adoption,
the separate financial information of each segment was re-defined consistent
with the way results are regularly evaluated by the chief operating decision
maker in deciding how to allocate resources and in assessing performance. A
summary of the significant changes in reportable segments is included below.
The Risk Management group includes two segments: Property and Casualty and
Corporate Risk Management Services. The 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 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 two segments: Allmerica
Financial Services and Allmerica Asset Management. The Allmerica Financial
Services segment includes variable annuities, variable universal life and
traditional life insurance products distributed via retail channels as well as
group retirement products, such as defined benefit and 401(k) plans and
tax-sheltered annuities distributed to institutions. Through its Allmerica Asset
Management segment, the Company offers its customers the option of investing in
three types of GICs; the traditional GIC, the synthetic GIC and the floating
rate GIC. This segment is also a Registered Investment Advisor providing
investment advisory services, primarily to affiliates, and to other
institutions, such as insurance companies and pension plans. In addition to the
four operating segments, the Company has a Corporate segment, which consists
primarily of cash, investments, corporate debt, Capital Securities and corporate
overhead expenses. Corporate overhead expenses reflect costs not attributable to
a
F-33
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
particular segment, such as those generated by certain officers and directors,
Corporate Technology, Corporate Finance, Human Resources and the legal
department.
Significant changes to the Company's segmentation include a reclassification of
corporate overhead expenses from each operating segment into the Corporate
segment. Additionally, certain products (group retirement products, such as
401(k) plans and tax-sheltered annuities, group variable universal life) and
certain other non-insurance operations (telemarketing and trust services)
previously reported in the Allmerica Financial Institutional Services segment
were combined with the Allmerica Financial Services segment. Also, the Company
reclassified the GIC product line previously reported in the Allmerica Financial
Institutional Services segment into the Allmerica Asset Management segment.
Management evaluates the results of the aforementioned segments based on pre-tax
segment income. Pre-tax segment income is determined by adjusting net income for
net realized investment gains and losses, net gains and losses on disposals of
businesses, extraordinary items, the cumulative effect of accounting changes and
certain other items which management believes are not indicative of overall
operating trends. While these items may be significant components in
understanding and assessing the Company's financial performance, management
believes that the presentation of pre-tax segment income enhances its
understanding of the Company's results of operations by highlighting net income
attributable to the normal, recurring operations of the business. However,
pre-tax segment income should not be construed as a substitute for net income
determined in accordance with generally accepted accounting principles.
Summarized below is financial information with respect to business segments:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1998 1997 1996
- ------------------------------------------------------------ -------- -------- --------
<S> <C> <C> <C>
Segment revenues:
Risk Management
Property and Casualty................................... $2,204.8 $2,211.0 $2,145.8
Corporate Risk Management Services...................... 412.9 405.4 370.7
-------- -------- --------
Subtotal............................................ 2,617.7 2,616.4 2,516.5
-------- -------- --------
Retirement and Asset Accumulation
Allmerica Financial Services............................ 721.2 709.7 700.0
Allmerica Asset Management.............................. 121.7 91.1 110.5
-------- -------- --------
Subtotal............................................ 842.9 800.8 810.5
-------- -------- --------
Corporate................................................. 2.3 5.5 5.2
Intersegment revenues..................................... (7.6) (11.6) (13.8)
-------- -------- --------
Total segment revenues including Closed Block........... 3,455.2 3,411.1 3,318.4
-------- -------- --------
Adjustment to segment revenues:
Adjustment for Closed Block............................. (98.4) (102.6) (105.7)
Net realized gains...................................... 62.6 75.6 66.8
-------- -------- --------
Total revenues...................................... $3,419.4 $3,384.2 $3,279.5
-------- -------- --------
-------- -------- --------
</TABLE>
F-34
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1998 1997 1996
- ------------------------------------------------------------ ------ ------ ------
<S> <C> <C> <C>
Segment income (loss) before income taxes and minority
interest:
Risk Management
Property and Casualty................................... $151.4 $172.9 $170.7
Corporate Risk Management Services...................... 7.8 27.0 28.3
------ ------ ------
Subtotal............................................ 159.2 199.9 199.0
------ ------ ------
Retirement and Asset Accumulation
Allmerica Financial Services............................ 166.6 134.6 106.8
Allmerica Asset Management.............................. 23.7 18.4 11.5
------ ------ ------
Subtotal............................................ 190.3 153.0 118.3
------ ------ ------
Corporate................................................. (45.3) (44.6) (36.6)
------ ------ ------
Segment income before income taxes and minority
interest.............................................. 304.2 308.3 280.7
------ ------ ------
Adjustments to segment income:
Net realized investment gains, net of amortization...... 53.9 78.7 69.6
Sales practice litigation expense....................... (31.0) -- --
Loss on exiting reinsurance pools....................... (25.3)
Gain from change in mortality assumptions............... -- 47.0 --
Loss on cession of disability income business........... -- (53.9) --
Restructuring costs..................................... (13.0) -- --
Other items............................................. (.7) (3.2) (1.1)
------ ------ ------
Income before taxes and minority interest................. $288.1 $376.9 $349.2
------ ------ ------
------ ------ ------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
(IN MILLIONS) 1998 1997 1998 1997
- ------------------------------------------------------------ --------- --------- -------- ------
DEFERRED
ACQUISITION
IDENTIFIABLE ASSETS COSTS
<S> <C> <C> <C> <C>
Risk Management
Property and Casualty................................... $ 5,649.0 $ 5,650.4 $ 164.9 $167.2
Corporate Risk Management Services...................... 567.8 619.8 2.6 2.9
--------- --------- -------- ------
Subtotal............................................ 6,216.8 6,270.2 167.5 170.1
Retirement and Asset Accumulation
Allmerica Financial Services............................ 19,407.3 15,159.2 993.1 794.5
Allmerica Asset Management.............................. 1,810.9 1,035.1 0.6 0.9
--------- --------- -------- ------
Subtotal............................................ 21,218.2 16,194.3 993.7 795.4
Corporate............................................... 29.6 26.9 -- --
--------- --------- -------- ------
Total............................................... $27,464.6 $22,491.4 $1,161.2 $965.5
--------- --------- -------- ------
--------- --------- -------- ------
</TABLE>
13. LEASE COMMITMENTS
Rental expenses for operating leases, principally with respect to buildings,
amounted to $34.9 million, $33.6 million and $34.9 million in 1998, 1997 and
1996, respectively. At December 31, 1998, future minimum rental payments under
non-cancelable operating leases were approximately $73.5 million, payable as
follows: 1999 -- $28.6 million; 2000 -- $21.0 million; 2001 -- $13.8 million;
2002 -- $6.9 million; and $3.2 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 1999.
F-35
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 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, 1998, 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 1998, 1997 and 1996 were
$34.3 million and $38.1 million, $32.3 million and $28.2 million, and $38.0
million and $21.8 million, respectively. The Company ceded to MCCA premiums
earned and losses and loss adjustment expenses in 1998, 1997 and 1996 of $3.7
million and $18.0 million, $9.8 million and $(0.8) million, and $50.5 million
and $(52.9) million, respectively.
On June 2, 1998, the Company recorded a $124.2 million one-time reduction of its
direct and ceded written premiums as a result of a return of excess surplus from
MCCA. This transaction had no impact on the total net premiums recorded by the
Company in 1998.
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.
F-36
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The effects of reinsurance were as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1998 1997 1996
- ------------------------------------------------------------ ---------- -------- --------
<S> <C> <C> <C>
Life and accident and health insurance premiums:
Direct.................................................. $ 416.6 $ 417.4 $ 389.1
Assumed................................................. 111.9 110.7 87.8
Ceded................................................... (189.8) (170.1) (138.9)
---------- -------- --------
Net premiums................................................ $ 338.7 $ 358.0 $ 338.0
---------- -------- --------
---------- -------- --------
Property and casualty premiums written:
Direct.................................................. $1,969.3 $2,068.5 $2,039.7
Assumed................................................. 58.8 103.1 108.7
Ceded................................................... (74.1) (179.8) (234.0)
---------- -------- --------
Net premiums................................................ $1,954.0 $1,991.8 $1,914.4
---------- -------- --------
---------- -------- --------
Property and casualty premiums earned:
Direct.................................................. $1,966.8 $2,046.2 $2,018.5
Assumed................................................. 64.5 102.0 112.4
Ceded................................................... (66.1) (195.1) (232.6)
---------- -------- --------
Net premiums................................................ $1,965.2 $1,953.1 $1,898.3
---------- -------- --------
---------- -------- --------
Life insurance and other individual policy benefits, claims,
losses and loss adjustment expenses:
Direct.................................................. $ 653.6 $ 656.4 $ 606.5
Assumed................................................. 67.9 61.6 44.9
Ceded................................................... (164.0) (158.8) (77.8)
---------- -------- --------
Net policy benefits, claims, losses and loss adjustment
expenses................................................... $ 557.5 $ 559.2 $ 573.6
---------- -------- --------
---------- -------- --------
Property and casualty benefits, claims, losses and loss
adjustment expenses:
Direct.................................................. $1,588.3 $1,464.9 $1,299.8
Assumed................................................. 62.7 101.2 85.8
Ceded................................................... (158.2) (120.6) (2.2)
---------- -------- --------
Net policy benefits, claims, losses, and loss adjustment
expenses................................................... $1,492.8 $1,445.5 $1,383.4
---------- -------- --------
---------- -------- --------
</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) 1998 1997 1996
- ------------------------------------------------------------ -------- -------- --------
<S> <C> <C> <C>
Balance at beginning of year................................ $ 965.5 $ 822.7 $ 735.7
Acquisition expenses deferred........................... 641.2 617.7 547.4
Amortized to expense during the year.................... (452.8) (476.0) (470.1)
Adjustment to equity during the year.................... 7.3 (11.1) 9.7
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...................................... $1,161.2 $ 965.5 $ 822.7
-------- -------- --------
-------- -------- --------
</TABLE>
F-37
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 recorded in results of operations in the year such
changes are determined to be needed.
The liability for future policy benefits and outstanding claims, losses and loss
adjustment expenses related to the Company's accident and health business was
$568.0 million, $533.6 million and $471.7 million at December 31, 1998, 1997 and
1996, respectively. Accident and health claim liabilities were re-estimated for
all prior years and were increased by $14.6 million in 1998, and decreased by
$0.2 million and $0.6 million in 1997 and 1996, respectively. The increase in
1998 resulted from the Company's reserve strengthening primarily in the assumed
reinsurance and stop loss only business.
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) 1998 1997 1996
- ------------------------------------------------------------ -------- -------- --------
<S> <C> <C> <C>
Reserve for losses and LAE, beginning of the year........... $2,615.4 $2,744.1 $2,896.0
Incurred losses and LAE, net of reinsurance recoverable:
Provision for insured events of the current year........ 1,609.0 1,564.1 1,513.3
Decrease in provision for insured events of prior
years................................................. (127.2) (127.9) (141.4)
-------- -------- --------
Total incurred losses and LAE............................... 1,481.8 1,436.2 1,371.9
-------- -------- --------
Payments, net of reinsurance recoverable:
Losses and LAE attributable to insured events of current
year.................................................. 871.9 775.1 759.6
Losses and LAE attributable to insured events of prior
years................................................. 643.0 732.1 627.6
-------- -------- --------
Total payments.............................................. 1,514.9 1,507.2 1,387.2
-------- -------- --------
Change in reinsurance recoverable on unpaid losses.......... 15.0 (50.2) (136.6)
-------- -------- --------
Other (1)................................................... -- (7.5) --
-------- -------- --------
Reserve for losses and LAE, end of year..................... $2,597.3 $2,615.4 $2,744.1
-------- -------- --------
-------- -------- --------
</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 $127.2 million,
$127.9 million and $141.1 million in 1998, 1997, and 1996, respectively.
The decrease in favorable development on prior years' reserves of $0.7 million
in 1998 results from a $20.7 million decrease in favorable development at
Citizens, significantly offset by a $20.0 million increase in favorable
development at Hanover. The decrease in favorable development on prior year
reserves at Citizens in 1998, reflects a $13.8 million decrease in favorable
development, to $21.9 million, in the workers' compensation line. In addition,
favorable development in the commercial multiple peril line decreased $4.0
million, to
F-38
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
$0.3 million. These declines in favorable development are partially offset by
continued favorable development on prior year reserves in the personal
automobile line due to tort reform in Michigan, which became effective July 26,
1996. The new legislation requires judges rather than juries to determine if the
minimum threshold to allow pain and suffering damage settlements has been met.
The increase in favorable development at Hanover during 1998 reflects a $20.6
million increase in favorable development on prior year reserves, to $38.0
million, in the personal automobile line, as well as a $14.9 million increase to
$12.1 million in the commercial multiple peril line. These increases are
primarily attributable to the initiatives taken by the Company over the past two
years which are expected to reduce ultimate settlement costs. These increases
are partially offset by less favorable development in the workers' compensation
line where favorable development on prior year reserves decreased $19.2 million,
to $9.6 million.
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. These increases are
partially offset by less favorable development in the personal automobile line,
where favorable development decreased $10.5 million, to $22.5 million in 1997.
This favorable development reflects the Regional Property and Casualty
subsidiaries' reserving philosophy consistently applied over these periods.
Conditions and trends that have affected development of the loss and LAE
reserves in the past may not necessarily occur in the future.
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 $49.9
million, $53.1 million and $50.8 million, net of reinsurance of $14.2 million,
$15.7 million and $20.2 million in 1998, 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. 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 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 70.0%,
65.8% and 59.5% of the outstanding shares of common stock at December 31, 1998,
1997 and 1996, respectively. Earnings and
F-39
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
shareholder's equity attributable to minority shareholders are included in
minority interest in the consolidated financial statements.
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 on behalf of a putative class was instituted in
Louisiana against AFC and certain of its subsidiaries, including FAFLIC, 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, the plaintiffs voluntarily dismissed the Louisiana
suit and filed a substantially similar action in Federal District Court in
Worcester, Massachusetts. In early November 1998, the Company and the plaintiffs
entered into a settlement agreement, to which the court granted preliminary
approval on December 4, 1998. A hearing was held on March 19, 1999 to consider
final approval of the settlement agreement. A decision by the court is expected
to be rendered in the near future. Accordingly, FAFLIC recognized a $31.0
million pre-tax expense during the third quarter of 1998 related to this
litigation. Although the Company believes that this expense reflects appropriate
recognition of its obligation under the settlement, this estimate assumes the
availability of insurance coverage for certain claims, and the estimate may be
revised based on the amount of reimbursement actually tendered by AFC's
insurance carriers, if any, and based on changes in the Company's estimate of
the ultimate cost of the benefits to be provided to members of the class.
The Company has been named a defendant in various other legal proceedings
arising in the normal course of business. In the Company's opinion, 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 miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities.
F-40
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 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) 1998 1997 1996
- ------------------------------------------------------------ -------- -------- --------
<S> <C> <C> <C>
Statutory Net Income (Combined)
Property and Casualty Companies......................... $ 180.7 $ 190.3 $ 155.5
Life and Health Companies............................... 86.4 191.2 133.3
Statutory Shareholder's Surplus (Combined)
Property and Casualty Companies......................... $1,269.3 $1,279.6 $1,201.6
Life and Health Companies............................... 1,164.1 1,221.3 1,120.1
</TABLE>
20. SUBSEQUENT EVENT
On April 1, 1999, Allmerica P&C redeemed an additional 3,246.8 shares of its
issued and outstanding common stock owned by AFC for $125.0 million, thereby
increasing FAFLIC's ownership of Allmerica P&C by 4.8%. The 1999 transaction
consisted of $75.4 million of securities and $49.6 million of cash.
F-41
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of First Allmerica Financial Life Insurance Company
and the Contractowners of 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 changes in net assets present fairly, in
all material respects, the financial position of each of the Sub-Accounts
constituting the Fulcrum Separate Account of First Allmerica Financial Life
Insurance Company at December 31, 1998, the results of each of their operations
and the changes in each of their net assets for each of 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 securities at December 31, 1998 by correspondence with the
Funds, provide a reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP PRICEWATERHOUSECOOPERS LLP
Boston, Massachusetts
March 26, 1999
<PAGE>
FULCRUM SEPARATE ACCOUNT
STATEMENTS OF ASSETS AND LIABILITIES
DECEMBER 31, 1998
<TABLE>
<CAPTION>
INTERNATIONAL STRATEGIC
VALUE GROWTH GROWTH INCOME*
------------ ----------- ----------- -------------
<S> <C> <C> <C> <C>
ASSETS:
Investment in shares of
Allmerica Investment Trust... $ -- $ -- $ -- $ --
Investments in shares of The
Fulcrum Trust*............... 1,147,286 432,446 115,401 335,516
Investment in shares of AIM
Variable Insurance Funds,
Inc.......................... -- -- -- --
Investments in shares of
Delaware Group Premium Fund,
Inc.......................... -- -- -- --
Investment in shares of Lazard
Retirement Series, Inc....... -- -- -- --
Investments in shares of MFS
Variable Insurance Trust..... -- -- -- --
Investments in shares of
Oppenheimer Variable Account
Funds........................ -- -- -- --
Investment in shares of PBHG
Insurance Series Fund,
Inc.......................... -- -- -- --
------------ ----------- ----------- -------------
Total assets................ 1,147,286 432,446 115,401 335,516
LIABILITIES:.................. -- -- -- --
------------ ----------- ----------- -------------
Net assets.................. $ 1,147,286 $ 432,446 $ 115,401 $ 335,516
------------ ----------- ----------- -------------
------------ ----------- ----------- -------------
Net asset distribution by
category:
Qualified variable annuity
contracts................. $ 371,992 $ 159,157 $ 32,919 $ 26,178
Non-qualified variable
annuity contracts......... 775,294 273,289 82,482 309,338
Value of investment by First
Allmerica Financial Life
Insurance Company
(Sponsor)................. -- -- -- --
------------ ----------- ----------- -------------
$ 1,147,286 $ 432,446 $ 115,401 $ 335,516
------------ ----------- ----------- -------------
------------ ----------- ----------- -------------
Qualified units outstanding,
December 31, 1998............ 334,744 185,410 41,156 24,971
Net asset value per qualified
unit, December 31, 1998...... $ 1.111272 $ 0.858405 $ 0.799853 $ 1.048350
Non-qualified units
outstanding, December 31,
1998......................... 697,663 318,368 103,121 295,071
Net asset value per
non-qualified unit, December
31, 1998..................... $ 1.111272 $ 0.858405 $ 0.799853 $ 1.048350
<CAPTION>
GLOBAL AIT OPPENHEIMER OPPENHEIMER
INTERACTIVE/ MONEY AGGRESSIVE GROWTH &
TELECOMM MARKET GROWTH INCOME
---------------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
ASSETS:
Investment in shares of
Allmerica Investment Trust... $ -- $ 16,420 $ -- $ --
Investments in shares of The
Fulcrum Trust*............... 962,597 -- -- --
Investment in shares of AIM
Variable Insurance Funds,
Inc.......................... -- -- -- --
Investments in shares of
Delaware Group Premium Fund,
Inc.......................... -- -- -- --
Investment in shares of Lazard
Retirement Series, Inc....... -- -- -- --
Investments in shares of MFS
Variable Insurance Trust..... -- -- -- --
Investments in shares of
Oppenheimer Variable Account
Funds........................ -- -- 26 24
Investment in shares of PBHG
Insurance Series Fund,
Inc.......................... -- -- -- --
---------------- ----------- ----------- -----------
Total assets................ 962,597 16,420 26 24
LIABILITIES:.................. -- -- -- --
---------------- ----------- ----------- -----------
Net assets.................. $ 962,597 $ 16,420 $ 26 $ 24
---------------- ----------- ----------- -----------
---------------- ----------- ----------- -----------
Net asset distribution by
category:
Qualified variable annuity
contracts................. $ 362,511 $ 623 $ -- $ --
Non-qualified variable
annuity contracts......... 600,086 15,797 -- --
Value of investment by First
Allmerica Financial Life
Insurance Company
(Sponsor)................. -- -- 26 24
---------------- ----------- ----------- -----------
$ 962,597 $ 16,420 $ 26 $ 24
---------------- ----------- ----------- -----------
---------------- ----------- ----------- -----------
Qualified units outstanding,
December 31, 1998............ 255,234 593 -- --
Net asset value per qualified
unit, December 31, 1998...... $ 1.420307 $ 1.050243 $ 1.296291 $ 1.214270
Non-qualified units
outstanding, December 31,
1998......................... 422,505 15,042 20 20
Net asset value per
non-qualified unit, December
31, 1998..................... $ 1.420307 $ 1.050243 $ 1.296291 $ 1.214270
</TABLE>
* Name changed. See Note 1.
The accompanying notes are an integral part of these financial statements.
SA-1
<PAGE>
FULCRUM SEPARATE ACCOUNT
STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED)
DECEMBER 31, 1998
<TABLE>
<CAPTION>
DGPF MFS
SMALL CAP DGPF EMERGING MFS GROWTH
VALUE DELAWARE GROWTH WITH INCOME
----------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
ASSETS:
Investment in shares of Allmerica Investment
Trust...................................... $ -- $ -- $ -- $ --
Investments in shares of The Fulcrum
Trust*..................................... -- -- -- --
Investment in shares of AIM Variable
Insurance Funds, Inc....................... -- -- -- --
Investments in shares of Delaware Group
Premium Fund, Inc.......................... 24 23 -- --
Investment in shares of Lazard Retirement
Series, Inc................................ -- -- -- --
Investments in shares of MFS Variable
Insurance Trust............................ -- -- 27 24
Investments in shares of Oppenheimer
Variable Account Funds..................... -- -- -- --
Investment in shares of PBHG Insurance
Series Fund, Inc........................... -- -- -- --
----------- ----------- ----------- -------------
Total assets.............................. 24 23 27 24
LIABILITIES:................................ -- -- -- --
----------- ----------- ----------- -------------
Net assets.................................. $ 24 $ 23 $ 27 $ 24
----------- ----------- ----------- -------------
----------- ----------- ----------- -------------
Net asset distribution by category:
Qualified variable annuity contracts...... $ -- $ -- $ -- $ --
Non-qualified variable annuity
contracts............................... -- -- -- --
Value of investment by First Allmerica
Financial Life Insurance Company
(Sponsor)............................... 24 23 27 24
----------- ----------- ----------- -------------
$ 24 $ 23 $ 27 $ 24
----------- ----------- ----------- -------------
----------- ----------- ----------- -------------
Qualified units outstanding, December 31,
1998....................................... -- -- -- --
Net asset value per qualified unit, December
31, 1998................................... $ 1.203723 $ 1.174328 $ 1.327214 $ 1.204265
Non-qualified units outstanding, December
31, 1998................................... 20 20 20 20
Net asset value per non-qualified unit,
December 31, 1998.......................... $ 1.203723 $ 1.174328 $ 1.327214 $ 1.204265
<CAPTION>
LAZARD
RETIREMENT
INTERNATIONAL AIM V.I. PBHG
EQUITY VALUE SELECT 20
---------------- ----------- -----------
<S> <C> <C> <C>
ASSETS:
Investment in shares of Allmerica Investment
Trust...................................... $ -- $ -- $ --
Investments in shares of The Fulcrum
Trust*..................................... -- -- --
Investment in shares of AIM Variable
Insurance Funds, Inc....................... -- 26 --
Investments in shares of Delaware Group
Premium Fund, Inc.......................... -- -- --
Investment in shares of Lazard Retirement
Series, Inc................................ 22 -- --
Investments in shares of MFS Variable
Insurance Trust............................ -- -- --
Investments in shares of Oppenheimer
Variable Account Funds..................... -- -- --
Investment in shares of PBHG Insurance
Series Fund, Inc........................... -- -- 25
---------------- ----------- -----------
Total assets.............................. 22 26 25
LIABILITIES:................................ -- -- --
---------------- ----------- -----------
Net assets.................................. $ 22 $ 26 $ 25
---------------- ----------- -----------
---------------- ----------- -----------
Net asset distribution by category:
Qualified variable annuity contracts...... $ -- $ -- $ --
Non-qualified variable annuity
contracts............................... -- -- --
Value of investment by First Allmerica
Financial Life Insurance Company
(Sponsor)............................... 22 26 25
---------------- ----------- -----------
$ 22 $ 26 $ 25
---------------- ----------- -----------
---------------- ----------- -----------
Qualified units outstanding, December 31,
1998....................................... -- -- --
Net asset value per qualified unit, December
31, 1998................................... $ 1.118058 $ 1.298212 $ 1.259905
Non-qualified units outstanding, December
31, 1998................................... 20 20 20
Net asset value per non-qualified unit,
December 31, 1998.......................... $ 1.118058 $ 1.298212 $ 1.259905
</TABLE>
* Name changed. See Note 1.
The accompanying notes are an integral part of these financial statements.
SA-2
<PAGE>
FULCRUM SEPARATE ACCOUNT
STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
GROWTH
VALUE ---------------------------------
----------------------------------- YEAR
YEAR ENDED PERIOD FROM ENDED PERIOD FROM
12/31/98 9/30/97** TO 12/31/97 12/31/98 9/30/97** TO 12/31/97
----------- --------------------- --------- ---------------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME (LOSS):
Dividends................... $ -- $ 3,179 $ -- $ --
Mortality and expense risk
fees...................... (10,190) (1,321) (4,489) (707)
Administrative expense
fees...................... (1,222) (159) (538) (85)
----------- -------- --------- --------
Net investment income
(loss).................. (11,412) 1,699 (5,027) (792)
----------- -------- --------- --------
REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS:
Realized gain distributions
from portfolio sponsors... 77,363 28,456 -- --
Net realized gain (loss)
from sales of
investments............... (12,890) 18 (23,657) (102)
----------- -------- --------- --------
Net realized gain (loss).... 64,473 28,474 (23,657) (102)
Net unrealized gain
(loss).................... (14,912) (14,124) 5,830 (35,717)
----------- -------- --------- --------
Net realized and
unrealized gain
(loss).................. 49,561 14,350 (17,827) (35,819)
----------- -------- --------- --------
Net increase (decrease) in
net assets from
operations................ 38,149 16,049 (22,854) (36,611)
----------- -------- --------- --------
CONTRACT TRANSACTIONS:
Net purchase payments....... 620,346 488,996 211,721 306,757
Withdrawals................. (11,516) (1,658) (5,697) (788)
Contract benefits........... (11,955) -- -- --
Contract charges............ (320) -- (178) --
Transfers between
sub-accounts (including
fixed account), net....... 45,889 (1,284) (9,520) 1,987
Other transfers from (to)
the General Account....... (40,271) 4,861 (12,233) (138)
Net increase (decrease) in
investment by Sponsor..... -- -- -- --
----------- -------- --------- --------
Net increase (decrease) in
net assets from contract
transactions.............. 602,173 490,915 184,093 307,818
----------- -------- --------- --------
Net increase (decrease) in
net assets................ 640,322 506,964 161,239 271,207
NET ASSETS:
Beginning of year........... 506,964 -- 271,207 --
----------- -------- --------- --------
End of year................. $1,147,286 $506,964 $432,446 $271,207
----------- -------- --------- --------
----------- -------- --------- --------
<CAPTION>
INTERNATIONAL GROWTH STRATEGIC INCOME*
----------------------------------- ----------------------------------
YEAR YEAR
ENDED PERIOD FROM ENDED PERIOD FROM
12/31/98 10/3/97** TO 12/31/97 12/31/98 10/3/97** TO 12/31/97
--------- ----------------------- --------- ----------------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME (LOSS):
Dividends................... $ -- $ 365 $ 138 $ 453
Mortality and expense risk
fees...................... (1,076) (215) (1,100) (115)
Administrative expense
fees...................... (129) (26) (132) (14)
--------- ------- --------- -------
Net investment income
(loss).................. (1,205) 124 (1,094) 324
--------- ------- --------- -------
REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS:
Realized gain distributions
from portfolio sponsors... -- 196 6,160 189
Net realized gain (loss)
from sales of
investments............... (1,188) (42) 432 8
--------- ------- --------- -------
Net realized gain (loss).... (1,188) 154 6,592 197
Net unrealized gain
(loss).................... (4,868) (9,550) (946) (472)
--------- ------- --------- -------
Net realized and
unrealized gain
(loss).................. (6,056) (9,396) 5,646 (275)
--------- ------- --------- -------
Net increase (decrease) in
net assets from
operations................ (7,261) (9,272) 4,552 49
--------- ------- --------- -------
CONTRACT TRANSACTIONS:
Net purchase payments....... 44,492 83,313 309,745 42,089
Withdrawals................. (3,118) (521) (3,461) (443)
Contract benefits........... -- -- -- --
Contract charges............ (60) -- (55) --
Transfers between
sub-accounts (including
fixed account), net....... 6,974 1,725 (12,293) (870)
Other transfers from (to)
the General Account....... (871) -- (3,797) --
Net increase (decrease) in
investment by Sponsor..... -- -- -- --
--------- ------- --------- -------
Net increase (decrease) in
net assets from contract
transactions.............. 47,417 84,517 290,139 40,776
--------- ------- --------- -------
Net increase (decrease) in
net assets................ 40,156 75,245 294,691 40,825
NET ASSETS:
Beginning of year........... 75,245 -- 40,825 --
--------- ------- --------- -------
End of year................. $115,401 $75,245 $335,516 $40,825
--------- ------- --------- -------
--------- ------- --------- -------
</TABLE>
* Name changed. See Note 1.
** Date of initial investment.
The accompanying notes are an integral part of these financial statements.
SA-3
<PAGE>
FULCRUM SEPARATE ACCOUNT
STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
OPPENHEIMER OPPENHEIMER DGPF
GLOBAL AGGRESSIVE GROWTH & SMALL CAP
INTERACTIVE/TELECOMM AIT MONEY MARKET GROWTH INCOME VALUE
--------------------------- ------------------------- ------------ ------------ ------------
YEAR PERIOD FROM YEAR PERIOD FROM PERIOD FROM PERIOD FROM PERIOD FROM
ENDED 9/30/97** TO ENDED 10/3/97** TO 9/1/98** TO 9/1/98** TO 9/1/98** TO
12/31/98 12/31/97 12/31/98 12/31/97 12/31/98 12/31/98 12/31/98
--------- --------------- --------- ------------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME (LOSS):
Dividends................... $ -- $ 709 $ 1,760 $ 107 $ -- $ -- $ --
Mortality and expense risk
fees...................... (6,456) (533) (419) (25) -- -- --
Administrative expense
fees...................... (775) (64) (50) (3) -- -- --
--------- --------------- --------- ------ --- --- ---
Net investment income
(loss).................. (7,231) 112 1,291 79 -- -- --
--------- --------------- --------- ------ --- --- ---
REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS:
Realized gain distributions
from portfolio sponsors... 82,860 11,087 -- -- -- -- --
Net realized gain (loss)
from sales of
investments............... 4,378 68 -- -- -- -- --
--------- --------------- --------- ------ --- --- ---
Net realized gain (loss).... 87,238 11,155 -- -- -- -- --
Net unrealized gain
(loss).................... 80,929 3,297 -- -- 6 4 4
--------- --------------- --------- ------ --- --- ---
Net realized and
unrealized gain
(loss).................. 168,167 14,452 -- -- 6 4 4
--------- --------------- --------- ------ --- --- ---
Net increase (decrease) in
net assets from
operations................ 160,936 14,564 1,291 79 6 4 4
--------- --------------- --------- ------ --- --- ---
CONTRACT TRANSACTIONS:
Net purchase payments....... 525,115 216,875 107,124 8,292 -- -- --
Withdrawals................. (8,772) (866) (1,688) -- -- -- --
Contract benefits........... (8,336) -- -- -- -- -- --
Contract charges............ (342) -- (2) -- -- -- --
Transfers between
sub-accounts (including
fixed account), net....... 45,921 (1,544) (76,972) (11) -- -- --
Other transfers from (to)
the General Account....... 14,831 4,215 (21,693) -- -- -- --
Net increase (decrease) in
investment by Sponsor..... -- -- -- -- 20 20 20
--------- --------------- --------- ------ --- --- ---
Net increase (decrease) in
net assets from contract
transactions.............. 568,417 218,680 6,769 8,281 20 20 20
--------- --------------- --------- ------ --- --- ---
Net increase (decrease) in
net assets................ 729,353 233,244 8,060 8,360 26 24 24
NET ASSETS:
Beginning of year........... 233,244 -- 8,360 -- -- -- --
--------- --------------- --------- ------ --- --- ---
End of year................. $962,597 $233,244 $ 16,420 $8,360 $ 26 $ 24 $ 24
--------- --------------- --------- ------ --- --- ---
--------- --------------- --------- ------ --- --- ---
</TABLE>
** Date of initial investment.
The accompanying notes are an integral part of these financial statements.
SA-4
<PAGE>
FULCRUM SEPARATE ACCOUNT
STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
LAZARD
MFS MFS RETIREMENT
EMERGING GROWTH INTERNATIONAL AIM V.I.
DGPF DELAWARE GROWTH WITH INCOME EQUITIY VALUE
------------- ------------- ------------- ------------- -------------
PERIOD FROM PERIOD FROM PERIOD FROM PERIOD FROM PERIOD FROM
9/1/98** TO 9/1/98** TO 9/1/98** TO 9/1/98** TO 9/1/98** TO
12/31/98 12/31/98 12/31/98 12/31/98 12/31/98
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME (LOSS):
Dividends............................. $-- $-- $-- $-- $--
Mortality and expense risk fees....... -- -- -- -- --
Administrative expense fees........... -- -- -- -- --
--- --- --- --- ---
Net investment income (loss)........ -- -- -- -- --
--- --- --- --- ---
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
Realized gain distributions from
portfolio sponsors.................. -- -- -- -- 1
Net realized gain (loss) from sales of
investments......................... -- -- -- -- --
--- --- --- --- ---
Net realized gain (loss).............. -- -- -- -- 1
Net unrealized gain (loss)............ 3 7 4 2 5
--- --- --- --- ---
Net realized and unrealized gain
(loss)............................ 3 7 4 2 6
--- --- --- --- ---
Net increase (decrease) in net assets
from operations..................... 3 7 4 2 6
--- --- --- --- ---
CONTRACT TRANSACTIONS:
Net purchase payments................. -- -- -- -- --
Withdrawals........................... -- -- -- -- --
Contract benefits..................... -- -- -- -- --
Contract charges...................... -- -- -- -- --
Transfers between sub-accounts
(including fixed account), net...... -- -- -- -- --
Other transfers from (to) the General
Account............................. -- -- -- -- --
Net increase (decrease) in investment
by Sponsor.......................... 20 20 20 20 20
--- --- --- --- ---
Net increase (decrease) in net assets
from contract transactions.......... 20 20 20 20 20
--- --- --- --- ---
Net increase (decrease) in net
assets.............................. 23 27 24 22 26
NET ASSETS:
Beginning of year..................... -- -- -- -- --
--- --- --- --- ---
End of year........................... $23 $27 $24 $22 $26
--- --- --- --- ---
--- --- --- --- ---
<CAPTION>
PBHG SELECT
20
-------------
PERIOD FROM
11/2/98** TO
12/31/98
-------------
<S> <C>
INVESTMENT INCOME (LOSS):
Dividends............................. $--
Mortality and expense risk fees....... --
Administrative expense fees........... --
---
Net investment income (loss)........ --
---
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
Realized gain distributions from
portfolio sponsors.................. --
Net realized gain (loss) from sales of
investments......................... --
---
Net realized gain (loss).............. --
Net unrealized gain (loss)............ 5
---
Net realized and unrealized gain
(loss)............................ 5
---
Net increase (decrease) in net assets
from operations..................... 5
---
CONTRACT TRANSACTIONS:
Net purchase payments................. --
Withdrawals........................... --
Contract benefits..................... --
Contract charges...................... --
Transfers between sub-accounts
(including fixed account), net...... --
Other transfers from (to) the General
Account............................. --
Net increase (decrease) in investment
by Sponsor.......................... 20
---
Net increase (decrease) in net assets
from contract transactions.......... 20
---
Net increase (decrease) in net
assets.............................. 25
NET ASSETS:
Beginning of year..................... --
---
End of year........................... $25
---
---
</TABLE>
** Date of initial investment.
The accompanying notes are an integral part of these financial statements.
SA-5
<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),
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. The Company is a wholly-owned subsidiary of
Allmerica Financial Corporation (AFC). Under applicable insurance law, the
assets and liabilities of the Separate Account are clearly identified and
distinguished from the other assets and liabilities of the Company. The Separate
Account cannot be charged with liabilities arising out of any other business of
the Company.
The Separate Account is registered as a unit investment trust under the
Investment Company Act of 1940, as amended (the 1940 Act). The Separate Account
currently offers fifteen Sub-Accounts under the Fulcrum variable annuity
contracts. Each Sub-Account invests exclusively in a corresponding portfolio of
The Fulcrum Trust (formerly The Palladian-SM- Trust) or the Allmerica Investment
Trust (AIT) managed by Allmerica Financial Investment Management Services, Inc.
(AFIMS) (successor to Allmerica Investment Management Company, Inc.), a
wholly-owned subsidiary of the Company; or of the AIM Variable Insurance Funds,
Inc. (AVIF) managed by A I M Advisors, Inc.; or of the Delaware Group Premium
Fund, Inc. (DGPF) managed by Delaware Management Company; or of the Lazard
Retirement Series, Inc. (Lazard) managed by Lazard Asset Management; or of the
MFS-Registered Trademark- Variable Insurance Trust (MFS Trust) managed by
Massachusetts Financial Services Company; or of the Oppenheimer Variable Account
Funds (Oppenheimer) managed by OppenheimerFunds-SM-, Inc.; or of the PBHG
Insurance Series Fund, Inc. (PBHG) managed by Pilgrim Baxter & Associates, Ltd.
The Fulcrum Trust, AIT, AVIF, DGPF, Lazard, MFS Trust, Oppenheimer and PBHG (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 (the
Code), while a non-qualified contract is one that is not purchased in connection
with one of the indicated retirement plans. The tax treatment for certain
withdrawals or surrenders will vary according to whether they are made from a
qualified contract or a non-qualified contract.
At a meeting of shareholders held on June 8, 1998, shareholders of Global
Strategic Income Portfolio changed the portfolio's investment objective to
reduce the global emphasis, approved new non-fundamental investment policies
consistent with the new investment objective and changed the name of the
Portfolio to the Strategic Income Portfolio.
Certain prior year balances have been reclassified to conform with current
year presentation.
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 Funds. 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 Funds at net asset value.
FEDERAL INCOME TAXES -- The Company is taxed as a "life insurance company"
under Subchapter L of the Code and files a consolidated federal income tax
return. The Company anticipates no tax liability resulting
SA-6
<PAGE>
FULCRUM SEPARATE ACCOUNT
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
from the operations of the Separate Account. Therefore, no provision for income
taxes has been charged against the Separate Account.
NOTE 3 -- INVESTMENTS
The number of shares owned, aggregate cost, and net asset value per share of
each Sub-Account's investment in the Funds at December 31, 1998 were as follows:
<TABLE>
<CAPTION>
PORTFOLIO INFORMATION
--------------------------------
NET
ASSET
VALUE
NUMBER OF AGGREGATE PER
INVESTMENT PORTFOLIO SHARES COST SHARE
- ---------------------------------------- --------- ---------- --------
<S> <C> <C> <C>
Value................................... 84,858 $1,176,322 $13.520
Growth.................................. 36,007 462,333 12.010
International Growth.................... 12,908 129,819 8.940
Strategic Income*....................... 32,829 336,934 10.220
Global Interactive/Telecomm............. 60,693 878,371 15.860
AIT Money Market........................ 16,420 16,420 1.000
Oppenheimer Aggressive Growth........... 1 20 44.830
Oppenheimer Growth & Income............. 1 20 20.480
DGPF Small Cap Value.................... 1 20 16.450
DGPF Delaware........................... 1 20 20.040
MFS Emerging Growth..................... 1 20 21.470
MFS Growth With Income.................. 1 20 20.110
Lazard Retirement International
Equity................................. 2 20 11.230
AIM V.I. Value.......................... 1 21 26.250
PBHG Select 20.......................... 2 20 16.300
</TABLE>
* Name changed. See Note 1.
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 0.20% 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 and are paid to
the Company on a monthly basis.
A contract fee 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 currently waived for contracts issued to and
maintained by the trustee of a 401(k) plan.
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 by the Company to registered representatives of
Allmerica Investments and to certain independent broker-dealers. The current
series of contracts have a contingent
SA-7
<PAGE>
FULCRUM SEPARATE ACCOUNT
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 4 -- RELATED PARTY TRANSACTIONS (CONTINUED)
deferred sales charge and no deduction is made for sales charges at the time of
the sale. For the years ended December 31, 1998 and 1997, there were no
contingent deferred sales charges applicable to the Separate Account.
NOTE 5 -- CONTRACTOWNERS AND SPONSOR TRANSACTIONS
Transactions from contractowners and sponsor were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1998 1997
---------------------- ---------------------
UNITS AMOUNT UNITS AMOUNT
--------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Value
Issuance of Units.......................... 744,905 $ 809,186 486,272 $ 493,827
Redemption of Units...................... . (195,886) (207,013) (2,884) (2,912)
--------- ---------- -------- ----------
Net increase (decrease).................. 549,019 $ 602,173 483,388 $ 490,915
--------- ---------- -------- ----------
--------- ---------- -------- ----------
Growth
Issuance of Units.......................... 320,186 $ 286,829 314,013 $ 308,899
Redemption of Units...................... . (129,383) (102,736) (1,038) (1,081)
--------- ---------- -------- ----------
Net increase (decrease).................. 190,803 $ 184,093 312,975 $ 307,818
--------- ---------- -------- ----------
--------- ---------- -------- ----------
International Growth
Issuance of Units.......................... 71,260 $ 58,279 85,995 $ 85,089
Redemption of Units...................... . (12,354) (10,862) (624) (572)
--------- ---------- -------- ----------
Net increase (decrease).................. 58,906 $ 47,417 85,371 $ 84,517
--------- ---------- -------- ----------
--------- ---------- -------- ----------
Strategic Income*
Issuance of Units.......................... 303,837 $ 315,760 42,271 $ 42,154
Redemption of Units...................... . (24,691) (25,621) (1,375) (1,378)
--------- ---------- -------- ----------
Net increase (decrease).................. 279,146 $ 290,139 40,896 $ 40,776
--------- ---------- -------- ----------
--------- ---------- -------- ----------
Global Interactive/Telecomm
Issuance of Units.......................... 529,297 $ 649,822 213,343 $ 221,039
Redemption of Units...................... . (62,620) (81,405) (2,281) (2,359)
--------- ---------- -------- ----------
Net increase (decrease).................. 466,677 $ 568,417 211,062 $ 218,680
--------- ---------- -------- ----------
--------- ---------- -------- ----------
AIT Money Market
Issuance of Units.......................... 183,752 $ 188,317 8,290 $ 8,292
Redemption of Units...................... . (176,395) (181,548) (12) (11)
--------- ---------- -------- ----------
Net increase (decrease).................. 7,357 $ 6,769 8,278 $ 8,281
--------- ---------- -------- ----------
--------- ---------- -------- ----------
Oppenheimer Aggressive Growth
Issuance of Units.......................... 20 $ 20 -- $ --
Redemption of Units........................ -- -- -- --
--------- ---------- -------- ----------
Net increase (decrease).................. 20 $ 20 -- $ --
--------- ---------- -------- ----------
--------- ---------- -------- ----------
* Name changed. See Note 1.
</TABLE>
SA-8
<PAGE>
FULCRUM SEPARATE ACCOUNT
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 5 -- CONTRACTOWNERS AND SPONSOR TRANSACTIONS (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1998 1997
---------------------- ---------------------
UNITS AMOUNT UNITS AMOUNT
--------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Oppenheimer Growth & Income
Issuance of Units.......................... 20 $ 20 -- $ --
Redemption of Units........................ -- -- -- --
--------- ---------- -------- ----------
Net increase (decrease).................. 20 $ 20 -- $ --
--------- ---------- -------- ----------
--------- ---------- -------- ----------
DGPF Small Cap Value
Issuance of Units.......................... 20 $ 20 -- $ --
Redemption of Units........................ -- -- -- --
--------- ---------- -------- ----------
Net increase (decrease).................. 20 $ 20 -- $ --
--------- ---------- -------- ----------
--------- ---------- -------- ----------
DGPF Delaware
Issuance of Units.......................... 20 $ 20 -- $ --
Redemption of Units........................ -- -- -- --
--------- ---------- -------- ----------
Net increase (decrease).................. 20 $ 20 -- $ --
--------- ---------- -------- ----------
--------- ---------- -------- ----------
MFS Emerging Growth
Issuance of Units.......................... 20 $ 20 -- $ --
Redemption of Units........................ -- -- -- --
--------- ---------- -------- ----------
Net increase (decrease).................. 20 $ 20 -- $ --
--------- ---------- -------- ----------
--------- ---------- -------- ----------
MFS Growth With Income
Issuance of Units.......................... 20 $ 20 -- $ --
Redemption of Units........................ -- -- -- --
--------- ---------- -------- ----------
Net increase (decrease).................. 20 $ 20 -- $ --
--------- ---------- -------- ----------
--------- ---------- -------- ----------
Lazard Retirement International Equity
Issuance of Units.......................... 20 $ 20 -- $ --
Redemption of Units........................ -- -- -- --
--------- ---------- -------- ----------
Net increase (decrease).................. 20 $ 20 -- $ --
--------- ---------- -------- ----------
--------- ---------- -------- ----------
AIM V.I. Value
Issuance of Units.......................... 20 $ 20 -- $ --
Redemption of Units........................ -- -- -- --
--------- ---------- -------- ----------
Net increase (decrease).................. 20 $ 20 -- $ --
--------- ---------- -------- ----------
--------- ---------- -------- ----------
PBHG Select 20
Issuance of Units.......................... 20 $ 20 -- $ --
Redemption of Units........................ -- -- -- --
--------- ---------- -------- ----------
Net increase (decrease).................. 20 $ 20 -- $ --
--------- ---------- -------- ----------
--------- ---------- -------- ----------
</TABLE>
SA-9
<PAGE>
FULCRUM SEPARATE ACCOUNT
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 6 -- DIVERSIFICATION REQUIREMENT
Under the provisions of Section 817(h) of the 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.
NOTE 7 -- PURCHASES AND SALES OF SECURITIES
Cost of purchases and proceeds from sales of shares of the Funds during the
year ended December 31, 1998 were as follows:
<TABLE>
<CAPTION>
INVESTMENT PORTFOLIO PURCHASES SALES
- ------------------------------------------------------- ------------ -----------
<S> <C> <C>
Value.................................................. $ 890,274 $ 222,150
Growth................................................. 291,150 112,084
International Growth................................... 57,347 11,135
Strategic Income*...................................... 320,181 24,976
Global Interactive/Telecomm............................ 740,067 96,021
AIT Money Market....................................... 189,250 181,190
Oppenheimer Aggressive Growth.......................... 20 --
Oppenheimer Growth & Income............................ 20 --
DGPF Small Cap Value................................... 20 --
DGPF Delaware.......................................... 20 --
MFS Emerging Growth.................................... 20 --
MFS Growth With Income................................. 20 --
Lazard Retirement International Equity................. 20 --
AIM V.I. Value......................................... 21 --
PBHG Select 20......................................... 20 --
------------ -----------
Totals............................................... $ 2,488,450 $ 647,556
------------ -----------
------------ -----------
</TABLE>
* Name changed. See Note 1.
SA-10
<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 (a) 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.
(b) Directors' Power of Attorney is filed herewith.
EXHIBIT 9 Opinion of Counsel is filed herewith.
<PAGE>
EXHIBIT 10 Consent of Independent Accountants is filed herewith.
EXHIBIT 11 None.
EXHIBIT 12 None.
EXHIBIT 13 Not Applicable.
EXHIBIT 14 Not Applicable
EXHIBIT 15 (A) Participation Agreement with 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 with 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) 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. Participation Agreement with Delaware Group
Premium Group 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.
(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.
(I) 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.
was previously filed on October 15, 1998 in Post-Effective
Amendment No. 3, and is incorporated by reference herein.
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
<PAGE>
DIRECTORS AND PRINCIPAL OFFICERS OF THE COMPANY
<TABLE>
<CAPTION>
Name and Position With Company Principal Occupation(s) During Past Five Years
- ------------------------------------------ ----------------------------------------------
<S> <C>
Bruce C. Anderson Director (since 1996), Vice President (since 1984) and Assistant
Director, Vice President and Secretary (since 1992) of First Allmerica
Assistant Secretary
Abigail M. Armstrong Secretary (since 1996) and Counsel (since 1991) of First Allmerica; Secretary
Secretary and Counsel (since 1988) and Counsel (since 1994) of Allmerica Investments, Inc.; and
Secretary (since 1990) of Allmerica Financial Investment Management Services, Inc.
Warren E. Barnes Vice President (since 1996) and Corporate Controller (since 1998) of First Allmerica
Vice President and
Corporate Controller
Robert E. Bruce Director and Chief Information Officer (since 1997) and Vice President (since
Director, Vice President and Chief 1995) of First Allmerica; and Corporate Manager (1979 to 1995) of Digital
Information Officer Equipment Corporation
John P. Kavanaugh Director and Chief Investment Officer (since 1996) and Vice President (since
Director, Vice President and 1991) of First Allmerica; and Vice President (since 1998) of Allmerica Financial
Chief Investment Officer Investment Management Services, Inc.
John F. Kelly Director (since 1996), Senior Vice President (since 1986), General Counsel (since
Director, Senior Vice President, 1981) and Assistant Secretary (since 1991) of First Allmerica; Director (since
General Counsel and Assistant 1985) of Allmerica Investments, Inc.; and Director (since 1990) of Allmerica
Secretary Financial Investment Management Services, Inc.
J. Barry May Director (since 1996) of First Allmerica; Director and President (since 1996) of
Director The Hanover Insurance Company; and Vice President (1993 to 1996) of The Hanover
Insurance Company
James R. McAuliffe Director (since 1996) of First Allmerica; Director (since 1992), President (since
Director 1994) and Chief Executive Officer (since 1996) of Citizens Insurance Company of America
John F. O'Brien Director, President and Chief Executive Officer (since 1989) of First Allmerica;
Director, President and Chief Director (since 1989) of Allmerica Investments, Inc.; and Director and Chairman
Executive Officer of the Board (since 1990) of Allmerica Financial Investment Management Services, Inc.
Edward J. Parry, III Director and Chief Financial Officer (since 1996) and Vice President and
Director, Vice President, Treasurer (since 1993) of First Allmerica; Treasurer (since 1993) of Allmerica
Chief Financial Officer and Investments, Inc.; and Treasurer (since 1993) of Allmerica Financial Investment
Treasurer Management Services, Inc.
Richard M. Reilly Director (since 1996) and Vice President (since 1990) of First Allmerica;
Director and Vice Presidentn Director (since 1990) of Allmerica Investments, Inc.; and Director and President
(since 1998) of Allmerica Financial Investment Management Services, Inc.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Name and Position With Company Principal Occupation(s) During Past Five Years
- ------------------------------------------ ----------------------------------------------
<S> <C>
Robert P. Restrepo, Jr. Director and Vice President (since 1998) of First Allmerica; Chief Executive
Director and Vice President Officer (1996 to 1998) of Travelers Property & Casualty; Senior Vice President
(1993 to 1996) of Aetna Life & Casualty Company
Eric A. Simonsen Director (since 1996) and Vice President (since 1990) of First Allmerica;
Director and Vice President Director (since 1991) of Allmerica Investments, Inc.; and Director (since 1991)
of Allmerica Financial Investment Management Services, Inc.
Phillip E. Soule Director (since 1996) and Vice President (since 1987) of First Allmerica
Director and Vice President
</TABLE>
<PAGE>
ITEM 26. PERSONS UNDER COMMON CONTROL WITH REGISTRANT
<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%
SMA First Sterling
Financial Corp. Reinsurance
Company
Limited
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%
APC The Hanover Allmerica Citizens
Funding Corp. Insurance Financial Insurance
Company Insurance Company of
Brokers, Inc. Illinois
Massachusetts New Hampshire Massachusetts Illinois
|
______________________________________________________________________________________________________________________
| | | | |
100% 100% 100% 100% 82.5% 100%
Allmerica Allmerica The Hanover Hanover Texas Citizens Massachusetts
Financial 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>
<PAGE>
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
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
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
NAME ADDRESS TYPE OF BUSINESS
- ----------------------------------------- ----------------------- -----------------------------
<S> <C> <C>
Allmerica Financial Life Insurance and 440 Lincoln Street Life insurance, accident and
Annuity Company (formerly known Worcester MA 01653 health insurance, annuities,variable
as SMA Life Assurance Company) 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.
(formerly known as Allmerica Worcester MA 01653
Institutional Services, 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
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
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
NAME ADDRESS TYPE OF BUSINESS
- ----------------------------------------- ----------------------- -----------------------------
<S> <C> <C>
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
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 Llyod'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
Massachusetts Bay Insurance Company 100 North Parkway Multi-line property and casualty
Worcester MA 01605 insurance
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
NAME ADDRESS TYPE OF BUSINESS
- ----------------------------------------- ----------------------- -----------------------------
<S> <C> <C>
SMA Financial Corp. 440 Lincoln Street Holding Company
Worcester MA 01653
Sterling Risk Management Services, Inc. 440 Lincoln Street Risk management services
Worcester MA 01653
</TABLE>
<PAGE>
ITEM 27.NUMBER OF CONTRACT OWNERS
As of February 28, 1999 there were 47 Contract holders of qualified Contracts
and 47 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:
X VEL Account, VEL II Account, VEL Account III, Select Account III,
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, and
Allmerica Select Separate Account of Allmerica Financial Life
Insurance and Annuity Company
X Inheiritage Account, VEL II Account, Separate Account I, Separate
Account VA-K, Separate Account VA-P, Allmerica Select Separate
Account II, 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
Phillip L. Heffernan Vice President
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Name Position Or Office With Underwriter
- -------------------------- -----------------------------------
<S> <C>
John F. Kelly Director
Daniel Mastrototaro Vice President
William F. Monroe, Jr Vice President
David J. Mueller Vice President and Controller
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.
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,
<PAGE>
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.
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 Post-Effective Amendment to the
Registration Statement pursuant to Rule 485(b) under the Securities Act of
1933 and has duly caused this Post-Effective Amendment to the Registration
Statement to be signed on its behalf by the undersigned, thereto duly
authorized, in the City of Worcester, and Commonwealth of Massachusetts, on
the 2nd day of April, 1999.
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
Post-Effective Amendment to the Registration Statement has been signed below
by the following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signatures Title Date
- ---------- ----- ----
<S> <C> <C>
/s/ Warren E. Barnes Vice President and Corporate Controller April 2, 1999
- ------------------------------
Warren E. Barnes
/s/ Edward J. Parry III Director, Vice President, Chief Financial April 2, 1999
- ------------------------------ Officer and Treasurer
Edward J. Parry III
/s/ Richard M. Reilly Director and Vice President April 2, 1999
- ------------------------------
Richard M. Reilly
John F. O'Brien* Director, President and Chief Executive April 2, 1999
- ------------------------------ Officer
Bruce C. Anderson* Director and Vice President April 2, 1999
- ------------------------------
Robert E. Bruce* Director, Vice President and Chief April 2, 1999
- ------------------------------ Information Officer
John P. Kavanaugh* Director, Vice President and April 2, 1999
- ------------------------------ Chief Investment Officer
John F. Kelly* Director, Senior Vice President and April 2, 1999
- ------------------------------ General Counsel
J. Barry May* Director April 2, 1999
- ------------------------------
James R. McAuliffe* Director April 2, 1999
- ------------------------------
Robert P. Restrepo, Jr.* Director and Vice President April 2, 1999
- ------------------------------
Eric A. Simonsen* Director and Vice President April 2, 1999
- ------------------------------
Phillip E. Soule* Director and Vice President April 2, 1999
- ------------------------------
</TABLE>
*Sheila B. St. Hilaire, by signing her name hereto, does hereby sign this
document on behalf of each of the above-named Directors and Officers of the
Registrant pursuant to the Power of Attorney dated April 1, 1999 duly
executed by such persons.
<PAGE>
/s/ Sheila B. St. Hilaire
- ---------------------------------------
Sheila B. St. Hilaire, Attorney-in-Fact
(333-16929)
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EXHIBIT TABLE
Exhibit 8(b) Directors' Power of Attorney
Exhibit 9 Opinion of Counsel
Exhibit 10 Consent of Independent Accountants
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POWER OF ATTORNEY
We, the undersigned, hereby severally constitute and appoint Richard M. Reilly,
John F. Kelly, Joseph W. MacDougall, Jr., and Sheila B. St. Hilaire, and each of
them singly, our true and lawful attorneys, with full power to them and each of
them, to sign for us, and in our names and in any and all capacities, any and
all amendments, including post-effective amendments, to the Registration
Statements on Form N-4 of Separate Account VA-K, Separate Account VA-P,
Allmerica Select Separate Account, Separate Account KG, Separate Account KGC and
Fulcrum Separate Account of First Allmerica Financial Life Insurance Company,
and to file the same with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorneys and each of them, acting alone, full power and authority to do
and perform each and every act and thing requisite or necessary to be done in
the premises, as fully to all intents and purposes as he or she might or could
do in person, hereby ratifying and confirming all that said attorneys or any of
them may lawfully do or cause to be done by virtue hereof. Witness our hands on
the date set forth below.
Signature Title Date
- --------- ----- ----
/s/ John F. O'Brien Director, President and Chief Executive 4/1/99
- ------------------------------ Officer ------
John F. O'Brien
/s/ Bruce C. Anderson Director and Vice President 4/1/99
- ------------------------------ ------
Bruce C. Anderson
/s/ Robert E. Bruce Director, Vice President and 4/1/99
- ------------------------------ Chief Information Officer ------
Robert E. Bruce
/s/ John P. Kavanaugh Director, Vice President and 4/1/99
- ------------------------------ Chief Investment Officer ------
John P. Kavanaugh
/s/ John F. Kelly Director, Senior Vice President and 4/1/99
- ------------------------------ General Counsel ------
John F. Kelly
/s/ J. Barry May Director 4/1/99
- ------------------------------ ------
J. Barry May
/s/ James R. McAuliffe Director 4/1/99
- ------------------------------ ------
James R. McAuliffe
/s/ Edward J. Parry, III Director, Vice President, Chief 4/1/99
- ------------------------------ Financial Officer and Treasurer ------
Edward J. Parry, III
/s/ Richard M. Reilly Director and Vice President 4/1/99
- ------------------------------ ------
Richard M. Reilly
/s/ Robert P. Restrepo, Jr. Director and Vice President 4/1/99
- ------------------------------ ------
Robert P. Restrepo, Jr.
/s/ Eric A. Simonsen
- ------------------------------ Director and Vice President 4/1/99
Eric A. Simonsen ------
/s/ Phillip E. Soule Director and Vice President 4/1/99
- ------------------------------ ------
Phillip E. Soule
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April 1, 1999
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 Assistant Vice President and Counsel of First Allmerica
Financial Life Insurance Company (the "Company"), I have participated in the
preparation of this 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 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 variable annuity contracts, when issued in accordance with the
Prospectus contained in the Post-Effective Amendment to the Registration
Statement and upon compliance with applicable local law, will be legal
and binding obligations of the Company in accordance with their terms and
when sold will be legally issued, fully paid and non-assessable.
In arriving at the foregoing opinion, I have made such examination of law and
examined such records and other documents as in my judgment are necessary or
appropriate.
I hereby consent to the filing of this opinion as an exhibit to this
Post-Effective Amendment to the Registration Statement for Fulcrum Separate
Account on Form N-4 filed under the Securities Act of 1933.
Very truly yours,
/s/ Sheila B. St. Hilaire
Sheila B. St. Hilaire
Assistant Vice President and Counsel
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CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Statement of Additional Information
constituting part of this Post-Effective Amendment No. 4 to the Registration
Statement of Fulcrum Separate Account of First Allmerica Financial Life
Insurance Company on Form N-4 of our report dated February 2, 1999, except
for paragraph 2 of Note 18 and Note 20, which are as of March 19, 1999 and
April 1, 1999, respectively, relating to the financial statements of First
Allmerica Financial Life Insurance Company, and our report dated March 26,
1999, 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
April 22, 1999
