<PAGE>
Registration No. 333-15569
811-07913
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-6
FOR REGISTRATION UNDER THE SECURITIES ACT OF 1933 OF
SECURITIES OF UNIT INVESTMENT TRUSTS REGISTERED ON FORM
N8B-2
Post-Effective Amendment No. 1
FULCRUM VARIABLE LIFE SEPARATE ACCOUNT
OF ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(Exact Name of Registrant)
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
440 Lincoln Street
Worcester, MA 01653
(Address of Principal Executive Office)
Abigail M. Armstrong, Secretary and Counsel
Allmerica Financial Life Insurance and Annuity Company
440 Lincoln Street
Worcester, MA 01653
(Name and Address of Agent for Service of Process)
It is proposed that this filing will become effective:
_____immediately upon filing pursuant to paragraph (b)
__X__on May 1, 1998 pursuant to paragraph (b)
_____60 days after filing pursuant to paragraph (a) (1)
_____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.
FLEXIBLE PREMIUM VARIABLE LIFE
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 is
being registered under the Securities Act of 1933 ("1933 Act"). The 24f-2 Notice
for the issuer's fiscal year ended December 31, 1997 was filed on or before
March 30, 1998.
<PAGE>
RECONCILIATION AND TIE BETWEEN ITEMS
IN FORM N-8b-2 AND THE PROSPECTUS
ITEM NO. OF
FORM N-8b-2 CAPTION IN PROSPECTUS
- ----------- ---------------------
1 . . . . . . . . . Cover Page
2 . . . . . . . . . Cover Page
3 . . . . . . . . . Not Applicable
4 . . . . . . . . . Distribution
5 . . . . . . . . . Allmerica Financial, The Variable Account
6 . . . . . . . . . The Variable Account
7 . . . . . . . . . Not Applicable
8 . . . . . . . . . Not Applicable
9 . . . . . . . . . Legal Proceedings
10. . . . . . . . . Summary; Description of Allmerica Financial, The Variable
Account, The Palladian Trust, and Allmerica Investment
Trust; The Contract; Contract Termination and Reinstatement;
Other Contract Provisions
11. . . . . . . . . Summary; Allmerica Investment Trust; Investment Objectives
and Policies
12. . . . . . . . . Summary; Allmerica Investment Trust
13. . . . . . . . . Summary; Allmerica Investment Trust; Investment Advisory
Services to Allmerica Investment Trust; Charges and
Deductions
14. . . . . . . . . Summary; Application for a Contract
15. . . . . . . . . Summary; Application for a Contract; Premium Payments;
Allocation of Net Premiums
16. . . . . . . . . The Variable Account; Allmerica Investment Trust; Allocation
of Net Premiums
17. . . . . . . . . Summary; Surrender; Partial Withdrawal; Charges and
Deductions; Contract Termination and Reinstatement
18. . . . . . . . . The Variable Account; Allmerica Investment Trust; Premium
Payments
19. . . . . . . . . Reports; Voting Rights
20. . . . . . . . . Not Applicable
21. . . . . . . . . Summary; Contract Loans; Other Contract Provisions
22. . . . . . . . . Other Contract Provisions
23. . . . . . . . . Not Required
24. . . . . . . . . Other Contract Provisions
25. . . . . . . . . Allmerica Financial
26. . . . . . . . . Not Applicable
27. . . . . . . . . Allmerica Financial
28. . . . . . . . . Directors and Principal Officers of Allmerica Financial
29. . . . . . . . . Allmerica Financial
30. . . . . . . . . Not Applicable
31. . . . . . . . . Not Applicable
32. . . . . . . . . Not Applicable
33. . . . . . . . . Not Applicable
34. . . . . . . . . Not Applicable
35. . . . . . . . . Distribution
36. . . . . . . . . Not Applicable
37. . . . . . . . . Not Applicable
38. . . . . . . . . Summary; Distribution
39. . . . . . . . . Summary; Distribution
40. . . . . . . . . Not Applicable
41. . . . . . . . . Allmerica Financial; Distribution
42. . . . . . . . . Not Applicable
43. . . . . . . . . Not Applicable
<PAGE>
44. . . . . . . . . Premium Payments; Contract Value and Cash Surrender Value
45. . . . . . . . . Not Applicable
46. . . . . . . . . Contract Value and Cash Surrender Value; Federal Tax
Considerations
47. . . . . . . . . Allmerica Financial
48. . . . . . . . . Not Applicable
49. . . . . . . . . Not Applicable
50. . . . . . . . . The Variable Account
51. . . . . . . . . Cover Page; Summary; Charges and Deductions; The Contract;
Contract Termination and Reinstatement; Other Contract
Provisions
52. . . . . . . . . Addition, Deletion or Substitution of Investments
53. . . . . . . . . Federal Tax Considerations
54. . . . . . . . . Not Applicable
55. . . . . . . . . Not Applicable
56. . . . . . . . . Not Applicable
57. . . . . . . . . Not Applicable
58. . . . . . . . . Not Applicable
59. . . . . . . . . Not Applicable
<PAGE>
THE FULCRUM FUND-SM- NEXT GENERATION
A MODIFIED SINGLE PAYMENT VARIABLE LIFE INSURANCE CONTRACT
This Prospectus describes THE FULCRUM FUND -SM- NEXT GENERATION contracts ("the
Contract"), a modified single payment variable life insurance contract offered
by Allmerica Financial Life Insurance and Annuity Company ("we," "our," "us" or
"Company"). The Contract provides for life insurance coverage and for the
accumulation of a Contract Value. The Contract requires the Contract Owner to
make an initial Payment of at least $25,000.
Contract Value may accumulate on a variable basis in the Contract's variable
account, known as the Fulcrum Variable Life Separate Account ("Variable
Account"). The assets of the Variable Account are divided into sub-accounts
("Sub-Accounts"), each investing exclusively in shares of one of the series of
an underlying investment company. The following portfolios of THE PALLADIAN-SM-
TRUST ("The Palladian-SM- Trust" or "Palladian") are offered under the Contract:
VALUE PORTFOLIO
GROWTH PORTFOLIO
INTERNATIONAL GROWTH PORTFOLIO
GLOBAL STRATEGIC INCOME PORTFOLIO
GLOBAL INTERACTIVE/TELECOMM PORTFOLIO
The following series of ALLMERICA INVESTMENT TRUST ("Trust") is offered under
the Contract:
MONEY MARKET FUND
Contract Values may also be allocated to the Fixed Account, which is part of the
Company's General Account. Amounts allocated to the Fixed Account earn interest
at a guaranteed rate from the date allocated to the next Contract anniversary.
Each Contract is a "modified endowment contract" for federal income tax
purposes, except in certain circumstances described in FEDERAL TAX
CONSIDERATIONS. A loan, distribution or other amounts received from a modified
endowment contract during the life of the Insured will be taxed to the extent of
accumulated income in the Contract. Death Benefits under a modified endowment
contract, however, are generally not subject to federal income tax, except in
certain cases described in FEDERAL TAX CONSIDERATIONS.
IT MAY NOT BE ADVANTAGEOUS TO REPLACE EXISTING INSURANCE WITH THE CONTRACT. THIS
PROSPECTUS IS VALID ONLY WHEN ACCOMPANIED BY CURRENT PROSPECTUSES OF THE
PALLADIAN-SM- TRUST AND ALLMERICA INVESTMENT TRUST. INVESTORS SHOULD RETAIN A
COPY OF THIS PROSPECTUS FOR FUTURE REFERENCE.
THE SECURITIES AND EXCHANGE COMMISSION AND STATE SECURITIES COMMISSIONS HAVE NOT
APPROVED OR DISAPPROVED THESE SECURITIES OR PASSED ON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE CONTRACTS ARE OBLIGATIONS OF ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY
COMPANY, AND ARE DISTRIBUTED BY ALLMERICA INVESTMENTS, INC. THE CONTRACTS ARE
NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY BANK OR CREDIT
UNION. THE CONTRACTS ARE NOT INSURED BY THE U.S. GOVERNMENT, THE FEDERAL DEPOSIT
INSURANCE CORPORATION (FDIC), OR ANY OTHER FEDERAL AGENCY. INVESTMENTS IN THE
CONTRACTS ARE SUBJECT TO VARIOUS RISKS, INCLUDING THE FLUCTUATION OF VALUE AND
POSSIBLE LOSS OF PRINCIPAL.
DATED MAY 1, 1998
440 LINCOLN STREET, WORCESTER, MASSACHUSETTS 01653
(508) 855-1000
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TABLE OF CONTENTS
<TABLE>
<S> <C>
SPECIAL TERMS.............................................................. 3
SUMMARY.................................................................... 6
DESCRIPTION OF ALLMERICA FINANCIAL, THE VARIABLE ACCOUNT,
THE PALLADIAN-SM- TRUST AND ALLMERICA INVESTMENT TRUST.................... 14
Allmerica Financial...................................................... 14
The Variable Account..................................................... 14
The Palladian-SM- Trust.................................................. 14
Allmerica Investment Trust............................................... 15
INVESTMENT OBJECTIVES AND POLICIES......................................... 16
THE CONTRACT............................................................... 17
Application for a Contract............................................... 17
Free-Look Period......................................................... 17
Conversion Privilege..................................................... 17
Payments................................................................. 18
Allocation of Net Payments............................................... 18
Transfer Privilege....................................................... 18
Death Benefit............................................................ 19
Contract Value........................................................... 20
Payment Options.......................................................... 22
Optional Insurance Benefits.............................................. 22
Surrender................................................................ 22
Partial Withdrawal....................................................... 22
CHARGES AND DEDUCTIONS..................................................... 23
Monthly Deductions....................................................... 23
Daily Deductions......................................................... 24
Surrender Charge......................................................... 24
Partial Withdrawal Costs................................................. 25
Transfer Charges......................................................... 25
CONTRACT LOANS............................................................. 25
CONTRACT TERMINATION AND REINSTATEMENT..................................... 26
OTHER CONTRACT PROVISIONS.................................................. 27
FEDERAL TAX CONSIDERATIONS................................................. 28
Allmerica Financial and The Variable Account............................. 28
Taxation of the Contracts................................................ 28
VOTING RIGHTS.............................................................. 30
DIRECTORS AND PRINCIPAL OFFICERS........................................... 31
DISTRIBUTION............................................................... 32
REPORTS.................................................................... 32
PERFORMANCE INFORMATION.................................................... 32
LEGAL PROCEEDINGS.......................................................... 34
ADDITION, DELETION OR SUBSTITUTION OF INVESTMENTS.......................... 34
FURTHER INFORMATION........................................................ 34
INDEPENDENT ACCOUNTANTS.................................................... 35
MORE INFORMATION ABOUT THE FIXED ACCOUNT................................... 35
FINANCIAL STATEMENTS....................................................... 35
APPENDIX A -- GUIDELINE MINIMUM SUM INSURED TABLE.......................... A-1
APPENDIX B -- OPTIONAL INSURANCE BENEFITS.................................. B-1
APPENDIX C -- PAYMENT OPTIONS.............................................. C-1
APPENDIX D -- ILLUSTRATIONS................................................ D-1
</TABLE>
2
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SPECIAL TERMS
AGE: how old the Insured is on his/her last birthday measured on the Date of
Issue and each Contract anniversary.
ALLMERICA FINANCIAL: Allmerica Financial Life Insurance and Annuity Company.
"We," "our," "us" and "Company" refer to Allmerica Financial in this Prospectus.
BENEFICIARY: the person or persons you name to receive the Net Death Benefit
when the Insured dies.
CONTRACT OWNER: the person who may exercise all rights under the Contract, with
the consent of any irrevocable Beneficiary. "You" and "your" refer to the
Contract Owner in this Prospectus.
CONTRACT VALUE: the total value of your Contract. It is the SUM of the:
- Value of the units of the Sub-Accounts credited to your Contract; PLUS
- Accumulation in the Fixed Account credited to the Contract.
DATE OF ISSUE: the date the Contract was issued, used to measure the Monthly
Processing Date, Contract months, Contract years and Contract anniversaries.
DEATH BENEFIT: the Face Amount (the amount of insurance determined by your
Payment) or the Guideline Minimum Sum Insured ( the minimum death benefit
federal law requires), whichever is greater.
EVIDENCE OF INSURABILITY: information, including medical information, used to
decide the Insured's Underwriting Class.
FACE AMOUNT: the amount of insurance coverage. The Face Amount is shown in your
Contract.
FINAL PAYMENT DATE: the Contract anniversary before the Insured's 100th
birthday. After this date, no Payments may be made and the Net Death Benefit is
the Contract value less any Outstanding Loan.
FIXED ACCOUNT: a guaranteed account of the General Account that guarantees
principal and a fixed minimum interest rate.
FUNDS: the portfolios of The Palladian-SM- Trust and the fund of Allmerica
Investment Trust which are offered under the Contract. These are the Value
Portfolio, Growth Portfolio, International Growth Portfolio, Global Strategic
Income Portfolio, and Global Interactive/Telecomm Portfolio of The Palladian-SM-
Trust and the Money Market Fund of Allmerica Investment Trust.
GENERAL ACCOUNT: all our assets other than those held in separate investment
accounts.
GUIDELINE MINIMUM SUM INSURED: the minimum death benefit required to qualify the
Contract as "life insurance" under federal tax laws. The guideline minimum sum
insured is the PRODUCT of
- The Contract Value TIMES
- A percentage based on the Insured's Age
GUIDELINE SINGLE PREMIUM: used to determine the Face Amount under the Contract.
INSURED: the person or persons covered under the Contract. If more than one
person is named, all provisions of the Contract that are based on the death of
the Insured will be based on the date of death of the last surviving Insured.
3
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ISSUANCE AND ACCEPTANCE: the date we mail the Contract if the application is
approved with no changes requiring your consent; otherwise, the date we receive
your written consent to any changes.
LOAN VALUE: the maximum amount you may borrow under the Contract.
MONTHLY DEDUCTIONS: the amount of money that we deduct from the Contract Value
each month to pay for the Monthly Maintenance Fee, Administration Charge,
Monthly Insurance Protection Charge, Distribution Charge and the Federal and
State Payment Tax Charge.
MONTHLY INSURANCE PROTECTION CHARGE: the amount of money that we deduct from the
Contract Value each month to pay for the insurance.
MONTHLY PROCESSING DATE: the date, shown in your Contract, when Monthly
Deductions are deducted.
NET DEATH BENEFIT: Before the Final Payment Date, the Net Death Benefit is:
- The Death Benefit; MINUS
- Any Outstanding Loan on the Insured's death, rider charges and Monthly
Deductions due and unpaid through the Contract month in which the Insured
dies, as well as any partial withdrawal costs and surrender charges.
After the Final Payment Date, the Net Death Benefit is:
- The Contract Value; MINUS
- Any Outstanding Loan on the Insured's death.
OUTSTANDING LOAN: all unpaid Contract loans plus loan interest due or accrued.
PAYMENT: the payment you must make to us.
PRINCIPAL OFFICE: our office at 440 Lincoln Street, Worcester, Massachusetts
01653.
PRO-RATA ALLOCATION: an allocation among the Fixed Account and the Sub-Accounts
of the Variable Account in the same proportion that, on the date of allocation,
the Contract Value in the Fixed Account (other than value subject to Outstanding
Loan) and the Contract Value in each Sub-Account bear to the total Contract
Value.
SECOND-TO-DIE: the Contract may be issued as a joint survivorship
("Second-to-Die") policy. Life insurance coverage is provided for two Insureds,
with death benefits payable at the death of the last surviving Insured.
SUB-ACCOUNT: a subdivision of the Variable Account investing exclusively in the
shares of a Fund.
SURRENDER VALUE: the amount payable on a full surrender. It is the Contract
Value less any Outstanding Loan and surrender charges.
UNDERWRITING CLASS: the insurance risk classification that we assign the Insured
based on the information in the application and other Evidence of Insurability
we consider. The Insured's Underwriting Class will affect the Monthly Insurance
Protection Charge.
UNIT: a measure of your interest in a Sub-Account.
4
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VALUATION DATE: any day on which the net asset value of the shares of any Funds
and Unit values of any Sub-Accounts are computed. Valuation Dates currently
occur on:
- Each day the New York Stock Exchange is open for trading; and
- Other days (other than a day during which no Payment, partial withdrawal
or surrender of a Contract was received) when there is a sufficient degree
of trading in a Fund's portfolio securities so that the current net asset
value of the Sub-Accounts may be materially affected.
VALUATION PERIOD: the interval between two consecutive Valuation Dates.
VARIABLE ACCOUNT: Fulcrum Variable Life Separate Account, one of Allmerica
Financial's separate investment accounts.
WRITTEN REQUEST: your request in writing, satisfactory to us, received at our
Principal Office.
5
<PAGE>
SUMMARY
WHAT IS THE CONTRACT'S OBJECTIVE?
The objective of the Contract is to give permanent life insurance protection and
to help you build assets tax deferred. Benefits available through the Contract
include:
- A life insurance benefit that can protect your family;
- Payment options that can guarantee an income for life, if you want to use
your Contract for retirement income;
- A personalized investment portfolio you may tailor to meet your needs,
time frame and risk tolerance level;
- Experienced professional investment advisers who are compensated on an
incentive fee basis; and
- Tax deferral on earnings while your money is accumulating.
The Contract combines features and benefits of traditional life insurance with
the advantages of professional money management. However, unlike the fixed
benefits of ordinary life insurance, the Contract Value will increase or
decrease depending on investment results. Unlike traditional insurance policies,
the Contract has no fixed schedule for payments.
WHO ARE THE KEY PERSONS UNDER THE CONTRACT?
The Contract is a contract between you and us. Each Contract has a Contract
Owner ("you"), the Insured and a Beneficiary. As Contract Owner, you make the
payments, choose investment allocations, and select the Insured and Beneficiary.
The Insured is the person covered under the Contract. The Beneficiary is the
person who receives the Net Death Benefit when the Insured dies.
WHAT HAPPENS WHEN THE INSURED DIES?
We will pay the Net Death Benefit to the Beneficiary when the Insured dies while
the Contract is in effect. If the Contract was issued as a Second-to-Die policy,
the Net Death Benefit will be paid on the death of the last surviving Insured.
The Death Benefit is the Face Amount (the amount of insurance determined by your
Payment) or the minimum death benefit federal tax law requires, whichever is
greater. The Net Death Benefit is the Death Benefit less any Outstanding Loan,
rider charges and Monthly Deductions due and unpaid through the Contract month
in which the Insured dies, as well as any partial withdrawals and surrender
charges. However, after the Final Payment Date, the Net Death Benefit is the
Contract Value less any Outstanding Loan. The Beneficiary may receive the Net
Death Benefit in a lump sum or under a payment option we offer.
CAN I EXAMINE THE CONTRACT?
Yes. You have the right to examine and cancel your Contract by returning it to
us or to one of our representatives within 10 days (or such later date as
required in your state) after you receive the Contract.
If your Contract provides for a full refund under its "Right to Cancel"
provision as required in your state, your refund will be your entire Payment.
If your Contract does not provide for a full refund, you will receive:
- Amounts allocated to the Fixed Account; PLUS
- The Contract Value in the Variable Account; PLUS
- All fees, charges and taxes which have been imposed.
6
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Your refund will be determined as of the Valuation Date that the Contract is
received at our Principal Office.
WHAT ARE MY INVESTMENT CHOICES?
You currently have a choice of six Funds:
- Value Portfolio of The Palladian-SM- Trust
Managed by GAMCO Investors, Inc.;
- Growth Portfolio of The Palladian-SM- Trust
Managed by Stonehill Capital Management, Inc.;
- International Growth Portfolio of The Palladian-SM- Trust,
Managed by Bee & Associates Incorporated;
- Global Strategic Income Portfolio of The Palladian-SM- Trust,
Managed by Allmerica Asset Management, Inc.
- Global Interactive/Telecomm Portfolio of The Palladian-SM- Trust,
Managed by GAMCO Investors, Inc.; and
- Money Market Fund of Allmerica Investment Trust.
Managed by Allmerica Asset Management, Inc.
This range of investment choices allows you to allocate your money among the
various Funds to meet your investment needs. If your Contract provides for a
full refund under its "Right to Cancel" provision as required in your state, we
will allocate all Sub-Account investments to the Money Market Fund. Relocation
will then be made to the Sub-Account investments you selected on the application
no later than the expiration of the Right to Cancel period.
The Contract also offers a Fixed Account. The Fixed Account is a guaranteed
account offering a minimum interest rate. It is part of the General Account of
the Company.
WHO ARE THE INVESTMENT ADVISERS?
THE PALLADIAN-SM- TRUST. Allmerica Financial Investment Management Services,
Inc. ("AFIMS"), an affiliate of the Company, serves as overall manager of The
Palladian-SM- Trust and is responsible for administrative and general
supervisory services to the Portfolios. The Palladian-SM- Trust and AFIMS have
entered into Sub-Adviser Agreements with certain investment advisers for
investment management services for the Portfolios.
The Portfolio Managers of the five Portfolios of The Palladian-SM- Trust are as
follows:
<TABLE>
<CAPTION>
PORTFOLIO PORTFOLIO MANAGER
- ------------------------------------------ ------------------------------------------
<S> <C>
Value Portfolio GAMCO Investors, Inc.
Growth Portfolio Stonehill Capital Management, Inc.
International Growth Portfolio Bee & Associates Incorporated
Global Strategic Income Portfolio Allmerica Asset Management, Inc.
Global Interactive/Telecomm Portfolio GAMCO Investors, Inc.
</TABLE>
The Portfolio Managers (other than Allmerica Asset Management, Inc.) are not
affiliated with the Company or the Trust.
ALLMERICA INVESTMENT TRUST. AFIMS is the investment manager of Allmerica
Investment Trust and, subject to the direction of its Board of Trustees, handles
the day-to-day affairs of the Trust. AFIMS has entered into a Sub-Adviser
Agreement with its affiliate, Allmerica Asset Management, Inc., for investment
management services for the Money Market Fund.
7
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For more information, see "The Palladian-SM- Trust" and "Allmerica Investment
Trust."
CAN I MAKE TRANSFERS AMONG THE FUNDS AND THE FIXED ACCOUNT?
Yes. You may transfer among the Funds and the Fixed Account, subject to our
consent and then current rules. You will incur no current taxes on transfers
while your money is in the Contract. You also may elect automatic account
rebalancing so that assets remain allocated according to a desired mix, or
choose automatic dollar-cost averaging to gradually move funds into one or more
Sub-Accounts. See THE CONTRACT -- "Transfer Privilege."
HOW MUCH CAN I INVEST AND HOW OFTEN?
The Contract requires a single payment on or before the Date of Issue.
Additional Payments of at least $10,000 may be made as long as the total
Payments do not exceed the Maximum Payment amount specified in the Contract.
WHAT IF I NEED MY MONEY?
You may borrow up to the Loan Value of your Contract. The Loan Value is 90% of
your Contract Value less the surrender charge. You may also make partial
withdrawals and surrender the Contract for its Surrender Value.
The guaranteed annual interest rate credited to the Contract Value securing a
loan will be at least 4.0%. However, any portion of the Outstanding Loan that is
a preferred loan will be credited with not less than 5.50%.
We will allocate Contract loans among the Sub-Accounts and the Fixed Account
according to your instructions. If you do not make an allocation, we will make a
Pro-Rata Allocation. We will transfer the Contract Value in each Sub-Account
equal to the Contract loan to the Fixed Account.
You may surrender your Contract and receive its Surrender Value. You may make
partial withdrawals of $1,000 or more from the Contract Value, subject to
partial withdrawal costs and any applicable surrender charges. The Face Amount
is reduced by each partial withdrawal. We will not allow a partial withdrawal if
it would reduce the Contract Value below $25,000. A surrender or partial
withdrawal may have tax consequences. See FEDERAL TAX CONSIDERATIONS --
"Taxation of the Contracts."
CAN I MAKE FUTURE CHANGES UNDER MY CONTRACT?
Yes. There are several changes you can make after receiving your Contract,
within limits. You may
- Cancel your Contract under its "Right to Cancel" provision;
- Transfer your ownership to someone else;
- Change the Beneficiary;
- Change the allocation for any additional Payment, with no tax consequences
under current law;
- Make transfers of the Contract Value among the Funds, with no taxes
incurred under current law; and
- Add or remove the optional insurance benefits provided by the rider.
8
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CAN I CONVERT MY CONTRACT INTO A NON-VARIABLE CONTRACT?
Yes. You can convert your Contract without charge during the first 24 months
after the Date of Issue. On conversion, we will transfer the Contract Value in
the Variable Account to the Fixed Account. We will allocate any future payments
to the Fixed Account, unless you instruct us otherwise.
WHAT CHARGES WILL I INCUR UNDER MY CONTRACT?
The following charges will apply to your Contract under the circumstances
described. Some of these charges apply throughout the Contract's duration.
We deduct the following monthly charges from the Contract Value:
- a $2.50 maintenance fee from Contracts with a Contract Value of less than
$50,000 (See "Maintenance Fee");
- 0.40% on an annual basis for the administrative expenses (See
"Administration Charge");
- 0.20% to 2.50% (depending on the type of Contract and Underwriting Class)
on an annual basis for the cost of insurance (See "Monthly Insurance
Protection Charge"); and
For the first ten Contract years:
* 0.30% on an annual basis for distribution expenses (See "Distribution
Fee"); and
* 0.40% on an annual basis for federal, state and local taxes (See
"Federal & State Payment Tax Charge").
The following daily charge is deducted from the Variable Account:
- 0.90% on an annual basis for the mortality and expense risks (See
"Mortality and Expense Risk Charge").
WHAT ARE THE EXPENSES AND FEES OF THE FUNDS?
In addition to the charges described above, certain fees and expenses are
deducted from the assets of the Funds. The levels of fees and expenses vary
among the Funds. For more information concerning fees and expenses, see the
prospectuses of the Funds.
The following table gives certain fee and expense information for the Funds for
1997. However, a performance-based management fee is provided for under the
Management Agreements for the Portfolios of The Palladian-SM- Trust. The base
fee is 2.00%, but the actual fee may vary from between 0.00% to 4.00%, depending
on the Portfolio's performance. Because of the possibility of wide variations in
the management
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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."
<TABLE>
<CAPTION>
OTHER EXPENSES
(AFTER ANY
MANAGEMENT APPLICABLE TOTAL FUND
FUND FEES REIMBURSEMENT) EXPENSES
- ------------------------------------------------ ---------------- ------------------- ---------------
<S> <C> <C> <C>
Value Portfolio................................. 0.14%(1) 1.00%(2) 1.14%
Growth Portfolio................................ 0.20%(1) 1.00%(2) 1.20%
International Growth Portfolio.................. 0.58%(1) 1.20%(2) 1.78%
Global Strategic Income Portfolio............... 0.40%(3) 1.20%(2) 1.60%
Global Interactive/Telecomm Portfolio........... 0.27%(1) 1.20%(2) 1.47%
Money Market Fund............................... 0.27% 0.08% 0.35%(4)
</TABLE>
(1) A performance based advisory fee is in effect, which fee may vary anywhere
from 0.00% to 4.00%.
(2) Restated to reflect the expense limitation in effect during 1998. AFIMS has
agreed to limit operating expenses and reimburse those expenses to the extent
that the Portfolios' "other expenses" during 1998 (i.e., expenses other than
management fees) exceed the following expense limitations: 1.00% for the Value
Portfolio, 1.00% for the Growth Portfolio, 1.20% for the International Growth
Portfolio, 1.20% for the Global Strategic Income Portfolio, and 1.20% for the
Global Interactive/Telecomm Portfolio. The limitations are in effect through
December 31, 1998. For the Value Portfolio and the Growth Portfolio, different
expense limitations were in effect during 1997. Without the effect of expense
limitations, the 1997 "Other Expenses" ratios would have been the following:
4.75% for the Value Portfolio, 6.12% for the Growth Portfolio, 7.11%% for the
International Growth Portfolio, 6.68% for the Global Strategic Income Portfolio,
and 7.26% for the Global Interactive/Telecomm Portfolio.
(3) The actual management fee for the Global Strategic Income Portfolio for 1997
was 0.41%. The fee has been restated to 0.40% because, effective April 13, 1998,
a new Portfolio Manager is in place. At a meeting of the Board of Trustees of
The Palladian-SM- Trust ("Board") which was held on April 9, 1998, the Board
approved a new Portfolio Management Agreement with Allmerica Asset Management,
Inc. ("AAM"). The Portfolio Management Agreement is subject to the approval of
shareholders at a meeting scheduled for June 8, 1998. The Portfolio Management
Agreement provides that during the Portfolio Manager's first year of service,
the Portfolio will pay a fixed annual fee of 0.80% of average daily net assets,
rather than paying a performance-based fee. After the twelfth full calendar
month has elapsed under the Portfolio Management Agreement, the
performance-based fee will be in effect. Although the Agreement sets the fee at
0.80% through April 30, 1999, the fee is subject to two important limitations.
First, until June 8, 1998, when the Portfolio Management Agreement is to be
presented at the shareholder meeting for approval, the fee will be calculated at
the lesser of the following two rates: (1) 0.80%; and (2) the rate that would
have applied under the old advisory Agreement. The latter rate varies based on
prior performance, but as noted above was 0.41% for 1997. Second, the Manager
and the Portfolio Manager have voluntarily agreed to limit their fee from June
9, 1998 through April 30, 1999 to an annual rate of 0.40%. See the Prospectus of
The Palladian-SM- Trust for more information.
(4) Under the Management Agreement with Allmerica Investment Trust, AFIMS has
declared a voluntary expense limitation of 0.60% for the Money Market Fund, but
the expenses of the Money Market Fund did not exceed the cap in 1997. The
limitation may be terminated at any time.
MORE INFORMATION ABOUT PERFORMANCE FEES
The tables below show the expenses of the Portfolios of The Palladian-SM- Trust
as if the Portfolios paid performance based management fees of 0%, 2%, and 4%,
respectively.
A performance-based management fee is currently in effect for the Portfolios of
The Palladian-SM- Trust, other than the Global Strategic Income Portfolio. The
base fee is 2.00%, but the actual fee may vary from between
10
<PAGE>
0.00% to 4.00%, depending on the Portfolio's performance. The base fee of 2.00%
will be paid if the Portfolio's performance (net of all fees and expenses,
including the management fee) is between 1.5 and 3.0 percentage points higher
than the applicable benchmark index. A fee of 4.00% will be paid only if the
Portfolio's performance (net of all fees and expenses, including the management
fee) is at least 7.5 percentage points higher than the applicable benchmark
index. No fee will apply if the Portfolio's performance is more than 3.0
percentage points lower than the applicable benchmark index; see the prospectus
of The Palladian-SM- Trust for more details. Because of this variation, expense
information assuming fees of 0.00%, 2.00% and 4.00% is shown below. The fee,
however, could be any figure between 0.00% and 4.00%. In 1997, the actual
management fees were 0.14% for the Value Portfolio, 0.20% for the Growth
Portfolio, 0.58% for the International Growth Portfolio, and 0.27% for the and
Global Interactive/Telecomm Portfolio.
For the first 12 full calendar months after a new Portfolio Manager is hired
(or, in the case of a Portfolio that had only one Portfolio Manager, for the
first 12 full calendar months of operations, the advisory agreement set the
management fee at an annual rate of 0.80% of the Portfolio's average daily net
assets. As of the date of this prospectus, this initial fee is relevant for only
one Portfolio -- the Global Strategic Income Portfolio. That Portfolio has
retained AAM as Portfolio Manager effective April 13, 1998. The Portfolio
Management Agreement with AAM provides that, during AAM's first year of service
the Portfolio will pay a fixed annual fee of 0.80% of average daily net assets,
rather than paying a performance-based fee. After the twelfth full calendar
month has elapsed under the Portfolio Management Agreement, the
performance-based fee arrangement described above will be in effect. However,
AFIMS and AAM have voluntarily agreed that for the first year (through April 30,
1999) the management fee will be capped at 0.40%. The fee is subject to
additional limitations. For more information, see Footnote 3, below, and the
prospectus for The Palladian-SM- Trust.
EXAMPLE 1 -- ASSUMING ADVISORY FEE OF 0.00% FOR THE PORTFOLIOS OF THE
PALLADIAN-SM- TRUST.
(For the fee to be 0.00% a Portfolio's performance, net of all fees and
expenses, would have to be more than 3.0 percentage points below the benchmark
index.)
<TABLE>
<CAPTION>
OTHER EXPENSES
(AFTER ANY
MANAGEMENT APPLICABLE TOTAL FUND
FUND FEES REIMBURSEMENT) EXPENSES
- ------------------------------------------------ ---------------- ------------------- ---------------
<S> <C> <C> <C>
Value Portfolio................................. 0.00%(1) 1.00%(2) 1.00%
Growth Portfolio................................ 0.00%(1) 1.00%(2) 1.00%
International Growth Portfolio.................. 0.00%(1) 1.20%(2) 1.20%
Global Strategic Income Portfolio............... 0.00%(3) 1.20%(2) 1.20%
Global Interactive/Telecomm Portfolio........... 0.00%(1) 1.20%(2) 1.20%
Money Market Fund............................... 0.27% 0.08% 0.35%(4)
</TABLE>
EXAMPLE 2 -- ASSUMING ADVISORY FEE OF 2.00% FOR THE PORTFOLIOS OF THE
PALLADIAN-SM- TRUST.
(For the fee to be 2.00%, a Portfolio's performance, net of all fees and
expenses, would have to be between 1.5 and 3.0 percentage points higher than the
benchmark index.)
<TABLE>
<CAPTION>
OTHER EXPENSES
(AFTER ANY
MANAGEMENT APPLICABLE TOTAL FUND
FUND FEES REIMBURSEMENT) EXPENSES
- ------------------------------------------------ ---------------- ------------------- ---------------
<S> <C> <C> <C>
Value Portfolio................................. 2.00%(1) 1.00%(2) 3.00%
Growth Portfolio................................ 2.00%(1) 1.00%(2) 3.00%
International Growth Portfolio.................. 2.00%(1) 1.20%(2) 3.20%
Global Strategic Income Portfolio............... 2.00%(3) 1.20%(2) 3.20%
Global Interactive/Telecomm Portfolio........... 2.00%(1) 1.20%(2) 3.20%
Money Market Fund............................... 0.27% 0.08% 0.35%(4)
</TABLE>
11
<PAGE>
EXAMPLE 3 -- ASSUMING ADVISORY FEE OF 4.00% FOR THE PORTFOLIOS OF THE
PALLADIAN-SM- TRUST.
(For the fee to be 4.00%, a Portfolio's performance, net of all fees and
expenses, would have to be at least 7.5 percentage points higher than the
benchmark index.)
<TABLE>
<CAPTION>
OTHER EXPENSES
(AFTER ANY
MANAGEMENT APPLICABLE TOTAL FUND
FUND FEES REIMBURSEMENT) EXPENSES
- ------------------------------------------------ ---------------- ------------------- ---------------
<S> <C> <C> <C>
Value Portfolio................................. 4.00%(1) 1.00%(2) 5.00%
Growth Portfolio................................ 4.00%(1) 1.00%(2) 5.00%
International Growth Portfolio.................. 4.00%(1) 1.20%(2) 5.20%
Global Strategic Income Portfolio............... 4.00%(3) 1.20%(2) 5.20%
Global Interactive/Telecomm Portfolio........... 4.00%(1) 1.20%(2) 5.20%
Money Market Fund............................... 0.27% 0.08% 0.35%(4)
</TABLE>
(1) A performance based advisory fee is in effect, which fee may vary anywhere
from 0.00% to 4.00%.
(2) AFIMS has agreed to limit operating expenses and reimburse those expenses to
the extent that the "other expenses" of the Portfolios during 1998 (i.e.,
expenses other than management fees) exceed the following expense limitations:
1.00% for the Value Portfolio, 1.00% for the Growth Portfolio, 1.20% for the
International Growth Portfolio, 1.20% for the Global Strategic Income Portfolio,
and 1.20% for the Global Interactive/Telecomm Portfolio. The limitations are in
effect through December 31, 1998. For the Value Portfolio and the Growth
Portfolio, different expense limitations were in effect during 1997. Without the
effect of expense limitations, the 1997 "Other Expenses" ratios would have been
the following: 4.75% for the Value Portfolio, 6.12% for the Growth Portfolio,
7.11% for the International Growth Portfolio, 6.68% for the Global Strategic
Income Portfolio, and 7.26% for the Global Interactive/Telecomm Portfolio.
(3) The actual management fee for the Global Strategic Income Portfolio for 1997
was 0.41%. The fee has been restated to 0.40% because, effective April 13, 1998,
a new Portfolio Manager is in place. At a meeting of the Board of Trustees of
The Palladian-SM- Trust ("Board") which was held on April 9, 1998, the Board
approved a new Portfolio Management Agreement with Allmerica Asset Management,
Inc. ("AAM"). The Portfolio Management Agreement is subject to the approval of
shareholders at a meeting scheduled for June 8, 1998. The Portfolio Management
Agreement provides that during the Portfolio Manager's first year of service,
the Portfolio will pay a fixed annual fee of 0.80% of average daily net assets,
rather than paying a performance-based fee. After the twelfth full calendar
month has elapsed under the Portfolio Management Agreement, the
performance-based fee will be in effect. Although the Agreement sets the fee at
0.80% through April 30, 1999, the fee is subject to two important limitations.
First, until June 8, 1998, when the Portfolio Management Agreement is to be
presented at the shareholder meeting for approval, the fee will be calculated at
the lesser of the following two rates: (1) 0.80%; and (2) the rate that would
have applied under the old advisory Agreement. The latter rate varies based on
prior performance, but as noted above was 0.41% for 1997. Second, the Manager
and the Portfolio Manager have voluntarily agreed to limit their fee from June
9, 1998 through April 30, 1999 to an annual rate of 0.40%. See the Prospectus of
The Palladian-SM- Trust for more information.
(4) Under the Management Agreement with Allmerica Investment Trust, AFIMS has
declared a voluntary expense limitation of 0.60% for the Money Market Fund, but
the expenses of the Money Market Fund did not exceed the cap in 1997. The
limitation may be terminated at any time.
THE PRECEDING EXPENSE INFORMATION WAS PROVIDED TO US BY THE FUNDS, AND WE HAVE
NOT INDEPENDENTLY VERIFIED SUCH INFORMATION. THESE FUND EXPENSES ARE NOT DIRECT
CHARGES AGAINST SUB-ACCOUNT ASSETS OR REDUCTIONS FROM CONTRACT VALUE; RATHER,
THESE FUND EXPENSES ARE TAKEN INTO CONSIDERATION IN COMPUTING EACH FUND'S NET
ASSET VALUE, WHICH IS THE SHARE PRICE USED THE CALCULATE THE UNIT VALUES OF THE
SUB-ACCOUNTS. FOR MORE INFORMATION CONCERNING FEES AND EXPENSES, SEE THE
PROSPECTUSES OF THE PALLADIAN-SM- TRUST AND ALLMERICA INVESTMENT TRUST.
12
<PAGE>
WHAT CHARGES DO I INCUR IF I SURRENDER MY CONTRACT OR MAKE A PARTIAL WITHDRAWAL?
The charges below apply only if you surrender your Contract or make partial
withdrawals:
- Surrender Charge -- This charge applies on full surrenders within ten
Contract years. The surrender charge begins at 9.75% of the Payment and
decreases to 0% by the tenth Contract year.
- Partial Withdrawal Costs -- We deduct from the Contract Value the
following for partial withdrawals:
- A transaction fee of 2.0% of the amount withdrawn, not to exceed $25,
for each partial withdrawal for processing costs; and
- A surrender charge on a withdrawal exceeding the "Free 10% Withdrawal."
The first 12 transfers of Contract Value in a Contract year are free. A transfer
charge not to exceed $25 may apply for each additional transfer in the same
Contract year. This charge is for the costs of processing the transfer.
WHAT ARE THE LAPSE AND REINSTATEMENT PROVISIONS OF MY CONTRACT?
The Contract will not lapse unless the Surrender Value on a Monthly Processing
Date is less than zero.
There is a 62-day grace period in this situation. You may reinstate your
Contract within three years after the grace period, within limits.
HOW IS MY CONTRACT TAXED?
The Contract has been designed to be a "modified endowment contract." However,
an exchange under Section 1035 of the Internal Revenue Service Code ("Code") of
a life insurance contract entered into before June 21, 1988 will not cause the
this Contract to be treated as a modified endowment contract if no additional
payments are made and there is no increase in the death benefit as a result of
the exchange.
If the Contract is considered a modified endowment contract, all distributions
(including Contract loans, partial withdrawals, surrenders and assignments) will
be taxed on an "income-first" basis. Also, a 10% penalty tax may be imposed on
that part of a distribution that is includible in income. However, the Net Death
Benefit under the Contract is excludable from the gross income of the
Beneficiary. In some circumstances, federal estate tax may apply to the Net
Death Benefit or the Contract Value. See FEDERAL TAX CONSIDERATION -- "Taxation
of the Contracts."
This Summary is intended to provide only a very brief overview of the more
significant aspects of the Contract. This Prospectus and the Contract provide
further detail. The Contract provides insurance protection for the named
Beneficiary. The Contract and its attached application are the entire agreement
between you and the Company.
13
<PAGE>
DESCRIPTION OF ALLMERICA FINANCIAL,
THE VARIABLE ACCOUNT, THE PALLADIAN-SM- TRUST
AND ALLMERICA INVESTMENT TRUST
ALLMERICA FINANCIAL. Allmerica Financial is a life insurance company organized
under the laws of Delaware in 1974. We are an indirect, wholly owned subsidiary
of First Allmerica Financial Life Insurance Company, formerly named State Mutual
Life Assurance Company of America ("First Allmerica"). First Allmerica was
organized under the laws of Massachusetts in 1844, and is the fifth oldest life
insurance company in America. Our Principal Office is 440 Lincoln Street,
Worcester, Massachusetts 01653, Telephone 1-508-855-1000. We are subject to the
laws of the state of Delaware, to regulation by the Commissioner of Insurance of
Delaware, and to other laws and regulations where we are licensed to operate.
Allmerica Financial is a charter member of the Insurance Marketplace Standard
Association ("IMSA"). Companies that belong to IMSA subscribe to a rigorous set
of standards that cover the various aspects of sales and service for
individually sold life insurance and annuities. IMSA members have adopted
policies and procedures that demonstrate a commitment to honesty, fairness and
integrity in all customer contacts involving sales and service of individual
life insurance and annuity products.
THE VARIABLE ACCOUNT. The Variable Account is a separate investment account
with six Sub-Accounts. Each Sub-Account invests in a Fund of The Palladian Trust
and Allmerica Investment Trust. The assets used to fund the variable part of the
Contracts are set aside in Sub-Accounts and are separate from our general
assets. We administer and account for each Sub-Account as part of our general
business. However, income, capital gains and capital losses are allocated to
each Sub-Account without regard to any of our other income, capital gains or
capital losses. Under Delaware law, the assets of the Variable Account may not
be charged with any liabilities arising out of any other business of ours.
Our Board of Directors authorized the Variable Account by vote on June 13, 1996.
The Variable Account meets the definition of "separate account" under federal
securities laws. It is registered with the Securities and Exchange Commission
("SEC") as a unit investment trust under the Investment Company Act of 1940
("1940 Act"). This registration does not involve SEC supervision of the
management or investment practices or policies of the Variable Account or of
Allmerica Financial. We reserve the right, subject to law, to change the names
of the Variable Account and the Sub-Accounts.
THE PALLADIAN-SM- TRUST. The Palladian-SM- Trust was established as a
Massachusetts business trust on September 8, 1993, and is registered with the
SEC as a management investment company. Five investment portfolios are currently
available under the Contract. The assets of each Portfolio are held separate
from the assets of the other Portfolios. Each Portfolio operates as a separate
investment vehicle and the income or losses of one Portfolio have no effect on
the investment performance of another Portfolio. Shares of The Palladian-SM-
Trust are not offered to the general public, but solely to separate accounts of
insurance companies for the purpose of providing a vehicle for the investment of
assets.
Allmerica Financial Investment Management Services, Inc. ("AFIMS") serves as
overall manager of The Palladian-SM- Trust and is responsible for general
investment supervisory services to the Portfolios. The Palladian-SM- Trust and
AFIMS have retained several Portfolio Managers to manage the assets of each
Portfolio. AFIMS is located at 440 Lincoln Street, Worcester, MA 01653.
14
<PAGE>
The five Portfolios of The Palladian-SM- Trust and their respective Portfolio
Managers are as follows:
<TABLE>
<CAPTION>
PORTFOLIO PORTFOLIO MANAGER
- ------------------------------------ ------------------------------------
<S> <C>
The Value Portfolio GAMCO Investors, Inc.
The Growth Portfolio Stonehill Capital Management, Inc.
The International Growth Portfolio Bee & Associates Incorporated
The Global Strategic Income Allmerica Asset Management, Inc.
Portfolio GAMCO Investors, Inc.
The Global Interactive/Telecomm
Portfolio
</TABLE>
Allmerica Asset Management, Inc. ("AAM") is an affiliate of the Company and of
AFIMS. The other Portfolio Managers are not affiliated with the Company or with
AFIMS.
The Palladian-SM- Trust currently pays AFIMS and the Portfolio Managers a
monthly fee (the "management fee") based on the average daily net assets of each
Portfolio. For the first year that a new Portfolio Manager is hired (or, in the
case of a Portfolio that has had only one Portfolio Manager, for the first year
of operations) the advisory fee is set at an annual rate of 0.80% of the
Portfolio's average daily net assets. After the twelfth full calendar month has
elapsed, the performance-based fee will be in effect. As of the date of this
prospectus, this first year fee arrangement is in effect for only one Portfolio
- -- the Global Strategic Income Portfolio. That Portfolio has a new Portfolio
Manager, Allmerica Asset Management, Inc. ("AAM"), effective April 13, 1998. The
Portfolio Management Agreement with AAM is subject to the approval of
shareholders at a meeting scheduled to be held no later than June 8, 1998. Until
the Portfolio Management Agreement is approved by shareholders, the advisory fee
will be the lesser of (1) the 0.80% fee and (2) the rate that would have applied
under the advisory agreement with the Portfolio's previous Portfolio Manager.
However, AFIMS and AAM have voluntarily agreed that for the first year (through
April 30, 1999) the management fee for the Global Strategic Income Portfolio
will be set at 0.40%.
Other than for the Global Strategic Income Portfolio, each Portfolio Manager is
currently paid on an incentive fee basis, which could result in either higher
than average management fees or, possibly, no management fee at all, depending
on how well each Portfolio Manager performs. There are two components to the
management fee: the basic fee and the incentive fee. The management fee is
structured to vary based upon the Portfolio's performance (after expenses)
compared to that of an appropriate market benchmark selected for that Portfolio.
The management fee schedule provides for an incentive performance fee for
superior performance, and provides for lower fee for sub-par performance. The
base fee is 2.00%, but may vary from 0.00% to 4.00% depending on the Portfolio's
performance.
ALLMERICA INVESTMENT TRUST. Allmerica Investment Trust is an open-end,
diversified, management investment company registered with the SEC under the
1940 Act.
Allmerica Investment Trust was established as a Massachusetts business trust on
October 11, 1984, for the purpose of providing a vehicle for the investment of
assets of various variable accounts established by the Company or other
affiliated insurance companies. The Money Market Fund of Allmerica Investment
Trust is available under the Contract; certain other funds of Allmerica
Investment Trust are not currently offered under the Contract. Shares of the
Trust are not offered to the general public but solely to such variable
accounts.
AFIMS is the investment manager of Allmerica Investment Trust and, subject to
the direction of the Board of Trustees, handles the day-to-day affairs of the
Trust. AFIMS has entered into a Sub-Adviser Agreement with its affiliate,
Allmerica Asset Management, Inc. ("AAM") for investment management services for
the Money Market Fund. Under the Sub-Adviser Agreement, AAM is authorized to
engage in portfolio transactions on behalf of the Money Market Fund, subject to
such general or specific instructions as may be given by the Trustees. The terms
of the Sub-Adviser Agreement cannot be materially changed without the approval
of a majority in interest of the shareholders of the Fund. Both AFIMS and AAM
are located at 440 Lincoln Street, Worcester, Massachusetts 01653.
15
<PAGE>
Other than the expenses specifically assumed by AFIMS under the Management
Agreement, all expenses incurred in the operation of the Trust are borne by it,
including fees and expenses associated with the registration and qualification
of the Trust's shares under the Securities Act of 1933 ("1933 Act") other fees
payable to the SEC, independent public accountant, legal and custodian fees,
association membership dues, taxes, interest, insurance premiums, brokerage
commissions, fees and expenses of the Trustees who are not affiliated with First
Allmerica and its affiliates and subsidiaries, expenses for proxies,
prospectuses, reports to shareholders and other expenses.
For providing its services under the Management Agreement, AFIMS will receive a
fee, computed daily at an annual rate based on the average daily net asset value
of the Money Market Fund as follows: 0.35% on net asset value up to $50,000,000;
0.25% on the next $200,000,000; and 0.20% on the remainder. The fee is paid from
the assets of the Money Market Fund. AFIMS is solely responsible for the payment
of all fees for investment management services to AAM, which will be a fee of
0.10%, computed daily at an annual rate based on the average daily net asset
value of the Money Market Fund.
INVESTMENT OBJECTIVES AND POLICIES
A summary of investment objectives of each of the Funds is set forth below. MORE
DETAILED INFORMATION REGARDING THE INVESTMENT OBJECTIVES, RESTRICTIONS AND
RISKS, EXPENSES PAID BY THE FUNDS, AND OTHER RELEVANT INFORMATION REGARDING THE
FUNDS MAY BE FOUND IN THE PROSPECTUSES OF THE PALLADIAN-SM- TRUST AND ALLMERICA
INVESTMENT TRUST WHICH ACCOMPANY THIS PROSPECTUS, AND SHOULD BE READ CAREFULLY
BEFORE INVESTING. The Statements of Additional Information of Palladian-SM- and
the Trust are available upon request. There can be no assurance that the
investment objectives of the Funds can be achieved or that the value of a
Contract will equal or exceed the aggregate amount of the Payments made under
the Contract.
VALUE PORTFOLIO seeks to make money for investors by investing primarily in
companies that the Portfolio Manager believes are undervalued and that by virtue
of anticipated developments may, in the Portfolio Manager's judgment, achieve
significant capital appreciation.
GROWTH PORTFOLIO seeks to make money for investors by investing primarily in
securities selected for their long-term growth prospects.
INTERNATIONAL GROWTH PORTFOLIO seeks to make money for investors by investing
internationally for long-term capital appreciation, primarily in equity
securities.
GLOBAL STRATEGIC INCOME PORTFOLIO seeks to make money for investors by investing
for high current income and capital appreciation in a variety of domestic and
foreign fixed-income securities.
GLOBAL INTERACTIVE/TELECOMM PORTFOLIO seeks to make money for investors
primarily by investing globally in equity securities of companies engaged in the
development, manufacture or sale of interactive and/or telecommunications
services and products.
MONEY MARKET FUND seeks to obtain maximum current income consistent with the
preservation of capital and liquidity.
If there is a material change in the investment policy of a Fund, the Contract
Owner will be notified of the change. If the Contract Owner has Contract Value
allocated to that Fund, he or she may have the Contract Value reallocated
without charge to another Fund or to the Fixed Account, where available, on
Written Request received by the Company within sixty (60) days of the later of:
(1) the effective date of such change in the investment policy, or (2) the
receipt of the notice of the Contract Owner's right to transfer.
16
<PAGE>
THE CONTRACT
APPLICATION FOR A CONTRACT. Individuals wishing to purchase a Contract must
complete an application and submit it to an authorized registered agent or to
Allmerica Financial at its Principal Office. We offer Contracts to applicants 89
years old and under. After receiving a completed application from a prospective
Contract Owner, we will begin underwriting to decide the insurability of the
proposed Insured. We may require medical examinations and other information
before deciding insurability. We issue a Contract only after underwriting has
been completed. We may reject an application that does not meet our underwriting
guidelines.
If a prospective Contract Owner makes the initial Payment with the application,
we will provide fixed conditional insurance during underwriting. The conditional
insurance will be based upon Death Benefit Factors shown in the Conditional
Insurance Agreement, up to a maximum of $500,000, depending on Age and
Underwriting Class. This coverage will continue for a maximum of 90 days from
the date of the application or, if required, the completed medical exam. If
death is by suicide, we will return only the Payment made.
If the initial Payment is not made with the application, on Contract delivery we
will require the initial Payment to place the insurance in force.
If you made the initial Payment before the date of Issuance and Acceptance, we
will allocate the Payment to our General Account within two business days of
receipt of the Payment at our Principal Office. IF WE ARE UNABLE TO ISSUE THE
CONTRACT, WE WILL ISSUE AN ANNUITY CONTRACT. HOWEVER, IF THE CONTRACT OWNER HAS
ELECTED NOT TO RECEIVE THE ANNUITY CONTRACT ON THE APPLICATION, THE PAYMENT WILL
BE RETURNED TO THE CONTRACT OWNER WITHOUT INTEREST.
If your application is approved and the Contract is issued and accepted, we will
allocate your Contract Value on Issuance and Acceptance according to your
instructions. However, if your Contract provides for a full refund of Payments
under its "Right to Cancel" provision as required in your state (see THE
CONTRACT -- "Free-Look Period"), we will initially allocate your Sub-Account
investments to the Money Market Fund. We will reallocate all amounts according
to your investment choices no later than the expiration of the right to cancel
period.
FREE-LOOK PERIOD. The Contract provides for a free-look period under the Right
to Cancel provision. You have the right to examine and cancel your Contract by
returning it to us or to one of our representatives on or before the tenth day
(or such later date as required in your state) after you receive the Contract.
If your Contract provides for a full refund under its "Right to Cancel"
provision as required in your state, your refund will be your entire Payment. If
your Contract does not provide for a full refund, you will receive:
- Amounts allocated to the Fixed Account; PLUS
- The Contract Value in the Variable Account: PLUS
- All fees, charges and taxes which have been imposed.
We may delay a refund of any Payment made by check until the check has cleared
your bank. Your refund will be determined as of the Valuation Date that the
Contract is received at our Principal Office.
CONVERSION PRIVILEGE. Within 24 months of the Date of Issue, you can convert
your Contract into a non-variable Contract by transferring all Contract Value in
the Sub-Accounts to the Fixed Account. The conversion will take effect at the
end of the Valuation Period in which we receive, at our Principal Office, notice
of the conversion satisfactory to us. There is no charge for this conversion. We
will allocate any future Payments to the Fixed Account, unless you instruct us
otherwise.
17
<PAGE>
PAYMENTS. The Contracts are designed for a large single Payment to be paid by
the Contract Owner on or before the Date of Issue. The minimum initial Payment
Allmerica Financial requires for a contract is $25,000. The initial Payment is
used to determine the Face Amount. The Face Amount will be determined by
treating the Payment as equal to 100% of the Guideline Single Premium. You may
indicate the desired Face Amount on the application. If the Face Amount
specified exceeds 100% of the Guideline Single Premium for the Payment amount,
the application will be amended and a Contract with a higher Face Amount will be
issued. If the Face Amount specified is less than 80% of the Guideline Single
Premium for the Payment amount, the application will be amended and a Contract
with a lower Face Amount will be issued. The Contract Owner must agree to any
amendment to the application.
Under our underwriting rules, the Face Amount must be based on 100% of the
Guideline Single Premium to be eligible for simplified underwriting.
Payments are payable to Allmerica Financial. Payments may be made by mail to our
Principal Office or through our authorized representative. Any additional
Payment, after the initial Payment, is credited to the Variable Account or Fixed
Account on the date of receipt at the Principal Office.
The Contract limits the ability to make additional Payments. However, no
additional Payment may be less than $10,000 without our consent. Any additional
Payments may not cause total Payments to exceed the Maximum Payment on the
specifications page of your Contract.
Total Payments may not exceed the current maximum payment limits under federal
tax law. Where total Payments would exceed the current maximum payment limits,
we will only accept that part of a Payment that will make total Payments equal
the maximum. We will return any part of a Payment that is greater than that
amount. However, we will accept a Payment needed to prevent Contract lapse
during a Contract year. See CONTRACT TERMINATION AND REINSTATEMENT.
ALLOCATION OF PAYMENTS. In the application for your Contract, you decide the
initial allocation of the Payment among the Sub-Account and the Fixed Account.
You may allocate the Payment to one or more of the Sub-Accounts and/or the Fixed
Account. The minimum amount that you may allocate to a Sub-Account is 1.0% of
the Payment. Allocation percentages must be in whole numbers (for example,
33 1/3% may not be chosen) and must total 100%.
You may change the allocation of any future Payment by Written Request or
telephone request. You have the privilege to make telephone requests, unless you
elected not to have the privilege on the application. The policy of Allmerica
Financial and its representatives and affiliates is that they will not be
responsible for losses resulting from acting on telephone requests reasonably
believed to be genuine. We will use reasonable methods to confirm that
instructions communicated by telephone are genuine; otherwise, Allmerica
Financial may be liable for any losses from unauthorized or fraudulent
instructions. We require that callers on behalf of a Contract Owner identify
themselves by name and identify the Contract Owner by name, date of birth and
social security number. All telephone requests are tape recorded. An allocation
change will take effect on the date of receipt of the notice at the Principal
Office. No charge is currently imposed for changing Payment allocation
instructions. We reserve the right to impose a charge in the future, but
guarantee that the charge will not exceed $25.
The Contract Value in the Sub-Accounts will vary with investment experience. You
bear this investment risk. Investment performance may also affect the Death
Benefit. Review your allocations of Contract Value as market conditions and your
financial planning needs change.
TRANSFER PRIVILEGE. At any time prior to the election of a Payment Option,
subject to our then current rules, you may transfer amounts among the
Sub-Accounts or between a Sub-Account and the Fixed Account. (You may not
transfer that portion of the Contract Value held in the Fixed Account that
secures a Contract loan.)
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We will make transfers at your Written Request or telephone request, as
described in THE CONTRACT -- "Allocation of Net Payments." Transfers are
effected at the value next computed after receipt of the transfer order.
The first 12 transfers in a Contract year are free. After that, we will deduct a
transfer charge not to exceed $25 from amounts transferred in that Contract
year.
You may apply for automatic transfers from the Fixed Account, the Global
Strategic Income Sub-Account or the Money Market Sub-Account to one or more of
the other Sub-Accounts every one, two, three, six or twelve months. Each
automatic transfer must be at least $100. If the Fixed Account or the
Sub-Account from which the automatic transfer is to be made is zero, the
automatic transfer will cease. The Contract Owner must reapply for any future
automatic transfers.
You may also apply for automatic account rebalancing in order to allocate
Contract Value among the Sub-Accounts every one, two, three, six or twelve
months. The Fixed Account is not included in the automatic account rebalancing.
We will process automatic transfers or automatic rebalancing on the 15th of each
scheduled month. If the 15th is not a business day or is the Monthly Processing
Date, we will process the automatic transfer or automatic rebalancing on the
next business day.
The first automatic transfer counts as one transfer toward the 12 free transfers
allowed in each Contract year. Each subsequent automatic transfer is free and
does not reduce the remaining number of transfers that are free in a Contract
year. Any transfers made for a conversion privilege, Contract loan or material
change in investment policy will not count toward the 12 free transfers.
The transfer privilege is subject to our consent. We reserve the right to impose
limits on transfers including, but not limited to, the:
- Minimum amount that may be transferred;
- Minimum amount that may remain in a Sub-Account following a transfer from
that Sub-Account;
- Minimum period between transfers involving the Fixed Account; and
- Maximum amounts that may be transferred from the Fixed Account.
Transfers involving the Fixed Account are currently permitted only if:
- There has been at least a ninety (90) day period since the last transfer
from the Fixed Account; and
- The amount transferred from the Fixed Account in each transfer does not
exceed the lesser of $100,000 or 25% of the Contract Value.
These rules are subject to change by Allmerica Financial.
DEATH BENEFIT. If the Contract is in force on the Insured's death, we will,
with due proof of death, pay the Net Death Benefit to the named Beneficiary. For
second-to-die Contracts, the Net Death Benefit is payable on the death of the
last surviving Insured. There is no Death Benefit payable on the death of the
first Insured to die. We will normally pay the Net Death Benefit within seven
days of receiving due proof of the Insured's death, but we may delay payment of
Net Death Benefits. See OTHER CONTRACT PROVISIONS -- "Delay of Benefit
Payments." The Beneficiary may receive the Net Death Benefit in a lump sum or
under a payment option, unless the payment option has been restricted by the
Contract owner. See APPENDIX C -- PAYMENT OPTIONS.
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Before the Final Payment Date, the Net Death Benefit is:
- The Death Benefit: MINUS
- Any Outstanding Loan, rider charges and Monthly Deductions due and unpaid
through the Contract month in which the Insured dies, as well as any
partial withdrawals and surrender charges.
After the Final Payment Date, the Net Death benefit is:
- The Contract Value; MINUS
- Any Outstanding Loan.
In most states, we will compute the Net Death Benefit on the date we receive due
proof of the Insured's death.
The Death Benefit is the GREATER of the:
- Face Amount; OR
- Guideline Minimum Sum Insured.
GUIDELINE MINIMUM SUM INSURED. The guideline minimum sum insured is a
percentage of the Contract Value as set forth in APPENDIX A -- GUIDELINE MINIMUM
SUM INSURED TABLE. The guideline minimum sum insured is computed based on
federal tax regulations to ensure that the Contract qualifies as a life
insurance contract, and that the insurance proceeds will be excluded from the
gross income of the Beneficiary.
ILLUSTRATION. In this illustration, assume that the Insured is under the age of
40, and that there is no Outstanding Loan.
A Contract with a $100,000 Face Amount will have a Death Benefit of $100,000.
However, because the Death Benefit must be equal to or greater than 250% of
Contract Value, if the Contract Value exceeds $40,000 the Death Benefit will
exceed the $100,000 Face Amount. In this example, each dollar of Contract Value
above $40,000 will increase the Death Benefit by $2.50. For example, a Contract
with a Contract Value of $50,000 will have a guideline minimum sum insured of
$125,000 ($50,000 X 2.50); Contract Value of $60,000 will produce a guideline
minimum sum insured of $150,000 ($60,000 X 2.50); and Contract Value of $75,000
will produce a guideline minimum sum insured of $187,500 ($75,000 X 2.50).
Similarly, if Contract Value exceeds $40,000, each dollar taken out of Contract
Value will reduce the Death Benefit by $2.50. If, for example, the Contract
Value is reduced from $60,000 to $50,000 because of partial withdrawals, charges
or negative investment performance, the Death Benefit will be reduced from
$150,000 to $125,000. If, however, the Contract Value multiplied by the
applicable percentage from the table in APPENDIX A is less than the Face Amount,
the Death Benefit will equal the Face Amount.
The applicable percentage becomes lower as the Insured's age increases. If the
Insured's age in the above example were, for example, 50 (rather than between
zero and 40), the applicable percentage would be 185%. The Death Benefit would
not exceed the $100,000 face amount unless the Contract Value exceeded $54,054
(rather than $40,000), and each dollar then added to or taken from Contract
Value would change the Death Benefit by $1.85.
CONTRACT VALUE. The Contract Value is the total value of your Contract. It is
the SUM of:
- Your accumulation in the Fixed Account; PLUS
- The value of your Units in the Sub-Accounts.
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There is no guaranteed minimum Contract Value. The Contract Value on any date
depends on variables that cannot be predetermined.
Your Contract Value is affected by the:
- Amount of your Payments;
- Interest credited in the Fixed Account;
- Investment performance of the Funds you select;
- Partial withdrawals;
- Loans, loan repayments and loan interest paid or credited; and
- Charges and deductions under the Contract.
COMPUTING CONTRACT VALUE. We compute the Contract Value on the Date of Issue
and on each Valuation Date. On the Date of Issue, the Contract Value is:
- Your Payment plus any interest earned during the period it was allocated
to the General Account (see THE CONTRACT -- "Application for a Contract");
MINUS
- The Monthly Deductions due.
On each Valuation Date after the Date of Issue, the Contract Value is the SUM
of:
- Accumulations in the Fixed Account; PLUS
- The SUM of the PRODUCTS of:
- The number of Units in each Sub-Account; TIMES
- The value of a Unit in each Sub-Account on the Valuation Date.
THE UNIT. We allocate each Payment to the Sub-Accounts you selected. We credit
allocations to the Sub-Accounts as Units. Units are credited separately for each
Sub-Account.
The number of Units of each Sub-Account credited to the Contract is the QUOTIENT
of:
- That part of the Payment allocated to the Sub-Account; DIVIDED BY
- The dollar value of a Unit on the Valuation Date the Payment is received
at our Principal Office.
The number of Units will remain fixed unless changed by a split of Unit value,
transfer, loan, partial withdrawal or surrender. Also, Monthly Deductions taken
from a Sub-Account will result in cancellation of Units equal in value to the
amount deducted.
The dollar value of a Unit of a Sub-Account varies from Valuation Date to
Valuation Date based on the investment experience of that Sub-Account. This
investment experience reflects the investment performance, expenses and charges
of the Fund in which the Sub-Account invests. The value of each Unit was set at
$1.00 on the first Valuation Date of each Sub-Account.
The value of a Unit on any Valuation Date is the PRODUCT of:
- The dollar value of the Unit on the preceding Valuation Date; TIMES
- The net investment factor.
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<PAGE>
NET INVESTMENT FACTOR. The net investment factor measures the investment
performance of a Sub-Account during the Valuation Period just ended. The net
investment factor for each Sub-Account is the result of:
- The net asset value per share of a Fund held in the Sub-Account determined
at the end of the current Valuation Period; PLUS
- The per share amount of any dividend or capital gain distributions made by
the Fund on shares in the Sub-Account if the "ex-dividend" date occurs
during the current Valuation Period; DIVIDED BY
- The net asset value per share of a Fund share held in the Sub-Account
determined as of the end of the immediately preceding Valuation Period;
MINUS
- The mortality and expense risk charge for each day in the Valuation
Period, currently at an annual rate of 0.90% of the daily net asset value
of that Sub-Account.
The net investment factor may be greater or less than one.
PAYMENT OPTIONS. The Net Death Benefit payable may be paid in a single sum or
under one or more of the payment options then offered by Allmerica Financial.
See APPENDIX C -- PAYMENT OPTIONS. These payment options also are available at
the Final Payment Date or if the Contract is surrendered. If no election is
made, we will pay the Net Death Benefit in a single sum.
OPTIONAL INSURANCE BENEFITS. You may add an optional insurance benefit to the
Contract by rider, as described in APPENDIX B -- OPTIONAL BENEFIT.
SURRENDER. You may surrender the Contract and receive its Surrender Value. The
Surrender Value is:
- The Contract Value; MINUS
- Any Outstanding Loan and surrender charges.
We will compute the Surrender Value on the Valuation Date on which we receive
the Contract with a Written Request for surrender. We will deduct a surrender
charge if you surrender the Contract within 10 full Contract years of the Date
of Issue. See CHARGES AND DEDUCTIONS -- SURRENDER CHARGE. The Surrender Value
may be paid in a lump sum or under a payment option then offered by us. See
APPENDIX C -- PAYMENT OPTIONS. We will normally pay the Surrender Value within
seven days following our receipt of Written Request. We may delay benefit
payments under the circumstances described in OTHER CONTRACT PROVISIONS --
"Delay of Benefit Payments."
For important tax consequences of a surrender, see FEDERAL TAX CONSIDERATIONS.
PARTIAL WITHDRAWAL. You may withdraw part of the Contract Value of your Contract
on Written Request. Your Written Request must state the dollar amount you wish
to receive. You may allocate the amount withdrawn among the Sub-Accounts and the
Fixed Account. If you do not provide allocation instructions, we will make a
Pro-Rata Allocation. Each partial withdrawal must be at least $1,000. We will
not allow a partial withdrawal if it would reduce the Contract Value below
$25,000. The Face Amount is reduced proportionately based on the ratio of the
amount of the partial withdrawal and charges to the Contract Value on the date
of withdrawal.
On a partial withdrawal from a Sub-Account, we will cancel the number of Units
equal in value to the amount withdrawn. The amount withdrawn will be the amount
you requested plus the partial withdrawal costs and any applicable surrender
fee. See CHARGES AND DEDUCTIONS -- SURRENDER CHARGES and CHARGES AND DEDUCTIONS
- -- "Partial Withdrawal Costs." We will normally pay the partial withdrawal
within seven days following our receipt of Written Request. We may delay payment
as described in OTHER CONTRACT PROVISIONS -- "Delay of Benefit Payments."
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<PAGE>
For important tax consequences of partial withdrawals, see FEDERAL TAX
CONSIDERATIONS.
CHARGES AND DEDUCTIONS
The following charges will apply to your Contract under the circumstances
described. Some of these charges apply throughout the Contract's duration.
No surrender charges or partial withdrawal charges are imposed, and no
commissions are paid where the Contract Owner as of the date of application is
within the following class of individuals:
All employees of First Allmerica and its affiliates and subsidiaries located
at First Allmerica's home office (or at off-site locations if such employees
are on First Allmerica's home office payroll); all employees and registered
representatives of any broker-dealer that has entered into a sales agreement
with us or Allmerica Investments, Inc. to sell the Contracts and any spouses
of the above persons or any children of the above persons.
MONTHLY DEDUCTIONS. On the Monthly Processing Date, the Company will deduct an
amount to cover charges and expenses incurred in connection with the Contract.
This Monthly Deduction will be deducted by subtracting values from the Fixed
Account accumulation and/or canceling Units from each applicable Sub-Account in
the ratio that the Contract Value in the Sub-Account bears to the Contract
Value. The amount of the Monthly Deduction will vary from month to month. If the
Contract Value is not sufficient to cover the Monthly Deduction which is due,
the Contract may lapse. (See CONTRACT TERMINATION AND REINSTATEMENT.) The
Monthly Deduction is comprised of the following charges:
- MAINTENANCE FEE: The Company will make a deduction of $2.50 from any
Contract with less than $50,000 in Contract Value to cover charges and
expenses incurred in connection with the Contract. This charge is to
reimburse the Company for expenses related to issuance and maintenance of
the Contract. The Company does not intend to profit from this charge.
- ADMINISTRATION CHARGE: The Company imposes a monthly charge at an annual
rate of 0.40% of the Contract Value. This charge is to reimburse us for
administrative expenses incurred in the administration of the Contract. It
is not expected to be a source of profit.
- MONTHLY INSURANCE PROTECTION CHARGE: Immediately after the Contract is
issued, the Death Benefit will be greater than the Payment. While the
Contract is in force, prior to the Final Payment Date, the Death Benefit
will generally be greater than the Contract Value. To enable us to pay
this excess of the Death Benefit over the Contract Value, a monthly cost
of insurance charge is deducted. This charge varies between an annual rate
of 0.20% and 2.50% of the Contract Value depending on the type of Contract
and the Underwriting Class. In no event will the current deduction for the
cost of insurance exceed the guaranteed maximum insurance protection rates
set forth in the Contract. These guaranteed rates are based on the
Commissioners 1980 Standard Ordinary Mortality Tables, Tobacco User or
Non-Tobacco User (Mortality Table B for unisex Contracts and Mortality
Table D for second-to-die Contracts) and the Insured's sex and Age. The
Tables used for this purpose set forth different mortality estimates for
males and females and for tobacco users and non-tobacco users. Any change
in the insurance protection rates will apply to all Insureds of the same
Age, sex and Underwriting Class whose Contracts have been in force for the
same period.
The Underwriting Class of an Insured will affect the insurance protection rate.
We currently place Insureds into standard Underwriting Classes and non-standard
Underwriting Classes. The Underwriting Classes are also divided into two
categories: tobacco user and non-tobacco user. We will place Insureds under the
Age of 18 at the Date of Issue in a standard (regular??) or non-standard
Underwriting Class. We will then classify the Insured as a non-tobacco user.
- DISTRIBUTION EXPENSE: During the first ten Contract years, we make a
monthly deduction to compensate for a portion of the sales expense which
are incurred by us with respect to the Contracts. This
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charge is equal to 0.30% of the Contract Value. We will monitor
distribution charges, federal tax charges and the sales charge portion of
the surrender fee deducted under a Contract to ensure that the sum of
these charges will never exceed 9% of the Payments made under the
Contract.
- FEDERAL & STATE PAYMENT TAX CHARGE: During the first ten Contract years,
we make a monthly deduction to compensate the Company for the increase in
federal tax liability from the application of Section 848 of the Code and
to offset the average premium tax the Company is expected to pay to
various state and local jurisdictions but will not necessarily equal the
premium tax paid by us for a particular Contract. The Company expects to
pay an average premium tax of approximately 2.5% of premiums in all
states, although such rates can generally range from 0% to 4%. The Company
does not intend to profit from the premium tax portion of this charge.
DAILY DEDUCTIONS. We assess each Sub-Account with a charge for mortality and
expense risks we assume. Fund expenses are also reflected in the Variable
Account.
- MORTALITY AND EXPENSE RISK CHARGE: We impose a daily charge at a current
annual rate of 0.90% of the average daily net asset value of each
Sub-Account. This charge compensates us for assuming mortality and expense
risks for variable interests in the Contracts. The mortality risk we
assume is that Insureds may live for a shorter time than anticipated. If
this happens, we will pay more Net Death Benefits than anticipated. The
expense risk we assume is that the expenses incurred in issuing and
administering the Contracts will exceed those compensated by the
maintenance fee and administration charges in the Contracts. If the charge
for mortality and expense risks is not sufficient to cover mortality
experience and expenses, we will absorb the losses. If the charge turns
out to be higher than mortality and expense risk expenses, the difference
will be a profit to us. If the charge provides us with a profit, the
profit will be available for our use to pay distribution, sales and other
expenses.
- FUND EXPENSES: The value of the Units of the Sub-Accounts will reflect the
investment management fee and other expenses of the Funds whose shares the
Sub-Accounts purchase. The prospectuses and statements of additional
information of Palladian-SM- and the Trust contain more information
concerning the fees and expenses.
No charges are currently made against the Sub-Accounts for federal or state
income taxes. Should income taxes be imposed, we may make deductions from the
Sub-Accounts to pay the taxes. See FEDERAL TAX CONSIDERATIONS.
SURRENDER CHARGE. The Contract's contingent surrender charge is a deferred sales
charge and an unrecovered payment tax charge. The deferred sales charge
compensates us for distribution expenses, including commissions to our
representatives, advertising and the printing of prospectuses and sales
literature. The unrecovered payment tax charge is designed to reimburse us for
the unrecovered federal and state taxes the Company has paid.
<TABLE>
<CAPTION>
Contract Year* 1 2 3 4 5 6 7 8 9
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Deferred Sale Charge 7.50% 7.50% 6.00% 6.00% 4.50% 4.50% 3.00% 3.00% 1.50%
Unrecovered Payment Tax
Charge 2.25% 2.00% 1.75% 1.25% 1.50% 1.00% 0.75% 0.50% 0.25%
Total Surrender Charge 9.75% 9.50% 7.75% 7.25% 5.75% 5.50% 3.75% 3.50% 1.75%
<CAPTION>
Contract Year* 10+
<S> <C>
Deferred Sale Charge 0%
Unrecovered Payment Tax
Charge 0%
Total Surrender Charge 0%
</TABLE>
The surrender charge applies for ten Contract years. We impose the surrender
charge only if, during its duration, you request a full surrender or a partial
withdrawal in excess of the free withdrawal amount.
* For a Contract that lapses and reinstates, see REINSTATEMENT.
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PARTIAL WITHDRAWAL COSTS. For each partial withdrawal, we deduct a transaction
fee of 2.0% of the amount withdrawn, not to exceed $25. This fee is intended to
reimburse us for the cost of processing the withdrawal.
A partial withdrawal charge may also be deducted from Contract Value. However,
in any Contract year, you may withdraw, without a partial withdrawal charge, up
to:
- 10% of the Contract Value; MINUS
- The total of any prior free withdrawals in the same Contract year ("Free
10% Withdrawal.")
The right to make the Free 10% Withdrawal is not cumulative from Contract year
to Contract year. For example, if only 8% of Contract Value were withdrawn in
the second Contract year, the amount you could withdraw in future Contract years
would not be increased by the amount you did not withdraw in the second Contract
year.
We impose any applicable surrender charge on any withdrawal greater than the
Free 10% Withdrawal.
TRANSFER CHARGES. The first 12 transfers in a Contract year are free. After
that, we may deduct a transfer charge, not to exceed $25, from amounts
transferred in that Contract year. This charge reimburses us for the
administrative costs of processing the transfer.
If you apply for automatic transfers, the first automatic transfer counts as one
transfer. Each future automatic transfer is without charge and does not reduce
the remaining number of transfers that may be made without charge.
Each of the following transfers of Contract Value from the Sub-Accounts to the
Fixed Account is free and does not count as one of the 12 free transfers in a
Contract year:
- A conversion within the first 24 months from Date of Issue;
- A transfer to the Fixed Account to secure a loan; and
- A transfer from the Fixed Account as a results of a loan repayment.
CONTRACT LOANS
You may borrow money secured by your Contract Value, both during and after the
first Contract year. The total amount you may borrow is the Loan Value. The Loan
Value is 90% of the Contract Value minus any surrender charges.
The minimum loan is $1,000. The maximum loan is the Loan Value minus any
Outstanding Loan. We will usually pay the loan within seven days after we
receive the Written Request. We may delay the payment of loans as stated in
OTHER CONTRACT PROVISIONS -- Delay of Payments.
We will allocate the loan among the Sub-Accounts and the Fixed Account according
to your instructions. If you do not make an allocation, we will make a Pro-Rata
Allocation. We will transfer Contract Value in each Sub-Account equal to the
Contract loan to the Fixed Account. We will not count this transfer as a
transfer subject to the transfer charge.
Contract Value equal to the Outstanding Loan will earn monthly interest in the
Fixed Account at an annual rate of at least 4.0%.
PREFERRED LOAN OPTION. Any portion of the Outstanding Loan that represents
earnings in this Contract, a loan from an exchanged life insurance policy that
was as carried over to this Contract or the gain in the
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exchanged life insurance policy that was carried over to this Contract may be
treated as a preferred loan. The available percentage of the gain carried over
from an exchanged policy less any policy loan carried over which will be
eligible for preferred loan treatment is as follows:
<TABLE>
<CAPTION>
Beginning of
Contract Year 1 2 3 4 5 6 7 8 9
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------
Unloaned Gain Available 0% 10% 20% 30% 40% 50% 60% 70% 80%
<CAPTION>
Beginning of
Contract Year 10 11
<S> <C> <C>
- -----------------------
Unloaned Gain Available 90% 100%
</TABLE>
The guaranteed annual interest rate credited to the Contract Value securing a
preferred loan will be at least 5.5%.
LOAN INTEREST CHARGED. Interest accrues daily at the annual rate of 6.0%.
Interest is due and payable in arrears at the end of each Contract year or for
as short a period as the loan may exist. Interest not paid when due will be
added to the Outstanding Loan by transferring Contract Value equal to the
interest due to the Fixed Account. The interest due will bear interest at the
same rate.
REPAYMENT OF OUTSTANDING LOAN. You may pay any loans before Contract lapse. We
will allocate that part of the Contract Value in the Fixed Account that secured
a repaid loan to the Sub-Accounts and Fixed Account according to your
instructions. If you do not make a repayment allocation, we will allocate
Contract Value according to your most recent Payment allocation instructions.
However, loan repayments allocated to the Variable Account cannot exceed
Contract Value previously transferred from the Variable Account to secure the
outstanding loan.
If the Outstanding Loan exceeds the Contract Value less the surrender charge,
the Contract will terminate. We will mail a notice of termination to the last
known address of you and any assignee. If you do not make sufficient payment
within 62 days after this notice is mailed, the Contract will terminate with no
value. See CONTRACT TERMINATION AND REINSTATEMENT.
- EFFECT OF CONTRACT LOANS: Contract loans will permanently affect the
Contract Value and Surrender Value, and may permanently affect the Death
Benefit. The effect could be favorable or unfavorable, depending on
whether the investment performance of the Sub-Accounts is less than or
greater than the interest credited to the Contract Value in the Fixed
Account that secures the loan.
We will deduct any Outstanding Loan from the proceeds payable when the Insured
dies or from a surrender.
CONTRACT TERMINATION AND REINSTATEMENT
TERMINATION. The Contract will terminate if, on a Monthly Processing Date, the
Surrender Value is less than $0 (zero.) If this situation occurs, the Contract
will be in default. You will then have a grace period of 62 days, measured from
the date of default, to make a Payment sufficient to prevent termination. On the
date of default, we will send a notice to you and to any assignee of record. The
notice will state the Payment due and the date by which it must be paid.
Failure to make a sufficient Payment within the grace period will result in the
Contract terminating without value. If the Insured dies during the grace period,
we will deduct from the Net Death Benefit any overdue charges.
REINSTATEMENT. A terminated Contract may be reinstated within three years of the
date of default and before the Final Payment Date. The reinstatement takes
effect on the Monthly Processing Date following the date you submit to us:
- Written application for reinstatement;
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- Evidence of Insurability showing that the Insured is insurable according
to our current underwriting rules;
- A Payment that is large enough to cover the cost of all Contract charges
that were due and unpaid during the grace period;
- A Payment that is large enough to keep the Contract in force for three
months; and
- A Payment or reinstatement of any loan against the Contract that existed
at the end of the grace period.
Contracts which have been surrendered may not be reinstated.
SURRENDER CHARGE. For the purpose of measuring the surrender charge period, the
contract will be reinstated as of the date of default. The surrender charge on
the date of reinstatement is the surrender charge that would have been in effect
on the date of default.
CONTRACT VALUE ON REINSTATEMENT -- The Contract Value on the date of
reinstatement is:
- The Payment made to reinstate the Contract and interest earned from the
date the Payment was received at our Principal Office; PLUS
- The Contract Value less any Outstanding Loan on the date of default (not
to exceed the surrender charge on the date of reinstatement); MINUS
- The Monthly Deductions due on the date of reinstatement.
You may reinstate any Outstanding Loan.
OTHER CONTRACT PROVISIONS
CONTRACT OWNER -- The Contract Owner named on the specifications page of the
Contract is the Insured unless another Contract Owner has been named in the
application. As Contract Owner, you are entitled to exercise all rights under
your Contract while the Insured is alive, with the consent of any irrevocable
Beneficiary.
BENEFICIARY -- The Beneficiary is the person or persons to whom the Net Death
Benefit is payable on the Insured's death. Unless otherwise stated in the
Contract, the Beneficiary has no rights in the Contract before the Insured dies.
While the Insured is alive, you may change the Beneficiary, unless you have
declared the Beneficiary to be irrevocable. If no Beneficiary is alive when the
Insured dies, the Contract Owner (or the Contract Owner's estate) will be the
Beneficiary. If more than one Beneficiary is alive when the Insured dies, we
will pay each Beneficiary in equal shares, unless you have chosen otherwise.
Where there is more than one Beneficiary, the interest of a Beneficiary who dies
before the Insured will pass to surviving Beneficiaries proportionately, unless
the Contract owner has requested otherwise.
ASSIGNMENT -- You may assign a Contract as collateral or make an absolute
assignment. All Contract rights will be transferred as to the assignee's
interest. The consent of the assignee may be required to make changes in Payment
allocations, make transfers or to exercise other rights under the Contract. We
are not bound by an assignment or release thereof, unless it is in writing and
recorded at our Principal Office. When recorded, the assignment will take effect
on the date the Written Request was signed. Any rights the assignment creates
will be subject to any payments we made or actions we took before the assignment
is recorded. We are not responsible for determining the validity of any
assignment or release.
The following Contract provisions may vary by state.
LIMIT ON RIGHT TO CONTEST THE CONTRACT -- We cannot challenge the validity of
your Contract if the Insured was alive after the Contract had been in force for
two years from the Date of Issue.
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<PAGE>
SUICIDE -- The Net Death Benefit will not be paid if the Insured commits
suicide, while sane or insane, within two years from the Date of Issue. Instead,
we will pay the Beneficiary all Payments made for the Contract, without
interest, less any Outstanding Loan and partial withdrawals.
MISSTATEMENT OF AGE OR SEX -- If the Insured's Age or sex is not correctly
stated in the Contract application, we will adjust benefits under the Contract
to reflect the correct Age and sex. The adjustment will be based upon the ratio
of the Maximum Payment for the Contract to the Maximum Payment for the Contract
issued for the correct Age or sex. We will not reduce the Death Benefit to less
than the Guideline Minimum Sum Insured. For a unisex Contract, there is no
adjusted benefit for misstatement of sex.
DELAY OF PAYMENTS -- Amounts payable from the Variable Account for surrender,
partial withdrawals, Net Death Benefit, Contract loans and transfers may be
postponed whenever:
- The New York Stock Exchange is closed other than customary weekend and
holiday closings;
- The SEC restricts trading on the New York Stock Exchange; or
- The SEC determines an emergency exists, so that disposal of securities is
not reasonably practicable or it is not reasonably practicable to compute
the value of the Variable Account's net assets.
We may delay paying any amount derived from a Payment you made by check until
the check has cleared your bank.
We reserve the right to defer amounts payable from the Fixed Account. This delay
may not exceed six months. However, if payment is delayed for 30 days or more,
we will pay interest at least equal to an effective annual yield of 3.0% per
year for the deferment. Amounts from the Fixed Account used to make payments on
contracts that we or our affiliates issue will not be delayed.
FEDERAL TAX CONSIDERATIONS
The following summary of federal tax considerations is based on our
understanding of the present federal income tax laws as they are currently
interpreted. Legislation may be proposed which, if passed, could adversely and
possibly retroactively affect the taxation of the Contracts. This summary is not
exhaustive, does not purport to cover all situations, and is not intended as tax
advice. We do not address tax provisions that may apply if the Contract Owner is
a corporation or the Trustee of an employee benefit plan. You should consult a
qualified tax adviser to apply the law to your circumstances.
ALLMERICA FINANCIAL AND THE VARIABLE ACCOUNT -- Allmerica Financial is taxed as
a life insurance company under Subchapter L of the Code. We file a consolidated
tax return with our parent and affiliates. We do not currently charge for any
income tax on the earnings or realized capital gains in the Variable Account. We
do not currently charge for federal income taxes respecting the Variable
Account. A charge may apply in the future for any federal income taxes we incur.
The charge may become necessary, for example, if there is a change in our tax
status. Any charge would be designed to cover the federal income taxes on the
investment results of the Variable Account.
Under current laws, Allmerica Financial may incur state and local taxes besides
premium taxes. These taxes are not currently significant. If there is a material
change in these taxes affecting the Variable Account, we may charge for taxes
paid or for tax reserves.
TAXATION OF THE CONTRACTS -- We believe that the Contracts described in this
prospectus are life insurance contracts under Section 7702 of the Code. Section
7702 affects the taxation of life insurance contracts and places limits on the
relationship of the Contract Value to the Death Benefit. As a life insurance
contract, the Net Death Benefit of the Contract is excludable from the gross
income of the Beneficiary. Also, any increase in Contract Value is not taxable
until received by you or your designee. Although the Company
28
<PAGE>
believes the Contracts are in compliance with Section 7702 of the Code, the
manner in which Section 7702 should be applied to a last survivorship life
insurance contract is not directly addressed by Section 7702. In absence of
final regulations or other guidance issued under Section 7702, there is
necessarily some uncertainty whether a Contract will meet the Section 7702
definition of a life insurance contract. This is true particularly if the
Contract Owner pays the full amount of payments permitted under the Contract. A
Contract Owner contemplating the payment of such amounts should do so only after
consulting a tax advisor. If a Contract were determined not to be a life
insurance contract under Section 7702, it would not have most of the tax
advantages normally provided by a life insurance contract.
A life insurance contract is treated as a "modified endowment contract" under
Section 7702A of the Code if it meets the definition of life insurance in
Section 7702 but fails the seven-pay test of Section 7702A. The seven-pay test
provides that payments can not be paid at a rate more rapidly than allowed by
the payment of seven annual payments using specified computational rules
provided in Section 7702A.
If the Contract is considered a modified endowment contract, distributions
(including Contract loans, partial withdrawals, surrenders and assignments) will
be taxed on an "income-first" basis and includible in gross income to the extent
that the Surrender Value exceeds the Contract Owner's investment in the
Contract. Any other amounts will be treated as a return of capital up to the
Contract Owner's basis in the Contract. A 10% tax is imposed on that part of any
distribution that is includible in income, unless the distribution is:
- Made after the taxpayer becomes disabled;
- Made after the taxpayer attains age 59 1/2; or
- Part of a series of substantially equal periodic payments for the
taxpayer's life or life expectancy or joint life expectancies of the
taxpayer and beneficiary.
Allmerica Financial has designed this Contract to meet the definition of a
modified endowment contract.
Any Contract received in exchange for a modified endowment contract will also be
a modified endowment contract. However, an exchange under Section 1035 of the
Code of a life insurance contract entered into before June 21, 1988 will not
cause the new Contract to be treated as a modified endowment contract if no
additional payments are made and there is no increase in the death benefit as a
result of the exchange.
All modified endowment contracts issued by the same insurance company to the
same Contract Owner during any 12-month period will be treated as a single
modified endowment contract in computing taxable distributions.
Consumer interest paid on Contract loans under an individually owned Contract is
not tax deductible. A business may deduct interest on loans up $50,000 subject
to a prescribed maximum amount, provided that the Insured is a "key person" of
that business. The Code defines "key person" to mean an officer or a 20% owner.
Federal tax law requires that the investment of each Sub-Account funding the
Contracts is adequately diversified according to Treasury regulations. Although
we do not have control over the investments of the Funds, we believe that the
Funds currently meet the Treasury's diversification requirements. We will
monitor continued compliance with these requirements.
The Treasury Department has announced that previous regulations on
diversification do not provide guidance concerning the extent to which Contract
Owners may direct their investments to divisions of a separate investment
account. Regulations may provide guidance in the future. The Contracts or our
administrative rules may be modified as necessary to prevent a Contract Owner
from being considered the owner of the assets of the Variable Account.
29
<PAGE>
VOTING RIGHTS
Where the law requires, we will vote Fund shares that each Sub-Account holds
according to instructions received from Contract Owners with Contract Value in
the Sub-Account. If, under the 1940 Act or its rules, we may vote shares in our
own right, whether or not the shares relate to the Contracts, we reserve the
right to do so.
We will provide each person having a voting interest in a Fund with proxy
materials and voting instructions. We will vote shares held in each Sub-Account
for which no timely instructions are received in proportion to all instructions
received for the Sub-Account. We will also vote in the same proportion our
shares held in the Variable Account that do not relate to the Contracts.
We will compute the number of votes that a Contract Owner has the right to
instruct on the record date established for the Fund. This number is the
quotient of:
- Each Contract Owner's Contract Value in the Sub-Account; divided by
- The net asset value of one share in the Fund in which the assets of the
Sub-Account are invested.
We may disregard voting instructions Contract Owners or the Trustees initiate in
favor of any change in the investment policies or in any investment adviser or
principal underwriter. Our disapproval of any change must be reasonable. A
change in investment policies or investment adviser must be based on a good
faith determination that the change would be contrary to state law or otherwise
is improper under the objectives and purposes of the funds. If we do disregard
voting instructions, we will include a summary of and reasons for that action in
the next report to Contract Owners.
30
<PAGE>
DIRECTORS AND PRINCIPAL OFFICERS OF THE COMPANY
<TABLE>
<CAPTION>
NAME AND POSITION PRINCIPAL OCCUPATION(S) DURING PAST FIVE YEARS
- ---------------------------------------- --------------------------------------------------
<S> <C>
Bruce C. Anderson Director of First Allmerica since 1996; Vice
Director President, First Allmerica since 1984
Abigail M. Armstrong Secretary of First Allmerica since 1996; Counsel,
Secretary and Counsel First Allmerica since 1991
Robert E. Bruce Director and Chief Information Officer of First
Director and Chief Information Officer Allmerica since 1997; Vice President of First
Allmerica since 1995; Corporate Manager, Digital
Equipment Corporation 1979 to 1995
John P. Kavanaugh Director and Chief Investment Officer of First
Director, Vice President and Allmerica since 1996; Vice President, First
Chief Investment Officer Allmerica since 1991
John F. Kelly Director of First Allmerica since 1996; General
Director, Vice President and Counsel since 1981; Senior Vice President
General Counsel since1986, and Assistant Secretary, First
Allmerica since 1991
J. Barry May Director of First Allmerica since 1996; Director
Director and President, The Hanover Insurance Company
since 1996; Vice President, The Hanover Insurance
Company, 1993 to 1996; General Manager, The
Hanover Insurance Company 1989 to 1993
James R. McAuliffe Director of First Allmerica since 1996; Director
Director of Citizens Insurance Company of America since
1992; President since 1994 and CEO since 1996;
Vice President, First Allmerica 1982 to 1994 and
Chief Investment Officer, First Allmerica 1986 to
1994.
John F. O'Brien Director, Chairman of the Board, President and
Director and Chairman of the Board Chief Executive Officer, First Allmerica since
1989
Edward J. Parry, III Director and Chief Financial Officer of First
Director, Vice President, Allmerica since 1996; Vice President and
Chief Financial Officer, and Treasurer Treasurer, First Allmerica since 1993
Richard M. Reilly Director of First Allmerica since 1996; Vice
Director, President and President, First Allmerica since 1990; Director,
Chief Executive Officer Allmerica Investments, Inc. since 1990; Director
and President, Allmerica Financial Investment
Management Services, Inc. since 1990
Eric A. Simonsen Director of First Allmerica since 1996; Vice
Director and Vice President President, First Allmerica since 1990; Chief
Financial Officer, First Allmerica 1990 to 1996
Phillip E. Soule Director of First Allmerica since 1996; Vice
Director President, First Allmerica since 1987
</TABLE>
31
<PAGE>
DISTRIBUTION
Allmerica Investments, Inc., an indirect wholly owned subsidiary of First
Allmerica, acts as the principal underwriter and general distributor of the
Contracts. Allmerica Investments, Inc. is registered with the SEC as a
broker-dealer and is a member of the National Association of Securities Dealers,
Inc. ("NASD"). Broker-dealers sell the Contracts through their registered
representatives who are appointed by us.
We pay to broker-dealers who sell the Contract commissions based on a commission
schedule. After the Date of Issue, commissions will not exceed 8.5% of the
Payment. After Contract year 10, we pay broker-dealer a persistency bonus and
commence paying annual compensation of up to 0.25% of unloaned Contract Value.
Alternative commission schedules are available with lower commission amounts
based upon the age of the Contract Owner. To the extent permitted by NASD rules,
promotional incentives or payments may also be provided to broker-dealers based
on sales volumes, the assumption of wholesaling functions or other sales-related
criteria. Other payments may be made for other services that do not directly
involve the sale of the Contracts. These services may include the recruitment
and training of personnel, production of promotional literature, and similar
services.
We intend to recoup commissions and other sales expenses through a combination
of the contingent surrender charge and investment earnings on amounts allocated
under the Contracts to the Fixed Account. Commissions paid on the Contracts,
including other incentives or payments, are not charged to Contract Owners or to
the Separate Account.
REPORTS
We will maintain the records for the Variable Account. We will promptly send you
statements of transactions under your Contract, including:
- Payments;
- Transfers among Sub-Accounts and the Fixed Account;
- Partial withdrawals;
- Increases in loan amount or loan repayments;
- Lapse or termination for any reason; and
- Reinstatement.
We will send an annual statement to you that will summarize all of the above
transactions and deductions of charges during the Contract year. It will also
set forth the status of the Death Benefit, Contract Value, Surrender Value,
amounts in the Sub-Accounts and Fixed Account, and any Contract loans. We will
send you reports containing financial statements and other information for the
Variable Account, Palladian-SM- and the Trust as the 1940 Act requires.
PERFORMANCE INFORMATION
The Contracts were first offered in 1997. However, the Allmerica Financial may
advertise "Total Return" and "Average Annual Total Return" performance
information based on the periods that the Funds have been in existence. The
results for any period prior to the Contracts being offered will be calculated
as if the Contracts had been offered during that period of time, with all
charges assumed to be those applicable to the Sub-Accounts and the Funds.
Total return and average annual total return are based on the hypothetical
profile of a representative Contract Owner and historical earnings and are not
intended to indicate future performance. "Total return" is the total income
generated net of certain expenses and charges. "Average annual total return" is
net of the same expenses and charges, but reflects the hypothetical return
compounded annually. This hypothetical return is
32
<PAGE>
equal to cumulative return had performance been constant over the entire period.
Average annual total returns are not the same as yearly results and tend to
smooth out variations in the Fund's return.
Performance information under the Contracts is net of Fund expenses, Monthly
Deductions and surrender charges. We take a representative Contract Owner and
assume that:
- The Insured is a male Age 36, standard (non-tobacco user) Underwriting
Class;
- The Contract Owner had allocations in each of the Sub-Accounts for the
Fund durations shown; and
- There was a full surrender at the end of the applicable period.
We may compare performance information for a Sub-Account in reports and
promotional literature to:
- Standard & Poor's 500 Stock Index ("S&P 500");
- Dow Jones Industrial Average ("DJIA");
- Shearson Lehman Aggregate Bond Index;
- Other unmanaged indices of unmanaged securities widely regarded by
investors as representative of the securities markets;
- Other groups of variable life separate accounts or other investment
products tracked by Lipper Analytical Services;
- Other services, companies, publications, or persons such as Morningstar,
Inc., who rank the investment products on performance or other criteria;
and
- The Consumer Price Index.
Unmanaged indices may assume the reinvestment of dividends but generally do not
reflect deductions for insurance and administrative charges, separate account
charges and fund management costs and expenses. Performance information for any
Sub-Account reflects only the performance of a hypothetical investment in the
Sub-Account during a period. It is not representative of what may be achieved in
the future. However, performance information may be helpful in reviewing market
conditions during a period and in considering a fund's success in meeting its
investment objectives.
In advertising, sales literature, publications or other materials, we may give
information on various topics of interest to Contract Owners and prospective
Contract Owners. These topics may include:
- The relationship between sectors of the economy and the economy as a whole
and its effect on various securities markets, investment strategies and
techniques (such as value investing, market timing, dollar cost averaging,
asset allocation and automatic account rebalancing);
- The advantages and disadvantages of investing in tax-deferred and taxable
investments;
- Customer profiles and hypothetical Payment and investment scenarios;
- Financial management and tax and retirement planning; and
- Investment alternatives to certificates of deposit and other financial
instruments, including comparisons between the Contracts and the
characteristics of and market for the financial instruments.
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, Inc. ("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/heath
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 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.
33
<PAGE>
PERFORMANCE INFORMATION REFLECTS ONLY THE PERFORMANCE OF A HYPOTHETICAL
INVESTMENT DURING THE PARTICULAR TIME PERIOD ON WHICH THE CALCULATIONS ARE
BASED. ONE-YEAR TOTAL RETURN AND AVERAGE ANNUAL TOTAL RETURN FIGURES ARE BASED
ON HISTORICAL EARNINGS AND ARE NOT INTENDED TO INDICATE FUTURE PERFORMANCE.
PERFORMANCE INFORMATION SHOULD BE CONSIDERED IN LIGHT OF THE INVESTMENT
OBJECTIVES AND POLICIES, CHARACTERISTICS AND QUALITY OF THE PORTFOLIO OF THE
FUND IN WHICH A 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.
LEGAL PROCEEDINGS
There are no pending legal proceedings involving the Variable Account or its
assets. Allmerica Financial is not involved in any litigation that is materially
important to its total assets.
ADDITION, DELETION OR SUBSTITUTION OF INVESTMENTS
We reserve the right, subject to law, to make additions to, deletions from, or
substitutions for the shares that are held in the Sub-Accounts. We may redeem
the shares of a Fund and substitute shares of another registered open-end
management company, if:
- The shares of the Fund are no longer available for investment: OR
- In our judgment further investment in the Fund would be improper based on
the purposes of the Variable Account or the affected Sub-Account.
Where the 1940 Act or other law requires, we will not substitute any shares
respecting a Contract interest in a Sub-Account without notice to Contract
Owners and prior approval of the SEC and state insurance authorities. The
Variable Account may, as the law allows, purchase other securities for other
contracts or allow a conversion between contracts on a Contract Owner's request.
We reserve the right to establish additional Sub-Accounts funded by a new fund
or by another investment company. Subject to law, we may, in our sole
discretion, establish new Sub-Accounts or eliminate one or more Sub-Accounts.
Shares of the Funds are issued to other separate accounts of Allmerica Financial
and its affiliates that fund variable annuity contracts ("mixed funding.")
Shares of the Portfolios of Palladian-SM- are also issued to other unaffiliated
insurance companies ("shared funding.") It is conceivable that in the future
such mixed funding or shared funding may be disadvantageous for variable life
contract owners or variable annuity contract owners. Allmerica Financial,
Palladian-SM- and the Trust do not believe that mixed funding is currently
disadvantageous to either variable life insurance Contract Owners or variable
annuity contract owners. Allmerica Financial will monitor events to identify any
material conflicts among Contract Owners because of mixed funding. If the
Company concludes that separate funds should be established for variable life
and variable annuity separate accounts, we will bear the expenses.
We may change the Contract to reflect a substitution or other change and will
notify Contract Owners of the change. Subject to any approvals the law may
require, the variable account or any sub-accounts may be:
- Operated as a management company under the 1940 Act;
- Deregistered under the 1940 Act if registration is no longer required; OR
- Combined with other sub-accounts or our other separate accounts.
FURTHER INFORMATION
We have filed a registration statement for this offering under the 1933 Act with
the SEC. Under SEC rules and regulations, we have omitted from this prospectus
parts of the registration statement and amendments. Statements contained in this
prospectus are summaries of the Contract and other legal documents. The complete
documents and omitted information may be obtained from the SEC's principal
office in Washington, D.C., on payment of the SEC's prescribed fees.
34
<PAGE>
INDEPENDENT ACCOUNTANTS
The financial statements of the Company as of December 31, 1997 and 1996 and for
each of the two years in the period ended December 31, 1997, included in this
prospectus constituting part of this Registration Statement, have been so
included in reliance on the report of Price Waterhouse LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting.
The financial statements of the Company included herein should be considered
only as bearing on the ability of the Company to meet its obligations under the
Policies.
MORE INFORMATION ABOUT THE FIXED ACCOUNT
This Prospectus serves as a disclosure document only for the aspects of the
Contract relating to the Variable Account. For complete details on the Fixed
Account, read the Contract itself. The Fixed Account and other interests in the
General Account are not regulated under the 1933 Act or the 1940 Act because of
exemption and exclusionary provisions. Provisions of the 1933 Act on the
accuracy and completeness of statements made in prospectuses may apply to
information on the fixed part of the Contract and the Fixed Account. The SEC has
not reviewed the disclosures in this section of the Prospectus.
GENERAL DESCRIPTION -- You may allocate part or all of your Payment to
accumulate at a fixed rate of interest in the Fixed Account. The Fixed Account
is a part of our General Account. The General Account is made up of all of our
general assets other than those allocated to any separate account. Allocations
to the Fixed Account become part of our General Account assets and are used to
support insurance and annuity obligations.
FIXED ACCOUNT INTEREST -- We guarantee amounts allocated to the Fixed Account as
to principal and a minimum rate of interest. The minimum interest we will credit
on amounts allocated to the Fixed Account is 4.0% compounded annually. "Excess
interest" may or may not be credited at our sole discretion. We will guarantee
initial rates on amounts allocated to the Fixed Account, either as a Payment or
a transfer, to the next Contract anniversary.
TRANSFERS, SURRENDERS, PARTIAL WITHDRAWALS AND CONTRACT LOANS -- If a Contract
is surrendered or if a partial withdrawal is made, a surrender charge and/or
partial withdrawal charge may be imposed. We deduct partial withdrawals from
Contract Value allocated to the Fixed Account on a last-in/first out basis.
The first 12 transfers in a Contract year are free. After that, we may deduct a
transfer charge, not to exceed $25, for each transfer in that Contract year. The
transfer privilege is subject to our consent and to our then current rules.
Contract loans may also be made from the Contract Value in the Fixed Account. We
will credit that part of the Contract value that is equal to any Outstanding
Loan with interest at an effective annual yield of at least 4.0% (5.5% for
preferred loans).
We may delay transfers, surrenders, partial withdrawals, Net Death Benefits and
Contract loans up to six months. However, if payment is delayed for 30 days or
more, we will pay interest at least equal to an effective annual yield of 3.0%
per year for the deferment. Amounts from the Fixed Account used to make payments
on contracts that we or our affiliates issue will not be delayed.
FINANCIAL STATEMENTS
Financial Statements for Allmerica Financial are included in this Prospectus,
starting on the next page. The financial statements of Allmerica Financial
should be considered only as bearing on our ability to meet our obligations
under the Contract. They should not be considered as bearing on the investment
performance of the assets held in the Variable Account.
35
<PAGE>
ALLMERICA FINANCIAL
LIFE INSURANCE AND
ANNUITY COMPANY
FINANCIAL STATEMENTS
DECEMBER 31, 1997
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholder of
Allmerica Financial Life Insurance and Annuity Company
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, of shareholder's equity, and of cash flows
present fairly, in all material respects, the financial position of Allmerica
Financial Life Insurance and Annuity Company at December 31, 1997 and 1996, and
the results of their operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ Price Waterhouse LLP
Price Waterhouse LLP
Boston, Massachusetts
February 3, 1998
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1997 1996
----------------------------------------------- ------- -------
<S> <C> <C>
REVENUES
Premiums..................................... $ 22.8 $ 32.7
Universal life and investment product
policy fees.............................. 212.2 176.2
Net investment income...................... 164.2 171.7
Net realized investment gains (losses)..... 2.9 (3.6)
Other income............................... 1.4 0.9
------- -------
Total revenues......................... 403.5 377.9
------- -------
BENEFITS, LOSSES AND EXPENSES
Policy benefits, claims, losses and loss
adjustment expenses...................... 187.8 192.6
Policy acquisition expenses................ 2.8 49.9
Loss from cession of disability income
business................................. 53.9 --
Other operating expenses................... 101.3 86.6
------- -------
Total benefits, losses and expenses.... 345.8 329.1
------- -------
Income before federal income taxes............. 57.7 48.8
------- -------
FEDERAL INCOME TAX EXPENSE (BENEFIT)
Current.................................... 13.9 26.9
Deferred................................... 7.1 (9.8)
------- -------
Total federal income tax expense....... 21.0 17.1
------- -------
Net income..................................... $ 36.7 $ 31.7
------- -------
------- -------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-1
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
(IN MILLIONS) 1997 1996
-------------------------------------------------------- ---------- ---------
<S> <C> <C>
ASSETS
Investments:
Fixed maturities at fair value (amortized cost of
$1,340.5 and $1,660.2)............................ $ 1,402.5 $ 1,698.0
Equity securities at fair value (cost of $34.4 and
$33.0)............................................ 54.0 41.5
Mortgage loans...................................... 228.2 221.6
Real estate......................................... 12.0 26.1
Policy loans........................................ 140.1 131.7
Other long term investments......................... 20.3 7.9
---------- ---------
Total investments............................... 1,857.1 2,126.8
---------- ---------
Cash and cash equivalents............................. 31.1 18.8
Accrued investment income............................. 34.2 37.7
Deferred policy acquisition costs..................... 765.3 632.7
Reinsurance receivables on paid and unpaid losses,
benefits and unearned premiums...................... 251.1 81.5
Other assets.......................................... 10.7 8.2
Separate account assets............................... 7,567.3 4,524.0
---------- ---------
Total assets.................................... $ 10,516.8 $ 7,429.7
---------- ---------
---------- ---------
LIABILITIES
Policy liabilities and accruals:
Future policy benefits.............................. $ 2,097.3 $ 2,171.3
Outstanding claims, losses and loss adjustment
expenses.......................................... 18.5 16.1
Unearned premiums................................... 1.8 2.7
Contractholder deposit funds and other policy
liabilities....................................... 32.5 32.8
---------- ---------
Total policy liabilities and accruals........... 2,150.1 2,222.9
---------- ---------
Expenses and taxes payable............................ 77.6 77.3
Reinsurance premiums payable.......................... 4.9 --
Deferred federal income taxes......................... 75.9 60.2
Separate account liabilities.......................... 7,567.3 4,523.6
---------- ---------
Total liabilities............................... 9,875.8 6,884.0
---------- ---------
Commitments and contingencies (Note 13)
SHAREHOLDER'S EQUITY
Common stock, $1,000 par value, 10,000 shares
authorized, 2,521 and 2,518 shares issued and
outstanding......................................... 2.5 2.5
Additional paid in capital............................ 386.9 346.3
Unrealized appreciation on investments, net........... 38.5 20.5
Retained earnings..................................... 213.1 176.4
---------- ---------
Total shareholder's equity...................... 641.0 545.7
---------- ---------
Total liabilities and shareholder's equity...... $ 10,516.8 $ 7,429.7
---------- ---------
---------- ---------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-2
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1997 1996
----------------------------------------------- ------- -------
<S> <C> <C>
COMMON STOCK
Balance at beginning of period............. $ 2.5 $ 2.5
Issued during year......................... -- --
------- -------
Balance at end of period................... 2.5 2.5
------- -------
ADDITIONAL PAID IN CAPITAL
Balance at beginning of period............. 346.3 324.3
Contribution from Parent................... 40.6 22.0
------- -------
Balance at end of period................... 386.9 346.3
------- -------
RETAINED EARNINGS
Balance at beginning of period............. 176.4 144.7
Net income................................. 36.7 31.7
------- -------
Balance at end of period................... 213.1 176.4
------- -------
NET UNREALIZED APPRECIATION ON INVESTMENTS
Balance at beginning of period............. 20.5 23.8
Net appreciation (depreciation) on
available for sale securities............ 27.0 (5.1)
(Provision) benefit for deferred federal
income taxes............................. (9.0) 1.8
------- -------
Balance at end of period................... 38.5 20.5
------- -------
Total shareholder's equity............. $ 641.0 $ 545.7
------- -------
------- -------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-3
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1997 1996
-------------------------------------------- -------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.............................. $ 36.7 $ 31.7
Adjustments to reconcile net income to
net cash used in operating activities:
Net realized gains.................. (2.9) 3.6
Net amortization and depreciation... -- 3.5
Loss from cession of disability
income business................... 53.9 --
Deferred federal income taxes....... 7.1 (9.8)
Payment related to cession of
disability income business........ (207.0) --
Change in deferred acquisition
costs............................. (181.3) (66.8)
Change in premiums and notes
receivable, net of reinsurance
payable........................... 3.9 (0.2)
Change in accrued investment
income............................ 3.5 1.2
Change in policy liabilities and
accruals, net..................... (72.4) (39.9)
Change in reinsurance receivable.... 22.1 (1.5)
Change in expenses and taxes
payable........................... 0.2 32.3
Separate account activity, net...... 0.4 10.5
Other, net.......................... (7.5) (0.2)
-------- --------
Net used in operating
activities.................... (343.3) (35.6)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from disposals and maturities
of available-for-sale fixed
maturities............................ 909.7 809.4
Proceeds from disposals of equity
securities............................ 2.4 1.5
Proceeds from disposals of other
investments........................... 23.7 17.4
Proceeds from mortgages matured or
collected............................. 62.9 34.0
Purchase of available-for-sale fixed
maturities............................ (579.7) (795.8)
Purchase of equity securities........... (3.2) (13.2)
Purchase of other investments........... (79.4) (36.2)
Other investing activities, net......... -- (2.0)
-------- --------
Net cash provided by investing
activities........................ 336.4 15.1
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of stock and
capital paid in....................... 19.2 22.0
-------- --------
Net cash provided by financing
activities........................ 19.2 22.0
-------- --------
Net change in cash and cash equivalents..... 12.3 1.5
Cash and cash equivalents, beginning of
period..................................... 18.8 17.3
-------- --------
Cash and cash equivalents, end of period.... $ 31.1 $ 18.8
-------- --------
-------- --------
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid........................... $ -- $ 3.4
Income taxes paid....................... $ 5.4 $ 16.5
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-4
<PAGE>
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
Allmerica Financial Life Insurance and Annuity Company ("AFLIAC" or the
"Company") is organized as a stock life insurance company, and is a wholly-owned
subsidiary of SMA Financial Corporation ("SMAFCO"), which is wholly owned by
First Allmerica Financial Life Insurance Company ("FAFLIC"). FAFLIC is a
wholly-owned subsidiary of Allmerica Financial Corporation ("AFC").
The consolidated financial statements of AFLIAC include the accounts of Somerset
Square, Inc., a wholly-owned non-insurance company and its results of operations
for the month of December, 1997. Somerset Square, Inc. was transferred from
SMAFCO effective November 30, 1997. (See Significant Transactions.)
The Statutory stockholder's equity of the Company is being maintained at a
minimum level of 5% of general account assets by FAFLIC in accordance with a
policy established by vote of FAFLIC's Board of Directors.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amount of revenues and expenses during the reporting period. Actual
results could differ from those estimates. Certain reclassifications have been
made to the 1996 financial statements in order to conform to the 1997
presentation.
B. VALUATION OF INVESTMENTS
In accordance with the provisions of Statement of Financial Accounting Standards
No. 115 ("Statement No. 115"), "ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND
EQUITY SECURITIES", the Company is required to classify its investments into one
of three categories: held-to-maturity, available-for-sale or trading. The
Company determines the appropriate classification of debt securities at the time
of purchase and reevaluates such designation as of each balance sheet date.
Mortgage loans on real estate are stated at unpaid principal balances, net of
unamortized discounts and reserves. Reserves on mortgage loans are based on
losses expected by management to be realized on transfers of mortgage loans to
real estate (upon foreclosure), on the disposition or settlement of mortgage
loans and on mortgage loans which management believes may not be collectible in
full. In establishing reserves, management considers, among other things, the
estimated fair value of the underlying collateral.
Fixed maturities and mortgage loans that are delinquent are placed on
non-accrual status, and thereafter interest income is recognized only when cash
payments are received.
Policy loans are carried principally at unpaid principal balances.
During 1997, the Company committed to a plan to dispose of all real estate
assets by the end of 1998. As a result of this decision real estate held by the
Company and real estate joint ventures were written down to the estimated fair
value less cost to sell. Depreciation is not recorded on these assets while they
are held for disposal.
Realized investment gains and losses, other than those related to separate
accounts for which the Company does not bear the investment risk, are reported
as a component of revenues based upon specific identification of the investment
assets sold. When an other-than-temporary impairment of the value of a specific
investment
F-5
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
or a group of investments is determined, a realized investment loss is recorded.
Changes in the valuation allowance for mortgage loans and real estate are
included in realized investment gains or losses.
C. FINANCIAL INSTRUMENTS
In the normal course of business, the Company enters into transactions involving
various types of financial instruments, including debt, investments such as
fixed maturities, mortgage loans and equity securities, and investment and loan
commitments. These instruments involve credit risk and also may be subject to
risk of loss due to interest rate fluctuation. The Company evaluates and
monitors each financial instrument individually and, when appropriate, obtains
collateral or other security to minimize losses.
D. CASH AND CASH EQUIVALENTS
Cash and cash equivalents includes cash on hand, amounts due from banks and
highly liquid debt instruments purchased with an original maturity of three
months or less.
E. DEFERRED POLICY ACQUISITION COSTS
Acquisition costs consist of commissions, underwriting costs and other costs,
which vary with, and are primarily related to, the production of revenues.
Acquisition costs related to universal life products, variable annuities and
contractholder deposit funds are deferred and amortized in proportion to total
estimated gross profits from investment yields, mortality, surrender charges and
expense margins over the expected life of the contracts. This amortization is
reviewed annually and adjusted retrospectively when the Company revises its
estimate of current or future gross profits to be realized from this group of
products, including realized and unrealized gains and losses from investments.
Acquisition costs related to fixed annuities and other life insurance products
are deferred and amortized, generally in proportion to the ratio of annual
revenue to the estimated total revenues over the contract periods based upon the
same assumptions used in estimating the liability for future policy benefits.
Deferred acquisition costs for each product are reviewed to determine if they
are recoverable from future income, including investment income. If such costs
are determined to be unrecoverable, they are expensed at the time of
determination. Although realization of deferred policy acquisition costs is not
assured, management believes it is more likely than not that all of these costs
will be realized. The amount of deferred policy acquisition costs considered
realizable, however, could be reduced in the near term if the estimates of gross
profits or total revenues discussed above are reduced. The amount of
amortization of deferred policy acquisition costs could be revised in the near
term if any of the estimates discussed above are revised.
F. SEPARATE ACCOUNTS
Separate account assets and liabilities represent segregated funds administered
and invested by the Company for the benefit of certain pension, variable annuity
and variable life insurance contractholders. Assets consist principally of
bonds, common stocks, mutual funds, and short-term obligations at market value.
The investment income, gains, and losses of these accounts generally accrue to
the contractholders and, therefore, are not included in the Company's net
income. Appreciation and depreciation of the Company's interest in the separate
accounts, including undistributed net investment income, is reflected in
shareholder's equity or net investment income.
G. POLICY LIABILITIES AND ACCRUALS
Future policy benefits are liabilities for life, health and annuity products.
Such liabilities are established in amounts adequate to meet the estimated
future obligations of policies in force. The liabilities associated with
traditional life insurance products are computed using the net level premium
method for individual life and annuity policies, and are based upon estimates as
to future investment yield, mortality and withdrawals that include provisions
for adverse deviation. Future policy benefits for individual life insurance and
annuity policies are computed using interest rates ranging from 2 1/2% to 6% for
life insurance and 2% to 9 1/2% for
F-6
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
annuities. Mortality, morbidity and withdrawal assumptions for all policies are
based on the Company's own experience and industry standards. Liabilities for
universal life include deposits received from customers and investment earnings
on their fund balances, less administrative charges. Universal life fund
balances are also assessed mortality and surrender charges. Individual health
benefit liabilities for active lives are estimated using the net level premium
method, and assumptions as to future morbidity, withdrawals and interest which
provide a margin for adverse deviation. Benefit liabilities for disabled lives
are estimated using the present value of benefits method and experience
assumptions as to claim terminations, expenses and interest.
Liabilities for outstanding claims, losses and loss adjustment expenses are
estimates of payments to be made for reported claims and estimates of claims
incurred but not reported. These liabilities are determined using case basis
evaluations and statistical analyses and represent estimates of the ultimate
cost of all claims incurred but not paid. These estimates are continually
reviewed and adjusted as necessary; such adjustments are reflected in current
operations.
Premiums for individual accident and health insurance are reported as earned on
a pro-rata basis over the contract period.
The unexpired portion of these premiums is recorded as unearned premiums.
Contractholder deposit funds and other policy liabilities include
investment-related products and consist of deposits received from customers and
investment earnings on their fund balances.
All policy liabilities and accruals are based on the various estimates discussed
above. Although the adequacy of these amounts cannot be assured, management
believes that it is more likely than not that policy liabilities and accruals
will be sufficient to meet future obligations of policies in force. The amount
of liabilities and accruals, however, could be revised in the near term if the
estimates discussed above are revised.
H. PREMIUM AND FEE REVENUE AND RELATED EXPENSES
Premiums for individual life and health insurance and individual annuity
products, excluding universal life and investment-related products, are
considered revenue when due. Individual accident and health insurance premiums
are recognized as revenue over the related contract periods. Benefits, losses
and related expenses are matched with premiums, resulting in their recognition
over the lives of the contracts. This matching is accomplished through the
provision for future benefits, estimated and unpaid losses and amortization of
deferred policy acquisition costs. Revenues for investment-related products
consist of net investment income and contract charges assessed against the fund
values. Related benefit expenses primarily consist of net investment income
credited to the fund values after deduction for investment and risk charges.
Revenues for universal life and group variable universal life products consist
of net investment income, and mortality, administration and surrender charges
assessed against the fund values. Related benefit expenses include universal
life benefits in excess of fund values and net investment income credited to
universal life fund values. Certain policy charges that represent compensation
for services to be provided in future periods are deferred and amortized over
the period benefited using the same assumptions used to amortize capitalized
acquisition costs.
I. FEDERAL INCOME TAXES
AFC, its life insurance subsidiaries, FAFLIC and AFLIAC, and its non-life
insurance domestic subsidiaries file a life-nonlife consolidated United States
Federal income tax return. Entities included within the consolidated group are
segregated into either a life insurance or non-life insurance company subgroup.
The consolidation of these subgroups is subject to certain statutory
restrictions on the percentage of eligible non-life insurance company taxable
operating losses that can be applied to offset life insurance company taxable
income. Allmerica P&C and its subsidiaries will be included in the AFC
consolidated return as part of the
F-7
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
non-life insurance company subgroup for the period July 17, 1997 through
December 31, 1997. For the period January 1, 1997 through July 16, 1997,
Allmerica P&C and its subsidiaries will file a separate consolidated United
States Federal income tax return.
The Board of Directors has delegated to AFC management, the development and
maintenance of appropriate Federal Income Tax allocation policies and
procedures, which are subject to written agreement between the companies. The
Federal income tax for all subsidiaries in the consolidated return of AFC is
calculated on a separate return basis. Any current tax liability is paid to AFC.
Tax benefits resulting from taxable operating losses or credits of AFC's
subsidiaries are not reimbursed to the subsidiary until such losses or credits
can be utilized by the subsidiary on a separate return basis.
Deferred income taxes are generally recognized when assets and liabilities have
different values for financial statement and tax reporting purposes, and for
other temporary taxable and deductible differences as defined by Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS No.
109). These differences result primarily from loss reserves, policy acquisition
expenses, and unrealized appreciation/depreciation on investments.
J. NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued Statement No. 131, DISCLOSURES ABOUT SEGMENTS OF
AN ENTERPRISE AND RELATED INFORMATION. This statement establishes standards for
the way that public enterprises report information about operating segments in
annual financial statements and requires that selected information about those
operating segments be reported in interim financial statements. This statement
supersedes Statement No. 14, FINANCIAL REPORTING FOR SEGMENTS OF A BUSINESS
ENTERPRISE. Statement No. 131 requires that all public enterprises report
financial and descriptive information about their reportable operating segments.
Operating segments are defined as components of an enterprise about which
separate financial information is available that is evaluated regularly by the
chief operating decision maker in deciding how to allocate resources and in
assessing performance. This statement is effective for fiscal years beginning
after December 15, 1997. The Company anticipates no impact from the adoption of
Statement No. 131.
In June 1997, the FASB also issued Statement No. 130, REPORTING COMPREHENSIVE
INCOME, which established standards for the reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements. All items that are required to be recognized under
accounting standards as components of comprehensive income are to be reported in
a financial statement that is displayed with the same prominence as other
financial statements. This statement stipulates that comprehensive income
reflect the change in equity of an enterprise during a period from transactions
and other events and circumstances from non-owner sources. This statement is
effective for fiscal years beginning after December 15, 1997. The Company
anticipates that the adoption of Statement No. 130 will result primarily in
reporting the changes in unrealized gains and losses on investments in debt and
equity securities in comprehensive income.
2. SIGNIFICANT TRANSACTIONS
On April 14, 1997, the Company entered into an agreement in principle to
transfer the Company's individual disability income under a 100% coinsurance
agreement to Metropolitan Life Insurance Company. The coinsurance agreement
became effective October 1, 1997. The transaction has resulted in the
recognition of a $53.9 million pre-tax loss in the first quarter of 1997.
During the 4th quarter of 1997, SMAFCO contributed $40.6 million of additional
paid in capital to the Company. The nature of the contribution was $19.2 million
in cash and $21.4 million in other assets including Somerset Square, Inc.
F-8
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Effective January 1, 1998, the Company entered into an agreement with
Reinsurance Group of America, Inc. to reinsure the mortality risk on the
universal life and variable universal life blocks of business. Management
believes that this agreement will not have a material effect on the results of
operations or financial position of the Company.
3. INVESTMENTS
A. SUMMARY OF INVESTMENTS
The Company accounts for its investments, all of which are classified as
available-for-sale, in accordance with the provisions of SFAS No. 115.
The amortized cost and fair value of available-for-sale fixed maturities and
equity securities were as follows:
<TABLE>
<CAPTION>
1997
--------------------------------------------
GROSS GROSS
DECEMBER 31, AMORTIZED UNREALIZED UNREALIZED FAIR
(IN MILLIONS) COST (1) GAINS LOSSES VALUE
- ---------------------------------------- ---------- -------- --------- --------
<S> <C> <C> <C> <C>
U.S. Treasury securities and U.S.
government and agency securities....... $ 6.3 $ .5 $-- $ 6.8
States and political subdivisions....... 2.8 .2 -- 3.0
Foreign governments..................... 50.1 2.0 -- 52.1
Corporate fixed maturities.............. 1,147.5 58.7 3.3 1,202.9
Mortgage-backed securities.............. 133.8 5.2 1.3 137.7
---------- -------- --------- --------
Total fixed maturities
available-for-sale..................... $1,340.5 $66.6 $ 4.6 $1,402.5
---------- -------- --------- --------
Equity securities....................... $ 34.4 $19.9 $ 0.3 $ 54.0
---------- -------- --------- --------
---------- -------- --------- --------
1996
--------------------------------------------
U.S. Treasury securities and U.S.
government and agency securities....... $ 15.7 $ 0.5 $ 0.2 $ 16.0
States and political subdivisions....... 8.9 1.6 -- 10.5
Foreign governments..................... 53.2 2.9 -- 56.1
Corporate fixed maturities.............. 1,437.2 38.6 6.1 1,469.7
Mortgage-backed securities.............. 145.2 2.2 1.7 145.7
---------- -------- --------- --------
Total fixed maturities
available-for-sale..................... $1,660.2 $45.8 $ 8.0 $1,698.0
---------- -------- --------- --------
Equity securities....................... $ 33.0 $10.2 $ 1.7 $ 41.5
---------- -------- --------- --------
---------- -------- --------- --------
</TABLE>
(1) Amortized cost for fixed maturities and cost for equity securities.
In connection with AFLIAC's voluntary withdrawal of its license in New York,
AFLIAC agreed with the New York Department of Insurance to maintain, through a
custodial account in New York, a security deposit, the market value of which
will at all times equal 102% of all outstanding liabilities of AFLIAC for New
York policyholders, claimants and creditors. At December 31, 1997, the amortized
cost and market value of these assets on deposit were $276.8 million and $291.7
million, respectively. At December 31, 1996, the amortized cost and market value
of these assets on deposit were $284.9 million and $292.2 million, respectively.
In addition, fixed maturities, excluding those securities on deposit in New
York, with an amortized cost of $4.2 million were on deposit with various state
and governmental authorities at December 31, 1997 and 1996.
There were no contractual fixed maturity investment commitments at December 31,
1997 and 1996, respectively.
F-9
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The amortized cost and fair value by maturity periods for fixed maturities are
shown below. Actual maturities may differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without call
or prepayment penalties, or the Company may have the right to put or sell the
obligations back to the issuers. Mortgage backed securities are included in the
category representing their ultimate maturity.
<TABLE>
<CAPTION>
1997
--------------------
DECEMBER 31, AMORTIZED FAIR
(IN MILLIONS) COST VALUE
- ------------------------------------------------------------ --------- ---------
<S> <C> <C>
Due in one year or less..................................... $ 63.0 $ 63.5
Due after one year through five years....................... 328.8 343.9
Due after five years through ten years...................... 649.5 679.9
Due after ten years......................................... 299.2 315.2
--------- ---------
Total....................................................... $1,340.5 $1,402.5
--------- ---------
--------- ---------
</TABLE>
The proceeds from voluntary sales of available-for-sale securities and the gross
realized gains and gross realized losses on those sales were as follows:
<TABLE>
<CAPTION>
PROCEEDS
FROM
FOR THE YEARS ENDED DECEMBER 31, VOLUNTARY GROSS GROSS
(IN MILLIONS) SALES GAINS LOSSES
- ------------------------------------------------------------ ---------- ------ ------
<S> <C> <C> <C>
1997
Fixed maturities............................................ $702.9 $ 11.4 $ 5.0
Equity securities........................................... $ 1.3 $ 0.5 $ --
1996
Fixed maturities............................................ $496.6 $ 4.3 $ 8.3
Equity securities........................................... $ 1.5 $ 0.4 $ 0.1
</TABLE>
Unrealized gains and losses on available-for-sale and other securities, are
summarized as follows:
<TABLE>
<CAPTION>
EQUITY
FOR THE YEAR ENDED DECEMBER 31, FIXED SECURITIES
(IN MILLIONS) MATURITIES AND OTHER (1) TOTAL
- ------------------------------------------------------------ ---------- ------------- ------
<S> <C> <C> <C>
1997
Net appreciation, beginning of year......................... $ 12.7 $ 7.8 $ 20.5
Net appreciation on available-for-sale securities........... 24.3 12.5 36.8
Net depreciation from the effect on deferred policy
acquisition costs and on policy liabilities................ (9.8) -- (9.8)
Provision for deferred federal income taxes................. (5.1) (3.9) (9.0)
---------- ----- ------
9.4 8.6 18.0
---------- ----- ------
Net appreciation, end of year............................... $ 22.1 $ 16.4 $ 38.5
---------- ----- ------
---------- ----- ------
</TABLE>
(1) Includes net appreciation on other investments of $11.1 million in 1997, and
$2.2 million in 1996.
F-10
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1996 FIXED SECURITIES
(IN MILLIONS) MATURITIES AND OTHER (1) TOTAL
- ------------------------------------------------------------ ---------- ------------- ------
<S> <C> <C> <C>
Net appreciation, beginning of year......................... $ 20.4 $ 3.4 $ 23.8
Net (depreciation) appreciation on available-for-sale
securities................................................. (20.8) 6.7 (14.1)
Net appreciation from the effect on deferred policy
acquisition costs and on policy liabilities................ 9.0 -- 9.0
Benefit (provision) for deferred federal income taxes....... 4.1 (2.3) 1.8
---------- ----- ------
(7.7) 4.4 (3.3)
---------- ----- ------
Net appreciation, end of year............................... $ 12.7 $ 7.8 $ 20.5
---------- ----- ------
---------- ----- ------
</TABLE>
(1) Includes net appreciation on other investments of $11.1 million in 1997, and
$2.2 million in 1996.
B. MORTGAGE LOANS AND REAL ESTATE
AFLIAC's mortgage loans and real estate are diversified by property type and
location. Real estate investments have been obtained primarily through
foreclosure. Mortgage loans are collateralized by the related properties and
generally are no more than 75% of the property's value at the time the original
loan is made.
The carrying values of mortgage loans and real estate investments net of
applicable reserves were as follows:
<TABLE>
<CAPTION>
DECEMBER 31
(IN MILLIONS) 1997 1996
- ------------------------------------------------------------ ---------- -------------
<S> <C> <C>
Mortgage loans.............................................. $228.2 $221.6
Real estate:
Held for sale............................................. 12.0 26.1
Held for production of income............................. -- --
---------- ------
Total real estate....................................... $ 12.0 $ 26.1
---------- ------
Total mortgage loans and real estate........................ $240.2 $247.7
---------- ------
---------- ------
</TABLE>
Reserves for mortgage loans were $9.4 million and $9.5 million at December 31,
1997 and 1996, respectively.
During 1997, the Company committed to a plan to dispose of all real estate
assets by the end of 1998. As a result, real estate assets with a carrying
amount of $15.7 million were written down to the estimated fair value less cost
to sell of $12.0 million, and a net realized investment loss of $3.7 million was
recognized. Depreciation is not recorded on these assets while they are held for
disposal.
There were no non-cash investing activities, including real estate acquired
through foreclosure of mortgage loans, in 1997. During 1996, non-cash investing
activities included real estate acquired through foreclosure of mortgage loans,
which had a fair value of $0.9 million.
At December 31, 1997, contractual commitments to extend credit under commercial
mortgage loan agreements amounted to approximately $18.7 million. These
commitments generally expire within one year.
F-11
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Mortgage loans and real estate investments comprised the following property
types and geographic regions:
<TABLE>
<CAPTION>
DECEMBER 31,
(IN MILLIONS) 1997 1996
- ------------------------------------------------------------ ---------- -------------
<S> <C> <C>
Property type:
Office building........................................... $101.7 $ 86.1
Residential............................................... 19.3 39.0
Retail.................................................... 42.2 55.9
Industrial/warehouse...................................... 61.9 52.6
Other..................................................... 24.5 25.3
Valuation allowances...................................... (9.4) (11.2)
---------- ------
Total....................................................... $240.2 $247.7
---------- ------
---------- ------
Geographic region:
South Atlantic............................................ $ 68.7 $ 72.9
Pacific................................................... 56.6 37.0
East North Central........................................ 61.4 58.3
Middle Atlantic........................................... 29.8 35.0
West South Central........................................ 6.9 5.7
New England............................................... 12.4 21.9
Other..................................................... 13.8 28.1
Valuation allowances...................................... (9.4) (11.2)
---------- ------
Total....................................................... $240.2 $247.7
---------- ------
---------- ------
</TABLE>
At December 31, 1997, scheduled mortgage loan maturities were as follows: 1998
- -- $52.0 million; 1999 -- $17.1 million; 2000 -- $46.3 million; 2001 -- $7.0
million; 2002 -- $11.7 million; and $94.1 million thereafter. Actual maturities
could differ from contractual maturities because borrowers may have the right to
prepay obligations with or without prepayment penalties and loans may be
refinanced. During 1997, the Company did not refinance any mortgage loans based
on terms which differed from those granted to new borrowers.
C. INVESTMENT VALUATION ALLOWANCES
Investment valuation allowances which have been deducted in arriving at
investment carrying values as presented in the balance sheet and changes thereto
are shown below.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, BALANCE AT BALANCE AT
(IN MILLIONS) JANUARY 1 ADDITIONS DEDUCTIONS DECEMBER 31
- ------------------------------------------------------------ ---------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
1997
Mortgage loans.............................................. $ 9.5 $ 1.1 $ 1.2 $ 9.4
Real estate................................................. 1.7 3.7 5.4 --
----- --- --- -----
Total................................................... $ 11.2 $ 4.8 $ 6.6 $ 9.4
----- --- --- -----
----- --- --- -----
1996
Mortgage loans.............................................. $ 12.5 $ 4.5 $ 7.5 $ 9.5
Real estate................................................. 2.1 -- 0.4 1.7
----- --- --- -----
Total................................................... $ 14.6 $ 4.5 $ 7.9 $ 11.2
----- --- --- -----
----- --- --- -----
</TABLE>
F-12
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Deductions of $5.4 million to the investment valuation allowance related to real
estate in 1997 primarily reflect writedowns to the estimated fair value less
cost to sell pursuant to the aforementioned 1997 plan of disposal.
The carrying value of impaired loans was $20.6 million and $21.5 million, with
related reserves of $7.1 million and $7.3 million as of December 31, 1997 and
1996, respectively. All impaired loans were reserved as of December 31, 1997 and
1996.
The average carrying value of impaired loans was $19.8 million and $26.3
million, with related interest income while such loans were impaired of $2.2
million and $3.4 million as of December 31, 1997 and 1996, respectively.
D. OTHER
At December 31, 1997, AFLIAC had no concentration of investments in a single
investee exceeding 10% of shareholder's equity.
4. INVESTMENT INCOME AND GAINS AND LOSSES
A. NET INVESTMENT INCOME
The components of net investment income were as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31
(IN MILLIONS) 1997 1996
- ------------------------------------------------------------ ---------- -------------
<S> <C> <C>
Fixed maturities............................................ $130.0 $137.2
Mortgage loans.............................................. 20.4 22.0
Equity securities........................................... 1.3 0.7
Policy loans................................................ 10.8 10.2
Real estate................................................. 3.9 6.2
Other long-term investments................................. 1.0 0.8
Short-term investments...................................... 1.4 1.4
---------- ------
Gross investment income..................................... 168.8 178.5
Less investment expenses.................................... (4.6) (6.8)
---------- ------
Net investment income....................................... $164.2 $171.7
---------- ------
---------- ------
</TABLE>
At December 31, 1997, mortgage loans on non-accrual status were $2.8 million,
which were all restructured loans. There were no fixed maturities on non-accrual
status at December 31, 1997. The effect of non-accruals, compared with amounts
that would have been recognized in accordance with the original terms of the
investment, had no impact in 1997, and reduced net income by $0.1 million in
1996.
The payment terms of mortgage loans may from time to time be restructured or
modified. The investment in restructured mortgage loans, based on amortized
cost, amounted to $21.1 million and $25.4 million at December 31, 1997 and 1996,
respectively. Interest income on restructured mortgage loans that would have
been recorded in accordance with the original terms of such loans amounted to
$1.9 million and $3.6 million in 1997 and 1996, respectively. Actual interest
income on these loans included in net investment income aggregated $2.1 million
and $2.2 million in 1997 and 1996, respectively.
There were no fixed maturities or mortgage loans which were non-income producing
for the twelve months ended December 31, 1997.
F-13
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
B. REALIZED INVESTMENT GAINS AND LOSSES
Realized gains (losses) on investments were as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31
(IN MILLIONS) 1997 1996
- ------------------------------------------------------------ ---------- -------------
<S> <C> <C>
Fixed maturities............................................ $ 3.0 $ (3.3)
Mortgage loans.............................................. (1.1) (3.2)
Equity securities........................................... 0.5 0.3
Real estate................................................. (1.5) 2.5
Other....................................................... 2.0 0.1
---------- ------
Net realized investment losses.............................. $ 2.9 $ (3.6)
---------- ------
---------- ------
</TABLE>
5. FAIR VALUE DISCLOSURES OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments", requires
disclosure of fair value information about certain financial instruments
(insurance contracts, real estate, goodwill and taxes are excluded) for which it
is practicable to estimate such values, whether or not these instruments are
included in the balance sheet. The fair values presented for certain financial
instruments are estimates which, in many cases, may differ significantly from
the amounts which could be realized upon immediate liquidation. In cases where
market prices are not available, estimates of fair value are based on discounted
cash flow analyses which utilize current interest rates for similar financial
instruments which have comparable terms and credit quality.
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments:
CASH AND CASH EQUIVALENTS
For these short-term investments, the carrying amount approximates fair value.
FIXED MATURITIES
Fair values are based on quoted market prices, if available. If a quoted market
price is not available, fair values are estimated using independent pricing
sources or internally developed pricing models using discounted cash flow
analyses.
EQUITY SECURITIES
Fair values are based on quoted market prices, if available. If a quoted market
price is not available, fair values are estimated using independent pricing
sources or internally developed pricing models.
MORTGAGE LOANS
Fair values are estimated by discounting the future contractual cash flows using
the current rates at which similar loans would be made to borrowers with similar
credit ratings. The fair value of below investment grade mortgage loans are
limited to the lesser of the present value of the cash flows or book value.
F-14
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
REINSURANCE RECEIVABLES
The carrying amount of the reinsurance receivable for outstanding claims, losses
and loss adjustment expenses reported in the balance sheet approximates fair
value.
POLICY LOANS
The carrying amount reported in the balance sheet approximates fair value since
policy loans have no defined maturity dates and are inseparable from the
insurance contracts.
INVESTMENT CONTRACTS (WITHOUT MORTALITY FEATURES)
Fair values for the Company's liabilities under investment type contracts are
estimated based on current surrender values.
The estimated fair values of the financial instruments were as follows:
<TABLE>
<CAPTION>
1997 1996
--------------------- ---------------------
DECEMBER 31, CARRYING FAIR CARRYING FAIR
(IN MILLIONS) VALUE VALUE VALUE VALUE
- ------------------------------------------------------------ --------- --------- --------- ---------
<S> <C> <C> <C> <C>
FINANCIAL ASSETS
Cash and cash equivalents................................. $ 31.1 $ 31.1 $ 18.8 $ 18.8
Fixed maturities.......................................... 1,402.5 1,402.5 1,698.0 1,698.0
Equity securities......................................... 54.0 54.0 41.5 41.5
Mortgage loans............................................ 228.2 239.8 221.6 229.3
Policy loans.............................................. 140.1 140.1 131.7 131.7
Reinsurance receivables................................... 251.1 251.1 72.5 72.5
--------- --------- --------- ---------
$2,107.0 $2,118.6 $2,184.1 $2,191.8
--------- --------- --------- ---------
--------- --------- --------- ---------
FINANCIAL LIABILITIES
Individual annuity contracts.............................. 876.0 850.6 910.2 885.9
Supplemental contracts without life contingencies......... 15.3 15.3 15.9 15.9
Other individual contract deposit funds................... 0.3 0.3 0.3 0.3
--------- --------- --------- ---------
$ 891.6 $ 866.2 $ 926.4 $ 902.1
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
6. DEBT
In 1997 the Company incurred no debt. During 1996, the Company utilized
repurchase agreements to finance certain investments.
Interest expense was $3.4 million in 1996, relating to the repurchase
agreements, and is recorded in other operating expenses.
F-15
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. FEDERAL INCOME TAXES
Provisions for federal income taxes have been calculated in accordance with the
provisions of SFAS No. 109. A summary of the federal income tax expense
(benefit) in the statement of income is shown below:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
(IN MILLIONS) 1997 1996
- ------------------------------------------------------------ ---------- ------
<S> <C> <C>
Federal income tax expense (benefit)
Current................................................... $ 13.9 $ 26.9
Deferred.................................................. 7.1 (9.8)
----- -----
Total....................................................... $ 21.0 $ 17.1
----- -----
----- -----
</TABLE>
The provision for federal income taxes does not materially differ from the
amount of federal income tax determined by applying the appropriate U.S.
statutory income tax rate to income before federal income taxes. The deferred
tax (assets) liabilities are comprised of the following at December 31, 1997:
<TABLE>
<CAPTION>
DECEMBER 31,
(IN MILLIONS) 1997 1996
- ------------------------------------------------------------ ---------- -------------
<S> <C> <C>
Deferred tax (assets) liabilitie
Loss reserves............................................. $(175.8) $(137.0)
Deferred acquisition costs................................ 226.4 186.9
Investments, net.......................................... 27.0 14.2
Bad debt reserve.......................................... (2.0) (1.1)
Other, net................................................ 0.3 (2.8)
---------- -------------
Deferred tax liability, net............................... $ 75.9 $ 60.2
---------- -------------
---------- -------------
</TABLE>
Gross deferred income tax liabilities totaled $253.7 million and $201.1 million
at December 31, 1997 and 1996. Gross deferred income tax assets totaled $177.8
million and $140.9 at December 31, 1997 and 1996.
Management believes, based on the Company's recent earnings history and its
future expectations, that the Company's taxable income in future years will be
sufficient to realize all deferred tax assets. In determining the adequacy of
future income, management considered the future reversal of its existing
temporary differences and available tax planning strategies that could be
implemented, if necessary.
The Company's federal income tax returns are routinely audited by the IRS, and
provisions are routinely made in the financial statements in anticipation of the
results of these audits. The IRS has examined the life-nonlife consolidated
group's federal income tax returns through 1991. The Company is currently
considering its response to certain adjustments proposed by the IRS with respect
to the life-nonlife consolidated group's federal income tax returns for 1989,
1990, and 1991. In management's opinion, adequate tax liabilities have been
established for all years. However, the amount of these tax liabilities could be
revised in the near term if estimates of the Company's ultimate liability are
revised.
8. RELATED PARTY TRANSACTIONS
The Company has no employees of its own, but has agreements under which FAFLIC
provides management, space and other services, including accounting, electronic
data processing, human resources, legal and other staff functions. Charges for
these services are based on full cost including all direct and indirect overhead
costs, and amounted to $124.1 million and $112.4 million in 1997 and 1996. The
net amounts payable to FAFLIC and affiliates for accrued expenses and various
other liabilities and receivables were $15.0 million and $13.3 million at
December 31, 1997 and 1996.
F-16
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. DIVIDEND RESTRICTIONS
Delaware has enacted laws governing the payment of dividends to stockholders by
insurers. These laws affect the dividend paying ability of the Company.
Pursuant to Delaware's statute, the maximum amount of dividends and other
distributions that an insurer may pay in any twelve month period, without the
prior approval of the Delaware Commissioner of Insurance, is limited to the
greater of (i) 10% of its policyholders' surplus as of the preceding December 31
or (ii) the individual company's statutory net gain from operations for the
preceding calendar year (if such insurer is a life company) or its net income
(not including realized capital gains) for the preceding calendar year (if such
insurer is not a life company). Any dividends to be paid by an insurer, whether
or not in excess of the aforementioned threshold, from a source other than
statutory earned surplus would also require the prior approval of the Delaware
Commissioner of Insurance.
At January 1, 1998, AFLIAC could pay dividends of $33.9 million to FAFLIC
without prior approval.
10. REINSURANCE
In the normal course of business, the Company seeks to reduce the loss that may
arise from events that cause unfavorable underwriting results by reinsuring
certain levels of risk in various areas of exposure with other insurance
enterprises or reinsurers. Reinsurance transactions are accounted for in
accordance with the provisions of SFAS No. 113.
Amounts recoverable from reinsurers are estimated in a manner consistent with
the claim liability associated with the reinsured policy. Reinsurance contracts
do not relieve the Company from its obligations to policyholders. Failure of
reinsurers to honor their obligations could result in losses to the Company;
consequently, allowances are established for amounts deemed uncollectible. The
Company determines the appropriate amount of reinsurance based on evaluation of
the risks accepted and analyses prepared by consultants and reinsurers and on
market conditions (including the availability and pricing of reinsurance). The
Company also believes that the terms of its reinsurance contracts are consistent
with industry practice in that they contain standard terms with respect to lines
of business covered, limit and retention, arbitration and occurrence. Based on
its review of its reinsurers' financial statements and reputations in the
reinsurance marketplace, the Company believes that its reinsurers are
financially sound.
The effects of reinsurance were as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31
(IN MILLIONS) 1997 1996
- ------------------------------------------------------------ ---------- -------------
<S> <C> <C>
Insurance premiums:
Direct.................................................... $ 48.8 $ 53.3
Assumed................................................... 2.6 3.1
Ceded..................................................... (28.6) (23.7)
---------- ------
Net premiums................................................ $ 22.8 $ 32.7
---------- ------
---------- ------
Insurance and other individual policy benefits, claims,
losses and loss adjustment expenses:
Direct.................................................... $226.0 $206.4
Assumed................................................... 4.2 4.5
Ceded..................................................... (42.4) (18.3)
---------- ------
Net policy benefits, claims, losses and loss adjustment
expenses................................................... $187.8 $192.6
---------- ------
---------- ------
</TABLE>
F-17
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
11. DEFERRED POLICY ACQUISITION EXPENSES
The following reflects the changes to the deferred policy acquisition asset:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31
(IN MILLIONS) 1997 1996
- ------------------------------------------------------------ ---------- -------------
<S> <C> <C>
Balance at beginning of year................................ $632.7 $555.7
Acquisition expenses deferred............................. 184.1 116.6
Amortized to expense during the year...................... (53.0) (49.9)
Adjustment to equity during the year...................... (10.2) 10.3
Adjustment for cession of disability income insurance..... (38.6) --
Adjustment for revision of universal life and variable
universal life insurance mortality assumptions.......... 50.3 --
---------- ------
Balance at end of year...................................... $765.3 $632.7
---------- ------
---------- ------
</TABLE>
On October 1, 1997, the Company revised the mortality assumptions for universal
life and variable universal life product lines. These revisions resulted in a
$50.3 million recapitalization of deferred policy acquisition costs.
12. LIABILITIES FOR INDIVIDUAL ACCIDENT AND HEALTH BENEFITS
The Company regularly updates its estimates of liabilities for future policy
benefits and outstanding claims, losses and loss adjustment expenses as new
information becomes available and further events occur which may impact the
resolution of unsettled claims. Changes in prior estimates are reflected in
results of operations in the year such changes are determined to be needed and
recorded.
The liability for future policy benefits and outstanding claims, losses and loss
adjustment expenses related to the Company's accident and health business was
$219.9 million and $226.2 million at December 31, 1997 and 1996. Accident and
health claim liabilities have been re-estimated for all prior years and were
increased by $-0- million in 1997 and $3.2 million in 1996. Due to the
reinsurance agreement whereby the Company has ceded substantially all of its
accident and health business to the Metropolitan, management believes that no
material adverse development of losses will occur. However, the amount of the
liabilities could be revised in the near term if the estimates are revised.
13. CONTINGENCIES
REGULATORY AND INDUSTRY DEVELOPMENTS
Unfavorable economic conditions may contribute to an increase in the number of
insurance companies that are under regulatory supervision. This may result in an
increase in mandatory assessments by state guaranty funds, or voluntary payments
by solvent insurance companies to cover losses to policyholders of insolvent or
rehabilitated companies. Mandatory assessments, which are subject to statutory
limits, can be partially recovered through a reduction in future premium taxes
in some states. The Company is not able to reasonably estimate the potential
effect on it of any such future assessments or voluntary payments.
LITIGATION
In July 1997, a lawsuit was instituted in Louisiana against Allmerica Financial
Corp. and certain of its subsidiaries by individual plaintiffs alleging fraud,
unfair or deceptive acts, breach of contract, misrepresentation and related
claims in the sale of life insurance policies. In October 1997, plaintiffs
voluntarily dismissed the Louisiana suit and refiled the action in Federal
District Court in Worcester, Massachusetts. The plaintiffs
F-18
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
seek to be certified as a class. The case is in the early stages of discovery
and the Company is evaluating the claims. Although the Company believes it has
meritorious defenses to plaintiffs' claims, there can be no assurance that the
claims will be resolved on a basis which is satisfactory to the Company.
The Company has been named a defendant in various legal proceedings arising in
the normal course of business. In the opinion of management, based on the advice
of legal counsel, the ultimate resolution of these proceedings will not have a
material effect on the Company's financial statements. However, liabilities
related to these proceedings could be established in the near term if estimates
of the ultimate resolution of these proceedings are revised.
YEAR 2000
The Year 2000 Issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
computer programs that have date-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities. Although the Company does not
believe that there is a material contingency associated with the Year 2000
project, there can be no assurance that exposure for material contingencies will
not arise.
14. STATUTORY FINANCIAL INFORMATION
The Company is required to file annual statements with state regulatory
authorities prepared on an accounting basis prescribed or permitted by such
authorities (statutory basis). Statutory surplus differs from shareholder's
equity reported in accordance with generally accepted accounting principles for
stock life insurance companies primarily because policy acquisition costs are
expensed when incurred, investment reserves are based on different assumptions,
life insurance reserves are based on different assumptions and income tax
expense reflects only taxes paid or currently payable. Statutory net income and
surplus are as follows:
<TABLE>
<CAPTION>
(IN MILLIONS) 1997 1996
- ------------------------------------------------------------ ---------- -------------
<S> <C> <C>
Statutory net income........................................ $ 31.5 $ 5.4
Statutory Surplus........................................... $307.1 $234.0
---------- ------
---------- ------
</TABLE>
F-19
<PAGE>
FULCRUM VARIABLE LIFE SEPARATE ACCOUNT
STATEMENTS OF ASSETS AND LIABILITIES
(UNAUDITED)
DECEMBER 31, 1997
<TABLE>
<CAPTION>
INTERNATIONAL GLOBAL GLOBAL
VALUE GROWTH GROWTH STRATEGIC INCOME INTERACTIVE/TELECOMM
------------ ------------ ------------- ---------------- --------------------
<S> <C> <C> <C> <C> <C>
ASSETS:
Investment in shares of Allmerica Investment
Trust..................................... $ -- $ -- $ -- $ -- $ --
Investments in shares of The Palladian
Trust..................................... -- -- -- -- --
------------ ------------ ------------- ---------------- --------------------
Total assets.............................. -- -- -- -- --
LIABILITIES: -- -- -- -- --
------------ ------------ ------------- ---------------- --------------------
Net assets................................ $ -- $ -- $ -- $ -- $ --
------------ ------------ ------------- ---------------- --------------------
------------ ------------ ------------- ---------------- --------------------
<CAPTION>
AIT
MONEY MARKET
------------
<S> <C>
ASSETS:
Investment in shares of Allmerica Investment
Trust..................................... $ --
Investments in shares of The Palladian
Trust..................................... --
------------
Total assets.............................. --
LIABILITIES: --
------------
Net assets................................ $ --
------------
------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
SA-1
<PAGE>
FULCRUM VARIABLE LIFE SEPARATE ACCOUNT
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 -- ORGANIZATION
The Fulcrum Variable Life Separate Account (the Variable Account) is a
separate investment account of Allmerica Financial Life Insurance and Annuity
Company (the Company), established on August 26, 1997 for the purpose of
separating from the general assets of the Company those assets used to fund
certain modified single payment variable life insurance contracts issued by the
Company. The Company is a wholly-owned subsidiary of First Allmerica Financial
Life Insurance Company (First Allmerica). First Allmerica is a wholly-owned
subsidiary of Allmerica Financial Corporation (AFC). Under applicable insurance
law, the assets and liabilities of the Variable Account are clearly identified
and distinguished from the other assets and liabilities of the Company. The
Variable Account cannot be charged with liabilities arising out of any other
business of the Company.
The Variable Account is registered as a unit investment trust under the
Investment Company Act of 1940, as amended (the 1940 Act). The Variable Account
currently offers six Sub-Accounts under the Fulcrum Fund Next Generation
variable life contracts. Each Sub-Account invests exclusively in one of five
investment portfolios of The Palladian Trust managed by Palladian Advisors,
Inc., or in the Money Market Fund of the Allmerica Investment Trust (AIT)
managed by Allmerica Investment Management Company, Inc., a wholly-owned
subsidiary of First Allmerica. The Palladian Trust and AIT (the Funds) are
open-end management investment companies registered under the 1940 Act.
NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES
INVESTMENTS -- Security transactions are recorded on the trade date.
Investments held by the Sub-Accounts are stated at the net asset value per share
of the respective investment portfolio of The Palladian Trust or AIT. Net
realized gains and losses on securities sold are determined using the average
cost method. Dividends and capital gain distributions are recorded on the
ex-dividend date and are reinvested in additional shares of the respective
investment portfolio of The Palladian Trust or AIT at net asset value.
FEDERAL INCOME TAXES -- The Company is taxed as a "life insurance company"
under Subchapter L of the Internal Revenue Code (the Code) and files a
consolidated federal income tax return with First Allmerica. The Company
anticipates no tax liability resulting from the operations of the Variable
Account. Therefore, no provision for income taxes has been charged against the
Variable Account.
NOTE 3 -- INVESTMENTS
There were no investment purchases or sales for the period ended December 31,
1997.
NOTE 4 -- RELATED PARTY TRANSACTIONS
The Company makes a charge of 0.90% per annum based on the average daily net
assets of each Sub-Account at each valuation date for mortality and expense
risks. This charge is deducted from the daily value of each Sub-Account and is
paid to the Company on a daily basis.
The following charges are deducted monthly from each contract's contract
value: a $2.50 monthly maintenance fee from contracts with a contract value of
less than $50,000; 0.40% on an annual basis for administrative expenses; 0.20%
to 2.50% on an annual basis for cost of insurance charges; for the first ten
contract years, 0.30% on an annual basis for distribution expenses and 0.40% on
an annual basis for federal,
SA-2
<PAGE>
FULCRUM VARIABLE LIFE SEPARATE ACCOUNT
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 4 -- RELATED PARTY TRANSACTIONS (CONTINUED)
state and local taxes. For the period ended December 31, 1997, there were no
charges deducted from contract values in the Variable Account.
Allmerica Investments, Inc. (Allmerica Investments), a wholly-owned
subsidiary of First Allmerica, is principal underwriter and general distributor
of the Variable Account, and does not receive any compensation for sales of the
contracts. Commissions are paid to registered representatives of Allmerica
Investments by the Company. As the current series of contracts have a contingent
deferred sales charge, no deduction is made for sales charges at the time of the
sale.
NOTE 5 -- DIVERSIFICATION REQUIREMENTS
Under the provisions of Section 817(h) of the Code, a variable contract,
other than a contract issued in connection with certain types of employee
benefit life plans, will not be treated as a life insurance 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 Variable Account satisfies the current
requirements of the regulations, and it intends that the Variable Account will
continue to meet such requirements.
NOTE 6 -- SUBSEQUENT EVENTS
Effective February 12, 1998, Allmerica Investment Management Company, Inc.
(AIMCO) assumed the function of Manager for The Palladian Trust (Trust),
replacing Palladian Advisors, Inc. (PAI). AIMCO's advisory agreement will remain
in effect past June 11, 1998, only if approved by shareholders of the Trust.
AIMCO is an indirect, wholly-owned subsidiary of AFC.
PAI had agreed to limit operating expenses and reimburse those expenses to
the extent that each Portfolio's "other expenses" (i.e., expenses other than
management fees) exceeded certain expense limitations. In January of 1998, PAI
advised the Board of Trustees of the Trust that it did not have sufficient
assets to make the required payment under the expense limitation. On January 28,
1998, a group (consisting of Allmerica Financial Life Insurance and Annuity
Company and certain principals of PAI and entities selling the variable
contracts) offered to make payment of the full amount due under the expense
limitation. The Board of Trustees accepted the offer, and the Trust has been
fully reimbursed for amounts owed under the 1997 expense limitation agreement.
The expense limitations in effect for 1998 have been modified with respect to
certain portfolios of the Trust and these payments are to be made by AIMCO.
SA-3
<PAGE>
APPENDIX A
GUIDELINE MINIMUM SUM INSURED TABLE
The guideline minimum sum insured is a percentage of the Contract Value as set
forth below, according to federal tax regulations:
GUIDELINE MINIMUM SUM INSURED
<TABLE>
<CAPTION>
AGE OF INSURED PERCENTAGE OF
ON DATE OF DEATH CONTRACT VALUE
- ------------------------------------------------------------------- ---------------
<S> <C>
40 and under....................................................... 250%
45................................................................. 215%
50................................................................. 185%
55................................................................. 150%
60................................................................. 130%
65................................................................. 120%
70................................................................. 115%
75................................................................. 105%
80................................................................. 105%
85................................................................. 105%
90................................................................. 105%
95 and above....................................................... 100%
</TABLE>
For the ages not listed, the progression between the listed ages is linear.
A-1
<PAGE>
APPENDIX B
OPTIONAL INSURANCE BENEFITS
This Appendix provides only a summary of other insurance benefits available by
rider. For more information, contact your representative.
OPTION TO ACCELERATE BENEFITS ENDORSEMENT (MAY NOT BE AVAILABLE IN ALL STATES)
This endorsement allows part of the Contract proceeds to be available before
death if the Insured becomes terminally ill or is permanently confined to a
nursing home.
B-1
<PAGE>
APPENDIX C
PAYMENT OPTIONS
PAYMENT OPTIONS -- On Written Request, the Surrender Value or all or part of any
payable Net Death Benefit may be paid under one or more payment options then
offered by Allmerica Financial. If you do not make an election, we will pay the
benefits in a single sum. If a payment option is selected, the B eneficiary may
pay to us any amount that would otherwise be deducted from the Death Benefit. A
certificate will be provided to the payee describing the payment option
selected.
The amounts payable under a payment option are paid from the General Account.
These amounts are not based on the investment experience of the Variable
Account. The amounts payable under these options, for each $1,000 applied, will
be:
(a) the rate per $1,000 of benefit based on our non-guaranteed current benefit
option rates for this class of Contracts, or
(b) the rate in your Contract for the applicable benefit option, whichever is
greater.
If you choose a benefit option, the beneficiary may, when filing a proof of
claim, pay us any amount that otherwise would be deducted from the proceeds.
- OPTION A: BENEFITS FOR A SPECIFIED NUMBER OF YEARS -- We will make equal
payments for any selected number of years up to 30 years. These payments
may be made annually, semi-annually, quarterly or monthly, whichever you
choose.
- OPTION B: LIFETIME MONTHLY BENEFIT -- Benefits are based on the age of the
person who receives the money (called the payee) on the date the first
payment will be made. You may choose one of the three following options to
specify when benefits will cease:
* when the payee dies with no further benefits due (Life Annuity);
* when the payee dies but not before the total benefit payments made by us
equals the amount applied under this option (Life Annuity with
Installment Refund); or
* when the payee dies but not before 10 years have elapsed from the date
of the first payment (Life Annuity with Payments Guaranteed for 10
years).
- OPTION C: INTEREST BENEFITS -- We will pay interest at a rate we determine
each year. It will not be less than 3% per year. We will make payments
annually, semi-annually, quarterly, or monthly, whichever is preferred.
These benefits will stop when the amount left has been withdrawn. If the
payee dies, any unpaid balance plus accrued interest will be paid in a
lump sum.
- OPTION D: BENEFITS FOR A SPECIFIED AMOUNT -- Interest will be credited to
the unpaid balance and we will make payments until the unpaid balance is
gone. We will credit interest at a rate we determine each year, but not
less than 3%. We will make payments annually, semi-annually, quarterly, or
monthly, whichever is preferred. The benefit level chosen must provide for
an annual benefit of at least 8% of the amount applied.
- OPTION E: LIFETIME MONTHLY BENEFITS FOR TWO PAYEES -- We will pay a
benefit jointly to two payees during their joint lifetime. After one payee
dies, the benefits to the survivor will be:
* the same as the original amount, or
* in an amount equal to b of the original amount.
C-1
<PAGE>
Benefits are based on the payees' ages on the date the first payment is due.
Benefits will end when the second payee dies.
SELECTION OF PAYMENT OPTIONS -- The amount applied under any one option for any
one payee must be at least $5,000. The periodic payment for any one payee must
be at least $50. Subject to the Contract Owner and Beneficiary provisions, any
option selection may be changed before the Net Death Benefit become payable. If
you make no selection, the beneficiary may select an option when the Net Death
Benefit becomes payable.
If the amount of the monthly benefit under Option B for the age of the payee is
the same for different periods certain, the payee will be entitled to the
longest period certain for the payee's age.
You may give the beneficiary the right to change from Option C or D to any other
option at any time. If Option C or D is chosen by the payee when this Contract
becomes a claim, the payee may reserve the right to change to any other option.
The payee who elects to change options must be the payee under the option
selected.
ADDITIONAL DEPOSITS -- An additional deposit may be added to any proceeds when
they are applied under Option B and E. We reserve the right to limit the amount
of any additional deposit. We may levy a charge of no more than 3% on any
additional deposits.
RIGHTS AND LIMITATIONS -- A payee has no right to assign any amount payable
under any option, nor to demand a lump sum benefit in place of any amount
payable under Options B or E. A payee will have the right to receive a lump sum
in place of installments under Option A. The payee must provide us with a
Written Request to reserve this right. If the right to receive a lump sum is
exercised, we will determine the lump sum benefit at the same interest rates
used to calculate the installments. The amount left under Option C and any
unpaid balance under Option D, may be withdrawn only as noted in the Written
Request selecting the option.
A corporate or fiduciary payee may select only Option A, C or D, subject to our
approval.
PAYMENT DATES -- The first payment under any option, except Option C, will be
due on the date this Contract matures, by death or otherwise, unless another
date is designated. Benefits under Option C begin at the end of the first
benefit period.
The last payment under any option will be made as stated in the option's
description. However, if a payee under Options B or E dies before the due date
of the second monthly payment, the amount applied, minus the first monthly
payment, will be paid in a lump sum or under any option other than Option E.
This payment will be made to the surviving payee under Option E or the
succeeding payee under Option B.
BENEFIT RATES -- The Benefit Option Tables in your Contract show benefit amounts
for Option A, B and E. If you choose one of these options, either within five
years of the date of surrender or the date the proceeds are otherwise payable,
we will apply either the benefit rates listed in the Tables, or the rates we use
on the date the proceeds are paid, whichever is more favorable. Benefits that
begin more than five years after that date, or as a result of additional
deposits, will be based on the rates we use on the date the first benefit is
due.
C-2
<PAGE>
APPENDIX D
ILLUSTRATIONS OF DEATH BENEFIT,
CONTRACT VALUES AND ACCUMULATED PAYMENTS
The following tables illustrate the way in which a Contract's Death Benefit and
Contract Value could vary over an extended period.
ASSUMPTIONS
The tables illustrate the following Contracts: a Contract issued to a male, age
55, qualifying for the non-tobacco user discount; a Contract issued on a unisex
basis to an Insured Age 55, qualifying for the non-tobacco user discount; a
second-to-die Contract issued to a male, age 65, qualifying for the non-tobacco
user discount and a female, age 65, qualifying for the non-tobacco user
discount; and a second-to-die Contract issued on a unisex basis to two Insureds,
both age 65, qualifying for the non-tobacco user discount. The tables illustrate
the guaranteed insurance protection rates and the current insurance protection
rates as presently in effect. ON REQUEST, WE WILL PROVIDE A COMPARABLE
ILLUSTRATION BASED ON THE PROPOSED INSURED'S AGE, SEX, AND UNDERWRITING CLASS,
AND A SPECIFIED PAYMENT.
Contract Values are based on the assumptions that no Contract loans have been
made, that no partial withdrawals have been made, and that no more than 12
transfers have been made in any Contract year (so that no transaction or
transfer charges have been incurred).
The tables assume that the initial payment is allocated to and remains in the
Variable Account for the entire period shown. They are based on hypothetical
gross investment rates of return for the fund (i.e., investment income and
capital gains and losses, realized or unrealized) equal to constant Gross Annual
Rates of 0%, 6%, and 12%. The second column of the tables show the amount that
would accumulate if the initial Payment was invested to earn interest, at 5%
compounded annually.
The Contract Values and Death Benefit would be different from those shown even
if the gross annual investment rates of return averaged 0%, 6%, and 12% over a
period of years, but fluctuated above or below the averages for individual
Contract years. The values would also be different depending on the allocation
of the Contract's total Contract Value among the Sub-Accounts, if the rates of
return averaged 0%, 6% or 12%, but the rates of each fund varied above and below
the averages.
DEDUCTIONS FOR CHARGES
The amounts shown for the Death Benefit and Contract Values take into account
the daily deduction of the mortality and expense risk charge and the deduction
from Contract Value for the Monthly Deductions. The amounts shown in the tables
also take into account underlying Fund advisory fees and operating expenses,
based on the assumptions described below. The amounts shown in the tables also
take into account the underlying Fund advisory fees and operating expenses. In
1997, the total fund expenses of the underlying funds (in the case of the
Portfolios, as restated to reflect certain voluntary expense limitations,
described below) ranged from 0.35% to 1.78%. For the purposes of the following
illustrations the total fund expenses are assumed to be 1.30% of the average
daily net assets of the underlying Funds. The fees and expenses associated with
your Contract may be more or less than 1.30% in the aggregate, depending upon
how you make allocations of Contract Value among the Sub-Accounts.
MONEY MARKET FUND OF ALLMERICA INVESTMENT TRUST. The advisory fee for the Money
Market Fund of Allmerica Investment Trust does not vary by performance, and in
1997 was 0.27%. Total Fund Expenses for the Money Market Fund in 1997 were
0.35%. Under the Management Agreement with Allmerica Investment Trust, AFIMS has
declared a voluntary expense limitation of 0.60% for the Money Market Fund, but
the expenses of the Money Market Fund did not exceed the cap in 1997. The
limitation may be terminated at any time.
D-1
<PAGE>
PORTFOLIOS OF THE PALLADIAN-SM- TRUST. Each of the Portfolios of The
Palladian-SM- Trust pays a monthly Management Fee, which varies based on a
comparison of the Portfolio's performance (after the deduction of all Portfolio
expenses, including the Management Fee) to the performance of a specific
Benchmark Index. The total Management Fee may vary between 0.00% to 4.00%. A fee
of 4.00% would be paid only if a Portfolio's performance (net of all fees and
expenses, including the advisory fee of 4. 00%) was at least 7.5 percentage
points better than the Benchmark Index. No fee will apply if the Portfolio's
performance (net of all Portfolio expenses, including the Management Fee) is
more than 3.0 percentage points lower then the Benchmark Index. In 1997, the
actual management fees were 0.14% for the Value Portfolio, 0.20% for the Growth
Portfolio, 0.58% for the International Growth Portfolio, 0.41% for the Global
Strategic Income Portfolio, and 0.27% for the and Global Interactive/Telecomm
Portfolio. For more information, see attached prospectus for The Palladian-SM-
Trust.
AFIMS has agreed to limit operating expenses and reimburse those expenses to the
extent that the Portfolios' "other expenses" (i.e., expenses other than
management fees) exceed the following expense limitations: 1.00% for the Value
Portfolio, 1.00% for the Growth Portfolio, 1.20% for the International Growth
Portfolio, 1.20% for the Global Strategic Income Portfolio, and 1.20% for the
Global Interactive/Telecomm Portfolio. Without the effect of expense
limitations, total fund expenses would have been 4.75% for the Value Portfolio,
6.12% for the Growth Portfolio, 7.11%% for the International Growth Portfolio,
6.68% for the Global Strategic Income Portfolio, and 7.26% for the Global
Interactive/Telecomm Portfolio. The limitations are in effect through December
31, 1998.
NET ANNUAL RATES OF INVESTMENT
Applying the mortality and expense risk charge of 0.90% and the average of total
fund expenses of 1.30%, the Gross Annual Return of 0%, 6% and 12% would produce
net annual rates of -2.20, 3.80% and 9.20%, respectively.
The hypothetical returns shown in the table do not reflect any charges for
income taxes against the Variable Account since no charges are currently made.
However, if in the future the charges are made, in order to produce the
illustrated Death Benefits and Contract Value, the gross annual investment rate
of return would have to exceed 0%, 6% or 12% by an amount sufficient to cover
the tax charges.
D-2
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
THE FULCRUM FUND-SM- NEXT GENERATION
MODIFIED SINGLE PAYMENT VARIABLE LIFE CONTRACT
MALE NONSMOKER AGE 55
SPECIFIED FACE AMOUNT = $67,803
CURRENT COST OF INSURANCE CHARGES
<TABLE>
<CAPTION>
PREMIUMS HYPOTHETICAL 0% HYPOTHETICAL 6% HYPOTHETICAL 12%
PAID PLUS GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN
INTEREST ----------------------------------- ----------------------------------- ---------------------------------
POLICY AT 5% SURRENDER POLICY DEATH SURRENDER POLICY DEATH SURRENDER POLICY DEATH
YEAR PER YEAR VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT
- --------- ----------- ----------- --------- ----------- ----------- --------- ----------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 26,250 21,532 24,032 67,803 23,008 25,508 67,803 24,483 26,983 67,803
2 27,563 20,789 23,101 67,803 23,714 26,026 67,803 26,813 29,125 67,803
3 28,941 20,080 22,205 67,803 24,431 26,556 67,803 29,316 31,441 67,803
4 30,388 19,405 21,342 67,803 25,159 27,097 67,803 32,005 33,942 67,803
5 31,907 18,762 20,512 67,803 25,900 27,650 67,803 34,896 36,646 67,803
6 33,502 18,150 19,712 67,803 26,652 28,214 67,803 38,004 39,567 67,803
7 35,178 17,756 18,943 67,803 27,603 28,791 67,803 41,536 42,723 67,803
8 36,936 17,390 18,203 67,803 28,568 29,380 67,803 45,321 46,134 67,803
9 38,783 17,115 17,490 67,803 29,607 29,982 67,803 49,444 49,819 67,803
10 40,722 16,805 16,805 67,803 30,597 30,597 67,803 53,830 53,830 67,803
11 42,758 16,258 16,258 67,803 31,444 31,444 67,803 58,591 58,591 70,309
12 44,896 15,729 15,729 67,803 32,316 32,316 67,803 63,774 63,774 75,891
13 47,141 15,215 15,215 67,803 33,213 33,213 67,803 69,400 69,400 81,892
14 49,498 14,718 14,718 67,803 34,136 34,136 67,803 75,519 75,519 88,357
15 51,973 14,235 14,235 67,803 35,085 35,085 67,803 82,176 82,176 95,325
16 54,572 13,768 13,768 67,803 36,062 36,062 67,803 89,421 89,421 102,834
17 57,300 13,315 13,315 67,803 37,066 37,066 67,803 97,304 97,304 109,954
18 60,165 12,876 12,876 67,803 38,099 38,099 67,803 105,883 105,883 117,530
19 63,174 12,450 12,450 67,803 39,162 39,162 67,803 115,260 115,260 125,633
20 66,332 12,038 12,038 67,803 40,256 40,256 67,803 125,544 125,544 134,332
Age 60 31,907 18,762 20,512 67,803 25,900 27,650 67,803 34,896 36,646 67,803
Age 65 40,722 16,805 16,805 67,803 30,597 30,597 67,803 53,830 53,830 67,803
Age 70 51,973 14,235 14,235 67,803 35,085 35,085 67,803 82,176 82,176 95,325
Age 75 66,332 12,038 12,038 67,803 40,256 40,256 67,803 125,544 125,544 134,332
</TABLE>
THE HYPOTHETICAL INVESTMENT RATES OF RETURN ARE ILLUSTRATIVE ONLY. THEY ARE NOT
A REPRESENTATION OF PAST OR FUTURE INVESTMENT RATES OF RETURN. INVESTMENT
RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN. INVESTMENT RESULTS WILL DEPEND ON
INVESTMENT ALLOCATIONS AND THE DIFFERENT INVESTMENT RATES OF RETURN FOR THE
FUNDS. THESE HYPOTHETICAL INVESTMENT RATES OF RETURN MAY NOT BE ACHIEVED FOR ANY
ONE YEAR OR SUSTAINED OVER ANY PERIOD.
D-3
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
THE FULCRUM FUND-SM- NEXT GENERATION
MODIFIED SINGLE PAYMENT VARIABLE LIFE CONTRACT
MALE NONSMOKER AGE 55
SPECIFIED FACE AMOUNT = $67,803
GUARANTEED COST OF INSURANCE CHARGES
<TABLE>
<CAPTION>
PREMIUMS HYPOTHETICAL 0% HYPOTHETICAL 6% HYPOTHETICAL 12%
PAID PLUS GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN
INTEREST ----------------------------------- ----------------------------------- ---------------------------------
POLICY AT 5% SURRENDER POLICY DEATH SURRENDER POLICY DEATH SURRENDER POLICY DEATH
YEAR PER YEAR VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT
- --------- ----------- ----------- --------- ----------- ----------- --------- ----------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 26,250 21,305 23,805 67,803 22,782 25,282 67,803 24,259 26,759 67,803
2 27,563 20,290 22,603 67,803 23,225 25,537 67,803 26,337 28,649 67,803
3 28,941 19,261 21,386 67,803 23,635 25,760 67,803 28,557 30,682 67,803
4 30,388 18,215 20,152 67,803 24,013 25,951 67,803 30,938 32,875 67,803
5 31,907 17,139 18,889 67,803 24,347 26,097 67,803 33,490 35,240 67,803
6 33,502 16,030 17,593 67,803 24,636 26,198 67,803 36,238 37,800 67,803
7 35,178 15,063 16,250 67,803 25,054 26,242 67,803 39,386 40,574 67,803
8 36,936 14,039 14,851 67,803 25,409 26,221 67,803 42,775 43,588 67,803
9 38,783 13,006 13,381 67,803 25,748 26,123 67,803 46,497 46,872 67,803
10 40,722 11,814 11,814 67,803 25,928 25,928 67,803 50,461 50,461 67,803
11 42,758 10,223 10,223 67,803 25,817 25,817 67,803 54,821 54,821 67,803
12 44,896 8,498 8,498 67,803 25,595 25,595 67,803 59,652 59,652 70,986
13 47,141 6,617 6,617 67,803 25,245 25,245 67,803 64,915 64,915 76,599
14 49,498 4,556 4,556 67,803 24,746 24,746 67,803 70,626 70,626 82,633
15 51,973 2,285 2,285 67,803 24,074 24,074 67,803 76,825 76,825 89,117
16 54,572 0 0 0 23,191 23,191 67,803 83,551 83,551 96,084
17 57,300 0 0 0 22,048 22,048 67,803 90,884 90,884 102,698
18 60,165 0 0 0 20,591 20,591 67,803 98,890 98,890 109,768
19 63,174 0 0 0 18,738 18,738 67,803 107,648 107,648 117,336
20 66,332 0 0 0 16,407 16,407 67,803 117,253 117,253 125,461
Age 60 31,907 17,139 18,889 67,803 24,347 26,097 67,803 33,490 35,240 67,803
Age 65 40,722 11,814 11,814 67,803 25,928 25,928 67,803 50,461 50,461 67,803
Age 70 51,973 2,285 2,285 67,803 24,074 24,074 67,803 76,825 76,825 89,117
Age 75 66,332 0 0 0 16,407 16,407 67,803 117,253 117,253 125,461
</TABLE>
THE HYPOTHETICAL INVESTMENT RATES OF RETURN ARE ILLUSTRATIVE ONLY. THEY ARE NOT
A REPRESENTATION OF PAST OR FUTURE INVESTMENT RATES OF RETURN. INVESTMENT
RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN. INVESTMENT RESULTS WILL DEPEND ON
INVESTMENT ALLOCATIONS AND THE DIFFERENT INVESTMENT RATES OF RETURN FOR THE
FUNDS. THESE HYPOTHETICAL INVESTMENT RATES OF RETURN MAY NOT BE ACHIEVED FOR ANY
ONE YEAR OR SUSTAINED OVER ANY PERIOD.
D-4
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
THE FULCRUM FUND-SM- NEXT GENERATION
MODIFIED SINGLE PAYMENT VARIABLE LIFE CONTRACT
UNISEX NONSMOKER AGE 55
SPECIFIED FACE AMOUNT = $69,861
CURRENT COST OF INSURANCE CHARGES
<TABLE>
<CAPTION>
HYPOTHETICAL 0% HYPOTHETICAL 6% HYPOTHETICAL 12%
PREMIUMS GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN
PAID PLUS ----------------------------------- ----------------------------------- ---------------------------------
POLICY INTEREST AT SURRENDER POLICY DEATH SURRENDER POLICY DEATH SURRENDER POLICY DEATH
YEAR 5% PER YEAR VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT
- --------- ----------- ----------- --------- ----------- ----------- --------- ----------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 26,250 21,532 24,032 69,861 23,008 25,508 69,861 24,483 26,983 69,861
2 27,563 20,789 23,101 69,861 23,714 26,026 69,861 26,813 29,125 69,861
3 28,941 20,080 22,205 69,861 24,431 26,556 69,861 29,316 31,441 69,861
4 30,388 19,405 21,342 69,861 25,159 27,097 69,861 32,005 33,942 69,861
5 31,907 18,762 20,512 69,861 25,900 27,650 69,861 34,896 36,646 69,861
6 33,502 18,150 19,712 69,861 26,652 28,214 69,861 38,004 39,567 69,861
7 35,178 17,756 18,943 69,861 27,603 28,791 69,861 41,536 42,723 69,861
8 36,936 17,390 18,203 69,861 28,568 29,380 69,861 45,321 46,134 69,861
9 38,783 17,115 17,490 69,861 29,607 29,982 69,861 49,444 49,819 69,861
10 40,722 16,805 16,805 69,861 30,597 30,597 69,861 53,830 53,830 69,861
11 42,758 16,258 16,258 69,861 31,444 31,444 69,861 58,587 58,587 70,305
12 44,896 15,729 15,729 69,861 32,316 32,316 69,861 63,793 63,793 75,914
13 47,141 15,215 15,215 69,861 33,213 33,213 69,861 69,448 69,448 81,949
14 49,498 14,718 14,718 69,861 34,136 34,136 69,861 75,591 75,591 88,441
15 51,973 14,235 14,235 69,861 35,085 35,085 69,861 82,262 82,262 95,424
16 54,572 13,768 13,768 69,861 36,062 36,062 69,861 89,514 89,514 102,941
17 57,300 13,315 13,315 69,861 37,066 37,066 69,861 97,412 97,412 110,076
18 60,165 12,876 12,876 69,861 38,099 38,099 69,861 106,041 106,041 117,705
19 63,174 12,450 12,450 69,861 39,162 39,162 69,861 115,479 115,479 125,872
20 66,332 12,038 12,038 69,861 40,256 40,256 69,861 125,827 125,827 134,635
Age 60 31,907 18,762 20,512 69,861 25,900 27,650 69,861 34,896 36,646 69,861
Age 65 40,722 16,805 16,805 69,861 30,597 30,597 69,861 53,830 53,830 69,861
Age 70 51,973 14,235 14,235 69,861 35,085 35,085 69,861 82,262 82,262 95,424
Age 75 66,332 12,038 12,038 69,861 40,256 40,256 69,861 125,827 125,827 134,635
</TABLE>
THE HYPOTHETICAL INVESTMENT RATES OF RETURN ARE ILLUSTRATIVE ONLY. THEY ARE NOT
A REPRESENTATION OF PAST OR FUTURE INVESTMENT RATES OF RETURN. INVESTMENT
RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN. INVESTMENT RESULTS WILL DEPEND ON
INVESTMENT ALLOCATIONS AND THE DIFFERENT INVESTMENT RATES OF RETURN FOR THE
FUNDS. THESE HYPOTHETICAL INVESTMENT RATES OF RETURN MAY NOT BE ACHIEVED FOR ANY
ONE YEAR OR SUSTAINED OVER ANY PERIOD.
D-5
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
THE FULCRUM FUND-SM- NEXT GENERATION
MODIFIED SINGLE PAYMENT VARIABLE LIFE CONTRACT
UNISEX NONSMOKER AGE 55
SPECIFIED FACE AMOUNT = $69,861
GUARANTEED COST OF INSURANCE CHARGES
<TABLE>
<CAPTION>
HYPOTHETICAL 0% HYPOTHETICAL 6% HYPOTHETICAL 12%
PREMIUMS GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN
PAID PLUS ----------------------------------- ----------------------------------- ---------------------------------
POLICY INTEREST AT SURRENDER POLICY DEATH SURRENDER POLICY DEATH SURRENDER POLICY DEATH
YEAR 5% PER YEAR VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT
- --------- ----------- ----------- --------- ----------- ----------- --------- ----------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 26,250 21,304 23,804 69,861 22,781 25,281 69,861 24,258 26,758 69,861
2 27,563 20,288 22,600 69,861 23,221 25,534 69,861 26,332 28,645 69,861
3 28,941 19,267 21,392 69,861 23,638 25,763 69,861 28,556 30,681 69,861
4 30,388 18,227 20,165 69,861 24,020 25,958 69,861 30,937 32,875 69,861
5 31,907 17,168 18,918 69,861 24,366 26,116 69,861 33,495 35,245 69,861
6 33,502 16,081 17,644 69,861 24,671 26,233 69,861 36,248 37,810 69,861
7 35,178 15,139 16,326 69,861 25,108 26,296 69,861 39,401 40,588 69,861
8 36,936 14,145 14,958 69,861 25,484 26,296 69,861 42,791 43,604 69,861
9 38,783 13,146 13,521 69,861 25,847 26,222 69,861 46,510 46,885 69,861
10 40,722 11,999 11,999 69,861 26,059 26,059 69,861 50,467 50,467 69,861
11 42,758 10,459 10,459 69,861 25,984 25,984 69,861 54,810 54,810 69,861
12 44,896 8,799 8,799 69,861 25,806 25,806 69,861 59,628 59,628 70,958
13 47,141 6,996 6,996 69,861 25,509 25,509 69,861 64,914 64,914 76,598
14 49,498 5,034 5,034 69,861 25,079 25,079 69,861 70,656 70,656 82,667
15 51,973 2,879 2,879 69,861 24,488 24,488 69,861 76,891 76,891 89,194
16 54,572 479 479 69,861 23,693 23,693 69,861 83,659 83,659 96,208
17 57,300 0 0 0 22,663 22,663 69,861 91,041 91,041 102,876
18 60,165 0 0 0 21,355 21,355 69,861 99,105 99,105 110,006
19 63,174 0 0 0 19,693 19,693 69,861 107,926 107,926 117,639
20 66,332 0 0 0 17,599 17,599 69,861 117,597 117,597 125,829
Age 60 31,907 17,168 18,918 69,861 24,366 26,116 69,861 33,495 35,245 69,861
Age 65 40,722 11,999 11,999 69,861 26,059 26,059 69,861 50,467 50,467 69,861
Age 70 51,973 2,879 2,879 69,861 24,488 24,488 69,861 76,891 76,891 89,194
Age 75 66,332 0 0 0 17,599 17,599 69,861 117,597 117,597 125,829
</TABLE>
THE HYPOTHETICAL INVESTMENT RATES OF RETURN ARE ILLUSTRATIVE ONLY. THEY ARE NOT
A REPRESENTATION OF PAST OR FUTURE INVESTMENT RATES OF RETURN. INVESTMENT
RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN. INVESTMENT RESULTS WILL DEPEND ON
INVESTMENT ALLOCATIONS AND THE DIFFERENT INVESTMENT RATES OF RETURN FOR THE
FUNDS. THESE HYPOTHETICAL INVESTMENT RATES OF RETURN MAY NOT BE ACHIEVED FOR ANY
ONE YEAR OR SUSTAINED OVER ANY PERIOD.
D-6
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
THE FULCRUM FUND-SM- NEXT GENERATION
MODIFIED SINGLE PAYMENT VARIABLE LIFE CONTRACT
MALE NONSMOKER AGE 65
FEMALE NONSMOKER AGE 65
SPECIFIED FACE AMOUNT = $66,006
CURRENT COST OF INSURANCE CHARGES
<TABLE>
<CAPTION>
PREMIUMS HYPOTHETICAL 0% HYPOTHETICAL 6% HYPOTHETICAL 12%
PAID PLUS GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN
INTEREST ----------------------------------- ----------------------------------- ---------------------------------
POLICY AT 5% SURRENDER POLICY DEATH SURRENDER POLICY DEATH SURRENDER POLICY DEATH
YEAR PER YEAR VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT
- --------- ----------- ----------- --------- ----------- ----------- --------- ----------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 26,250 21,640 24,140 66,006 23,122 25,622 66,006 24,605 27,105 66,006
2 27,563 20,964 23,277 66,006 23,919 26,231 66,006 27,049 29,362 66,006
3 28,941 20,316 22,441 66,006 24,721 26,846 66,006 29,667 31,792 66,006
4 30,388 19,697 21,635 66,006 25,538 27,476 66,006 32,487 34,425 66,006
5 31,907 19,106 20,856 66,006 26,371 28,121 66,006 35,529 37,279 66,006
6 33,502 18,541 20,104 66,006 27,219 28,782 66,006 38,809 40,372 66,006
7 35,178 18,191 19,378 66,006 28,272 29,459 66,006 42,536 43,724 66,006
8 36,936 17,865 18,678 66,006 29,341 30,153 66,006 46,545 47,357 66,006
9 38,783 17,626 18,001 66,006 30,489 30,864 66,006 50,928 51,303 66,006
10 40,722 17,348 17,348 66,006 31,593 31,593 66,006 55,602 55,602 66,006
11 42,758 16,836 16,836 66,006 32,566 32,566 66,006 60,686 60,686 66,006
12 44,896 16,337 16,337 66,006 33,571 33,571 66,006 66,266 66,266 69,579
13 47,141 15,853 15,853 66,006 34,608 34,608 66,006 72,352 72,352 75,970
14 49,498 15,382 15,382 66,006 35,677 35,677 66,006 78,973 78,973 82,921
15 51,973 14,924 14,924 66,006 36,781 36,781 66,006 86,193 86,193 90,503
16 54,572 14,478 14,478 66,006 37,920 37,920 66,006 94,074 94,074 98,778
17 57,300 14,046 14,046 66,006 39,095 39,095 66,006 102,675 102,675 107,809
18 60,165 13,625 13,625 66,006 40,307 40,307 66,006 112,063 112,063 117,666
19 63,174 13,216 13,216 66,006 41,558 41,558 66,006 122,309 122,309 128,424
20 66,332 12,818 12,818 66,006 42,849 42,849 66,006 133,492 133,492 140,166
Age 70 31,907 19,106 20,856 66,006 26,371 28,121 66,006 35,529 37,279 66,006
Age 75 40,722 17,348 17,348 66,006 31,593 31,593 66,006 55,602 55,602 66,006
</TABLE>
THE HYPOTHETICAL INVESTMENT RATES OF RETURN ARE ILLUSTRATIVE ONLY. THEY ARE NOT
A REPRESENTATION OF PAST OR FUTURE INVESTMENT RATES OF RETURN. INVESTMENT
RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN. INVESTMENT RESULTS WILL DEPEND ON
INVESTMENT ALLOCATIONS AND THE DIFFERENT INVESTMENT RATES OF RETURN FOR THE
FUNDS. THESE HYPOTHETICAL INVESTMENT RATES OF RETURN MAY NOT BE ACHIEVED FOR ANY
ONE YEAR OR SUSTAINED OVER ANY PERIOD.
D-7
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
THE FULCRUM FUND-SM- NEXT GENERATION
MODIFIED SINGLE PAYMENT VARIABLE LIFE CONTRACT
MALE NONSMOKER AGE 65
FEMALE NONSMOKER AGE 65
SPECIFIED FACE AMOUNT = $66,006
GUARANTEED COST OF INSURANCE CHARGES
<TABLE>
<CAPTION>
HYPOTHETICAL 12%
PREMIUMS HYPOTHETICAL 0% HYPOTHETICAL 6% GROSS INVESTMENT
PAID PLUS GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN RETURN
INTEREST ----------------------------------- ------------------------------------- ----------------------
POLICY AT 5% SURRENDER POLICY DEATH SURRENDER POLICY DEATH SURRENDER POLICY
YEAR PER YEAR VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE
- --------- ----------- ----------- --------- ----------- ----------- ----------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 26,250 21,640 24,140 66,006 23,122 25,622 66,006 24,605 27,105
2 27,563 20,964 23,277 66,006 23,919 26,231 66,006 27,049 29,362
3 28,941 20,277 22,402 66,006 24,695 26,820 66,006 29,657 31,782
4 30,388 19,570 21,507 66,006 25,445 27,383 66,006 32,439 34,376
5 31,907 18,830 20,580 66,006 26,160 27,910 66,006 35,410 37,160
6 33,502 18,043 19,606 66,006 26,829 28,392 66,006 38,588 40,151
7 35,178 17,379 18,567 66,006 27,626 28,814 66,006 42,179 43,367
8 36,936 16,625 17,438 66,006 28,346 29,158 66,006 46,021 46,833
9 38,783 15,812 16,187 66,006 29,027 29,402 66,006 50,209 50,584
10 40,722 14,778 14,778 66,006 29,518 29,518 66,006 54,688 54,688
11 42,758 13,266 13,266 66,006 29,691 29,691 66,006 59,601 59,601
12 44,896 11,492 11,492 66,006 29,684 29,684 66,006 65,059 65,059
13 47,141 9,401 9,401 66,006 29,462 29,462 66,006 71,035 71,035
14 49,498 6,922 6,922 66,006 28,979 28,979 66,006 77,535 77,535
15 51,973 3,965 3,965 66,006 28,173 28,173 66,006 84,599 84,599
16 54,572 405 405 66,006 26,962 26,962 66,006 92,266 92,266
17 57,300 0 0 0 25,229 25,229 66,006 100,579 100,579
18 60,165 0 0 0 22,814 22,814 66,006 109,578 109,578
19 63,174 0 0 0 19,500 19,500 66,006 119,303 119,303
20 66,332 0 0 0 14,992 14,992 66,006 129,795 129,795
Age 70 31,907 18,830 20,580 66,006 26,160 27,910 66,006 35,410 37,160
Age 75 40,722 14,778 14,778 66,006 29,518 29,518 66,006 54,688 54,688
<CAPTION>
POLICY DEATH
YEAR BENEFIT
- --------- ---------
<S> <C>
1 66,006
2 66,006
3 66,006
4 66,006
5 66,006
6 66,006
7 66,006
8 66,006
9 66,006
10 66,006
11 66,006
12 68,312
13 74,587
14 81,412
15 88,829
16 96,879
17 105,608
18 115,057
19 125,268
20 136,285
Age 70 66,006
Age 75 66,006
</TABLE>
THE HYPOTHETICAL INVESTMENT RATES OF RETURN ARE ILLUSTRATIVE ONLY. THEY ARE NOT
A REPRESENTATION OF PAST OR FUTURE INVESTMENT RATES OF RETURN. INVESTMENT
RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN. INVESTMENT RESULTS WILL DEPEND ON
INVESTMENT ALLOCATIONS AND THE DIFFERENT INVESTMENT RATES OF RETURN FOR THE
FUNDS. THESE HYPOTHETICAL INVESTMENT RATES OF RETURN MAY NOT BE ACHIEVED FOR ANY
ONE YEAR OR SUSTAINED OVER ANY PERIOD.
D-8
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
THE FULCRUM FUND-SM- NEXT GENERATION
MODIFIED SINGLE PAYMENT VARIABLE LIFE CONTRACT
UNISEX NONSMOKER AGE 65
UNISEX NONSMOKER AGE 65
SPECIFIED FACE AMOUNT = $65,807
CURRENT COST OF INSURANCE CHARGES
<TABLE>
<CAPTION>
PREMIUMS HYPOTHETICAL 0% HYPOTHETICAL 6% HYPOTHETICAL 12%
PAID PLUS GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN
INTEREST ----------------------------------- ----------------------------------- ---------------------------------
POLICY AT 5% SURRENDER POLICY DEATH SURRENDER POLICY DEATH SURRENDER POLICY DEATH
YEAR PER YEAR VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT
- --------- ----------- ----------- --------- ----------- ----------- --------- ----------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 26,250 21,640 24,140 65,807 23,122 25,622 65,807 24,604 27,104 65,807
2 27,563 20,963 23,275 65,807 23,917 26,229 65,807 27,048 29,360 65,807
3 28,941 20,315 22,440 65,807 24,719 26,844 65,807 29,664 31,789 65,807
4 30,388 19,695 21,633 65,807 25,536 27,474 65,807 32,485 34,423 65,807
5 31,907 19,104 20,854 65,807 26,369 28,119 65,807 35,526 37,276 65,807
6 33,502 18,540 20,102 65,807 27,217 28,780 65,807 38,807 40,369 65,807
7 35,178 18,189 19,377 65,807 28,269 29,457 65,807 42,534 43,721 65,807
8 36,936 17,864 18,676 65,807 29,338 30,151 65,807 46,542 47,354 65,807
9 38,783 17,625 18,000 65,807 30,487 30,862 65,807 50,924 51,299 65,807
10 40,722 17,347 17,347 65,807 31,590 31,590 65,807 55,599 55,599 65,807
11 42,758 16,834 16,834 65,807 32,564 32,564 65,807 60,682 60,682 65,807
12 44,896 16,336 16,336 65,807 33,569 33,569 65,807 66,261 66,261 69,574
13 47,141 15,851 15,851 65,807 34,605 34,605 65,807 72,346 72,346 75,963
14 49,498 15,380 15,380 65,807 35,675 35,675 65,807 78,963 78,963 82,912
15 51,973 14,922 14,922 65,807 36,778 36,778 65,807 86,183 86,183 90,492
16 54,572 14,477 14,477 65,807 37,917 37,917 65,807 94,063 94,063 98,766
17 57,300 14,044 14,044 65,807 39,092 39,092 65,807 102,663 102,663 107,796
18 60,165 13,624 13,624 65,807 40,304 40,304 65,807 112,050 112,050 117,652
19 63,174 13,215 13,215 65,807 41,555 41,555 65,807 122,294 122,294 128,409
20 66,332 12,817 12,817 65,807 42,845 42,845 65,807 133,476 133,476 140,150
Age 70 31,907 19,104 20,854 65,807 26,369 28,119 65,807 35,526 37,276 65,807
Age 75 40,722 17,347 17,347 65,807 31,590 31,590 65,807 55,599 55,599 65,807
</TABLE>
THE HYPOTHETICAL INVESTMENT RATES OF RETURN ARE ILLUSTRATIVE ONLY. THEY ARE NOT
A REPRESENTATION OF PAST OR FUTURE INVESTMENT RATES OF RETURN. INVESTMENT
RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN. INVESTMENT RESULTS WILL DEPEND ON
INVESTMENT ALLOCATIONS AND THE DIFFERENT INVESTMENT RATES OF RETURN FOR THE
FUNDS. THESE HYPOTHETICAL INVESTMENT RATES OF RETURN MAY NOT BE ACHIEVED FOR ANY
ONE YEAR OR SUSTAINED OVER ANY PERIOD.
D-9
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
THE FULCRUM FUND-SM- NEXT GENERATION
MODIFIED SINGLE PAYMENT VARIABLE LIFE CONTRACT
UNISEX NONSMOKER AGE 65
UNISEX NONSMOKER AGE 65
SPECIFIED FACE AMOUNT = $65,807
GUARANTEED COST OF INSURANCE CHARGES
<TABLE>
<CAPTION>
PREMIUMS HYPOTHETICAL 0% HYPOTHETICAL 6% HYPOTHETICAL 12%
PAID PLUS GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN
INTEREST ----------------------------------- ----------------------------------- ---------------------------------
POLICY AT 5% SURRENDER POLICY DEATH SURRENDER POLICY DEATH SURRENDER POLICY DEATH
YEAR PER YEAR VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT
- --------- ----------- ----------- --------- ----------- ----------- --------- ----------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 26,250 21,640 24,140 65,807 23,122 25,622 65,807 24,604 27,104 65,807
2 27,563 20,963 23,275 65,807 23,917 26,229 65,807 27,048 29,360 65,807
3 28,941 20,273 22,398 65,807 24,691 26,816 65,807 29,652 31,777 65,807
4 30,388 19,560 21,498 65,807 25,436 27,374 65,807 32,430 34,368 65,807
5 31,907 18,814 20,564 65,807 26,145 27,895 65,807 35,397 37,147 65,807
6 33,502 18,017 19,580 65,807 26,805 28,367 65,807 38,567 40,129 65,807
7 35,178 17,340 18,527 65,807 27,589 28,777 65,807 42,149 43,336 65,807
8 36,936 16,571 17,383 65,807 28,295 29,108 65,807 45,981 46,793 65,807
9 38,783 15,740 16,115 65,807 28,961 29,336 65,807 50,160 50,535 65,807
10 40,722 14,686 14,686 65,807 29,434 29,434 65,807 54,631 54,631 65,807
11 42,758 13,150 13,150 65,807 29,586 29,586 65,807 59,536 59,536 65,807
12 44,896 11,353 11,353 65,807 29,558 29,558 65,807 64,989 64,989 68,238
13 47,141 9,237 9,237 65,807 29,314 29,314 65,807 70,956 70,956 74,504
14 49,498 6,735 6,735 65,807 28,808 28,808 65,807 77,447 77,447 81,319
15 51,973 3,757 3,757 65,807 27,981 27,981 65,807 84,500 84,500 88,725
16 54,572 180 180 65,807 26,750 26,750 65,807 92,157 92,157 96,765
17 57,300 0 0 0 25,002 25,002 65,807 100,460 100,460 105,483
18 60,165 0 0 0 22,576 22,576 65,807 109,448 109,448 114,920
19 63,174 0 0 0 19,258 19,258 65,807 119,163 119,163 125,121
20 66,332 0 0 0 14,758 14,758 65,807 129,645 129,645 136,127
Age 70 31,907 18,814 20,564 65,807 26,145 27,895 65,807 35,397 37,147 65,807
Age 75 40,722 14,686 14,686 65,807 29,434 29,434 65,807 54,631 54,631 65,807
</TABLE>
THE HYPOTHETICAL INVESTMENT RATES OF RETURN ARE ILLUSTRATIVE ONLY. THEY ARE NOT
A REPRESENTATION OF PAST OR FUTURE INVESTMENT RATES OF RETURN. INVESTMENT
RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN. INVESTMENT RESULTS WILL DEPEND ON
INVESTMENT ALLOCATIONS AND THE DIFFERENT INVESTMENT RATES OF RETURN FOR THE
FUNDS. THESE HYPOTHETICAL INVESTMENT RATES OF RETURN MAY NOT BE ACHIEVED FOR ANY
ONE YEAR OR SUSTAINED OVER ANY PERIOD.
D-10
<PAGE>
PART II
UNDERTAKING TO FILE REPORTS
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.
RULE 484 UNDERTAKING
Article VIII of Registrant's Bylaws provides: 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 judgment,
except in relation to matters as to which he shall be finally adjudged in such
action, suit, or proceeding to be liable for negligence or misconduct in the
performance of his duties as such Director or Officer; and the foregoing right
of indemnification or reimbursement shall not affect any other rights to which
he may be entitled under the Articles of Incorporation, any statute, bylaw,
agreement, vote of stockholders, or otherwise.
Insofar as indemnification for liability arising under the 1933 Act may be
permitted to Directors, officers and controlling persons of the Registrant
pursuant to the foregoing provisions, or otherwise, the 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 the Registrant of expenses incurred or paid by a Director, officer or
controlling person of the 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, the 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.
REPRESENTATIONS PURSUANT TO SECTION 26(e) OF THE INVESTMENT COMPANY ACT OF 1940
The Company hereby represents that the aggregate fees and charges under the
Policy are reasonable in relation to the services rendered, the expenses
expected to be incurred, and the risks assumed by the Company.
<PAGE>
CONTENTS OF THE REGISTRATION STATEMENT
This registration statement comprises the following papers and documents:
The facing sheet.
Cross-reference to items required by Form N-8B-2.
The prospectus consisting of ____ pages.
The undertaking to file reports.
The undertaking pursuant to Rule 484 under the 1933 Act.
Representations pursuant to Section 26(e) of the 1940 Act.
The signatures.
Written consents of the following persons:
1. Actuarial Consent
2. Opinion of Counsel
3. Consent of Independent Accountants
The following exhibits:
1. Exhibit 1 (Exhibits required by paragraph A of the instructions to
Form N-8B-2)
(1) Certified copy of Resolutions of the Board of Directors of the
Company dated June 13, 1996 establishing the Fulcrum Variable
Life Separate Account was filed in Registrant's initial
Registration Statement on November 5, 1996, and is incorporated
by reference herein.
(2) Not Applicable.
(4) Not Applicable.
(5) Policy Form was filed in Registrant's initial Registration
Statement on November 5, 1996, and is incorporated by reference
herein.
(6) Company's Restated Articles of Incorporation and Bylaws were
filed in Registrant's initial Registration Statement on November
5, 1996, and are incorporated by reference herein.
(7) Not Applicable.
(8) (a) Participation Agreement with Allmerica Investment Trust is
filed herewith.
(b) Form of Participation Agreement with The Palladian Trust,
is filed herewith.
(9) Not Applicable.
<PAGE>
(9) Application Form is filed herewith.
2. The Policy and Policy riders are as set forth in Exhibit
1(5) above.
3. Opinion of Counsel is filed herewith.
4. Not Applicable.
5. Not Applicable.
6. Actuarial Consent is filed herewith.
7. Procedures Memorandum pursuant to Rule 6e-3(T)(b)(12)(iii)
under the 1940 Act which includes conversion procedures
pursuant to Rule 6e-3(T)(b)(13)(v)(B) was filed in
Registrant's initial Registration Statement on November 5,
1996, and is incorporated by reference herein.
8. Consent of Independent Accountants is filed herewith.
10. Wholesaling Agreement was filed in Registrant's initial
Registration Statement on November 5, 1996, and is
incorporated by reference herein.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940 the Registrant certifies that it meets all the requirements
for effectiveness of this Registration Statement pursuant to Rule 485(b) under
the Securities Act of 1933 and has duly caused this Registration Statement to be
signed on its behalf by the undersigned, thereto duly authorized, in the City of
Worcester, and Commonwealth of Massachusetts, on the 15th day of April, 1998.
FULCRUM VARIABLE LIFE SEPARATE ACCOUNT
OF ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
By: /s/ Abigail M. Armstrong
-------------------------------
Abigail M. Armstrong, Secretary
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed below by the following persons in the capacities and
on the dates indicated.
Signatures Title Date
/s/ John F. O'Brien
- --------------------------- Director and Chairman of April 15, 1998
John F. O'Brien the Board
/s/ Bruce C. Anderson
- --------------------------- Director
Bruce C. Anderson
/s/ Robert E. Bruce
- --------------------------- Director and Chief Information Officer
Robert E. Bruce
/s/ John P. Kavanaugh
- --------------------------- Director, Vice President and
John P. Kavanaugh Chief Investment Officer
/s/ John F. Kelly
- --------------------------- Director, Vice President and
John F. Kelly General Counsel
/s/ J. Barry May
- --------------------------- Director
J. Barry May
/s/ James R. McAuliffe
- --------------------------- Director
James R. McAuliffe
/s/ Edward J. Parry III
- --------------------------- Director, Vice President, Chief Financial
Edward J. Parry III Officer and Treasurer
/s/ Richard M. Reilly
- --------------------------- Director, President and
Richard M. Reilly Chief Executive Officer
/s/ Eric A. Simonsen
- --------------------------- Director and Vice President
Eric A. Simonsen
/s/ Phillip E. Soule
- --------------------------- Director
Phillip E. Soule
<PAGE>
FORM S-6 EXHIBIT TABLE
Exhibit 1(8)(a) Participation Agreement with Allmerica Investment Trust
Exhibit 1(8)(b) Participation Agreement with The Palladian Trust
Exhibit 3 Opinion of Counsel
Exhibit 6 Actuarial Consent
Exhibit 8 Consent of Independent Accountants
<PAGE>
PARTICIPATION AGREEMENT
AMONG
ALLMERICA INVESTMENT TRUST
ALLMERICA INVESTMENT MANAGEMENT COMPANY, INC.
AND
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
DATED AS OF
FEBRUARY 25, 1998
<PAGE>
TABLE OF CONTENTS
PAGE
ARTICLE I Purchase of Fund Shares 4
ARTICLE II Representations and Warranties 5
ARTICLE III Prospectuses, Reports to Shareholders
and Proxy Statements, Voting 6
ARTICLE IV Sales Material and Information 8
ARTICLE V Fees and Expenses 9
ARTICLE VI Diversification 9
ARTICLE VII Potential Conflicts 10
ARTICLE VIII Indemnification 11
ARTICLE IX Applicable Law 15
ARTICLE X Termination 15
ARTICLE XI Notices 17
ARTICLE XII Miscellaneous 17
SCHEDULE A Separate Accounts and Variable Products A-1
SCHEDULE B Portfolios of Allmerica Investment Trust B-1
SCHEDULE C Proxy Voting Procedures C-1
2
<PAGE>
THIS AGREEMENT, made and entered into as of the 25th day of February, 1998 by
and among: ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(hereinafter the "Company"), a Delaware corporation, on its own behalf and on
behalf of each separate account of the Company set forth on Schedule A
hereto, as may be amended from time to time (each such account hereinafter
referred to as the "Account"); ALLMERICA INVESTMENT TRUST, an unincorporated
Massachusetts business trust (hereinafter the "Fund"), and ALLMERICA
INVESTMENT MANAGEMENT COMPANY, INC. (hereinafter the "Adviser"), a
Massachusetts corporation
WHEREAS, the Fund engages in business as an open-end management
investment company and is available to act as (i) the investment vehicle for
separate accounts established by insurance companies for individual and group
life insurance policies and annuity contracts with variable accumulation
and/or pay-out provisions (hereinafter referred to individually and/or
collectively as "Variable Products") and (ii) the investment vehicle for
certain qualified pension and retirement plans (hereinafter "Qualified
Plans"); and
WHEREAS, insurance companies desiring to utilize the Fund as an
investment vehicle under their Variable Products enter into participation
agreements with the Fund and the Adviser (the "Participating Insurance
Companies");
WHEREAS, shares of the Fund are divided into several series of shares,
each representing the interest in a particular managed portfolio of
securities and other assets (each such series hereinafter referred to as a
"Portfolio"), any one or more of which may be made available under this
Agreement, as may be amended from time to time by mutual agreement of the
parties hereto; and
WHEREAS, the Fund has applied for an order from the Securities and
Exchange Commission, granting Participating Insurance Companies and Variable
Insurance Product separate accounts exemptions from the provisions of
Sections 9(a), 13(a), 15(a), and 15(b) of the Investment Company Act of 1940,
as amended (hereinafter the "1940 Act"), and Rules 6e-2(b)(15) and
6e-3(T)(b)(15) thereunder, to the extent necessary to permit shares of the
Fund to be sold to and held by separate accounts of both affiliated and
unaffiliated life insurance companies and Qualified Plans (hereinafter the
"Shared Funding Exemptive Order"); and
WHEREAS, the Fund is registered as an open-end management investment
company under the 1940 Act and its shares are registered under the Securities
Act of 1933, as amended (hereinafter the "1933 Act"); and
WHEREAS, the Adviser is duly registered as an investment adviser under
the Investment Advisers Act of 1940, as amended, and any applicable state
securities laws and manages each of the certain portfolios of the Fund and
retains Sub-Advisers for the daily investment and reinvestment of the assets
of each portfolio; and
WHEREAS, Allmerica Investments, Inc. (the "Distributor") is registered
as a broker/dealer under the Securities Exchange Act of 1934, as amended
(hereinafter the "1934 Act"), is a member in good standing of the National
Association of Securities Dealers, Inc. (hereinafter "NASD"); and
WHEREAS, the Company has registered or will register certain Variable
Products under the 1933 Act; and
3
<PAGE>
WHEREAS, each Account is a duly organized, validly existing segregated
asset account, established by resolution or under authority of the Board of
Directors of the Company, to set aside and invest assets attributable to the
aforesaid Variable Products, and the Company has registered or will register
each Account as a unit investment trust under the 1940 Act; and
WHEREAS, to the extent permitted by applicable insurance laws and
regulations, the Company intends to purchase, on behalf of each Account,
shares in the Portfolios set forth in Schedule B attached to this Agreement,
to fund certain of the aforesaid Variable Insurance Products and the Fund is
authorized to sell such shares to each such Account at net asset value;
NOW, THEREFORE, in consideration of their mutual promises, the parties
hereto agree as follows:
ARTICLE I. PURCHASE OF FUND SHARES
1.1. The Fund agrees to make available for purchase by the Company
shares of the Fund and shall execute orders placed for each Account on a
daily basis at the net asset value next computed after receipt by the Fund or
its designee of such order. For purposes of this Section 1.1, the Company
shall be the designee of the Fund for receipt of such orders from each
Account and receipt by such designee of an order prior to the close of
regular trading on the New York Stock Exchange ("NYSE") shall constitute
receipt by the Fund; provided that the Fund receives notice of such order by
10:00 a.m. Eastern time on the next following Business Day. "Business Day"
shall mean any day on which the New York Stock Exchange is open for trading
and on which the Fund calculates its net asset value pursuant to the rules of
the Securities and Exchange Commission.
1.2. The Fund, so long as this Agreement is in effect, agrees to make
its shares available indefinitely for purchase at the applicable net asset
value per share by the Company and its Accounts on those days on which the
Fund calculates its net asset value pursuant to rules of the Securities and
Exchange Commission and the Fund shall use reasonable efforts to calculate
such net asset value on each day which the New York Stock Exchange is open
for trading. Notwithstanding the foregoing, the Board of Trustees of the
Fund (hereinafter the "Board") may refuse to permit the Fund to sell shares
of any Portfolio to any person, or suspend or terminate the offering of
shares of any Portfolio if such action is required by law or by regulatory
authorities having jurisdiction or is, in the sole discretion of the Board
acting in good faith and in light of their fiduciary duties under federal and
any applicable state laws, necessary in the best interests of the
shareholders of such Portfolio.
1.3. The Fund agrees that shares of the Fund will be sold only to
Participating Insurance Companies and their separate accounts and to certain
Qualified Plans. No shares of any Portfolio will be sold to the general
public.
1.4. The Fund agrees to redeem for cash, on the Company's request, any
full or fractional shares of the Fund held by the Company, executing such
requests on a daily basis at the net asset value next computed after receipt
by the Fund or its designee of the request for redemption. For purposes of
this Section 1.4, the Company shall be the designee of the Fund for receipt
of requests for redemption from each Account and receipt by such designee of
a request prior to the close of regular trading on the NYSE shall constitute
receipt by the Fund, provided that the Fund receives notice of such request
for redemption on the next following Business Day.
4
<PAGE>
1.5. The Company agrees that purchases and redemptions of Portfolio
shares offered by the then current prospectus of the Fund shall be made in
accordance with the provisions of such prospectus.
1.6. The Company shall pay for Fund shares no later than the next
Business Day after an order to purchase Fund shares is made in accordance
with the provisions of Section 1.1 hereof. Payment shall be in federal funds
transmitted by wire.
1.7. Issuance and transfer of the Fund's shares will be by book entry
only. Stock certificates will not be issued to the Company or any Account.
Shares ordered from the Fund will be recorded in an appropriate title for
each Account or the appropriate subaccount of each Account.
1.9. The Fund shall furnish same day notice (by wire or telephone,
followed by written confirmation) to the Company of any income, dividends or
capital gain distributions payable on the Fund's shares. The Company hereby
elects to receive all such income dividends and capital gain distributions as
are payable on the Portfolio shares in additional shares of that Portfolio.
The Company reserves the right to revoke this election and to receive all
such income dividends and capital gain distributions in cash. The Fund shall
notify the Company of the number of shares so issued as payment of such
dividends and distributions.
1.10. The Fund shall make the net asset value per share for each
Portfolio available to the Company on a daily basis as soon as reasonably
practical after the net asset value per share is calculated (normally by 6:30
p.m. Eastern time) and shall use its best efforts to make such net asset
value per share available by 7:00 p.m. Eastern time.
ARTICLE II. REPRESENTATIONS AND WARRANTIES
2.1. The Company represents and warrants that the Variable Products are
or will be registered under the 1933 Act; that the Variable Products will be
issued and sold in compliance in all material respects with all applicable
federal and state laws, and that the sale of the Variable Products shall
comply in all material respects with state insurance suitability
requirements. The Company further represents and warrants that it is an
insurance company duly organized and in good standing under applicable law,
that it has legally and validly established each Account as a segregated
asset account under Section 2932 of the Delaware Insurance Code, and that it
has registered or, prior to any issuance or sale of the Variable Products,
will register each Account as a unit investment trust in accordance with the
provisions of the 1940 Act to serve as a segregated investment account for
the Variable Products.
2.2. The Fund represents and warrants that Fund shares sold pursuant to
this Agreement shall be registered under the 1933 Act, duly authorized for
issuance and sold in compliance with the laws of the Commonwealth of
Massachusetts and all applicable federal and state securities laws, and that
the Fund is and shall make every effort to remain registered under the 1940
Act. The Fund shall amend the registration statement for its shares under the
1933 Act and the 1940 Act from time to time as required in order to effect
the continuous offering of its shares. The Fund shall register and qualify
the shares for sale in accordance with the laws of the various states only if
and to the extent deemed advisable by the Fund.
2.3. The Fund represents that it is currently qualified as a Regulated
Investment Company under Subchapter M of the Internal Revenue Code of 1986,
as amended (the "Code"), and that it will make every effort to maintain such
qualification (under Subchapter M or any successor or similar provision)
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and that it will notify the Company promptly upon having a reasonable basis
for believing that it has ceased to so qualify or that it might not so
qualify in the future.
2.4. The Company represents that the Variable Products are currently
treated as life insurance policies or annuity contracts under applicable
provisions of the Code, that it will make every effort to maintain such
treatment, and that it will notify the Fund immediately upon having a
reasonable basis for believing that the Variable Products have ceased to be
so treated or that they might not be so treated in the future.
2.5. The Fund represents that to the extent that it decides to finance
distribution expenses pursuant to Rule 12b-1 under the 1940 Act, the Fund
undertakes to have its board of Trustees, a majority of whom are not
interested persons of the Fund, formulate and approve any plan under Rule
12b-1 to finance distribution expenses.
2.6. The Fund makes no representation as to whether any aspect of its
operations (including, but not limited to, fees and expenses and investment
policies) complies with the insurance laws or regulations of the various
states.
2.7. The Fund represents that it is lawfully organized and validly
existing under the laws of the Commonwealth of Massachusetts and that it does
and will comply in all material respects with the 1940 Act.
2.8. The Adviser represents and warrants that it is and shall remain
duly registered in all material respects under all applicable federal and
state securities laws and that it will perform its obligations for the Fund
in compliance in all material respects with the laws of its state of domicile
and any applicable state and federal securities laws.
2.9. The Fund represents and warrants that its Trustees, officers,
employees, and other individuals/entities dealing with the money and/or
securities of the Fund are and shall continue to be at all times covered by a
blanket fidelity bond or similar coverage for the benefit of the Fund in an
amount not less than the minimal coverage as required currently by Rule
17g-(1) of the 1940 Act or related provisions as may be promulgated from time
to time. The aforesaid blanket fidelity bond shall include coverage for
larceny and embezzlement and shall be issued by a reputable bonding company.
2.10. The Company represents and warrants that all of its directors,
officers, employees, investment advisers, and other individuals/entities
dealing with the money and/or securities of the Fund are covered by a blanket
fidelity bond or similar coverage, in an amount not less $5 million. The
aforesaid, which includes coverage for larceny and embezzlement, shall be
issued by a reputable bonding company. The Company agrees to make all
reasonable efforts to see that this bond or another bond containing these
provisions is always in effect, and agrees to notify the Fund and the
Distributor promptly in writing in the event that such coverage no longer
applies.
ARTICLE III. PROSPECTUSES, REPORTS TO SHAREHOLDERS AND PROXY STATEMENTS;
VOTING
3.1. The Fund or its designee shall provide the Company with as many
printed copies of the Fund's current prospectus and statement of additional
information as the Company may reasonably request. If requested by the
Company, in lieu of providing printed copies, the Fund shall provide
camera-ready film or computer diskettes containing the Fund's prospectus and
statement of additional
6
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information, and such other assistance as is reasonably necessary in order
for the Company once each year (or more frequently if the prospectus and/or
statement of additional information for the Fund is amended during the year)
to have the prospectus for the Variable Products and the Fund's prospectus
printed together in one document, and to have the statement of additional
information for the Fund and the statement of additional information for the
Variable Products printed together in one document. Alternatively, the
Company may print the Fund's prospectus and/or its statement of additional
information in combination with other fund companies' prospectuses and
statements of additional information.
3.2. Except as provided in this Section 3.2., all expenses of printing
and distributing Fund prospectuses and statements of additional information
shall be the expense of the Company. For any prospectuses and statements of
additional information provided by the Company to the existing owners of
Variable Products who currently own shares of one or more of the Fund's
Portfolios, in order to update disclosure as required by the 1933 Act and/or
the 1940 Act, the cost of printing shall be borne by the Fund. If the
Company chooses to receive camera-ready film or computer diskettes in lieu of
receiving printed copies of the Fund's prospectus, the Fund will reimburse
the Company in an amount equal to the product of x and y where x is the
number of such prospectuses distributed to owners of the Variable Products
who currently own shares of one or more of the Fund's Portfolios, and y is
the Fund's per unit cost of typesetting and printing the Fund's prospectus.
The same procedures shall be followed with respect to the Fund's statement of
additional information. The Company agrees to provide the Fund or its
designee with such information as may be reasonably requested by the Fund to
assure that the Fund's expenses do not include the cost of printing any
prospectuses or statements of additional information other than those
actually distributed to existing owners of the Variable Products.
3.3. The Fund's statement of additional information shall be obtainable
from the Fund, the Company or such other person as the Fund may designate, as
agreed upon by the parties.
3.4. The Fund, at its expense, shall provide the Company with copies of
its proxy statements, reports to shareholders, and other communications
(except for prospectuses and statements of additional information, which are
covered in section 3.1) to shareholders in such quantity as the Company shall
reasonably require for distribution to contract owners. The Fund or its
designee shall bear the cost of printing, duplicating, and mailing of these
documents to current contract owners, and the Company shall bear the cost for
such documents used for purposes other than distribution to current contract
owners.
3.5. If and to the extent required by law the Company shall:
(i) solicit voting instructions from contract owners;
(ii) vote the Fund shares in accordance with instructions received
from contract owners; and
(iii) vote Fund shares for which no instructions have been received
in the same proportion as Fund shares of such Portfolio for
which instructions have been received,
so long as and to the extent that the Securities and Exchange Commission
continues to interpret the 1940 Act to require pass-through voting privileges
for variable contract owners. The Company reserves the right to vote Fund
shares held in any segregated asset account in its own right, to the extent
permitted by law. The Fund and the Company shall follow the procedures, and
shall have the corresponding
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<PAGE>
responsibilities, for the handling of proxy and voting instruction
solicitations, as set forth in Schedule C attached hereto and incorporated
herein by reference. Participating Insurance Companies shall be responsible
for ensuring that each of their separate accounts participating in the Fund
calculates voting privileges in a manner consistent with the standards set
forth on Schedule C, which standards will also be provided to the other
Participating Insurance Companies, if any.
3.6. The Fund will comply with all provisions of the 1940 Act requiring
voting by shareholders, including Sections 16(a) and, if and when applicable,
16(b). Further, the Fund will act in accordance with the Securities and
Exchange Commission's interpretation of the requirements of Section 16(a)
with respect to periodic elections of trustees and with whatever rules the
Commission may promulgate with respect thereto.
3.7. The Fund shall use reasonable efforts to provide Fund prospectuses,
reports to shareholders, proxy materials and other Fund communications (or
camera-ready equivalents) to the Company sufficiently in advance of the
Company's mailing dates to enable the Company to complete, at reasonable
cost, the printing, assembling and/or distribution of the communications in
accordance with applicable laws and regulations.
ARTICLE IV. SALES MATERIAL AND INFORMATION
4.1. The Company shall furnish, or shall cause to be furnished, to the
Fund or its designee, each piece of sales literature or other promotional
material in which the Fund or the Adviser(s) is named, at least fifteen
Business Days prior to its use. No such material shall be used if the Fund
or its designee reasonably objects to such use within fifteen Business Days
after receipt of such material.
4.2. The Company shall not give any information or make any
representations or statements on behalf of the Fund or concerning the Fund in
connection with the sale of the Variable Products other than the information
or representations contained in the registration statement or prospectus for
the Fund shares, as such registration statement and prospectus may be amended
or supplemented from time to time, or in reports or proxy statements for the
Fund, or in sales literature or other promotional material approved by the
Fund or its designee, except with the permission of the Fund.
4.3. The Fund or its designee shall furnish, or shall cause to be
furnished, to the Company or its designee, each piece of sales literature or
other promotional material in which the Company and/or its separate
account(s) is named at least fifteen Business Days prior to its use. No such
material shall be used if the Company or its designee reasonably objects to
such use within fifteen Business Days after receipt of such material.
4.4. The Fund and the Adviser shall not give any information or make
any representations on behalf of the Company or concerning the Company, each
Account, or the Variable Products, other than the information or
representations contained in a registration statement or prospectus for the
Variable Products, as such registration statement and prospectus may be
amended or supplemented from time to time, or in published reports for each
Account which are in the public domain or approved by the Company for
distribution to contract owners, or in sales literature or other promotional
material approved by the Company or its designee, except with the permission
of the Company.
4.5. The Fund will provide to the Company at least one complete copy of
all registration statements, prospectuses, statements of additional
information, reports, proxy statements, sales literature
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<PAGE>
and other promotional materials, applications for exemptions, requests for
no-action letters, and all amendments to any of the above, that relate to the
Fund or its shares, which are relevant to the Company or the Variable
Products.
4.6. The Company will provide to the Fund at least one complete copy of
all registration statements, prospectuses, statements of additional
information, reports, solicitations for voting instructions, sales literature
and other promotional materials, applications for exemptions, requests for no
action letters, and all amendments to any of the above, that relate to the
investment in the Fund under the Variable Products.
4.7. For purposes of this Article IV, the phrase "sales literature or
other promotional material" includes, but is not limited to, any of the
following that refer to the Fund or any affiliate of the Fund: advertisements
(such as material published, or designed for use in, a newspaper, magazine,
or other periodical, radio, television, telephone or tape recording,
videotape display, signs or billboards, motion pictures, or other public
media), sales literature (I.E., any written communication distributed or made
generally available to customers or the public, including brochures,
circulars, research reports, market letters, form letters, seminar texts,
reprints or excerpts of any other advertisement, sales literature, or
published article), educational or training materials or other communications
distributed or made generally available to some or all agents or employees,
and registration statements, prospectuses, statements of additional
information, shareholder reports, and proxy materials.
ARTICLE V. FEES AND EXPENSES
5.1. The Fund shall pay no fee or other compensation to the Company
under this Agreement, except that if the Fund or any Portfolio adopts and
implements a plan pursuant to Rule 12b-1 to finance distribution expenses,
then the Distributor may make payments to the Company or to the distributor
for the Variable Products if and in amounts agreed to by the Distributor in
writing.
5.2. All expenses incident to performance by the Fund under this
Agreement shall be paid by the Fund, other than expenses assumed by the
Adviser under the Management Agreement between the Fund and the Adviser or by
another party. The Fund shall see to it that all its shares are registered
and authorized for issuance in accordance with applicable federal law and, if
and to the extent deemed advisable by the Fund, in accordance with applicable
state laws prior to their sale. The Fund shall bear the expenses for the
cost of registration and qualification of the Fund's shares, preparation and
filing of the Fund's prospectus and registration statement, proxy materials
and reports, setting the prospectus in type, setting in type and printing the
proxy materials and reports to shareholders (including the costs of printing
a prospectus that constitutes an annual report), the preparation of all
statements and notices required by any federal or state law, and all taxes on
the issuance or transfer of the Fund's shares.
ARTICLE VI. DIVERSIFICATION
6.1. The Fund will at all times invest money from the Variable Products
in such a manner as to ensure that the Variable Products will be treated as
variable contracts under the Code and the regulations issued thereunder.
Without limiting the scope of the foregoing, the Fund will at all times
comply with Section 817(h) of the Code and Treasury Regulation 1.817-5,
relating to the diversification requirements for variable annuity, endowment,
or life insurance contracts and any amendments or other modifications to such
Section or Regulations. In the event of a breach of this Article VI by the
Fund, it will take all reasonable steps (a) to notify Company of such breach
and (b) to adequately diversify the Fund so as to achieve compliance within
the grace period afforded by Regulation 1.817-5.
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<PAGE>
ARTICLE VII. POTENTIAL CONFLICTS
7.1. The Board will monitor the Fund for the existence of any material
irreconcilable conflict between the interests of the contract owners of all
separate accounts investing in the Fund. An irreconcilable material conflict
may arise for a variety of reasons, including: (a) an action by any state
insurance regulatory authority; (b) a change in applicable federal or state
insurance, tax, or securities laws or regulations, or a public ruling,
private letter ruling, no-action or interpretative letter, or any similar
action by insurance, tax, or securities regulatory authorities; (c) an
administrative or judicial decision in any relevant proceeding; (d) the
manner in which the investments of any Portfolio are being managed; (e) a
difference in voting instructions given by Variable Insurance Product owners;
or (f) a decision by a Participating Insurance Company to disregard the
voting instructions of contract owners. The Board shall promptly inform the
Company if it determines that an irreconcilable material conflict exists and
the implications thereof.
7.2. Each of the Company and the Adviser will report any potential or
existing conflicts of which it is aware to the Board. Each of the Company
and the Adviser will assist the Board in carrying out its responsibilities
under SEC rules and regulations. The Adviser, and the participating
insurance companies and participating qualified plans will at least annually
submit to the Board such reports, materials, or data as the Board may
reasonably request so that the Board may fully carry out the obligations
imposed upon by the conditions contained in the Shared Funding Exemptive
Order, and said reports, materials, and data will be submitted more
frequently if deemed appropriate by the Board.
7.3. If it is determined by a majority of the Board, or a majority of
its members who are not "interested persons" of the Fund, the Adviser or the
Company as that term is defined in the 1940 Act (hereinafter "disinterested
members"), that a material irreconcilable conflict exists, the Company and
other Participating Insurance Companies shall, at their expense and to the
extent reasonably practicable (as determined by a majority of the
disinterested directors), take whatever steps are necessary to remedy or
eliminate the irreconcilable material conflict, up to and including: (1)
withdrawing the assets allocable to some or all of the separate accounts from
the Fund or any Portfolio and reinvesting such assets in a different
investment medium, including (but not limited to) another Portfolio of the
Fund, or submitting the question whether such segregation should be
implemented to a vote of all affected contract owners and, as appropriate,
segregating the assets of any appropriate group (I.E., annuity contract
owners, life insurance policy owners, or variable contract owners of one or
more Participating Insurance Companies) that votes in favor of such
segregation, or offering to the affected contract owners the option of making
such a change; and (2) establishing a new registered management investment
company or managed separate account.
7.4. If a material irreconcilable conflict arises because of a decision
by the Company to disregard contract owner voting instructions and that
decision represents a minority position or would preclude a majority vote,
the Company may be required, at the Fund's election, to withdraw the affected
Account's investment in the Fund and terminate this Agreement with respect to
such Account (at the Company's expense); provided, however that such
withdrawal and termination shall be limited to the extent required by the
foregoing material irreconcilable conflict as determined by a majority of the
disinterested members of the Board.
7.5. If a material irreconcilable conflict arises because a particular
state insurance regulator's decision applicable to the Company conflicts with
the majority of other state regulators, then the
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<PAGE>
Company will withdraw the affected Account's investment in the Fund and
terminate this Agreement with respect to such Account within six months after
the Board informs the Company in writing that it has determined that such
decision has created an irreconcilable material conflict; provided, however,
that such withdrawal and termination shall be limited to the extent required
by the foregoing material irreconcilable conflict as determined by a majority
of the disinterested members of the Board. Until the end of the foregoing
six month period, the Distributor and Fund shall continue to accept and
implement orders by the Company for the purchase (and redemption) of shares
of the Fund.
7.6. For purposes of Sections 7.3 through 7.5 of this Agreement, a
majority of the disinterested members of the Board shall determine whether
any proposed action adequately remedies any irreconcilable material conflict,
but in no event will the Fund be required to establish a new funding medium
for the Variable Products. The Company shall not be required by Section 7.3
to establish a new funding medium for the Variable Products if an offer to do
so has been declined by vote of a majority of contract owners materially
adversely affected by the irreconcilable material conflict.
7.7. If and to the extent that Rule 6e-2 and Rule 6e-3(T) are amended,
or Rule 6e-3 is adopted, to provide exemptive relief from any provision of
the 1940 Act or the rules promulgated thereunder with respect to mixed or
shared funding, or if the Fund obtains a Shared Exemptive Order which
requires provisions that are materially different from the provisions of this
Agreement, then (a) the Fund and/or the Participating Insurance Companies, as
appropriate, shall take such steps as may be necessary to comply with Rules
6e-2 and 6e-3(T), as amended, and Rule 6e-3, as adopted, or to the terms of
the Shared Exemptive Order, to the extent applicable; and (b) Sections 3.4,
3.5, 7.1, 7.2, 7.3, 7.4, and 7.5 of this Agreement shall continue in effect
only to the extent that terms and conditions substantially identical to such
Sections are contained in such Rule(s) as so amended or adopted.
ARTICLE VIII. INDEMNIFICATION
8.1. INDEMNIFICATION BY THE COMPANY
8.1(a) The Company agrees to indemnify and hold harmless the Fund and
the Adviser, each of their respective officers, employees, and Trustees or
Directors, and each person, if any, who controls the Fund or the Adviser
within the meaning of Section 15 of the 1933 Act (collectively, the
"Indemnified Parties" and individually, "Indemnified Party," for purposes of
this Section 8.1) against any and all losses, claims, damages, liabilities
(including amounts paid in settlement with the written consent of the
Company) or litigation (including legal and other expenses), to which the
Indemnified Parties may become subject under any statute, regulation, at
common law or otherwise, insofar as such losses, claims, damages, liabilities
or expenses (or actions in respect thereof) or settlements are related to the
sale or acquisition of the Fund's shares or the Variable Products and:
(i) arise out of or are based upon any untrue statements or
alleged untrue statements of any material fact contained in
the registration statement or prospectus for the Variable
Products or contained in the Variable Products or sales
literature for the Variable Products (or any amendment or
supplement to any of the foregoing), or arise out of or are
based upon the omission or the alleged omission to state
therein a material fact required to be stated therein or
necessary to make the statements therein not misleading,
provided that this agreement to indemnify shall not apply as
to any Indemnified Party if such statement or omission or such
alleged statement or omission was made in reliance upon and in
conformity with information furnished to the Company by or on
behalf of the Fund for use in the registration statement or
prospectus for the Variable Products or in the Variable
Products or sales literature (or any amendment or
11
<PAGE>
supplement) or otherwise for use in connection with the sale of the
Variable Products or Fund shares; or
(ii) arise out of or as a result of statements or
representations (other than statements or representations
contained in the registration statement, prospectus or sales
literature of the Fund not supplied by the Company, or persons
under its control and other than statements or representations
authorized by the Fund or an Adviser) or unlawful conduct of
the Company or persons under its control, with respect to the
sale or distribution of the Variable Products or Fund shares;
or
(iii) arise out of or as a result of any untrue statement or
alleged untrue statement of a material fact contained in a
registration statement, prospectus, or sales literature of the
Fund or any amendment thereof or supplement thereto or the
omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the
statements therein not misleading, if such a statement or
omission was made in reliance upon and in conformity with
information furnished to the Fund by or on behalf of the
Company; or
(iv) arise as a result of any failure by the Company to
provide the services and furnish the materials under the terms
of this Agreement; or
(v) arise out of or result from any material breach of any
representation and/or warranty made by the Company in this
Agreement or arise out of or result from any other material
breach of this Agreement by the Company, as limited by and in
accordance with the provisions of Sections 8.1(b) and 8.1(c)
hereof.
8.1(b). The Company shall not be liable under this indemnification
provision with respect to any losses, claims, damages, liabilities or
litigation incurred or assessed against an Indemnified Party as such may
arise from such Indemnified Party's willful misfeasance, bad faith, or gross
negligence in the performance of such Indemnified Party's duties or by reason
of such Indemnified Party's reckless disregard of obligations or duties under
this Agreement.
8.1(c). The Company shall not be liable under this indemnification
provision with respect to any claim made against an Indemnified Party unless
such Indemnified Party shall have notified the Company in writing within a
reasonable time after the summons or other first legal process giving
information of the nature of the claim shall have been served upon such
Indemnified Party (or after such Indemnified Party shall have received notice
of such service on any designated agent), but failure to notify the Company
of any such claim shall not relieve the Company from any liability which it
may have to the Indemnified Party against whom such action is brought
otherwise than on account of this indemnification provision. In case any
such action is brought against the Indemnified Parties, the Company shall be
entitled to participate, at its own expense, in the defense of such action.
The Company also shall be entitled to assume the defense thereof, with
counsel satisfactory to the party named in the action. After notice from the
Company to such party of the Company's election to assume the defense
thereof, the Indemnified Party shall bear the fees and expenses of any
additional counsel retained by it, and the Company will not be liable to such
party under this Agreement for any legal or other expenses subsequently
incurred by such party independently in connection with the defense thereof
other than reasonable costs of investigation.
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8.1(d). The Indemnified Parties will promptly notify the Company of the
commencement of any litigation or proceedings against them in connection with
the issuance or sale of the Fund shares or the Variable Products or the
operation of the Fund.
8.2. INDEMNIFICATION BY THE ADVISER
8.2(a). The Adviser agrees, with respect to each Portfolio that it
manages, to indemnify and hold harmless the Company, each of its directors,
officers, and employees, and each person, if any, who controls the Company
within the meaning of Section 15 of the 1933 Act (collectively, the
"Indemnified Parties" and individually, "Indemnified Party," for purposes of
this Section 8.2) against any and all losses, claims, damages, liabilities
(including amounts paid in settlement with the written consent of the
Adviser) or litigation (including legal and other expenses) to which the
Indemnified Parties may become subject under any statute, regulation, at
common law or otherwise, insofar as such losses, claims, damages, liabilities
or expenses (or actions in respect thereof) or settlements are related to the
sale or acquisition of shares of the Portfolio that it manages or the
Variable Products and:
(i) arise out of or are based upon any untrue statement or alleged
untrue statement of any material fact contained in the registration
statement or prospectus or sales literature of the Fund (or any
amendment or supplement to any of the foregoing), or arise out of
or are based upon the omission or the alleged omission to state
therein a material fact required to be stated therein or necessary
to make the statements therein not misleading, provided that this
agreement to indemnify shall not apply as to any Indemnified Party
if such statement or omission or such alleged statement or omission
was made in reliance upon and in conformity with information
furnished to the Fund by or on behalf of the Company for use in the
registration statement or prospectus for the Fund or in sales
literature (or any amendment or supplement) or otherwise for use in
connection with the sale of the Variable Products or Portfolio
shares; or
(ii) arise out of or as a result of statements or representations
(other than statements or representations contained in the
registration statement, prospectus or sales literature for the
Variable Products not supplied by the Fund or persons under its
control and other than statements or representations authorized by
the Company) or unlawful conduct of the Fund, Adviser(s) or
Distributor or persons under their control, with respect to the
sale or distribution of the Variable Products or Portfolio shares;
or
(iii) arise out of or as a result of any untrue statement or
alleged untrue statement of a material fact contained in a
registration statement, prospectus, or sales literature covering
the Variable Products, or any amendment thereof or supplement
thereto, or the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make
the statement or statements therein not misleading, if such
statement or omission was made in reliance upon information
furnished to the Company by or on behalf of the Fund; or
(iv) arise as a result of any failure by the Fund to provide the
services and furnish the materials under the terms of this
Agreement; or
(v) arise out of or result from any material breach of any
representation and/or warranty made by the Adviser in this
Agreement or arise out of or result from any other material breach
of this Agreement by the Adviser; as limited by and in accordance
with the provisions of Sections 8.2(b) and 8.2(c) hereof.
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8.2(b). The Adviser shall not be liable under this
indemnification provision with respect to any losses, claims,
damages, liabilities or litigation incurred or assessed against an
Indemnified Party as such may arise from such Indemnified Party's
willful misfeasance, bad faith, or gross negligence in the
performance of such Indemnified Party's duties or by reason of such
Indemnified Party's reckless disregard of obligations and duties
under this Agreement.
8.2(c). The Adviser shall not be liable under this
indemnification provision with respect to any claim made against an
Indemnified Party unless such Indemnified Party shall have notified
the Adviser in writing within a reasonable time after the summons
or other first legal process giving information of the nature of
the claim shall have been served upon such Indemnified Party (or
after such Indemnified Party shall have received notice of such
service on any designated agent), but failure to notify the Adviser
of any such claim shall not relieve the Adviser from any liability
which it may have to the Indemnified Party against whom such action
is brought otherwise than on account of this indemnification
provision. In case any such action is brought against the
Indemnified Parties, the Adviser will be entitled to participate,
at its own expense, in the defense thereof. The Adviser also shall
be entitled to assume the defense thereof, with counsel
satisfactory to the party named in the action. After notice from
the Adviser to such party of the Adviser's election to assume the
defense thereof, the Indemnified Party shall bear the fees and
expenses of any additional counsel retained by it, and the Adviser
will not be liable to such party under this Agreement for any legal
or other expenses subsequently incurred by such party independently
in connection with the defense thereof other than reasonable costs
of investigation.
8.2(d). The Company agrees promptly to notify the Adviser of
the commencement of any litigation or proceedings against it or any
of its officers or directors in connection with the issuance or
sale of the Variable Products or the operation of each Account.
8.3. INDEMNIFICATION BY THE FUND
8.3(a). The Fund agrees to indemnify and hold harmless the
Company, and each of its directors and officers and each person, if
any, who controls the Company within the meaning of Section 15 of
the 1933 Act (hereinafter collectively, the "Indemnified Parties"
and individually, "Indemnified Party," for purposes of this Section
8.3) against any and all losses, claims, damages, liabilities
(including amounts paid in settlement with the written consent of
the Fund) or litigation (including legal and other expenses) to
which the Indemnified Parties may become subject under any statute,
regulation, at common law or otherwise, insofar as such losses,
claims, damages, liabilities or expenses (or actions in respect
thereof), litigation or settlements result from the gross
negligence, bad faith or willful misconduct of the Board or any
member thereof, are related to the operations of the Fund and:
(i) arise as a result of any failure by the Fund to provide the services
and furnish the materials under the terms of this Agreement; or
(ii) arise out of or result from any material breach of any
representation and/or warranty made by the Fund in this Agreement
or arise out of or result from any other material breach of this
Agreement by the Fund, as limited and in accordance with the
provisions of Sections 8.3(b) and 8.3(a);
8.3(b). The Fund shall not be liable under this
indemnification provision with respect to any losses, claims,
damages, liabilities or litigation incurred or assessed against an
Indemnified Party as may arise from such Indemnified Party's gross
negligence, bad faith, or willful misconduct the performance of
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<PAGE>
such Indemnified Party's duties or by reason of such Indemnified Party's
reckless disregard of obligations and duties under this Agreement.
8.3(c). The Fund shall not be liable under this
indemnification provision with respect to any claim made against an
Indemnified Party unless such Indemnified Party shall have notified
the Fund in writing within a reasonable time after the summons or
other first legal process giving information of the nature of the
claim shall have been served upon such Indemnified Party (or after
such Indemnified Party shall have received notice of such service
on any designated agent), but failure to notify the Fund of any
such claim shall not relieve the Fund from any liability which it
may have to the Indemnified Party against whom such action is
brought otherwise than on account of this indemnification
provision. In case any such action is brought against the
Indemnified Parties, the Fund will be entitled to participate, at
its own expense, in the defense thereof. The Fund also shall be
entitled to assume the defense thereof, with counsel satisfactory
to the party named in the action. After notice from the Fund to
such party of the Fund's election to assume the defense thereof,
the Indemnified Party shall bear the fees and expenses of any
additional counsel retained by it, and the Fund will not be liable
to such party under this Agreement for any legal or other expenses
subsequently incurred by such party independently in connection
with the defense thereof other than reasonable costs of
investigation.
8.3(d). The Company agrees promptly to notify the Fund of the
commencement of any litigation or proceedings against it or any of
its respective officers or directors in connection with this
Agreement, the issuance or sale of the Variable Products, with
respect to the operation of either Account, or the sale or
acquisition of shares of the Fund.
ARTICLE IX. APPLICABLE LAW
9.1. This Agreement shall be construed and the provisions hereof
interpreted under and in accordance with the laws of the Commonwealth of
Massachusetts.
9.2. This Agreement shall be subject to the provisions of the 1933,
1934 and 1940 Acts, and the rules and regulations and rulings thereunder,
including such exemptions from those statutes, rules and regulations as the
Securities and Exchange Commission may grant (including, but not limited to,
the Shared Funding Exemptive Order) and the terms hereof shall be interpreted
and construed in accordance therewith.
ARTICLE X. TERMINATION
10.1. This Agreement shall continue in full force and effect until the
first to occur of:
10.1(a) termination by any party for any reason by at least sixty (60)
days advance written notice delivered to the other parties; or
10.1(b) termination by the Company by written notice to the Fund and
the Adviser with respect to any Portfolio based upon the Company's
determination that shares of such Portfolio are not reasonably available to
meet the requirements of the Variable Products; or
10.1(c) termination by the Company by written notice to the Fund and
the Adviser with respect to any Portfolio in the event any of the Portfolio's
shares are not registered, issued or sold in accordance with applicable state
and/or federal law or such law precludes the use of such shares as the
underlying investment media of the Variable Products issued or to be issued
by the Company; or
15
<PAGE>
10.1(d) termination by the Company by written notice to the Fund and the
Adviser with respect to any Portfolio in the event that such Portfolio ceases to
qualify as a Regulated Investment Company under Subchapter M of the Code or
under any successor or similar provision, or if the Company reasonably believes
that the Fund may fail to so qualify; or
10.1(e) termination by the Company by written notice to the Fund and the
Adviser with respect to any Portfolio in the event that such Portfolio fails to
meet the diversification requirements specified in Article VI hereof; or
10.1(f) termination by the Fund by written notice to the Company if the
Fund shall determine, in its sole judgment exercised in good faith, that the
Company and/or its affiliated companies has suffered a material adverse change
in its business, operations, financial condition or prospects since the date of
this Agreement or is the subject of material adverse publicity, or
10.1(g) termination by the Company by written notice to the Fund and the
Adviser, if the Company shall determine, in its sole judgment exercised in good
faith, that either the Fund or the Adviser has suffered a material adverse
change in its business, operations, financial condition or prospects since the
date of this Agreement or is the subject of material adverse publicity; or
10.2. Notwithstanding any termination of this Agreement, the Fund shall,
at the option of the Company, continue to make available additional shares of
the Fund pursuant to the terms and conditions of this Agreement, for all
Variable Products in effect on the effective date of termination of this
Agreement (hereinafter referred to as "Existing Variable Products").
Specifically, without limitation, the owners of the Existing Variable Products
shall be permitted to direct reallocation of investments in the Portfolios of
the Fund, redemption of investments in the Portfolios of the Fund and/or
investment in the Portfolios of the Fund upon the making of additional purchase
payments under the Existing Variable Products. The parties agree that this
Section 10.2 shall not apply to any termination under Article VII and the effect
of such Article VII termination shall be governed by Article VII of this
Agreement.
10.3. The provisions of Article VIII Indemnification shall survive any
termination of this Agreement pursuant to this Article X Termination.
10.4. The Company shall not redeem Fund shares attributable to the
Variable Products (as distinct from Fund shares attributable to the Company's
assets held in the Account) except (i) as necessary to implement contract owner
initiated or approved transactions, or (ii) as required by state and/or federal
laws or regulations or judicial or other legal precedent of general application
(hereinafter referred to as a "Legally Required Redemption") or (iii) as
permitted by an order of the Securities and Exchange Commission pursuant to
Section 26(b) of the 1940 Act. Upon request, the Company will promptly furnish
to the Fund the opinion of counsel for the Company (which counsel shall be
reasonably satisfactory to the Fund) to the effect that any redemption pursuant
to clause (ii) above is a Legally Required Redemption. Furthermore, except in
cases where permitted under the terms of the Variable Products, the Company
shall not prevent contract owners from allocating payments to a Portfolio that
was otherwise available under the Variable Products without first giving the
Fund 90 days prior written notice of its intention to do so.
16
<PAGE>
ARTICLE XI. NOTICES
Any notice shall be sufficiently given when hand delivered or sent by
registered or certified mail to the other party at the address of such party set
forth below or at such other address as such party may from time to time specify
in writing to the other party.
If to the Fund:
Allmerica Investment Trust
440 Lincoln Street
Worcester, MA 01653
Attention: George M. Boyd, Esq.
If to Adviser:
Allmerica Investment Management Company, Inc.
440 Lincoln Street
Worcester, MA 01653
Attention: Abigail M. Armstrong, Esq.
If to the Company:
Allmerica Financial Life Insurance and Annuity Company
440 Lincoln Street
Worcester, Massachusetts 01653
Attention: Richard M. Reilly, President
ARTICLE XII. MISCELLANEOUS
12.1. A copy of the Fund's Agreement and Declaration of Trust, as may be
amended from time to time, is on file with the Secretary of the Commonwealth of
Massachusetts. Notice is hereby given that this instrument is executed by the
Fund's Trustees as Trustees and not individually, and the Fund's obligations
under this Agreement are not binding upon any of the Trustees or Shareholders of
the Fund, but are binding only upon the assets and property of the Fund.
12.2. Subject to the requirements of legal process and regulatory
authority, each party hereto shall treat as confidential the names and addresses
of the owners of the Variable Products and all information reasonably identified
as confidential in writing by any other party hereto and, except as permitted by
this Agreement, shall not disclose, disseminate or utilize such names and
addresses and other confidential information until such time as it may come into
the public domain without the express written consent of the affected party.
12.3. The captions in this Agreement are included for convenience of
reference only and in no way define or delineate any of the provisions hereof or
otherwise affect their construction or effect.
12.4. This Agreement may be executed simultaneously in two or more
counterparts, each of which taken together shall constitute one and the same
instrument.
12.5. If any provision of this Agreement shall be held or made invalid by
a court decision, statute, rule or otherwise, the remainder of the Agreement
shall not be affected thereby.
17
<PAGE>
12.6. Each party hereto shall cooperate with each other party and all
appropriate governmental authorities (including without limitation the
Securities and Exchange Commission, the National Association of Securities
Dealers and state insurance regulators) and shall permit such authorities
reasonable access to its books and records in connection with any investigation
or inquiry relating to this Agreement or the transactions contemplated hereby.
Notwithstanding the generality of the foregoing, each party hereto further
agrees to furnish the California Insurance Commissioner with any information or
reports in connection with services provided under this Agreement which such
Commissioner may request in order to ascertain whether the insurance operations
of the Company are being conducted in a manner consistent with the California
Insurance Regulations and any other applicable law or regulations.
12.7. The rights, remedies and obligations contained in this Agreement are
cumulative and are in addition to any and all rights, remedies and obligations
at law or in equity, which the parties hereto are entitled to under state and
federal laws.
12.8. This Agreement or any of the rights and obligations hereunder may
not be assigned by any party without the prior written consent of all parties
hereto; provided, however, that the Adviser may assign this Agreement or any
rights or obligations hereunder to any affiliate of or company controlled by or
under common control with the Adviser, if such assignee is duly licensed and
registered to perform the obligations of the Adviser under this Agreement.
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to be
executed in its name and on its behalf by its duly authorized representative and
its seal to be hereunder affixed hereto as of the date specified above.
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
By: /s/ Joseph W. MacDougall, Jr.
--------------------------------------
NAME: Joseph W. MacDougall, Jr.
TITLE: Vice President
ALLMERICA INVESTMENT TRUST
By: /s/ Thomas P. Cunningham
--------------------------------------
NAME: Thomas P. Cunningham
TITLE: Vice President & Treasurer
ALLMERICA INVESTMENT MANAGEMENT COMPANY, INC.
By: /s/ Richard F. Betzler, Jr.
--------------------------------------
NAME: Richard F. Betzler, Jr.
TITLE: Vice President
18
<PAGE>
SCHEDULE A
SEPARATE ACCOUNTS AND VARIABLE PRODUCTS
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
VARIABLE LIFE PRODUCTS
SEPARATE ACCOUNT PRODUCT NAME 1933 ACT # 1940 ACT #
- ---------------- ------------ ---------- ----------
<S> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------
VEL VEL ('87) 33-14672 811-5183
VEL VEL ('91) 33-90320 811-5183
VEL II VEL ('93) 33-57792 811-7466
VEL VEL (Plus) 33-42687 811-5183
Inheiritage Inheiritage 33-70948 811-8120
Select Inheiritage
Allmerica Select Separate Account II Select Life 33-83604 811-8746
Group VEL Group VEL 33-82658 811-08704
- --------------------------------------------------------------------------------------------------------------
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
VARIABLE ANNUITY PRODUCTS
SEPARATE ACCOUNT PRODUCT NAME 1933 ACT # 1940 ACT #
- ---------------- ------------ ---------- ----------
<S> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------
VA-K ExecAnnuity Plus 91 33-39702 811-6293
ExecAnnuity Plus 93
Allmerica Advantage
Allmerica Select Separate Account Allmerica Select Resource I 33-47216 811-6632
Allmerica Select Resource II
Separate Accounts VA-A, VA-B, VA-C, Variable Annuities (discontinued)
VA-G, VA-H
- --------------------------------------------------------------------------------------------------------------
</TABLE>
A-1
<PAGE>
SCHEDULE B
PORTFOLIOS OF
ALLMERICA INVESTMENT TRUST
Select Emerging Markets Fund
Select International Equity Fund
Select Aggressive Growth Fund
Select Capital Appreciation Fund
Select Value Opportunity Fund
Select Strategic Growth Fund
Select Growth Fund
Growth Fund
Equity Index Fund
Select Growth and Income Fund
Select Income Fund
Investment Grade Income Fund
Government Bond Fund
Money Market Fund
B-1
<PAGE>
SCHEDULE C
PROXY VOTING PROCEDURES
The following is a list of procedures and corresponding responsibilities for the
handling of proxies and voting instructions relating to the Fund. The defined
terms herein shall have the meanings assigned in the Participation Agreement
except that the term "Company" shall also include the department or third party
assigned by the Company to perform the steps delineated below.
- - The proxy proposals are given to the Company by the Fund as early as
possible before the date set by the Fund for the shareholder meeting to
enable the Company to consider and prepare for the solicitation of voting
instructions from owners of the Variable Products and to facilitate the
establishment of tabulation procedures. At this time the Fund will inform
the Company of the Record, Mailing and Meeting dates. This will be done
verbally approximately two months before meeting.
- - Promptly after the Record Date, the Company will perform a "tape run," or
other activity, which will generate the names, addresses and number of
units which are attributed to each contract owner/policyholder (the
"Customer") as of the Record Date. Allowance should be made for account
adjustments made after this date that could affect the status of the
Customers' accounts as of the Record Date.
- - Note: The number of proxy statements is determined by the activities
described above. The Company will use its best efforts to call in the
number of Customers to the Fund, as soon as possible, but no later than
two weeks after the Record Date.
- - The Fund's Annual Report must be sent to each Customer by the Company
either before or together with the Customers' receipt of voting instruction
solicitation material. The Fund will provide the last Annual Report to the
Company pursuant to the terms of Section 3.43 of the Agreement to which
this Schedule relates.
- - The text and format for the Voting Instruction Cards ("Cards" or "Card") is
provided to the Company by the Fund. The Company, at its expense, shall
produce and personalize the Voting Instruction Cards. The Fund or its
affiliate must approve the Card before it is printed. Allow approximately
2-4 business days for printing information on the Cards. Information
commonly found on the Cards includes:
- name (legal name as found on account registration)
address
- fund or account number
- coding to state number of units
- individual Card number for use in tracking and verification of votes
(already on Cards as printed by the Fund).
(This and related steps may occur later in the chronological process due to
possible uncertainties relating to the proposals.)
C-1
<PAGE>
- - During this time, the Fund will develop, produce and pay for the Notice of
Proxy and the Proxy Statement (one document). Printed and folded notices
and statements will be sent to Company for insertion into envelopes
(envelopes and return envelopes are provided and paid for by the Company).
Contents of envelope sent to Customers by the Company will include:
- Voting Instruction Card(s)
- One proxy notice and statement (one document)
- return envelope (postage pre-paid by Company) addressed to the Company
or its tabulation agent
- "urge buckslip" - optional, but recommended. (This is a small, single
sheet of paper that requests Customers to vote as quickly as possible
and that their vote is important. One copy will be supplied by the
Fund.)
- cover letter - optional, supplied by Company and reviewed and approved
in advance by the Fund.
- - The above contents should be received by the Company approximately 3-5
business days before mail date. Individual in charge at Company reviews
and approves the contents of the mailing package to ensure correctness and
completeness. Copy of this approval sent to the Fund.
- - Package mailed by the Company.
* The Fund must allow at least a 15-day solicitation time to the Company
as the shareowner. (A 5-week period is recommended.) Solicitation
time is calculated as calendar days from (but NOT including,) the
meeting, counting backwards.
- - Collection and tabulation of Cards begins. Tabulation usually takes place
in another department or another vendor depending on process used. An
often used procedure is to sort Cards on arrival by proposal into vote
categories of all yes, no, or mixed replies, and to begin data entry.
Note: Postmarks are not generally needed. A need for postmark information
would be due to an insurance company's internal procedure and has not been
required by the Fund in the past.
- - Signatures on Card checked against legal name on account registration which
was printed on the Card.
Note: For Example, if the account registration is under "John A. Smith,
Trustee," then that is the exact legal name to be printed on the Card and
is the signature needed on the Card.
- - If Cards are mutilated, or for any reason are illegible or are not signed
properly, they are sent back to Customer with an explanatory letter and a
new Card and return envelope. The mutilated or illegible Card is
disregarded and considered to be NOT RECEIVED for purposes of vote
tabulation. Any Cards that have been "kicked out" (e.g. mutilated,
illegible) of the procedure are "hand verified," i.e., examined as to why
they did not complete the system. Any questions on those Cards are usually
remedied individually.
- - There are various control procedures used to ensure proper tabulation of
votes and accuracy of that tabulation. The most prevalent is to sort the
Cards as they first arrive into categories depending upon their vote; an
estimate of how the vote is progressing may then be calculated. If the
initial estimates and the actual vote do not coincide, then an internal
audit of that vote should occur. This may entail a recount.
C-2
<PAGE>
- - The actual tabulation of votes is done in units which is then converted to
shares. (It is very important that the Fund receives the tabulations stated
in terms of a percentage and the number of SHARES.) The Fund must review
and approve tabulation format.
- - Final tabulation in shares is verbally given by the Company to the Fund on
the morning of the meeting not later than 10:00 a.m. Eastern time. The
Fund may request an earlier deadline if reasonable and if required to
calculate the vote in time for the meeting.
- - A Certification of Mailing and Authorization to Vote Shares will be
required from the Company as well as an original copy of the final vote.
The Fund will provide a standard form for each Certification.
- - The Company will be required to box and archive the Cards received from the
Customers. In the event that any vote is challenged or if otherwise
necessary for legal, regulatory, or accounting purposes, the Fund will be
permitted reasonable access to such Cards.
- - All approvals and "signing-off" may be done orally, but must always be
followed up in writing.
C-3
<PAGE>
FORM OF
PARTICIPATION AGREEMENT
AMONG
THE PALLADIAN TRUST
ALLMERICA INVESTMENT MANAGEMENT COMPANY, INC.
AND
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
DATED AS OF
_______________, 1998
<PAGE>
TABLE OF CONTENTS
Page
----
ARTICLE I. Purchase of Fund Shares 4
ARTICLE II Representations and Warranties 5
ARTICLE III Prospectuses, Reports to Shareholders
and Proxy Statements, Voting 6
ARTICLE IV Sales Material and Information 8
ARTICLE V Fees and Expenses 9
ARTICLE VI Diversification 9
ARTICLE VII Potential Conflicts 10
ARTICLE VIII Indemnification 11
ARTICLE IX. Applicable Law 15
ARTICLE X Termination 15
ARTICLE XI Notices 16
ARTICLE XII Miscellaneous 17
SCHEDULE A Separate Accounts and Variable Products A -1
SCHEDULE B Portfolios of The Palladian Trust B -1
SCHEDULE C Proxy Voting Procedures C -1
2
<PAGE>
THIS AGREEMENT, made and entered into as of the ____ day of ________, 1998 by
and among: ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY (hereinafter
the "Company"), a Delaware corporation, on its own behalf and on behalf of each
separate account of the Company set forth on Schedule A hereto, as may be
amended from time to time (each such account hereinafter referred to as the
"Account"); THE PALLADIAN TRUST, an unincorporated Massachusetts business trust
(hereinafter the "Fund"), and ALLMERICA INVESTMENT MANAGEMENT COMPANY, INC.
(hereinafter the "Adviser"), a Massachusetts corporation
WHEREAS, the Fund engages in business as an open-end management investment
company and is available to act as (i) the investment vehicle for separate
accounts established by insurance companies for individual and group life
insurance policies and annuity contracts with variable accumulation and/or
pay-out provisions (hereinafter referred to individually and/or collectively as
"Variable Products") and (ii) the investment vehicle for certain qualified
pension and retirement plans (hereinafter "Qualified Plans"); and
WHEREAS, insurance companies desiring to utilize the Fund as an investment
vehicle under their Variable Products enter into participation agreements with
the Fund and the Adviser (the "Participating Insurance Companies");
WHEREAS, shares of the Fund are divided into several series of shares, each
representing the interest in a particular managed portfolio of securities and
other assets (each such series hereinafter referred to as a "Portfolio"), any
one or more of which may be made available under this Agreement, as may be
amended from time to time by mutual agreement of the parties hereto; and
WHEREAS, the Fund has received for an order from the Securities and
Exchange Commission, granting Participating Insurance Companies and Variable
Insurance Product separate accounts exemptions from the provisions of Sections
9(a), 13(a), 15(a), and 15(b) of the Investment Company Act of 1940, as amended
(hereinafter the "1940 Act"), and Rules 6e-2(b)(15) and 6e-3(T)(b)(15)
thereunder, to the extent necessary to permit shares of the Fund to be sold to
and held by separate accounts of both affiliated and unaffiliated life insurance
companies and Qualified Plans (hereinafter the "Shared Funding Exemptive
Order"); and
WHEREAS, the Fund is registered as an open-end management investment
company under the 1940 Act and its shares are registered under the Securities
Act of 1933, as amended (hereinafter the "1933 Act"); and
WHEREAS, the Adviser is duly registered as an investment adviser under the
Investment Advisers Act of 1940, as amended, and any applicable state securities
laws and manages each of the certain portfolios of the Fund and retains
Sub-Advisers for the daily investment and reinvestment of the assets of each
portfolio; and
WHEREAS, the Company has registered or will register certain Variable
Products under the 1933 Act; and
WHEREAS, each Account is a duly organized, validly existing segregated
asset account, established by resolution or under authority of the Board of
Directors of the Company, to set aside and invest assets attributable to the
aforesaid Variable Products, and the Company has registered or will register
each Account as a unit investment trust under the 1940 Act; and
3
<PAGE>
WHEREAS, to the extent permitted by applicable insurance laws and
regulations, the Company intends to purchase, on behalf of each Account, shares
in the Portfolios set forth in Schedule B attached to this Agreement, to fund
certain of the aforesaid Variable Insurance Products and the Fund is authorized
to sell such shares to each such Account at net asset value;
NOW, THEREFORE, in consideration of their mutual promises, the parties
hereto agree as follows:
ARTICLE I. PURCHASE OF FUND SHARES
1.1. The Fund agrees to make available for purchase by the Company shares
of the Fund and shall execute orders placed for each Account on a daily basis at
the net asset value next computed after receipt by the Fund or its designee of
such order. For purposes of this Section 1.1, the Company shall be the designee
of the Fund for receipt of such orders from each Account and receipt by such
designee of an order prior to the close of regular trading on the New York Stock
Exchange ("NYSE") shall constitute receipt by the Fund; provided that the Fund
receives notice of such order by 10:00 a.m. Eastern time on the next following
Business Day. "Business Day" shall mean any day on which the New York Stock
Exchange is open for trading and on which the Fund calculates its net asset
value pursuant to the rules of the Securities and Exchange Commission.
1.2. The Fund, so long as this Agreement is in effect, agrees to make its
shares available indefinitely for purchase at the applicable net asset value per
share by the Company and its Accounts on those days on which the Fund calculates
its net asset value pursuant to rules of the Securities and Exchange Commission
and the Fund shall use reasonable efforts to calculate such net asset value on
each day which the New York Stock Exchange is open for trading. Notwithstanding
the foregoing, the Board of Trustees of the Fund (hereinafter the "Board") may
refuse to permit the Fund to sell shares of any Portfolio to any person, or
suspend or terminate the offering of shares of any Portfolio if such action is
required by law or by regulatory authorities having jurisdiction or is, in the
sole discretion of the Board acting in good faith and in light of their
fiduciary duties under federal and any applicable state laws, necessary in the
best interests of the shareholders of such Portfolio.
1.3. The Fund agrees that shares of the Fund will be sold only to
Participating Insurance Companies and their separate accounts and to certain
Qualified Plans. No shares of any Portfolio will be sold to the general public.
1.4. The Fund agrees to redeem for cash, on the Company's request, any
full or fractional shares of the Fund held by the Company, executing such
requests on a daily basis at the net asset value next computed after receipt by
the Fund or its designee of the request for redemption. For purposes of this
Section 1.4, the Company shall be the designee of the Fund for receipt of
requests for redemption from each Account and receipt by such designee of a
request prior to the close of regular trading on the NYSE shall constitute
receipt by the Fund, provided that the Fund receives notice of such request for
redemption on the next following Business Day.
1.5. The Company agrees that purchases and redemptions of Portfolio shares
offered by the then current prospectus of the Fund shall be made in accordance
with the provisions of such prospectus.
4
<PAGE>
1.6. The Company shall pay for Fund shares no later than the next Business
Day after an order to purchase Fund shares is made in accordance with the
provisions of Section 1.1 hereof. Payment shall be in federal funds transmitted
by wire.
1.7. Issuance and transfer of the Fund's shares will be by book entry
only. Stock certificates will not be issued to the Company or any Account.
Shares ordered from the Fund will be recorded in an appropriate title for each
Account or the appropriate subaccount of each Account.
1.9. The Fund shall furnish same day notice (by wire or telephone,
followed by written confirmation) to the Company of any income, dividends or
capital gain distributions payable on the Fund's shares. The Company hereby
elects to receive all such income dividends and capital gain distributions as
are payable on the Portfolio shares in additional shares of that Portfolio. The
Company reserves the right to revoke this election and to receive all such
income dividends and capital gain distributions in cash. The Fund shall notify
the Company of the number of shares so issued as payment of such dividends and
distributions.
1.10. The Fund shall make the net asset value per share for each Portfolio
available to the Company on a daily basis as soon as reasonably practical after
the net asset value per share is calculated (normally by 6:30 p.m. Eastern time)
and shall use its best efforts to make such net asset value per share available
by 7:00 p.m. Eastern time.
ARTICLE II. REPRESENTATIONS AND WARRANTIES
2.1. The Company represents and warrants that the Variable Products are or
will be registered under the 1933 Act; that the Variable Products will be issued
and sold in compliance in all material respects with all applicable federal and
state laws, and that the sale of the Variable Products shall comply in all
material respects with state insurance suitability requirements. The Company
further represents and warrants that it is an insurance company duly organized
and in good standing under applicable law, that it has legally and validly
established each Account as a segregated asset account under the Massachusetts
Insurance Code, and that it has registered or, prior to any issuance or sale of
the Variable Products, will register each Account as a unit investment trust in
accordance with the provisions of the 1940 Act to serve as a segregated
investment account for the Variable Products.
2.2. The Fund represents and warrants that Fund shares sold pursuant to
this Agreement shall be registered under the 1933 Act, duly authorized for
issuance and sold in compliance with the laws of the Commonwealth of
Massachusetts and all applicable federal and state securities laws, and that the
Fund is and shall make every effort to remain registered under the 1940 Act.
The Fund shall amend the registration statement for its shares under the 1933
Act and the 1940 Act from time to time as required in order to effect the
continuous offering of its shares. The Fund shall register and qualify the
shares for sale in accordance with the laws of the various states only if and to
the extent deemed advisable by the Fund.
2.3. The Fund represents that it is currently qualified as a Regulated
Investment Company under Subchapter M of the Internal Revenue Code of 1986, as
amended (the "Code"), and that it will make every effort to maintain such
qualification (under Subchapter M or any successor or similar provision) and
that it will notify the Company promptly upon having a reasonable basis for
believing that it has ceased to so qualify or that it might not so qualify in
the future.
2.4. The Company represents that the Variable Products are currently
treated as life insurance policies or annuity contracts under applicable
provisions of the Code, that it will make every effort to
5
<PAGE>
maintain such treatment, and that it will notify the Fund immediately upon
having a reasonable basis for believing that the Variable Products have ceased
to be so treated or that they might not be so treated in the future.
2.5. The Fund represents that to the extent that it decides to finance
distribution expenses pursuant to Rule 12b-1 under the 1940 Act, the Fund
undertakes to have its board of Trustees, a majority of whom are not interested
persons of the Fund, formulate and approve any plan under Rule 12b-1 to finance
distribution expenses.
2.6. The Fund makes no representation as to whether any aspect of its
operations (including, but not limited to, fees and expenses and investment
policies) complies with the insurance laws or regulations of the various states.
2.7. The Fund represents that it is lawfully organized and validly
existing under the laws of the Commonwealth of Massachusetts and that it does
and will comply in all material respects with the 1940 Act.
2.8. The Adviser represents and warrants that it is and shall remain duly
registered in all material respects under all applicable federal and state
securities laws and that it will perform its obligations for the Fund in
compliance in all material respects with the laws of its state of domicile and
any applicable state and federal securities laws.
2.9. The Fund represents and warrants that its Trustees, officers,
employees, and other individuals/entities dealing with the money and/or
securities of the Fund are and shall continue to be at all times covered by a
blanket fidelity bond or similar coverage for the benefit of the Fund in an
amount not less than the minimal coverage as required currently by Rule 17g-(1)
of the 1940 Act or related provisions as may be promulgated from time to time.
The aforesaid blanket fidelity bond shall include coverage for larceny and
embezzlement and shall be issued by a reputable bonding company.
2.10. The Company represents and warrants that all of its directors,
officers, employees, investment advisers, and other individuals/entities dealing
with the money and/or securities of the Fund are covered by a blanket fidelity
bond or similar coverage, in an amount not less $5 million. The aforesaid,
which includes coverage for larceny and embezzlement, shall be issued by a
reputable bonding company. The Company agrees to make all reasonable efforts to
see that this bond or another bond containing these provisions is always in
effect, and agrees to notify the Fund promptly in writing in the event that such
coverage no longer applies.
ARTICLE III. PROSPECTUSES, REPORTS TO SHAREHOLDERS AND PROXY STATEMENTS; VOTING
3.1. The Fund or its designee shall provide the Company with as many
printed copies of the Fund's current prospectus and statement of additional
information as the Company may reasonably request. If requested by the Company,
in lieu of providing printed copies, the Fund shall provide camera-ready film or
computer diskettes containing the Fund's prospectus and statement of additional
information, and such other assistance as is reasonably necessary in order for
the Company once each year (or more frequently if the prospectus and/or
statement of additional information for the Fund is amended during the year) to
have the prospectus for the Variable Products and the Fund's prospectus printed
together in one document, and to have the statement of additional information
for the Fund and the statement of additional information for the Variable
Products printed together in one document.
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Alternatively, the Company may print the Fund's prospectus and/or its statement
of additional information in combination with other fund companies' prospectuses
and statements of additional information.
3.2. Except as provided in this Section 3.2., all expenses of printing and
distributing Fund prospectuses and statements of additional information shall be
the expense of the Company. For any prospectuses and statements of additional
information provided by the Company to the existing owners of Variable Products
who currently own shares of one or more of the Fund's Portfolios, in order to
update disclosure as required by the 1933 Act and/or the 1940 Act, the cost of
printing shall be borne by the Fund. If the Company chooses to receive
camera-ready film or computer diskettes in lieu of receiving printed copies of
the Fund's prospectus, the Fund will reimburse the Company in an amount equal to
the product of x and y where x is the number of such prospectuses distributed to
owners of the Variable Products who currently own shares of one or more of the
Fund's Portfolios, and y is the Fund's per unit cost of typesetting and printing
the Fund's prospectus. The same procedures shall be followed with respect to
the Fund's statement of additional information. The Company agrees to provide
the Fund or its designee with such information as may be reasonably requested by
the Fund to assure that the Fund's expenses do not include the cost of printing
any prospectuses or statements of additional information other than those
actually distributed to existing owners of the Variable Products.
3.3. The Fund's statement of additional information shall be obtainable
from the Fund, the Company or such other person as the Fund may designate, as
agreed upon by the parties.
3.4. The Fund, at its expense, shall provide the Company with copies of
its proxy statements, reports to shareholders, and other communications (except
for prospectuses and statements of additional information, which are covered in
section 3.1) to shareholders in such quantity as the Company shall reasonably
require for distribution to contract owners. The Fund or its designee shall
bear the cost of printing, duplicating, and mailing of these documents to
current contract owners, and the Company shall bear the cost for such documents
used for purposes other than distribution to current contract owners.
3.5. If and to the extent required by law the Company shall:
(i) solicit voting instructions from contract owners;
(ii) vote the Fund shares in accordance with instructions
received from contract owners; and
(iii) vote Fund shares for which no instructions have been
received in the same proportion as Fund shares of such
Portfolio for which instructions have been received,
so long as and to the extent that the Securities and Exchange Commission
continues to interpret the 1940 Act to require pass-through voting privileges
for variable contract owners. The Company reserves the right to vote Fund
shares held in any segregated asset account in its own right, to the extent
permitted by law. The Fund and the Company shall follow the procedures, and
shall have the corresponding responsibilities, for the handling of proxy and
voting instruction solicitations, as set forth in Schedule C attached hereto and
incorporated herein by reference. Participating Insurance Companies shall be
responsible for ensuring that each of their separate accounts participating in
the Fund calculates voting privileges in a manner consistent with the standards
set forth on Schedule C, which standards will also be provided to the other
Participating Insurance Companies, if any.
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3.6. The Fund will comply with all provisions of the 1940 Act requiring
voting by shareholders, including Sections 16(a) and, if and when applicable,
16(b). Further, the Fund will act in accordance with the Securities and
Exchange Commission's interpretation of the requirements of Section 16(a) with
respect to periodic elections of trustees and with whatever rules the Commission
may promulgate with respect thereto.
3.7. The Fund shall use reasonable efforts to provide Fund prospectuses,
reports to shareholders, proxy materials and other Fund communications (or
camera-ready equivalents) to the Company sufficiently in advance of the
Company's mailing dates to enable the Company to complete, at reasonable cost,
the printing, assembling and/or distribution of the communications in accordance
with applicable laws and regulations.
ARTICLE IV. SALES MATERIAL AND INFORMATION
4.1. The Company shall furnish, or shall cause to be furnished, to the
Fund or its designee, each piece of sales literature or other promotional
material in which the Fund or the Adviser(s) is named, at least fifteen Business
Days prior to its use. No such material shall be used if the Fund or its
designee reasonably objects to such use within fifteen Business Days after
receipt of such material.
4.2. The Company shall not give any information or make any
representations or statements on behalf of the Fund or concerning the Fund in
connection with the sale of the Variable Products other than the information or
representations contained in the registration statement or prospectus for the
Fund shares, as such registration statement and prospectus may be amended or
supplemented from time to time, or in reports or proxy statements for the Fund,
or in sales literature or other promotional material approved by the Fund or its
designee, except with the permission of the Fund.
4.3. The Fund or its designee shall furnish, or shall cause to be
furnished, to the Company or its designee, each piece of sales literature or
other promotional material in which the Company and/or its separate account(s)
is named at least fifteen Business Days prior to its use. No such material
shall be used if the Company or its designee reasonably objects to such use
within fifteen Business Days after receipt of such material.
4.4. The Fund and the Adviser shall not give any information or make any
representations on behalf of the Company or concerning the Company, each
Account, or the Variable Products, other than the information or representations
contained in a registration statement or prospectus for the Variable Products,
as such registration statement and prospectus may be amended or supplemented
from time to time, or in published reports for each Account which are in the
public domain or approved by the Company for distribution to contract owners, or
in sales literature or other promotional material approved by the Company or its
designee, except with the permission of the Company.
4.5. The Fund will provide to the Company at least one complete copy of
all registration statements, prospectuses, statements of additional information,
reports, proxy statements, sales literature and other promotional materials,
applications for exemptions, requests for no-action letters, and all amendments
to any of the above, that relate to the Fund or its shares, which are relevant
to the Company or the Variable Products.
4.6. The Company will provide to the Fund at least one complete copy of
all registration statements, prospectuses, statements of additional information,
reports, solicitations for voting
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instructions, sales literature and other promotional materials, applications for
exemptions, requests for no action letters, and all amendments to any of the
above, that relate to the investment in the Fund under the Variable Products.
4.7. For purposes of this Article IV, the phrase "sales literature or
other promotional material" includes, but is not limited to, any of the
following that refer to the Fund or any affiliate of the Fund: advertisements
(such as material published, or designed for use in, a newspaper, magazine, or
other periodical, radio, television, telephone or tape recording, videotape
display, signs or billboards, motion pictures, or other public media), sales
literature (i.e., any written communication distributed or made generally
available to customers or the public, including brochures, circulars, research
reports, market letters, form letters, seminar texts, reprints or excerpts of
any other advertisement, sales literature, or published article), educational or
training materials or other communications distributed or made generally
available to some or all agents or employees, and registration statements,
prospectuses, statements of additional information, shareholder reports, and
proxy materials.
ARTICLE V. FEES AND EXPENSES
5.1. The Fund shall pay no fee or other compensation to the Company under
this Agreement, except that if the Fund or any Portfolio adopts and implements a
plan pursuant to Rule 12b-1 to finance distribution expenses, then the Fund may
make payments to the Company for the Variable Products if and in amounts agreed
to in writing.
5.2. All expenses incident to performance by the Fund under this Agreement
shall be paid by the Fund, other than expenses assumed by the Adviser under the
Management Agreement between the Fund and the Adviser or by another party. The
Fund shall see to it that all its shares are registered and authorized for
issuance in accordance with applicable federal law and, if and to the extent
deemed advisable by the Fund, in accordance with applicable state laws prior to
their sale. The Fund shall bear the expenses for the cost of registration and
qualification of the Fund's shares, preparation and filing of the Fund's
prospectus and registration statement, proxy materials and reports, setting the
prospectus in type, setting in type and printing the proxy materials and reports
to shareholders (including the costs of printing a prospectus that constitutes
an annual report), the preparation of all statements and notices required by any
federal or state law, and all taxes on the issuance or transfer of the Fund's
shares.
ARTICLE VI. DIVERSIFICATION
6.1. The Fund will at all times invest money from the Variable Products in
such a manner as to ensure that the Variable Products will be treated as
variable contracts under the Code and the regulations issued thereunder.
Without limiting the scope of the foregoing, the Fund will at all times comply
with Section 817(h) of the Code and Treasury Regulation 1.817-5, relating to the
diversification requirements for variable annuity, endowment, or life insurance
contracts and any amendments or other modifications to such Section or
Regulations. In the event of a breach of this Article VI by the Fund, it will
take all reasonable steps (a) to notify Company of such breach and (b) to
adequately diversify the Fund so as to achieve compliance within the grace
period afforded by Regulation 1.817-5.
ARTICLE VII. POTENTIAL CONFLICTS
7.1. The Board will monitor the Fund for the existence of any material
irreconcilable conflict between the interests of the contract owners of all
separate accounts investing in the Fund. An irreconcilable material conflict
may arise for a variety of reasons, including: (a) an action by any state
9
<PAGE>
insurance regulatory authority; (b) a change in applicable federal or state
insurance, tax, or securities laws or regulations, or a public ruling, private
letter ruling, no-action or interpretative letter, or any similar action by
insurance, tax, or securities regulatory authorities; (c) an administrative or
judicial decision in any relevant proceeding; (d) the manner in which the
investments of any Portfolio are being managed; (e) a difference in voting
instructions given by Variable Insurance Product owners; or (f) a decision by a
Participating Insurance Company to disregard the voting instructions of contract
owners. The Board shall promptly inform the Company if it determines that an
irreconcilable material conflict exists and the implications thereof.
7.2. Each of the Company and the Adviser will report any potential or
existing conflicts of which it is aware to the Board. Each of the Company and
the Adviser will assist the Board in carrying out its responsibilities under SEC
rules and regulations. The Adviser, and the participating insurance companies
and participating qualified plans will at least annually submit to the Board
such reports, materials, or data as the Board may reasonably request so that the
Board may fully carry out the obligations imposed upon by the conditions
contained in the Shared Funding Exemptive Order, and said reports, materials,
and data will be submitted more frequently if deemed appropriate by the Board.
7.3. If it is determined by a majority of the Board, or a majority of its
members who are not "interested persons" of the Fund, the Adviser or the Company
as that term is defined in the 1940 Act (hereinafter "disinterested members"),
that a material irreconcilable conflict exists, the Company and other
Participating Insurance Companies shall, at their expense and to the extent
reasonably practicable (as determined by a majority of the disinterested
directors), take whatever steps are necessary to remedy or eliminate the
irreconcilable material conflict, up to and including: (1) withdrawing the
assets allocable to some or all of the separate accounts from the Fund or any
Portfolio and reinvesting such assets in a different investment medium,
including (but not limited to) another Portfolio of the Fund, or submitting the
question whether such segregation should be implemented to a vote of all
affected contract owners and, as appropriate, segregating the assets of any
appropriate group (i.e., annuity contract owners, life insurance policy owners,
or variable contract owners of one or more Participating Insurance Companies)
that votes in favor of such segregation, or offering to the affected contract
owners the option of making such a change; and (2) establishing a new registered
management investment company or managed separate account.
7.4. If a material irreconcilable conflict arises because of a decision by
the Company to disregard contract owner voting instructions and that decision
represents a minority position or would preclude a majority vote, the Company
may be required, at the Fund's election, to withdraw the affected Account's
investment in the Fund and terminate this Agreement with respect to such Account
(at the Company's expense); provided, however that such withdrawal and
termination shall be limited to the extent required by the foregoing material
irreconcilable conflict as determined by a majority of the disinterested members
of the Board.
7.5. If a material irreconcilable conflict arises because a particular
state insurance regulator's decision applicable to the Company conflicts with
the majority of other state regulators, then the Company will withdraw the
affected Account's investment in the Fund and terminate this Agreement with
respect to such Account within six months after the Board informs the Company in
writing that it has determined that such decision has created an irreconcilable
material conflict; provided, however, that such withdrawal and termination shall
be limited to the extent required by the foregoing material irreconcilable
conflict as determined by a majority of the disinterested members of the Board.
Until the end of the foregoing six month period, the Fund shall continue to
accept and implement orders by the Company for the purchase (and redemption) of
shares of the Fund.
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7.6. For purposes of Sections 7.3 through 7.5 of this Agreement, a
majority of the disinterested members of the Board shall determine whether any
proposed action adequately remedies any irreconcilable material conflict, but in
no event will the Fund be required to establish a new funding medium for the
Variable Products. The Company shall not be required by Section 7.3 to
establish a new funding medium for the Variable Products if an offer to do so
has been declined by vote of a majority of contract owners materially adversely
affected by the irreconcilable material conflict.
7.7. If and to the extent that Rule 6e-2 and Rule 6e-3(T) are amended, or
Rule 6e-3 is adopted, to provide exemptive relief from any provision of the 1940
Act or the rules promulgated thereunder with respect to mixed or shared funding,
or if the Fund obtains a Shared Exemptive Order which requires provisions that
are materially different from the provisions of this Agreement, then (a) the
Fund and/or the Participating Insurance Companies, as appropriate, shall take
such steps as may be necessary to comply with Rules 6e-2 and 6e-3(T), as
amended, and Rule 6e-3, as adopted, or to the terms of the Shared Exemptive
Order, to the extent applicable; and (b) Sections 3.4, 3.5, 7.1, 7.2, 7.3, 7.4,
and 7.5 of this Agreement shall continue in effect only to the extent that terms
and conditions substantially identical to such Sections are contained in such
Rule(s) as so amended or adopted.
ARTICLE VIII. INDEMNIFICATION
8.1. INDEMNIFICATION BY THE COMPANY
8.1(a) The Company agrees to indemnify and hold harmless the Fund and the
Adviser, each of their respective officers, employees, and Trustees or
Directors, and each person, if any, who controls the Fund or the Adviser within
the meaning of Section 15 of the 1933 Act (collectively, the "Indemnified
Parties" and individually, "Indemnified Party," for purposes of this Section
8.1) against any and all losses, claims, damages, liabilities (including amounts
paid in settlement with the written consent of the Company) or litigation
(including legal and other expenses), to which the Indemnified Parties may
become subject under any statute, regulation, at common law or otherwise,
insofar as such losses, claims, damages, liabilities or expenses (or actions in
respect thereof) or settlements are related to the sale or acquisition of the
Fund's shares or the Variable Products and:
(i) arise out of or are based upon any untrue statements or alleged untrue
statements of any material fact contained in the registration statement or
prospectus for the Variable Products or contained in the Variable Products
or sales literature for the Variable Products (or any amendment or
supplement to any of the foregoing), or arise out of or are based upon the
omission or the alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not
misleading, provided that this agreement to indemnify shall not apply as to
any Indemnified Party if such statement or omission or such alleged
statement or omission was made in reliance upon and in conformity with
information furnished to the Company by or on behalf of the Fund for use in
the registration statement or prospectus for the Variable Products or in
the Variable Products or sales literature (or any amendment or supplement)
or otherwise for use in connection with the sale of the Variable Products
or Fund shares; or
(ii) arise out of or as a result of statements or representations (other
than statements or representations contained in the registration statement,
prospectus or sales literature of the Fund not supplied by the Company, or
persons under its control and other than statements or representations
authorized by the Fund or an Adviser) or unlawful conduct of the Company or
11
<PAGE>
persons under its control, with respect to the sale or distribution of the
Variable Products or Fund shares; or
(iii) arise out of or as a result of any untrue statement or alleged
untrue statement of a material fact contained in a registration statement,
prospectus, or sales literature of the Fund or any amendment thereof or
supplement thereto or the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the
statements therein not misleading, if such a statement or omission was made
in reliance upon and in conformity with information furnished to the Fund
by or on behalf of the Company; or
(iv) arise as a result of any failure by the Company to provide the
services and furnish the materials under the terms of this Agreement; or
(v) arise out of or result from any material breach of any representation
and/or warranty made by the Company in this Agreement or arise out of or
result from any other material breach of this Agreement by the Company, as
limited by and in accordance with the provisions of Sections 8.1(b) and
8.1(c) hereof.
8.1(b). The Company shall not be liable under this indemnification
provision with respect to any losses, claims, damages, liabilities or litigation
incurred or assessed against an Indemnified Party as such may arise from such
Indemnified Party's willful misfeasance, bad faith, or gross negligence in the
performance of such Indemnified Party's duties or by reason of such Indemnified
Party's reckless disregard of obligations or duties under this Agreement.
8.1(c). The Company shall not be liable under this indemnification
provision with respect to any claim made against an Indemnified Party unless
such Indemnified Party shall have notified the Company in writing within a
reasonable time after the summons or other first legal process giving
information of the nature of the claim shall have been served upon such
Indemnified Party (or after such Indemnified Party shall have received notice of
such service on any designated agent), but failure to notify the Company of any
such claim shall not relieve the Company from any liability which it may have to
the Indemnified Party against whom such action is brought otherwise than on
account of this indemnification provision. In case any such action is brought
against the Indemnified Parties, the Company shall be entitled to participate,
at its own expense, in the defense of such action. The Company also shall be
entitled to assume the defense thereof, with counsel satisfactory to the party
named in the action. After notice from the Company to such party of the
Company's election to assume the defense thereof, the Indemnified Party shall
bear the fees and expenses of any additional counsel retained by it, and the
Company will not be liable to such party under this Agreement for any legal or
other expenses subsequently incurred by such party independently in connection
with the defense thereof other than reasonable costs of investigation.
8.1(d). The Indemnified Parties will promptly notify the Company of the
commencement of any litigation or proceedings against them in connection with
the issuance or sale of the Fund shares or the Variable Products or the
operation of the Fund.
8.2. INDEMNIFICATION BY THE ADVISER
8.2(a). The Adviser agrees, with respect to each Portfolio that it manages,
to indemnify and hold harmless the Company, each of its directors, officers, and
employees, and each person, if any, who controls the Company within the meaning
of Section 15 of the 1933 Act (collectively, the "Indemnified
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Parties" and individually, "Indemnified Party," for purposes of this Section
8.2) against any and all losses, claims, damages, liabilities (including amounts
paid in settlement with the written consent of the Adviser) or litigation
(including legal and other expenses) to which the Indemnified Parties may become
subject under any statute, regulation, at common law or otherwise, insofar as
such losses, claims, damages, liabilities or expenses (or actions in respect
thereof) or settlements are related to the sale or acquisition of shares of the
Portfolio that it manages or the Variable Products and:
(i) arise out of or are based upon any untrue statement or alleged untrue
statement of any material fact contained in the registration statement or
prospectus or sales literature of the Fund (or any amendment or supplement
to any of the foregoing), or arise out of or are based upon the omission or
the alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading,
provided that this agreement to indemnify shall not apply as to any
Indemnified Party if such statement or omission or such alleged statement
or omission was made in reliance upon and in conformity with information
furnished to the Fund by or on behalf of the Company for use in the
registration statement or prospectus for the Fund or in sales literature
(or any amendment or supplement) or otherwise for use in connection with
the sale of the Variable Products or Portfolio shares; or
(ii) arise out of or as a result of statements or representations (other
than statements or representations contained in the registration statement,
prospectus or sales literature for the Variable Products not supplied by
the Fund or persons under its control and other than statements or
representations authorized by the Company) or unlawful conduct of the Fund,
Adviser(s) or persons under their control, with respect to the sale or
distribution of the Variable Products or Portfolio shares; or
(iii) arise out of or as a result of any untrue statement or alleged
untrue statement of a material fact contained in a registration statement,
prospectus, or sales literature covering the Variable Products, or any
amendment thereof or supplement thereto, or the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statement or statements therein not misleading, if
such statement or omission was made in reliance upon information furnished
to the Company by or on behalf of the Fund; or
(iv) arise as a result of any failure by the Fund to provide the services
and furnish the materials under the terms of this Agreement; or
(v) arise out of or result from any material breach of any representation
and/or warranty made by the Adviser in this Agreement or arise out of or
result from any other material breach of this Agreement by the Adviser; as
limited by and in accordance with the provisions of Sections 8.2(b) and
8.2(c) hereof.
8.2(b). The Adviser shall not be liable under this indemnification
provision with respect to any losses, claims, damages, liabilities or litigation
incurred or assessed against an Indemnified Party as such may arise from such
Indemnified Party's willful misfeasance, bad faith, or gross negligence in the
performance of such Indemnified Party's duties or by reason of such Indemnified
Party's reckless disregard of obligations and duties under this Agreement.
8.2(c). The Adviser shall not be liable under this indemnification
provision with respect to any claim made against an Indemnified Party unless
such Indemnified Party shall have notified the Adviser in writing within a
reasonable time after the summons or other first legal process giving
information of the
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nature of the claim shall have been served upon such Indemnified Party (or after
such Indemnified Party shall have received notice of such service on any
designated agent), but failure to notify the Adviser of any such claim shall not
relieve the Adviser from any liability which it may have to the Indemnified
Party against whom such action is brought otherwise than on account of this
indemnification provision. In case any such action is brought against the
Indemnified Parties, the Adviser will be entitled to participate, at its own
expense, in the defense thereof. The Adviser also shall be entitled to assume
the defense thereof, with counsel satisfactory to the party named in the action.
After notice from the Adviser to such party of the Adviser's election to assume
the defense thereof, the Indemnified Party shall bear the fees and expenses of
any additional counsel retained by it, and the Adviser will not be liable to
such party under this Agreement for any legal or other expenses subsequently
incurred by such party independently in connection with the defense thereof
other than reasonable costs of investigation.
8.2(d). The Company agrees promptly to notify the Adviser of the
commencement of any litigation or proceedings against it or any of its officers
or directors in connection with the issuance or sale of the Variable Products or
the operation of each Account.
8.3. INDEMNIFICATION BY THE FUND
8.3(a). The Fund agrees to indemnify and hold harmless the Company, and
each of its directors and officers and each person, if any, who controls the
Company within the meaning of Section 15 of the 1933 Act (hereinafter
collectively, the "Indemnified Parties" and individually, "Indemnified Party,"
for purposes of this Section 8.3) against any and all losses, claims, damages,
liabilities (including amounts paid in settlement with the written consent of
the Fund) or litigation (including legal and other expenses) to which the
Indemnified Parties may become subject under any statute, regulation, at common
law or otherwise, insofar as such losses, claims, damages, liabilities or
expenses (or actions in respect thereof), litigation or settlements result from
the gross negligence, bad faith or willful misconduct of the Board or any member
thereof, are related to the operations of the Fund and:
(i) arise as a result of any failure by the Fund to provide the services
and furnish the materials under the terms of this Agreement; or
(ii) arise out of or result from any material breach of any representation
and/or warranty made by the Fund in this Agreement or arise out of or
result from any other material breach of this Agreement by the Fund, as
limited and in accordance with the provisions of Sections 8.3(b) and
8.3(a);
8.3(b). The Fund shall not be liable under this indemnification provision
with respect to any losses, claims, damages, liabilities or litigation incurred
or assessed against an Indemnified Party as may arise from such Indemnified
Party's gross negligence, bad faith, or willful misconduct the performance of
such Indemnified Party's duties or by reason of such Indemnified Party's
reckless disregard of obligations and duties under this Agreement.
8.3(c). The Fund shall not be liable under this indemnification provision
with respect to any claim made against an Indemnified Party unless such
Indemnified Party shall have notified the Fund in writing within a reasonable
time after the summons or other first legal process giving information of the
nature of the claim shall have been served upon such Indemnified Party (or after
such Indemnified Party shall have received notice of such service on any
designated agent), but failure to notify the Fund of any such claim shall not
relieve the Fund from any liability which it may have to the Indemnified Party
against whom such action is brought otherwise than on account of this
indemnification provision. In case any such
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<PAGE>
action is brought against the Indemnified Parties, the Fund will be entitled to
participate, at its own expense, in the defense thereof. The Fund also shall be
entitled to assume the defense thereof, with counsel satisfactory to the party
named in the action. After notice from the Fund to such party of the Fund's
election to assume the defense thereof, the Indemnified Party shall bear the
fees and expenses of any additional counsel retained by it, and the Fund will
not be liable to such party under this Agreement for any legal or other expenses
subsequently incurred by such party independently in connection with the defense
thereof other than reasonable costs of investigation.
8.3(d). The Company agrees promptly to notify the Fund of the commencement
of any litigation or proceedings against it or any of its respective officers or
directors in connection with this Agreement, the issuance or sale of the
Variable Products, with respect to the operation of either Account, or the sale
or acquisition of shares of the Fund.
ARTICLE IX. APPLICABLE LAW
9.1. This Agreement shall be construed and the provisions hereof
interpreted under and in accordance with the laws of the Commonwealth of
Massachusetts.
9.2. This Agreement shall be subject to the provisions of the 1933, 1934
and 1940 Acts, and the rules and regulations and rulings thereunder, including
such exemptions from those statutes, rules and regulations as the Securities and
Exchange Commission may grant (including, but not limited to, the Shared Funding
Exemptive Order) and the terms hereof shall be interpreted and construed in
accordance therewith.
ARTICLE X. TERMINATION
10.1. This Agreement shall continue in full force and effect until the
first to occur of:
10.1(a) termination by any party for any reason by at least sixty (60)
days advance written notice delivered to the other parties; or
10.1(b) termination by the Company by written notice to the Fund and the
Adviser with respect to any Portfolio based upon the Company's determination
that shares of such Portfolio are not reasonably available to meet the
requirements of the Variable Products; or
10.1(c) termination by the Company by written notice to the Fund and the
Adviser with respect to any Portfolio in the event any of the Portfolio's shares
are not registered, issued or sold in accordance with applicable state and/or
federal law or such law precludes the use of such shares as the underlying
investment media of the Variable Products issued or to be issued by the Company;
or
10.1(d) termination by the Company by written notice to the Fund and the
Adviser with respect to any Portfolio in the event that such Portfolio ceases to
qualify as a Regulated Investment Company under Subchapter M of the Code or
under any successor or similar provision, or if the Company reasonably believes
that the Fund may fail to so qualify; or
10.1(e) termination by the Company by written notice to the Fund and the
Adviser with respect to any Portfolio in the event that such Portfolio fails to
meet the diversification requirements specified in Article VI hereof; or
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10.1(f) termination by the Fund by written notice to the Company if the
Fund shall determine, in its sole judgment exercised in good faith, that the
Company and/or its affiliated companies has suffered a material adverse change
in its business, operations, financial condition or prospects since the date of
this Agreement or is the subject of material adverse publicity, or
10.1(g) termination by the Company by written notice to the Fund and the
Adviser, if the Company shall determine, in its sole judgment exercised in good
faith, that either the Fund or the Adviser has suffered a material adverse
change in its business, operations, financial condition or prospects since the
date of this Agreement or is the subject of material adverse publicity; or
10.2. Notwithstanding any termination of this Agreement, the Fund shall,
at the option of the Company, continue to make available additional shares of
the Fund pursuant to the terms and conditions of this Agreement, for all
Variable Products in effect on the effective date of termination of this
Agreement (hereinafter referred to as "Existing Variable Products").
Specifically, without limitation, the owners of the Existing Variable Products
shall be permitted to direct reallocation of investments in the Portfolios of
the Fund, redemption of investments in the Portfolios of the Fund and/or
investment in the Portfolios of the Fund upon the making of additional purchase
payments under the Existing Variable Products. The parties agree that this
Section 10.2 shall not apply to any termination under Article VII and the effect
of such Article VII termination shall be governed by Article VII of this
Agreement.
10.3. The provisions of Article VIII Indemnification shall survive any
termination of this Agreement pursuant to this Article X Termination.
10.4. The Company shall not redeem Fund shares attributable to the
Variable Products (as distinct from Fund shares attributable to the Company's
assets held in the Account) except (i) as necessary to implement contract owner
initiated or approved transactions, or (ii) as required by state and/or federal
laws or regulations or judicial or other legal precedent of general application
(hereinafter referred to as a "Legally Required Redemption") or (iii) as
permitted by an order of the Securities and Exchange Commission pursuant to
Section 26(b) of the 1940 Act. Upon request, the Company will promptly furnish
to the Fund the opinion of counsel for the Company (which counsel shall be
reasonably satisfactory to the Fund) to the effect that any redemption pursuant
to clause (ii) above is a Legally Required Redemption. Furthermore, except in
cases where permitted under the terms of the Variable Products, the Company
shall not prevent contract owners from allocating payments to a Portfolio that
was otherwise available under the Variable Products without first giving the
Fund 90 days prior written notice of its intention to do so.
ARTICLE XI. NOTICES
Any notice shall be sufficiently given when hand delivered or sent by
registered or certified mail to the other party at the address of such party set
forth below or at such other address as such party may from time to time specify
in writing to the other party.
If to the Fund:
The Palladian Trust
440 Lincoln Street
Worcester, MA 01653
Attention: George M. Boyd, Esq.
If to Adviser:
16
<PAGE>
Allmerica Investment Management Company, Inc.
440 Lincoln Street
Worcester, MA 01653
Attention: Abigail M. Armstrong, Esq.
If to the Company:
Allmerica Financial Life Insurance and Annuity Company
440 Lincoln Street
Worcester, Massachusetts 01653
Attention: Richard M. Reilly, President
ARTICLE XII. MISCELLANEOUS
12.1. A copy of the Fund's Agreement and Declaration of Trust, as may be
amended from time to time, is on file with the Secretary of the Commonwealth of
Massachusetts. Notice is hereby given that this instrument is executed by the
Fund's Trustees as Trustees and not individually, and the Fund's obligations
under this Agreement are not binding upon any of the Trustees or Shareholders of
the Fund, but are binding only upon the assets and property of the Fund.
12.2. Subject to the requirements of legal process and regulatory
authority, each party hereto shall treat as confidential the names and addresses
of the owners of the Variable Products and all information reasonably identified
as confidential in writing by any other party hereto and, except as permitted by
this Agreement, shall not disclose, disseminate or utilize such names and
addresses and other confidential information until such time as it may come into
the public domain without the express written consent of the affected party.
12.3. The captions in this Agreement are included for convenience of
reference only and in no way define or delineate any of the provisions hereof or
otherwise affect their construction or effect.
12.4. This Agreement may be executed simultaneously in two or more
counterparts, each of which taken together shall constitute one and the same
instrument.
12.5. If any provision of this Agreement shall be held or made invalid by
a court decision, statute, rule or otherwise, the remainder of the Agreement
shall not be affected thereby.
12.6. Each party hereto shall cooperate with each other party and all
appropriate governmental authorities (including without limitation the
Securities and Exchange Commission, the National Association of Securities
Dealers and state insurance regulators) and shall permit such authorities
reasonable access to its books and records in connection with any investigation
or inquiry relating to this Agreement or the transactions contemplated hereby.
Notwithstanding the generality of the foregoing, each party hereto further
agrees to furnish the California Insurance Commissioner with any information or
reports in connection with services provided under this Agreement which such
Commissioner may request in order to ascertain whether the insurance operations
of the Company are being conducted in a manner consistent with the California
Insurance Regulations and any other applicable law or regulations.
17
<PAGE>
12.7. The rights, remedies and obligations contained in this Agreement are
cumulative and are in addition to any and all rights, remedies and obligations
at law or in equity, which the parties hereto are entitled to under state and
federal laws.
12.8. This Agreement or any of the rights and obligations hereunder may
not be assigned by any party without the prior written consent of all parties
hereto; provided, however, that the Adviser may assign this Agreement or any
rights or obligations hereunder to any affiliate of or company controlled by or
under common control with the Adviser, if such assignee is duly licensed and
registered to perform the obligations of the Adviser under this Agreement.
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to be
executed in its name and on its behalf by its duly authorized representative and
its seal to be hereunder affixed hereto as of the date specified above.
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
By:
------------------------------
NAME:
TITLE:
THE PALLADIAN TRUST
By:
------------------------------
NAME:
TITLE:
ALLMERICA INVESTMENT MANAGEMENT COMPANY, INC.
By:
------------------------------
NAME:
TITLE:
18
<PAGE>
SCHEDULE A
SEPARATE ACCOUNTS AND VARIABLE PRODUCTS
VARIABLE LIFE PRODUCTS
SEPARATE ACCOUNT PRODUCT NAME 1933 ACT # 1940 ACT #
- ---------------- ------------ --------- --------
Fulcrum Variable Life Fulcrum SPVUL 333-15569 811-07913
Separate Account
VARIABLE ANNUITY PRODUCTS
SEPARATE ACCOUNT PRODUCT NAME 1933 ACT # 1940 ACT #
- ---------------- ------------ --------- --------
Fulcrum Separate Account Fulcrum Annuity 333-11377 811-7799
<PAGE>
SCHEDULE B
PORTFOLIOS OF
-------------
THE PALLADIAN TRUST
-------------------
Value Portfolio
Growth Portfolio
International Growth Portfolio
Global Strategic Income Portfolio
Global Interactive/Telecomm Portfolio
<PAGE>
SCHEDULE C
PROXY VOTING PROCEDURES
The following is a list of procedures and corresponding responsibilities for the
handling of proxies and voting instructions relating to the Fund. The defined
terms herein shall have the meanings assigned in the Participation Agreement
except that the term "Company" shall also include the department or third party
assigned by the Company to perform the steps delineated below.
. The proxy proposals are given to the Company by the Fund as early as
possible before the date set by the Fund for the shareholder meeting to
enable the Company to consider and prepare for the solicitation of voting
instructions from owners of the Variable Products and to facilitate the
establishment of tabulation procedures. At this time the Fund will inform
the Company of the Record, Mailing and Meeting dates. This will be done
verbally approximately two months before meeting.
. Promptly after the Record Date, the Company will perform a "tape run," or
other activity, which will generate the names, addresses and number of
units which are attributed to each contract owner/policyholder (the
"Customer") as of the Record Date. Allowance should be made for account
adjustments made after this date that could affect the status of the
Customers' accounts as of the Record Date.
Note: The number of proxy statements is determined by the activities
described above. The Company will use its best efforts to call in the
number of Customers to the Fund , as soon as possible, but no later than
two weeks after the Record Date.
. The Fund's Annual Report must be sent to each Customer by the Company
either before or together with the Customers' receipt of voting instruction
solicitation material. The Fund will provide the last Annual Report to the
Company pursuant to the terms of Section 3.43 of the Agreement to which
this Schedule relates.
. The text and format for the Voting Instruction Cards ("Cards" or "Card") is
provided to the Company by the Fund. The Company, at its expense, shall
produce and personalize the Voting Instruction Cards. The Fund or its
affiliate must approve the Card before it is printed. Allow approximately
2-4 business days for printing information on the Cards. Information
commonly found on the Cards includes:
. name (legal name as found on account registration)
. address
. fund or account number
. coding to state number of units
. individual Card number for use in tracking and verification of votes
(already on Cards as printed by the Fund).
(This and related steps may occur later in the chronological process due to
possible uncertainties relating to the proposals.)
<PAGE>
. During this time, the Fund will develop, produce and pay for the Notice of
Proxy and the Proxy Statement (one document). Printed and folded notices
and statements will be sent to Company for insertion into envelopes
(envelopes and return envelopes are provided and paid for by the Company).
Contents of envelope sent to Customers by the Company will include:
. Voting Instruction Card(s)
. One proxy notice and statement (one document)
. return envelope (postage pre-paid by Company) addressed to the Company
or its tabulation agent
. "urge buckslip" - optional, but recommended. (This is a small, single
sheet of paper that requests Customers to vote as quickly as possible
and that their vote is important. One copy will be supplied by the
Fund.)
. cover letter - optional, supplied by Company and reviewed and approved
in advance by the Fund.
. The above contents should be received by the Company approximately 3-5
business days before mail date. Individual in charge at Company reviews
and approves the contents of the mailing package to ensure correctness and
completeness. Copy of this approval sent to the Fund.
. Package mailed by the Company.
* The Fund must allow at least a 15-day solicitation time to the Company
as the shareowner. (A 5-week period is recommended.) Solicitation
time is calculated as calendar days from (but NOT including,) the
meeting, counting backwards.
. Collection and tabulation of Cards begins. Tabulation usually takes place
in another department or another vendor depending on process used. An
often used procedure is to sort Cards on arrival by proposal into vote
categories of all yes, no, or mixed replies, and to begin data entry.
Note: Postmarks are not generally needed. A need for postmark information
would be due to an insurance company's internal procedure and has not been
required by the Fund in the past.
. Signatures on Card checked against legal name on account registration which
was printed on the Card.
Note: For Example, if the account registration is under "John A. Smith,
Trustee," then that is the exact legal name to be printed on the Card and
is the signature needed on the Card.
. If Cards are mutilated, or for any reason are illegible or are not signed
properly, they are sent back to Customer with an explanatory letter and a
new Card and return envelope. The mutilated or illegible Card is
disregarded and considered to be not received for purposes of vote
tabulation. Any Cards that have been "kicked out" (e.g. mutilated,
illegible) of the procedure are "hand verified," i.e., examined as to why
they did not complete the system. Any questions on those Cards are usually
remedied individually.
. There are various control procedures used to ensure proper tabulation of
votes and accuracy of that tabulation. The most prevalent is to sort the
Cards as they first arrive into categories depending upon their vote; an
estimate of how the vote is progressing may then be calculated. If the
initial estimates and the actual vote do not coincide, then an internal
audit of that vote should occur. This may entail a recount.
<PAGE>
. The actual tabulation of votes is done in units which is then converted to
shares. (It is very important that the Fund receives the tabulations stated
in terms of a percentage and the number of SHARES.) The Fund must review
and approve tabulation format.
. Final tabulation in shares is verbally given by the Company to the Fund on
the morning of the meeting not later than 10:00 a.m. Eastern time. The
Fund may request an earlier deadline if reasonable and if required to
calculate the vote in time for the meeting.
. A Certification of Mailing and Authorization to Vote Shares will be
required from the Company as well as an original copy of the final vote.
The Fund will provide a standard form for each Certification.
. The Company will be required to box and archive the Cards received from the
Customers. In the event that any vote is challenged or if otherwise
necessary for legal, regulatory, or accounting purposes, the Fund will be
permitted reasonable access to such Cards.
. All approvals and "signing-off' may be done orally, but must always be
followed up in writing.
<PAGE>
April 15, 1998
Allmerica Financial Life Insurance and Annuity Company
440 Lincoln Street
Worcester MA 01653
RE: FULCRUM VARIABLE LIFE SEPARATE ACCOUNT OF ALLMERICA
FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
FILE NO.'S: 333-15569 AND 811-07913
Gentlemen:
In my capacity as Counsel of Allmerica Financial Life Insurance and Annuity
Company (the "Company"), I have participated in the preparation of this
Post-Effective Amendment to the Registration Statement for the Fulcrum Variable
Life Separate Account on Form S-6 under the Securities Act of 1933 with respect
to the Company's individual flexible premium variable life insurance policies.
I am of the following opinion:
1. The Fulcrum Variable Life Separate Account is a separate account of the
Company validly existing pursuant to the Delaware Insurance Code and the
regulations issued thereunder.
2. The assets held in the Fulcrum Variable Life Separate Account equal to
the reserves and other Policy liabilities of the Policies which are
supported by the Fulcrum Variable Life Separate Account are not
chargeable with liabilities arising out of any other business the Company
may conduct.
3. The individual flexible premium variable life insurance policies, when
issued in accordance with the Prospectus contained in the Registration
Statement and upon compliance with applicable local law, will be legal
and binding obligations of the Company in accordance with their terms and
when sold will be legally issued, fully paid and non-assessable.
In arriving at the foregoing opinion, I have made such examination of law and
examined such records and other documents as in my judgment are necessary or
appropriate.
I hereby consent to the filing of this opinion as an exhibit to this
Post-Effective Amendment to the Registration Statement of the Fulcrum Variable
Life Separate Account on Form S-6 filed under the Securities Act of 1933.
Very truly yours,
/s/ Sheila B. St. Hilaire
Sheila B. St. Hilaire
Assistant Vice President and Counsel
<PAGE>
April 15, 1998
Allmerica Financial Life Insurance and Annuity Company
440 Lincoln Street
Worcester MA 01653
RE: FULCRUM VARIABLE LIFE SEPARATE ACCOUNT OF ALLMERICA
FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
FILE NO.'S: 333-15569 AND 811-07913
Gentlemen:
This opinion is furnished in connection with the filing by Allmerica Financial
Life Insurance and Annuity Company of a post-effective amendment to the
Registration Statement on Form S-6 of its flexible premium variable life
insurance policies ("Policies") allocated to the Fulcrum Variable Life Separate
Account under the Securities Act of 1933. The prospectus included in the
post-effective amendment to the Registration Statement describes the Policies.
I am familiar with and have provided actuarial advice concerning the preparation
of the post-effective amendment to the Registration Statement, including
exhibits.
In my professional opinion, the illustration of death benefits and cash values
included in Appendix C of the prospectus, based on the assumptions stated in the
illustrations, are consistent with the provisions of the Policy. The rate
structure of the Policies has not been designed so as to make the relationship
between premiums and benefits, as shown in the illustrations, appear more
favorable to a prospective purchaser of a Policy for a person age 30 or a person
age 45 than to prospective purchasers of Policies for people at other ages or
underwriting classes.
I am also of the opinion that the aggregate fees and charges under the Policy
are reasonable in relation to the services rendered, the expenses expected to be
incurred, and the risks assumed by the Company.
I hereby consent to the use of this opinion as an exhibit to the post-effective
amendment to the Registration Statement.
Sincerely,
/s/ William H. Mawdsley
William H. Mawdsley, FSA, MAAA
Vice President and Actuary
<PAGE>
EXHIBIT 8
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Post-Effective Amendment No. 1 to the Registration Statement of the Fulcrum
Variable Life Separate Account of Allmerica Financial Life Insurance and
Annuity Company on Form S-6 of our report dated February 3, 1998, relating to
the financial statements of Allmerica Financial Life Insurance and Annuity
Company, which appears in such Prospectus. We also consent to the reference
to us under the heading "Independent Accountants" in such Prospectus.
/s/ Price Waterhouse LLP
Price Waterhouse LLP
Boston, Massachusetts
April 29, 1998