<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. 3
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, 1999 pursuant to paragraph (b) 60 days
----
after filing pursuant to paragraph (a) (1) 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 Rule 24f-2
Notice for the issuer's fiscal year ended December 31, 1998 was filed on or
before March 30, 1999.
<PAGE>
RECONCILIATION AND TIE BETWEEN ITEMS
IN FORM N-8B-2 AND THE PROSPECTUS
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<CAPTION>
ITEM NO. OF
FORM N-8B-2 CAPTION IN PROSPECTUS
- ----------- ---------------------
<S> <C>
1..........................Cover Page
2..........................Cover Page
3..........................Not Applicable
4..........................Distribution
5..........................The Company, The Variable Account
6..........................The Variable Account
7..........................Not Applicable
8..........................Not Applicable
9..........................Legal Proceedings
10.........................Summary; Description of The Company, The Variable Account, The Fulcrum 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; 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.........................The Company
26.........................Not Applicable
27.........................The Company
28.........................Directors and Principal Officers of the Company
29.........................The Company
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.........................The Company; Distribution
42.........................Not Applicable
<PAGE>
43.........................Not Applicable
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
</TABLE>
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
WORCESTER, MASSACHUSETTS
A MODIFIED SINGLE PAYMENT VARIABLE LIFE INSURANCE CONTRACT
FULCRUM FUND NEXT GENERATION
<TABLE>
<C> <S>
This Prospectus provides important information about
Vari-Exceptional Life modified single payment
variable life insurance contracts offered by
Allmerica Financial Life Insurance and Annuity
Company. The Contracts provide for life insurance
coverage and for the accumulation of a Contract
Value. The Contracts require the Contract Owner to
make an initial payment of at least $25,000. The
Contracts are funded through the Fulcrum Variable
Life Separate Account, a separate investment account
of the Company that is referred to as the Variable
Account, and the fixed-interest account that is
PLEASE READ THIS referred to as the General Account.
PROSPECTUS CAREFULLY
BEFORE INVESTING AND
KEEP IT FOR FUTURE
REFERENCE.
The Variable Account is subdivided into Sub-Accounts.
Each Sub-Account invests exclusively in shares of one
of the following Funds of Allmerica Investment Trust
and The Fulcrum Trust.
VARIABLE LIFE
POLICIES INVOLVE
RISKS
INCLUDING POSSIBLE
LOSS OF PRINCIPAL.
</TABLE>
<TABLE>
<CAPTION>
ALLMERICA INVESTMENT TRUST
----------------------------------------
<C> <C> <S> <C>
THIS PROSPECTUS MUST Money Market Fund
BE ACCOMPANIED BY THE FULCRUM TRUST
PROSPECTUSES OF THE ----------------
FUNDS. Global Interactive/Telecomm Portfolio
International Growth Portfolio
Growth Portfolio
Value Portfolio
Strategic Income Portfolio
</TABLE>
Each Contract is a "modified endowment contract"
for federal income tax purposes, except in certain
circumstances described in FEDERAL TAX
THIS LIFE POLICY IS CONSIDERATIONS. A loan, distribution or other
NOT: amounts received from a modified endowment
- A BANK DEPOSIT OR contract during the life of the Insured will be
OBLIGATION; taxed to the extent of accumulated income in the
- FEDERALLY INSURED; Contract. Death Benefits under a modified
- ENDORSED BY ANY endowment contract, however, are generally not
BANK OR subject to federal income tax, except in certain
GOVERNMENTAL cases described in FEDERAL TAX CONSIDERATIONS.
AGENCY. This Prospectus can also be obtained from the
Securities and Exchange Commission's website
(http://www.sec.gov).
IT MAY NOT BE ADVANTAGEOUS TO REPLACE EXISTING
INSURANCE WITH THE POLICY.
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT
APPROVED OR DISAPPROVED THESE SECURITIES OR
DETERMINED THAT THE INFORMATION IS TRUTHFUL OR
COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
CORRESPONDENCE MAY BE MAILED TO
<TABLE>
<C> <S> <C>
ALLMERICA LIFE DATED MAY 1, 1999
P.O. BOX 8014 440 LINCOLN STREET
BOSTON, MA 02266-8014 WORCESTER, MASSACHUSETTS 01653
(508) 855-1000
</TABLE>
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
SPECIAL TERMS......................................................................... 3
SUMMARY............................................................................... 6
DESCRIPTION OF THE COMPANY, THE VARIABLE ACCOUNT, THE FULCRUM TRUST AND ALLMERICA
INVESTMENT TRUST.................................................................... 14
INVESTMENT OBJECTIVES AND POLICIES.................................................... 16
THE CONTRACT.......................................................................... 16
Application for a Contract.......................................................... 16
Free-Look Period.................................................................... 17
Conversion Privilege................................................................ 17
Payments............................................................................ 17
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............................................................ 24
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
LEGAL PROCEEDINGS..................................................................... 33
ADDITION, DELETION OR SUBSTITUTION OF INVESTMENTS..................................... 33
FURTHER INFORMATION................................................................... 34
INDEPENDENT ACCOUNTANTS............................................................... 34
MORE INFORMATION ABOUT THE FIXED ACCOUNT.............................................. 34
YEAR 2000 DISCLOSURE.................................................................. 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
APPENDIX E -- PERFORMANCE INFORMATION................................................. E-1
</TABLE>
2
<PAGE>
SPECIAL TERMS
AGE: how old the Insured is on his/her last birthday measured on the Date of
Issue and each Contract anniversary.
BENEFICIARY: the person or persons you name to receive the Net Death Benefit
when the Insured dies.
COMPANY: Allmerica Financial Life Insurance and Annuity Company. "We," "our,"
"us" and "Company" refer to Allmerica Financial Life Insurance and Annuity
Company in this Prospectus.
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 Fulcrum Trust and the fund of Allmerica Investment
Trust which are offered under the Contract. These are the Value Portfolio,
Growth Portfolio, International Growth Portfolio, Strategic Income Portfolio,
and Global Interactive/Telecomm Portfolio of The Fulcrum 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
<PAGE>
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
<PAGE>
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
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<PAGE>
- All fees, charges and taxes which have been imposed.
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:
- Global Interactive/Telecomm Portfolio of The Fulcrum Trust
Managed by GAMCO Investors, Inc.
- International Growth Portfolio of The Fulcrum Trust
Managed by Bee & Associates Incorporated
- Growth Portfolio of The Fulcrum Trust
Managed by Analytic Investors, Inc.
- Value Portfolio of The Fulcrum Trust
Managed by GAMCO Investors, Inc.
- Strategic Income Portfolio of The Fulcrum Trust,
Managed by Allmerica Asset Management, Inc.
- Money Market Fund of Allmerica Investment Trust
Managed by Allmerica Asset Management, Inc.
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 FULCRUM TRUST. Allmerica Financial Investment Management Services, Inc.
("AFIMS"), an affiliate of the Company, serves as overall manager of The Fulcrum
Trust and is responsible for administrative and general supervisory services to
the Portfolios. The Fulcrum 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 Fulcrum Trust are as
follows:
<TABLE>
<CAPTION>
PORTFOLIO PORTFOLIO MANAGER
- ------------------------------------------ ------------------------------------------
<S> <C>
Global Interactive/Telecomm Portfolio GAMCO Investors, Inc.
International Growth Portfolio Bee & Associates Incorporated
Growth Portfolio Analytic Investors, Inc.
Value Portfolio GAMCO Investors, Inc.
Strategic Income Portfolio Allmerica Asset Management, Inc.
</TABLE>
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
7
<PAGE>
Sub-Adviser Agreement with its affiliate, Allmerica Asset Management, Inc., for
investment management services for the Money Market Fund.
For more information, see "The Fulcrum 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.
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CAN I CONVERT MY CONTRACT INTO A FIXED 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
1998. However, a performance-based management fee is provided for under the
Management Agreements for the Portfolios of The Fulcrum 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 fees from
9
<PAGE>
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>
MANAGEMENT TOTAL FUND
FEES EXPENSES
(AFTER ANY OTHER EXPENSES (AFTER ANY
VOLUNTARY (AFTER ANY WAIVERS/
FUND WAIVERS) REIMBURSEMENTS) REIMBURSEMENTS)
- ------------------------------------------ ---------------- -------------------- --------------------
<S> <C> <C> <C>
Global Interactive/Telecomm Portfolio..... 1.96%(1) 1.50%(2) 3.46%
International Growth Portfolio............ 0.05%(1) 1.50%(2) 1.55%
Growth Portfolio.......................... 0.00%(3) 1.20%(2) 1.20%
Value Portfolio........................... 0.30%(1) 1.20%(2) 1.50%
Strategic Income Portfolio................ 0.67%(1) 1.50%(2) 2.17%
Money Market Fund......................... 0.26% 0.06% 0.32%(4)
</TABLE>
(1) A performance based advisory fee is in effect, which fee may vary anywhere
from 0.00% to 4.00%.
(2) These numbers have been restated to reflect the expense limitations in
effect during 1999. (Different expense limitations were in effect during 1998.)
AFIMS has voluntarily agreed to limit operating expenses and reimburse those
expenses to the extent that the Portfolios' "Other Expenses" during 1999 (i.e.,
expenses other than management fees) exceed the following expense limitations
(expressed as an annualized percentage of average daily net assets): 1.50% for
the Global Interactive/Telecomm Portfolio, 1.50% for the International Growth
Portfolio, 1.20% for the Growth Portfolio, 1.20% for the Value Portfolio, and
1.50% for the Strategic Income Portfolio. These limitations are in effect
through December 31, 1999. Without the effect of the expense limitations, the
1998 "Other Expenses" ratios would have been the following: 3.69% for the Global
Interactive/Telecomm Portfolio, 5.09% for the International Growth Portfolio,
5.04% for the Growth Portfolio, 3.00% for the Value Portfolio, and 6.49% for the
Strategic Income Portfolio.
(3) Effective August 1, 1998, a new Portfolio Manager, Analytic Investors, Inc.,
is in place for the Growth Portfolio. The Manager and the Portfolio Manager have
voluntarily agreed to limit their fee from August 1, 1998 through July 31, 1999
to the lesser of the following two rates: (1) 0.80%, the rate specified in the
Portfolio Manager Agreement; or (2) the rate that would have applied under the
prior Portfolio Manager Agreement with the prior portfolio manager. The latter
rate varies based on prior performance.
(4) Under the Management Agreement with Allmerica Investment Trust, AFIMS has
declared a voluntary expense limitation of 0.60% for the Money Market Fund, the
expenses of the Money Market Fund did not exceed the cap in 1998. The limitation
may be terminated at any time.
The Underlying Fund information above was provided by the Underlying Funds and
was not independently verified by the Company.
MORE INFORMATION ABOUT PERFORMANCE FEES
The tables below show the expenses of the Portfolios of The Fulcrum 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 Fulcrum Trust, other than the Growth Portfolio. The base fee is 2.00%, but
the actual fee may vary from between 0.00% to 4.00%, depending on the
Portfolio's performance. The base fee of 2.00% will be paid if the Portfolio's
performance (net of all fees and expenses, including the management fee) is
between 1.5 and 3.0 percentage points higher than the applicable benchmark
index. A fee of 4.00% will be paid only if the Portfolio's performance (net of
all fees and expenses, including the management fee) is at least 7.5 percentage
points higher than the applicable benchmark index. No fee will apply if the
Portfolio's performance is more than 3.0 percentage
10
<PAGE>
points lower than the applicable benchmark index; see the prospectus of The
Fulcrum Trust for more details. Because of this variation, expense information
assuming fees of 0.00%, 2.00% and 4.00% is shown below. The fee, however, could
be any figure between 0.00% and 4.00%. In 1998, the actual management fees were
0.30% for the Value Portfolio, 0.00% for the Growth Portfolio, 0.05% for the
International Growth Portfolio, 0.47% for the Strategic Income Portfolio and
1.96% 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 Growth Portfolio. Effective August 1, 1998, a new Portfolio
Manager, Analytic Investors, Inc. ("Analytic"), is in place for the Growth
Portfolio. The Manager and the Portfolio Manager have voluntarily agreed to
limit their fee from August 1, 1998 through July 31, 1999 to the lesser of the
following two rates: (1) 0.80%, the rate specified in the Portfolio Manager
Agreement; or (2) the rate that would have applied under the prior Portfolio
Manager Agreement with the prior portfolio manager. The latter rate varies based
on prior performance.
For more information, see Footnotes 3 and 4, below, and the prospectus for The
Fulcrum Trust.
EXAMPLE 1 -- ASSUMING ADVISORY FEE OF 0.00% FOR THE PORTFOLIOS OF THE FULCRUM
TRUST.
(For the fee to be 0.00% a Portfolio's performance, net of all fees and
expenses, would have to be more than 3.0 percentage points below the benchmark
index.)
<TABLE>
<CAPTION>
OTHER EXPENSES
(AFTER ANY
MANAGEMENT APPLICABLE TOTAL FUND
FUND FEES REIMBURSEMENT) EXPENSES
- ------------------------------------------------ ---------------- ------------------ --------------
<S> <C> <C> <C>
Global Interactive/Telecomm Portfolio........... 0.00%(1) 1.50%(2) 1.50%
International Growth Portfolio.................. 0.00%(1) 1.50%(2) 1.50%
Growth Portfolio................................ 0.00%(4) 1.20%(2) 1.20%
Value Portfolio................................. 0.00%(1) 1.20%(2) 1.20%
Strategic Income Portfolio...................... 0.00%(1) 1.50%(2) 1.50%
Money Market Fund............................... 0.27% 0.06% 0.32%(3)
</TABLE>
EXAMPLE 2 -- ASSUMING ADVISORY FEE OF 2.00% FOR THE PORTFOLIOS OF THE FULCRUM
TRUST.
(For the fee to be 2.00%, a Portfolio's performance, net of all fees and
expenses, would have to be between 1.5 and 3.0 percentage points higher than the
benchmark index.)
<TABLE>
<CAPTION>
OTHER EXPENSES
(AFTER ANY
MANAGEMENT APPLICABLE TOTAL FUND
FUND FEES REIMBURSEMENT) EXPENSES
- ------------------------------------------------ ---------------- ------------------ --------------
<S> <C> <C> <C>
Global Interactive/Telecomm Portfolio........... 2.00%(1) 1.50%(2) 3.50%
International Growth Portfolio.................. 2.00%(1) 1.50%(2) 3.50%
Growth Portfolio................................ 2.00%(4) 1.20%(2) 3.20%
Value Portfolio................................. 2.00%(1) 1.20%(2) 3.20%
Strategic Income Portfolio...................... 2.00%(1) 1.50%(2) 3.50%
Money Market Fund............................... 0.26% 0.06% 0.32%(3)
</TABLE>
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<PAGE>
EXAMPLE 3 -- ASSUMING ADVISORY FEE OF 4.00% FOR THE PORTFOLIOS OF THE FULCRUM
TRUST.
(For the fee to be 4.00%, a Portfolio's performance, net of all fees and
expenses, would have to be at least 7.5 percentage points higher than the
benchmark index.)
<TABLE>
<CAPTION>
OTHER EXPENSES
(AFTER ANY
MANAGEMENT APPLICABLE TOTAL FUND
FUND FEES REIMBURSEMENT) EXPENSES
- ------------------------------------------------ ---------------- ------------------ --------------
<S> <C> <C> <C>
Global Interactive/Telecomm Portfolio........... 4.00%(1) 1.50%(2) 5.50%
International Growth Portfolio.................. 4.00%(1) 1.50%(2) 5.50%
Growth Portfolio................................ 4.00%(4) 1.20%(2) 5.20%
Value Portfolio................................. 4.00%(1) 1.20%(2) 5.20%
Strategic Income Portfolio...................... 4.00%(1) 1.50%(2) 5.50%
Money Market Fund............................... 0.26% 0.06% 0.32%(3)
</TABLE>
(1) A performance based advisory fee is in effect, which fee may vary anywhere
from 0.00% to 4.00%.
(2) These numbers have been restated to reflect the expense limitations in
effect during 1999. (Different expense limitations were in effect during 1998.)
AFIMS has voluntarily agreed to limit operating expenses and reimburse those
expenses to the extent that the Portfolios' "Other Expenses" during 1999 (i.e.,
expenses other than management fees) exceed the following expense limitations
(expressed as an annualized percentage of average daily net assets): 1.50% for
the Global Interactive/Telecomm Portfolio, 1.50% for the International Growth
Portfolio, 1.20% for the Growth Portfolio, 1.20% for the Value Portfolio, and
1.50% for the Strategic Income Portfolio. There was a different expense
limitation in effect during 1998. These limitations are in effect through
December 31, 1999. Without the effect of the expense limitations, the 1998
"Other Expenses" ratios would have been the following: 3.69% for the Global
Interactive/Telecomm Portfolio, 5.09% for the International Growth Portfolio,
5.04% for the Growth Portfolio, 2.99% for the Value Portfolio, and 3.00% for the
Strategic Income Portfolio.
(3) Effective August 1, 1998, a new Portfolio Manager, Analytic Investors, Inc.,
is in place for the Growth Portfolio. The Manager and the Portfolio Manager have
voluntarily agreed to limit their fee from August 1, 1998 through July 31, 1999
to the lesser of the following two rates: (1) 0.80%, the rate specified in the
Portfolio Manager Agreement; or (2) the rate that would have applied under the
prior Portfolio Manager Agreement with the prior portfolio manager. The latter
rate varies based on prior performance.
(4) Under the Management Agreement with Allmerica Investment Trust, AFIMS has
declared a voluntary expense limitation of 0.60% for the Money Market Fund, the
expenses of the Money Market Fund did not exceed the cap in 1998. 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 TO CALCULATE THE UNIT VALUES OF THE
SUB-ACCOUNTS. FOR MORE INFORMATION CONCERNING FEES AND EXPENSES, SEE THE
PROSPECTUSES OF THE FULCRUM TRUST AND ALLMERICA INVESTMENT TRUST.
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.
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<PAGE>
- 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
- The transaction fee applies to all partial withdrawals, including a
Withdrawal without a surrender charge; 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 THE COMPANY,
THE VARIABLE ACCOUNT, THE FULCRUM TRUST
AND ALLMERICA INVESTMENT TRUST
THE COMPANY. The Company 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. As of December 31, 1998, the
Company had over $14 billion in assets and over $26 billion of life insurance in
force. 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.
The Company 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 Fulcrum 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 the
Company. We reserve the right, subject to law, to change the names of the
Variable Account and the Sub-Accounts.
THE FULCRUM TRUST. The Fulcrum 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 Fulcrum 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 Fulcrum Trust and is responsible for general investment
supervisory services to the Portfolios. The Fulcrum Trust and AFIMS have
retained several Portfolio Managers to manage the assets of each Portfolio.
AFIMS is located at 440 Lincoln Street, Worcester, MA 01653.
14
<PAGE>
The five Portfolios of The Fulcrum Trust and their respective Portfolio Managers
are as follows:
<TABLE>
<CAPTION>
PORTFOLIO PORTFOLIO MANAGER
- ------------------------------------ ------------------------------------
<S> <C>
Global Interactive/Telecomm GAMCO Investors, Inc.
Portfolio Bee & Associates Incorporated
International Growth Portfolio Analytic Investors, Inc.
Growth Portfolio GAMCO Investors, Inc.
Value Portfolio Allmerica Asset Management, Inc.
Strategic Income 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 Fulcrum Trust currently pays AFIMS and the Portfolio Managers a monthly fee
(the "management fee") based on the average daily net assets of each Portfolio.
For the first year that a new Portfolio Manager is hired (or, in the case of a
Portfolio that has had only one Portfolio Manager, for the first year of
operations) the advisory fee is set at an annual rate of 0.80% of the
Portfolio's average daily net assets. After the twelfth full calendar month has
elapsed, the performance-based fee will be in effect. As of the date of this
prospectus, this first year fee arrangement is in effect for only one Portfolio
- -- the Growth Portfolio. Effective August 1, 1998, a new Portfolio Manager,
Analytic Investors, Inc. ("Analytic"), is in place for the Growth Portfolio. The
Manager and the Portfolio Manager have voluntarily agreed to limit their fee
from August 1, 1998 through July 31, 1999 to the lesser of the following two
rates: (1) 0.80%, the rate specified in the Portfolio Manager Agreement; or (2)
the rate that would have applied under the prior Portfolio Manager Agreement
with the prior portfolio manager. The latter rate varies based on prior
performance.
Other than for the Growth Portfolio, each Portfolio Manager is currently paid on
an incentive fee basis, which could result in either higher than average
management fees or, possibly, no management fee at all, depending on how well
each Portfolio Manager performs. There are two components to the management fee:
the basic fee and the incentive fee. The management fee is structured to vary
based upon the Portfolio's performance (after expenses) compared to that of an
appropriate market benchmark selected for that Portfolio. The management fee
schedule provides for an incentive performance fee for superior performance, and
provides for lower fee for sub-par performance. The base fee is 2.00%, but may
vary from 0.00% to 4.00% depending on the Portfolio's performance.
ALLMERICA INVESTMENT TRUST. Allmerica Investment Trust is an open-end,
diversified, management investment company registered with the SEC under the
1940 Act.
Allmerica Investment Trust was established as a Massachusetts business trust on
October 11, 1984, for the purpose of providing a vehicle for the investment of
assets of various variable accounts established by the Company or other
insurance companies. The Money Market Fund of Allmerica Investment Trust is
available under the Contract; certain other funds of Allmerica Investment Trust
are not currently offered under the Contract. Shares of the Trust are not
offered to the general public but solely to such variable accounts.
AFIMS is the investment manager of Allmerica Investment Trust and, subject to
the direction of the Board of Trustees, handles the day-to-day affairs of the
Trust. AFIMS has entered into a Sub-Adviser Agreement with its affiliate,
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. Both
AFIMS and AAM are located at 440 Lincoln Street, Worcester, Massachusetts 01653.
Other than the expenses specifically assumed by AFIMS under the Management
Agreement, all expenses incurred in the operation of the Trust are borne by it,
including fees and expenses associated with the registration and qualification
of the Trust's shares under the Securities Act of 1933 ("1933 Act") other fees
payable to the SEC, independent public accountant, legal and custodian fees,
association membership dues,
15
<PAGE>
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 FULCRUM TRUST AND ALLMERICA
INVESTMENT TRUST WHICH ACCOMPANY THIS PROSPECTUS, AND SHOULD BE READ CAREFULLY
BEFORE INVESTING. The Statements of Additional Information of The Fulcrum Trust
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.
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.
INTERNATIONAL GROWTH PORTFOLIO seeks to make money for investors by investing
internationally for long-term capital appreciation, primarily in equity
securities.
GROWTH PORTFOLIO seeks to make money for investors by investing primarily in
securities selected for their long-term growth prospects.
VALUE PORTFOLIO seeks to make money for investors by investing primarily in
companies that the Portfolio Manager believes are undervalued and that by virtue
of anticipated developments may, in the Portfolio Manager's judgment, achieve
significant capital appreciation.
STRATEGIC INCOME PORTFOLIO seeks to make money for investors by investing for
high current income and capital appreciation in a variety of fixed-income
securities.
MONEY MARKET FUND seeks to obtain maximum current income consistent with the
preservation of capital and liquidity.
If there is a material change in the investment policy of a Fund, the 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.
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
the Company at its Principal Office. We offer Contracts to applicants 89 years
old and under. After receiving a completed application from a prospective
Contract
16
<PAGE>
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. We
may delay a refund of any Payment made by check until the check has cleared your
bank.
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.
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 fixed 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.
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
the Company 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
17
<PAGE>
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 the Company. 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 the Company
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, the Company may be liable for
any losses from unauthorized or fraudulent instructions. We may 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 or PIN
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.)
18
<PAGE>
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 to and from 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 the Company.
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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<PAGE>
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 underwriting 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 the Company. 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 INSURANCE BENEFITS.
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."
For important tax consequences of partial withdrawals, see FEDERAL TAX
CONSIDERATIONS.
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<PAGE>
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 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 charge is equal to
0.30% of the Contract Value. We will monitor distribution charges, federal
tax
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<PAGE>
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 AND 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 The Fulcrum Trust 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 Sales 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 Sales 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.
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
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<PAGE>
withdrawal. The transaction fee applies to all partial withdrawals, including a
Withdrawal without a surrender charge.
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 exchanged life insurance
policy that was carried over to this Contract may be treated as a preferred
loan. The
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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;
- Evidence of Insurability showing that the Insured is insurable according
to our current underwriting rules;
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- 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.
THE COMPANY AND THE VARIABLE ACCOUNT -- The Company 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, the Company 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.
The Company 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 WITH COMPANY PRINCIPAL OCCUPATION(S) DURING PAST FIVE YEARS
- ---------------------------------------- --------------------------------------------------
<S> <C>
Bruce C. Anderson Director (since 1996), Vice President (since 1984)
Director and Assistant Secretary (since 1992) of First
Allmerica
Abigail M. Armstrong Secretary (since 1996) and Counsel (since 1991) of
Secretary and Counsel First Allmerica; Secretary (since 1988) and
Counsel (since 1994) of Allmerica Investments,
Inc.; and Secretary (since 1990) of Allmerica
Financial Investment Management Services, Inc.
Warren E. Barnes Vice President (since 1996) and Corporate
Vice President and Controller (since 1998) of First Allmerica
Corporate Controller
Robert E. Bruce Director and Chief Information Officer (since
Director and Chief 1997) and Vice President (since 1995) of First
Information Officer Allmerica; and Corporate Manager (1979 to 1995)
of Digital Equipment Corporation
John P. Kavanaugh Director and Chief Investment Officer (since 1996)
Director, Vice President and and Vice President (since 1991) of First
Chief Investment Officer Allmerica; and Vice President (since 1998) of
Allmerica Financial Investment Management
Services, Inc.
John F. Kelly Director (since 1996), Senior Vice President
Director, Vice President and (since 1986), General Counsel (since 1981) and
General Counsel Assistant Secretary (since 1991) of First
Allmerica; Director (since 1985) of Allmerica
Investments, Inc.; and Director (since 1990) of
Allmerica Financial Investment Management
Services, Inc.
J. Barry May Director (since 1996) of First Allmerica; Director
Director and President (since 1996) of The Hanover
Insurance Company; and Vice President (1993 to
1996) of The Hanover Insurance Company
James R. McAuliffe Director (since 1996) of First Allmerica; Director
Director (since 1992), President (since 1994) and Chief
Executive Officer (since 1996) of Citizens
Insurance Company of America
John F. O'Brien Director, President and Chief Executive Officer
Director and Chairman of (since 1989) of First Allmerica; Director (since
the Board 1989) of Allmerica Investments, Inc.; and
Director and Chairman of the Board (since 1990)
of Allmerica Financial Investment Management
Services, Inc.
Edward J. Parry, III Director and Chief Financial Officer (since 1996)
Director, Vice President, and Vice President and Treasurer (since 1993) of
Chief Financial Officer and First Allmerica; Treasurer (since 1993) of
Treasurer Allmerica Investments, Inc.; and Treasurer (since
1993) of Allmerica Financial Investment
Management Services, Inc.
</TABLE>
31
<PAGE>
<TABLE>
<CAPTION>
NAME AND POSITION WITH COMPANY PRINCIPAL OCCUPATION(S) DURING PAST FIVE YEARS
- ---------------------------------------- --------------------------------------------------
<S> <C>
Richard M. Reilly Director (since 1996) and Vice President (since
Director, President and 1990) of First Allmerica; Director (since 1990)
Chief Executive Officer of Allmerica Investments, Inc.; and Director and
President (since 1998) of Allmerica Financial
Investment Management Services, Inc.
Robert P. Restrepo, Jr. Director and Vice President (since 1998) of First
Director Allmerica; Chief Executive Officer (1996 to 1998)
of Travelers Property & Casualty; Senior Vice
President (1993 to 1996) of Aetna Life & Casualty
Company
Eric A. Simonsen Director (since 1996) and Vice President (since
Director and Vice President 1990) of First Allmerica; Director (since 1991)
of Allmerica Investments, Inc.; and Director
(since 1991) of Allmerica Financial Investment
Management Services, Inc.
Phillip E. Soule Director (since 1996) and Vice President (since
Director 1987) of First Allmerica
</TABLE>
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;
32
<PAGE>
- 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, The Fulcrum Trust and the Trust as the 1940 Act requires.
LEGAL PROCEEDINGS
There are no pending legal proceedings involving the Variable Account and
Allmerica Investments, Inc. or its assets. The Company is not involved in any
litigation that is materially important to their 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 the Company and its
affiliates that fund variable annuity contracts ("mixed funding.") Shares of the
Portfolios of The Fulcrum Trust 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. The Company, The Fulcrum Trust and
the Trust do not believe that mixed funding is currently disadvantageous to
either variable life insurance Contract Owners or variable annuity contract
owners. The Company 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.
33
<PAGE>
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.
INDEPENDENT ACCOUNTANTS
The financial statements of the Company as of December 31, 1998 and 1997 and for
each of the three years in the period ended December 31, 1998, included in this
Prospectus constituting part of this Registration Statement, have been so
included in reliance on the report of PricewaterhouseCoopers LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting.
The financial statements of the Company included herein should be considered
only as bearing on the ability of the Company to meet its obligations under the
Policy.
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
34
<PAGE>
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.
YEAR 2000 DISCLOSURE
The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
computer programs that have date-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices or
engage in similar normal business activities.
Based on a third party assessment, the Company determined that significant
portions of its software required modification or replacement to enable its
computer systems to properly process dates beyond December 31, 1999. The Company
is presently completing the process of modifying or replacing existing software
and believes that this action will resolve the Year 2000 issue. However, if such
modifications and conversions are not made, or are not completed timely, or
should there be serious unanticipated interruptions from unknown sources, the
Year 2000 issue could have a material adverse impact on the operations of the
Company. Specifically, the Company could experience, among other things, an
interruption in its ability to collect and process premiums, process claim
payments, safeguard and manage its invested assets, accurately maintain
policyholder information, accurately maintain accounting records, and perform
customer service. Any of these specific events, depending on duration, could
have a material adverse impact on the results of operations and the financial
position of the Company.
The Company has initiated formal communications with all of its suppliers to
determine the extent to which the Company is vulnerable to those third parties'
failure to remediate their own Year 2000 issue. The Company's total Year 2000
project cost and estimates to complete the project include the estimated costs
and time associated with the Company's involvement on a third party's Year 2000
issue, and are based on presently available information. However, there can be
no guarantee that the systems of other companies on which the Company's systems
rely will be timely converted, or that a failure to convert by another company,
or a conversion that is incompatible with the Company's systems, would not have
material adverse effect on the Company. The Company does not believe that it has
material exposure to contingencies related to the Year 2000 issue for the
products it has sold. Although the Company does not believe that there is a
material contingency associated with the Year 2000 project, there can be no
assurance that exposure for material contingencies will not arise.
The cost of the Year 2000 project will be expensed as incurred and is being
funded primarily through a reallocation of resources from discretionary projects
and a reduction in systems maintenance and support costs. Therefore, the Year
2000 project is not expected to result in any significant incremental technology
cost and is not expected to have a material effect on the results of operations.
The Company and its affiliates have incurred and expensed approximately $54
million related to the assessment, plan development and substantial completion
of the Year 2000 project, through December 31, 1998. The total remaining cost of
the project is estimated between $20-30 million.
FINANCIAL STATEMENTS
Financial Statements for the Company are included in this Prospectus, starting
after the Appendices. The financial statements of the Company 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>
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 the Company. If you do not make an election, we will pay the benefits
in a single sum. If a payment option is selected, the Beneficiary 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 2/3 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 becomes 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 morality 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
1998, 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 0.32% to 3.46%. 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
1998 was 0.26%. Total Fund Expenses for the Money Market Fund in 1998 were
0.32%. Under the Management Agreement with Allmerica Investment Trust, AFIMS has
declared a voluntary expense limitation of 0.60% for the Money Market Fund, but
the expenses of the Money Market Fund did not exceed the cap in 1998. The
limitation may be terminated at any time.
D-1
<PAGE>
PORTFOLIOS OF THE FULCRUM TRUST. Each of the Portfolios of The Fulcrum 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 than the Benchmark Index. In 1998, the actual management
fees were 0.30% for the Value Portfolio, 0.00% for the Growth Portfolio, 0.05%
for the International Growth Portfolio, 0.47% for the Strategic Income
Portfolio, and 1.96% for the Global Interactive/Telecomm Portfolio. For more
information, see attached prospectus for The Fulcrum Trust.
AFIMS has voluntarily agreed to limit operating expenses and reimburse those
expenses to the extent that the Portfolios' "Other Expenses" during 1999 (i.e.,
expenses other than management fees) exceed the following expense limitations
(expressed as an annualized percentage of average daily net assets): 1.50% for
the Global Interactive/Telecomm Portfolio, 1.50% for the International Growth
Portfolio, 1.20% for the Growth Portfolio, 1.20% for the Value Portfolio, and
1.50% for the Strategic Income Portfolio. Different expense limitations were in
effect during 1998. The limitations are in effect through December 31, 1999.
Without the effect of the expense limitations, the 1998 "Other Expenses" ratios
would have been the following: 3.69% for the Global Interactive/Telecomm
Portfolio, 5.09% for the International Growth Portfolio, 5.04% for the Growth
Portfolio, 3.00% for the Value Portfolio, and 6.49% for the Strategic Income
Portfolio.
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 ANNUTIY COMPANY
THE FULCRUM FUND NEXT GENERATION
MODIFIED SINGLE PAYMENT VARIABLE LIFE CONTRACT
MALE NON-SMOKER AGE 55
SPECIFIED FACE AMOUNT = $67,803
CURRENT COST OF INSURANCE CHARGES
<TABLE>
<CAPTION>
PREMIUMS
PAID HYPOTHETICAL 0% HYPOTHETICAL 6% HYPOTHETICAL 12%
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 21,434 23,934 67,803 22,909 25,409 67,803 24,384 26,884 67,803
2 53,813 20,600 22,912 67,803 23,513 25,826 67,803 26,601 28,913 67,803
3 82,753 19,808 21,933 67,803 24,124 26,249 67,803 28,973 31,098 67,803
4 113,141 19,057 20,994 67,803 24,743 26,681 67,803 31,512 33,449 67,803
5 145,048 18,344 20,094 67,803 25,369 27,119 67,803 34,231 35,981 67,803
6 178,550 17,669 19,232 67,803 26,004 27,566 67,803 37,145 38,707 67,803
7 213,728 17,217 18,405 67,803 26,833 28,020 67,803 40,455 41,642 67,803
8 250,664 16,800 17,612 67,803 27,670 28,483 67,803 43,990 44,802 67,803
9 289,447 16,478 16,853 67,803 28,578 28,953 67,803 47,829 48,204 67,803
10 330,170 16,125 16,125 67,803 29,432 29,432 67,803 51,882 51,882 67,803
11 372,928 15,535 15,535 67,803 30,130 30,130 67,803 56,251 56,251 67,803
12 417,825 14,966 14,966 67,803 30,844 30,844 67,803 61,002 61,002 72,592
13 464,966 14,417 14,417 67,803 31,577 31,577 67,803 66,142 66,142 78,047
14 514,464 13,887 13,887 67,803 32,327 32,327 67,803 71,711 71,711 83,901
15 566,437 13,375 13,375 67,803 33,097 33,097 67,803 77,748 77,748 90,188
16 621,009 12,881 12,881 67,803 33,885 33,885 67,803 84,294 84,294 96,939
17 678,310 12,405 12,405 67,803 34,693 34,693 67,803 91,392 91,392 103,273
18 738,475 11,944 11,944 67,803 35,520 35,520 67,803 99,087 99,087 109,986
19 801,649 11,500 11,500 67,803 36,368 36,368 67,803 107,469 107,469 117,141
20 867,981 11,071 11,071 67,803 37,238 37,238 67,803 116,631 116,631 124,795
Age 60 145,048 18,344 20,094 67,803 25,369 27,119 67,803 34,231 35,981 67,803
Age 65 330,170 16,125 16,125 67,803 29,432 29,432 67,803 51,882 51,882 67,803
Age 70 566,437 13,375 13,375 67,803 33,097 33,097 67,803 77,748 77,748 90,188
Age 75 867,981 11,071 11,071 67,803 37,238 37,238 67,803 116,631 116,631 124,795
</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 ANNUTIY COMPANY
THE FULCRUM FUND NEXT GENERATION
MODIFIED SINGLE PAYMENT VARIABLE LIFE CONTRACT
MALE NON-SMOKER AGE 55
SPECIFIED FACE AMOUNT = $67,803
GUARANTEED COST OF INSURANCE CHARGES
<TABLE>
<CAPTION>
PREMIUMS
PAID HYPOTHETICAL 0% HYPOTHETICAL 6% HYPOTHETICAL 12%
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 21,206 23,706 67,803 22,683 25,183 67,803 24,160 26,660 67,803
2 53,813 20,101 22,413 67,803 23,023 25,336 67,803 26,124 28,436 67,803
3 82,753 18,988 21,113 67,803 23,327 25,452 67,803 28,211 30,336 67,803
4 113,141 17,865 19,802 67,803 23,593 25,531 67,803 30,438 32,376 67,803
5 145,048 16,719 18,469 67,803 23,810 25,560 67,803 32,813 34,563 67,803
6 178,550 15,547 17,109 67,803 23,976 25,539 67,803 35,356 36,919 67,803
7 213,728 14,521 15,709 67,803 24,267 25,455 67,803 38,269 39,456 67,803
8 250,664 13,446 14,259 67,803 24,488 25,300 67,803 41,386 42,198 67,803
9 289,447 12,367 12,742 67,803 24,686 25,061 67,803 44,793 45,168 67,803
10 330,170 11,135 11,135 67,803 24,717 24,717 67,803 48,391 48,391 67,803
11 372,928 9,505 9,505 67,803 24,439 24,439 67,803 52,296 52,296 67,803
12 417,825 7,746 7,746 67,803 24,039 24,039 67,803 56,629 56,629 67,803
13 464,966 5,837 5,837 67,803 23,497 23,497 67,803 61,396 61,396 72,447
14 514,464 3,753 3,753 67,803 22,791 22,791 67,803 66,554 66,554 77,868
15 566,437 1,466 1,466 67,803 21,895 21,895 67,803 72,132 72,132 83,673
16 621,009 0 0 0 20,769 20,769 67,803 78,161 78,161 89,886
17 678,310 0 0 0 19,358 19,358 67,803 84,711 84,711 95,724
18 738,475 0 0 0 17,606 17,606 67,803 91,839 91,839 101,941
19 801,649 0 0 0 15,423 15,423 67,803 99,608 99,608 108,572
20 867,981 0 0 0 12,722 12,722 67,803 108,100 108,100 115,667
Age 60 145,048 16,719 18,469 67,803 23,810 25,560 67,803 32,813 34,563 67,803
Age 65 330,170 11,135 11,135 67,803 24,717 24,717 67,803 48,391 48,391 67,803
Age 70 566,437 1,466 1,466 67,803 21,895 21,895 67,803 72,132 72,132 83,673
Age 75 867,981 0 0 0 12,722 12,722 67,803 108,100 108,100 115,667
</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 ANNUTIY COMPANY
THE FULCRUM FUND NEXT GENERATION
MODIFIED SINGLE PAYMENT VARIABLE LIFE CONTRACT
UNISEX NON-SMOKER AGE 55
SPECIFIED FACE AMOUNT = $69,861
CURRENT COST OF INSURANCE CHARGES
<TABLE>
<CAPTION>
PREMIUMS
PAID HYPOTHETICAL 0% HYPOTHETICAL 6% HYPOTHETICAL 12%
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 21,434 23,934 69,861 22,909 25,409 69,861 24,384 26,884 69,861
2 53,813 20,600 22,912 69,861 23,513 25,826 69,861 26,601 28,913 69,861
3 82,753 19,808 21,933 69,861 24,124 26,249 69,861 28,973 31,098 69,861
4 113,141 19,057 20,994 69,861 24,743 26,681 69,861 31,512 33,449 69,861
5 145,048 18,344 20,094 69,861 25,369 27,119 69,861 34,231 35,981 69,861
6 178,550 17,669 19,232 69,861 26,004 27,566 69,861 37,145 38,707 69,861
7 213,728 17,217 18,405 69,861 26,833 28,020 69,861 40,455 41,642 69,861
8 250,664 16,800 17,612 69,861 27,670 28,483 69,861 43,990 44,802 69,861
9 289,447 16,478 16,853 69,861 28,578 28,953 69,861 47,829 48,204 69,861
10 330,170 16,125 16,125 69,861 29,432 29,432 69,861 51,882 51,882 69,861
11 372,928 15,535 15,535 69,861 30,130 30,130 69,861 56,250 56,250 69,861
12 417,825 14,966 14,966 69,861 30,844 30,844 69,861 61,009 61,009 72,600
13 464,966 14,417 14,417 69,861 31,577 31,577 69,861 66,175 66,175 78,086
14 514,464 13,887 13,887 69,861 32,327 32,327 69,861 71,765 71,765 83,966
15 566,437 13,375 13,375 69,861 33,097 33,097 69,861 77,814 77,814 90,265
16 621,009 12,881 12,881 69,861 33,885 33,885 69,861 84,366 84,366 97,021
17 678,310 12,405 12,405 69,861 34,693 34,693 69,861 91,476 91,476 103,368
18 738,475 11,944 11,944 69,861 35,520 35,520 69,861 99,215 99,215 110,129
19 801,649 11,500 11,500 69,861 36,368 36,368 69,861 107,653 107,653 117,341
20 867,981 11,071 11,071 69,861 37,238 37,238 69,861 116,872 116,872 125,053
Age 60 145,048 18,344 20,094 69,861 25,369 27,119 69,861 34,231 35,981 69,861
Age 65 330,170 16,125 16,125 69,861 29,432 29,432 69,861 51,882 51,882 69,861
Age 70 566,437 13,375 13,375 69,861 33,097 33,097 69,861 77,814 77,814 90,265
Age 75 867,981 11,071 11,071 69,861 37,238 37,238 69,861 116,872 116,872 125,053
</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 ANNUTIY COMPANY
THE FULCRUM FUND NEXT GENERATION
MODIFIED SINGLE PAYMENT VARIABLE LIFE CONTRACT
UNISEX NON-SMOKER AGE 55
SPECIFIED FACE AMOUNT = $69,861
GUARANTEED COST OF INSURANCE CHARGES
<TABLE>
<CAPTION>
PREMIUMS
PAID HYPOTHETICAL 0% HYPOTHETICAL 6% HYPOTHETICAL 12%
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 21,206 23,706 69,861 22,683 25,183 69,861 24,160 26,660 69,861
2 53,813 20,099 22,411 69,861 23,020 25,333 69,861 26,119 28,432 69,861
3 82,753 18,994 21,119 69,861 23,330 25,455 69,861 28,211 30,336 69,861
4 113,141 17,878 19,815 69,861 23,600 25,538 69,861 30,438 32,376 69,861
5 145,048 16,749 18,499 69,861 23,830 25,580 69,861 32,819 34,569 69,861
6 178,550 15,598 17,161 69,861 24,013 25,575 69,861 35,368 36,931 69,861
7 213,728 14,599 15,786 69,861 24,323 25,510 69,861 38,286 39,474 69,861
8 250,664 13,554 14,366 69,861 24,565 25,378 69,861 41,407 42,219 69,861
9 289,447 12,509 12,884 69,861 24,789 25,164 69,861 44,813 45,188 69,861
10 330,170 11,322 11,322 69,861 24,853 24,853 69,861 48,408 48,408 69,861
11 372,928 9,744 9,744 69,861 24,613 24,613 69,861 52,301 52,301 69,861
12 417,825 8,049 8,049 69,861 24,260 24,260 69,861 56,612 56,612 69,861
13 464,966 6,218 6,218 69,861 23,774 23,774 69,861 61,378 61,378 72,427
14 514,464 4,234 4,234 69,861 23,142 23,142 69,861 66,564 66,564 77,880
15 566,437 2,063 2,063 69,861 22,332 22,332 69,861 72,175 72,175 83,723
16 621,009 0 0 0 21,300 21,300 69,861 78,241 78,241 89,978
17 678,310 0 0 0 20,011 20,011 69,861 84,835 84,835 95,863
18 738,475 0 0 0 18,419 18,419 69,861 92,013 92,013 102,134
19 801,649 0 0 0 16,443 16,443 69,861 99,837 99,837 108,823
20 867,981 0 0 0 13,997 13,997 69,861 108,387 108,387 115,975
Age 60 145,048 16,749 18,499 69,861 23,830 25,580 69,861 32,819 34,569 69,861
Age 65 330,170 11,322 11,322 69,861 24,853 24,853 69,861 48,408 48,408 69,861
Age 70 566,437 2,063 2,063 69,861 22,332 22,332 69,861 72,175 72,175 83,723
Age 75 867,981 0 0 0 13,997 13,997 69,861 108,387 108,387 115,975
</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 ANNUTIY COMPANY
THE FULCRUM FUND NEXT GENERATION
MODIFIED SINGLE PAYMENT VARIABLE LIFE CONTRACT
MALE NON-SMOKER AGE 65
FEMALE NON-SMOKER AGE 65
SPECIFIED FACE AMOUNT = $66,006
CURRENT COST OF INSURANCE CHARGES
<TABLE>
<CAPTION>
PREMIUMS
PAID HYPOTHETICAL 0% HYPOTHETICAL 6% HYPOTHETICAL 12%
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 21,541 24,041 66,006 23,024 25,524 66,006 24,506 27,006 66,006
2 53,813 20,774 23,086 66,006 23,716 26,029 66,006 26,835 29,148 66,006
3 82,753 20,041 22,166 66,006 24,411 26,536 66,006 29,319 31,444 66,006
4 113,141 19,344 21,281 66,006 25,116 27,053 66,006 31,987 33,924 66,006
5 145,048 18,681 20,431 66,006 25,831 27,581 66,006 34,852 36,602 66,006
6 178,550 18,051 19,613 66,006 26,558 28,120 66,006 37,932 39,494 66,006
7 213,728 17,640 18,827 66,006 27,483 28,670 66,006 41,430 42,617 66,006
8 250,664 17,259 18,071 66,006 28,419 29,232 66,006 45,177 45,990 66,006
9 289,447 16,970 17,345 66,006 29,430 29,805 66,006 49,256 49,631 66,006
10 330,170 16,646 16,646 66,006 30,389 30,389 66,006 53,590 53,590 66,006
11 372,928 16,087 16,087 66,006 31,204 31,204 66,006 58,276 58,276 66,006
12 417,825 15,545 15,545 66,006 32,042 32,042 66,006 63,381 63,381 66,550
13 464,966 15,021 15,021 66,006 32,902 32,902 66,006 68,951 68,951 72,398
14 514,464 14,513 14,513 66,006 33,787 33,787 66,006 74,986 74,986 78,735
15 566,437 14,022 14,022 66,006 34,696 34,696 66,006 81,544 81,544 85,621
16 621,009 13,546 13,546 66,006 35,631 35,631 66,006 88,675 88,675 93,109
17 678,310 13,086 13,086 66,006 36,592 36,592 66,006 96,430 96,430 101,252
18 738,475 12,640 12,640 66,006 37,579 37,579 66,006 104,863 104,863 110,106
19 801,649 12,208 12,208 66,006 38,594 38,594 66,006 114,034 114,034 119,736
20 867,981 11,790 11,790 66,006 39,637 39,637 66,006 124,007 124,007 130,207
Age 70 145,048 18,681 20,431 66,006 25,831 27,581 66,006 34,852 36,602 66,006
Age 75 330,170 16,646 16,646 66,006 30,389 30,389 66,006 53,590 53,590 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 ANNUTIY COMPANY
THE FULCRUM FUND NEXT GENERATION
MODIFIED SINGLE PAYMENT VARIABLE LIFE CONTRACT
MALE NON-SMOKER AGE 65
FEMALE NON-SMOKER AGE 65
SPECIFIED FACE AMOUNT = $66,006
GUARANTEED COST OF INSURANCE CHARGES
<TABLE>
<CAPTION>
PREMIUMS
PAID HYPOTHETICAL 0% HYPOTHETICAL 6% HYPOTHETICAL 12%
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 21,541 24,041 66,006 23,024 25,524 66,006 24,506 27,006 66,006
2 53,813 20,774 23,086 66,006 23,716 26,029 66,006 26,835 29,148 66,006
3 82,753 20,001 22,126 66,006 24,384 26,509 66,006 29,308 31,433 66,006
4 113,141 19,215 21,152 66,006 25,020 26,958 66,006 31,935 33,873 66,006
5 145,048 18,401 20,151 66,006 25,615 27,365 66,006 34,727 36,477 66,006
6 178,550 17,547 19,110 66,006 26,159 27,721 66,006 37,697 39,260 66,006
7 213,728 16,821 18,008 66,006 26,823 28,010 66,006 41,049 42,236 66,006
8 250,664 16,009 16,821 66,006 27,402 28,214 66,006 44,613 45,425 66,006
9 289,447 15,142 15,517 66,006 27,934 28,309 66,006 48,476 48,851 66,006
10 330,170 14,059 14,059 66,006 28,265 28,265 66,006 52,569 52,569 66,006
11 372,928 12,496 12,496 66,006 28,255 28,255 66,006 57,022 57,022 66,006
12 417,825 10,675 10,675 66,006 28,048 28,048 66,006 61,944 61,944 66,006
13 464,966 8,540 8,540 66,006 27,605 27,605 66,006 67,382 67,382 70,752
14 514,464 6,021 6,021 66,006 26,874 26,874 66,006 73,280 73,280 76,944
15 566,437 3,028 3,028 66,006 25,790 25,790 66,006 79,664 79,664 83,648
16 621,009 0 0 0 24,259 24,259 66,006 86,568 86,568 90,897
17 678,310 0 0 0 22,156 22,156 66,006 94,024 94,024 98,725
18 738,475 0 0 0 19,303 19,303 66,006 102,063 102,063 107,166
19 801,649 0 0 0 15,463 15,463 66,006 110,717 110,717 116,253
20 867,981 0 0 0 10,310 10,310 66,006 120,015 120,015 126,016
Age 70 145,048 18,401 20,151 66,006 25,615 27,365 66,006 34,727 36,477 66,006
Age 75 330,170 14,059 14,059 66,006 28,265 28,265 66,006 52,569 52,569 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 ANNUTIY COMPANY
THE FULCRUM FUND NEXT GENERATION
MODIFIED SINGLE PAYMENT VARIABLE LIFE CONTRACT
UNISEX NON-SMOKER AGE 65
UNISEX NON-SMOKER AGE 65
SPECIFIED FACE AMOUNT = $65,807
CURRENT COST OF INSURANCE CHARGES
<TABLE>
<CAPTION>
PREMIUMS
PAID HYPOTHETICAL 0% HYPOTHETICAL 6% HYPOTHETICAL 12%
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 21,541 24,041 65,807 23,023 25,523 65,807 24,506 27,006 65,807
2 53,813 20,772 23,085 65,807 23,715 26,027 65,807 26,833 29,146 65,807
3 82,753 20,039 22,164 65,807 24,409 26,534 65,807 29,317 31,442 65,807
4 113,141 19,342 21,280 65,807 25,114 27,051 65,807 31,985 33,922 65,807
5 145,048 18,679 20,429 65,807 25,829 27,579 65,807 34,850 36,600 65,807
6 178,550 18,049 19,612 65,807 26,556 28,118 65,807 37,929 39,492 65,807
7 213,728 17,638 18,826 65,807 27,481 28,668 65,807 41,427 42,615 65,807
8 250,664 17,257 18,070 65,807 28,417 29,229 65,807 45,174 45,987 65,807
9 289,447 16,968 17,343 65,807 29,427 29,802 65,807 49,253 49,628 65,807
10 330,170 16,645 16,645 65,807 30,387 30,387 65,807 53,586 53,586 65,807
11 372,928 16,086 16,086 65,807 31,202 31,202 65,807 58,273 58,273 65,807
12 417,825 15,544 15,544 65,807 32,039 32,039 65,807 63,378 63,378 66,547
13 464,966 15,020 15,020 65,807 32,900 32,900 65,807 68,945 68,945 72,393
14 514,464 14,512 14,512 65,807 33,785 33,785 65,807 74,978 74,978 78,727
15 566,437 14,021 14,021 65,807 34,694 34,694 65,807 81,535 81,535 85,612
16 621,009 13,545 13,545 65,807 35,628 35,628 65,807 88,666 88,666 93,099
17 678,310 13,085 13,085 65,807 36,589 36,589 65,807 96,420 96,420 101,241
18 738,475 12,639 12,639 65,807 37,576 37,576 65,807 104,852 104,852 110,095
19 801,649 12,207 12,207 65,807 38,591 38,591 65,807 114,022 114,022 119,723
20 867,981 11,789 11,789 65,807 39,634 39,634 65,807 123,994 123,994 130,194
Age 70 145,048 18,679 20,429 65,807 25,829 27,579 65,807 34,850 36,600 65,807
Age 75 330,170 16,645 16,645 65,807 30,387 30,387 65,807 53,586 53,586 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 ANNUTIY COMPANY
THE FULCRUM FUND NEXT GENERATION
MODIFIED SINGLE PAYMENT VARIABLE LIFE CONTRACT
UNISEX NON-SMOKER AGE 65
UNISEX NON-SMOKER AGE 65
SPECIFIED FACE AMOUNT = $65,807
GUARANTEED COST OF INSURANCE CHARGES
<TABLE>
<CAPTION>
PREMIUMS
PAID HYPOTHETICAL 0% HYPOTHETICAL 6% HYPOTHETICAL 12%
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 21,541 24,041 65,807 23,023 25,523 65,807 24,506 27,006 65,807
2 53,813 20,772 23,084 65,807 23,715 26,027 65,807 26,833 29,146 65,807
3 82,753 19,997 22,122 65,807 24,380 26,505 65,807 29,304 31,429 65,807
4 113,141 19,205 21,143 65,807 25,011 26,949 65,807 31,927 33,864 65,807
5 145,048 18,386 20,136 65,807 25,600 27,350 65,807 34,713 36,463 65,807
6 178,550 17,521 19,084 65,807 26,134 27,696 65,807 37,676 39,238 65,807
7 213,728 16,781 17,968 65,807 26,786 27,973 65,807 41,018 42,205 65,807
8 250,664 15,954 16,766 65,807 27,351 28,164 65,807 44,572 45,385 65,807
9 289,447 15,070 15,445 65,807 27,867 28,242 65,807 48,426 48,801 65,807
10 330,170 13,966 13,966 65,807 28,180 28,180 65,807 52,507 52,507 65,807
11 372,928 12,381 12,381 65,807 28,149 28,149 65,807 56,951 56,951 65,807
12 417,825 10,536 10,536 65,807 27,921 27,921 65,807 61,865 61,865 65,807
13 464,966 8,376 8,376 65,807 27,454 27,454 65,807 67,296 67,296 70,661
14 514,464 5,834 5,834 65,807 26,701 26,701 65,807 73,184 73,184 76,844
15 566,437 2,821 2,821 65,807 25,595 25,595 65,807 79,559 79,559 83,537
16 621,009 0 0 0 24,044 24,044 65,807 86,452 86,452 90,775
17 678,310 0 0 0 21,924 21,924 65,807 93,897 93,897 98,592
18 738,475 0 0 0 19,061 19,061 65,807 101,925 101,925 107,021
19 801,649 0 0 0 15,218 15,218 65,807 110,568 110,568 116,096
20 867,981 0 0 0 10,077 10,077 65,807 119,856 119,856 125,849
Age 70 145,048 18,386 20,136 65,807 25,600 27,350 65,807 34,713 36,463 65,807
Age 75 330,170 13,966 13,966 65,807 28,180 28,180 65,807 52,507 52,507 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>
APPENDIX E
PERFORMANCE INFORMATION
The Company 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 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, Inc.;
- 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;
E-1
<PAGE>
- 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 ("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.
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.
E-2
<PAGE>
ALLMERICA FINANCIAL
LIFE INSURANCE AND
ANNUITY COMPANY
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
<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, comprehensive income, shareholder's equity
and cash flows present fairly, in all material respects, the financial position
of Allmerica Financial Life Insurance and Annuity Company (the "Company") at
December 31, 1998 and 1997, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1998 in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ PRICEWATERHOUSECOOPERS
PricewaterhouseCoopers LLP
Boston, Massachusetts
February 2, 1999, except for paragraph 2 of Note 12,
which is as of March 19, 1999
<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) 1998 1997 1996
----------------------------------------------- ------- ------- -------
<S> <C> <C> <C>
REVENUES
Premiums................................... $ 0.5 $ 22.8 $ 32.7
Universal life and investment product
policy fees.............................. 267.4 212.2 176.2
Net investment income...................... 151.3 164.2 171.7
Net realized investment gains (losses)..... 20.0 2.9 (3.6)
Other income............................... 0.6 1.4 0.9
------- ------- -------
Total revenues......................... 439.8 403.5 377.9
------- ------- -------
BENEFITS, LOSSES AND EXPENSES
Policy benefits, claims, losses and loss
adjustment expenses...................... 153.9 187.8 192.6
Policy acquisition expenses................ 64.6 2.8 49.9
Sales practice litigation.................. 21.0 -- --
Loss from cession of disability income
business................................. -- 53.9 --
Other operating expenses................... 104.1 101.3 86.6
------- ------- -------
Total benefits, losses and expenses.... 343.6 345.8 329.1
------- ------- -------
Income before federal income taxes............. 96.2 57.7 48.8
------- ------- -------
FEDERAL INCOME TAX EXPENSE (BENEFIT)
Current.................................... 22.1 13.9 26.9
Deferred................................... 11.8 7.1 (9.8)
------- ------- -------
Total federal income tax expense....... 33.9 21.0 17.1
------- ------- -------
Net income..................................... $ 62.3 $ 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) 1998 1997
-------------------------------------------------------- ---------- ----------
<S> <C> <C>
ASSETS
Investments:
Fixed maturities at fair value (amortized cost of
$1,284.6 and $1,340.5)............................ $ 1,330.4 $ 1,402.5
Equity securities at fair value (cost of $27.4 and
$34.4)............................................ 31.8 54.0
Mortgage loans...................................... 230.0 228.2
Real estate......................................... 14.5 12.0
Policy loans........................................ 151.5 140.1
Other long-term investments......................... 9.1 20.3
---------- ----------
Total investments............................... 1,767.3 1,857.1
---------- ----------
Cash and cash equivalents............................. 217.9 31.1
Accrued investment income............................. 33.5 34.2
Deferred policy acquisition costs..................... 950.5 765.3
Reinsurance receivables on paid and unpaid losses,
future policy benefits and unearned premiums........ 308.0 251.1
Other assets.......................................... 46.9 10.7
Separate account assets............................... 11,020.4 7,567.3
---------- ----------
Total assets.................................... $ 14,344.5 $ 10,516.8
---------- ----------
---------- ----------
LIABILITIES
Policy liabilities and accruals:
Future policy benefits.............................. $ 2,284.8 $ 2,097.3
Outstanding claims, losses and loss adjustment
expenses.......................................... 17.9 18.5
Unearned premiums................................... 2.7 1.8
Contractholder deposit funds and other policy
liabilities....................................... 38.1 32.5
---------- ----------
Total policy liabilities and accruals........... 2,343.5 2,150.1
---------- ----------
Expenses and taxes payable............................ 146.2 77.6
Reinsurance premiums payable.......................... 45.7 4.9
Deferred federal income taxes......................... 78.8 75.9
Separate account liabilities.......................... 11,020.4 7,567.3
---------- ----------
Total liabilities............................... 13,634.6 9,875.8
---------- ----------
Commitments and contingencies (Note 12)
SHAREHOLDER'S EQUITY
Common stock, $1,000 par value, 10,000 shares
authorized, 2,524 and 2,521 shares issued and
outstanding......................................... 2.5 2.5
Additional paid-in capital............................ 407.9 386.9
Accumulated other comprehensive income................ 24.1 38.5
Retained earnings..................................... 275.4 213.1
---------- ----------
Total shareholder's equity...................... 709.9 641.0
---------- ----------
Total liabilities and shareholder's equity...... $ 14,344.5 $ 10,516.8
---------- ----------
---------- ----------
</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) 1998 1997 1996
----------------------------------------------- -------- -------- --------
<S> <C> <C> <C>
COMMON STOCK................................... $ 2.5 $ 2.5 $ 2.5
-------- -------- --------
ADDITIONAL PAID-IN CAPITAL
Balance at beginning of period............. 386.9 346.3 324.3
Issuance of common stock................... 21.0 40.6 22.0
-------- -------- --------
Balance at end of period................... 407.9 386.9 346.3
-------- -------- --------
ACCUMULATED OTHER COMPREHENSIVE INCOME
Net unrealized appreciation on investments:
Balance at beginning of period............. 38.5 20.5 23.8
Appreciation (depreciation) during the
period:
Net (depreciation) appreciation on
available-for-sale securities........ (23.4) 27.0 (5.1)
Benefit (provision) for deferred
federal income taxes................. 9.0 (9.0) 1.8
-------- -------- --------
(14.4) 18.0 (3.3)
-------- -------- --------
Balance at end of period................... 24.1 38.5 20.5
-------- -------- --------
RETAINED EARNINGS
Balance at beginning of period............. 213.1 176.4 144.7
Net income................................. 62.3 36.7 31.7
-------- -------- --------
Balance at end of period................... 275.4 213.1 176.4
-------- -------- --------
Total shareholder's equity............. $ 709.9 $ 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 COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1998 1997 1996
-------------------------------------------- ------- ------- -------
<S> <C> <C> <C>
Net income.................................. $ 62.3 $ 36.7 $ 31.7
Other comprehensive income:
Net (depreciation) appreciation on
available-for-sale securities......... (23.4) 27.0 (5.1)
Benefit (provision) for deferred federal
income taxes.......................... 9.0 (9.0) 1.8
------- ------- -------
Other comprehensive income.......... (14.4) 18.0 (3.3)
------- ------- -------
Comprehensive income.................... 47.9 $ 54.7 $ 28.4
------- ------- -------
------- ------- -------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-4
<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) 1998 1997 1996
-------------------------------------------- -------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.............................. $ 62.3 $ 36.7 $ 31.7
Adjustments to reconcile net income to
net cash used in operating activities:
Net realized gains.................. (20.0) (2.9) 3.6
Net amortization and depreciation... (7.1) -- 3.5
Sales practice litigation expense... 21.0
Loss from cession of disability
income business................... -- 53.9 --
Deferred federal income taxes....... 11.8 7.1 (9.8)
Payment related to cession of
disability income business........ -- (207.0) --
Change in deferred acquisition
costs............................. (177.8) (181.3) (66.8)
Change in reinsurance premiums
payable........................... 40.8 3.9 (0.2)
Change in accrued investment
income............................ 0.7 3.5 1.2
Change in policy liabilities and
accruals, net..................... 193.1 (72.4) (39.9)
Change in reinsurance receivable.... (56.9) 22.1 (1.5)
Change in expenses and taxes
payable........................... 55.4 0.2 32.3
Separate account activity, net...... (0.5) 1.6 8.0
Other, net.......................... (28.0) (8.7) 2.3
-------- -------- --------
Net cash provided by (used in)
operating activities.......... 94.8 (343.3) (35.6)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from disposals and maturities
of available-for-sale fixed
maturities............................ 187.0 909.7 809.4
Proceeds from disposals of equity
securities............................ 53.3 2.4 1.5
Proceeds from disposals of other
investments........................... 22.7 23.7 17.4
Proceeds from mortgages matured or
collected............................. 60.1 62.9 34.0
Purchase of available-for-sale fixed
maturities............................ (136.0) (579.7) (795.8)
Purchase of equity securities........... (30.6) (3.2) (13.2)
Purchase of other investments........... (22.7) (9.0) (13.9)
Purchase of mortgages................... (58.9) (70.4) (22.3)
Other investing activities, net......... (3.9) -- (2.0)
-------- -------- --------
Net cash provided by investing
activities........................ 71.0 336.4 15.1
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of stock and
capital paid in....................... 21.0 19.2 22.0
-------- -------- --------
Net cash provided by financing
activities........................ 21.0 19.2 22.0
-------- -------- --------
Net change in cash and cash equivalents..... 186.8 12.3 1.5
Cash and cash equivalents, beginning of
period..................................... 31.1 18.8 17.3
-------- -------- --------
Cash and cash equivalents, end of period.... $ 217.9 $ 31.1 $ 18.8
-------- -------- --------
-------- -------- --------
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid........................... $ 0.6 $ -- $ 3.4
Income taxes paid....................... $ 36.2 $ 5.4 $ 16.5
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-5
<PAGE>
NOTES TO CONSOLIDATED 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, which was transferred from
SMAFCO effective November 30, 1997 and dissolved as a subsidiary, effective
November 30, 1998. Its results of operations are included for 11 months of 1998
and for the month of December, 1997.
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 the Company to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amount of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
B. VALUATION OF INVESTMENTS
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 re-evaluates such designation as of each balance sheet date.
Marketable equity securities and debt securities are classified as
available-for-sale. Available-for-sale securities are carried at fair value,
with the unrealized gains and losses, net of tax, reported in a separate
component of shareholder's equity. The amortized cost of debt securities is
adjusted for amortization of premiums and accretion of discounts to maturity.
Such amortization is included in investment income.
Mortgage loans on real estate are stated at unpaid principal balances, net of
unamortized discounts and reserves. Reserves on mortgage loans are based on
losses expected by the Company to be realized on transfers of mortgage loans to
real estate (upon foreclosure), on the disposition or settlement of mortgage
loans and on mortgage loans which the Company believes may not be collectible in
full. In establishing reserves, the Company considers, among other things, the
estimated fair value of the underlying collateral.
Fixed maturities and mortgage loans that are delinquent are placed on
non-accrual status, and thereafter interest income is recognized only when cash
payments are received.
Policy loans are carried principally at unpaid principal balances.
During 1997, the Company adopted to a plan to dispose of all real estate assets
by the end of 1998. As of December 31, 1998, there was 1 property remaining in
the Company's real estate portfolio, which is being actively marketed. As a
result of the Plan, real estate held by the Company and real estate joint
ventures were written down to the estimated fair value less cost of disposal.
Depreciation is not recorded on this asset while it is held for disposal.
F-6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Realized investment gains and losses, other than those related to separate
accounts for which the Company does not bear the investment risk, are reported
as a component of revenues based upon specific identification of the investment
assets sold. When an other-than-temporary impairment of the value of a specific
investment or a group of investments is determined, a realized investment loss
is recorded. Changes in the valuation allowance for mortgage loans are included
in realized investment gains or losses.
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, the Company believes it is more likely than not that all of these costs
will be realized. The amount of deferred policy acquisition costs considered
realizable, however, could be reduced in the near term if the estimates of gross
profits or total revenues discussed above are reduced. The amount of
amortization of deferred policy acquisition costs could be revised in the near
term if any of the estimates discussed above are revised.
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, disability income 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
F-7
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 3% to 6% for life
insurance and 3 1/2% to 9 1/2% for annuities. Mortality, morbidity and
withdrawal assumptions for all policies are based on the Company's own
experience and industry standards. Liabilities for universal life include
deposits received from customers and investment earnings on their fund balances,
less administrative charges. Universal life fund balances are also assessed
mortality and surrender charges.
Individual disability income 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 for individual life and disability income policies.
These estimates are continually reviewed and adjusted as necessary; such
adjustments are reflected in current operations.
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, the Company
believes that it is more likely than not that policy liabilities and accruals
will be sufficient to meet future obligations of policies in force. The amount
of liabilities and accruals, however, could be revised in the near term if the
estimates discussed above are revised.
H. PREMIUM AND FEE REVENUE AND RELATED EXPENSES
Premiums for individual life and individual annuity products, excluding
universal life and investment-related products, are considered revenue when due.
Individual disability income insurance premiums are recognized as revenue over
the related contract periods. The unexpired portion of these premiums is
recorded as unearned premiums. 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, with
mortality, administration and surrender charges assessed against the fund
values. Related benefit expenses include universal life benefit claims in excess
of fund values and net investment income credited to universal life fund values.
Certain policy charges that represent compensation for services to be provided
in future periods are deferred and amortized over the period benefited using the
same assumptions used to amortize capitalized acquisition costs.
I. FEDERAL INCOME TAXES
AFC and its domestic subsidiaries file a consolidated United States federal
income tax return. Entities included within the consolidated group are
segregated into either a life insurance or non-life insurance company subgroup.
The consolidation of these subgroups is subject to certain statutory
restrictions on the percentage of eligible non-life tax losses that can be
applied to offset life insurance company taxable income.
The Board of Directors has delegated to AFC management, the development and
maintenance of appropriate federal income tax allocation policies and
procedures, which are subject to written agreement between the
F-8
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
companies. The Federal income tax for all subsidiaries in the consolidated
return of AFC is calculated on a separate return basis. Any current tax
liability is paid to AFC. Tax benefits resulting from taxable operating losses
or credits of AFC's subsidiaries are not reimbursed to the subsidiary until such
losses or credits can be utilized by the subsidiary on a separate return basis.
Deferred income taxes are generally recognized when assets and liabilities have
different values for financial statement and tax reporting purposes, and for
other temporary taxable and deductible differences as defined by Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" (Statement
No. 109). These differences result primarily from policy reserves, policy
acquisition expenses, and unrealized appreciation or depreciation on
investments.
J. NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("Statement No. 133"), which establishes
accounting and reporting standards for derivative instruments. Statement No. 133
requires that an entity recognize all derivatives as either assets or
liabilities at fair value in the statement of financial position, and
establishes special accounting for the following three types of hedges; fair
value hedges, cash flow hedges, and hedges of foreign currency exposures of net
investment in foreign operations. This statement is effective for fiscal years
beginning after June 15, 1999. The Company is currently assessing the impact of
adoption of Statement No. 133.
In March 1998, the American Institute of Certified Public Accountants ("AICPA")
issued Statement of Position 98-1, "Accounting for the Cost of Computer Software
Developed or Obtained for Internal Use" ("SoP 98-1"). SoP 98-1 requires that
certain costs incurred in developing internal-use computer software be
capitalized and provides guidance for determining whether computer software is
to be considered for internal use. This statement is effective for fiscal years
beginning after December 15, 1998. In the second quarter, the Company adopted
SoP 98-1 effective January 1, 1998, resulting in an increase in pre-tax income
of $9.8 million through December 31, 1998. The adoption of SoP 98-1 did not have
a material effect on the results of operations or financial position for the
three months ended March 31, 1998.
In December 1997, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position 97-3, "Accounting by Insurance and Other
Enterprises for Insurance-Related Assessments" ("SoP 97-3"). SoP 97-3 provides
guidance when a liability should be recognized for guaranty fund and other
assessments and how to measure the liability. This statement allows for the
discounting of the liability if the amount and timing of the cash payments are
fixed and determinable. In addition, it provides criteria for when an asset may
be recognized for a portion or all of the assessment liability or paid
assessment that can be recovered through premium tax offsets or policy
surcharges. This statement is effective for fiscal years beginning after
December 15, 1998. The Company believes that the adoption of this statement will
not have a material effect on the results of operations or financial position.
In June 1997, the FASB issued Statement No. 131, "Disclosures About Segments of
an Enterprise and Related Information" ("Statement No. 131"). This statement
establishes standards for the way that public enterprises report information
about operating segments in annual financial statements and requires that
selected information about those operating segments be reported in interim
financial statements. This statement supersedes Statement No. 14, "Financial
Reporting for Segments of a Business Enterprise". Statement No. 131 requires
that all public enterprises report financial and descriptive information about
their reportable operating segments. Operating segments are defined as
components of an enterprise about which separate financial information is
available that is evaluated regularly by the chief operating decision maker in
deciding how to allocate resources and in assessing performance. This statement
is effective for fiscal years
F-9
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
beginning after December 15, 1997. AFLIAC consists of one segment, Allmerica
Financial Services, which underwrites and distributes variable annuities and
variable universal life via retail channels.
In June 1997, the FASB also issued Statement No. 130, "Reporting Comprehensive
Income" ("Statement No. 130"), 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 adopted Statement No. 130 for the first quarter of 1998,
which resulted primarily in reporting unrealized gains and losses on investments
in debt and equity securities in comprehensive income.
2. SIGNIFICANT TRANSACTIONS
Effective January 1, 1998, the Company entered into an agreement with a highly
rated reinsurer to reinsure the mortality risk on the universal life and
variable universal life blocks of business. The agreement does not have a
material effect on the results of operations or financial position of the
Company.
On April 14, 1997, the Company entered into an agreement in principle to cede
substantially all of the Company's individual disability income line of business
under a 100% coinsurance agreement with a highly rated reinsurer. The
coinsurance agreement became effective October 1, 1997. The transaction has
resulted in the recognition of a $53.9 million pre-tax loss in the first quarter
of 1997.
During 1998, 1997 and 1996 , SMAFCO contributed $21.0 million, $40.6 million and
$22.0 million, respectively, of additional paid-in capital to the Company. The
nature of the 1997 contribution was $19.2 million in cash and $21.4 million in
other assets including Somerset Square, Inc.
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 Statement No. 115.
The amortized cost and fair value of available-for-sale fixed maturities and
equity securities were as follows:
<TABLE>
<CAPTION>
1998
----------------------------------------------
GROSS GROSS
DECEMBER 31, AMORTIZED UNREALIZED UNREALIZED FAIR
(IN MILLIONS) COST (1) GAINS LOSSES VALUE
- ---------------------------------------- --------- ---------- ---------- --------
<S> <C> <C> <C> <C>
U.S. Treasury securities and U.S.
government and agency securities....... $ 5.8 $ 0.8 $-- $ 6.6
States and political subdivisions....... 2.7 0.2 -- 2.9
Foreign governments..................... 48.8 1.6 1.5 48.9
Corporate fixed maturities.............. 1,096.0 58.0 17.7 1,136.3
Mortgage-backed securities.............. 131.3 5.8 1.4 135.7
--------- ----- ----- --------
Total fixed maturities.................. $ 1,284.6 $66.4 $20.6 $1,330.4
--------- ----- ----- --------
--------- ----- ----- --------
Equity securities....................... $ 27.4 $ 8.9 $ 4.5 $ 31.8
--------- ----- ----- --------
--------- ----- ----- --------
</TABLE>
F-10
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<S> <C> <C> <C> <C>
1997
----------------------------------------------
<CAPTION>
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 $ 0.5 $-- $ 6.8
States and political subdivisions....... 2.8 0.2 -- 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.................. $ 1,340.5 $66.6 $ 4.6 $1,402.5
--------- ----- ----- --------
--------- ----- ----- --------
Equity securities....................... $ 34.4 $19.9 $ 0.3 $ 54.0
--------- ----- ----- --------
--------- ----- ----- --------
</TABLE>
(1) Amortized cost for fixed maturities and cost for equity securities.
In connection with AFLIAC's voluntary withdrawal of its license in New York,
AFLIAC agreed with the New York Department of Insurance to maintain, through a
custodial account in New York, a security deposit, the market value of which
will at all times equal 102% of all outstanding liabilities of AFLIAC for New
York policyholders, claimants and creditors. At December 31, 1998, the amortized
cost and market value of these assets on deposit in New York were $268.5 million
and $284.1 million, respectively. At December 31, 1997, the amortized cost and
market value of assets on deposit were $276.8 million and $291.7 million,
respectively. In addition, fixed maturities, excluding those securities on
deposit in New York, with an amortized cost of $4.2 million were on deposit with
various state and governmental authorities at December 31, 1998 and 1997.
There were no contractual fixed maturity investment commitments at December 31,
1998 and 1997, respectively.
The amortized cost and fair value by maturity periods for fixed maturities are
shown below. Actual maturities may differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without call
or prepayment penalties, or the Company may have the right to put or sell the
obligations back to the issuers. Mortgage backed securities are included in the
category representing their ultimate maturity.
<TABLE>
<CAPTION>
1998
--------------------
DECEMBER 31, AMORTIZED FAIR
(IN MILLIONS) COST VALUE
- ------------------------------------------------------------ --------- --------
<S> <C> <C>
Due in one year or less..................................... $ 97.7 $ 98.9
Due after one year through five years....................... 269.1 278.3
Due after five years through ten years...................... 638.2 658.5
Due after ten years......................................... 279.6 294.7
--------- --------
Total....................................................... $ 1,284.6 $1,330.4
--------- --------
--------- --------
</TABLE>
F-11
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The proceeds from voluntary sales of available-for-sale securities and the gross
realized gains and gross realized losses on those sales were as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, PROCEEDS FROM GROSS GROSS
(IN MILLIONS) VOLUNTARY SALES GAINS LOSSES
- ------------------------------------------------------------ --------------- ----- ------
<S> <C> <C> <C>
1998
Fixed maturities............................................ $ 60.0 $ 2.0 $ 2.0
Equity securities........................................... $ 52.6 $17.5 $ 0.9
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 YEARS ENDED DECEMBER 31, FIXED SECURITIES
(IN MILLIONS) MATURITIES AND OTHER (1) TOTAL
- ------------------------------------------------------------ ---------- ------------- -------
<S> <C> <C> <C>
1998
Net appreciation, beginning of year......................... $ 22.1 $ 16.4 $ 38.5
---------- ------ -------
Net depreciation on available-for-sale securities........... (16.2) (14.3) (30.5)
Net appreciation from the effect on deferred policy
acquisition costs and on policy liabilities................ 7.1 -- 7.1
Benefit from deferred federal income taxes.................. 3.2 5.8 9.0
---------- ------ -------
(5.9) (8.5) (14.4)
---------- ------ -------
Net appreciation, end of year............................... $ 16.2 $ 7.9 $ 24.1
---------- ------ -------
---------- ------ -------
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
---------- ------ -------
---------- ------ -------
1996
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>
F-12
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(1) Includes net appreciation on other investments of $.9 million, $1.3 million,
and $2.2 million in 1998, 1997, and 1996, respectively.
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) 1998 1997
- ------------------------------------------------------------ ------- -------
<S> <C> <C>
Mortgage loans.............................................. $ 230.0 $ 228.2
Real estate held for sale................................... 14.5 12.0
------- -------
Total mortgage loans and real estate........................ $ 244.5 $ 240.2
------- -------
------- -------
</TABLE>
Reserves for mortgage loans were $3.3 million and $9.4 million at December 31,
1998 and 1997, respectively.
During 1997, the Company committed to a plan to dispose of all real estate
assets by the end of 1998. At December 31, 1998, there was 1 property remaining
in the Company's real estate portfolio, which is being actively marketed. As a
result of the Plan, during 1997, 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 was not recorded on these assets while they were held
for disposal.
There were no non-cash investing activities, including real estate acquired
through foreclosure of mortgage loans, in 1998 and 1997. During 1996, non-cash
investing activities included real estate acquired through foreclosure of
mortgage loans, which had a fair value of $0.9 million.
There were no contractual commitments to extend credit under commercial mortgage
loan agreements at December 31, 1998. These commitments generally expire within
one year.
Mortgage loans and real estate investments comprised the following property
types and geographic regions:
<TABLE>
<CAPTION>
DECEMBER 31,
(IN MILLIONS) 1998 1997
- ------------------------------------------------------------ ------ ------
<S> <C> <C>
Property type:
Office building........................................... $129.2 $101.7
Residential............................................... 18.9 19.3
Retail.................................................... 37.4 42.2
Industrial/warehouse...................................... 59.2 61.9
Other..................................................... 3.1 24.5
Valuation allowances...................................... (3.3) (9.4)
------ ------
Total....................................................... $244.5 $240.2
------ ------
------ ------
</TABLE>
F-13
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
(IN MILLIONS) 1998 1997
- ------------------------------------------------------------ ------ ------
Geographic region:
<S> <C> <C>
South Atlantic............................................ $ 55.5 $ 68.7
Pacific................................................... 80.0 56.6
East North Central........................................ 41.4 61.4
Middle Atlantic........................................... 22.5 29.8
West South Central........................................ 6.7 6.9
New England............................................... 26.9 12.4
Other..................................................... 14.8 13.8
Valuation allowances...................................... (3.3) (9.4)
------ ------
Total....................................................... $244.5 $240.2
------ ------
------ ------
</TABLE>
At December 31, 1998, scheduled mortgage loan maturities were as follows: 1999
- -- $24.8 million; 2000 -- $43.5 million; 2001 -- $6.6 million; 2002 -- $11.5
million; 2003 -- $0.6 million; and $143.0 million thereafter. Actual maturities
could differ from contractual maturities because borrowers may have the right to
prepay obligations with or without prepayment penalties and loans may be
refinanced. During 1998, the Company did not refinance any mortgage loans based
on terms which differed from those granted to new borrowers.
C. INVESTMENT VALUATION ALLOWANCES
Investment valuation allowances, which have been deducted in arriving at
investment carrying values as presented in the balance sheet and changes thereto
are shown below.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, BALANCE AT BALANCE AT
(IN MILLIONS) JANUARY 1 PROVISIONS WRITE-OFFS DECEMBER 31
- ------------------------------------------------------------ ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
1998
Mortgage loans.............................................. $ 9.4 $(4.5) $1.6 $ 3.3
----- ----- --- -----
----- ----- --- -----
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>
Provisions on mortgages during 1998 reflect the release of redundant reserves.
Write-offs of $5.4 million to the investment valuation allowance related to real
estate in 1997 primarily reflect write downs to the estimated fair value less
cost to sell pursuant to the aforementioned 1997 plan of disposal.
The carrying value of impaired loans was $15.3 million and $20.6 million, with
related reserves of $1.5 million and $7.1 million as of December 31, 1998 and
1997, respectively. All impaired loans were reserved as of December 31, 1998 and
1997.
The average carrying value of impaired loans was $17.0 million, $19.8 million
and $26.3 million, with related interest income while such loans were impaired
of $2.0 million, $2.2 million and $3.4 million as of December 31, 1998, 1997 and
1996, respectively.
F-14
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
D. OTHER
At December 31, 1998, 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 YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1998 1997 1996
- ------------------------------------------------------------ ------ ------ ------
<S> <C> <C> <C>
Fixed maturities............................................ $107.7 $130.0 $137.2
Mortgage loans.............................................. 25.5 20.4 22.0
Equity securities........................................... 0.3 1.3 0.7
Policy loans................................................ 11.7 10.8 10.2
Real estate................................................. 3.3 3.9 6.2
Other long-term investments................................. 1.5 1.0 0.8
Short-term investments...................................... 4.2 1.4 1.4
------ ------ ------
Gross investment income..................................... 154.2 168.8 178.5
Less investment expenses.................................... (2.9) (4.6) (6.8)
------ ------ ------
Net investment income....................................... $151.3 $164.2 $171.7
------ ------ ------
------ ------ ------
</TABLE>
There were no mortgage loans or fixed maturities on non-accrual status at
December 31, 1998. The effect of non-accruals, compared with amounts that would
have been recognized in accordance with the original terms of the investment,
had no impact in 1998 and 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 $12.6 million, $21.1 million and $25.4 million at December 31,
1998, 1997 and 1996, respectively. Interest income on restructured mortgage
loans that would have been recorded in accordance with the original terms of
such loans amounted to $1.4 million, $1.9 million and $3.6 million in 1998,
1997, and 1996, respectively. Actual interest income on these loans included in
net investment income aggregated $1.8 million, $2.1 million and $2.2 million in
1998, 1997, and 1996, respectively.
There were no fixed maturities or mortgage loans which, were non-income
producing for the twelve months ended December 31, 1998.
B. REALIZED INVESTMENT GAINS AND LOSSES
Realized gains (losses) on investments were as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1998 1997 1996
- ------------------------------------------------------------ ------ ------ ------
<S> <C> <C> <C>
Fixed maturities............................................ $ (6.1) $ 3.0 $ (3.3)
Mortgage loans.............................................. 8.0 (1.1) (3.2)
Equity securities........................................... 15.7 0.5 0.3
Real estate................................................. 2.4 (1.5) 2.5
Other....................................................... -- 2.0 0.1
------ ------ ------
Net realized investment gains (losses)...................... $ 20.0 $ 2.9 $ (3.6)
------ ------ ------
------ ------ ------
</TABLE>
F-15
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
C. OTHER COMPREHENSIVE INCOME RECONCILIATION
The following table provides a reconciliation of gross unrealized gains to the
net balance shown in the Statement of Comprehensive income:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1998 1997 1996
- ------------------------------------------------------------ ------- ------- -------
<S> <C> <C> <C>
Unrealized gains on securities:
Unrealized holding gains arising during period (net of taxes
of $(5.6) million, $10.2 million and $(2.9) million in
1998, 1997 and 1996 respectively).......................... $ (8.2) $ 20.3 $ (5.3)
Less: reclassification adjustment for gains included in net
income (net of taxes of $3.4 million, $1.2 million and
$(1.0) million in 1998, 1997 and 1996 respectively)........ 6.2 2.3 (2.0)
------- ------- -------
Other comprehensive income.................................. $ (14.4) $ 18.0 $ (3.3)
------- ------- -------
------- ------- -------
</TABLE>
5. FAIR VALUE DISCLOSURES OF FINANCIAL INSTRUMENTS
Statement No. 107, "Disclosures about Fair Value of Financial Instruments"
("Statement No, 107"), 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 is
limited to the lesser of the present value of the cash flows or book value.
F-16
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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>
1998 1997
--------------------- ---------------------
DECEMBER 31, CARRYING FAIR CARRYING FAIR
(IN MILLIONS) VALUE VALUE VALUE VALUE
- ------------------------------------------------------------ --------- --------- --------- ---------
<S> <C> <C> <C> <C>
FINANCIAL ASSETS
Cash and cash equivalents................................. $ 217.9 $ 217.9 $ 31.1 $ 31.1
Fixed maturities.......................................... 1,330.4 1,330.4 1,402.5 1,402.5
Equity securities......................................... 31.8 31.8 54.0 54.0
Mortgage loans............................................ 230.0 241.9 228.2 239.8
Policy loans.............................................. 151.5 151.5 140.1 140.1
--------- --------- --------- ---------
$ 1,961.6 $ 1,973.5 $ 1,855.9 $ 1,867.5
--------- --------- --------- ---------
--------- --------- --------- ---------
FINANCIAL LIABILITIES
Individual fixed annuity contracts........................ $ 1,069.4 $ 1,034.6 $ 876.0 $ 850.6
Supplemental contracts without life Contingencies......... 16.6 16.6 15.3 15.3
--------- --------- --------- ---------
$ 1,086.0 $ 1,051.2 $ 891.3 $ 865.9
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
6. FEDERAL INCOME TAXES
Provisions for federal income taxes have been calculated in accordance with the
provisions of Statement No. 109. A summary of the federal income tax expense
(benefit) in the statement of income is shown below:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1998 1997 1996
- ------------------------------------------------------------ ----- ----- -----
<S> <C> <C> <C>
Federal income tax expense (benefit)
Current................................................... $22.1 $13.9 $26.9
Deferred.................................................. 11.8 7.1 (9.8)
----- ----- -----
Total....................................................... $33.9 $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.
F-17
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The deferred tax liabilities are comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
(IN MILLIONS) 1998 1997
- ------------------------------------------------------------ -------- --------
<S> <C> <C>
Deferred tax (assets) liabilities
Policy reserves........................................... $ (205.1) $ (175.8)
Deferred acquisition costs................................ 278.8 226.4
Investments, net.......................................... 12.5 27.0
Sales practice litigation................................. (7.4) --
Bad debt reserve.......................................... (0.4) (2.0)
Other, net................................................ 0.4 0.3
-------- --------
Deferred tax liability, net................................. $ 78.8 $ 75.9
-------- --------
-------- --------
</TABLE>
Gross deferred income tax liabilities totaled $291.7 million and $253.7 million
at December 31, 1998 and 1997, respectively. Gross deferred income tax assets
totaled $212.9 million and $177.8 at December 31, 1998 and 1997, respectively.
The Company believes, based on its recent earnings history and its future
expectations, that the Company's taxable income in future years will be
sufficient to realize all deferred tax assets. In determining the adequacy of
future income, the Company considered the future reversal of its existing
temporary differences and available tax planning strategies that could be
implemented, if necessary.
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 consolidated group's federal
income tax returns through 1994. The Company has appealed certain adjustments
proposed by the IRS with respect to the consolidated group's federal income tax
returns for 1992, 1993, and 1994. Also, certain adjustments proposed by the IRS
with respect to FAFLIC/AFLIAC's federal income tax returns for 1982 and 1983
remain unresolved. If upheld, these adjustments would result in additional
payments; however, the Company will vigorously defend its position with respect
to these adjustments. In the Company's opinion, adequate tax liabilities have
been established for all years. However, the amount of these tax liabilities
could be revised in the near term if estimates of the Company's ultimate
liability are revised.
7. RELATED PARTY TRANSACTIONS
The Company has no employees of its own, but has agreements under which FAFLIC
provides management, space and other services, including accounting, electronic
data processing, human resources, legal and other staff functions. Charges for
these services are based on full cost including all direct and indirect overhead
costs, and amounted to $145.4 million and $124.1 million in 1998 and 1997. The
net amounts payable to FAFLIC and affiliates for accrued expenses and various
other liabilities and receivables were $16.4 million and $15.0 million at
December 31, 1998 and 1997, respectively.
8. DIVIDEND RESTRICTIONS
Delaware has enacted laws governing the payment of dividends to stockholders by
insurers. These laws affect the dividend paying ability of the Company.
Pursuant to Delaware's statute, the maximum amount of dividends and other
distributions that an insurer may pay in any twelve month period, without the
prior approval of the Delaware Commissioner of Insurance, is limited to the
greater of (i) 10% of its policyholders' surplus as of the preceding December 31
or (ii) the individual company's statutory net gain from operations for the
preceding calendar year (if such insurer is a
F-18
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
life company) or its net income (not including realized capital gains) for the
preceding calendar year (if such insurer is not a life company). Any dividends
to be paid by an insurer, whether or not in excess of the aforementioned
threshold, from a source other than statutory earned surplus would also require
the prior approval of the Delaware Commissioner of Insurance.
No dividends were declared by the Company during 1998, 1997 and 1996. During
1999, AFLIAC could pay dividends of $26.1 million to FAFLIC without prior
approval.
9. REINSURANCE
In the normal course of business, the Company seeks to reduce the loss that may
arise from events that cause unfavorable underwriting results by reinsuring
certain levels of risk in various areas of exposure with other insurance
enterprises or reinsurers. Reinsurance transactions are accounted for in
accordance with the provisions of Statement No. 113, "Accounting and Reporting
for Reinsurance of Short-Duration and Long-Duration Contracts" ("Statement No.
113").
The Company reinsures 100% of its traditional individual life and certain blocks
of its universal life business, substantially all of its disability income
business, and effective January 1, 1998, the mortality risk on the variable
universal life and remaining universal life blocks of business in-force at
December 31, 1997.
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.
Amounts recoverable from reinsurers at December 31, 1998 and 1997 for the
disability income business were $230.8 million and $216.1 million, respectively,
traditional life were $11.4 million and $15.2 million, respectively, and
universal and variable universal life were $65.8 million and $19.8 million,
respectively.
The effects of reinsurance were as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1998 1997 1996
- ------------------------------------------------------------ ------ ------ ------
<S> <C> <C> <C>
Insurance premiums:
Direct.................................................... $ 45.5 $ 48.8 $ 53.3
Assumed................................................... -- 2.6 3.1
Ceded..................................................... (45.0) (28.6) (23.7)
------ ------ ------
Net premiums................................................ $ 0.5 $ 22.8 $ 32.7
------ ------ ------
------ ------ ------
</TABLE>
F-19
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1998 1997 1996
- ------------------------------------------------------------ ------ ------ ------
Insurance and other individual policy benefits, claims,
losses and loss adjustment expenses:
<S> <C> <C> <C>
Direct.................................................... $204.0 $226.0 $206.4
Assumed................................................... -- 4.2 4.5
Ceded..................................................... (50.1) (42.4) (18.3)
------ ------ ------
Net policy benefits, claims, losses and loss adjustment
expenses................................................... $153.9 $187.8 $192.6
------ ------ ------
------ ------ ------
</TABLE>
10. DEFERRED POLICY ACQUISITION COSTS
The following reflects the changes to the deferred policy acquisition asset:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1998 1997 1996
- ------------------------------------------------------------ ------ ------ ------
<S> <C> <C> <C>
Balance at beginning of year................................ $765.3 $632.7 $555.7
Acquisition expenses deferred............................. 242.4 184.2 116.6
Amortized to expense during the year...................... (64.6) (53.1) (49.9)
Adjustment to equity during the year...................... 7.4 (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...................................... $950.5 $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.
11. LIABILITIES FOR INDIVIDUAL DISABILITY INCOME 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 recorded in
results of operations in the year such changes are determined to be needed.
The liability for future policy benefits and outstanding claims, losses and loss
adjustment expenses related to the Company's disability income business was
$233.3 million and $219.9 million at December 31, 1998 and 1997. Due to the
reinsurance agreement whereby the Company has ceded substantially all of its
disability income business to a highly rated reinsurer, the Company 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.
12. CONTINGENCIES
REGULATORY AND INDUSTRY DEVELOPMENTS
Unfavorable economic conditions may contribute to an increase in the number of
insurance companies that are under regulatory supervision. This may result in an
increase in mandatory assessments by state guaranty funds, or voluntary payments
by solvent insurance companies to cover losses to policyholders of insolvent or
rehabilitated companies. Mandatory assessments, which are subject to statutory
limits, can be partially
F-20
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
recovered through a reduction in future premium taxes in some states. The
Company is not able to reasonably estimate the potential effect on it of any
such future assessments or voluntary payments.
LITIGATION
In July 1997, a lawsuit on behalf of a putative class was instituted in
Louisiana against AFC and certain of its subsidiaries including AFLIAC, 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 filed a substantially similar action in Federal District Court in Worcester,
Massachusetts. In early November 1998, AFC and the plaintiffs entered into a
settlement agreement, to which the court granted preliminary approval on
December 4, 1998. A hearing was held on March 19, 1999 to consider final
approval of the settlement agreement. A decision by the court is expected to be
rendered in the near future. Accordingly, AFLIAC recognized a $21.0 million
pre-tax expense during the third quarter of 1998 related to this litigation.
Although the Company believes that this expense reflects appropriate recognition
of its obligation under the settlement, this estimate assumes the availability
of insurance coverage for certain claims, and the estimate may be revised based
on the amount of reimbursement actually tendered by AFC's insurance carriers, if
any, and based on changes in the Company's estimate of the ultimate cost of the
benefits to be provided to members of the class.
The Company has been named a defendant in various legal proceedings arising in
the normal course of business. In the Company's opinion of, 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.
13. STATUTORY FINANCIAL INFORMATION
The Company is required to file annual statements with state regulatory
authorities prepared on an accounting basis prescribed or permitted by such
authorities (statutory basis). Statutory surplus differs from shareholder's
equity reported in accordance with generally accepted accounting principles
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) 1998 1997 1996
- ------------------------------------------------------------ ------ ------ ------
<S> <C> <C> <C>
Statutory net income........................................ $ (8.2) $ 31.5 $ 5.4
Statutory shareholder's surplus............................. $309.7 $307.1 $234.0
</TABLE>
F-21
<PAGE>
FULCRUM SPVUL
STATEMENTS OF ASSETS AND LIABILITIES
UNAUDITED
DECEMBER 31, 1998
<TABLE>
<CAPTION>
INTERNATIONAL STRATEGIC
VALUE GROWTH GROWTH INCOME
----- ------ ------------- ---------
<S> <C> <C> <C> <C>
ASSETS
Investment in shares of Allmerica Investment
Trust...................................... $-- $-- $-- $--
Investments in shares of The Fulcrum
Trust...................................... -- -- -- --
----- ------ --- ---
Total assets.............................. -- -- -- --
LIABILITIES: -- -- -- --
----- ------ --- ---
Net assets................................ $-- $-- $-- $--
----- ------ --- ---
----- ------ --- ---
<CAPTION>
AIT
GLOBAL MONEY
INTERACTIVE/TELECOMM MARKET
-------------------- ------------
<S> <C> <C>
ASSETS
Investment in shares of Allmerica Investment
Trust...................................... $-- $--
Investments in shares of The Fulcrum
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
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 policies 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 variable life policies. Each
Sub-Account invests exclusively in a corresponding portfolio of The Fulcrum
Trust (formerly The Palladian(sm) Trust) or the Allmerica Investment Trust (AIT)
managed by Allmerica Financial Investment Management Services, Inc. (AFIMS)
(successor to Allmerica Investment management Company, Inc.), a wholly-owned
subsidiary of First Allmerica. The Fulcrum 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 Funds. Net realized gains and
losses on securities sold are determined using the average cost method.
Dividends and capital gain distributions are recorded on the ex-dividend date
and are reinvested in additional shares of the respective investment portfolio
of the Funds at net asset value.
FEDERAL INCOME TAXES -- The Company is taxed as a "life insurance company"
under Subchapter L of the 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 will be charged against the
Variable Account.
NOTE 3 -- INVESTMENTS
There were no investment purchases or sales for the period ended December
31, 1998.
NOTE 4 -- RELATED PARTY TRANSACTIONS
On the date of issue and each monthly payment date thereafter, a monthly
charge is deducted from the policy value to compensate the Company for the cost
of insurance, which varies by policy, administrative charges, distribution
charges and the cost of any additional benefits provided by rider. The
policyowner may instruct the Company to deduct this monthly charge from a
specific Sub-Account, but if not so specified, it will be deducted on a pro-rata
basis of allocation which is the same proportion that the policy value in the
General Account of the Company and in each Sub-Account bear to the total policy
value.
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 may be increased or decreased by
SA-2
<PAGE>
FULCRUM VARIABLE LIFE SEPARATE ACCOUNT
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 4 -- RELATED PARTY TRANSACTIONS (CONTINUED)
the Board of Directors of the Company, subject to compliance with applicable
state and federal requirements, but the total charge may not exceed 0.90% per
annum. This charge is deducted from the daily value of each Sub-Account and is
paid to the Company on a monthly basis.
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
policies. Commissions are paid by the Company to registered representatives of
Allmerica Investments and to certain independent broker-dealers. The current
series of policies have a contingent deferred sales charge and no deduction is
made for sales charges at the time of the sale.
SA-3
<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.
(3) Not Applicable.
(4) Not Applicable.
(5) Amended Specifications Page was previously filed on May 15, 1998
in Post-Effective Amendment No. 1, and is incorporated by
reference herein. 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 was
previously filed on April 30, 1998 in Post-Effective
Amendment No. 1, and is incorporated by reference herein.
(b) Participation Agreement with The Palladian Trust was
previously filed on April 30, 1998 in Post-Effective
Amendment No. 1, and is incorporated by reference herein.
<PAGE>
(9) Directors' Power of Attorney is filed herewith.
(10) Amended Application Form was previously filed on May 15, 1998 in
Post-Effective Amendment No. 1, and is incorporated by reference
herein. Application Form was previously filed on April 30, 1998
in Post-Effective Amendment No. 1, and is incorporated by
reference herein.
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.
9. Directors' Power of Attorney is filed herewith.
10. Wholesaling Agreement was previously filed on 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 of the
requirements for effectiveness of this Post-Effective Amendment to the
Registration Statement pursuant to Rule 485(b) under the Securities Act of 1933
and has duly caused this Post-Effective Amendment to the Registration Statement
to be signed on its behalf by the undersigned, thereto duly authorized, in the
City of Worcester, and Commonwealth of Massachusetts, on the 2nd day of April,
1999.
FULCRUM 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 Post-Effective
Amendment to the Registration Statement has been signed below by the following
persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signatures Title Date
- ---------- ----- ----
<S> <C> <C>
/s/ Warren E. Barnes Vice President and Corporate Controller April 2, 1999
Warren E. Barnes
/s/ Edward J. Parry III Director, Vice President, Chief Financial
Edward J. Parry III Officer and Treasurer April 2, 1999
/s/ Richard M. Reilly Director, President and
Richard M. Reilly Chief Executive Officer April 2, 1999
John F. O'Brien* Director and Chairman of the Board April 2, 1999
Bruce C. Anderson* Director April 2, 1999
Robert E. Bruce* Director and Chief Information Officer April 2, 1999
John P. Kavanaugh* Director, Vice President and April 2, 1999
Chief Investment Officer
John F. Kelly* Director, Vice President and April 2, 1999
General Counsel
J. Barry May Director April 2, 1999
James R. McAuliffe* Director April 2, 1999
Robert P. Restrepo, Jr.* Director April 2, 1999
Eric A. Simonsen* Director and Vice President April 2, 1999
Phillip E. Soule* Director April 2, 1999
</TABLE>
*Sheila B. St. Hilaire, by signing her name hereto, does hereby sign this
document on behalf of each of the above-named Directors and Officers of the
Registrant pursuant to the Power of Attorney dated April 1, 1999 duly executed
by such persons.
/s/ Sheila B. St. Hilaire
- ----------------------------------------
Sheila B. St. Hilaire, Attorney-in-Fact
<PAGE>
FORM S-6 EXHIBIT TABLE
Exhibit 1(9) Directors' Power of Attorney
Exhibit 3 Opinion of Counsel
Exhibit 6 Actuarial Consent
Exhibit 8 Consent of Independent Accountants
<PAGE>
POWER OF ATTORNEY
We, the undersigned, hereby severally constitute and appoint Richard M. Reilly,
John F. Kelly, Joseph W. MacDougall, Jr., and Sheila B. St. Hilaire, and each of
them singly, our true and lawful attorneys, with full power to them and each of
them, to sign for us, and in our names and in any and all capacities, any and
all amendments, including post-effective amendments, to the Registration
Statements on Form S-6 of VEL Account, VEL II Account, VEL Account III, Group
VEL Account, Allmerica Select Separate Account II, Allmerica Select Separate
Account III, Inheiritage Account and Fulcrum Variable Life Separate Account of
Allmerica Financial Life Insurance and Annuity Company, and to file the same
with all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys and each of
them, acting alone, full power and authority to do and perform each and every
act and thing requisite or necessary to be done in the premises, as fully to all
intents and purposes as he or she might or could do in person, hereby ratifying
and confirming all that said attorneys or any of them may lawfully do or cause
to be done by virtue hereof. Witness our hands on the date set forth below.
Signature Title Date
- --------- ----- ----
/s/ John F. O'Brien Director and Chairman of the Board 4/1/99
- ------------------------------ ------
John F. O'Brien
/s/ Bruce C. Anderson Director 4/1/99
- ------------------------------ ------
Bruce C. Anderson
/s/ Robert E. Bruce Director and Chief Information 4/1/99
- ------------------------------ Officer ------
Robert E. Bruce
/s/ John P. Kavanaugh Director, Vice President and 4/1/99
- ------------------------------ Chief Investment Officer ------
John P. Kavanaugh
/s/ John F. Kelly Director, Vice President and 4/1/99
- ------------------------------ General Counsel ------
John F. Kelly
/s/ J. Barry May Director 4/1/99
- ------------------------------ ------
J. Barry May
/s/ James R. McAuliffe Director 4/1/99
- ------------------------------ ------
James R. McAuliffe
/s/ Edward J. Parry, III Director, Vice President, Chief 4/1/99
- ------------------------------ Financial Officer and Treasurer ------
Edward J. Parry, III
/s/ Richard M. Reilly Director, President and 4/1/99
- ------------------------------ Chief Executive Officer ------
Richard M. Reilly
/s/ Robert P. Restrepo, Jr. Director 4/1/99
- ------------------------------ ------
Robert P. Restrepo, Jr.
/s/ Eric A. Simonsen
- ------------------------------ Director and Vice President 4/1/99
Eric A. Simonsen ------
/s/ Phillip E. Soule Director 4/1/99
- ------------------------------ ------
Phillip E. Soule
<PAGE>
April 1, 1999
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 Assistant Vice President and 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 Post-Effective
Amendment to the Registration Statement and upon compliance with
applicable local law, will be legal and binding obligations of the
Company in accordance with their terms and when sold will be legally
issued, fully paid and non-assessable.
In arriving at the foregoing opinion, I have made such examination of law and
examined such records and other documents as in my judgment are necessary or
appropriate.
I hereby consent to the filing of this opinion as an exhibit to this
Post-Effective Amendment to the Registration Statement 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 1, 1999
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 payment variable life
insurance policies ("Policies") allocated to the Fulcrum Variable Life Separate
Account under the Securities Act of 1933. The Prospectus included in this
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 illustrations 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 55 or a person
age 65 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/ Kevin G. Finneran
Kevin G. Finneran, ASA, MAAA
Assistant Vice President and Actuary
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Post-Effective Amendment No. 3 to the Registration Statement of Fulcrum
Variable Life Separate Account of Allmerica Financial Life Insurance and
Annuity Company on Form S-6 of our report dated February 2, 1999, except for
paragraph 2 of Note 12, which is as of March 19, 1999, 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/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 22, 1999