<PAGE>
File Nos. 333-78245
811-6632
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-effective Amendment No. 2
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 28
ALLMERICA SELECT SEPARATE ACCOUNT OF
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(Exact Name of Registrant)
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(Name of Depositor)
440 Lincoln Street
Worcester, MA 01653
(Address of Depositor's Principal Executive Offices)
(508) 855-1000
(Depositor's Telephone Number, including Area Code)
Mary Eldridge, Secretary
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) of Rule 485
___ on (date) pursuant to paragraph (b) of Rule 485
___ 60 days after filing pursuant to paragraph (a) (1) of Rule 485
___ on (date) pursuant to paragraph (a) (1) of Rule 485
___ this post-effective amendment designates a new effective
date for a previously filed post-effective amendment
VARIABLE ANNUITY POLICIES
Pursuant to Reg. Section 270.24f-2 of the Investment Company Act of 1940
("1940 Act"), Registrant hereby declares that an indefinite amount of its
securities is being registered under the Securities Act of 1933 ("1933 Act").
No filing fee is submitted as a filing fee is not required for this type of
filing. Registrant will file its Notice pursuant to Rule 24f-2 for its fiscal
year ending December 31, 1999 on or before March 1, 2000.
Registrant hereby amends this Registration Statement on such date or dates as
may be necessary to delay its effective date until Registrant shall file a
futher amendment which specifically states that this Registration Statement
shall become effective in accordance with section 8(a) of the Securities Act
of 1933 or until this Registration Statement shall become effective on such
date or dates as the Commission, acting pursuant to said section 8(a), may
determine.
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CROSS REFERENCE SHEET SHOWING LOCATION IN PROSPECTUS OF
ITEMS CALLED FOR BY FORM N-4
<TABLE>
<CAPTION>
FORM N-4 ITEM NO. CAPTION IN PROSPECTUS
- ----------------- ---------------------
<S> <C>
1......................... Cover Page
2......................... Special Terms
3......................... Summary of Fees and Expenses; Summary of Contract Features
4......................... Condensed Financial Information; Performance Information
5......................... Description of the Company, the Variable Account,
and The Underlying Funds
6......................... Charges and Deductions
7......................... Description of the Contract -- Accumulation Phase;
Annuitization -- The Payout Phase
8......................... Annuitization -- The Payout Phase
9......................... Description of the Contract -- Accumulation Phase,
G. Death Benefit
10........................ Payments; Computation of Values; Distribution
11........................ Surrender and Withdrawals; Surrender Charge;
Charges and Deductions; Withdrawal Without Surrender Charge;
Texas Optional Retirement Program
12........................ Federal Tax Considerations
13........................ Legal Matters
14........................ Statement of Additional Information - Table of Contents
</TABLE>
<TABLE>
<CAPTION>
FORM N-4 ITEM NO. CAPTION IN STATEMENT OF ADDITIONAL INFORMATION
- ----------------- ----------------------------------------------
<S> <C>
15........................ Cover Page
16........................ Table of Contents
17........................ General Information and History
18........................ Services
19........................ Underwriters
21........................ Performance Information
22........................ Annuity Benefit Payments
23........................ Financial Statements
</TABLE>
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ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
WORCESTER, MASSACHUSETTS
ALLMERICA SELECT SEPARATE ACCOUNT
PLEASE READ THIS This Prospectus provides important information about
PROSPECTUS CAREFULLY the Allmerica Select Reward variable annuity contract
BEFORE INVESTING AND issued by Allmerica Financial Life Insurance and
KEEP IT FOR FUTURE Annuity Company in all jurisdictions except New York.
REFERENCE. The contract is a flexible payment tax-deferred
combination variable and fixed annuity offered on
both a group and individual basis.
Allmerica Select Separate Account is subdivided into
Sub-Accounts, each investing exclusively in shares of
one of the following funds:
<TABLE>
<CAPTION>
FUND INVESTMENT ADVISER
-------------------------------------------------- --------------------------------------------------
<C> <S> <C>
ANNUITIES INVOLVE Select Emerging Markets Fund Schroder Investment Management North America Inc.
RISKS INCLUDING Select International Equity Fund Bank of Ireland Asset Management (U.S.) Limited
POSSIBLE LOSS OF T. Rowe Price International Stock Portfolio Rowe Price-Fleming International, Inc.
PRINCIPAL. Select Aggressive Growth Fund Nicholas-Applegate Capital Management, L.P
Select Capital Appreciation Fund T. Rowe Price Associates, Inc.
Select Value Opportunity Fund Cramer Rosenthal McGlynn, LLC
Alliance Premier Growth Portfolio Alliance Capital Management L.P.
Select Strategic Growth Fund Cambiar Investors, Inc.
Fidelity VIP Growth Portfolio Fidelity Management & Research Company
Select Growth and Income Fund J. P. Morgan Investment Management Inc.
Fidelity VIP Equity-Income Portfolio Fidelity Management & Research Company
Fidelity VIP High Income Portfolio Fidelity Management & Research Company
Select Income Fund Standish, Ayer & Wood, Inc.
Money Market Fund Allmerica Asset Management, Inc.
</TABLE>
The Fixed Account is part of the Company's General
Account and pays an interest rate guaranteed for one
year from the time a payment is received. The
Guarantee Period Accounts offer fixed rates of
interest for specified periods. A Market Value
Adjustment is applied to payments removed from a
THIS ANNUITY IS Guarantee Period Account before the end of the
NOT: specified period. The Market Value Adjustment may be
- A BANK DEPOSIT OR positive or negative. Payments allocated to a
OBLIGATION; Guarantee Period Account are held in the Company's
- FEDERALLY INSURED; Separate Account GPA (except in California where they
- ENDORSED BY ANY are allocated to the General Account).
BANK OR A Statement of Additional Information dated
GOVERNMENTAL _________, 1999 containing more information about
AGENCY. this annuity is on file with the Securities and
Exchange Commission and is incorporated by reference
into this Prospectus. A copy may be obtained free of
charge by calling Allmerica Select Customer Service
at 1-800-366-1492. The Table of Contents of the
Statement of Additional Information is listed on page
3 of this Prospectus.
This Prospectus and the Statement of Additional
Information can also be obtained from the Securities
and Exchange Commission's website
(http://www.sec.gov).
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT
APPROVED OR DISAPPROVED THESE SECURITIES OR
DETERMINED THAT THE INFORMATION IS TRUTHFUL OR
COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
WORCESTER, MASSACHUSETTS
DATED , 1999
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
SPECIAL TERMS........................................................................... 4
SUMMARY OF FEES AND EXPENSES............................................................ 6
SUMMARY OF CONTRACT FEATURES............................................................ 11
DESCRIPTION OF THE COMPANY, THE VARIABLE ACCOUNT, AND THE UNDERLYING FUNDS.............. 17
INVESTMENT OBJECTIVES AND POLICIES...................................................... 18
INVESTMENT ADVISORY SERVICES............................................................ 20
DESCRIPTION OF THE CONTRACT -- THE ACCUMULATION PHASE................................... 23
A. Payments......................................................................... 23
B. Payment Credits.................................................................. 24
C. Computation of Values............................................................ 24
The Accumulation Unit........................................................... 24
Net Investment Factor........................................................... 24
D. Right to Cancel.................................................................. 25
E. Transfer Privilege............................................................... 25
Asset Allocation Model Reallocations............................................ 26
Automatic Transfers (Dollar Cost Averaging)..................................... 26
Automatic Account Rebalancing................................................... 27
F. Surrender and Withdrawals........................................................ 27
Systematic Withdrawals.......................................................... 28
Life Expectancy Distributions................................................... 28
Systematic Level Free of Surrender Charge Withdrawal Program.................... 29
G. Death Benefit.................................................................... 29
Standard Death Benefit.......................................................... 29
Optional Enhanced Death Benefit Rider........................................... 29
Payment of the Death Benefit Prior to the Annuity Date.......................... 30
H. The Spouse of the Owner as Beneficiary........................................... 30
I. Optional Minimum Guaranteed Annuity Payout (M-GAP) Rider......................... 31
J. Assignment....................................................................... 33
ANNUITIZATION -- THE PAYOUT PHASE....................................................... 34
A. Electing the Annuity Date........................................................ 34
B. Choosing the Annuity Payout Option............................................... 34
Fixed Annuity Payout Options.................................................... 35
Variable Annuity Payout Options................................................. 35
C. Description of Annuity Payout Options............................................ 35
D. Variable Annuity Benefit Payments................................................ 36
The Annuity Unit................................................................ 36
Determination of the First Annuity Benefit Payment.............................. 37
Determination of the Number of Annuity Units.................................... 37
Dollar Amount of Subsequent Variable Annuity Benefit Payments................... 37
Payment of Annuity Benefit Payments............................................. 37
E. Transfers of Annuity Units....................................................... 38
F. Withdrawals After the Annuity Date............................................... 38
Calculation of Proportionate Reduction.......................................... 39
Calculation of Present Value.................................................... 40
Deferral of Withdrawals......................................................... 41
G. Reversal of Annuitization........................................................ 42
H. NORRIS Decision.................................................................. 42
CHARGES AND DEDUCTIONS.................................................................. 43
A. Variable Account Deductions...................................................... 43
Mortality and Expense Risk Charge............................................... 43
Administrative Expense Charge................................................... 43
Other Charges................................................................... 43
B. Contract Fee..................................................................... 44
C. Optional Rider Charges........................................................... 44
</TABLE>
2
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<TABLE>
<S> <C>
D. Premium Taxes.................................................................... 44
E. Surrender Charge................................................................. 45
Calculation of Surrender Charge................................................. 45
Withdrawal Without Surrender Charge............................................. 46
Reduction or Elimination of Surrender Charge and Additional Amounts Credited.... 47
F. Transfer Charge.................................................................. 48
G. Withdrawal Adjustment Charge..................................................... 49
GUARANTEE PERIOD ACCOUNTS............................................................... 49
FEDERAL TAX CONSIDERATIONS.............................................................. 51
A. General.......................................................................... 51
The Company..................................................................... 51
Diversification Requirements.................................................... 51
Investor Control................................................................ 52
B. Qualified and Non-Qualified Contracts............................................ 52
C. Taxation of the Contract in General.............................................. 52
Withdrawals Prior to Annuitization.............................................. 52
Withdrawals After Annuitization................................................. 53
Annuity Payouts After Annuitization............................................. 53
Penalty on Distribution......................................................... 53
Assignments or Transfers........................................................ 54
Nonnatural Owners............................................................... 54
Deferred Compensation Plans of State and Local Government and Tax-Exempt
Organizations................................................................... 54
D. Tax Withholding.................................................................. 54
E. Provisions Applicable to Qualified Employer Plans................................ 54
Corporate and Self-Employed Pension and Profit Sharing Plans.................... 54
Individual Retirement Annuities................................................. 55
Tax-Sheltered Annuities......................................................... 55
Texas Optional Retirement Program............................................... 55
STATEMENTS AND REPORTS.................................................................. 55
ADDITION, DELETION OR SUBSTITUTION OF INVESTMENTS....................................... 56
CHANGES TO COMPLY WITH LAW AND AMENDMENTS............................................... 57
VOTING RIGHTS........................................................................... 57
DISTRIBUTION............................................................................ 57
LEGAL MATTERS........................................................................... 58
YEAR 2000 COMPLIANCE.................................................................... 58
FURTHER INFORMATION..................................................................... 59
APPENDIX A -- MORE INFORMATION ABOUT THE FIXED ACCOUNT.................................. A-1
APPENDIX B -- PERFORMANCE INFORMATION................................................... B-1
APPENDIX C -- SURRENDER CHARGES AND THE MARKET VALUE ADJUSTMENT......................... C-1
APPENDIX D -- CONDENSED FINANCIAL INFORMATION........................................... D-1
APPENDIX E -- EXAMPLES OF PRESENT VALUE WITHDRAWALS AND PAYMENT WITHDRAWALS............. E-1
STATEMENT OF ADDITIONAL INFORMATION
TABLE OF CONTENTS
GENERAL INFORMATION AND HISTORY......................................................... 2
TAXATION OF THE CONTRACT, THE VARIABLE ACCOUNT AND THE COMPANY.......................... 3
SERVICES................................................................................ 3
UNDERWRITERS............................................................................ 3
ANNUITY BENEFIT PAYMENTS................................................................ 4
PERFORMANCE INFORMATION................................................................. 5
FINANCIAL STATEMENTS.................................................................... F-1
</TABLE>
3
<PAGE>
SPECIAL TERMS
ACCUMULATED VALUE: the total dollar amount of all values in the Sub-Accounts,
the Fixed Account and the Guarantee Period Accounts credited to the Contract on
any day before the Annuity Date. The Accumulated Value includes all Payment
Credits applied to the Contract.
ACCUMULATION UNIT: a measure used to calculate the value of a Sub-Account before
annuity benefit payments begin.
ANNUITANT: the person designated in the Contract whose life is used to determine
the duration of annuity benefit payments involving a life contingency. Joint
Annuitants are permitted and, unless otherwise indicated, any reference to
Annuitant shall include Joint Annuitants.
ANNUITY BENEFIT PAYMENT CHANGE FREQUENCY: the frequency (monthly, quarterly,
semi-annually or annually) that changes due to investment performance will be
reflected in the dollar value of an annuity benefit payment under a variable
annuity payout option.
ANNUITY DATE: the date specified in the Contract or a date elected later by the
Owner to begin annuity benefit payments. This date must be at least two years
after the issue date and may not be later than the Owner's (or youngest Joint
Owner's) 99th birthday.
ANNUITY UNIT: a measure used to calculate annuity benefit payments under a
variable payout option.
ANNUITY VALUE: the value of the amount applied under an annuity payout option.
COMPANY: unless otherwise specified, any reference to the "Company" shall refer
exclusively to Allmerica Financial Life Insurance and Annuity Company.
CONTRACT YEAR: a period of twelve consecutive months starting on the Contract's
issue date or on any anniversary of the issue date.
FIXED ACCOUNT: an investment option under the Contract that guarantees principal
and a fixed minimum interest rate and which is part of the Company's General
Account.
FIXED ANNUITY PAYOUT: an annuity payout option with annuity benefit payments
that are fixed in amount and guaranteed throughout the annuity benefit payment
period.
GENERAL ACCOUNT: all the assets of the Company other than those held in a
separate account.
GROSS PAYMENT BASE: the total of all payments invested in the Contract, less any
withdrawals that exceed the Withdrawal Without Surrender Charge amount.
GUARANTEE PERIOD: the number of years that a Guaranteed Interest Rate is
credited.
GUARANTEE PERIOD ACCOUNT: an account that corresponds to a Guaranteed Interest
Rate for a specified Guarantee Period.
GUARANTEED INTEREST RATE: the annual effective rate of interest, after daily
compounding, credited to a Guarantee Period Account.
ISSUE DATE: the date the Contract is issued and the date that is used to
determine Contract days, Contract months, Contract years and Contract
anniversaries.
4
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MARKET VALUE ADJUSTMENT: a positive or negative adjustment assessed if any
portion of a Guarantee Period Account is withdrawn or transferred prior to the
end of its Guarantee Period.
OWNER (YOU): the person, persons (Joint Owners) or entity entitled to exercise
the rights and privileges under this Contract. Unless otherwise indicated, any
reference to Owner shall include Joint Owners.
PAYMENT CREDIT: an amount added to the Contract by the Company when a payment is
made to the Contract. The amount will be a specified percentage of the payment.
SUB-ACCOUNT: a subdivision of the Variable Account investing exclusively in the
shares of a corresponding fund of Allmerica Investment Trust, a corresponding
portfolio of the Fidelity Variable Insurance Products Fund ("Fidelity VIP"), the
T. Rowe Price International Stock Portfolio of T. Rowe Price International
Series, Inc. ("T. Rowe Price") or the Alliance Premier Growth Portfolio of
Alliance Variable Products Series Fund, Inc. ("Alliance").
SURRENDER VALUE: the Accumulated Value of the Contract on full surrender after
application of any applicable Contract fee, surrender charge, rider charges and
Market Value Adjustment.
UNDERLYING FUND (OR FUNDS): an investment portfolio of the Trust, Fidelity VIP,
T. Rowe Price or Alliance in which a Sub-Account invests.
VALUATION DATE: a day on which the unit values of the Sub-Accounts are
determined. Valuation Dates currently occur on each day on which the New York
Stock Exchange is open for trading, and on such other days (other than a day
during which no payment, withdrawal or surrender of a Contract was received)
when there is a sufficient degree of trading in an Underlying Fund's portfolio
securities such that the current unit value of the Sub-Accounts may be affected
materially.
VARIABLE ACCOUNT: Allmerica Select Separate Account, one of the Company's
separate accounts, consisting of assets segregated from other assets of the
Company. The investment performance of the assets of the Variable Account is
determined separately from the other assets of the Company and the assets are
not chargeable with liabilities arising out of any other business which the
Company may conduct.
VARIABLE ANNUITY PAYOUT: an annuity payout option providing for payments varying
in amount in accordance with the investment experience of the Underlying Funds.
5
<PAGE>
SUMMARY OF FEES AND EXPENSES
There are certain fees and expenses that you will incur directly or indirectly
under the Allmerica Select Reward Contract. The purpose of the following tables
is to help you understand these various charges. The tables show (1) charges
under the Contract, (2) annual expenses of the Sub-Accounts, and (3) annual
expenses of the Funds during the accumulation phase. In addition to the charges
and expenses described below, premium taxes are applicable in some states and
are deducted as described under "D. Premium Taxes."
<TABLE>
<CAPTION>
COMPLETE YEARS
FROM DATE OF
(1) CONTRACT CHARGES: PAYMENT CHARGE
---------------- -----------
<S> <C> <C>
0 - 4 8.5%
More than 4 7.5%
More than 5 6.5%
More than 6 6.5%
More than 7 5.5%
More than 8 3.5%
More than 9 1.5%
0
SURRENDER CHARGE:*
This charge may be assessed upon surrender, withdrawals or
reversal of annuitization. The charge is a percentage of
payments applied to the amount surrendered (in excess of any
amount that is free of surrender charge) within the indicated
time period.
TRANSFER CHARGE: None
The Company currently does not charge for processing
transfers and guarantees that the first 12 transfers in a
Contract year will not be subject to a transfer charge. For
each subsequent transfer, the Company reserves the right to
assess a charge, guaranteed never to exceed $25, to reimburse
the Company for the costs of processing the transfer.
ANNUAL CONTRACT FEE: $35**
The fee is deducted annually and upon surrender prior to the
Annuity Date when Accumulated Value is less than $75,000. The
fee is waived for Contracts issued to and maintained by the
trustee of a 401(k) plan.
</TABLE>
<TABLE>
<S> <C>
OPTIONAL RIDER CHARGES:
Under the following riders, 1/12th of the annual charge is
deducted pro rata on a monthly basis at the end of each
Contract month and at termination of the rider. The charge for
these riders on an annual basis as a percentage of Accumulated
Value is:
1. Minimum Guaranteed Annuity Payout Rider with a ten-year
waiting period: 0.35%
2. Minimum Guaranteed Annuity Payout Rider with a
fifteen-year waiting period: 0.20%
3. 5% Enhanced Death Benefit Rider With Annual Step-up: 0.25%
</TABLE>
* From time to time, the Company may reduce or eliminate the surrender charge,
the period during which it applies, or both, and/or credit additional amounts on
Contracts when Contracts are sold to individuals or groups in a manner that
reduces sales expenses or where the Owner and Annuitant on the date of issue is
within certain classes of eligible individuals. For more information see
"Reduction or Elimination of Surrender Charge and Additional Amounts Credited"
under "E. Surrender Charge."
**The fee may be lower in some jurisdictions. See Contract Specifications for
specific charge.
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WITHDRAWAL ADJUSTMENT CHARGE AFTER THE ANNUITY DATE:
During the Annuity Payout Phase, you may request withdrawals which will result
in a calculation by the Company of the Present Value of future annuity payments.
For withdrawals taken within 5 years of the Issue Date, the Assumed Investment
Return ("AIR") you have chosen (in the case of a variable annuity payout option)
or the interest rate (in the case of a fixed annuity payout option) used to
determine the Present Value is increased by a Withdrawal Adjustment Charge in
the following manner:
<TABLE>
<S> <C>
ADJUSTMENT TO AIR OR INTEREST RATE:
If 15 or more years of annuity payments are being valued, the increase is 1.00%
If 10-14 years of annuity payments are being valued, the increase is 1.50%
If less than 10 years of annuity payments are being valued, the increase is 2.00%
</TABLE>
The increase to the AIR or the interest rate used to determine the Present Value
results in a greater proportionate reduction in the number of Annuity Units
(under a variable annuity payout option) or dollar amount (under a fixed annuity
payout option), than if the increase had not been made. Because each variable
annuity benefit payment is determined by multiplying the number of Annuity Units
by the value of an Annuity Unit, the reduction in the number of Annuity Units
will result in lower future variable annuity benefit payments. See "D. Variable
Annuity Benefit Payments" and "F. Withdrawals After the Annuity Date" under
ANNUITIZATION -- THE PAYOUT PHASE for additional information.
<TABLE>
<S> <C>
(2) ANNUAL SUB-ACCOUNT EXPENSES:
(on an annual basis as a percentage of average daily net
assets)
Mortality and Expense Risk Charge: 1.25%
Administrative Expense Charge: 0.15%
-----------
Total Annual Expenses: 1.40%
</TABLE>
(3) ANNUAL UNDERLYING FUND EXPENSES: The following table shows the expenses of
the Underlying Funds as a percentage of average daily net assets for the year
ended December 31, 1998. For more information concerning fees and expenses, see
the prospectuses for the Underlying Funds.
<TABLE>
<CAPTION>
MANAGEMENT FEE OTHER EXPENSES TOTAL FUND
(AFTER ANY (AFTER ANY EXPENSES (AFTER ANY
UNDERLYING FUND VOLUNTARY WAIVERS) REIMBURSEMENTS) WAIVERS/REIMBURSEMENTS)
- ---------------------------------------------------- ------------------- ------------------- --------------------------
<S> <C> <C> <C>
Select Emerging Markets Fund(@)..................... 1.00%(*) 1.19% 2.19%(1)(2)*
Select International Equity Fund.................... 0.90% 0.12% 1.02%(1)(2)
T. Rowe Price International Stock Portfolio......... 1.05% 0.00% 1.05%
Select Aggressive Growth Fund....................... 0.82%(**) 0.07% 0.89%(1)(2)**
Select Capital Appreciation Fund.................... 0.94%(**) 0.10% 1.04%(1)(2)**
Select Value Opportunity Fund....................... 0.90%(1)* 0.08% 0.98%(1)(2)*
Alliance Premier Growth Portfolio................... 1.00% 0.09% 1.09%(4)
Select Strategic Growth Fund(@)..................... 0.39%(*) 0.81% 1.20%(1)(2)*
Fidelity VIP Growth Portfolio....................... 0.59% 0.09% 0.69%(3)
Select Growth and Income Fund....................... 0.68% 0.05% 0.73%(1)(2)
Fidelity VIP Equity-Income Portfolio................ 0.49% 0.09% 0.58%(3)
Fidelity VIP High Income Portfolio.................. 0.58% 0.12% 0.70%
Select Income Fund.................................. 0.54% 0.10% 0.64%(1)
Money Market Fund................................... 0.26% 0.06% 0.32%(1)
</TABLE>
(@) Select Emerging Markets Fund and Select Strategic Growth Fund commenced
operations on February 20, 1998. Expenses shown are annualized.
(*) Amount has been adjusted to reflect a voluntary expense limitation currently
in effect for Select Emerging Markets Fund, Select Value Opportunity Fund, and
Select Strategic Growth Fund. Without these adjustments,
7
<PAGE>
the Management Fees and Total Fund Expenses would have been 1.35% and 2.54%,
respectively, for Select Emerging Markets Fund, 0.91% and 0.99%, respectively,
for Select Value Opportunity Fund, and 0.85% and 1.66%, respectively, for the
Select Strategic Growth Fund.
(**) Effective September 1, 1999, the management fee rates for the Select
Aggressive Growth Fund and Select Capital Appreciation Fund were revised. The
Management Fee and Total Fund Expenses shown in the table above have been
adjusted to assume that the revised rates took effect January 1, 1998.
(1) Until further notice, Allmerica Financial Investment Management Services,
Inc. ("AFIMS") has declared a voluntary expense limitation of 1.35% of average
net assets for Select Aggressive Growth Fund and Select Capital Appreciation
Fund, 1.25% for Select Value Opportunity Fund, 1.50% for Select International
Equity Fund, 1.10% for Select Growth and Income Fund, 1.00% for Select Income
Fund, and 0.60% for Money Market Fund. The total operating expenses of these
Funds of the Trust were less than their respective expense limitations
throughout 1998.
Until further notice, AFIMS has declared a voluntary expense limitation of 1.20%
of average daily net assets for the Select Strategic Growth Fund. In addition,
AFIMS has agreed to voluntarily waive its management fee to the extent that
expenses of the Select Emerging Markets Fund exceed 2.00% of the Fund's average
daily net assets, except that such waiver shall not exceed the net amount of
management fees earned by AFIMS from the Fund after subtracting fees paid by
AFIMS to a sub-adviser.
Until further notice, the Select Value Opportunity Fund's management fee rate
has been voluntarily limited to an annual rate of 0.90% of average daily net
assets, and total expenses are limited to 1.25% of average daily net assets.
The declaration of a voluntary management fee or expense limitation in any year
does not bind AFIMS to declare future expense limitations with respect to these
Funds. These limitations may be terminated at any time.
(2) These Funds have entered into agreements with brokers whereby brokers rebate
a portion of commissions. Had these amounts been treated as reductions of
expenses, the total annual fund operating expense ratios would have been 2.19%
for Select Emerging Markets Fund, 0.86% for Select Aggressive Growth Fund, 1.02%
for Select Capital Appreciation Fund, 0.94% for Select Value Opportunity Fund,
1.01% for Select International Equity Fund, 1.14% for Select Strategic Growth
Fund, and 0.70% for Select Growth and Income Fund.
(3) A portion of the brokerage commissions that the Funds paid was used to
reduce Fund expenses. In addition, certain funds, or Fidelity Management &
Research Company on behalf of certain funds, have entered into arrangements with
their custodian whereby credits realized as a result of uninvested cash balances
were used to reduce custodian expenses. Including these reductions, the total
operating expenses would have been 0.57% for Fidelity VIP Equity-Income
Portfolio, and 0.66% for Fidelity VIP Growth Portfolio.
(4) From time to time, the Alliance Premier Growth Portfolio's investment
adviser, in its own discretion, may voluntarily waiver all or part of its fees
and/or voluntarily assume certain portfolio expenses. No such voluntary waiver
or assumption of expenses is in effect at this time. The expenses shown in the
above expenses table are the expenses paid for 1998.
The Underlying Fund information above was provided by the Underlying Funds and
was not independently verified by the Company.
EXPENSE EXAMPLES: The following examples demonstrate the cumulative expenses
which an Owner would pay at 1-year, 3-year, 5-year and 10-year intervals under
certain contingencies. Each example assumes a $1,000 investment in a Sub-Account
and a 5% annual return on assets. As required by rules of the Securities and
Exchange Commission ("SEC"), the Contract fee is reflected in the examples by a
method designed to
8
<PAGE>
show the "average" impact on an investment in the Variable Account. The total
Contract fees collected are divided by the total average net assets attributable
to the Contracts. The resulting percentage is 0.04%, and the amount of the
Contract fee is assumed to be $0.40 in the examples. The Contract fee is only
deducted when the Accumulated Value is less than $75,000. Lower costs apply to
Contracts owned and maintained under a 401(k) plan. Because the expenses of the
Underlying Funds differ, separate examples are used to illustrate the expenses
incurred by an Owner on an investment in the various Sub-Accounts.
THESE EXAMPLES SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESSER THAN THOSE SHOWN.
(1a) If, at the end of the applicable time period, you surrender your Contract,
you would have paid the following expenses on a $1,000 investment, assuming a 5%
annual return on assets, and no Riders.
<TABLE>
<CAPTION>
WITH SURRENDER CHARGE 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ----------------------------------------------------------------------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Select Emerging Markets Fund................................................. $ 110 $ 186 $ 255 $ 386
Select International Equity Fund............................................. $ 99 $ 154 $ 202 $ 276
T. Rowe Price International Stock Portfolio.................................. $ 99 $ 154 $ 203 $ 279
Select Aggressive Growth Fund................................................ $ 97 $ 150 $ 196 $ 263
Select Capital Appreciation Fund............................................. $ 99 $ 154 $ 203 $ 278
Select Value Opportunity Fund................................................ $ 98 $ 152 $ 200 $ 272
Select Growth Fund $ 97 $ 149 $ 194 $ 260
Select Strategic Growth Fund................................................. $ 100 $ 159 $ 210 $ 294
Fidelity VIP Growth Portfolio................................................ $ 96 $ 144 $ 186 $ 242
Select Growth and Income Fund................................................ $ 96 $ 146 $ 188 $ 247
Fidelity VIP Equity-Income Portfolio......................................... $ 95 $ 141 $ 181 $ 231
Fidelity VIP High Income Portfolio........................................... $ 96 $ 145 $ 187 $ 244
Select Income Fund........................................................... $ 95 $ 143 $ 184 $ 238
Money Market Fund............................................................ $ 92 $ 134 $ 169 $ 204
Alliance Premier Growth Portfolio............................................ $ 99 $ 156 $ 205 $ 283
</TABLE>
(1)(b) If, at the end of the applicable time period, you surrender your
Contract, you would have paid the following expenses on a $1,000 investment,
assuming a 5% annual return on assets and election at issue of the Minimum
Guaranteed Annuity Payout Rider with a ten-year waiting period and the 5%
Enhanced Death Benefit Rider With Annual Step-Up.
<TABLE>
<CAPTION>
WITH SURRENDER CHARGE 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ----------------------------------------------------------------------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Select Emerging Markets Fund................................................. $ 115 $ 202 $ 281 $ 438
Select International Equity Fund............................................. $ 104 $ 170 $ 229 $ 334
T. Rowe Price International Stock Portfolio.................................. $ 105 $ 171 $ 231 $ 337
Select Aggressive Growth Fund................................................ $ 103 $ 167 $ 223 $ 322
Select Capital Appreciation Fund............................................. $ 104 $ 171 $ 230 $ 336
Select Value Opportunity Fund................................................ $ 104 $ 169 $ 227 $ 330
Select Growth Fund $ 103 $ 166 $ 222 $ 319
Select Strategic Growth Fund................................................. $ 106 $ 175 $ 237 $ 351
Fidelity VIP Growth Portfolio................................................ $ 101 $ 161 $ 214 $ 302
Select Growth and Income Fund................................................ $ 102 $ 162 $ 216 $ 307
Fidelity VIP Equity-Income Portfolio......................................... $ 100 $ 158 $ 209 $ 292
Fidelity VIP High Income Portfolio........................................... $ 101 $ 161 $ 215 $ 304
Select Income Fund........................................................... $ 101 $ 160 $ 212 $ 298
Money Market Fund............................................................ $ 98 $ 151 $ 197 $ 266
Alliance Premier Growth Portfolio............................................ $ 105 $ 172 $ 232 $ 341
</TABLE>
9
<PAGE>
(2)(a) If, at the end of the applicable time period, you do not surrender your
Contract or you annuitize,* you would have paid the following expenses on a
$1,000 investment, assuming a 5% annual return on assets, and no Riders.
<TABLE>
<CAPTION>
WITHOUT SURRENDER CHARGE 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ----------------------------------------------------------------------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Select Emerging Markets Fund................................................. $ 36 $ 110 $ 187 $ 386
Select International Equity Fund............................................. $ 25 $ 76 $ 129 $ 276
T. Rowe Price International Stock Portfolio.................................. $ 25 $ 77 $ 131 $ 279
Select Aggressive Growth Fund................................................ $ 23 $ 72 $ 123 $ 263
Select Capital Appreciation Fund............................................. $ 25 $ 76 $ 130 $ 278
Select Value Opportunity Fund................................................ $ 24 $ 74 $ 127 $ 272
Select Growth Fund $ 23 $ 71 $ 121 $ 260
Select Strategic Growth Fund................................................. $ 26 $ 81 $ 138 $ 294
Fidelity VIP Growth Portfolio................................................ $ 21 $ 65 $ 112 $ 242
Select Growth and Income Fund................................................ $ 22 $ 67 $ 115 $ 247
Fidelity VIP Equity-Income Portfolio......................................... $ 20 $ 62 $ 107 $ 231
Fidelity VIP High Income Portfolio........................................... $ 21 $ 66 $ 113 $ 244
Select Income Fund........................................................... $ 21 $ 64 $ 110 $ 238
Money Market Fund............................................................ $ 18 $ 55 $ 94 $ 204
Alliance Premier Growth Portfolio............................................ $ 25 $ 78 $ 133 $ 283
</TABLE>
(2)(b) If, at the end of the applicable time period, you do not surrender your
Contract or you annuitize,* you would have paid the following expenses on a
$1,000 investment, assuming an annual 5% return on assets and election at issue
of the Minimum Guaranteed Annuity Payout Rider with a ten-year waiting period
and the 5% Enhanced Death Benefit Rider With Annual Step-Up.
<TABLE>
<CAPTION>
WITHOUT SURRENDER CHARGE 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ----------------------------------------------------------------------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Select Emerging Markets Fund................................................. $ 42 $ 128 $ 215 $ 438
Select International Equity Fund............................................. $ 31 $ 94 $ 159 $ 334
T. Rowe Price International Stock Portfolio.................................. $ 31 $ 94 $ 161 $ 337
Select Aggressive Growth Fund................................................ $ 29 $ 90 $ 153 $ 322
Select Capital Appreciation Fund............................................. $ 31 $ 94 $ 160 $ 336
Select Value Opportunity Fund................................................ $ 30 $ 92 $ 157 $ 330
Select Growth Fund $ 29 $ 89 $ 151 $ 319
Select Strategic Growth Fund................................................. $ 32 $ 99 $ 168 $ 351
Fidelity VIP Growth Portfolio................................................ $ 27 $ 83 $ 142 $ 302
Select Growth and Income Fund................................................ $ 28 $ 85 $ 145 $ 307
Fidelity VIP Equity-Income Portfolio......................................... $ 26 $ 80 $ 137 $ 292
Fidelity VIP High Income Portfolio........................................... $ 27 $ 84 $ 143 $ 304
Select Income Fund........................................................... $ 27 $ 82 $ 140 $ 298
Money Market Fund............................................................ $ 24 $ 73 $ 124 $ 266
Alliance Premier Growth Portfolio............................................ $ 31 $ 96 $ 162 $ 341
</TABLE>
* The Contract fee is not deducted after annuitization. No surrender charges are
deducted at or after annuitization under any of the available annuity payout
options.
10
<PAGE>
SUMMARY OF CONTRACT FEATURES
WHAT IS THE ALLMERICA SELECT REWARD VARIABLE ANNUITY?
The Allmerica Select Reward variable annuity contract ("Contract") is an
insurance contract designed to help you, the Owner, accumulate assets for your
retirement or other important financial goals on a tax-deferred basis. The
Contract may be purchased up to age 85 of the oldest Owner or, if the Owner is
not a natural person, the oldest Annuitant. The Contract combines the concept of
professional money management with the attributes of an annuity contract.
Features available through the Contract include:
- a customized investment portfolio;
- a Payment Credit equal to 5% of your payment, added to the Contract's
Accumulated Value as soon as your payment is applied;
- experienced professional investment advisers;
- tax deferral on earnings;
- guarantees that can protect your family;
- withdrawals during the accumulation and annuitization phases; and
- income that you can receive for life.
WHAT HAPPENS IN THE ACCUMULATION PHASE?
The Contract has two phases: an accumulation phase and, if you choose to
annuitize, an annuity payout phase (described below). During the accumulation
phase, you may allocate your initial payment and any additional payments to the
combination of portfolios of securities ("Underlying Funds") under your
Contract, to the Guarantee Period Accounts, and to the Fixed Account. You select
the investment options most appropriate for your investment needs. As those
needs change, you may also change your allocation without incurring any tax
consequences. Your Contract's Accumulated Value is based on the investment
performance of the Underlying Funds and any accumulations in the Guarantee
Period Accounts and the Fixed Account. You do not pay taxes on any earnings
under the Contract until you withdraw money. In addition, during the
accumulation phase, your beneficiaries receive certain protections in the event
of your death. See discussion below: "WHAT HAPPENS UPON MY DEATH DURING THE
ACCUMULATION PHASE?"
WHAT HAPPENS UPON MY DEATH DURING THE ACCUMULATION PHASE?
If you or a Joint Owner dies before the Annuity Date, a standard death benefit
will be paid to the beneficiary. (No death benefit is payable at the death of
any Annuitant except when the Owner is not a natural person.) An optional
Enhanced Death Benefit Rider is also available at issue for a separate monthly
charge. See "G. Death Benefit" under DESCRIPTION OF THE CONTRACT -- THE
ACCUMULATION PHASE.
WHAT HAPPENS IN THE ANNUITY PAYOUT PHASE?
During the annuity payout phase, you, or the payee you designate, can receive
income based on one of the numerous annuity payout options available under the
Contract. You choose:
- the annuity payout option;
- the date annuity benefit payments begin but no earlier than 2 years after
the Issue Date;
- whether you want variable annuity benefit payments based on the investment
performance of the Underlying Funds, fixed-amount annuity benefit payments
with payment amounts guaranteed by the Company, or a combination of
fixed-amount and variable annuity benefit payments; and
- whether you want certain protections provided under optional riders.
11
<PAGE>
You may also take withdrawals during the annuity payout phase. The type of
withdrawal and the number of withdrawals that may be made each calendar year
depend upon whether the Owner annuitizes under an annuity payout option with
payments based on the life of one or more Annuitants with no guaranteed payments
(a "Life" annuity payout option), under a life annuity payout option that in
part provides for a guaranteed number of payments (a "Life With Period Certain"
or "Life With Cash Back" annuity payout option), or an annuity payout option
based on a guaranteed number of payments (a "Period Certain" annuity payout
option). Under a Life annuity payout option, the Owner may make one Payment
Withdrawal each calendar year. Under a Life with Period Certain or Life with
Cash Back annuity payout option, the Owner may make one Payment Withdrawal and
one Present Value Withdrawal in each calendar year. Under a Period Certain
annuity payout option, the Owner may make multiple Present Value Withdrawals
each calendar year. For more information, see "F. Withdrawals After the Annuity
Date" under ANNUITIZATION -- THE PAYOUT PHASE. In addition, if you choose a
variable payout option, you may transfer among the available Sub-Accounts.
M-GAP RIDER. When applying for the Contract, currently the Owner may elect to
purchase the Minimum Guaranteed Annuity Payout ("M-GAP") Rider for a separate
monthly charge. This optional rider provides a guaranteed minimum amount of
income under a life contingent fixed annuity payout option. The M-GAP Rider is
based on the based on the Company's guaranteed fixed annuity option rates as set
forth in the Contract. These annuity option rates determine the dollar amount of
the first payment under each form of fixed annuity for each $1,000 of applied
value. The rates are based on the Annuity 2000 Mortality Table and a 3% Assumed
Investment Return ("AIR"). The M-GAP Rider is not available at all ages.
For more information on this optional rider, see "I. Optional Minimum Guaranteed
Annuity Payout (M-GAP) Rider" under DESCRIPTION OF THE CONTRACT -- THE
ACCUMULATION PHASE.
WHO ARE THE KEY PERSONS UNDER THE CONTRACT?
The Contract is between you, (the "Owner"), and us, Allmerica Financial Life
Insurance and Annuity Company. Each Contract has an Owner (or an Owner and a
Joint Owner), an Annuitant (or an Annuitant and a Joint Annuitant) and one or
more beneficiaries. As Owner, you may:
- make payments
- choose investment allocations
- choose annuity payout options
- receive annuity benefit payments (or designate someone else to receive
annuity benefit payments)
- select the Annuitant and beneficiary.
The Annuitant is the person whose life is used to determine the duration of
annuity benefit payments involving a life contingency. There must be at least
one Annuitant at all times. If an Annuitant dies and a replacement is not named,
the Owner will become the new Annuitant. The beneficiary is the person(s) or
entity entitled to the death benefit at the death of a sole Owner prior to the
Annuity Date. In the case of the death of a Joint Owner, the surviving Joint
Owner will receive the death benefit. Under certain circumstances, the
beneficiary may be entitled to annuity benefit payments upon the death of an
Owner on or after the Annuity Date.
HOW MUCH CAN I INVEST AND HOW OFTEN?
During the Accumulation Phase, you may make additional payments. Total payments
under the Contract can exceed $5,000,000 only with the Company's prior approval.
The number and frequency of your payments are flexible, subject only to a $1,000
minimum for your initial payment and a $50 minimum for any additional
12
<PAGE>
payments. A lower initial payment is permitted for certain qualified plans and
where monthly payments are being forwarded directly from a financial
institution. A minimum of $1,000 is always required to establish a Guarantee
Period Account.
Each time you make a payment, you will receive a Payment Credit equal to 5% of
your payment. This Payment Credit will be immediately invested along with your
payment. However, if you cancel the Contract under its "Right to Examine"
provision, your refund will be reduced by the amount of the Payment Credit. For
more information, see "D. Right to Cancel" under DESCRIPTION OF THE CONTRACT --
THE ACCUMULATION PHASE.
WHAT ARE MY INVESTMENT CHOICES?
You may choose among fourteen Sub-Accounts investing in the Underlying Funds,
the Guarantee Period Accounts, and the Fixed Account. The fourteen Funds are:
- Select Emerging Markets Fund
Managed by Schroder Investment Management North America Inc.
- Select International Equity Fund
Managed by Bank of Ireland Asset Management (U.S.) Limited
- T. Rowe Price International Stock Portfolio
Managed by Rowe Price-Fleming International, Inc.
- Select Aggressive Growth Fund
Managed by Nicholas-Applegate Capital Management, L.P.
- Select Capital Appreciation Fund
Managed by T. Rowe Price Associates, Inc.
- Select Value Opportunity Fund
Managed by Cramer Rosenthal McGlynn, LLC
- Alliance Premier Growth Portfolio
Managed by Alliance Capital Management L.P.
- Select Strategic Growth Fund
Managed by Cambiar Investors, Inc.
- Fidelity VIP Growth Portfolio
Managed by Fidelity Management & Research Company
- Select Growth and Income Fund
Managed by J. P. Morgan Investment Management Inc.
- Fidelity VIP Equity-Income Portfolio
Managed by Fidelity Management & Research Company
- Fidelity VIP High Income Portfolio
Managed by Fidelity Management & Research Company
- Select Income Fund
Managed by Standish, Ayer & Wood, Inc.
- Money Market Fund
Managed by Allmerica Asset Management, Inc.
For a more detailed description of the Underlying Funds, see "INVESTMENT
OBJECTIVES AND POLICIES."
13
<PAGE>
Each Underlying Fund operates pursuant to different investment objectives and
this range of investment options enables you to allocate your money among the
Underlying Funds to meet your particular investment needs.
GUARANTEE PERIOD ACCOUNTS. Assets supporting the guarantees under the Guarantee
Period Accounts are held in the Company's Separate Account GPA, a non-unitized
insulated separate account (except in California, where assets are held in the
Company's General Account). Values and benefits calculated on the basis of
Guarantee Period Account allocations, however, are obligations of the Company's
General Account. Amounts allocated to a Guarantee Period Account earn a
Guaranteed Interest Rate declared by the Company. The level of the Guaranteed
Interest Rate depends on the number of years of the Guarantee Period selected.
The Company may offer up to eight Guarantee Periods ranging from three to ten
years in duration. Once declared, the Guaranteed Interest Rate will not change
during the duration of the Guarantee Period.
If amounts allocated to a Guarantee Period Account are transferred, surrendered
or applied to any annuity payout option at any time other than the day following
the last day of the applicable Guarantee Period, a Market Value Adjustment will
apply that may increase or decrease the value. However, this adjustment will
never be applied against your principal. In addition, earnings in the GPA AFTER
application of the Market Value Adjustment will not be less than an effective
annual rate of 3%. For more information about the Guarantee Period Accounts and
the Market Value Adjustment, see "GUARANTEE PERIOD ACCOUNTS."
THE GUARANTEE PERIOD ACCOUNTS ARE NOT AVAILABLE IN ALL STATES AND ARE NOT
OFFERED AFTER ANNUITIZATION.
FIXED ACCOUNT. The Fixed Account is part of the General Account, which consists
of all the Company's assets other than those allocated to the Variable Account
and any other separate account. Allocations to the Fixed Account are guaranteed
as to principal and a minimum rate of interest. Additional excess interest may
be declared periodically at the Company's discretion. The initial rate in effect
on the date an amount is allocated to the Fixed Account will be guaranteed for
one year from that date. For more information about the Fixed Account, see
APPENDIX A, "MORE INFORMATION ABOUT THE FIXED ACCOUNT."
WHO ARE THE INVESTMENT ADVISERS OF THE FUNDS AND HOW ARE THEY SELECTED?
BARRA RogersCasey, Inc. ("BARRA RogersCasey"), a pension consulting firm,
assists the Company in the selection of the Contract's Funds. In addition, BARRA
RogersCasey assists the Trust in the selection of investment advisers for the
Funds of the Trust. BARRA RogersCasey provides consulting services to pension
plans representing hundreds of billions of dollars in total assets and, in its
consulting capacity, monitors the investment performance of over 1000 investment
advisers. BARRA RogersCasey is wholly-controlled by BARRA, Inc. As a consultant,
BARRA RogersCasey has no discretionary or decision-making authority with respect
to the Funds, and has no responsibility for any investment advice or other
services provided to the Funds by Allmerica Financial Investment Management
Services, Inc. ("AFIMS") or the investment advisers.
AFIMS, an affiliate of the Company, is the investment manager of the Trust.
AFIMS has entered into agreements with investment advisers ("Sub-Advisers")
selected by AFIMS and the Trustees in consultation with BARRA RogersCasey. Each
investment adviser is selected by using strict objective, quantitative, and
qualitative criteria, with special emphasis on the investment adviser's record
in managing similar portfolios. In consultation with BARRA RogersCasey, a
committee monitors and evaluates the ongoing performance of all of the Funds.
The committee may recommend the replacement of an investment adviser of one of
the Funds of the Trust, or the addition or deletion of any other Funds. The
committee includes members who may be affiliated or unaffiliated with the
Company and the Trust. The Sub-Advisers (other than Allmerica Asset Management,
Inc.) are not affiliated with the Company or the Trust.
Fidelity Management & Research Company ("FMR") is the investment adviser of
Fidelity VIP. FMR is one of America's largest investment management
organizations and has its principal business address at 82 Devonshire Street,
Boston, MA. It is composed of a number of different companies, which provide a
variety of
14
<PAGE>
financial services and products. FMR is the original Fidelity company, founded
in 1946. It provides a number of mutual funds and other clients with investment
research and portfolio management services.
Rowe Price-Fleming International, Inc. ("Price-Fleming") is the investment
adviser of T. Rowe Price. Price-Fleming, founded in 1979 as a joint venture
between T. Rowe Price Associates, Inc. and Roger Fleming Holdings, Limited, is
one of America's largest no-load international mutual fund asset managers with
approximately $32 billion (as of December 31, 1998) under management in its
offices in Baltimore, London, Tokyo, Hong Kong, Singapore and Buenos Aires.
Alliance Capital Management L.P. ("Alliance Capital") is the investment adviser
of Alliance Variable Products Series Fund, Inc. ("Alliance"). Alliance Capital
is a leading international investment manager supervising client accounts with
assets as of December 31, 1998, totaling more than $286 billion (of which
approximately $118 billion represented the assets of investment companies.)
Alliance's clients are primarily major corporate employee benefit funds, public
employee retirement systems, investment companies, foundations, and endowment
funds.
The following are the investment advisers of the Funds:
<TABLE>
<CAPTION>
Fund Investment Adviser
- ---------------------------------------------------------------------------------------------
<S> <C>
SELECT EMERGING MARKETS FUND SCHRODER INVESTMENT MANAGEMENT NORTH AMERICA INC.
SELECT INTERNATIONAL EQUITY FUND BANK OF IRELAND ASSET MANAGEMENT (U.S.) LIMITED
T. ROWE PRICE INTERNATIONAL STOCK ROWE PRICE-FLEMING INTERNATIONAL, INC.
PORTFOLIO
SELECT AGGRESSIVE GROWTH FUND NICHOLAS-APPLEGATE CAPITAL MANAGEMENT, L.P.
SELECT CAPITAL APPRECIATION FUND T. ROWE PRICE ASSOCIATES, INC.
SELECT VALUE OPPORTUNITY FUND CRAMER ROSENTHAL MCGLYNN, LLC
ALLIANCE PREMIER GROWTH PORTFOLIO ALLIANCE CAPITAL MANAGEMENT L.P.
SELECT STRATEGIC GROWTH FUND CAMBIAR INVESTORS, INC.
FIDELITY VIP GROWTH PORTFOLIO FIDELITY MANAGEMENT & RESEARCH COMPANY
SELECT GROWTH AND INCOME FUND J. P. MORGAN INVESTMENT MANAGEMENT INC.
FIDELITY VIP EQUITY-INCOME PORTFOLIO FIDELITY MANAGEMENT & RESEARCH COMPANY
FIDELITY VIP HIGH INCOME PORTFOLIO FIDELITY MANAGEMENT & RESEARCH COMPANY
SELECT INCOME FUND STANDISH, AYER & WOOD, INC.
MONEY MARKET FUND ALLMERICA ASSET MANAGEMENT, INC.
</TABLE>
CAN I MAKE TRANSFERS AMONG THE SUB-ACCOUNTS?
Yes. Prior to the Annuity Date, you may transfer among the Sub-Accounts
investing in the Underlying Funds, the Guarantee Period Accounts, and the Fixed
Account. On and after the Annuity Date, if you have elected a variable option,
you may transfer only among the Sub-Accounts. You will incur no current taxes on
transfers while your money remains in the Contract. See "E. Transfer Privilege"
under DESCRIPTION OF THE CONTRACT -- THE ACCUMULATION PHASE and "E. Transfers of
Annuity Units" under ANNUITIZATION -- THE PAYOUT PHASE.
The first 12 transfers in a Contract year are guaranteed to be free of a
transfer charge. For each subsequent transfer in a Contract year, the Company
does not currently charge but reserves the right to assess a processing charge
guaranteed never to exceed $25.
If you authorize automatic periodic transfers (under an Asset Allocation Model
Reallocation program, Automatic Transfers program (Dollar Cost Averaging) or
Automatic Account Rebalancing program), the first automatic transfer or
rebalancing under a request counts as one transfer for purposes of the 12
transfers guaranteed to be free of a transfer charge in each Contract year. Each
subsequent automatic transfer or rebalancing under that request is without
charge and does not reduce the remaining number of transfers which may be made
free of charge in that Contract year.
15
<PAGE>
WHAT IF I NEED MY MONEY BEFORE THE ANNUITY PAYOUT PHASE BEGINS?
Before the annuity payout phase begins, you may surrender your Contract or make
withdrawals at any time. Each calendar year, you can take without a surrender
charge the greater of:
(1) 100% of cumulative earnings (excluding Payment Credits); or
(2) 15% of the total of all payments invested in the Contract LESS that portion
of any prior withdrawal(s) of payments that are subject to the surrender
charge table (even if the applicable surrender charge is 0%) as of the
Valuation Date for the withdrawal (the Gross Payment Base), LESS any prior
withdrawal(s) during the same calendar year to which the surrender charge
table was not applicable.
If greater than the amount available under either (1) or (2) above, the Owner of
a qualified Contract or a Contract issued under a Section 457 Deferred
Compensation Plan may take each calendar year without charge an amount
calculated by the Company based on his or her life expectancy. A 10% tax penalty
may apply on all amounts deemed to be earnings if you are under age 59 1/2.
In addition, WHERE PERMITTED BY LAW, the Company will waive surrender charges
if, after the Contract is issued:
- you become disabled before you attain age 65; or
- you are diagnosed with a fatal illness or are confined in a medical care
facility for the later of 90 consecutive days or one year after the Issue
Date.
Additional amounts may be withdrawn at any time. However, the withdrawal of
payments that have not been invested in the Contract for more than nine years
may be subject to a surrender charge. A Market Value Adjustment will apply to
withdrawals from a Guarantee Period Account prior to the expiration of the
Guarantee Period.
CAN I EXAMINE THE CONTRACT?
Yes. Your Contract will be delivered to you after your purchase. If you return
the Contract to the Company within ten days of receipt, the Contract will be
cancelled. There may be a longer period in certain jurisdictions; see the "Right
to Examine" provision on the cover of your Contract.
If you cancel the Contract, you will receive the Contract's Accumulated Value
adjusted for any Market Value Adjustment for amounts allocated to a Guarantee
Period Account, plus any fees or charges that may have been deducted, less the
Payment Credit(s). However, if required in your state or if the Contract was
issued as an Individual Retirement Annuity (IRA), you will generally receive a
refund of your gross payment(s). In certain jurisdictions this refund may be the
greater of (1) your gross payment(s) or (2) the Accumulated Value adjusted for
any Market Value Adjustment, plus any fees or charges previously deducted, less
any Payment Credit(s). See "D. Right to Cancel" under DESCRIPTION OF THE
CONTRACT -- THE ACCUMULATION PHASE.
Each time you make a payment, you will receive a Payment Credit equal to 5% of
the payment. The Payment Credit will be immediately invested along with your
payment. However, if you cancel the Contract under its "Right to Examine"
provision, your refund will be reduced by the amount of the Payment Credit(s).
If the "Right to Examine" provision in your state provides that you will receive
the Accumulated Value of the Contract (adjusted as described above), this means
that you receive any gains and bear any losses attributable to the Payment
Credit. For more information, see "D. Right to Cancel" under DESCRIPTION OF THE
CONTRACT -- THE ACCUMULATION PHASE.
CAN I MAKE FUTURE CHANGES UNDER MY CONTRACT?
You can make several changes after receiving your Contract:
- You may assign your ownership to someone else, except under certain
qualified plans.
- You may change the beneficiary, unless you have designated an irrevocable
beneficiary.
16
<PAGE>
- You may change your allocation of payments.
- You may make transfers among the Sub-Accounts without any tax
consequences.
- You may cancel your Contract within ten days of delivery (or longer if
required by state law).
DESCRIPTION OF THE COMPANY, THE VARIABLE ACCOUNT,
AND THE UNDERLYING FUNDS
THE COMPANY. Allmerica Financial Life Insurance and Annuity Company ("Allmerica
Financial") is a life insurance company organized under the laws of Delaware in
July 1974. Its Principal Office is located at 440 Lincoln Street, Worcester, MA
01653, Telephone 508-855-1000. Allmerica Financial is subject to the laws of the
state of Delaware governing insurance companies and to regulation by the
Commissioner of Insurance of Delaware. In addition, Allmerica Financial is
subject to the insurance laws and regulations of other states and jurisdictions
in which it is licensed to operate. As of December 31, 1998, Allmerica Financial
had over $14 billion in assets and over $26 billion of life insurance in force.
Effective October 1, 1995, Allmerica Financial changed its name from SMA Life
Assurance Company to Allmerica Financial Life Insurance and Annuity Company.
Allmerica Financial is a wholly owned subsidiary of First Allmerica Financial
Life Insurance Company ("First Allmerica") which, in turn, is a wholly owned
subsidiary of Allmerica Financial Corporation ("AFC"). First Allmerica,
originally organized under the laws of Massachusetts in 1844 as a mutual life
insurance company and known as State Mutual Life Assurance Company of America,
converted to a stock life insurance company on October 16, 1995 and adopted its
present name. First Allmerica is the fifth oldest life insurance company in
America.
Allmerica Financial is a charter member of the Insurance Marketplace Standards
Association ("IMSA"). Companies that belong to IMSA subscribe to a rigorous set
of standards that cover the various aspects of sales and service for
individually sold life insurance and annuities. IMSA members have adopted
policies and procedures that demonstrate a commitment to honesty, fairness, and
integrity in all customer contacts involving sales and service of individual
life insurance and annuity products.
ALLMERICA SELECT SEPARATE ACCOUNT. The Company maintains a separate account
called the Allmerica Select Separate Account (the "Variable Account"). The
Variable Account was authorized by vote of the Board of Directors of the Company
on March 5, 1992. The Variable Account is registered with the SEC as a unit
investment trust under the Investment Company Act of 1940 ("the 1940 Act"). This
registration does not involve the supervision or management of investment
practices or policies of the Variable Account by the SEC.
The Variable Account is a separate investment account of the Company. The assets
used to fund the variable portions of the Contract are set aside in Sub-Accounts
of the Variable Account, and are kept separate from the general assets of the
Company. Fourteen Sub-Accounts of the Variable Account are available under the
Contract. Each Sub-Account is administered and accounted for as part of the
general business of the Company. The income, capital gains or capital losses of
each Sub-Account, however, are allocated to each Sub-Account, without regard to
any other income, capital gains, or capital losses of the Company. Obligations
under the Contracts are obligations of the Company. Under Delaware law, the
assets of the Variable Account may not be charged with any liabilities arising
out of any other business of the Company.
The Company reserves the right, subject to compliance with applicable law, to
change the names of the Variable Account and the Sub-Accounts. The Company also
offers other variable annuity contracts investing in the Variable Account which
are not discussed in this Prospectus. In addition, the Variable Account may
invest in other underlying funds, which are not available to the Contracts
described in this Prospectus.
ALLMERICA INVESTMENT TRUST. Allmerica Investment Trust (the "Trust") is an
open-end, diversified, management investment company registered with the SEC
under the 1940 Act. The Trust was established as a
17
<PAGE>
Massachusetts business trust on October 11, 1984, for the purpose of providing a
vehicle for the investment of assets of various separate accounts established by
the Company or other affiliated insurance companies. Nine investment portfolios
of the Trust currently are available under the Contract, each issuing a series
of shares: Select Emerging Markets Fund, Select International Equity Fund,
Select Aggressive Growth Fund, Select Capital Appreciation Fund, Select Value
Opportunity Fund, Select Strategic Growth Fund, Select Growth and Income Fund,
Select Income Fund and the Money Market Fund. The assets of each Fund are held
separate from the assets of the other Funds. Each Fund operates as a separate
investment vehicle and the income or losses of one Fund have no effect on the
investment performance of another Fund. Shares of the Trust are not offered to
the general public but solely to such variable accounts.
Allmerica Financial Investment Management Services, Inc. ("AFIMS") serves as the
investment adviser of the Trust and has entered into sub-advisory agreements
with other investment managers ("Sub-Advisers") who manage the investments of
the Funds. See "Investment Advisory Services to the Trust."
FIDELITY VARIABLE INSURANCE PRODUCTS FUND. Fidelity Variable Insurance Products
Fund ("Fidelity VIP"), managed by Fidelity Management & Research Company
("FMR"), is an open-end, diversified, management investment company organized as
a Massachusetts business trust on November 13, 1981 and registered with the SEC
under the 1940 Act. Three of its investment portfolios are available under the
Contract: Fidelity VIP High Income Portfolio, Fidelity VIP Equity-Income
Portfolio, and Fidelity VIP Growth Portfolio.
Various Fidelity companies perform certain activities required to operate
Fidelity VIP. FMR is one of America's largest investment management
organizations, and has its principal business address at 82 Devonshire Street,
Boston, Massachusetts. It is composed of a number of different companies which
provide a variety of financial services and products. FMR is the original
Fidelity company, founded in 1946. It provides a number of mutual funds and
other clients with investment research and portfolio management services. The
Portfolios of Fidelity VIP as part of their operating expenses pay an investment
management fee to FMR. See "Investment Advisory Services to Fidelity VIP."
T. ROWE PRICE INTERNATIONAL SERIES, INC. T. Rowe Price International Series,
Inc. ("T. Rowe Price"), managed by Rowe Price-Fleming International, Inc.
("Price-Fleming"), is an open-end, diversified, management investment company
organized as a Maryland corporation in 1994 and registered with the SEC under
the 1940 Act. One of its investment portfolios is available under the Contract:
the T. Rowe Price International Stock Portfolio. See "Investment Advisory
Services to T. Rowe Price." One of its affiliates, T. Rowe Price Associates,
Inc., serves as the Sub-Adviser to the Select Capital Appreciation Fund.
ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC. Alliance Variable Products Series
Fund, Inc. ("Alliance"), managed by Alliance Capital Management L.P. ("Alliance
Capital"), is an open-end, diversified, management investment company organized
as a Maryland corporation on November 17, 1987 and registered with the SEC under
the 1940 Act. One of its investment portfolios is available under the Contract:
the Alliance Premier Growth Portfolio. See "Investment Advisory Services to
Alliance."
INVESTMENT OBJECTIVES AND POLICIES
A summary of investment objectives of each of the Underlying Funds is set forth
below. MORE DETAILED INFORMATION REGARDING THE INVESTMENT OBJECTIVES,
RESTRICTIONS AND RISKS, EXPENSES PAID BY THE UNDERLYING FUNDS, AND OTHER
RELEVANT INFORMATION REGARDING THE UNDERLYING FUNDS MAY BE FOUND IN THE
PROSPECTUSES OF THE TRUST, FIDELITY VIP AND T. ROWE PRICE, WHICH PROSPECTUSES
ACCOMPANY THIS PROSPECTUS, AND SHOULD BE READ CAREFULLY BEFORE INVESTING. The
Statements of Additional Information ("SAI") of the Underlying Funds are
available upon request. There can be no assurance that the investment objectives
of the Underlying Funds can be achieved or that the value of the Contract will
equal or exceed the aggregate amount of the purchase payments made under the
Contract.
18
<PAGE>
SELECT EMERGING MARKETS FUND -- seeks long-term growth of capital by investing
in the world's emerging markets. The Sub-Adviser for the Select Emerging Markets
Fund is Schroder Investment Management North America Inc.
SELECT INTERNATIONAL EQUITY FUND -- seeks maximum long-term total return
(capital appreciation and income). The Fund will invest primarily in common
stocks of established non-U.S. companies. The Sub-Adviser for the Select
International Equity Fund is Bank of Ireland Asset Management (U.S.) Limited.
T. ROWE PRICE INTERNATIONAL STOCK PORTFOLIO -- seeks long-term growth of capital
through investments primarily in common stocks of established, non-U.S.
companies. The manager of the Portfolio is Rowe Price-Fleming International,
Inc.
SELECT AGGRESSIVE GROWTH FUND -- seeks above-average capital appreciation by
investing primarily in common stocks of companies which are believed to have
significant potential for capital appreciation. The Sub-Adviser for the Select
Aggressive Growth Fund is Nicholas-Applegate Capital Management L.P.
SELECT CAPITAL APPRECIATION FUND -- seeks long-term growth of capital.
Realization of income is not a significant investment consideration and any
income realized on the Fund's investments will be incidental to its primary
objective. The Fund will invest primarily in common stock of industries and
companies which are experiencing favorable demand for their products and
services, and which operate in a favorable competitive environment and
regulatory climate. The Sub-Adviser for the Select Capital Appreciation Fund is
T. Rowe Price Associates, Inc.
SELECT VALUE OPPORTUNITY FUND -- seeks long-term growth of capital by investing
principally in diversified portfolio of common stocks of small and mid-size
companies whose securities at the time of purchase are considered by the
Sub-Adviser to be undervalued. The Sub-Adviser for the Select Value Opportunity
Fund is Cramer Rosenthal McGlynn, LLC.
ALLIANCE PREMIER GROWTH PORTFOLIO -- seeks growth of capital by pursuing
aggressive investment policies.
SELECT STRATEGIC GROWTH FUND -- seeks long-term growth of capital by investing
primarily in common stocks of established companies. The Sub-Adviser for the
Select Strategic Growth Fund is Cambiar Investors, Inc.
FIDELITY VIP GROWTH PORTFOLIO -- seeks to achieve capital appreciation. The
Portfolio normally purchases common stocks, although its investments are not
restricted to any one type of security. Capital appreciation also may be found
in other types of securities, including bonds and preferred stocks.
SELECT GROWTH AND INCOME FUND -- seeks a combination of long-term growth of
capital and current income. The Fund will invest primarily in dividend-paying
common stocks and securities convertible into common stocks. The Sub-Adviser for
the Select Growth and Income Fund is J. P. Morgan Investment Management Inc.
FIDELITY VIP EQUITY-INCOME PORTFOLIO -- seeks reasonable income by investing
primarily in income-producing equity securities. In choosing these securities,
the Portfolio also will consider the potential for capital appreciation. The
Portfolio's goal is to achieve a yield which exceeds the composite yield on the
securities comprising the S&P 500.
FIDELITY VIP HIGH INCOME PORTFOLIO -- seeks to obtain a high level of current
income by investing primarily in high-yielding, lower-rated fixed-income
securities (commonly referred to as "junk bonds"), while also considering growth
of capital. These securities are often considered to be speculative and involve
greater risk of default or price changes than securities assigned a high quality
rating. For more information about these lower-rated securities, see the VIP
prospectus.
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<PAGE>
SELECT INCOME FUND -- seeks a high level of current income. The Fund will invest
primarily in investment-grade, fixed-income securities. The Sub-Adviser for the
Select Income Fund is Standish, Ayer, & Wood, Inc.
MONEY MARKET FUND -- seeks to obtain maximum current income consistent with the
preservation of capital and liquidity. Allmerica Asset Management, Inc. is the
Sub-Adviser of the Money Market Fund.
If there is a material change in the investment policy of a Sub-Account or the
Fund in which it invests, the Owner will be notified of the change. If the Owner
has Accumulated Value allocated to that Fund, he or she may have the Accumulated
Value reallocated without charge to another Fund or to the Fixed Account, 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 Owner's right to transfer.
INVESTMENT ADVISORY SERVICES
INVESTMENT ADVISORY SERVICES TO THE TRUST. The overall responsibility for the
supervision of the affairs of the Trust rests with the trustees. The Trust has
entered into an agreement ("Management Agreement") with Allmerica Financial
Investment Management Services, Inc. ("AFIMS"), an indirect wholly owned
subsidiary of First Allmerica, to handle the day-to-day affairs of the Trust.
AFIMS, subject to review by the trustees, is responsible for the general
management of the Funds of the Trust. AFIMS also performs certain administrative
and management services for the Trust, furnishes to the Trust all necessary
office space, facilities and equipment, and pays the compensation, if any, of
officers and trustees affiliated with AFIMS.
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.
These include fees and expenses associated with the registration and
qualification of the Trust's shares under the Securities Act of 1933 ("the 1933
Act"), other fees payable to the SEC, independent public accountant, legal and
custodian fees, association membership dues, taxes, interest, insurance
premiums, brokerage commission, fees and expenses of the trustees who are not
affiliated with AFIMS, 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 each Fund of the Trust as follows:
<TABLE>
<CAPTION>
FUND NET ASSET VALUE RATE
- -------------------------------- ---------------- ---------
Select Emerging Markets Fund * 1.35%
<S> <C> <C>
First $100
Select International Equity Fund million 1.00%
Next $150
million 0.90%
Over $250
million 0.85%
First $100
Select Aggressive Growth Fund million 1.00%
Next $150
million 0.90%
Next $250
million 0.80%
Next $500
million 0.70%
Over $1 billion 0.65%
First $100
Select Capital Appreciation Fund million 1.00%
Next $150
million 0.90%
Next $250
million 0.80%
Next $500
million 0.70%
Over $1 billion 0.65%
First $100
Select Value Opportunity Fund million 1.00%
Next $150
million 0.85%
Next $250
million 0.80%
Next $250
million 0.75%
Over $750
million 0.70%
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
FUND NET ASSET VALUE RATE
- -------------------------------- ---------------- ---------
Select Strategic Growth Fund * 0.85%
<S> <C> <C>
First $100
Select Growth and Income Fund million 0.75%
Next $150
million 0.70%
Over $250
million 0.65%
First $50
Select Income Fund million 0.60%
Next $50 million 0.55%
Over $100
million 0.45%
First $50
Money Market Fund million 0.35%
Next $200
million 0.25%
Over $250
million 0.20%
</TABLE>
* For the Select Emerging Markets Fund and Select Strategic Growth Fund, the
rate applicable to AFIMS does not vary according to the level of assets in the
Fund.
Under the management agreement with the Trust, AFIMS has entered into agreements
with investment advisers ("Sub-Advisers") selected by AFIMS and Trustees in
consultation with BARRA RogersCasey, Inc. ("BARRA RogersCasey"), a pension
consulting firm. The cost of such consultation services is borne by AFIMS. BARRA
RogersCasey provides consulting services to pension plans representing hundreds
of billions of dollars in total assets and, in its consulting capacity, monitors
the investment performance of over 1000 investment advisers. BARRA RogersCasey
is wholly-controlled by BARRA, Inc. As a consultant, BARRA RogersCasey has no
decision-making authority with respect to the Funds, and is not responsible for
any advice provided by AFIMS or the Sub-Advisers.
Each independent Sub-Adviser is selected by using strict objective,
quantitative, and qualitative criteria, with special emphasis on the
Sub-Adviser's record in managing similar portfolios. In consultation with BARRA
RogersCasey, a committee monitors and evaluates the ongoing performance of all
of the Funds. The committee may recommend the replacement of a Sub-Adviser of
one of the Funds of the Trust, or the addition or deletion of any of the other
Funds. The committee includes members who may be affiliated or unaffiliated with
the Company and the Trust. The Sub-Advisers (other than Allmerica Asset
Management, Inc.) are not affiliated with the Company or the Trust.
Under each Sub-Adviser agreement, the Sub-Adviser is authorized to engage in
portfolio transactions on behalf of the Fund, subject to the Trustees'
instructions. The terms of a Sub-Adviser agreement cannot be materially changed
without the approval of a majority in interest of the shareholders of the Fund.
The prospectus of the Trust contains additional information concerning the
Funds, including information about additional expenses paid by the Funds, and
should be read in conjunction with the Prospectus.
INVESTMENT ADVISORY SERVICES TO FIDELITY VIP. For managing investments and
business affairs, each Portfolio pays a monthly fee to Fidelity Management &
Research Company ("FMR"). The prospectus of Fidelity VIP contains additional
information about the Portfolios, including information about additional
expenses paid by the Portfolios, and should be read in conjunction with this
Prospectus.
The fee for each fund is calculated by adding a group fee rate to an individual
fund fee rate, multiplying the result by the fund's monthly average net assets,
and dividing by twelve.
The Fidelity VIP High Income Portfolio's annual fee rate is made up of the sum
of two components:
1. A group fee rate based on the average net assets of all the mutual funds
advised by FMR. On an annual basis, this rate cannot rise above 0.37%, and
will drop as the total assets under management increase.
2. An individual fund fee rate of 0.45% for the Fidelity VIP High Income
Portfolio.
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<PAGE>
Both Fidelity VIP Growth and Fidelity VIP Equity-Income Portfolios' annual fee
rates are made up of two components:
1. A group fee rate based on the average net assets of all the mutual funds
advised by FMR. On an annual basis, this rate cannot rise above 0.52%, and
will drop as the total assets under management increase.
2. An individual fund fee rate of 0.30% for the Fidelity VIP Growth Portfolio
and 0.20% for the Fidelity VIP Equity-Income Portfolio.
Thus, the Fidelity VIP High Income Portfolio may have a fee as high as 0.82% of
its average net assets. The Fidelity VIP Growth Portfolio may have a fee as high
as 0.82% of its average net assets. The Fidelity VIP Equity-Income Portfolio may
have a fee as high as 0.72% of its average net assets.
INVESTMENT ADVISORY SERVICES TO T. ROWE PRICE. To cover investment management
and operating expenses, the T. Rowe Price International Stock Portfolio pays
Rowe Price-Fleming International, Inc. a single, all-inclusive fee of 1.05% of
its average daily net assets.
INVESTMENT ADVISORY SERVICES TO ALLIANCE. Alliance Capital Management L.P.
("Alliance Capital") provides investment advisory services and order placement
facilities for the Alliance Premier Growth Portfolio. For these advisory
services, the Portfolio pays Alliance Capital 1.00% of its average net assets.
Management fee waivers and/or reimbursements may be in effect for certain or all
of the Underlying Funds. For more information, see "Annual Underlying Fund
Expenses" under the SUMMARY OF FEES AND EXPENSES section.
22
<PAGE>
DESCRIPTION OF THE CONTRACT -- THE ACCUMULATION PHASE
A. PAYMENTS
The latest Issue Date is age 85 of the oldest Owner, or, if the Owner is not a
natural person, the oldest Annuitant. The Company will issue a Contract when its
underwriting requirements are met. These requirements include receipt of the
initial payment and allocation instructions by the Company at its Principal
Office and may include the proper completion of an application; however, where
permitted by law, the Company may issue a Contract without completion of an
application. If all issue requirements are not completed within five business
days of the Company's receipt of the initial payment, the payment will be
returned immediately unless the applicant authorizes the Company to retain it
pending completion of all issue requirements.
Payments may be made to the Contract at any time prior to the Annuity Date, or
prior to the death of an Owner, subject to certain minimums:
- Currently, the initial payment must be at least $1,000.
- Under a salary deduction or monthly automatic payment plan, the minimum
initial payment is $50.
- Each subsequent payment must be at least $50.
- Where the contribution on behalf of an employee under an
employer-sponsored retirement plan is less than $600 but more than $300
annually, the Company may issue a Contract on the employee if the plan's
average annual contribution per eligible plan participant is at least
$600.
- The minimum allocation to a Guarantee Period Account is $1,000. If less
than $1,000 is allocated to a Guarantee Period Account, the Company
reserves the right to apply that amount to the Money Market Fund of the
Trust.
Payments are to be made payable to the Company. The Company may reduce a payment
by any applicable premium tax before applying it to the Contract. The initial
net payment is credited to the Contract and allocated among the requested
accounts as of the date that all issue requirements are properly met. The
allocation instructions for the initial net payment will serve as the allocation
instructions for all future payments. You can change the allocation instructions
for future payments by notifying the Company.
You also have the option of specifying how a specific payment should be
allocated. This will not change the allocation instructions for any subsequent
payment.
For a discussion of future payments to an Automatic Transfer Program (Dollar
Cost Averaging), please see "Automatic Transfers (Dollar Cost Averaging)" below.
In order for the Owner to be able to initiate transactions over the telephone, a
properly completed authorization must be on file before telephone requests will
be honored. The policy of the Company and its agents and affiliates is that we
will not be responsible for losses resulting from acting upon telephone requests
reasonably believed to be genuine. The Company will employ reasonable procedures
to confirm that instructions communicated by telephone are genuine; otherwise,
the Company may be liable for any losses due to unauthorized or fraudulent
instructions. Such procedures may include, among others, requiring some form of
personal identification prior to acting upon instructions received by telephone.
All telephone instructions are tape-recorded.
23
<PAGE>
B. PAYMENT CREDITS
A Payment Credit will be added to the Contract's Accumulated Value each time a
payment is made. The Payment Credit is funded from the Company's General Account
and is currently equal to 5% of each payment received. The Company guarantees
that the Payment Credit will never be less than 5%. Payment Credits are not
considered to be "investment in the contract" for income tax purposes. (See
FEDERAL TAX CONSIDERATIONS).
Each Payment Credit is immediately allocated among the Accounts in the same
proportions as the applicable payment. However, if you cancel the Contract under
its "Right to Examine" provision, the amount refunded to you will be reduced by
the amount of the Payment Credit(s). If the applicable "Right to Examine"
provision in your state provides that you will receive the adjusted Accumulated
Value of the Contract, this means that you receive any gains and bear any losses
attributable to the Payment Credit. For more information, see "D. Right to
Cancel," below.
C. COMPUTATION OF VALUES
The Owner may allocate payments among the Sub-Accounts, Guarantee Period
Accounts, and the Fixed Account. Allocations to the Guarantee Period Accounts
and the Fixed Account are not converted into Accumulation Units, but are
credited interest at a rate periodically set by the Company. See "GUARANTEE
PERIOD ACCOUNTS" and APPENDIX A, "MORE INFORMATION ABOUT THE FIXED ACCOUNT."
The Accumulated Value under the Contract is determined by:
(1) multiplying the number of Accumulation Units in each Sub-Account by the
value of an Accumulation Unit of that Sub-Account on the Valuation Date,
(2) adding together the values of each Sub-Account, and
(3) adding the amount of the accumulations in the Fixed Account and Guarantee
Period Accounts, if any.
THE ACCUMULATION UNIT. Allocations to the Sub-Accounts are credited to the
Contract in the form of Accumulation Units. Accumulation Units are credited
separately for each Sub-Account. The number of Accumulation Units of each
Sub-Account credited to the Contract is equal to the portion of the payment and
Payment Credit allocated to the Sub-Account, divided by the dollar value of the
applicable Accumulation Unit as of the Valuation Date. The number of
Accumulation Units resulting from each payment and Payment Credit will remain
fixed unless changed by a subsequent split of Accumulation Unit value, a
transfer, a withdrawal, or surrender. The dollar value of an Accumulation Unit
of each Sub-Account varies from Valuation Date to Valuation Date based on the
investment experience of that Sub-Account, and will reflect the investment
performance, expenses, and charges of its Underlying Funds. The value of an
Accumulation Unit was arbitrarily set at $1.00 on the first Valuation Date for
each Sub-Account.
NET INVESTMENT FACTOR. The net investment factor is an index that measures the
investment performance of a Sub-Account from one Valuation Period to the next.
This factor is equal to 1.000000 plus the result (which may be positive or
negative) from dividing (1) by (2) and subtracting (3) and (4) where:
(1) is the investment income of a Sub-Account for the Valuation Period,
including realized or unrealized capital gains and losses during the
Valuation Period, adjusted for provisions made for taxes, if any;
(2) is the value of that Sub-Account's assets at the beginning of the Valuation
Period;
(3) is a charge for mortality and expense risks equal to 1.25% on an annual
basis of the daily value of the Sub-Account's assets; and
(4) is an administrative charge equal to 0.15% on an annual basis of the daily
value of the Sub-Account's assets.
24
<PAGE>
The dollar value of an Accumulation Unit as of a given Valuation Date is
determined by multiplying the dollar value of the corresponding Accumulation
Unit as of the immediately preceding Valuation Date by the appropriate net
investment factor.
For an illustration of an Accumulation Unit calculation using a hypothetical
example see the SAI.
D. RIGHT TO CANCEL
An Owner may cancel the Contract at any time within ten days after receipt of
the Contract (or longer if required by law) and receive a refund. In order to
cancel the Contract, the Owner must mail or deliver it to the Company's
Principal Office at 440 Lincoln Street, Worcester, MA 01653, or to an authorized
representative. Mailing or delivery must occur within ten days after receipt of
the Contract for cancellation to be effective.
In most states, the Company will pay the Owner the Contract's Accumulated Value,
adjusted for any Market Value Adjustment for amounts allocated to a Guarantee
Period Account, plus any amounts deducted for taxes, charges or fees, minus any
Payment Credit(s). However, if the Contract was purchased as an IRA or issued in
a state that requires a full refund of the initial payment(s), the Company will
provide a refund equal to your gross payment(s). In some states, the refund may
equal the greater of (a) your gross payment(s) or (b) the Accumulated Value
adjusted for any Market Value Adjustment, plus any amounts deducted for taxes,
charges or fees, minus any Payment Credit(s). At the time the Contract is
issued, the "Right to Examine" provision on the cover of the Contract will
specifically indicate what the refund will be and the time period allowed to
exercise the right to cancel.
Each time you make a payment, you receive a Payment Credit equal to 5% of the
payment. If you cancel the Contract under its "Right to Examine" provision, your
refund will be reduced by the amount of the Payment Credit(s). If the "Right to
Examine" provision in your state provides that you will receive the Accumulated
Value of the Contract (adjusted as described above), this means that you receive
any gains and bear any losses attributable to the Payment Credit.
The liability of the Variable Account under this provision is limited to the
Owner's Accumulated Value in the Sub-Accounts on the date of cancellation. Any
additional amounts refunded to the Owner will be paid by the Company.
E. TRANSFER PRIVILEGE
Prior to the Annuity Date, the Owner may transfer amounts among accounts at any
time upon written or telephone request to the Company. As discussed in "A.
Payments," a properly completed authorization form must be on file before
telephone requests will be honored. Transfer values will be based on the
Accumulated Value next computed after receipt of the transfer request.
Transfers to a Guarantee Period Account must be at least $1,000. If the amount
to be transferred to a Guarantee Period Account is less than $1,000, the Company
may transfer that amount to the Money Market Fund. Transfers from a Guarantee
Period Account prior to the expiration of the Guarantee Period will be subject
to a Market Value Adjustment.
Currently, the Company does not charge for transfers. The first 12 transfers in
a Contract year are guaranteed to be free of any transfer charge. For each
subsequent transfer in a Contract year, the Company reserves the right to assess
a charge, guaranteed never to exceed $25, to reimburse it for the expense of
processing transfers. The first automatic transfer or rebalancing under an Asset
Allocation Model Reallocation program, Automatic Transfers (Dollar Cost
Averaging) program, or Automatic Account Rebalancing program counts as one
transfer for purposes of the 12 transfers guaranteed to be free of a transfer
charge in each Contract year. Each subsequent automatic transfer or rebalancing
under that request is without charge and does not reduce the remaining number of
transfers which may be made free of charge in that Contract year.
25
<PAGE>
The Company also reserves the right to restrict transfer privileges when
exercised by a market timing firm or any other third party authorized to
initiate allocations, transfers or exchanges on behalf of multiple Contract
Owners. The Company may, among other things, not accept:
- the transfer or exchange instructions of any agent acting under a power of
attorney on behalf of more than one Owner, or
- the transfer or exchange instructions of individual Owners who have
executed pre-authorized transfer or exchange forms which are submitted by
market timing firms or other third parties on behalf of more than one
Owner at the same time.
ASSET ALLOCATION MODEL REALLOCATIONS. If an Owner elects to follow an asset
allocation strategy, the Owner may preauthorize transfers in accordance with the
chosen strategy. The Company may provide administrative or other support
services to independent third parties that provide recommendations as to such
allocation strategies. However, the Company does not engage any third parties to
offer investment allocation services of any type under this Contract, does not
endorse or review any investment allocation recommendations made by such third
parties and is not responsible for the investment allocations and transfers
transacted on the Owner's behalf. The Company does not charge for providing
additional asset allocation support services. Additional information concerning
asset allocation programs for which the Company is currently providing support
services may be obtained from a registered representative or the Company.
AUTOMATIC TRANSFERS (DOLLAR COST AVERAGING). You may elect automatic transfers
of a predetermined dollar amount on a periodic basis from the Fixed Account or
the Sub-Accounts investing in the Money Market Fund and the Select Income Fund
("source accounts"). You may elect automatic transfers to one or more Sub-
Accounts, subject to the following:
- the predetermined dollar amount may not be less than $100;
- the periodic basis may be monthly, quarterly, semi-annually or annually;
- automatic transfers may not be made into the selected source account,
Fixed Account, or the Guarantee Period Accounts; and
- if an automatic transfer would reduce the balance in the source account(s)
to less than $100, the entire balance will be transferred proportionately
to the chosen Sub-Accounts.
Automatic transfers from a particular source account will continue until the
earlier of:
- the amount in the source account on a transfer date is zero; or
- the Owner's request to terminate the option is received by the Company.
If additional amounts are allocated to a source account before its balance has
fallen to zero, those additional amounts will also be automatically transferred.
The original automatic transfer allocations will apply to all amounts in that
source account unless you provide new allocation instructions. New allocation
instructions will apply to the entire balance in the source account. If
additional amounts are allocated to a source account after its balance has
fallen to zero, automatic transfers will not begin again unless you specifically
instruct the Company to do so.
To the extent permitted by law, the Company reserves the right, from time to
time, to credit an enhanced interest rate to an initial and/or subsequent
payment made to the Fixed Account, which is then used as the source account from
which to process automatic transfers. For more information see APPENDIX A, "MORE
INFORMATION ABOUT THE FIXED ACCOUNT."
26
<PAGE>
AUTOMATIC ACCOUNT REBALANCING. The Owner may request automatic rebalancing of
Sub-Account allocations on a monthly, quarterly, semi-annual or annual basis in
accordance with his/her specified percentage allocations. As frequently as
elected by the Owner, the Company will review the percentage allocations in the
Underlying Funds and, if necessary, transfer amounts to ensure conformity with
the designated percentage allocation mix. If the amount necessary to
re-establish the mix on any scheduled date is less than $100, no transfer will
be made.
Automatic Account Rebalancing will continue until (1) the Owner's request to
terminate or change the option is received by the Company or (2) the end date
designated by the Owner when the option was elected. If a subsequent payment is
allocated in a manner different from the percentage allocation mix in effect on
the date the payment is received, on the next scheduled rebalancing date the
payment will be reallocated in accordance with the existing mix.
Currently, Dollar Cost Averaging and Automatic Account Rebalancing may not be in
effect simultaneously. Either option may be elected at no additional charge when
the Contract is purchased or at a later date. The Company reserves the right to
limit the number of Sub-Accounts that may be utilized for automatic transfers
and rebalancing, and to discontinue either option upon advance written notice.
F. SURRENDERS AND WITHDRAWALS.
Before the Annuity Date, an Owner may surrender the Contract for its Surrender
Value or withdraw a portion of its Accumulated Value. In the case of surrender,
the Owner must send the Contract and a signed written request for surrender,
satisfactory to the Company, to the Principal Office. The Surrender Value will
be calculated based on the Contract's Accumulated Value as of the Valuation
Date.
In the case of a withdrawal, the Owner must submit to the Principal Office a
signed, written request indicating the desired dollar amount and the accounts
from which such amount is to be withdrawn. A withdrawal from a Sub-Account will
result in cancellation of a number of units equivalent in value to the amount
withdrawn. The amount withdrawn will equal the amount requested by the Owner
plus any applicable surrender charge. Each withdrawal must be a minimum of $100.
No withdrawal will be permitted if the Accumulated Value remaining under the
Contract would be reduced to less than $1,000.
A surrender charge and a Contract fee may apply when a withdrawal is made or a
Contract is surrendered. See "CHARGES AND DEDUCTIONS." However, each calendar
year prior to the Annuity Date, an Owner may withdraw a portion of the
Contract's Surrender Value without any applicable surrender charge; see "E.
Surrender Charge," "Withdrawal Without Surrender Charge" under CHARGES AND
DEDUCTIONS. Amounts withdrawn from a Guarantee Period Account prior to the end
of the applicable Guarantee Period will be subject to a Market Value Adjustment,
as described under "GUARANTEE PERIOD ACCOUNTS."
Any distribution is normally payable within seven days following the Company's
receipt of the surrender or withdrawal request. The Company reserves the right
to defer surrenders and withdrawals of amounts allocated to the Company's Fixed
Account and Guarantee Period Accounts for a period not to exceed six months. The
Company reserves the right to defer surrenders and withdrawals of amounts in
each Sub-Account in any period during which:
- trading on the New York Stock Exchange is restricted as determined by the
SEC or such Exchange is closed for other than weekends and holidays,
- the SEC has by order permitted such suspension, or
- an emergency, as determined by the SEC, exists such that disposal of
portfolio securities or valuation of assets of a separate account is not
reasonably practicable.
27
<PAGE>
The surrender and withdrawal rights of Owners who are participants under Section
403(b) plans or who are participants in the Texas Optional Retirement Program
(Texas ORP) are restricted; see "Tax-Sheltered Annuities" and "Texas Optional
Retirement Program."
For important tax consequences, which may result from surrender or withdrawals,
see "FEDERAL TAX CONSIDERATIONS."
For information about Withdrawals after the Annuity Date, see "F. Withdrawals
After the Annuity Date" under ANNUITIZATION -- THE PAYOUT PHASE.
SYSTEMATIC WITHDRAWALS. The Owner may elect an automatic schedule of
withdrawals (systematic withdrawals) from amounts in the Sub-Accounts and/or the
Fixed Account on a periodic basis (monthly, bi-monthly, quarterly, semi-annually
or annually). Systematic withdrawals from Guarantee Period Accounts are not
available. The Owner may request:
- the withdrawal of a SPECIFIC DOLLAR AMOUNT and the percentage of this
amount to be taken from each designated Sub-Account and/or the Fixed
Account; or
- the withdrawal of a SPECIFIC PERCENTAGE of the Accumulated Value
calculated as of the withdrawal dates, and may designate the percentage of
this amount which should be taken from each account.
The first withdrawal will take place on the latest of 15 days after Issue Date,
the date the written request is received at the Principal Office, or on a date
specified by the Owner.
Systematic withdrawals will first be taken from amounts available as a
"Withdrawal Without Surrender Charge" (see "E. Surrender Charge, Withdrawal
Without Surrender Charge" under CHARGES AND DEDUCTIONS); then from any
applicable payments not subject to a surrender charge, if any; then from
payments subject to a surrender charge; and last, from Payment Credits. Any
applicable surrender charge will be deducted from the Contract's remaining
Accumulated Value.
The minimum amount of each automatic withdrawal is $100. If a withdrawal would
cause the remaining Accumulated Value to be less than $1,000, systematic
withdrawals may be discontinued. Systematic withdrawals will cease automatically
on the Annuity Date. The Owner may change or terminate systematic withdrawals
only by written request to the Principal Office.
LIFE EXPECTANCY DISTRIBUTIONS (for Qualified Contracts and Contracts issued
under Section 457 Deferred Compensation Plans only). Prior to the Annuity Date,
an Owner may elect to make a series of systematic withdrawals from the Contract
according to the Company's life expectancy distribution ("LED") option by
returning a properly signed LED request form to the Principal Office. Where the
Owner is a trust or other nonnatural person, the Owner may elect the LED option
based on the Annuitant's life expectancy.
If an Owner elects the Company's LED option, in each calendar year a fraction of
the Accumulated Value is withdrawn without a surrender charge, based on the
Owner's life expectancy (or the joint life expectancy of the Owner and a
beneficiary.) The numerator of the fraction is 1 (one). The denominator of the
fraction will be either:
- the remaining life expectancy of the Owner (or Owner and beneficiary), as
determined annually by the Company; or
- the prior year's life expectancy, minus one.
The resulting fraction, expressed as a percentage, is then applied to the
Accumulated Value at the beginning of the year to determine the amount to be
distributed during the year. The Owner may choose to have the
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applicable life expectancy redetermined each year or use the prior year's life
expectancy, minus one. Under the Company's LED option, the amount withdrawn from
the Contract changes each year.
The Owner may elect periodic LED distributions on a monthly, bi-monthly,
quarterly, semi-annual, or annual basis. The Owner may terminate the LED option
at any time. The LED option will terminate automatically on the maximum Annuity
Date permitted under the Contract, at which time an annuity payout option must
be selected.
The LED option may not produce annual distributions that meet the definition of
"substantially equal periodic payments" as defined under Code Section 72(t). The
withdrawals may be treated by the Internal Revenue Service (IRS) as premature
distributions from the Contract and may be subject to a 10% federal tax penalty.
Owners seeking distributions over their life under this definition should
consult their tax advisor. For more information, see "FEDERAL TAX
CONSIDERATIONS," "B. Taxation of the Contract in General." IN ADDITION, IF THE
AMOUNT NECESSARY TO MEET THE "SUBSTANTIALLY EQUAL PERIODIC PAYMENT" DEFINITION
IS GREATER THAN THE COMPANY'S LED AMOUNT, A SURRENDER CHARGE MAY APPLY TO THE
AMOUNT IN EXCESS OF THE LED AMOUNT.
SYSTEMATIC LEVEL FREE OF SURRENDER CHARGE WITHDRAWAL PROGRAM. In order to
ensure that no surrender charge will ever apply to withdrawals, the Owner may
preauthorize level periodic withdrawals under the Systematic Level Free of
Surrender Charge Withdrawal Program. Withdrawals under the Program may be made
on a monthly, bi-monthly, quarterly, semi-annual or annual basis. In order to
ensure that no surrender charge will ever apply, the periodic withdrawals in any
calendar year are limited to 15% of the total of all payments invested in the
Contract as reduced by certain prior withdrawal(s) of payments. For more
information on how this amount is calculated, see "E. Surrender Charge,"
"Withdrawal Without Surrender Charge" under CHARGES AND DEDUCTIONS.
The program will automatically terminate if a withdrawal that is not part of the
program is made. Otherwise, withdrawals will continue until all available
Accumulated Value has been exhausted or until the Owner terminates the program
by written request.
G. DEATH BENEFIT.
A death benefit is payable if the Owner or the first of Joint Owners dies prior
to the Annuity Date. If the Owner is a natural person, no death benefit is
payable at the death of any Annuitant. If the Owner is not a natural person, a
death benefit will be paid upon the death of any Annuitant. A spousal
beneficiary may elect to continue the Contract rather than receive the death
benefit as provided in "H. The Spouse of the Owner as Beneficiary."
STANDARD DEATH BENEFIT. Unless an enhanced death benefit is elected at issue,
the standard death benefit will be paid. The standard death benefit is equal to
the greater of (a) the Contract's Accumulated Value on the Valuation Date that
the Company receives proof of death, increased by any positive Market Value
Adjustment or (b) gross payments prior to the date of death, proportionately
reduced to reflect withdrawals.
For each withdrawal under (b), the proportionate reduction is calculated by
multiplying the standard death benefit immediately prior to the withdrawal by
the following fraction:
Amount of the withdrawal
------------------------------------------------
Accumulated Value immediately prior to the withdrawal
OPTIONAL ENHANCED DEATH BENEFIT RIDER. When applying for the Contract, an Owner
may elect the optional 5% Enhanced Death Benefit With Annual Step-Up Rider. A
separate charge for this Rider is made against the Contract's Accumulated Value
on the last day of each Contract month for the coverage provided during that
month and, if applicable, on the date the Rider is terminated. The charge is
made through a pro-rata reduction (based on relative values) of Accumulation
Units in the Sub-Accounts and dollar amounts in the
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Fixed and Guarantee Period Accounts. For specific charges and more detail, see
"C. Optional Rider Charges" under CHARGES AND DEDUCTIONS.
The 5% Enhanced Death Benefit With Annual Step-Up Rider provides a death benefit
guarantee if death of an Owner (or an Annuitant if the Owner is not a natural
person) occurs before the Annuity Date. The calculation of the death benefit
depends upon whether death occurs before or on or after the 90th birthday:
I. Death BEFORE 90th Birthday. If an Owner (or an Annuitant if the Owner is not
a natural person) dies before the Annuity Date and before his/her 90th birthday,
the death benefit is equal to the GREATEST of:
(a) the Accumulated Value on the Valuation Date that the Company receives
proof of death, increased by any positive Market Value Adjustment;
(b) gross payments, accumulated daily at an effective annual yield of 5%
from the date each payment is applied until the date of death,
proportionately reduced to reflect withdrawals; and
(c) the highest Accumulated Value on any Contract anniversary date prior to
the date of death, as determined after being increased for any positive
Market Value Adjustment and subsequent payments and proportionately
reduced for subsequent withdrawals.
II. Death ON OR AFTER 90th Birthday. If an Owner (or the Annuitant if the Owner
is not a natural person) dies before the Annuity Date but on or after his/her
90th birthday, the death benefit is equal to the GREATER of:
(a) the Accumulated Value on the Valuation Date that the Company receives
proof of death, increased by any positive Market Value Adjustment; or
(b) the death benefit, as calculated under Section I above, that would have
been payable on the Contract anniversary prior to the deceased's 90th
birthday, increased for subsequent payments and proportionately reduced
for subsequent withdrawals.
Proportionate reductions are calculated in the same manner as described above
under "Standard Death Benefit."
PAYMENT OF THE DEATH BENEFIT PRIOR TO THE ANNUITY DATE. The death benefit
generally will be paid to the beneficiary in one sum upon receipt of proof of
death at the Principal Office, unless the Owner has elected to apply the
proceeds to a life annuity not extending beyond the beneficiary's life
expectancy. Instead of payment in one sum, the beneficiary may, by written
request, elect to:
(1) defer distribution of the death benefit for a period no more than five
years from the date of death; or
(2) receive distributions over the life of the beneficiary or for a period
certain not extending beyond the beneficiary's life expectancy, with
annuity benefit payments beginning within one year from the date of
death.
If distribution of the death benefit is deferred under (1) or (2), any value in
the Guarantee Period Accounts will be transferred to the Money Market
Sub-Account. The excess, if any, of the death benefit over the Accumulated Value
also will be transferred to the Money Market Sub-Account. The beneficiary may,
by written request, effect transfers and withdrawals during the deferral period
and prior to annuitization under (2), but may not make additional payments. The
death benefit will reflect any earnings or losses experienced during the
deferral period. If there are multiple beneficiaries, the consent of all is
required.
H. THE SPOUSE OF THE OWNER AS BENEFICIARY
If the sole beneficiary is the deceased Owner's spouse, he or she may, by
written request, continue the Contract in lieu of receiving payment of the death
benefit. The spouse will then become the Owner and Annuitant subject to the
following:
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(1) any value in the Guarantee Period Accounts will be transferred to the
Money Market Sub-Account; and
(2) the excess, if any, of the death benefit over the Contract's Accumulated
Value also will be added to the Money Market Sub-Account.
The resulting value will never be subject to a surrender charge when withdrawn.
The new Owner may also make additional payments, but a surrender charge will
apply to these additional amounts if they are withdrawn before they have been
invested in the Contract for at least nine years. All other rights and benefits
provided in the Contract will continue, except that any subsequent spouse of the
new Owner, if named as beneficiary, will not be entitled to continue the
Contract when the new Owner dies.
I. OPTIONAL MINIMUM GUARANTEED ANNUITY PAYOUT (M-GAP) RIDER
An optional Minimum Guaranteed Annuity Payout (M-GAP) Rider is available at
Issue Date for a separate monthly charge (see, "C. Optional Rider Charges" under
CHARGES AND DEDUCTIONS). The M-GAP Rider guarantees a minimum amount of fixed
annuity lifetime income during the annuity payout phase after a ten-year or a
fifteen-year waiting period, subject to the conditions described below. The
M-GAP Rider may not be available in all jurisdictions. The Company reserves the
right to terminate the availability of the M-GAP Rider at any time (see
"Conditions on Election of the M-GAP Rider" below).
The M-GAP Rider does not create Accumulated Value or guarantee performance of
any investment option. Annuitization under the terms of this Rider will occur at
the guaranteed annuity option rates listed under the Annuity Option Tables in
the Contract. Because this Rider is based on guaranteed actuarial factors, the
level of lifetime income that it guarantees may often be less than the level
that would be provided by applying the then current annuity factors. Therefore,
the Rider should be regarded as providing a guarantee of a minimum amount of
annuity income.
An M-GAP Benefit Base is determined on the Rider's effective date and each
applicable Contract anniversary thereafter. The M-GAP Benefit Base, less any
applicable premium tax, is the value that will be annuitized at the guaranteed
annuity option rates if the Rider is exercised. As described below, withdrawals
will reduce the Benefit Base.
The M-GAP Benefit Base is equal to the greatest of:
(a) the Accumulated Value, increased by any positive Market Value Adjustment, if
applicable;
(b) the Accumulated Value on the effective date of the Rider, accumulated daily
at an effective annual yield of 5%, plus gross payments made thereafter
accumulated daily at an effective annual yield of 5%, starting on the date
each payment is applied, proportionately reduced to reflect withdrawals; and
(c) the highest Accumulated Value on any Contract anniversary since the Rider's
effective date as determined after being increased for any subsequent
payments and any positive Market Value Adjustment, if applicable, and
proportionately reduced for subsequent withdrawals.
For each withdrawal described above, the proportionate reduction is calculated
by multiplying the (b) or (c) value, whichever is applicable, determined
immediately prior to the withdrawal by the following fraction:
Amount of the withdrawal
----------------------------------------------------------
Accumulated Value determined immediately prior to the withdrawal
CONDITIONS ON ELECTION OF THE M-GAP RIDER. The following conditions apply to
the election of the M-GAP Rider:
- The Owner must elect the M-GAP Rider at Contract issue.
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- The Owner may not elect a Rider with a ten-year waiting period if at the
time of election the youngest Owner has reached his or her 87th birthday.
The Owner may not elect a Rider with a fifteen-year waiting period if at
the time of election the youngest Owner has reached his or her 82nd
birthday (the age limitations may be lower in some jurisdictions.)
REPURCHASE FEATURE. On any Contract anniversary or within thirty days
immediately following any Contract anniversary, if the M-GAP Rider is still
being offered by the Company, the Owner may elect to terminate and repurchase
the Rider, thereby resetting the benefit based on the Contract's then current
Accumulated Value. The repurchase will be effective as of the termination date
of the prior Rider. A new waiting period, equal to or greater than the prior
waiting period, will commence as of that date. If the benefit is repurchased,
the Company's then current monthly charge for the M-GAP Rider will apply.
EXERCISING THE M-GAP RIDER. The following conditions apply to the exercise of
the M-GAP Rider:
- The Owner may only exercise the M-GAP Rider within thirty days after any
Contract anniversary following the expiration of a ten or fifteen-year
waiting period (whichever was elected) from the effective date of the
Rider.
- The Owner may only annuitize under a fixed annuity payout option involving
a life contingency, as provided under "C. Description of Annuity Payout
Options."
- The Owner may only annuitize at the guaranteed fixed annuity option rates
listed under the Annuity Option Tables in the Contract.
TERMINATING THE M-GAP RIDER. The following conditions apply to the termination
of the M-GAP Rider:
- The Owner may not terminate the M-GAP Rider prior to the seventh Contract
anniversary after the effective date of the Rider, unless such termination
occurs (1) on or within thirty days after a Contract anniversary and (2)
in conjunction with the repurchase of an M-GAP Rider with a waiting period
of equal or greater length, if available.
- The Owner may terminate the M-GAP Rider any time after the seventh
Contract anniversary following the effective date of the Rider.
- Other than in the event of a repurchase, once terminated the M-GAP Rider
may not be purchased again.
- The M-GAP Rider will terminate on the date the Contract is surrendered or
annuitized, or on the date that a death benefit is payable unless the
Contract is continued under "H. The Spouse of the Owner as Beneficiary"
(see DESCRIPTION OF THE CONTRACT -- THE ACCUMULATION PHASE.)
From time to time the Company may illustrate minimum guaranteed income amounts
under the M-GAP Rider for individuals based on a variety of assumptions,
including varying rates of return on the value of the Contract during the
accumulation phase, annuity payout periods, annuity payout options and M-GAP
Rider waiting periods. Any assumed rates of return are for purposes of
illustration only and are not intended as a representation of past or future
investment rates of return.
For example, the illustration below assumes an initial payment of $100,000 plus
Payment Credits for a male age 60 (at issue) and exercise of an M-GAP Rider with
a ten-year waiting period. The illustration assumes that no subsequent payments
or withdrawals are made and that the annuity payout option is a Life With 10
Year Period Certain. The values below have been computed based on a 5% net rate
of return and are the guaranteed minimums that would be received under the M-GAP
Rider. The minimum guaranteed benefit base amounts
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are the values that will be annuitized if the Rider is exercised. Minimum
guaranteed annual income values are based on a fixed annuity payout.
<TABLE>
<CAPTION>
MINIMUM
CONTRACT GUARANTEED MINIMUM
ANNIVERSARY BENEFIT GUARANTEED
AT EXERCISE BASE ANNUAL INCOME(1)
- ----------- ----------- ----------------
<S> <C> <C>
10 $ 171,034 $ 12,786
15 $ 218,287 $ 18,571
</TABLE>
(1)Other fixed annuity payout options involving a life contingency other than
Life Annuity With Payments Guaranteed for 10 Years are available. See "C.
Description of Annuity Payout Options."
J. ASSIGNMENT
The Contract, other than one sold in connection with certain qualified plans,
may be assigned by the Owner at any time prior to the Annuity Date and prior to
the death of an Owner (see "FEDERAL TAX CONSIDERATIONS"). The Company will not
be deemed to have knowledge of an assignment unless it is made in writing and
filed at the Principal Office. The Company will not assume responsibility for
determining the validity of any assignment. If an assignment of the Contract is
in effect on the Annuity Date, the Company reserves the right to pay to the
assignee, in one sum, that portion of the Surrender Value of the Contract to
which the assignee appears to be entitled. The Company will pay the balance, if
any, in one sum to the Owner in full settlement of all liability under the
Contract. The interest of the Owner and of any beneficiary will be subject to
any assignment.
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ANNUITIZATION -- THE PAYOUT PHASE
Subject to certain restrictions discussed below, at annuitization the Owner has
the right:
- to select the annuity payout option under which annuity benefit payments
are to be made;
- to determine whether those payments are to be made on a fixed basis, a
variable basis, or a combination fixed and variable basis. If a variable
payout annuity option is selected, the Owner must choose an Annuity
Benefit Payment Change Frequency ("Change Frequency") and the date the
first Change Frequency will occur;
- to select one of the available Assumed Investment Returns ("AIR") for a
variable option (see "D. Variable Annuity Benefit Payments" below for
details);
- to elect to have the Death Benefit applied under any annuity payout option
not extending beyond the beneficiary's life expectancy. The beneficiary
may not change such an election.
A. ELECTING THE ANNUITY DATE
Generally, annuity benefit payments under the Contract will begin on the Annuity
Date. The Annuity Date:
- may not be earlier than the second Contract Anniversary; and
- must occur on the first day of any month before the Owner's 99th birthday.
If the Owner does not select an Annuity Date, the Annuity Date will be the later
of (a) the Owner's age 85 or (b) two years after the Issue Date.
If there are Joint Owners, the age of the younger will determine the latest
possible Annuity Date. The Owner may elect to change the Annuity Date by sending
a written request to the Principal Office at least one month before the earlier
of the new Annuity Date or the currently scheduled date.
If the Annuity Date occurs when the Owner is at an advanced age, it is possible
that the Contract will not be considered an annuity for federal tax purposes. In
addition, the Internal Revenue Code ("the Code") and/or the terms of qualified
plans may impose limitations on the age at which annuity benefit payments may
commence and the type of annuity payout option that may be elected. The Owner
should carefully review the Annuity Date and the annuity payout options with
his/her tax adviser. See also "FEDERAL TAX CONSIDERATIONS" for further
information.
B. CHOOSING THE ANNUITY PAYOUT OPTION
Regardless of how payments were allocated during the accumulation phase, the
Owner may choose a variable annuity payout option, a fixed annuity payout option
or a combination fixed and variable annuity payout option. Currently, all of the
variable annuity payout options described below are available and may be funded
through all of the variable Sub-Accounts. In addition, each of the variable
annuity payout options is also available on a fixed basis. The Company may offer
other annuity payout options.
The Owner may change the annuity payout option up to one month before the
Annuity Date. If the Owner fails to choose an annuity payout option, monthly
benefit payments will be made under a variable Life with Cash Back annuity
payout option. If the Owner exercises the M-GAP Rider, annuity benefit payments
must be made under a fixed annuity payout option involving a life contingency
option.
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The annuity payout option selected must result in an initial payment of at least
$50 (a lower amount may be required in certain jurisdictions.) The Company
reserves the right to increase this minimum amount. If the annuity payout option
selected does not produce an initial payment which meets this minimum, a single
payment may be made.
FIXED ANNUITY PAYOUT OPTIONS. If the Owner selects a fixed annuity payout
option, each monthly annuity benefit payment will be equal to the first (unless
a withdrawal is made or as otherwise described under certain reduced survivor
annuity benefits.) Any portion of the Contract's Accumulated Value converted to
a fixed annuity will be held in the Company's General Account. The Contract
provides guaranteed fixed annuity option rates that determine the dollar amount
of the first payment under each form of fixed annuity for each $1,000 of applied
value. These rates are based on the Annuity 2000 Mortality Table and a 3% AIR.
The Company may offer annuity rates more favorable than those contained in the
Contract. Any such rates will be applied uniformly to all Owners of the same
class. For more specific information about fixed annuity payout options, see the
Contract.
VARIABLE ANNUITY PAYOUT OPTIONS. If the Owner selects a variable annuity payout
option, he/she will receive monthly payments equal to the value of the fixed
number of Annuity Units in the chosen Sub-Account(s). The first variable annuity
benefit payment will be based on the current annuity option rates made available
by the Company at the time the variable annuity payout option is selected.
Annuity option rates determine the dollar amount of the first payment for each
$1,000 of applied value. The annuity option rates are based on the Annuity 2000
Mortality Table and a 3% AIR.
Since the value of an Annuity Unit in a Sub-Account reflects the investment
performance of the Sub-Account, the amount of each monthly annuity benefit
payment will usually vary. However, under this Contract, if the Owner elects a
variable payout option, he or she must also select a monthly, quarterly,
semi-annual or annual Change Frequency. The Change Frequency is the frequency
that changes due to the Sub-Account's investment performance will be reflected
in the dollar value of a variable annuity benefit payment. As such, the Change
Frequency chosen will determine how frequently monthly variable annuity payments
will vary. For example, if a monthly Change Frequency is in effect, payments may
vary on a monthly basis. If a quarterly Change Frequency is selected, the amount
of each monthly payment may change every three months and will be level within
each three month cycle.
At the time the Change Frequency is elected, the Owner must also select the date
the first change is to occur. This date may not be later than the length of the
Change Frequency elected. For example, if a semi-annual Change Frequency is
elected, the date of the first change may not be later than six months after the
Annuity Date. If a quarterly Change Frequency is elected, the date of the first
change may not be later than three months after the Annuity Date.
C. DESCRIPTION OF ANNUITY PAYOUT OPTIONS
The Company currently provides the following annuity payout options:
LIFE ANNUITY PAYOUT OPTION
- SINGLE LIFE ANNUITY -- Monthly payments during the Annuitant's life.
Payments cease with the last annuity benefit payment due prior to the
Annuitant's death.
- JOINT AND SURVIVOR ANNUITIES -- Monthly payments during the Annuitant's
and Joint Annuitant's joint lifetimes. Upon the first death, payments will
continue for the remaining lifetime of the survivor at a previously
elected level of 100%, two-thirds or one-half of the total number of
Annuity Units.
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LIFE WITH PERIOD CERTAIN ANNUITY PAYOUT OPTION
- SINGLE LIFE -- Monthly payments guaranteed for a specified number of years
and continuing thereafter during the Annuitant's lifetime. If the
Annuitant dies before all guaranteed payments have been made, the
remaining payments continue to the Owner or the Beneficiary (whichever is
applicable).
- JOINT AND SURVIVOR ANNUITIES -- Monthly payments guaranteed for a
specified number of years and continuing during the Annuitant's and Joint
Annuitant's joint lifetimes. Upon the first death, payments continue for
the survivor's remaining lifetime at the previously elected level of 100%,
two-thirds or one-half of the Annuity Units. If the surviving Annuitant
dies before all guaranteed payments have been made, the remaining payments
continue to the Owner or the Beneficiary (whichever is applicable).
LIFE WITH CASH BACK ANNUITY PAYOUT OPTION
- SINGLE LIFE -- Monthly payments during the Annuitant's life. Thereafter,
any excess of the originally applied Annuity Value, over the total amount
of annuity benefit payments made and withdrawals taken, will be paid to
the Owner or the Beneficiary (whichever is applicable).
- JOINT AND SURVIVOR ANNUITIES -- Monthly payments during the Annuitant's
and Joint Annuitant's joint lifetimes. At the first death, payments
continue for the survivor's remaining lifetime at the previously elected
level of 100%, two-thirds or one-half of the Annuity Units. Thereafter,
any excess of the original applied Annuity Value, over the total amount of
annuity benefit payments made and withdrawals taken, will be paid to the
Owner or the Beneficiary (whichever is applicable).
PERIOD CERTAIN ANNUITY PAYOUT OPTION
Monthly annuity benefit payments for a chosen number of years ranging from five
to thirty are paid. If the Annuitant dies before the end of the period,
remaining payments will continue. The period certain option does not involve a
life contingency. In the computation of the payments under this option, the
charge for annuity rate guarantees, which includes a factor for mortality risks,
is made.
D. VARIABLE ANNUITY BENEFIT PAYMENTS
THE ANNUITY UNIT. On and after the Annuity Date, the Annuity Unit is a measure
of the value of the monthly annuity benefit payments under a variable annuity
payout option. The value of an Annuity Unit in each Sub-Account on its inception
date was set at $1.00. The value of an Annuity Unit under a Sub-Account on any
Valuation Date thereafter is equal to the value of the Annuity Unit on the
immediately preceding Valuation Date multiplied by the product of:
(1) a discount factor equivalent to the AIR and
(2) the Net Investment Factor of the Sub-Account funding the annuity benefit
payments for the applicable Valuation Period.
Annuity benefit payments will increase from one payment date to the next if the
annualized net rate of return during that period is greater than the AIR and
will decrease if the annualized net rate of return is less than the AIR. Where
permitted by law, the Owner may select an AIR of 3%, 5%, or 7%. A higher AIR
will result in a higher initial payment. However, subsequent payments will
increase more slowly during periods when actual investment performance exceeds
the AIR, and will decrease more rapidly during periods when investment
performance is less than the AIR.
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<PAGE>
DETERMINATION OF THE FIRST ANNUITY BENEFIT PAYMENT. The amount of the first
periodic variable annuity benefit payment depends on the:
- annuity payout option chosen;
- length of the annuity payout option elected;
- age of the Annuitant;
- gender of the Annuitant (if applicable, see "H. NORRIS Decision");
- value of the amount applied under the annuity payout option;
- applicable annuity option rates based on the Annuity 2000 Mortality Table;
and
- AIR selected.
The dollar amount of the first periodic annuity benefit payment is determined by
multiplying:
(1) the Accumulated Value applied under that option after application of any
Market Value Adjustment and less premium tax, if any, (or the amount of the
death benefit, if applicable) divided by $1,000, by
(2) the applicable amount of the first monthly payment per $1,000 of value.
DETERMINATION OF THE NUMBER OF ANNUITY UNITS. The dollar amount of the first
variable annuity benefit payment is then divided by the value of an Annuity Unit
of the selected Sub-Account(s) to determine the number of Annuity Units
represented by the first payment. The number of Annuity Units remains fixed
under all annuity payout options (except for the survivor annuity benefit
payment under the joint and two-thirds or joint and one-half option) unless the
Owner transfers among Sub-Accounts, makes a withdrawal, or units are split.
DOLLAR AMOUNT OF SUBSEQUENT VARIABLE ANNUITY BENEFIT PAYMENTS. For each
subsequent payment, the dollar amount of the variable annuity benefit payment is
determined by multiplying this fixed number of Annuity Units by the value of an
Annuity Unit on the applicable Valuation Date. The dollar amount of each
periodic variable annuity benefit payment after the first will vary with
subsequent variations in the value of the Annuity Unit of the selected
Sub-Account(s).
For an illustration of the calculation of a variable annuity benefit payment
using a hypothetical example, see "Annuity Benefit Payments" in the SAI.
PAYMENT OF ANNUITY BENEFIT PAYMENTS. The Owner will receive the annuity benefit
payments unless he/ she requests in writing that payments be made to another
person, persons, or entity. If the Owner (or, if there are Joint Owners, the
surviving Joint Owner) dies on or after the Annuity Date, the beneficiary will
become the Owner of the Contract. Any remaining annuity benefit payments will
continue to the beneficiary in accordance with the terms of the annuity benefit
payment option selected. If there are Joint Owners on or after the Annuity Date,
upon the first Owner's death, any remaining annuity benefit payments will
continue to the surviving Joint Owner in accordance with the terms of the
annuity benefit payment option selected.
If an Annuitant dies on or after the Annuity Date but before all guaranteed
annuity benefit payments have been made, any remaining payments will continue to
be paid to the Owner or the payee the Owner has designated. Unless otherwise
indicated by the Owner, the present value of any remaining guaranteed annuity
benefit payments may be paid in a single sum to the Owner. For discussion of
present value calculation, see "Calculation of Present Value" below.
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<PAGE>
E. TRANSFERS OF ANNUITY UNITS
After the Annuity Date and prior to the death of the Annuitant, the Owner may
transfer among the available Sub-Accounts upon written or telephone request to
the Company. As discussed in "A. Payments," a properly completed authorization
form must be on file before telephone requests will be honored. A designated
number of Annuity Units equal to the dollar amount of the transfer requested
will be exchanged for an equivalent dollar amount of Annuity Units of another
Sub-Account. Transfer values will be based on the Annuity Value next computed
after receipt of the transfer request.
Currently, the Company does not charge for transfers. The first 12 transfers in
a Contract year are guaranteed to be free of any transfer charge. For each
subsequent transfer in a Contract year, the Company reserves the right to assess
a charge, guaranteed never to exceed $25, to reimburse it for the expense of
processing transfers. As of the date of this Prospectus, transfers may be made
to all of the Sub-Accounts during the life of the Contract and prior to the
Annuity Date. However, the Company reserves the right to limit the number of
Sub-Accounts to which transfers may be made.
Automatic transfers (Dollar Cost Averaging) are available during the
annuitization phase subject to the same rules described in "E. Transfer
Privilege" except that the Fixed Account is not available as a source account.
F. WITHDRAWALS AFTER THE ANNUITY DATE
WITHDRAWALS AFTER THE ANNUITY DATE FROM QUALIFIED AND NON-QUALIFIED CONTRACTS
MAY HAVE ADVERSE TAX CONSEQUENCES. BEFORE MAKING A WITHDRAWAL, PLEASE CONSULT
YOUR TAX ADVISOR AND SEE FEDERAL TAX CONSIDERATIONS, "B. TAXATION OF THE
CONTRACT IN GENERAL," "WITHDRAWALS AFTER ANNUITIZATION."
After the Annuity Date and prior to the death of the Annuitant, the Owner may
take withdrawals from the Contract. The Owner must submit to the Principal
Office a signed, written request indicating the desired dollar amount of the
withdrawal. The minimum amount of a withdrawal is $1,000. If the amount
requested is greater than the maximum amount that may be withdrawn at that time,
the Company will allow the withdrawal only up to the maximum amount.
The type of withdrawal and the number of withdrawals that may be made each
calendar year depend upon whether the Owner annuitizes under an annuity payout
option with payments based on the life of one or more Annuitants with no
guaranteed payments (a "Life" annuity payout option), under a life annuity
payout option that in part provides for a guaranteed number of payments (a "Life
With Period Certain" or "Life With Cash Back" annuity payout option), or an
annuity payout option based on a guaranteed number of payments (a "Period
Certain" annuity payout option). Under a Life annuity payout option, the Owner
may make one Payment Withdrawal each calendar year. Under a Life with Period
Certain or Life with Cash Back annuity payout option, the Owner may make one
Payment Withdrawal and one Present Value Withdrawal in each calendar year. Under
a Period Certain annuity payout option, the Owner may make multiple Present
Value Withdrawals each calendar year.
- - WITHDRAWALS UNDER LIFE ANNUITY PAYOUT OPTIONS
The Owner may make one Payment Withdrawal in each calendar year. A Payment
Withdrawal cannot exceed the previous monthly annuity benefit payment
multiplied by ten (10). The amount of each Payment Withdrawal represents a
percentage of the present value of the remaining annuity benefit payments.
- - WITHDRAWALS UNDER LIFE WITH PERIOD CERTAIN OR LIFE WITH CASH BACK ANNUITY
PAYOUT OPTIONS
The Owner may make one Payment Withdrawal in each calendar year. A Payment
Withdrawal cannot exceed the previous monthly annuity benefit payment
multiplied by ten (10). The amount of each
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<PAGE>
Payment Withdrawal represents a percentage of the present value of the
remaining annuity benefit payments.
The Owner may make one Present Value Withdrawal in each calendar year, if
there are remaining guaranteed annuity benefit payments. The amount of each
Present Value Withdrawal represents a percentage of the present value of the
remaining guaranteed annuity benefit payments. Each year a Present Value
Withdrawal is taken, the Company records the percentage of the present value
of the then remaining guaranteed annuity benefit payments that was
withdrawn. The total percentage withdrawn over the life of the Contract
cannot exceed 75%. (For example, assume that in year three the Owner
withdraws 15% of the then current present value of the remaining guaranteed
annuity benefit payments. In year seven, the Owner withdraws 20% of the then
current present value of the remaining guaranteed annuity benefit payments.
Through year seven the total percentage withdrawn is 35%. After year seven,
the Owner may make Present Value Withdrawal(s) of up to 40% (75% - 35%) of
the present value of any remaining guaranteed annuity benefit payments.
Under a Life with Period Certain annuity payout option or Life with Cash
Back annuity payout option, if the Annuitant is still living after the
guaranteed annuity benefit payments have been made, the number of Annuity
Units or dollar amount applied to future annuity benefit payments will be
restored as if no Present Value Withdrawal(s) had taken place. See
"Calculation of Proportionate Reduction -- Present Value Withdrawals,"
below.
- - WITHDRAWALS UNDER PERIOD CERTAIN ANNUITY PAYOUT OPTIONS
The Owner may make multiple Present Value Withdrawals in each calendar year,
up to 100% of the present value of the guaranteed annuity benefit payments.
Withdrawal of 100% of the present value of the guaranteed annuity benefit
payments will result in termination of the Contract.
The amount of each Payment Withdrawal or Present Value Withdrawal represents a
portion of the present value of the remaining annuity benefit payments or
remaining guaranteed annuity benefit payments, respectively, and proportionately
reduces the number of Annuity Units (under a variable annuity payout option) or
dollar amount (under a fixed annuity payout option) applied to future annuity
benefit payments. Because each variable annuity benefit payment is determined by
multiplying the number of Annuity Units by the value of an Annuity Unit, the
reduction in the number of Annuity Units will result in lower future variable
annuity benefit payments. See "Calculation of Proportionate Reduction," below.
The present value is calculated with a discount rate that will include an
additional charge if a withdrawal is taken within 5 years of the Issue Date. See
"Calculation of Present Value," below.
CALCULATION OF PROPORTIONATE REDUCTION. Each Payment Withdrawal proportionately
reduces the number of Annuity Units applied to each future variable annuity
benefit payment or the dollar amount applied to each future fixed annuity
benefit payment. Each Present Value Withdrawal proportionately reduces the
number of Annuity Units applied to each future GUARANTEED variable annuity
benefit payment or the dollar amount applied to each future GUARANTEED fixed
annuity benefit payment. Because each variable annuity benefit payment is
determined by multiplying the number of Annuity Units by the value of an Annuity
Unit, the reduction in the number of Annuity Units will result in lower future
variable annuity benefit payments.
- - PAYMENT WITHDRAWALS. A Payment Withdrawal proportionately reduces the number
of Annuity Units (under a variable annuity payout option) or dollar amounts
(under a fixed annuity payout option) applied to each future annuity benefit
payment.
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<PAGE>
Under a variable annuity payout option, the proportionate reduction in Annuity
Units is calculated by multiplying the number of Annuity Units in each future
variable annuity benefit payment (determined immediately prior to the
withdrawal) by the following fraction:
Amount of the variable withdrawal
-------------------------------------------------
Present value of all remaining variable annuity benefit
payments immediately prior to the withdrawal
Because each variable annuity benefit payment is determined by multiplying the
number of Annuity Units by the value of an Annuity Unit, the reduction in the
number of Annuity Units will result in lower future variable annuity benefit
payments.
Under a fixed annuity payout option, the proportionate reduction is calculated
by multiplying the dollar amount of each future fixed annuity benefit payment
by a similar fraction, which is based on the amount of the fixed withdrawal
and present value of remaining fixed annuity benefit payments.
If a withdrawal is taken within 5 years of the Issue Date, the discount rate
used to calculate the present value will include an additional charge. See
"Calculation of Present Value," below.
- - PRESENT VALUE WITHDRAWALS. Each Present Value Withdrawal proportionately
reduces the number of Annuity Units (under a variable annuity payout option)
or dollar amount (under a fixed annuity payout option) applied to each future
guaranteed annuity benefit payment.
Under a variable annuity payout option, the proportionate reduction in Annuity
Units is calculated by multiplying the number of Annuity Units in each future
variable guaranteed annuity benefit payment (determined immediately prior to
the withdrawal) by the following fraction:
Amount of the variable withdrawal
-------------------------------------------------
Present value of remaining guaranteed variable annuity
benefit payments immediately prior to the withdrawal
Under a fixed annuity payout option, the proportionate reduction is calculated
by multiplying the dollar amount of each future fixed annuity benefit payment
by a similar fraction, which is based on the amount of the fixed withdrawal
and present value of remaining guaranteed fixed annuity benefit payments.
Because each variable annuity benefit payment is determined by multiplying the
number of Annuity Units by the value of an Annuity Unit, the reduction in the
number of Annuity Units will result in lower variable annuity benefit payments
with respect to the guaranteed payments. Under a fixed annuity payout option,
the proportionate reduction will result in lower fixed annuity benefit
payments with respect to the guaranteed payments. However, under a Life with
Period Certain annuity payout option or Life with Cash Back annuity payout
option, if the Annuitant is still living after the guaranteed number of
annuity benefit payments has been made, the number of Annuity Units or dollar
amount of future annuity benefit payments will be restored as if no Present
Value Withdrawal(s) had taken place.
If a withdrawal is taken within 5 years of the Issue Date, the discount rate
used to calculate the present value will include an additional charge. See
"Calculation of Present Value," below.
CALCULATION OF PRESENT VALUE. When a withdrawal is taken, the present value of
future annuity benefit payments is calculated based on an assumed mortality
table and a discount rate. The mortality table that is used will be equal to the
mortality table used at the time of annuitization to determine the annuity
benefit payments (currently the Annuity 2000 Mortality Table with male, female,
or unisex rates, as appropriate). The discount rate is the AIR (for a variable
annuity payout option) or the interest rate (for a fixed annuity payout option)
that was used at the time of annuitization to determine the annuity benefit
payments. If a withdrawal is
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<PAGE>
made within 5 years of the Issue Date, the discount rate is increased by one of
the following charges
("Withdrawal Adjustment Charge"):
- 15 or more years of annuity benefit payments being valued -- 1.00%
- 10-14 years of annuity benefit payments being valued -- 1.50%
- Less than 10 years of annuity benefit payments being valued -- 2.00%
The Withdrawal Adjustment Charge does not apply if a withdrawal is made in
connection with the death of an Annuitant or if a withdrawal is made 5 or more
years after the Issue Date.
For each Payment Withdrawal, the number of years of annuity benefit payments
being valued depends upon the life expectancy of the Annuitant at the time of
the withdrawal. The life expectancy will be determined by a mortality table that
will be equal to the mortality table used at the time of annuitization to
determine the annuity benefit payments (currently the Annuity 2000 Mortality
Table).
The impact of the Withdrawal Adjustment Charge will depend on the type of the
withdrawal taken, as follows:
- For a Payment Withdrawal, the present value calculation (including any
applicable adjustments) affects the proportionate reduction of the
remaining number of Annuity Units (under a variable annuity payout option)
or dollar amount (under a fixed annuity payout option), applied to each
future annuity benefit payment, as explained in "Calculation of
Proportionate Reduction-- Payment Withdrawals," above. If a Withdrawal
Adjustment Charge applies, there will be a larger proportionate reduction
in the number of Annuity Units or the dollar amount applied to each future
annuity benefit payment. This will result in lower future annuity benefit
payments, all other things being equal.
- For a Present Value Withdrawal, the discount factor is used in determining
the maximum amount that can be withdrawn under the present value
calculation. If a Withdrawal Adjustment Charge applies, the discount
factor will be higher, and the maximum amount that can be withdrawn will
be lower. In addition, there will be a larger proportionate reduction in
the number of Annuity Units or the dollar amount applied to each future
guaranteed annuity benefit payment. This will result in lower future
annuity benefit payments with respect to the guaranteed payments, all
other things being equal. See "Calculation of Proportionate Reduction --
Present Value Withdrawals," above.
For examples comparing a Payment Withdrawal and a Present Value Withdrawal, see
APPENDIX E -- EXAMPLES OF PRESENT VALUE WITHDRAWALS AND PAYMENT WITHDRAWALS.
DEFERRAL OF WITHDRAWALS. A withdrawal is normally payable within seven days
following the Company's receipt of the withdrawal request. However, the Company
reserves the right to defer withdrawals of amounts in each Sub-Account in any
period during which:
- trading on the New York Stock Exchange is restricted as determined by the
SEC or such Exchange is closed for other than weekends and holidays;
- the SEC has by order permitted such suspension; or
- an emergency, as determined by the SEC, exists such that disposal of
portfolio securities or valuation of assets of a separate account is not
reasonably practicable.
The Company reserves the right to defer withdrawals of amounts allocated to the
Company's General Account for a period not to exceed six months.
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<PAGE>
G. REVERSAL OF ANNUITIZATION
The Owner may reverse the decision to annuitize by written request to the
Company within 90 days of the Annuity Date. Upon receipt of such request, the
Company will return the Contract to the Accumulation Phase, subject to the
following:
(1) The value applied under a fixed annuity payout option at the time of
annuitization (except for the excess value of the M-GAP Benefit Base over
the Annuity Value, if applicable) will be treated as if it had been invested
in the Fixed Account of the Contract on that same date.
(2) The Sub-Account allocations that were in effect at the time of annuitization
will first be used for calculating the reversal. Any transfers between
variable Sub-Accounts during the Annuity Payout phase will then be treated
as transfers during the Accumulation Phase (As a result, the Contract's
Accumulated Value after the reversal will reflect the same Sub-Account
allocations that were in effect immediately prior to the reversal).
(3) Any annuity benefit payments paid and any withdrawals taken during the
Annuity Payout phase will be treated as a withdrawal of the Surrender Value
in the Accumulation Phase, as of the date of the payment or withdrawal.
Surrender charges may apply to these withdrawals, and there may be adverse
tax consequences. See FEDERAL TAX CONSIDERATIONS, "C. Taxation of the
Contract in General."
If the Company learns of the Owner's decision to reverse annuitization after the
maximum Annuity Date permitted under the Contract, the Company will contact the
Owner. The Owner must then immediately select an annuity payout option (either
the original annuity payout option or a different annuity payout option). If the
Owner does not select an annuity payout option, payments will begin under a
variable Life with Cash Back annuity payout option.
H. NORRIS DECISION
In the case of ARIZONA GOVERNING COMMITTEE V. NORRIS, the United States Supreme
Court ruled that, in connection with retirement benefit options offered under
certain employer-sponsored employee benefit plans, annuity payout options based
on sex-distinct actuarial tables are not permissible under Title VII of the
Civil Rights Act of 1964. The ruling requires that benefits derived from
contributions paid into a plan after August 1, 1983 be calculated without regard
to the sex of the employee. Annuity benefits attributable to payments received
by the Company under a Contract issued in connection with an employer-sponsored
benefit plan affected by the NORRIS decision will be based on unisex rates.
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<PAGE>
CHARGES AND DEDUCTIONS
Deductions under the Contract and charges against the assets of the Sub-Accounts
are described below. Other deductions and expenses paid out of the assets of the
Underlying Funds are described in the prospectuses and SAIs of the Trust,
Fidelity VIP, and T. Rowe Price.
A. VARIABLE ACCOUNT DEDUCTIONS
MORTALITY AND EXPENSE RISK CHARGE. The Company assesses a charge against the
assets of each Sub-Account to compensate for certain mortality and expense risks
it has assumed. The mortality and expense risk charge is assessed daily at an
annual rate of 1.25% of each Sub-Account's assets. The charge is imposed during
both the accumulation phase and the annuity payout phase. The mortality risk
arises from the Company's guarantee that it will make annuity benefit payments
in accordance with annuity rate provisions established at the time the Contract
is issued for the life of the Annuitant (or in accordance with the annuity
payout option selected), no matter how long the Annuitant lives and no matter
how long all Annuitants as a class live. The mortality charge is deducted during
the annuity payout phase on all Contracts, including those that do not involve a
life contingency, even though the Company does not bear direct mortality risk
with respect to variable annuity settlement options that do not involve life
contingencies. The expense risk arises from the Company's guarantee that the
charges it makes will not exceed the limits described in the Contract and in
this Prospectus.
If the charge for mortality and expense risks is not sufficient to cover actual
mortality experience and expenses, the Company will absorb the losses. If
expenses are less than the amounts provided to the Company by the charge, the
difference will be a profit to the Company. To the extent this charge results in
a profit to the Company, such profit will be available for use by the Company
for, among other things, the payment of distribution, sales and other expenses.
This charge may not be increased. Since mortality and expense risks involve
future contingencies that are not subject to precise determination in advance,
it is not feasible to identify specifically the portion of the charge which is
applicable to each.
ADMINISTRATIVE EXPENSE CHARGE. The Company assesses each Sub-Account with a
daily Administrative Expense Charge at an annual rate of 0.15% of the average
daily net assets of the Sub-Account. The charge is imposed during both the
accumulation phase and the annuity payout phase. The daily Administrative
Expense Charge is assessed to help defray administrative expenses actually
incurred in the administration of the Sub-Account. There is no direct
relationship, however, between the amount of administrative expenses imposed on
a given Contract and the amount of expenses actually attributable to that
Contract.
Deductions for the Contract fee (described below under "B. Contract Fee") and
for the Administrative Expense Charge are designed to reimburse the Company for
the cost of administration and related expenses and are not expected to be a
source of profit. The administrative functions and expense assumed by the
Company in connection with the Variable Account and the Contract include, but
are not limited to, clerical, accounting, actuarial and legal services, rent,
postage, telephone, office equipment and supplies, expenses of preparing and
printing registration statements, expense of preparing and typesetting
prospectuses and the cost of printing prospectuses not allocable to sales
expense, filing and other fees.
OTHER CHARGES. Because the Sub-Accounts purchase shares of the Underlying
Funds, the value of the net assets of the Sub-Accounts will reflect the
investment advisory fee and other expenses incurred by the Underlying Funds. The
prospectuses and SAIs of the Trust, Fidelity VIP, T. Rowe Price and Alliance
contain additional information concerning expenses of the Underlying Funds.
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B. CONTRACT FEE
A $35 Contract fee (a lower fee may apply in some states) currently is deducted
during the accumulation phase, on the Contract anniversary date and upon full
surrender of the Contract if the Accumulated Value on any of these dates is less
than $75,000. The Contract fee is waived for Contracts issued to and maintained
by the trustee of a 401(k) plan.
Where Contract value has been allocated to more than one account, a percentage
of the total Contract fee will be deducted from the value in each account. The
portion of the charge deducted from each account will be equal to the percentage
which the value in that account bears to the Accumulated Value under the
Contract. The deduction of the Contract fee from a Sub-Account will result in
cancellation of a number of Accumulation Units equal in value to the portion of
the charge deducted from that Sub-Account.
Where permitted by law, the Contract fee also may be waived for Contracts where,
on the Issue Date, either the Owner or the Annuitant is within the following
class of individuals: employees and registered representatives of any
broker-dealer which has entered into a sales agreement with the Company to sell
the Contract; employees of the Company, its affiliates and subsidiaries,
officers, directors, trustees and employees of any of the Funds; investment
managers or sub-advisers; and the spouses of and immediate family members
residing in the same household with such eligible persons. "Immediate family
members" means children, siblings, parents and grandparents.
C. OPTIONAL RIDER CHARGES
Subject to state availability, the Company offers a number of riders that are
only available if elected by the Owner at issue. A separate monthly charge is
made for each Rider through a pro-rata reduction of the Accumulated Value of the
Sub-Accounts, the Fixed Account and the Guarantee Period Accounts. The pro-rata
reduction is based on the relative value that the Accumulation Units of the
Sub-Accounts, the dollar amounts in the Fixed Account and the dollar amounts in
the Guarantee Period Accounts bear to the total Accumulated Value.
The applicable charge for the following is assessed on the Accumulated Value on
the last day of each Contract month and, if applicable, on the date the Rider is
terminated, multiplied by 1/12th of the following annual percentage rates:
<TABLE>
<S> <C>
Minimum Guaranteed Annuity Payout Rider with ten-year waiting period....... 0.35%
Minimum Guaranteed Annuity Payout Rider with fifteen-year waiting period... 0.20%
5% Enhanced Death Benefit With Annual Step-Up.............................. 0.25%
</TABLE>
For a description of the Riders, see "Optional Enhanced Death Benefit Rider"
under "G. Death Benefit", and "I. Optional Minimum Guaranteed Annuity Payout
(M-GAP) Rider" under DESCRIPTION OF THE CONTRACT -- THE ACCUMULATION PHASE,
above.
D. PREMIUM TAXES
Some states and municipalities impose a premium tax on variable annuity
contracts. State premium taxes currently range up to 3.5%. The Company makes a
charge for state and municipal premium taxes, when applicable, and deducts the
amount paid as a premium tax charge. The current practice of the Company is to
deduct the premium tax charge in one of two ways:
1. if the premium tax was paid by the Company when payments were received,
the premium tax charge is deducted on a pro-rata basis when withdrawals
are made, upon surrender of the Contract, or when annuity benefit
payments begin (the Company reserves the right instead to deduct the
premium tax charge for a Contract at the time payments are received); or
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<PAGE>
2. the premium tax charge is deducted when annuity benefit payments begin.
In no event will a deduction be taken before the Company has incurred a tax
liability under applicable state law.
If no amount for premium tax was deducted at the time the payment was received,
but subsequently tax is determined to be due prior to the Annuity Date, the
Company reserves the right to deduct the premium tax from the Contract value at
the time such determination is made.
E. SURRENDER CHARGE
No charge for sales expense is deducted from payments at the time the payments
are made. A surrender charge, however, may be deducted from the Accumulated
Value in the case of surrender or withdrawal within certain time limits
described below.
CALCULATION OF SURRENDER CHARGE. For purposes of determining the surrender
charge, the Accumulated Value is divided into four categories:
- The amount available under the Withdrawal Without Surrender Charge
provision, described below;
- Old Payments -- total payments invested in the Contract for more than nine
years;
- New Payments -- payments received by the Company during the nine years
preceding the date of the surrender or withdrawal; and
- Payment Credits.
Amounts available as a Withdrawal Without Surrender Charge, followed by Old
Payments, may be withdrawn from the Contract at any time without the imposition
of a surrender charge. However, if a withdrawal or surrender is attributable all
or in part to New Payments, a surrender charge may be imposed.
The amount of the charge will depend upon the number of years that any New
Payments to which the withdrawal is attributed have remained credited under the
Contract. For the purpose of calculating surrender charges for New Payments, all
amounts withdrawn are assumed to be deducted first from the oldest New Payment
and then from the next oldest New Payment and so on, until all New Payments have
been exhausted pursuant to the first-in-first-out ("FIFO") method of accounting.
(See "FEDERAL TAX CONSIDERATIONS" for a discussion of how withdrawals are
treated for income tax purposes.)
The following surrender charge table outlines these charges:
<TABLE>
<CAPTION>
COMPLETE YEARS FROM
DATE OF PAYMENT CHARGE
- -------------------- -----------
<S> <C>
0-4 8.5%
more than 4 7.5%
more than 5 6.5%
more than 6 5.5%
more than 7 3.5%
more than 8 1.5%
more than 9 0
</TABLE>
The amount withdrawn equals the amount requested by the Owner plus the surrender
charge, if any. The charge is applied as a percentage of the New Payments
withdrawn.
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The total charge equals the aggregate of all applicable surrender charges for a
surrender and withdrawals, including the Withdrawal Adjustment Charge that may
apply if a withdrawal is taken during the Annuity Payout phase (see
ANNUITIZATION -- THE PAYOUT PHASE, "F. Withdrawals after the Annuity Date"). In
no event will the total surrender and withdrawal charges exceed a maximum limit
of 8.5% of total gross New Payments.
WITHDRAWAL WITHOUT SURRENDER CHARGE. Each calendar year prior to the Annuity
Date, an Owner may withdraw a portion of the Contract's Surrender Value without
any applicable surrender charge ("Withdrawal Without Surrender Charge Amount").
The above surrender charge table is not applicable to these withdrawals. The
first time an Owner makes a withdrawal from the Contract, the Withdrawal Without
Surrender Charge Amount is the greater of (a) or (b):
Where
(a)
is: 100% of cumulative earnings (excluding Payment Credits); and
Where
(b) 15% of the total of all payments invested in the Contract as of the
is: Valuation Date for the withdrawal.
After that first withdrawal from the Contract, the maximum annual Withdrawal
Without Surrender Charge Amount is the greater of (a) or (b):
Where
(a)
is: 100% of cumulative earnings (excluding Payment Credits); and
Where 15% of the total of all payments invested in the Contract LESS that
(b) portion of any prior withdrawal(s) of payments that are subject to
is: the surrender charge table (even if the applicable surrender charge
is 0%) as of the Valuation Date for the withdrawal (the Gross
Payment Base), LESS any prior withdrawal(s) during the same
calendar year to which the surrender charge table was not
applicable.
In (a), cumulative earnings are calculated as the Accumulated Value as of the
Valuation Date, reduced by Payment Credits and total gross payments not
previously withdrawn.
EFFECT OF WITHDRAWAL WITHOUT SURRENDER CHARGE AMOUNT. When a withdrawal is
taken, the Company initially determines the Withdrawal Without Surrender Charge
Amount in the following order:
- The Company first deducts the Withdrawal Without Surrender Charge Amount
from cumulative earnings.
- If the Withdrawal Without Surrender Charge Amount exceeds cumulative
earnings, the Company will deem the excess to be withdrawn from New
Payments on a last-in-first-out (LIFO) basis, so that the newest New
Payments are withdrawn first. This results in those New Payments, which
are otherwise subject to the highest surrender charge at that point in
time, being withdrawn first without a surrender charge.
- If more than one withdrawal is made during the year, on each subsequent
withdrawal the Company will waive the surrender charge, if any, until the
entire Withdrawal Without Surrender Charge Amount has been withdrawn.
After the entire Withdrawal Without Surrender Charge Amount available in a
calendar year has been withdrawn, for the purposes of determining the amount of
the surrender charge, if any, withdrawals will be deemed to be taken in the
following order:
- - First from Old Payments.
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- The surrender charge table is applicable, but because Old Payments have
been invested in the Contract for more than 9 years, the surrender charge
is 0%.
- - Second from New Payments.
- The surrender charge table is applicable.
- Payments are now withdrawn from this category on a first-in-first-out
(FIFO) basis, so that the oldest New Payments are now withdrawn first.
This results in the withdrawal of New Payments with the lowest surrender
charge first.
- - Third from Payment Credits.
- The surrender charge table is not applicable to the withdrawal of Payment
Credits.
For Qualified Contracts and Contracts issued under Section 457 Deferred
Compensation Plans only, the maximum amount available without a surrender charge
during any calendar year will be the greatest of (a), (b) and (c) where (a) and
(b) are the same as above and (c) is the amount available as a Life Expectancy
Distribution less any Withdrawal Without Surrender Charge taken during the same
calendar year. (see "Life Expectancy Distributions" under DESCRIPTION OF THE
CONTACT -- THE ACCUMULATION PHASE.
For further information on surrender and withdrawals, including minimum limits
on amount withdrawn and amount remaining under the Contract in the case of
withdrawals, and important tax considerations, see "F. Surrender and
Withdrawals" under DESCRIPTION OF THE CONTRACT -- THE ACCUMULATION PHASE and see
"FEDERAL TAX CONSIDERATIONS."
REDUCTION OR ELIMINATION OF SURRENDER CHARGE AND ADDITIONAL AMOUNTS
CREDITED. Where permitted by law, the Company will waive the surrender charge
in the event that the Owner (or the Annuitant, if the Owner is not an
individual) becomes physically disabled after the Issue Date of the Contract (or
in the event that the original Owner or Annuitant has changed since issue, after
being named Owner or Annuitant) and before attaining age 65. The Company may
require proof of such disability and continuing disability and reserves the
right to obtain an examination by a licensed physician of its choice and at its
expense.
In addition, the Company will waive the surrender charge in the event that an
Owner (or the Annuitant, if the Owner is not an individual) is:
(1) admitted to a medical care facility after becoming the Owner or Annuitant
under the Contract and remains confined there until the later of one year
after the Issue Date or 90 consecutive days; or
(2) first diagnosed by a licensed physician as having a fatal illness after the
Issue Date of the Contract and after being named Owner or Annuitant.
For purposes of the above provision, "medical care facility" means any
state-licensed facility or, in a state that does not require licensing, a
facility that is operating pursuant to state law, providing medically necessary
inpatient care which is prescribed by a licensed "physician" in writing and
based on physical limitations which prohibit daily living in a non-institutional
setting. "Fatal illness" means a condition diagnosed by a licensed "physician"
which is expected to result in death within two years of the diagnosis.
"Physician" means a person (other than the Owner, Annuitant or a member of one
of their families) who is state licensed to give medical care or treatment and
is acting within the scope of that license. "Physically disabled" means that the
Owner or Annuitant, as applicable, has been unable to engage in an occupation or
to conduct daily activities for a period of at least 12 consecutive months as a
result of disease or bodily injury.
Where surrender charges have been waived under any of the situations discussed
above, no additional payments under this Contract will be accepted unless
required by state law.
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In addition, from time to time the Company may allow a reduction in or
elimination of the surrender charges, the period during which the charges apply,
or both, and/or credit additional amounts on Contracts, when Contracts are sold
to individuals or groups of individuals in a manner that reduces sales expenses.
The Company will consider factors such as the following:
- the size and type of group or class, and the persistency expected from
that group or class;
- the total amount of payments to be received, and the manner in which
payments are remitted;
- the purpose for which the Contracts are being purchased, and whether that
purpose makes it likely that costs and expenses will be reduced;
- other transactions where sales expenses are likely to be reduced; or
- the level of commissions paid to selling broker-dealers or certain
financial institutions with respect to Contracts within the same group or
class (for example, broker-dealers who offer this Contract in connection
with financial planning services offered on a fee-for-service basis).
The Company also may reduce or waive the surrender charge, and/or credit
additional amounts on Contracts, where either the Owner or the Annuitant on the
Issue Date is within the following class of individuals ("eligible persons"):
- employees and registered representatives of any broker-dealer which has
entered into a sales agreement with the Company to sell the Contract;
- employees of the Company, its affiliates and subsidiaries; officers,
directors, trustees and employees of any of the Underlying Funds;
- investment managers or sub-advisers of the Underlying Funds; and
- the spouses of and immediate family members residing in the same household
with such eligible persons. "Immediate family members" means children,
siblings, parents, and grandparents.
In addition, if permitted under state law, surrender charge will be waived under
403(b) Contracts where the amount withdrawn is being contributed to a life
policy issued by the Company as part of the individual's 403(b) plan.
Where an Owner who is trustee under a pension plan surrenders, in whole or in
part, a Contract on a terminating employee, the trustee will be permitted to
reallocate all or a part of the Accumulated Value under the Contract to other
Contracts issued by the Company and owned by the trustee, with no deduction for
any otherwise applicable surrender charge. Any such reallocation will be at the
unit values for the Sub-Accounts as of the Valuation Date on which a written,
signed request is received at the Principal Office.
Any reduction or elimination in the amount or duration of the surrender charge
will not discriminate unfairly among purchasers of this Contract. The Company
will not make any changes to this charge where prohibited by law.
F. TRANSFER CHARGE
The Company currently does not assess a charge for processing transfers. The
Company guarantees that the first 12 transfers in a Contract year will be free
of transfer charge, but reserves the right to assess a charge, guaranteed never
to exceed $25, for each subsequent transfer in a Contract year to reimburse it
for the expense of processing transfers. For more information, see "E. Transfer
Privilege" under DESCRIPTION OF THE
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CONTRACT -- THE ACCUMULATION PHASE and "E. Transfers of Annuity Units" under
ANNUITIZATION -- THE PAYOUT PHASE.
G. WITHDRAWAL ADJUSTMENT CHARGE
After the Annuity Date, a withdrawal will result in a calculation by the Company
of the present value of either all future annuity benefit payments or future
guaranteed annuity benefit payments. The present value is calculated based on
the Annuity 2000 Mortality Table (male, female or unisex rates as appropriate).
If a withdrawal is made within 5 years of the Issue Date, the AIR or interest
rate used to determine the annuity benefit payments is increased by one of the
following adjustments:
15 or more years of annuity benefit payments being valued -- 1.00%
10-14 years of annuity benefit payments being valued -- 1.50%
Less than 10 years of annuity benefit payments being valued -- 2.00%
The adjustment to the AIR or interest rate used to determine the present value
results in lower future annuity payments, and may be viewed as a charge under
the Contract. The Withdrawal Adjustment Charge does not apply if a withdrawal is
made in connection with the death of an Annuitant or if a withdrawal is made 5
or more years after the Issue Date.
For more information see "F. Withdrawals After the Annuity Date," under
ANNUITIZATION -- THE PAYOUT PHASE.
GUARANTEE PERIOD ACCOUNTS
Due to certain exemptive and exclusionary provisions in the securities laws,
interests in the Guarantee Period Accounts and the Company's Fixed Account are
not registered as an investment company under the provisions of the 1933 Act or
the 1940 Act. Accordingly, the staff of the SEC has not reviewed the disclosures
in this Prospectus relating to the Guarantee Period Accounts or the Fixed
Account. Nevertheless, disclosures regarding the Guarantee Period Accounts and
the Fixed Account of this Contract or any fixed benefits offered under these
accounts may be subject to the provisions of the 1933 Act relating to the
accuracy and completeness of statements made in the Prospectus.
INVESTMENT OPTIONS. In most jurisdictions, Guarantee Periods ranging from two
through ten years may be available. Each Guarantee Period established for the
Owner is accounted for separately in a non-unitized segregated account except in
California where it is accounted for in the Company's General Account. Each
Guarantee Period Account provides for the accumulation of interest at a
Guaranteed Interest Rate. The Guaranteed Interest Rate on amounts allocated or
transferred to a Guarantee Period Account is determined from time to time by the
Company in accordance with market conditions. Once an interest rate is in effect
for a Guarantee Period Account, however, the Company may not change it during
the duration of its Guarantee Period. In no event will the Guaranteed Interest
Rate be less than 3%. The Guarantee Period Accounts are not available in New
York, Oregon, Maryland, and Pennsylvania.
To the extent permitted by law, the Company reserves the right at any time to
offer Guarantee Periods with durations that differ from those which were
available when a Contract initially was issued and to stop accepting new
allocations, transfers or renewals to a particular Guarantee Period.
Owners may allocate net payments or make transfers from any of the Sub-Accounts,
the Fixed Account or an existing Guarantee Period Account to establish a new
Guarantee Period Account at any time prior to the Annuity Date. Transfers from a
Guarantee Period Account on any date other than on the day following the
expiration of that Guarantee Period will be subject to a Market Value
Adjustment. The Company establishes a separate investment account each time the
Owner allocates or transfers amounts to a Guarantee Period except that amounts
allocated to the same Guarantee Period on the same day will be treated as one
Guarantee Period
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Account. The minimum that may be allocated to establish a Guarantee Period
Account is $1,000. If less than $1,000 is allocated, the Company reserves the
right to apply that amount to the Money Market Sub-Account. The Owner may
allocate amounts to any of the Guarantee Periods available.
At least 45 days, but not more than 75 days, prior to the end of a Guarantee
Period, the Company will notify the Owner in writing of the expiration of that
Guarantee Period. At the end of a Guarantee Period the Owner may transfer
amounts to the Sub-Accounts, the Fixed Account or establish a new Guarantee
Period Account of any duration then offered by the Company without a Market
Value Adjustment. If reallocation instructions are not received at the Principal
Office before the end of a Guarantee Period, the account value automatically
will be applied to a new Guarantee Period Account with the same duration at the
then current rate unless (1) less than $1,000 would remain in the Guarantee
Period Account on the expiration date, or (2) unless the Guarantee Period would
extend beyond the Annuity Date or is no longer available. In such cases, the
Guarantee Period Account value will be transferred to the Sub-Account investing
in the Money Market Sub-Account. Where amounts have been renewed automatically
in a new Guarantee Period, it is the Company's current practice to give the
Owner an additional 30 days to transfer out of the Guarantee Period Account
without application of a Market Value Adjustment.
MARKET VALUE ADJUSTMENT. No Market Value Adjustment will be applied to
transfers, withdrawals, or surrender from a Guarantee Period Account on the
expiration of its Guarantee Period. In addition, no negative Market Value
Adjustment will be applied to a death benefit although a positive Market Value
Adjustment, if any, will be applied to increase the value of the death benefit
when based on the Contract's Accumulated Value. See "G. Death Benefit." All
other transfers, withdrawals, or a surrender prior to the end of a Guarantee
Period will be subject to a Market Value Adjustment, which may increase or
decrease the value. Amounts applied under an annuity option are treated as
withdrawals when calculating the Market Value Adjustment. The Market Value
Adjustment will be determined by multiplying the amount taken from each
Guarantee Period Account before deduction of any Surrender Charge by the market
value factor. The market value factor for each Guarantee Period Account is equal
to:
[(1+i)/(1+j)](n/365) - 1
where: i is the Guaranteed Interest Rate expressed as a decimal for
example: (3% = 0.03) being credited to the current Guarantee
Period;
j is the new Guaranteed Interest Rate, expressed as a decimal,
for a Guarantee Period with a duration equal to the number of
years remaining in the current Guarantee Period, rounded to
the next higher number of whole years. If that rate is not
available, the Company will use a suitable rate or index
allowed by the Department of Insurance; and
n is the number of days remaining from the Valuation Date to the
end of the current Guarantee Period.
Based on the application of this formula, the value of a Guarantee Period
Account will increase after the Market Value Adjustment is applied if the then
current market rates are lower than the rate being credited to the Guarantee
Period Account. Similarly, the value of a Guarantee Period Account will decrease
after the Market Value Adjustment is applied if the then current market rates
are higher than the rate being credited to the Guarantee Period Account. The
Market Value Adjustment is limited; however, so that even if the account value
is decreased after application of a Market Value Adjustment, it will equal or
exceed the Owner's principal plus 3% earnings per year less applicable Contract
fees. Conversely, if the then current market rates are lower and the account
value is increased after the Market Value Adjustment is applied, the increase in
value is also affected by the minimum guaranteed rate of 3%. The amount that
will be added to the Guarantee Period Account is limited to the difference
between the amount earned and the 3% minimum guaranteed earnings. For examples
of how the Market Value Adjustment works, See APPENDIX C, "SURRENDER CHARGES AND
THE MARKET VALUE ADJUSTMENT."
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WITHDRAWALS. Prior to the Annuity Date, the Owner may make withdrawals of
amounts held in the Guarantee Period Accounts. Withdrawals from these accounts
will be made in the same manner and be subject to the same rules as set forth
under "F. Surrender and Withdrawals." In addition, the following provisions also
apply to withdrawals from a Guarantee Period Account: (1) a Market Value
Adjustment will apply to all withdrawals, including Withdrawals Without
Surrender Charge, unless made at the end of the Guarantee Period; and (2) the
Company reserves the right to defer payments of amounts withdrawn from a
Guarantee Period Account for up to six months from the date it receives the
withdrawal request. If deferred for 30 days or more, the Company will pay
interest on the amount deferred at a rate of at least 3%.
In the event that a Market Value Adjustment applies to a withdrawal of a portion
of the value of a Guarantee Period Account, it will be calculated on the amount
requested and deducted from or added to the amount withdrawn. If a surrender
charge applies to the withdrawal, it will be calculated as set forth under "E.
Surrender Charge" after application of the Market Value Adjustment.
FEDERAL TAX CONSIDERATIONS
The effect of federal income taxes on the value of a Contract, on withdrawals or
surrenders, on annuity benefit payments, and on the economic benefit to the
Owner, Annuitant, or beneficiary depends upon a variety of factors. The
following discussion is based upon the Company's understanding of current
federal income tax laws as they are interpreted as of the date of this
Prospectus. No representation is made regarding the likelihood of continuation
of current federal income tax laws or of current interpretations by the IRS. In
addition, this discussion does not address state or local tax consequences that
may be associated with the Contract.
IT SHOULD BE RECOGNIZED THAT THE FOLLOWING DISCUSSION OF FEDERAL INCOME TAX
ASPECTS OF AMOUNTS RECEIVED UNDER VARIABLE ANNUITY CONTRACTS IS NOT EXHAUSTIVE,
DOES NOT PURPORT TO COVER ALL SITUATIONS, AND IS NOT INTENDED AS TAX ADVICE. A
QUALIFIED TAX ADVISER ALWAYS SHOULD BE CONSULTED WITH REGARD TO THE APPLICATION
OF LAW TO INDIVIDUAL CIRCUMSTANCES.
A. GENERAL
THE COMPANY. The Company intends to make a charge for any effect which the
income, assets, or existence of the Contract, the Variable Account or the
Sub-Accounts may have upon its tax. The Variable Account presently is not
subject to tax, but the Company reserves the right to assess a charge for taxes
should the Variable Account at any time become subject to tax. Any charge for
taxes will be assessed on a fair and equitable basis in order to preserve equity
among classes of Owners and with respect to each separate account as though that
separate account was a separate taxable entity.
The Variable Account is considered a part of and taxed with the operations of
the Company. The Company is taxed as a life insurance company under Subchapter L
of the Code. The Company files a consolidated tax return with its affiliates.
DIVERSIFICATION REQUIREMENTS. The IRS has issued regulations under Section
817(h) of the Code relating to the diversification requirements for variable
annuity and variable life insurance contracts. The regulations prescribed by the
Treasury Department provide that the investments of a segregated asset account
underlying a variable annuity contract are adequately diversified if no more
than 55% of the value of its assets is represented by any one investment, no
more than 70% by any two investments, no more than 80% by any three investments,
and no more than 90% by any four investments. Under this section of the Code, if
the investments are not adequately diversified, the Contract will not be treated
as an annuity contract, and therefore the income on the Contract, for any
taxable year of the Owner, would be treated as ordinary income received or
accrued by the Owner. It is anticipated that the Underlying Portfolios will
comply with the current diversification requirements. In the event that future
IRS regulations and/or rulings would require Contract modifications in
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order to remain in compliance with the diversification standards, the Company
will make reasonable efforts to comply, and it reserves the right to make such
changes as it deems appropriate for that purpose.
INVESTOR CONTROL. In order for a variable annuity contract to qualify for tax
deferral, the Company, and not the variable contract owner, must be considered
to be the owner for tax purposes of the assets in the segregated asset account
underlying the variable annuity contract. In certain circumstances, however,
variable annuity contract owners may now be considered the owners of these
assets for federal income tax purposes. Specifically, the IRS has stated in
published rulings that a variable annuity contract owner may be considered the
owner of segregated account assets if the contract owner possesses incidents of
ownership in those assets, such as the ability to exercise investment control
over the assets. The Treasury Department has also announced, in connection with
the issuance of regulations concerning investment diversification, that those
regulations do not provide guidance governing the circumstances in which
investor control of the investments of a segregated asset account may cause the
investor (i.e., the contract owner), rather than the insurance company, to be
treated as the owner of the assets in the account. This announcement also states
that guidance would be issued by way of regulations or rulings on the "extent to
which policyholders may direct their investments to particular sub-accounts
without being treated as owners of the underlying assets." As of the date of
this Prospectus, no such guidance has been issued. The Company therefore
additionally reserves the right to modify the Contract as necessary in order to
attempt to prevent a contract owner from being considered the owner of a pro
rata share of the assets of the segregated asset account underlying the variable
annuity contracts.
B. QUALIFIED AND NON-QUALIFIED CONTRACTS
From a federal tax viewpoint there are two types of variable annuity contracts,
"qualified" contracts and "non-qualified" contracts. A qualified contract is one
that is purchased in connection with a retirement plan which meets the
requirements of Sections 401, 403, or 408 of the Code, while a non-qualified
contract is one that is not purchased in connection with one of the indicated
retirement plans. The tax treatment for certain withdrawals or surrenders will
vary, depending on whether they are made from a qualified contract or a non-
qualified contract. For more information on the tax provisions applicable to
qualified contracts, see "E. Provisions Applicable to Qualified Employer Plans"
below.
C. TAXATION OF THE CONTRACT IN GENERAL
The Company believes that the Contract described in this Prospectus will, with
certain exceptions (see "Nonnatural Owner" below), be considered an annuity
contract under Section 72 of the Code. Please note, however, if the Owner
chooses an Annuity Date beyond the Owner's 85th birthday, it is possible that
the Contract may not be considered an annuity for tax purposes, and therefore,
the Owner will be taxed on the annual increase in Accumulated Value. The Owner
should consult tax and financial advisors for more information. This section
governs the taxation of annuities. The following discussion concerns annuities
subject to Section 72.
WITHDRAWALS PRIOR TO ANNUITIZATION. With certain exceptions, any increase in
the Contract's Accumulated Value is not taxable to the Owner until it is
withdrawn from the Contract. Under the current provisions of the Code, amounts
received under an annuity contract prior to annuitization (including payments
made upon the death of the annuitant or owner), generally are first attributable
to any investment gains credited to the contract over the taxpayer's "investment
in the contract." Such amounts will be treated as gross income subject to
federal income taxation. "Investment in the contract" is the total of all
payments to the Contract which were not excluded from the Owner's gross income
less any amounts previously withdrawn which were not included in income. Section
72(e)(11)(A)(ii) requires that all non-qualified deferred annuity contracts
issued by the same insurance company to the same owner during a single calendar
year be treated as one contract in determining taxable distributions.
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WITHDRAWALS AFTER ANNUITIZATION. A withdrawal from a qualified or non-qualified
contract may create significant adverse tax consequences. It is possible that
the Internal Revenue Service may take the view that when withdrawals (other than
annuity payments) are taken during the annuity payout phase of the Contract, all
amounts received by the taxpayer are taxable at ordinary income rates as amounts
"not received as an annuity." In addition, such amounts may be taxable to the
recipient without regard to the Owner's investment in the Contract or any
investment gain that might be present in the current Annuity Value.
For example, assume that a Contract owner with a Contract Value of $100,000 of
which $90,000 is comprised of investment in the Contract and $10,000 is
investment gain, makes a withdrawal of $20,000 during the annuity payout phase.
Under this view, the Contract owner would pay income taxes on the entire $20,000
amount in that tax year. For some taxpayers, such as those under age 59 1/2,
additional tax penalties may also apply.
OWNERS OF QUALIFIED AND NON-QUALIFIED CONTRACTS SHOULD CONSIDER CAREFULLY THE
TAX IMPLICATIONS OF ANY WITHDRAWAL REQUESTS AND THEIR NEED FOR CONTRACT FUNDS
PRIOR TO THE EXERCISE OF THE WITHDRAWAL RIGHT. CONTRACT OWNERS SHOULD ALSO
CONTACT THEIR TAX ADVISER PRIOR TO MAKING WITHDRAWALS.
ANNUITY PAYOUTS AFTER ANNUITIZATION. When annuity benefit payments begin under
the Contract, generally a portion of each payment may be excluded from gross
income. The excludable portion generally is determined by a formula that
establishes the ratio that the investment in the Contract bears to the expected
return under the Contract. The portion of the payment in excess of this
excludable amount is taxable as ordinary income. Once all the investment in the
Contract is recovered, the entire payment is taxable. If the annuitant dies
before cost basis is recovered, a deduction for the difference is allowed on the
Owner's final tax return.
PENALTY ON DISTRIBUTION. A 10% penalty tax may be imposed on the withdrawal of
investment gains if the withdrawal is made prior to age 59 1/2. The penalty tax
will not be imposed on withdrawals:
- taken on or after age 59 1/2; or
- if the withdrawal follows the death of the Owner (or, if the Owner is not
an individual, the death of the primary Annuitant, as defined in the
Code); or
- in the case of the Owner's "total disability" (as defined in the Code); or
- if withdrawals from a qualified Contract are made to an employee who has
terminated employment after reaching age 55; or
- irrespective of age, if the amount received is one of a series of
"substantially equal" periodic payments made at least annually for the
life or life expectancy of the payee.
The requirement of "substantially equal" periodic payments is met when the Owner
elects to have distributions made over the Owner's life expectancy, or over the
joint life expectancy of the Owner and beneficiary. The requirement is also met
when the number of units withdrawn to make each distribution is substantially
the same. Any modification, other than by reason of death or disability, of
distributions which are part of a series of substantially equal periodic
payments that occurs before the later of the Owner's age 59 1/2 or five years,
will subject the Owner to the 10% penalty tax on the prior distributions.
In a Private Letter Ruling, the IRS took the position that where distributions
from a variable annuity contract were determined by amortizing the accumulated
value of the contract over the taxpayer's remaining life expectancy, and the
option could be changed or terminated at any time, the distributions failed to
qualify as part of a "series of substantially equal payments" within the meaning
of Section 72 of the Code. The distributions, therefore, were subject to the 10%
federal penalty tax. This Private Letter Ruling may be
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applicable to an Owner who receives distributions under any LED-type option
prior to age 59 1/2. Subsequent Private Letter Rulings, however, have treated
LED-type withdrawal programs as effectively avoiding the 10% penalty tax. The
position of the IRS on this issue is unclear.
ASSIGNMENTS OR TRANSFERS. If the Owner transfers (assigns) the Contract to
another individual as a gift prior to the Annuity Date, the Code provides that
the Owner will incur taxable income at the time of the transfer. An exception is
provided for certain transfers between spouses. The amount of taxable income
upon such taxable transfer is equal to any investment gain in value over the
Owner's cost basis at the time of the transfer. The transfer also is subject to
federal gift tax provisions.
NONNATURAL OWNERS. As a general rule, deferred annuity contracts owned by
"nonnatural persons" (e.g., a corporation) are not treated as annuity contracts
for federal tax purposes, and the investment income attributable to
contributions made after February 28, 1986 is taxed as ordinary income that is
received or accrued by the owner during the taxable year. This rule does not
apply to annuity contracts purchased with a single payment when the annuity date
is no later than a year from the Issue Date or to deferred annuities owned by
qualified employer plans, estates, employers with respect to a terminated
pension plan, and entities other than employers, such as a trust, holding an
annuity as an agent for a natural person. This exception, however, will not
apply in cases of any employer who is the owner of an annuity contract under a
non-qualified deferred compensation plan.
DEFERRED COMPENSATION PLANS OF STATE AND LOCAL GOVERNMENTS AND TAX-EXEMPT
ORGANIZATIONS. Under Section 457 of the Code, deferred compensation plans
established by governmental and certain other tax-exempt employers for their
employees may invest in annuity contracts. Contributions and investment earnings
are not taxable to employees until distributed; however, with respect to
payments made after February 28, 1986, a Contract owned by a state or local
government or a tax-exempt organization will not be treated as an annuity under
Section 72 as well.
D. TAX WITHHOLDING
The Code requires withholding with respect to payments or distributions from
non-qualified contracts and IRAs, unless a taxpayer elects not to have
withholding. A 20% withholding requirement applies to distributions from most
other qualified contracts. In addition, the Code requires reporting to the IRS
of the amount of income received with respect to payment or distributions from
annuities.
E. PROVISIONS APPLICABLE TO QUALIFIED EMPLOYER PLANS
The tax rules applicable to qualified retirement plans, as defined by the Code,
are complex and vary according to the type of plan. Benefits under a qualified
plan may be subject to that plan's terms and conditions irrespective of the
terms and conditions of any annuity contract used to fund such benefits. As
such, the following is simply a general description of various types of
qualified plans that may use the Contract. Before purchasing any annuity
contract for use in funding a qualified plan, more specific information should
be obtained.
Qualified Contracts may include special provisions (endorsements) changing or
restricting rights and benefits otherwise available to owners of non-qualified
Contracts. Individuals purchasing a qualified Contract should carefully review
any such changes or limitations which may include restrictions to ownership,
transferability, assignability, contributions, and distributions.
CORPORATE AND SELF-EMPLOYED ("H.R. 10" AND "KEOGH") PENSION AND PROFIT SHARING
PLANS. Sections 401(a), 401(k) and 403(a) of the Code permit business employers
and certain associations to establish various types of tax-favored retirement
plans for employees. The Self-Employed Individuals' Tax Retirement Act of 1962,
as amended, permits self-employed individuals to establish similar plans for
themselves and their employees. Employers intending to use qualified Contracts
in connection with such plans should seek
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competent advice as to the suitability of the Contract to their specific needs
and as to applicable Code limitations and tax consequences.
The Company can provide prototype plans for certain pension or profit sharing
plans for review by the plan's legal counsel. For information, ask your
financial representative.
INDIVIDUAL RETIREMENT ANNUITIES. Sections 408 and 408A of the Code permits
eligible individuals to contribute to an individual retirement program known as
an Individual Retirement Annuity ("IRA"). Note: This term covers all IRAs
permitted under Sections 408 and 408A of the Code, including Roth IRAs. IRAs are
subject to limits on the amounts that may be contributed, the persons who may be
eligible, and on the time when distributions may commence. In addition, certain
distributions from other types of retirement plans may be "rolled over," on a
tax-deferred basis, to an IRA. Purchasers of an IRA Contract will be provided
with supplementary information as may be required by the IRS or other
appropriate agency, and will have the right to cancel the Contract as described
in this Prospectus. See "D. Right to Cancel."
Eligible employers that meet specified criteria may establish simplified
employee pension plans (SEP-IRAs) for their employees using IRAs. Employer
contributions that may be made to such plans are larger than the amounts that
may be contributed to regular IRAs and may be deductible to the employer.
TAX-SHELTERED ANNUITIES ("TSAS"). Under the provisions of Section 403(b) of the
Code, payments made to annuity Contracts purchased for employees under annuity
plans adopted by public school systems and certain organizations which are tax
exempt under Section 501(c)(3) of the Code are excludable from the gross income
of such employees to the extent that total annual payments do not exceed the
maximum contribution permitted under the Code. Purchasers of TSA contracts
should seek competent advice as to eligibility, limitations on permissible
payments and other tax consequences associated with the contracts.
Withdrawals or other distributions attributable to salary reduction
contributions (including earnings thereon) made to a TSA contract after December
31, 1988, may not begin before the employee attains age 59 1/2, separates from
service, dies or becomes disabled. In the case of hardship, an Owner may
withdraw amounts contributed by salary reduction, but not the earnings on such
amounts. Even though a distribution may be permitted under these rules (e.g.,
for hardship or after separation from service), it may be subject to a 10%
penalty tax as a premature distribution, in addition to income tax.
TEXAS OPTIONAL RETIREMENT PROGRAM. Distributions under a TSA contract issued to
participants in the Texas Optional Retirement Program may not be received except
in the case of the participant's death, retirement or termination of employment
in the Texas public institutions of higher education. These additional
restrictions are imposed under the Texas Government Code and a prior opinion of
the Texas Attorney General.
STATEMENTS AND REPORTS
An Owner is sent a report semi-annually which provides certain financial
information about the Underlying Funds. At least annually, but possibly as
frequently as quarterly, the Company will furnish a statement to the Owner
containing information about his or her Contract, including Accumulation Unit
Values and other information as required by applicable law, rules and
regulations. The Company will also send a confirmation statement to Owners each
time a transaction is made affecting the Contract Value. (Certain transactions
made under recurring payment plans may in the future be confirmed quarterly
rather than by immediate confirmations.) The Owner should review the information
in all statements carefully. All errors or corrections must be reported to the
Company immediately to assure proper crediting to the Contract. The Company will
assume that all transactions are accurately reported on confirmation statements
and quarterly/annual statements unless the Owner notifies the Principal Office
in writing within 30 days after receipt of the statement.
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ADDITION, DELETION OR SUBSTITUTION OF INVESTMENTS
The Company reserves the right, subject to applicable law, to make additions to,
deletions from, or substitutions for the shares that are held in the
Sub-Accounts or that the Sub-Accounts may purchase. If the shares of any
Underlying Fund no longer are available for investment or if, in the Company's
judgment, further investment in any Underlying Fund should become inappropriate
in view of the purposes of the Variable Account or the affected Sub-Account, the
Company may withdraw the shares of that Underlying Fund and substitute shares of
another registered open-end management company. The Company will not substitute
any shares attributable to a Contract interest in a Sub-Account without notice
to the Owner and prior approval of the SEC and state insurance authorities, to
the extent required by the 1940 Act or other applicable law. The Variable
Account may, to the extent permitted by law, purchase other securities for other
contracts or permit a conversion between contracts upon request by an Owner.
The Company also reserves the right to establish additional Sub-Accounts of the
Variable Account, each of which would invest in shares corresponding to a new
Underlying Fund or in shares of another investment company having a specified
investment objective. Subject to applicable law and any required SEC approval,
the Company may, in its sole discretion, establish new Sub-Accounts or eliminate
one or more Sub-Accounts if marketing needs, tax considerations or investment
conditions warrant. Any new Sub-Accounts may be made available to existing
Owners on a basis to be determined by the Company.
Shares of the Underlying Funds also are issued to variable accounts of the
Company and its affiliates which issue variable life contracts ("mixed
funding"). Shares of the Underlying Funds also are 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
owners or variable annuity owners. Although the Company, the Trust, Fidelity VIP
and T. Rowe Price do not currently foresee any such disadvantages to either
variable life insurance owners or variable annuity owners, the Company and the
respective trustees intend to monitor events in order to identify any material
conflicts between such owners, and to determine what action, if any, should be
taken in response thereto. If the trustees were to conclude that separate funds
should be established for variable life and variable annuity separate accounts,
the Company will bear the attendant expenses.
If any of these substitutions or changes is made, the Company may endorse the
Contract to reflect the substitution or change, and will notify Owners of all
such changes. If the Company deems it to be in the best interest of Owners, and
subject to any approvals that may be required under applicable law, the Variable
Account or any Sub-Account(s) may be operated as a management company under the
1940 Act, may be deregistered under the 1940 Act if registration is no longer
required, or may be combined with other Sub-Accounts or other separate accounts
of the Company.
The Company reserves the right, subject to compliance with applicable law and to
the provisions of the Participation Agreements, to:
(1) transfer assets from the Variable Account or Sub-Account to another of the
Company's variable accounts or sub-accounts having assets of the same class,
(2) to operate the Variable Account or any Sub-Account as a management
investment company under the 1940 Act or in any other form permitted by law,
(3) to deregister the Variable Account under the 1940 Act in accordance with the
requirements of the 1940 Act,
(4) to substitute the shares of any other registered investment company for the
Fund shares held by a Sub-Account, in the event that Fund shares are
unavailable for investment, or if the Company determines that further
investment in such Fund shares is inappropriate in view of the purpose of
the Sub-Account,
(5) to change the methodology for determining the net investment factor, and
56
<PAGE>
(6) to change the names of the Variable Account or of the Sub-Accounts. In no
event will the changes described be made without notice to Owners in
accordance with the 1940 Act.
CHANGES TO COMPLY WITH LAW AND AMENDMENTS
The Company reserves the right, without the consent of Owners, to suspend sales
of the Contract as presently offered, and to make any change to provisions of
the Contract to comply with, or give Owners the benefit of, any federal or state
statute, rule or regulation (or any laws, regulations or rules of any
jurisdiction in which the Company is doing business), including but not limited
to requirements for annuity contracts and retirement plans under the Code and
pertinent regulations or any state statute or regulation. Any such changes will
apply uniformly to all Contracts that are affected. Owners will be given written
notice of such changes.
VOTING RIGHTS
The Company will vote Underlying Fund shares held by each Sub-Account in
accordance with instructions received from Owners. Each person having a voting
interest in a Sub-Account will be provided with proxy materials of the
Underlying Fund, together with a form with which to give voting instructions to
the Company. Shares for which no timely instructions are received will be voted
in proportion to the instructions that are received. The Company also will vote
shares in a Sub-Account that it owns and which are not attributable to Contracts
in the same proportion. If the 1940 Act or any rules thereunder should be
amended or if the present interpretation of the 1940 Act or such rules should
change, and as a result the Company determines that it is permitted to vote
shares in its own right, whether or not such shares are attributable to the
Contract, the Company reserves the right to do so.
The number of votes which an Owner may cast will be determined by the Company as
of the record date established by the Underlying Fund. During the accumulation
period, the number of Underlying Fund shares attributable to each Owner will be
determined by dividing the dollar value of the Accumulation Units of the
Sub-Account credited to the Contract by the net asset value of one Underlying
Fund share. During the annuity payout phase, the number of Underlying Fund
shares attributable to each Owner will be determined by dividing the reserve
held in each Sub-Account for the Owner's Variable Annuity by the net asset value
of one Underlying Fund share. Ordinarily, the Owner's voting interest in the
Underlying Fund will decrease as the reserve for the Variable Annuity is
depleted.
DISTRIBUTION
The Contract offered by this Prospectus may be purchased from certain
independent broker-dealers which are registered under the Securities and
Exchange Act of 1934 and members of the National Association of Securities
Dealers, Inc. ("NASD"). The Contract also is offered through Allmerica
Investments, Inc., which is the principal underwriter and distributor of the
Contracts. Allmerica Investments, Inc., 440 Lincoln Street, Worcester, MA 01653,
is a registered broker-dealer, a member of the NASD and an indirectly wholly
owned subsidiary of First Allmerica.
The Company pays commissions not to exceed 7.0% of payments to broker-dealers
which sell the Contract. Alternative commission schedules are available with
lower initial commission amounts based on payments, plus ongoing annual
compensation of up to 1% of Contract value. To the extent permitted by NASD
rules, promotional incentives or payments also may be provided to such
broker-dealers based on sales volumes, the assumption of wholesaling functions,
or other sales-related criteria. Additional payments may be made for other
services not directly related to the sale of the Contract, including the
recruitment and training of personnel, production of promotional literature, and
similar services.
The Company intends to recoup commissions and other sales expenses through a
combination of anticipated surrender charges and profits from the Company's
General Account, which may include amounts derived from mortality and risk
charges. Commissions paid on the Contract, including additional incentives or
57
<PAGE>
payments, do not result in any additional charge to Owners or to the Variable
Account. The Company will retain any surrender charges assessed on a Contract.
Owners may direct any inquiries to their financial representative or to
Allmerica Investments, Inc., 440 Lincoln Street, Worcester, MA 01653, telephone
1-800-366-1492.
LEGAL MATTERS
There are no legal proceedings pending to which the Variable Account is a party,
or to which the assets of the Variable Account are subject. The Company and the
Principal Underwriter are not involved in any litigation that is of material
importance in relation to its total assets or that relates to the Separate
Account.
YEAR 2000 COMPLIANCE
The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
computer programs that have date-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices or
engage in similar normal business activities.
Based on a third party assessment, the Company determined that significant
portions of its software required modification or replacement to enable its
computer systems to properly process dates beyond December 31, 1999. The Company
has completed the process of modifying or replacing existing software and
believes that this action will resolve the Year 2000 issue. However, 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 is engaged in formal communications with all of its significant
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 program, 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
issue, there can be no assurance that exposure for material contingencies will
not arise.
The cost of the Year 2000 project is being 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 $59
million related to the assessment, plan development and substantial completion
of the Year 2000 project through June 30, 1999. The total remaining cost of the
project is estimated between $10-$20 million.
58
<PAGE>
FURTHER INFORMATION
A Registration Statement under the 1933 Act relating to this offering has been
filed with the SEC. Certain portions of the Registration Statement and
amendments have been omitted in this Prospectus pursuant to the rules and
regulations of the SEC. The omitted information may be obtained from the SEC's
principal office in Washington, D.C., upon payment of the SEC's prescribed fees.
59
<PAGE>
APPENDIX A
MORE INFORMATION ABOUT THE FIXED ACCOUNT
Because of exemption and exclusionary provisions in the securities laws,
interests in the Fixed Account generally are not subject to regulation under the
provisions of the 1933 Act or the 1940 Act. Disclosures regarding the fixed
portion of the annuity Contract and the Fixed Account may be subject to the
provisions of the 1933 Act concerning the accuracy and completeness of
statements made in this Prospectus. The disclosures in this APPENDIX A have not
been reviewed by the SEC.
The Fixed Account is part of the Company's General Account which is made up of
all of the general assets of the Company other than those allocated to a
separate account. Allocations to the Fixed Account become part of the assets of
the Company and are used to support insurance and annuity obligations. A portion
or all of net payments may be allocated to accumulate at a fixed rate of
interest in the Fixed Account. Such net amounts are guaranteed by the Company as
to principal and a minimum rate of interest. Under the Contract, the minimum
interest which may be credited on amounts allocated to the Fixed Account is 3%
compounded annually. Additional "Excess Interest" may or may not be credited at
the sole discretion of the Company.
STATE RESTRICTIONS. In Massachusetts, payments and transfers to the Fixed
Account are subject to the following restrictions:
If a Contract is issued prior to the Annuitant's 60th birthday,
allocations to the Fixed Account will be permitted until the
Annuitant's 61st birthday. On and after the Annuitant's 61st
birthday, no additional Fixed Account allocations will be
accepted. If a Contract is issued on or after the Annuitant's 60th
birthday, up through and including the Annuitant's 81st birthday,
Fixed Account allocations will be permitted during the first
Contract year. On and after the first Contract anniversary, no
additional allocations to the Fixed Account will be permitted. If
a Contract is issued after the Annuitant's 81st birthday, no
payments to the Fixed Account will be permitted at any time.
In Oregon, no payments to the Fixed Account will be permitted if a Contract is
issued after the Annuitant's 81st birthday. If an allocation designated as a
Fixed Account allocation is received at the Principal Office during a period
when the Fixed Account is not available due to the limitations outlined above,
the monies will be allocated to the Money Market Sub-Account.
ENHANCED AUTOMATIC TRANSFER (DOLLAR COST AVERAGING) PROGRAMS. To the extent
permitted by law, the Company reserves the right to offer Enhanced Automatic
Transfer Program(s) from time to time. If you elect to participate, the Company
will credit an enhanced interest rate to payments made to the Enhanced Automatic
Transfer Program. Eligible payments:
- must be new payments to the Contract, including the initial payment,
- must be allocated to the Fixed Account, which will be the source account,
- must be automatically transferred out of the Fixed Account to one or more
Sub-Accounts over a specified time period and
- will receive the enhanced rate while they remain in the Fixed Account.
You may be able to establish more than one Enhanced Automatic Transfer Program.
Payments made to the Contract during the same month will be part of the same
Enhanced Automatic Transfer Program if the length of the time period is the same
and the enhanced rate is the same. The allocation for all of the amounts in the
same program will be in accordance with the instructions for the most recent
payment to this program. The monthly transfer will be made on the date
designated for the initial payment to this program. The amount allocated will be
determined by dividing the amount in the program by the number of remaining
months. For example, for a six-month program, the first automatic transfer will
be 1/6th of the balance; the second automatic transfer will be 1/5th of the
balance, and so on.
Payments to different Enhanced Automatic Transfer Programs will be handled in
accordance with the instructions for each particular program.
A-1
<PAGE>
APPENDIX B
PERFORMANCE INFORMATION
This Contract was first offered to the public in 1999. However, in order to help
people understand how investment performance can affect money invested in the
Sub-Accounts, the Company may advertise "total return" and "average annual total
return" performance information based on (1) the periods that the Sub-Accounts
have been in existence and (2) the periods that the Underlying Funds have been
in existence. Performance results in Tables 1A and 2A reflect the applicable
deductions for the Contract fee, Sub-Account charges and Underlying Fund charges
under this Contract and also assume that the Contract is surrendered at the end
of the applicable period. Performance results in Tables 1B and 2B do not include
the Contract fee and assume that the Contract is not surrendered at the end of
the applicable period. Neither sets of tables include optional Rider charges.
Both the total return and yield figures are based on historical earnings and are
not intended to indicate future performance.
The "total return" of a Sub-Account refers to the total of the income generated
by an investment in the Sub-Account and of the changes in the value of the
principal (due to realized and unrealized capital gains or losses) for a
specified period, reduced by Variable Account charges, and expressed as a
percentage. The "average annual total" return represents the average annual
percentage change in the value of an investment in the Sub-Account over a given
period of time. It represents averaged figures as opposed to the actual
performance of a Sub-Account, which will vary from year to year.
The yield of the Sub-Account investing in the Money Market Fund refers to the
income generated by an investment in the Sub-Account over a seven-day period
(which period will be specified in the advertisement). This income is then
"annualized" by assuming that the income generated in the specific week is
generated over a 52-week period. This annualized yield is shown as a percentage
of the investment. The "effective yield" calculation is similar but, when
annualized, the income earned by an investment in the Sub-Account is assumed to
be reinvested. Thus the effective yield will be slightly higher than the yield
because of the compounding effect of this assumed reinvestment.
Quotations of average annual total return as shown in Table 1A are calculated in
the manner prescribed by the SEC and show the percentage rate of return of a
hypothetical initial investment of $1,000 for the most recent one, five and ten
year period or for a period covering the time the Sub-Account has been in
existence, if less than the prescribed periods. The calculation is adjusted to
reflect the deduction of the annual Sub-Account asset charge of 1.40%, the
effect of the $35 annual Contract fee, the Underlying Fund charges and the
surrender charge which would be assessed if the investment were completely
withdrawn at the end of the specified period. The calculation is not adjusted to
reflect the deduction of any optional Rider charges. Quotations of supplemental
average total returns, as shown in Table 1B, are calculated in exactly the same
manner and for the same periods of time except that it does not reflect the
Contract fee and assumes that the Contract is not surrendered at the end of the
periods shown.
The performance shown in Tables 2A and 2B is calculated in exactly the same
manner as those in Tables 1A and 1B; however, the period of time is based on the
Underlying Fund's lifetime, which may predate the Sub-Account's inception date.
These performance calculations are based on the assumption that the Sub-Account
corresponding to the applicable Underlying Fund was actually in existence
throughout the stated period and that the contractual charges and expenses
during that period were equal to those currently assessed under this Contract.
For more detailed information about these performance calculations, including
actual formulas, see the SAI.
PERFORMANCE INFORMATION FOR ANY SUB-ACCOUNT REFLECTS ONLY THE PERFORMANCE OF A
HYPOTHETICAL INVESTMENT IN THE SUB-ACCOUNT DURING THE TIME PERIOD ON WHICH THE
CALCULATIONS ARE BASED. PERFORMANCE
B-1
<PAGE>
INFORMATION SHOULD BE CONSIDERED IN LIGHT OF THE INVESTMENT OBJECTIVES AND
POLICIES AND RISK CHARACTERISTICS OF THE UNDERLYING FUND IN WHICH THE
SUB-ACCOUNT INVESTS AND THE MARKET CONDITIONS DURING THE GIVEN TIME PERIOD, AND
SHOULD NOT BE CONSIDERED AS A REPRESENTATION OF WHAT MAY BE ACHIEVED IN THE
FUTURE.
Performance information for a Sub-Account may be compared, in reports and
promotional literature, to:
(1) the Standard & Poor's 500 Composite Stock Price Index ("S&P 500"), Dow Jones
Industrial Average ("DJIA"), Shearson Lehman Aggregate Bond Index or other
unmanaged indices, so that investors may compare the Sub-Account results
with those of a group of unmanaged securities widely regarded by investors
as representative of the securities markets in general; or
(2) other groups of variable annuity separate accounts or other investment
products tracked by Lipper Analytical Services, a widely used independent
research firm which ranks mutual funds and other investment products by
overall performance, investment objectives, and assets, or tracked by other
services, companies, publications, or persons, who rank such investment
products on overall performance or other criteria; or
(3) the Consumer Price Index (a measure for inflation) to assess the real rate
of return from an investment in the Sub-Account. Unmanaged indices may
assume the reinvestment of dividends but generally do not reflect deductions
for administrative and management costs and expenses. In addition, relevant
broad-based indices and performance from independent sources may be used to
illustrate the performance of certain Contract features.
At times, the Company may also advertise the ratings and other information
assigned to it by independent rating organizations such as A.M. Best Company
("A.M. Best"), Moody's Investors Service ("Moody's"), Standard & Poor's
Insurance Rating Services ("S&P") and Duff & Phelps. A.M. Best's and Moody's
ratings reflect their current opinion of the Company's relative financial
strength and operating performance in comparison to the norms of the life/health
insurance industry. S&P's and Duff & Phelps' ratings measure the ability of an
insurance company to meet its obligations under insurance policies it issues and
do not measure the ability of such companies to meet other non-policy
obligations. The ratings also do not relate to the performance of the Underlying
Funds.
B-2
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
TABLE 1A
AVERAGE ANNUAL TOTAL RETURNS OF SUB-ACCOUNT
FOR PERIODS ENDING DECEMBER 31, 1998
SINCE INCEPTION OF SUB-ACCOUNT
(ASSUMING COMPLETE WITHDRAWAL OF THE INVESTMENT)
<TABLE>
<CAPTION>
SINCE
SUB-ACCOUNT FOR YEAR INCEPTION
INCEPTION ENDED OF
SUB-ACCOUNT INVESTING IN UNDERLYING FUND DATE 12/31/98 5 YEARS SUB-ACCOUNT
<S> <C> <C> <C> <C>
Select Emerging Markets Fund.............. 2/20/98 N/A N/A -27.97%
Select International Equity Fund.......... 5/3/94 6.13% N/A 9.34%
T. Rowe Price International Stock
Portfolio................................ 5/1/95 5.57% N/A 7.44%
Select Aggressive Growth Fund............. 9/8/92 0.79% 12.23% 15.96%
Select Capital Appreciation Fund.......... 4/30/95 3.78% N/A 16.97%
Select Value Opportunity Fund............. 2/20/98 N/A N/A -8.50%
Alliance Premier Growth Portfolio......... N/A N/A N/A N/A
Select Strategic Growth Fund.............. 2/20/98 N/A N/A -10.80%
Fidelity VIP Growth Portfolio............. 5/1/95 28.81% N/A 24.54%
Select Growth and Income Fund............. 9/8/92 6.08% 15.11% 13.35%
Fidelity VIP Equity-Income Portfolio...... 5/1/95 1.75% N/A 16.79%
Fidelity VIP High Income Portfolio........ 5/1/95 -12.65% N/A 6.35%
Select Income Fund........................ 9/8/92 -2.58% 3.05% 4.19%
Money Market Fund......................... 10/8/92 -3.77% 2.18% 2.32%
</TABLE>
TABLE 1B
SUPPLEMENTAL AVERAGE ANNUAL TOTAL RETURNS OF SUB-ACCOUNT
FOR PERIODS ENDING DECEMBER 31, 1998
SINCE INCEPTION OF SUB-ACCOUNT
(ASSUMING NO WITHDRAWAL OF THE INVESTMENT AND NO CONTRACT FEES)
<TABLE>
<CAPTION>
SINCE
SUB-ACCOUNT FOR YEAR INCEPTION
INCEPTION ENDED OF
SUB-ACCOUNT INVESTING IN UNDERLYING FUND DATE 12/31/98 5 YEARS SUB-ACCOUNT
<S> <C> <C> <C> <C>
Select Emerging Markets Fund.............. 2/20/98 N/A N/A -22.40%
Select International Equity Fund.......... 5/3/94 14.87% N/A 10.73%
T. Rowe Price International Stock
Portfolio................................ 5/1/95 14.25% N/A 9.56%
Select Aggressive Growth Fund............. 9/8/92 9.03% 13.41% 16.61%
Select Capital Appreciation Fund.......... 4/30/95 12.30% N/A 18.72%
Select Value Opportunity Fund............. 2/20/98 N/A N/A -1.12%
Alliance Premier Growth Portfolio......... N/A N/A N/A N/A
Select Strategic Growth Fund.............. 2/20/98 N/A N/A -3.63%
Fidelity VIP Growth Portfolio............. 5/1/95 37.56% N/A 26.08%
Select Growth and Income Fund............. 9/8/92 14.82% 16.20% 14.04%
Fidelity VIP Equity-Income Portfolio...... 5/1/95 10.08% N/A 18.55%
Fidelity VIP High Income Portfolio........ 5/1/95 -5.65% N/A 8.52%
Select Income Fund........................ 9/8/92 5.35% 4.58% 5.12%
Money Market Fund......................... 10/8/92 4.05% 3.76% 3.33%
</TABLE>
B-3
<PAGE>
TABLE 2A
AVERAGE ANNUAL TOTAL RETURNS OF SUB-ACCOUNT
FOR PERIODS ENDING DECEMBER 31, 1998
SINCE INCEPTION OF UNDERLYING FUND
(ASSUMING COMPLETE WITHDRAWAL OF THE INVESTMENT)
<TABLE>
<CAPTION>
SINCE
UNDERLYING INCEPTION
FUND FOR YEAR OF
INCEPTION ENDED UNDERLYING
SUB-ACCOUNT INVESTING IN UNDERLYING FUND DATE 12/31/98 5 YEARS FUND
<S> <C> <C> <C> <C>
Select Emerging Markets Fund.............. 2/20/98 N/A N/A -27.97%
Select International Equity Fund.......... 5/2/94 6.13% N/A 9.34%
T. Rowe Price International Stock
Portfolio................................ 3/31/94 5.57% N/A 6.68%
Select Aggressive Growth Fund............. 8/21/92 0.79% 12.23% 15.82%
Select Capital Appreciation Fund.......... 4/28/95 3.78% N/A 16.94%
Select Value Opportunity Fund............. 4/30/93 -4.35% 10.29% 12.22%
Alliance Premier Growth Portfolio......... 6/26/92 37.18% 25.24% 23.18%
Select Strategic Growth Fund.............. 2/20/98 N/A N/A -10.80%
Fidelity VIP Growth Portfolio............. 10/9/86 28.81% 19.08% 17.51%
Select Growth and Income Fund............. 8/21/92 6.08% 15.11% 13.35%
Fidelity VIP Equity-Income Portfolio...... 10/9/86 1.75% 16.07% 13.87%
Fidelity VIP High Income Portfolio........ 9/19/85 -12.65% 5.88% 9.29%
Select Income Fund........................ 8/21/92 -2.58% 3.05% 4.15%
Money Market Fund......................... 4/29/85 -3.77% 2.18% 3.91%
</TABLE>
TABLE 2B
SUPPLEMENTAL AVERAGE ANNUAL TOTAL RETURNS OF SUB-ACCOUNT
FOR PERIODS ENDING DECEMBER 31, 1998
SINCE INCEPTION OF UNDERLYING FUND
(ASSUMING NO WITHDRAWAL OF THE INVESTMENT AND NO CONTRACT FEES)
<TABLE>
<CAPTION>
SINCE
UNDERLYING INCEPTION
FUND FOR YEAR OF
INCEPTION ENDED UNDERLYING
SUB-ACCOUNT INVESTING IN UNDERLYING FUND DATE 12/31/98 5 YEARS FUND
<S> <C> <C> <C> <C>
Select Emerging Markets Fund.............. 2/20/98 N/A N/A -22.40%
Select International Equity Fund.......... 5/2/94 14.87% N/A 10.72%
T. Rowe Price International Stock
Portfolio................................ 3/31/94 14.25% N/A 8.13%
Select Aggressive Growth Fund............. 8/21/92 9.03% 13.41% 16.45%
Select Capital Appreciation Fund.......... 4/28/95 12.30% N/A 18.69%
Select Value Opportunity Fund............. 4/30/93 3.42% 11.53% 13.13%
Alliance Premier Growth Portfolio......... 6/26/92 45.93% 26.09% 23.70%
Select Strategic Growth Fund.............. 2/20/98 N/A N/A -3.63%
Fidelity VIP Growth Portfolio............. 10/9/86 37.56% 20.06% 17.76%
Select Growth and Income Fund............. 8/21/92 14.82% 16.20% 14.03%
Fidelity VIP Equity-Income Portfolio...... 10/9/86 10.08% 17.13% 14.12%
Fidelity VIP High Income Portfolio........ 9/19/85 -5.65% 7.29% 9.54%
Select Income Fund........................ 8/21/92 5.35% 4.58% 5.06%
Money Market Fund......................... 4/29/85 4.05% 3.76% 4.16%
</TABLE>
B-4
<PAGE>
APPENDIX C
SURRENDER CHARGES AND THE MARKET VALUE ADJUSTMENT
PART 1: SURRENDER CHARGES
FULL SURRENDER -- Assume a payment of $50,000 is made on the Issue Date and no
additional payments are made. Assume there are no partial withdrawals. The
Withdrawal Without Surrender Charge Amount is equal to the greater of 100% of
cumulative earnings (excluding Payment Credits) or 15% of the total of all
payments invested in the Contract.
The table below presents examples of the surrender charge resulting from a full
surrender, based on Hypothetical Accumulated Values:
<TABLE>
<CAPTION>
HYPOTHETICAL WITHDRAWAL SURRENDER
CONTRACT ACCUMULATED WITHOUT SURRENDER CHARGE SURRENDER
YEAR VALUE CHARGE AMOUNT PERCENTAGE CHARGE
- -------- ----------- ----------------- ---------- ---------
<S> <C> <C> <C> <C>
1 $ 56,700 $ 7,500 8.5% $4,182
2 61,236 8,736 8.5% 4,250
3 66,135 13,635 8.5% 4,250
4 71,426 18,926 8.5% 4,250
5 77,140 24,640 7.5% 3,750
6 83.311 30,811 6.5% 3,250
7 89,976 37,476 5.5% 2,750
8 97,174 44,674 3.5% 1,750
9 104,948 52,448 1.5% 750
10 113,344 60,844 0.0% 0
</TABLE>
WITHDRAWALS -- Assume a payment of $50,000 is made on the Issue Date and no
additional payments are made. Assume that there are withdrawals as detailed
below. The Withdrawal Without Surrender Charge Amount is equal to the greater of
100% of cumulative earnings (excluding Payment Credits) or 15% of the total of
all payments invested in the Contract LESS that portion of any prior
withdrawal(s) of payments that are subject to the surrender charge table.
The table below presents examples of the surrender charge resulting from
withdrawals, based on Hypothetical Accumulated Values:
<TABLE>
<CAPTION>
HYPOTHETICAL WITHDRAWAL SURRENDER
CONTRACT ACCUMULATED WITHOUT SURRENDER CHARGE SURRENDER
YEAR VALUE WITHDRAWALS CHARGE AMOUNT PERCENTAGE CHARGE
- -------- ----------- ----------- ----------------- ---------- ---------
<S> <C> <C> <C> <C> <C>
1 $56,700 $0 $ 7,500 8.5% $0
2 61,236 0 8,736 8.5% 0
3 66,135 0 13,635 8.5% 0
4 71,426 30,000 18,926 8.5% 941
5 44,740 10,000 5,839 7.5% 312
6 37,519 5,000 5,215 6.5% 0
7 35,120 10,000 5,215 5.5% 263
8 27,130 15,000 4,497 3.5% 368
9 13,100 5,000 2.921 1.5% 31
10 8,748 5,000 2,610 0.0% 0
</TABLE>
C-1
<PAGE>
PART 2: MARKET VALUE ADJUSTMENT
The market value factor is: [(1+i)/(1+j)] to the power of n/365 - 1
The following examples assume:
1. The payment was allocated to a ten-year Guarantee Period Account with a
Guaranteed Interest Rate of 8%.
2. The date of surrender is seven years (2,555 days) from the expiration
date.
3. The value of the Guarantee Period Account is equal to $66,134.88 at the
end of three years.
4. No transfers or withdrawals affecting this Guarantee Period Account have
been made.
5. Surrender charges, if any, are calculated in the same manner as shown in
the examples in Part 1.
NEGATIVE MARKET VALUE ADJUSTMENT (UNCAPPED)
Assume that on the date of surrender, the current rate (j) is 10.00% or 0.10
<TABLE>
<C> <C> <S>
The market value factor = [(1+i)/(1+j)] to the power of n/365 - 1
= [(1+.08)/(1+.10)] to the power of 2555/365 - 1
= (.98182) to the power of 7 - 1
= -.12054
The market value = the market value factor multiplied by the withdrawal
adjustment
= -.12054 X $66,134.88
= -$7,971.71
</TABLE>
POSITIVE MARKET VALUE ADJUSTMENT (UNCAPPED)
Assume that on the date of surrender, the current rate (j) is 7.00% or 0.07
<TABLE>
<C> <C> <S>
The market value factor = [(1+i)/(1+j)] to the power of n/365 - 1
= [(1+.08)/(1+.07)] to the power of 2555/365 - 1
= (1.00935) to the power of 7 - 1
= .06728
The market value = the market value factor multiplied by the withdrawal
adjustment
= .06728 X $66,134.88
= $4,449.79
</TABLE>
C-2
<PAGE>
NEGATIVE MARKET VALUE ADJUSTMENT (CAPPED)
Assume that on the date of surrender, the current rate (j) is 11.00% or 0.11
<TABLE>
<C> <C> <S>
The market value factor = [(1+i)/(1+j)] to the power of n/365 - 1
= [(1+.08)/(1+.11)] to the power of 2555/365 - 1
= (.97297) to the power of 7 - 1
= -.17454
The market value = Minimum of the market value factor multiplied by the
adjustment withdrawal or the negative of the excess interest earned over
3%
= Minimum (-.17454 X $66,134.88 or -$11,498.53)
= Minimum (-$11,543.18 or -$11,498.53)
= -$11,498.53
</TABLE>
POSITIVE MARKET VALUE ADJUSTMENT (CAPPED)
Assume that on the date of surrender, the current rate (j) is 5.00% or 0.05
<TABLE>
<C> <C> <S>
The market value factor = [(1+i)/(1+j)] to the power of n/365 - 1
= [(1+.08)/(1+.05)] to the power of 2555/365 - 1
= (1.02857) to the power of 7 - 1
= .21798
The market value = Minimum of the market value factor multiplied by the
adjustment withdrawal or the excess interest earned over 3%
= Minimum of (.21798 X $66,134.88 or $11,498.53)
= Minimum of ($14,416.27 or $11,498.53)
= $11,498.53
</TABLE>
C-3
<PAGE>
APPENDIX D
CONDENSED FINANCIAL INFORMATION
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
ALLMERICA SELECT SEPARATE ACCOUNT
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------
1998 1997 1996 1995 1994 1993 1992
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
SELECT EMERGING MARKETS
Unit Value:
Beginning of Period................... 0.000 N/A N/A N/A N/A N/A N/A
End of Period......................... 0.776 N/A N/A N/A N/A N/A N/A
Units Outstanding at End of Period (in
thousands)............................. 5,209 N/A N/A N/A N/A N/A N/A
SELECT INTERNATIONAL EQUITY
Unit Value:
Beginning of Period................... 1.400 1.357 1.128 0.956 1.000 N/A N/A
End of Period......................... 1.608 1.400 1.357 1.128 0.956 N/A N/A
Units Outstanding at End of Period (in
thousands)............................. 103,028 93,170 60,304 35,558 22,183 N/A N/A
T. ROWE PRICE INTERNATIONAL STOCK
Unit Value:
Beginning of Period................... 1.223 1.203 1.065 1.000 N/A N/A N/A
End of Period......................... 1.398 1.223 1.203 1.065 N/A N/A N/A
Units Outstanding at End of Period (in
thousands)............................. 41,458 33,977 16,510 4,066 N/A N/A N/A
SELECT AGGRESSIVE GROWTH
Unit Value:
Beginning of Period................... 2.419 2.066 1.768 1.354 1.405 1.192 1.192
End of Period......................... 2.637 2.419 2.066 1.768 1.354 1.405 1.192
Units Outstanding at End of Period (in
thousands)............................. 86,699 81,233 64,262 51,006 36,330 17,538 5,123
SELECT CAPITAL APPRECIATION
Unit Value:
Beginning of Period................... 1.672 1.484 1.383 1.000 N/A N/A N/A
End of Period......................... 1.878 1.672 1.484 1.383 N/A N/A N/A
Units Outstanding at End of Period in
thousands)............................. 54,789 43,733 24,257 5,424 N/A N/A N/A
SELECT VALUE OPPORTUNITY
Unit Value:
Beginning of Period................... 0.000 N/A N/A N/A N/A N/A N/A
End of Period......................... 0.989 N/A N/A N/A N/A N/A N/A
Units Outstanding at End of Period (in
thousands)............................. 18,240 N/A N/A N/A N/A N/A N/A
SELECT STRATEGIC GROWTH
Unit Value
Beginning of Period................... 0.000 N/A N/A N/A N/A N/A N/A
End of Period......................... 0.964 N/A N/A N/A N/A N/A N/A
Units Outstanding at End of Period in
thousands)............................. 8,709 N/A N/A N/A N/A N/A N/A
</TABLE>
D-1
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------
1998 1997 1996 1995 1994 1993 1992
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
FIDELITY VIP GROWTH
Unit Value:
Beginning of Period................... 1.701 1.397 1.235 1.000 N/A N/A N/A
End of Period......................... 2.340 1.701 1.397 1.235 N/A N/A N/A
Units Outstanding at End of Period in
thousands)............................. 63,055 45,772 24,745 6,677 N/A N/A N/A
SELECT GROWTH AND INCOME
Unit Value:
Beginning of Period................... 1.996 1.652 1.382 1.074 1.082 0.994 1.000
End of Period......................... 2.292 1.996 1.652 1.382 1.074 1.082 0.994
Units Outstanding at End of Period (in
thousands)............................. 129,119 106,800 77,919 61,942 43,292 20,983 22,339
FIDELITY VIP EQUITY-INCOME
Unit Value:
Beginning of Period................... 1.696 1.342 1.191 1.000 N/A N/A N/A
End of Period......................... 1.867 1.696 1.342 1.191 N/A N/A N/A
Units Outstanding at End of Period in
thousands)............................. 95,537 65,130 31,681 9,213 N/A N/A N/A
FIDELITY VIP HIGH INCOME
Unit Value:
Beginning of Period................... 1.430 1.233 1.096 1.000 N/A N/A N/A
End of Period......................... 1.350 1.430 1.233 1.096 N/A N/A N/A
Units Outstanding at End of Period (in
thousands)............................. 74,986 50,470 23,051 6,714 N/A N/A N/A
SELECT INCOME
Unit Value:
Beginning of Period................... 1.301 1.208 1.186 1.028 1.095 1.001 1.000
End of Period......................... 1.371 1.301 1.208 1.186 1.028 1.095 1.001
Units Outstanding at End of Period (in
thousands)............................. 102,171 72,394 58,751 46,845 32,823 18,320 5,372
MONEY MARKET
Unit Value:
Beginning of Period................... 1.179 1.133 1.091 1.045 1.019 1.003 1.000
End of Period......................... 1.227 1.179 1.133 1.091 1.045 1.019 1.003
Units Outstanding at End of Period (in
thousands)............................. 92,796 65,441 60,691 45,589 31,836 19,802 1,447
</TABLE>
No information is shown above for the Sub-Accounts that commenced operations
after December 31, 1998
D-2
<PAGE>
APPENDIX E
EXAMPLES OF PRESENT VALUE WITHDRAWALS AND PAYMENT WITHDRAWALS
Assume in the examples below that a 65-year-old male annuitizes his contract
exactly two years after the Issue Date. The annuitization amount is $250,000.
Further assume that he selects a variable Life with Period Certain annuity
payout option of Single Life with Payments Guaranteed for 10 Years, an Assumed
Investment Return ("AIR") of 3%, and an annual Change Frequency. Assume that the
Annuity Value purchases 1,370 Annuity Units and the first monthly annuity
benefit payment is equal to $1,370. The following examples assume a net return
of 8% (gross return of 9.4 %).
PRESENT VALUE WITHDRAWALS
EXAMPLE 1. Assume that the Owner has taken no previous withdrawals and would
like to take the maximum Present Value Withdrawal available at the beginning of
the fifth contract year (the third year of the Annuity Payout phase).
Annuity Units prior to withdrawal = 1,370
Annuity Unit Value on the date of withdrawal = 1.09944
Monthly Annuity Benefit Payment prior to withdrawal = $1,506.24
Rate used in Present Value Determination = 5% (3% AIR plus 2% Withdrawal
Adjustment Charge)
Present Value of Future Guaranteed Annuity Benefit Payments = $119,961.92
Maximum Present Value Withdrawal Amount = $89,971.44 ($119,961.92 * 75%)
Annuity Units after withdrawal = 342.50 (1,370 * (1 -
(89,971.44/119,961.92)))
Annuity Unit Value on the date of withdrawal = 1.09944
Monthly Annuity Benefit Payment after withdrawal = $376.56
Because the withdrawal is being made within 5 years of the Issue Date, the rate
used in the Present Value Determination is increased by a Withdrawal Adjustment
Charge. Since less than 10 years of guaranteed annuity payments are being
valued, the Withdrawal Adjustment Charge is 2%. Because this is a Present Value
Withdrawal, the number of Annuity Units will increase to 1,370 after the end of
the 10-year period during which the Company guaranteed to make payments.
EXAMPLE 2. Assume that the Owner has taken no previous withdrawals and would
like to take the maximum Present Value Withdrawal available at the beginning of
the tenth contract year (eighth year of the Annuity Payout phase).
Annuity Units prior to withdrawal = 1,370
Annuity Unit Value on the date of withdrawal = 1.39350
Monthly Annuity Benefit Payment prior to withdrawal = $1,909.09
Rate used in Present Value Determination = 3% (3% AIR)
Present Value of Future Guaranteed Annuity Benefit Payments = $65,849.08
Maximum Present Value Withdrawal Amount = $49,386.81 ($65,849.08 * 75%)
Annuity Units after withdrawal = 342.50 (1,370 * (1 -
(49,386.81/65,849.08)))
Annuity Unit Value on the date of withdrawal = 1.39350
Monthly Annuity Benefit Payment after withdrawal = $477.27
Because the withdrawal is being made more than 5 years after the Issue Date, the
rate used in the Present Value Determination is not increased by a Withdrawal
Adjustment Charge. Because this is a Present Value Withdrawal, the number of
Annuity Units will increase to 1,370 after the end of the 10-year period during
which the Company guaranteed to make payments.
E-1
<PAGE>
PAYMENT WITHDRAWALS
EXAMPLE 3. Assume that the Owner has taken no previous withdrawals and would
like to take the maximum Payment Withdrawal of 10 monthly annuity benefit
payments at the beginning of the fifth contract year (the third year of the
Annuity Payout phase). At that time, the Annuitant's life expectancy is greater
than 15 years.
Last Monthly Annuity Benefit Payment = 1,436.50
Withdrawal Amount = $14,365.00 (10 * 1,436.50)
Annuity Units prior to withdrawal = 1,370
Annuity Unit Value on the date of withdrawal = 1.09944
Monthly Annuity Benefit Payment prior to withdrawal = $1,506.24
Rate used in Present Value Determination = 4% (3% AIR plus 1% Withdrawal
Adjustment Charge)
Present Value of Future Annuity Benefit Payments = $234,482.77
Annuity Units after withdrawal = 1,286.07 (1,370 * (1 -
(14,365.00/234,482.77)))
Annuity Unit Value on the date of withdrawal = 1.09944
Monthly Annuity Benefit Payment after withdrawal = $1,413.96
Because the withdrawal is being made within 5 years of the Issue Date, the rate
used in the Present Value Determination is increased by a Withdrawal Adjustment
Charge. Since there are more than 15 years of annuity payments being valued (the
Annuitant's life expectancy is more than 15 years), the Withdrawal Adjustment
Charge is 1%. Because this is a Payment Withdrawal, the number of Annuity Units
will not increase after the end of the 10-year period during which the Company
guaranteed to make payments.
EXAMPLE 4. Assume that the Owner has taken no previous withdrawals and would
like to take the maximum Payment Withdrawal of 10 monthly annuity benefit
payments at the beginning of the tenth contract year (eighth year of the Annuity
Payout phase).
Last Monthly Annuity Benefit Payment = $1,820.71
Withdrawal Amount = $18,207.10 (10 * 1,820.71)
Annuity Units prior to withdrawal = 1,370
Annuity Unit Value on the date of withdrawal = 1.39350
Monthly Annuity Benefit Payment prior to withdrawal = $1,909.09
Rate used in Present Value Determination = 3% (3% AIR)
Present Value of Future Annuity Benefit Payments = $268,826.18
Annuity Units after withdrawal = 1,272.71 (1,370 * (1 -
(18,207.10/268,826.18)))
Annuity Unit Value on the date of withdrawal = 1.39350
Monthly Annuity Benefit Payment after withdrawal = $1,779.80
Because the withdrawal is being made more than 5 years after the Issue Date, the
rate used in the Present Value Determination is not increased by a Withdrawal
Adjustment Charge. Because this is a Payment Withdrawal, the number of Annuity
Units will not increase after the end of the 10-year period during which the
Company guaranteed to make payments.
E-2
<PAGE>
PRESENT VALUE WITHDRAWAL VERSUS PAYMENT WITHDRAWAL
EXAMPLE 5. Assume that the Owner has taken no previous withdrawals and would
like to take a $10,000 withdrawal at the beginning of the fifth contract year
(the third year of the Annuity Payout phase). At that time, the Annuitant's life
expectancy is greater than 15 years. The following examples show the impact of
taking the withdrawal under the Present Value Withdrawal Option and the Payment
Withdrawal Option.
PRESENT VALUE WITHDRAWAL
Annuity Units prior to withdrawal = 1,370
Annuity Unit Value on the date of withdrawal = 1.09944
Monthly Annuity Benefit Payment prior to withdrawal = $1,506.24
Rate used in Present Value Determination = 5% (3% AIR plus 2% Withdrawal
Adjustment Charge)
Present Value of future Guaranteed Annuity Benefit Payments = $119,961.92
Withdrawal = $10,000
Annuity Units after withdrawal = 1,255.80 (1,370 * (1 -
(10,000/119,961.92)))
Annuity Unit Value on the date of withdrawal = 1.09944
Monthly Annuity Benefit Payment after withdrawal = $1,380.67
Because the withdrawal is being made within 5 years of the Issue Date, the rate
used in the Present Value Determination is increased by a Withdrawal Adjustment
Charge. Since less than 10 years of guaranteed annuity payments are being
valued, the Withdrawal Adjustment Charge is 2%. Because this is a Present Value
Withdrawal, the number of Annuity Units will increase to 1,370 at the end of the
10-year period during which the Company guaranteed to make payments.
PAYMENT WITHDRAWAL
Annuity Units prior to withdrawal = 1,370
Annuity Unit Value on the date of withdrawal = 1.09944
Monthly Annuity Benefit Payment prior to withdrawal = $1,506.24
Rate used in Present Value Determination = 4% (3% AIR plus 1% Withdrawal
Adjustment Charge)
Present Value of future Annuity Benefit Payments = $234,482.77
Withdrawal = $10,000
Annuity Units after withdrawal = 1,311.57 (1,370 * (1 -
(10,000/$234,482.77)))
Annuity Unit Value on the date of withdrawal = 1.09944
Monthly Annuity Benefit Payment after withdrawal = $1,442.00
Because the withdrawal is being made within 5 years of the Issue Date, the rate
used in the Present Value Determination is increased by a Withdrawal Adjustment
Charge. Since there are more than 15 years of annuity payments being valued (the
Annuitant's life expectancy is more than 15 years), the Withdrawal Adjustment
Charge is 1%. Because this is a Payment Withdrawal, the number of Annuity Units
will not increase at the end of the 10-year period during which the Company
guaranteed to make payments.
E-3
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
STATEMENT OF ADDITIONAL INFORMATION
OF
INDIVIDUAL AND GROUP VARIABLE ANNUITY CONTRACTS FUNDED THROUGH
SUB-ACCOUNTS OF
ALLMERICA SELECT SEPARATE ACCOUNT
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS. IT SHOULD BE
READ IN CONJUNCTION WITH THE ALLMERICA SELECT REWARD PROSPECTUS OF ALLMERICA
SELECT SEPARATE ACCOUNT DATED , 1999 ("THE PROSPECTUS"). THE
PROSPECTUS MAY BE OBTAINED FROM ANNUITY CLIENT SERVICES, ALLMERICA FINANCIAL
LIFE INSURANCE AND ANNUITY COMPANY, 440 LINCOLN STREET, WORCESTER,
MASSACHUSETTS 01653, TELEPHONE 1-800-366-1492.
DATED , 1999
Allmerica Select Reward
<PAGE>
TABLE OF CONTENTS
GENERAL INFORMATION AND HISTORY........................................ 2
TAXATION OF THE CONTRACT, THE VARIABLE ACCOUNT AND THE COMPANY......... 3
SERVICES............................................................... 3
UNDERWRITERS........................................................... 3
ANNUITY BENEFIT PAYMENTS............................................... 4
PERFORMANCE INFORMATION................................................ 5
FINANCIAL STATEMENTS................................................... F-1
GENERAL INFORMATION AND HISTORY
Allmerica Select Separate Account (the "Variable Account") is a separate
investment account of Allmerica Financial Life Insurance and Annuity Company
(the "Company") authorized by vote of its Board of Directors on March 5,
1992. The Company is a life insurance company organized under the laws of
Delaware in July 1974. Its principal office (the "Principal Office") is
located at 440 Lincoln Street, Worcester, Massachusetts 01653, telephone
(508) 855-1000. The Company is subject to the laws of the State of Delaware
governing insurance companies and to regulation by the Commissioner of
Insurance of Delaware. In addition, the Company is subject to the insurance
laws and regulations of other states and jurisdictions in which it is
licensed to operate. As of December 31, 1998, the Company had over $14
billion in assets and over $26 billion of life insurance in force.
Effective October 1, 1995, the Company changed its name from SMA Life
Assurance Company to Allmerica Financial Life Insurance and Annuity Company.
The Company is a wholly owned subsidiary of First Allmerica Financial Life
Insurance Company ("First Allmerica") which, in turn, is a wholly owned
subsidiary of Allmerica Financial Corporation ("AFC"). First Allmerica,
originally organized under the laws of Massachusetts in 1844 as a mutual life
insurance company, and known as State Mutual Life Assurance Company of
America, converted to a stock life insurance company and adopted its present
name on October 16, 1995. First Allmerica is among the five oldest life
insurance companies in America. As of December 31, 1998, First Allmerica and
its subsidiaries (including the Company) had over $27 billion in combined
assets and over $48 billion in life insurance in force.
Currently, 14 Sub-Accounts of the Variable Account are available under the
Allmerica Select Reward contract (the "Contract"). Each Sub-Account invests
in a corresponding investment portfolio of Allmerica Investment Trust
("Trust"), Fidelity Variable Insurance Products Fund ("Fidelity VIP"),
Alliance Variable Products Series Fund, Inc. ("Alliance") or T. Rowe Price
International Series, Inc. ("T. Rowe Price"). The Trust is managed by
Allmerica Financial Investment Management Services, Inc. Fidelity VIP is
managed by Fidelity Management & Research Company ("FMR"). The Alliance
Premier Growth Portfolio is managed by Alliance Capital Management L.P. The
T. Rowe Price International Stock Portfolio of T. Rowe Price is managed by
Rowe Price-Fleming International, Inc.
The Trust, Fidelity VIP, Alliance and T. Rowe Price are open-end, diversified
management investment companies. Nine different funds of the Trust are
available under the Contract: the Select Emerging Markets Fund, Select
2
<PAGE>
International Equity Fund, Select Aggressive Growth Fund, Select Capital
Appreciation Fund, Select Value Opportunity Fund, Select Strategic Growth
Fund, Select Growth and Income Fund, Select Income Fund and Money Market
Fund. Three portfolios of Fidelity VIP are available under the Contract: the
Fidelity VIP High Income Portfolio, Fidelity VIP Equity-Income Portfolio, and
Fidelity VIP Growth Portfolio. The Alliance Premier Growth Portfolio of
Alliance is available under the Contract. The T. Rowe Price International
Stock Portfolio of T. Rowe Price is available under the Contract. Each Fund
and Portfolio available under the Contract (together, the "Underlying Funds")
has its own investment objectives and certain attendant risks.
TAXATION OF THE CONTRACT, THE VARIABLE
ACCOUNT AND THE COMPANY
The Company currently imposes no charge for taxes payable in connection with
the Contract, other than for state and local premium taxes and similar
assessments when applicable. The Company reserves the right to impose a
charge for any other taxes that may become payable in the future in
connection with the Contract or the Variable Account.
The Variable Account is considered to be a part of and taxed with the
operations of the Company. The Company is taxed as a life insurance company
under subchapter L of the Internal Revenue Code (the "Code"), and files a
consolidated tax return with its parent and affiliated companies.
The Company reserves the right to make a charge for any effect which the
income, assets or existence of the Contract or the Variable Account may have
upon its tax. Such charge for taxes, if any, will be assessed on a fair and
equitable basis in order to preserve equity among classes of Contract Owners
("Owners"). The Variable Account presently is not subject to tax.
SERVICES
CUSTODIAN OF SECURITIES. The Company serves as custodian of the assets of
the Variable Account. Underlying Fund shares owned by the Sub-Accounts are
held on an open account basis. A Sub-Account's ownership of Underlying Fund
shares is reflected on the records of the Underlying Fund and is not
represented by any transferable stock certificates.
EXPERTS. The financial statements of the Company as of December 31, 1998 and
1997 and for each of the three years in the period ended December 31, 1998,
and the financial statements of Allmerica Select Separate Account of the
Company as of December 31, 1998 and for the periods indicated, included in
this Statement of Additional Information constituting part of this
Registration Statement, have been so included in reliance on the reports of
PricewaterhouseCoopers LLP, independent accountants, given on the authority
of said firm as experts in auditing and accounting.
The financial statements of the Company included herein should be considered
only as bearing on the ability of the Company to meet its obligations under
the Contract.
UNDERWRITERS
Allmerica Investments, Inc. ("Allmerica Investments"), a registered
broker-dealer under the Securities Exchange Act of 1934 and a member of the
National Association of Securities Dealers, Inc. ("NASD"), serves as
principal underwriter and general distributor for the Contract pursuant to a
contract with Allmerica Investments, the Company and the Variable Account.
Allmerica Investments distributes the Contract on a best-efforts basis.
Allmerica Investments, Inc., 440 Lincoln Street, Worcester, Massachusetts
01653, was organized in 1969 as a wholly owned subsidiary of First Allmerica,
and presently is indirectly wholly owned by First Allmerica.
The Contract offered by this Prospectus is offered continuously, and may be
purchased from certain independent broker-dealers which are NASD members and
whose representatives are authorized by applicable law to sell variable
annuity contracts.
3
<PAGE>
All persons selling the Contract are required to be licensed by their
respective state insurance authorities for the sale of variable annuity
contracts. The Company pays commissions, not to exceed 7.0% of purchase
payments, to entities which sell the Contract. To the extent permitted by
NASD rules, promotional incentives or payments also may be provided to such
entities based on sales volumes, the assumption of wholesaling functions or
other sales-related criteria. Additional payments may be made for other
services not directly related to the sale of the Contract, including the
recruitment and training of personnel, production of promotional literature
and similar services.
Commissions paid by the Company do not result in any charge to Owners or to
the Variable Account in addition to the charges described under "CHARGES AND
DEDUCTIONS" in the Prospectus. The Company intends to recoup the commission
and other sales expense through a combination of anticipated surrender,
withdrawal and/or annuitization charges, profits from the Company's general
account, including the investment earnings on amounts allocated to accumulate
on a fixed basis in excess of the interest credited on fixed accumulations by
the Company, and the profit, if any, from the mortality and expense risk
charge.
The aggregate amounts of commissions retained by Allmerica Investments for
sales of contracts A3020-92, A3025-96 and A3027-98 funded by Allmerica Select
Separate Account for the years 1996, 1997 and 1998 were $316.41, $747.30 and
$619.00, respectively.
No commissions were paid for sales of Contract A3028-99 since it was not
offered until September __, 1999.
ANNUITY BENEFIT PAYMENTS
The method by which the Accumulated Value under the Contract is determined is
described in detail under "Computation of Values" in the Prospectus.
ILLUSTRATION OF ACCUMULATION UNIT CALCULATION USING HYPOTHETICAL EXAMPLE. The
Accumulation Unit calculation for a daily Valuation Period may be illustrated
by the following hypothetical example: Assume that the assets of a
Sub-Account at the beginning of a one-day Valuation Period were $5,000,000;
that the value of an Accumulation Unit on the previous date was $1.135000;
and that during the Valuation Period, the investment income and net realized
and unrealized capital gains exceed net realized and unrealized capital
losses by $1,675. The Accumulation Unit Value at the end of the current
Valuation Period would be calculated as follows:
(1) Accumulation Unit Value -- Previous Valuation Period . . . . . . $ 1.135000
(2) Value of Assets -- Beginning of Valuation Period . . . . . . . $ 5,000,000
(3) Excess of Investment Income and Net Gains Over Capital Losses . . $ 1,675
(4) Adjusted Gross Investment Rate for the Valuation Period (3)
divided by (2) . . . . . . . . . . . . . . . . . . . . . . . . . . 0.000335
(5) Annual Charge (one-day equivalent of 1.40% per annum) . . . . . . 0.000039
(6) Net Investment Rate (4) - (5) . . . . . . . . . . . . . . . . . . 0.000296
(7) Net Investment Factor 1.000000 + (6) . . . . . . . . . . . . . . . 1.000296
(8) Accumulation Unit Value -- Current Period (1) x (7) . . . . . . $ 1.135336
Conversely, if unrealized capital losses and charges for expenses and taxes
exceeded investment income and
4
<PAGE>
net realized capital gains of $1,675, the Accumulation Unit Value at the end
of the Valuation Period would have been $1.134576.
The method for determining the amount of annuity benefit payments is
described in detail under "Variable Annuity Benefit Payments" in the
Prospectus.
ILLUSTRATION OF VARIABLE ANNUITY BENEFIT PAYMENT CALCULATION USING
HYPOTHETICAL EXAMPLE. The determination of the Annuity Unit Value and the
variable annuity benefit payment may be illustrated by the following
hypothetical example: Assume an Owner has 40,000 Accumulation Units in a
Variable Account, and that the value of an Accumulation Unit on the Valuation
Date used to determine the amount of the first variable annuity benefit
payment is $1.120000. Therefore, the Accumulated Value of the Contract is
$44,800 (40,000 x $1.120000). Assume also that the Owner elects an option
for which the first monthly payment is $6.57 per $1,000 of Accumulated Value
applied. Assuming no premium tax or surrender charge, the first monthly
payment would be $44,800 multiplied by $6.57, or $294.34.
Next, assume that the Annuity Unit Value for the assumed investment return of
3.0% per annum for the Valuation Date as of which the first payment was
calculated was $1.100000. Annuity Unit Values will not be the same as
Accumulation Unit Values because the former reflect the 3.0% assumed
investment return used in the annuity rate calculations. When the Annuity
Unit Value of $1.100000 is divided into the first monthly payment the number
of Annuity Units represented by that payment is determined to be 267.5818.
The value of this same number of Annuity Units will be paid in each
subsequent month under most options. Assume further that the net investment
factor for the Valuation Period applicable to the next annuity benefit
payment is 1.000190. Multiplying this factor by .999919 (the one-day
adjustment factor for the assumed investment return of 3.0% per annum)
produces a factor of 1.000109. This then is multiplied by the Annuity Unit
Value on the immediately preceding Valuation Date (assumed here to be
$1.105000). The result is an Annuity Unit Value of $1.105121 for the current
monthly payment. The current monthly payment then is determined by
multiplying the number of Annuity Units by the current Annuity Unit Value, or
267.5818 times $1.105121, which produces a current monthly payment of $295.71.
PERFORMANCE INFORMATION
Performance information for a Sub-Account may be compared, in reports and
promotional literature, to certain indices described in the Prospectus under
"PERFORMANCE INFORMATION." In addition, the Company may provide advertising,
sales literature, periodic publications or other material information on
various topics of interest to Owners and prospective Owners. These topics
may include the relationship between sectors of the economy and the economy
as a whole and its effect on various securities markets, investment
strategies and techniques (such as value investing, market timing, dollar
cost averaging, asset allocation, constant ratio transfer and account
rebalancing), the advantages and disadvantages of investing in tax-deferred
and taxable investments, customer profiles and hypothetical purchase and
investment scenarios, financial management and tax and retirement planning,
and investment alternatives to certificates of deposit and other financial
instruments, including comparisons between the Contract and the
characteristics of and market for such financial instruments. Total return
data and supplemental total return information may be advertised based on the
period of time that an Underlying Fund and an underlying Sub-Account have
been in existence, even if longer than the period of time that the Contract
has been offered. The results for any period prior to a Contract being
offered will be calculated as if the Contract had been offered during that
period of time, with all charges assumed to be those applicable to the
Contract.
5
<PAGE>
TOTAL RETURN
"Total Return" refers to the total of the income generated by an investment
in a Sub-Account and of the changes of value of the principal invested (due
to realized and unrealized capital gains or losses) for a specified period,
reduced by the Sub-Account's asset charge and any applicable surrender charge
which would be assessed upon complete withdrawal of the investment.
Total Return figures are calculated by standardized methods prescribed by
rules of the Securities and Exchange Commission (the "SEC"). The quotations
are computed by finding the average annual compounded rates of return over
the specified period that would equate the initial amount invested to the
ending redeemable values, according to the following formula:
P(1 + T) (n) = ERV
Where: P = a hypothetical initial payment to the Variable Account of
$1,000
T = average annual total return
n = number of years
ERV = the ending redeemable value of the $1,000 payment at
the end of the specified period
The calculation of Total Return includes the annual charges against the
assets of the Sub-Account. This charge is 1.40% on an annual basis. The
calculation of ending redeemable value assumes (1) the Contract was issued at
the beginning of the period, and (2) a complete surrender of the Contract at
the end of the period. The deduction of the surrender charge, if any,
applicable at the end of the period is included in the calculation, according
to the following schedule:
<TABLE>
<CAPTION>
YEARS FROM CHARGE AS
DATE OF PERCENTAGE OF
PAYMENT TO NEW PURCHASE
DATE OF PAYMENTS
WITHDRAWAL WITHDRAWN*
---------- -------------
<S> <C>
0 - 4 8.5%
More than 4 7.5%
More than 5 6.5%
More than 6 5.5%
More than 7 3.5%
More than 8 1.5%
More than 9 0
</TABLE>
* Subject to the maximum limit described in the Prospectus.
No surrender charge is deducted upon expiration of the periods specified
above. In each calendar year, a certain amount (withdrawal without surrender
charge amount, as described in the Prospectus) is not subject to the
surrender charge.
The calculations of Total Return include the deduction of the $35 annual
Contract fee.
SUPPLEMENTAL TOTAL RETURN INFORMATION
The Supplemental Total Return Information in this section refers to the total
of the income generated by an investment in a Sub-Account and of the changes
of value of the principal invested (due to realized and
6
<PAGE>
unrealized capital gains or losses) for a specified period reduced by the
Sub-Account's asset charges. It is assumed, however, that the investment is
NOT withdrawn at the end of each period.
The quotations of Supplemental Total Return are computed by finding the
average annual compounded rates of return over the specified periods that
would equate the initial amount invested to the ending values, according to
the following formula:
P(1 + T) (n) = EV
Where: P = a hypothetical initial payment to the Variable Account of
$1,000
T = average annual total return
n = number of years
EV = the ending value of the $1,000 payment at the end
of the specified period.
The calculation of Supplemental Total Return reflects the 1.40% annual charge
against the assets of the Sub-Accounts. The ending value assumes that the
Contract is NOT surrendered at the end of the specified period, and therefore
there is no adjustment for the surrender charge that would be applicable if
the Contract was surrendered at the end of the period. The calculation of
Supplemental Total Return does not include the deduction of the $30 annual
Contract fee.
YIELD AND EFFECTIVE YIELD - THE MONEY MARKET SUB-ACCOUNT
Set forth below is yield and effective yield information for the Money Market
Sub-Account for the seven-day period ended December 31, 1998:
Yield 3.59%
Effective Yield 3.66%
The yield and effective yield figures are calculated by standardized methods
prescribed by rules of the SEC. Under those methods, the yield quotation is
computed by determining the net change (exclusive of capital changes) in the
value of a hypothetical pre-existing account having a balance of one
accumulation unit of the Sub-Account at the beginning of the period, dividing
the difference by the value of the account at the beginning of the same
period to obtain the base period return, for a seven-day base period by
(365/7), with the resulting yield carried to the nearest hundredth of one
percent.
The Money Market Sub-Account computes effective yield by compounding the
unannualized base period return by using the formula:
Effective Yield = [(base period return + 1) (365/7) ] - 1
The calculations of yield and effective yield reflect the $35 annual Contract
fee.
FINANCIAL STATEMENTS
Financial Statements are included for Allmerica Financial Life Insurance and
Annuity Company and for its Allmerica Select Separate Account.
7
<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 LLP
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>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. EVENTS SUBSEQUENT TO DATE OF INDEPENDENT ACCOUNTANTS' REPORT (UNAUDITED)
AFC has made certain changes to its corporate structure effective July 1, 1999.
These changes include the transfer of FAFLIC's ownership of Allmerica Property &
Casualty Companies, Inc., as well as several non-insurance subsidiaries, from
FAFLIC to AFC. In addition, certain changes affected AFLIAC. SMAFCO transferred
its ownership in AFLIAC to FAFLIC. Hence, AFLIAC became a wholly owned
subsidiary of FAFLIC. Further, four non-insurance subsidiaries previously held
by SMAFCO were contributed to AFLIAC. Under an agreement with the Commonwealth
of Massachusetts Insurance Commissioner ("the Commissioner"), AFC has
contributed to FAFLIC capital of $125.0 million and agreed to maintain FAFLIC's
statutory surplus at specified levels during the following six years. In
addition, any dividend from FAFLIC to AFC during 2000 and 2001 would require the
prior approval of the Commissioner. This transaction was approved by the
Commissioner on May 24, 1999.
In 1998, the net income of the subsidiaries, which was reported in SMAFCO's
results of operations, to be transferred to AFLIAC from SMAFCO pursuant to the
aforementioned change in corporate structure was $18.8 million. As of December
31, 1998, the total assets and total shareholders' equity of these subsidiaries
were $16.8 million and $9.2 million, respectively.
On May 19, 1999, the Federal District Court in Worcester, Massachusetts issued
an order relating to the litigation mentioned in Note 12, above, certifying the
class for settlement purposes and granting final approval of the settlement
agreement.
F-22
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of Allmerica Financial Life Insurance and Annuity
Company and the Contractowners of the Allmerica Select Separate Account of
Allmerica Financial Life Insurance and Annuity Company
In our opinion, the accompanying statements of assets and liabilities, and the
related statements of operations and changes in net assets present fairly, in
all material respects, the financial position of each of the Sub-Accounts
constituting the Allmerica Select Separate Account of Allmerica Financial Life
Insurance and Annuity Company at December 31, 1998, the results of each of their
operations and the changes in each of their net assets for each of the periods
indicated, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of Allmerica Financial Life
Insurance and Annuity Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at December 31, 1998 by
correspondence with the Funds, provide a reasonable basis for the opinion
expressed above.
/s/ PRICEWATERHOUSECOOPERS LLP
PricewaterhouseCoopers LLP
Boston, Massachusetts
March 26, 1999
<PAGE>
ALLMERICA SELECT SEPARATE ACCOUNT
STATEMENTS OF ASSETS AND LIABILITIES
DECEMBER 31, 1998
<TABLE>
<CAPTION>
SELECT
AGGRESSIVE SELECT SELECT GROWTH SELECT
GROWTH GROWTH AND INCOME INCOME
------------ ------------ ------------- -------------
<S> <C> <C> <C> <C>
ASSETS:
Investments in shares of Allmerica
Investment Trust........................... $228,649,110 $336,704,259 $295,912,048 $140,061,555
Investments in shares of Fidelity Variable
Insurance Products Fund (VIP).............. -- -- -- --
Investment in shares of T. Rowe Price
International Series, Inc.................. -- -- -- --
Receivable from Allmerica Financial Life
Insurance and Annuity Company (Sponsor).... -- -- 14,258 --
------------ ------------ ------------- -------------
Total assets.............................. 228,649,110 336,704,259 295,926,306 140,061,555
LIABILITIES:
Payable to Allmerica Financial Life
Insurance and Annuity Company (Sponsor).... 773 51,859 -- 27,082
------------ ------------ ------------- -------------
Net assets................................ $228,648,337 $336,652,400 $295,926,306 $140,034,473
------------ ------------ ------------- -------------
------------ ------------ ------------- -------------
Net asset distribution by category:
Qualified variable annuity contracts...... $ 79,475,593 $104,744,491 $ 89,963,271 $ 47,733,147
Non-qualified variable annuity
contracts............................... 149,172,744 231,907,909 205,963,035 92,301,326
------------ ------------ ------------- -------------
$228,648,337 $336,652,400 $295,926,306 $140,034,473
------------ ------------ ------------- -------------
------------ ------------ ------------- -------------
Qualified units outstanding, December 31,
1998....................................... 30,135,760 37,503,752 39,252,772 34,826,842
Net asset value per qualified unit, December
31, 1998................................... $ 2.637252 $ 2.792907 $ 2.291896 $ 1.370585
Non-qualified units outstanding, December
31, 1998................................... 56,563,704 83,034,597 89,865,786 67,344,474
Net asset value per non-qualified unit,
December 31, 1998.......................... $ 2.637252 $ 2.792907 $ 2.291896 $ 1.370585
<CAPTION>
SELECT SELECT
MONEY INTERNATIONAL CAPITAL
MARKET EQUITY APPRECIATION
------------ ------------- ------------
<S> <C> <C> <C>
ASSETS:
Investments in shares of Allmerica
Investment Trust........................... $113,859,875 $165,703,596 $102,870,665
Investments in shares of Fidelity Variable
Insurance Products Fund (VIP).............. -- -- --
Investment in shares of T. Rowe Price
International Series, Inc.................. -- -- --
Receivable from Allmerica Financial Life
Insurance and Annuity Company (Sponsor).... -- -- --
------------ ------------- ------------
Total assets.............................. 113,859,875 165,703,596 102,870,665
LIABILITIES:
Payable to Allmerica Financial Life
Insurance and Annuity Company (Sponsor).... 44,786 -- --
------------ ------------- ------------
Net assets................................ $113,815,089 $165,703,596 $102,870,665
------------ ------------- ------------
------------ ------------- ------------
Net asset distribution by category:
Qualified variable annuity contracts...... $ 33,102,121 $ 55,886,977 $34,926,665
Non-qualified variable annuity
contracts............................... 80,712,968 109,816,619 67,944,000
------------ ------------- ------------
$113,815,089 $165,703,596 $102,870,665
------------ ------------- ------------
------------ ------------- ------------
Qualified units outstanding, December 31,
1998....................................... 26,989,026 34,748,214 18,601,998
Net asset value per qualified unit, December
31, 1998................................... $ 1.226503 $ 1.608341 $ 1.877576
Non-qualified units outstanding, December
31, 1998................................... 65,807,394 68,279,437 36,187,084
Net asset value per non-qualified unit,
December 31, 1998.......................... $ 1.226503 $ 1.608341 $ 1.877576
</TABLE>
The accompanying notes are an integral part of these financial statements.
SA-1
<PAGE>
ALLMERICA SELECT SEPARATE ACCOUNT
STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED)
DECEMBER 31, 1998
<TABLE>
<CAPTION>
SELECT SELECT SELECT T. ROWE PRICE
EMERGING VALUE STRATEGIC FIDELITY VIP FIDELITY VIP FIDELITY VIP INTERNATIONAL
MARKETS OPPORTUNITY GROWTH HIGH INCOME EQUITY-INCOME GROWTH STOCK
---------- ----------- ---------- ------------ ------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Investments in shares of
Allmerica Investment Trust... $4,042,580 $18,034,508 $8,392,045 $ -- $ -- $ -- $ --
Investments in shares of
Fidelity Variable Insurance
Products Fund (VIP).......... -- -- -- 101,203,216 178,330,222 147,531,533 --
Investment in shares of T.
Rowe Price International
Series, Inc.................. -- -- -- -- -- -- 57,943,955
Receivable from Allmerica
Financial Life Insurance and
Annuity Company (Sponsor).... -- -- -- -- -- -- --
---------- ----------- ---------- ------------ ------------- ------------ -------------
Total assets.................. 4,042,580 18,034,508 8,392,045 101,203,216 178,330,222 147,531,533 57,943,955
LIABILITIES:
Payable to Allmerica Financial
Life Insurance and Annuity
Company (Sponsor)............ -- -- -- -- -- -- --
---------- ----------- ---------- ------------ ------------- ------------ -------------
Net assets.................... $4,042,580 $18,034,508 $8,392,045 $101,203,216 $178,330,222 $147,531,533 $57,943,955
---------- ----------- ---------- ------------ ------------- ------------ -------------
---------- ----------- ---------- ------------ ------------- ------------ -------------
Net asset distribution by
category:
Qualified variable annuity
contracts................. $1,503,793 $6,034,114 $2,793,756 $ 33,723,717 $ 49,381,970 $ 46,070,951 $17,698,051
Non-qualified variable
annuity contracts......... 2,538,787 12,000,394 5,598,289 67,479,499 128,948,252 101,460,582 40,245,904
---------- ----------- ---------- ------------ ------------- ------------ -------------
$4,042,580 $18,034,508 $8,392,045 $101,203,216 $178,330,222 $147,531,533 $57,943,955
---------- ----------- ---------- ------------ ------------- ------------ -------------
---------- ----------- ---------- ------------ ------------- ------------ -------------
Qualified units outstanding,
December 31, 1998............ 1,937,832 6,102,727 2,899,110 24,987,324 26,455,515 19,690,822 12,662,557
Net asset value per qualified
unit, December 31, 1998...... $ 0.776018 $ 0.988757 $ 0.963660 $ 1.349633 $ 1.866604 $ 2.339717 $ 1.397668
Non-qualified units
outstanding, December 31,
1998......................... 3,271,557 12,136,849 5,809,402 49,998,407 69,081,740 43,364,469 28,795,038
Net asset value per
non-qualified unit, December
31, 1998..................... $ 0.776018 $ 0.988757 $ 0.963660 $ 1.349633 $ 1.866604 $ 2.339717 $ 1.397668
</TABLE>
The accompanying notes are an integral part of these financial statements.
SA-2
<PAGE>
ALLMERICA SELECT SEPARATE ACCOUNT
STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
SELECT
AGGRESSIVE GROWTH SELECT GROWTH
----------------------------- -----------------------------
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
1998 1997 1998 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME (LOSS):
Dividends.................................. $ -- $ -- $ 217,779 $ 594,234
Mortality and expense risk fees............ (2,636,982) (2,015,705) (3,272,612) (1,909,171)
Administrative expense fees................ (325,919) (249,132) (404,481) (235,965)
------------- ------------- ------------- -------------
Net investment income (loss)............. (2,962,901) (2,264,837) (3,459,314) (1,550,902)
------------- ------------- ------------- -------------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
Realized gain distributions from portfolio
sponsors................................. -- 15,267,707 2,708,827 10,519,168
Net realized gain (loss) from sales of
investments.............................. 3,969,770 1,569,746 3,364,057 784,352
------------- ------------- ------------- -------------
Net realized gain (loss)................... 3,969,770 16,837,453 6,072,884 11,303,520
Net unrealized gain (loss)................. 17,405,709 9,062,264 74,575,052 31,295,973
------------- ------------- ------------- -------------
Net realized and unrealized gain
(loss).................................. 21,375,479 25,899,717 80,647,936 42,599,493
------------- ------------- ------------- -------------
Net increase (decrease) in net assets from
operations............................... 18,412,578 23,634,880 77,188,622 41,048,591
------------- ------------- ------------- -------------
CONTRACT TRANSACTIONS:
Net purchase payments...................... 36,061,562 35,797,976 70,613,422 48,274,492
Withdrawals................................ (13,438,781) (7,811,125) (15,891,976) (7,969,058)
Contract benefits.......................... (2,728,888) (1,379,292) (3,404,074) (1,551,120)
Contract charges........................... (89,767) (77,043) (89,116) (62,180)
Transfers between sub-accounts (including
fixed account), net...................... (7,180,823) 11,700,863 266,856 16,263,001
Other transfers from (to) the General
Account.................................. 1,134,404 1,835,272 1,932,745 2,183,627
------------- ------------- ------------- -------------
Net increase (decrease) in net assets from
contract transactions.................... 13,757,707 40,066,651 53,427,857 57,138,762
------------- ------------- ------------- -------------
Net increase (decrease) in net assets...... 32,170,285 63,701,531 130,616,479 98,187,353
NET ASSETS:
Beginning of year.......................... 196,478,052 132,776,521 206,035,921 107,848,568
------------- ------------- ------------- -------------
End of year................................ $ 228,648,337 $ 196,478,052 $ 336,652,400 $ 206,035,921
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
<CAPTION>
SELECT GROWTH AND INCOME
-----------------------------
YEAR ENDED DECEMBER 31,
1998 1997
------------- -------------
<S> <C> <C>
INVESTMENT INCOME (LOSS):
Dividends.................................. $ 3,198,324 $ 2,276,955
Mortality and expense risk fees............ (3,145,481) (2,111,147)
Administrative expense fees................ (388,767) (260,929)
------------- -------------
Net investment income (loss)............. (335,924) (95,121)
------------- -------------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
Realized gain distributions from portfolio
sponsors................................. 924,289 18,113,569
Net realized gain (loss) from sales of
investments.............................. 1,064,670 854,942
------------- -------------
Net realized gain (loss)................... 1,988,959 18,968,511
Net unrealized gain (loss)................. 32,750,667 12,001,401
------------- -------------
Net realized and unrealized gain
(loss).................................. 34,739,626 30,969,912
------------- -------------
Net increase (decrease) in net assets from
operations............................... 34,403,702 30,874,791
------------- -------------
CONTRACT TRANSACTIONS:
Net purchase payments...................... 63,681,715 46,842,354
Withdrawals................................ (15,115,743) (8,766,378)
Contract benefits.......................... (4,138,997) (2,390,486)
Contract charges........................... (85,677) (69,205)
Transfers between sub-accounts (including
fixed account), net...................... 106,049 15,332,554
Other transfers from (to) the General
Account.................................. 3,902,001 2,625,475
------------- -------------
Net increase (decrease) in net assets from
contract transactions.................... 48,349,348 53,574,314
------------- -------------
Net increase (decrease) in net assets...... 82,753,050 84,449,105
NET ASSETS:
Beginning of year.......................... 213,173,256 128,724,151
------------- -------------
End of year................................ $ 295,926,306 $ 213,173,256
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
SA-3
<PAGE>
ALLMERICA SELECT SEPARATE ACCOUNT
STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
SELECT INCOME MONEY MARKET
---------------------------- ------------------------------
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
1998 1997 1998 1997
------------- ------------ ------------- --------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME (LOSS):
Dividends.................................. $ 6,954,415 $ 5,022,772 $ 5,221,319 $ 4,384,109
Mortality and expense risk fees............ (1,469,378) (998,230) (1,211,909) (1,016,141)
Administrative expense fees................ (181,608) (123,377) (149,786) (125,591)
------------- ------------ ------------- --------------
Net investment income (loss)............. 5,303,429 3,901,165 3,859,624 3,242,377
------------- ------------ ------------- --------------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
Realized gain distributions from portfolio
sponsors................................. -- -- -- --
Net realized gain (loss) from sales of
investments.............................. 191,685 22,839 -- --
------------- ------------ ------------- --------------
Net realized gain (loss)................... 191,685 22,839 -- --
Net unrealized gain (loss)................. 575,603 2,251,800 -- --
------------- ------------ ------------- --------------
Net realized and unrealized gain
(loss).................................. 767,288 2,274,639 -- --
------------- ------------ ------------- --------------
Net increase (decrease) in net assets from
operations............................... 6,070,717 6,175,804 3,859,624 3,242,377
------------- ------------ ------------- --------------
CONTRACT TRANSACTIONS:
Net purchase payments...................... 43,005,439 18,288,534 65,100,611 129,227,661
Withdrawals................................ (8,082,420) (4,662,262) (20,168,912) (9,185,006)
Contract benefits.......................... (1,772,510) (1,408,135) (5,486,115) (2,972,579)
Contract charges........................... (37,909) (34,436) (24,776) (23,565)
Transfers between sub-accounts (including
fixed account), net...................... 3,617,459 3,517,315 (7,256,363) (114,998,424)
Other transfers from (to) the General
Account.................................. 3,052,759 1,318,021 645,196 3,070,706
------------- ------------ ------------- --------------
Net increase (decrease) in net assets from
contract transactions.................... 39,782,818 17,019,037 32,809,641 5,118,793
------------- ------------ ------------- --------------
Net increase (decrease) in net assets...... 45,853,535 23,194,841 36,669,265 8,361,170
NET ASSETS:
Beginning of year.......................... 94,180,938 70,986,097 77,145,824 68,784,654
------------- ------------ ------------- --------------
End of year................................ $ 140,034,473 $ 94,180,938 $ 113,815,089 $ 77,145,824
------------- ------------ ------------- --------------
------------- ------------ ------------- --------------
<CAPTION>
SELECT INTERNATIONAL EQUITY
-----------------------------
YEAR ENDED DECEMBER 31,
1998 1997
------------- -------------
<S> <C> <C>
INVESTMENT INCOME (LOSS):
Dividends.................................. $ 2,110,384 $ 2,964,278
Mortality and expense risk fees............ (1,871,430) (1,350,796)
Administrative expense fees................ (231,300) (166,952)
------------- -------------
Net investment income (loss)............. 7,654 1,446,530
------------- -------------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
Realized gain distributions from portfolio
sponsors................................. -- 4,123,293
Net realized gain (loss) from sales of
investments.............................. 1,650,381 941,203
------------- -------------
Net realized gain (loss)................... 1,650,381 5,064,496
Net unrealized gain (loss)................. 17,773,061 (4,292,377)
------------- -------------
Net realized and unrealized gain
(loss).................................. 19,423,442 772,119
------------- -------------
Net increase (decrease) in net assets from
operations............................... 19,431,096 2,218,649
------------- -------------
CONTRACT TRANSACTIONS:
Net purchase payments...................... 29,615,052 33,743,058
Withdrawals................................ (8,122,159) (5,026,523)
Contract benefits.......................... (1,791,387) (830,243)
Contract charges........................... (56,589) (45,226)
Transfers between sub-accounts (including
fixed account), net...................... (5,116,809) 16,445,449
Other transfers from (to) the General
Account.................................. 1,294,775 2,131,290
------------- -------------
Net increase (decrease) in net assets from
contract transactions.................... 15,822,883 46,417,805
------------- -------------
Net increase (decrease) in net assets...... 35,253,979 48,636,454
NET ASSETS:
Beginning of year.......................... 130,449,617 81,813,163
------------- -------------
End of year................................ $ 165,703,596 $ 130,449,617
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
SA-4
<PAGE>
ALLMERICA SELECT SEPARATE ACCOUNT
STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
SELECT EMERGING
SELECT CAPITAL APPRECIATION MARKETS
---------------------------- ---------------------
YEAR ENDED DECEMBER 31, PERIOD FROM
1998 1997 2/20/98** TO 12/31/98
------------- ------------ ---------------------
<S> <C> <C> <C>
INVESTMENT INCOME (LOSS):
Dividends.................................. $ -- $ -- $ 7,175
Mortality and expense risk fees............ (1,046,274) (636,664) (20,600)
Administrative expense fees................ (129,315) (78,689) (2,546)
------------- ------------ -----------
Net investment income (loss)............... (1,175,589) (715,353) (15,971)
------------- ------------ -----------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
Realized gain distributions from portfolio
sponsors................................. 15,561,260 -- --
Net realized gain (loss) from sales of
investments.............................. 1,026,367 122,244 (24,720)
------------- ------------ -----------
Net realized gain (loss)................... 16,587,627 122,244 (24,720)
Net unrealized gain (loss)................. (4,726,710) 8,440,399 (309,858)
------------- ------------ -----------
Net realized and unrealized gain
(loss).................................. 11,860,917 8,562,643 (334,578)
------------- ------------ -----------
Net increase (decrease) in net assets from
operations............................... 10,685,328 7,847,290 (350,549)
------------- ------------ -----------
CONTRACT TRANSACTIONS:
Net purchase payments...................... 25,436,320 23,378,356 3,000,520
Withdrawals................................ (3,623,727) (1,984,458) (61,386)
Contract benefits.......................... (1,106,068) (728,926) (9,898)
Contract charges........................... (30,776) (19,236) (134)
Transfers between sub-accounts (including
fixed account), net...................... (2,261,255) 6,974,304 1,172,968
Other transfers from (to) the General
Account.................................. 654,274 1,663,876 291,059
------------- ------------ -----------
Net increase (decrease) in net assets from
contract transactions.................... 19,068,768 29,283,916 4,393,129
------------- ------------ -----------
Net increase (decrease) in net assets...... 29,754,096 37,131,206 4,042,580
NET ASSETS:
Beginning of year.......................... 73,116,569 35,985,363 --
------------- ------------ -----------
End of year................................ $ 102,870,665 $ 73,116,569 $4,042,580
------------- ------------ -----------
------------- ------------ -----------
<CAPTION>
SELECT VALUE SELECT STRATEGIC
OPPORTUNITY GROWTH
--------------------- ---------------------
PERIOD FROM PERIOD FROM
2/20/98** TO 12/31/98 2/20/98** TO 12/31/98
--------------------- ---------------------
<S> <C> <C>
INVESTMENT INCOME (LOSS):
Dividends.................................. $ 150,189 $ 19,691
Mortality and expense risk fees............ (89,478) (42,877)
Administrative expense fees................ (11,060) (5,300)
--------------------- -----------
Net investment income (loss)............... 49,651 (28,486)
--------------------- -----------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
Realized gain distributions from portfolio
sponsors................................. 25,524 --
Net realized gain (loss) from sales of
investments.............................. (29,187) (151,091)
--------------------- -----------
Net realized gain (loss)................... (3,663) (151,091)
Net unrealized gain (loss)................. 160,234 219,846
--------------------- -----------
Net realized and unrealized gain
(loss).................................. 156,571 68,755
--------------------- -----------
Net increase (decrease) in net assets from
operations............................... 206,222 40,269
--------------------- -----------
CONTRACT TRANSACTIONS:
Net purchase payments...................... 12,809,082 5,671,296
Withdrawals................................ (356,168) (209,854)
Contract benefits.......................... (49,956) (20,535)
Contract charges........................... (478) (338)
Transfers between sub-accounts (including
fixed account), net...................... 4,206,999 2,187,617
Other transfers from (to) the General
Account.................................. 1,218,807 723,590
--------------------- -----------
Net increase (decrease) in net assets from
contract transactions.................... 17,828,286 8,351,776
--------------------- -----------
Net increase (decrease) in net assets...... 18,034,508 8,392,045
NET ASSETS:
Beginning of year.......................... -- --
--------------------- -----------
End of year................................ $18,034,508 $8,392,045
--------------------- -----------
--------------------- -----------
</TABLE>
** Date of initial investment
The accompanying notes are an integral part of these financial statements.
SA-5
<PAGE>
ALLMERICA SELECT SEPARATE ACCOUNT
STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
FIDELITY VIP
FIDELITY VIP HIGH INCOME EQUITY-INCOME
---------------------------- -----------------------------
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
1998 1997 1998 1997
------------- ------------ ------------- -------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME (LOSS):
Dividends.................................. $ 5,463,771 $ 2,360,937 $ 1,609,296 $ 800,519
Mortality and expense risk fees............ (1,129,683) (618,957) (1,802,457) (903,314)
Administrative expense fees................ (139,623) (76,500) (222,776) (111,646)
------------- ------------ ------------- -------------
Net investment income (loss)............. 4,194,465 1,665,480 (415,937) (214,441)
------------- ------------ ------------- -------------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
Realized gain distributions from portfolio
sponsors................................. 3,471,771 291,801 5,727,200 4,024,829
Net realized gain (loss) from sales of
investments.............................. (410,592) 153,432 454,647 173,070
------------- ------------ ------------- -------------
Net realized gain (loss)................... 3,061,179 445,233 6,181,847 4,197,899
Net unrealized gain (loss)................. (13,622,064) 5,256,704 7,180,318 11,931,704
------------- ------------ ------------- -------------
Net realized and unrealized gain
(loss)................................. (10,560,885) 5,701,937 13,362,165 16,129,603
------------- ------------ ------------- -------------
Net increase (decrease) in net assets from
operations............................... (6,366,420) 7,367,417 12,946,228 15,915,162
------------- ------------ ------------- -------------
CONTRACT TRANSACTIONS:
Net purchase payments...................... 33,755,346 24,147,277 57,177,724 37,371,024
Withdrawals................................ (4,291,123) (1,540,245) (6,972,862) (3,009,887)
Contract benefits.......................... (1,095,080) (642,692) (1,970,745) (501,372)
Contract charges........................... (24,772) (15,225) (41,629) (24,945)
Transfers between sub-accounts (including
fixed account), net...................... 5,384,061 13,083,846 3,401,689 16,129,962
Other transfers from (to) the General
Account.................................. 1,643,387 1,382,727 3,352,791 2,039,756
------------- ------------ ------------- -------------
Net increase (decrease) in net assets from
contract transactions.................... 35,371,819 36,415,688 54,946,968 52,004,538
------------- ------------ ------------- -------------
Net increase (decrease) in net assets...... 29,005,399 43,783,105 67,893,196 67,919,700
NET ASSETS:
Beginning of year.......................... 72,197,817 28,414,712 110,437,026 42,517,326
------------- ------------ ------------- -------------
End of year................................ $ 101,203,216 $ 72,197,817 $ 178,330,222 $ 110,437,026
------------- ------------ ------------- -------------
------------- ------------ ------------- -------------
<CAPTION>
T. ROWE PRICE
FIDELITY VIP INTERNATIONAL
GROWTH STOCK
---------------------------- ---------------------------
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
1998 1997 1998 1997
------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME (LOSS):
Dividends.................................. $ 413,212 $ 255,385 $ 663,390 $ 380,324
Mortality and expense risk fees............ (1,334,435) (685,823) (627,152) (394,964)
Administrative expense fees................ (164,930) (84,765) (77,513) (48,816)
------------- ------------ ------------ ------------
Net investment income (loss)............. (1,086,153) (515,203) (41,275) (63,456)
------------- ------------ ------------ ------------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
Realized gain distributions from portfolio
sponsors................................. 10,808,765 1,143,150 234,138 538,793
Net realized gain (loss) from sales of
investments.............................. 1,061,177 252,760 151,115 932,107
------------- ------------ ------------ ------------
Net realized gain (loss)................... 11,869,942 1,395,910 385,253 1,470,900
Net unrealized gain (loss)................. 25,112,290 9,153,516 5,788,775 (1,612,907)
------------- ------------ ------------ ------------
Net realized and unrealized gain
(loss)................................. 36,982,232 10,549,426 6,174,028 (142,007)
------------- ------------ ------------ ------------
Net increase (decrease) in net assets from
operations............................... 35,896,079 10,034,223 6,132,753 (205,463)
------------- ------------ ------------ ------------
CONTRACT TRANSACTIONS:
Net purchase payments...................... 35,768,091 26,585,405 14,149,159 16,331,917
Withdrawals................................ (5,164,629) (2,025,514) (2,057,947) (1,619,234)
Contract benefits.......................... (1,505,737) (774,277) (649,684) (397,243)
Contract charges........................... (37,556) (22,196) (18,009) (11,423)
Transfers between sub-accounts (including
fixed account), net...................... 3,426,882 8,237,545 (1,989,024) 6,388,208
Other transfers from (to) the General
Account.................................. 1,296,933 1,256,357 812,777 1,212,597
------------- ------------ ------------ ------------
Net increase (decrease) in net assets from
contract transactions.................... 33,783,984 33,257,320 10,247,272 21,904,822
------------- ------------ ------------ ------------
Net increase (decrease) in net assets...... 69,680,063 43,291,543 16,380,025 21,699,359
NET ASSETS:
Beginning of year.......................... 77,851,470 34,559,927 41,563,930 19,864,571
------------- ------------ ------------ ------------
End of year................................ $ 147,531,533 $ 77,851,470 $ 57,943,955 $ 41,563,930
------------- ------------ ------------ ------------
------------- ------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
SA-6
<PAGE>
ALLMERICA SELECT SEPARATE ACCOUNT
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- ORGANIZATION
Allmerica Select Separate Account (Allmerica Select) is a separate
investment account of Allmerica Financial Life Insurance and Annuity Company
(the Company), established on March 5, 1992 for the purpose of separating from
the general assets of the Company those assets used to fund certain variable
annuity contracts issued by the Company. The Company is a wholly-owned
subsidiary of First Allmerica Financial Life Insurance Company (First
Allmerica). First Allmerica is a wholly-owned subsidiary of Allmerica Financial
Corporation (AFC). Under applicable insurance law, the assets and liabilities of
Allmerica Select are clearly identified and distinguished from the other assets
and liabilities of the Company. Allmerica Select cannot be charged with
liabilities arising out of any other business of the Company.
Allmerica Select is registered as a unit investment trust under the
Investment Company Act of 1940, as amended (the 1940 Act). Allmerica Select
currently offers fourteen Sub-Accounts. Each Sub-Account invests exclusively in
a corresponding investment portfolio of the Allmerica Investment Trust (the
Trust) managed by Allmerica Financial Investment Management Services, Inc.
(AFIMS) (successor to Allmerica Investment Management Company, Inc.), a
wholly-owned subsidiary of First Allmerica; or of the Variable Insurance
Products Fund (Fidelity VIP) managed by Fidelity Management & Research Company
(FMR); or of the T. Rowe Price International Series, Inc. (T. Rowe Price)
managed by Rowe Price-Fleming International, Inc. The Trust, Fidelity VIP, and
T. Rowe Price (the Funds) are open-end, diversified management investment
companies registered under the 1940 Act.
Allmerica Select funds two types of variable annuity contracts, "qualified"
contracts and "non-qualified" contracts. A qualified contract is one that is
purchased in connection with a retirement plan which meets the requirements of
Section 401, 403, or 408 of the Internal Revenue Code (the Code), while a
non-qualified contract is one that is not purchased in connection with one of
the indicated retirement plans. The tax treatment for certain withdrawals or
surrenders will vary according to whether they are made from a qualified
contract or a non-qualified contract.
Certain prior year balances have been reclassified to conform with current
year presentation.
NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES
INVESTMENTS -- Security transactions are recorded on the trade date.
Investments held by the Sub-Accounts are stated at the net asset value per share
of the respective investment portfolio of the Funds. Net realized gains and
losses on securities sold are determined using the average cost method.
Dividends and capital gain distributions are recorded on the ex-dividend date
and are reinvested in additional shares of the respective investment portfolio
of the Funds at net asset value.
FEDERAL INCOME TAXES -- The Company is taxed as a "life insurance company"
under Subchapter L of the Code and files a consolidated federal income tax
return with First Allmerica. The Company anticipates no tax liability resulting
from the operations of Allmerica Select. Therefore, no provision for income
taxes has been charged against Allmerica Select.
SA-7
<PAGE>
ALLMERICA SELECT SEPARATE ACCOUNT
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 3 -- INVESTMENTS
The number of shares owned, aggregate cost, and net asset value per share of
each Sub-Account's investment in the Funds at December 31, 1998 were as follows:
<TABLE>
<CAPTION>
PORTFOLIO INFORMATION
-----------------------------------
NET
ASSET
VALUE
NUMBER OF AGGREGATE PER
INVESTMENT PORTFOLIO SHARES COST SHARE
- ---------------------------------------- ----------- ------------ --------
<S> <C> <C> <C>
Select Aggressive Growth.............. . 92,946,793 $176,479,934 $ 2.460
Select Growth........................... 138,675,560 219,038,878 2.428
Select Growth and Income................ 166,336,171 231,011,231 1.779
Select Income........................... 135,718,561 137,625,649 1.032
Money Market............................ 113,859,875 113,859,875 1.000
Select International Equity............. 107,460,179 138,459,337 1.542
Select Capital Appreciation............. 62,726,015 98,278,605 1.640
Select Emerging Markets................. 5,156,352 4,352,438 0.784
Select Value Opportunity................ 10,702,972 17,874,274 1.685
Select Strategic Growth................. 8,624,918 8,172,199 0.973
Fidelity VIP High Income................ 8,777,382 108,048,761 11.530
Fidelity VIP Equity-Income.............. 7,015,351 155,707,691 25.420
Fidelity VIP Growth..................... 3,287,977 111,568,787 44.870
T. Rowe Price International Stock....... 3,990,630 52,472,892 14.520
</TABLE>
NOTE 4 -- RELATED PARTY TRANSACTIONS
The Company makes a charge of 1.25% per annum based on the average daily net
assets of each Sub-Account at each valuation date for mortality and expense
risks. The Company also charges each Sub-Account 0.15% per annum based on the
average daily net assets of each Sub-Account for administrative expenses. These
charges are deducted from the daily value of each Sub-Account and are paid to
the Company on a daily basis.
For contracts issued on Form A3020-92 (Allmerica Select Resource I), a
contract fee is deducted on the contract anniversary and upon full surrender of
the contract. For contracts issued on Form A3025-96 (Allmerica Select Resource
II), a contract fee is deducted on the contract anniversary and upon full
surrender if the accumulated value is less than $50,000. The fee is currently
waived for Allmerica Select Resource II contracts issued to and maintained by
the trustee of a 401(k) plan.
Allmerica Investments, Inc. (Allmerica Investments), a wholly-owned
subsidiary of First Allmerica, is principal underwriter and general distributor
of Allmerica Select, and does not receive any compensation for sales of the
contracts. Commissions are paid by the Company to registered representatives of
certain independent broker-dealers. The Allmerica Select Resource I and II
contracts have a contingent deferred sales charge and no deduction is made for
sales charges at the time of the sale. For the years ended December 31, 1998 and
1997, the Company received $1,530,964 and $793,493, respectively, for contingent
deferred sales charges applicable to Allmerica Select Separate Account.
SA-8
<PAGE>
ALLMERICA SELECT SEPARATE ACCOUNT
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 5 -- CONTRACTOWNERS AND SPONSOR TRANSACTIONS
Transactions from contractowners and sponsor were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1998 1997
------------------------------ -----------------------------
UNITS AMOUNT UNITS AMOUNT
------------- -------------- ------------- -------------
<S> <C> <C> <C> <C>
Select Aggressive Growth
Issuance of Units.......................... 28,443,354 $ 71,461,752 33,846,682 $ 75,147,109
Redemption of Units........................ (22,974,119) (57,704,045) (16,878,413) (35,080,458)
------------- -------------- ------------- -------------
Net increase (decrease).................. 5,469,235 $ 13,757,707 16,968,269 $ 40,066,651
------------- -------------- ------------- -------------
------------- -------------- ------------- -------------
Select Growth
Issuance of Units.......................... 48,669,777 $ 117,987,024 46,267,945 $ 85,189,100
Redemption of Units........................ (26,664,319) (64,559,167) (15,928,340) (28,050,338)
------------- -------------- ------------- -------------
Net increase (decrease).................. 22,005,458 $ 53,427,857 30,339,605 $ 57,138,762
------------- -------------- ------------- -------------
------------- -------------- ------------- -------------
Select Growth and Income
Issuance of Units.......................... 45,914,205 $ 99,392,688 44,731,254 $ 80,982,519
Redemption of Units...................... . (23,587,262) (51,043,340) (15,854,780) (27,408,205)
------------- -------------- ------------- -------------
Net increase (decrease).................. 22,326,943 $ 48,349,348 28,876,474 $ 53,574,314
------------- -------------- ------------- -------------
------------- -------------- ------------- -------------
Select Income
Issuance of Units.......................... 59,979,984 $ 80,651,018 28,213,650 $ 34,575,615
Redemption of Units...................... . (30,202,528) (40,868,200) (14,565,754) (17,556,578)
------------- -------------- ------------- -------------
Net increase (decrease)................ . 29,777,456 $ 39,782,818 13,647,896 $ 17,019,037
------------- -------------- ------------- -------------
------------- -------------- ------------- -------------
Money Market
Issuance of Units.......................... 160,175,464 $ 193,712,183 184,460,786 $ 205,139,510
Redemption of Units...................... . (132,822,470) (160,902,542) (179,708,703) (200,020,717)
------------- -------------- ------------- -------------
Net increase (decrease).................. 27,352,994 $ 32,809,641 4,752,083 $ 5,118,793
------------- -------------- ------------- -------------
------------- -------------- ------------- -------------
Select International Equity
Issuance of Units.......................... 35,836,093 $ 56,782,369 50,880,736 $ 70,478,183
Redemption of Units........................ (25,978,288) (40,959,486) (18,015,151) (24,060,378)
------------- -------------- ------------- -------------
Net increase (decrease).................. 9,857,805 $ 15,822,883 32,865,585 $ 46,417,805
------------- -------------- ------------- -------------
------------- -------------- ------------- -------------
Select Capital Appreciation
Issuance of Units.......................... 25,684,264 $ 44,175,487 29,860,999 $ 43,787,971
Redemption of Units...................... . (14,627,907) (25,106,719) (10,385,180) (14,504,055)
------------- -------------- ------------- -------------
Net increase (decrease).................. 11,056,357 $ 19,068,768 19,475,819 $ 29,283,916
------------- -------------- ------------- -------------
------------- -------------- ------------- -------------
Select Emerging Markets
Issuance of Units.......................... 6,117,004 $ 5,235,588 -- $ --
Redemption of Units........................ (907,615) (842,459) -- --
------------- -------------- ------------- -------------
Net increase (decrease).................. 5,209,389 $ 4,393,129 -- $ --
------------- -------------- ------------- -------------
------------- -------------- ------------- -------------
</TABLE>
SA-9
<PAGE>
ALLMERICA SELECT SEPARATE ACCOUNT
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 5 -- CONTRACTOWNERS AND SPONSOR TRANSACTIONS (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1998 1997
------------------------------ -----------------------------
UNITS AMOUNT UNITS AMOUNT
------------- -------------- ------------- -------------
<S> <C> <C> <C> <C>
Select Value Opportunity
Issuance of Units.......................... 20,566,820 $ 20,586,826 -- $ --
Redemption of Units........................ (2,327,244) (2,758,540) -- --
------------- -------------- ------------- -------------
Net increase (decrease).................. 18,239,576 $ 17,828,286 -- $ --
------------- -------------- ------------- -------------
------------- -------------- ------------- -------------
Select Strategic Growth
Issuance of Units.......................... 10,583,703 $ 10,307,180 -- $ --
Redemption of Units........................ (1,875,191) (1,955,404) -- --
------------- -------------- ------------- -------------
Net increase (decrease).................. 8,708,512 $ 8,351,776 -- $ --
------------- -------------- ------------- -------------
------------- -------------- ------------- -------------
Fidelity VIP High Income
Issuance of Units.......................... 42,299,742 $ 60,272,832 40,320,288 $ 52,914,842
Redemption of Units........................ (17,784,384) (24,901,013) (12,900,932) (16,499,154)
------------- -------------- ------------- -------------
Net increase (decrease).................. 24,515,358 $ 35,371,819 27,419,356 $ 36,415,688
------------- -------------- ------------- -------------
------------- -------------- ------------- -------------
Fidelity VIP Equity-Income
Issuance of Units.......................... 48,319,788 $ 87,225,760 44,976,217 $ 67,922,420
Redemption of Units........................ (17,913,028) (32,278,792) (11,526,295) (15,917,882)
------------- -------------- ------------- -------------
Net increase (decrease).................. 30,406,760 $ 54,946,968 33,449,922 $ 52,004,538
------------- -------------- ------------- -------------
------------- -------------- ------------- -------------
Fidelity VIP Growth
Issuance of Units.......................... 32,964,840 $ 65,335,816 29,081,173 $ 44,906,335
Redemption of Units...................... . (15,681,080) (31,551,832) (8,054,427) (11,649,015)
------------- -------------- ------------- -------------
Net increase (decrease).................. 17,283,760 $ 33,783,984 21,026,746 $ 33,257,320
------------- -------------- ------------- -------------
------------- -------------- ------------- -------------
T. Rowe Price International Stock
Issuance of Units.......................... 17,721,810 $ 23,965,360 32,358,642 $ 40,274,630
Redemption of Units...................... . (10,241,106) (13,718,088) (14,891,726) (18,369,808)
------------- -------------- ------------- -------------
Net increase (decrease).................. 7,480,704 $ 10,247,272 17,466,916 $ 21,904,822
------------- -------------- ------------- -------------
------------- -------------- ------------- -------------
</TABLE>
NOTE 6 -- DIVERSIFICATION REQUIREMENTS
Under the provisions of Section 817(h) of the Code, a variable annuity
contract, other than a contract issued in connection with certain types of
employee benefit plans, will not be treated as an annuity contract for federal
income tax purposes for any period for which the investments of the segregated
asset account on which the contract is based are not adequately diversified. The
Code provides that the "adequately diversified" requirement may be met if the
underlying investments satisfy either a statutory safe harbor test or
diversification requirements set forth in regulations issued by the Secretary of
The Treasury.
The Internal Revenue Service has issued regulations under Section 817(h) of
the Code. The Company believes that Allmerica Select satisfies the current
requirements of the regulations, and it intends that Allmerica Select will
continue to meet such requirements.
SA-10
<PAGE>
ALLMERICA SELECT SEPARATE ACCOUNT
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 7 -- PURCHASES AND SALES OF SECURITIES
Cost of purchases and proceeds from sales of shares of the Funds by
Allmerica Select during the year ended December 31, 1998 were as follows:
<TABLE>
<CAPTION>
INVESTMENT PORTFOLIO PURCHASES SALES
- ------------------------------------------------------- ------------ ------------
<S> <C> <C>
Select Aggressive Growth............................... $ 31,905,921 $ 21,116,601
Select Growth.......................................... 66,752,075 14,023,151
Select Growth and Income............................... 56,761,065 7,853,839
Select Income.......................................... 52,061,641 6,948,820
Money Market........................................... 101,896,643 65,179,446
Select International Equity............................ 28,715,202 12,884,665
Select Capital Appreciation............................ 42,248,036 8,793,597
Select Emerging Markets................................ 4,586,750 209,592
Select Value Opportunity............................... 19,115,410 1,211,949
Select Strategic Growth................................ 9,437,611 1,114,321
Fidelity VIP High Income............................... 50,494,226 7,456,171
Fidelity VIP Equity-Income............................. 66,365,787 6,107,556
Fidelity VIP Growth.................................... 52,632,705 9,126,109
T. Rowe Price International Stock...................... 14,266,496 3,826,362
------------ ------------
Totals............................................... $597,239,568 $165,852,179
------------ ------------
------------ ------------
</TABLE>
SA-11
<PAGE>
PART C. OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(a) FINANCIAL STATEMENTS
Financial Statements Included in Part A
None
Financial Statements Included in Part B
Financial Statements for Allmerica Financial Life Insurance and
Annuity Company and
Financial Statements for Allmerica Select Separate Account of
Allmerica Financial Life Insurance and Annuity Company
Financial Statements Included in Part C
None
(b) EXHIBITS
EXHIBIT 1 Vote of Board of Directors Authorizing Establishment of
Registrant dated March 5, 1992 was previously filed on
April 24, 1998 in Post-Effective Amendment No. 16 (File
nos. 33-47216, 811-6632) and is incorporated by
reference herein.
EXHIBIT 2 Not Applicable. Pursuant to Rule 26a-2, the Insurance
Company may hold the assets of the Registrant NOT pursuant
to a trust indenture or other such instrument.
EXHIBIT 3 (A) Underwriting and Administrative Services
Agreement was previously filed on April 24,
1998 in Post-Effective Amendment No. 16
(File Nos. 33-47216, 811-6632) and is
incorporated by reference herein.
(B) Bonus Product Commissions Schedule was
previously filed on May 11, 1999 in Post-effective
Amendment No. 26 (File Nos. 333-78245, 811-6632), and
is incorporated by reference herein. Sales Agreements
(Select) with Commission Schedule were previously
filed on April 24, 1998 in Post-Effective Amendment
No. 16 (File Nos. 33-47216, 811-6632) and are
incorporated by reference herein.
(C) General Agent's Agreement was previously filed
on April 24, 1998 in Post-Effective Amendment
No. 16 (File Nos. 33-47216, 811-6632) and is
incorporated by reference herein.
(D) Career Agent Agreement was previously filed on
April 24, 1998 in Post-Effective Amendment No.
16 (File Nos. 33-47216, 811-6632) and is incorporated
by reference herein.
(E) Registered Representative's Agreement was
previously filed on April 24, 1998 in
Post-Effective Amendment No. 16 (File Nos. 33-47216,
811-6632) and is incorporated by reference herein.
EXHIBIT 4 The following documents were previously filed on
May 11, 1999 in Post-effective Amendment No. 26, (File
Nos. 333-78245, 811-6632) and are incorporated herein
by reference:
(a) Contract Form A3028-99;
(b) Specification pages Form A8028-99;
(c) Enhanced Death Benefit "EDB" Rider (Form 3263-99);
(d) Minimum Guaranteed Annuity Payout ("M-GAP")
Rider Form (3269-99);
(e) Trail Employee Program Endorsement (Form 3275-99);
(f) Trail Employee Program Endorsement (Form 3275-99);
(g) Annuitization Withdrawal Endorsement (Form 3276-99);
<PAGE>
EXHIBIT 5 Application Form AS-563 was previously filed on
May 11, 1999 in Post-effective Amendment No. 26 (File
Nos. 333-78245, 811-6632) and is incorporated by
reference herein.
EXHIBIT 6 The Depositor's Articles of Incorporation and
Bylaws, as amended to reflect its name change
were previously filed on September 29, 1995 in
Post-Effective Amendment No. 7 (File Nos. 33-47216,
811-6632) and are incorporated by reference herein.
EXHIBIT 7 Not Applicable.
EXHIBIT 8 (A) Fidelity Service Agreement was previously filed
on April 30, 1996 in Post-Effective No. 8 (File
Nos. 33-47216, 811-6632 and is incorporated by
reference herein.
(B) An Amendment to the Fidelity Service Agreement,
effective as of January 1, 1997, was previously
filed on April 30, 1997 in Post-Effective
Amendment No. 12 (File Nos. 33-47216, 811-6632)
and is incorporated by reference herein.
(C) Fidelity Service Contract, effective as of
January 1, 1997, was previously filed on April
30, 1997 in Post-Effective Amendment No. 12
(File Nos. 33-47216, 811-6632) and is
incorporated by reference herein.
(D) T. Rowe Price Service Agreement was previously
filed on April 24, 1998 in Post-Effective
Amendment No. 16 (File Nos. 33-47216, 811-6632)
and is incorporated by reference herein.
(E) BFDS Agreements for lockbox and mailroom services were
previously filed on April 24, 1998 in Post-Effective
Amendment No. 16 (File Nos. 33-47216, 811-6632) and
are incorporated by reference herein.
(F) Directors' Power of Attorney is filed herewith.
EXHIBIT 9 Opinion of Counsel is filed herewith.
EXHIBIT 10 Consent of Independent Accountants is filed herewith.
EXHIBIT 11 None.
EXHIBIT 12 None.
EXHIBIT 13 Schedule for Computation of Performance Quotations is filed
herewith.
EXHIBIT 14 Not Applicable.
EXHIBIT 15 (A) Participation Agreement between the Company and
Allmerica Investment Trust was previously filed on
April 24, 1998 in Post-Effective Amendment No. 16
(File Nos. 33-47216, 811-6632) and is incorporated
by reference herein.
(B) Participation Agreement between the Company and
Fidelity VIP, as amended, was previously filed on
April 24, 1998 in Post-Effective Amendment No. 16
(File Nos. 33-47216, 811-6632) and is incorporated
by reference herein.
(C) Participation Agreement between the Company and
T. Rowe Price International Series, Inc. was previously
filed on April 24, 1998 in Post-Effective Amendment
No. 16 (File Nos. 33-47216, 811-6632) and is
incorporated by reference herein.
(D) Participation Agreement between the Company, and
Alliance Capital Management L.P. is filed herewith.
<PAGE>
ITEM 25. DIRECTORS AND OFFICERS OF THE DEPOSITOR
The principal business address of all the following Directors and Officers is:
440 Lincoln Street
Worcester, Massachusetts 01653
DIRECTORS AND PRINCIPAL OFFICERS OF THE COMPANY
<TABLE>
<CAPTION>
NAME AND POSITION PRINCIPAL OCCUPATION(S) DURING
WITH COMPANY PAST FIVE YEARS
------------ ---------------
<S> <C>
Bruce C. Anderson Director (since 1996), Vice President (since 1984) and
Director Assistant Secretary (since 1992) of First Allmerica
Warren E. Barnes Vice President (since 1996) and Corporate Controller (since
Vice President and Corporate Controller 1998) of First Allmerica
Robert E. Bruce Director and Chief Information Officer (since 1997) and
Director and Chief Information Officer Vice President (since 1995) of First Allmerica; and Corporate
Manager (1979 to 1995) of Digital Equipment Corporation
Mary Eldridge Secretary (since 1999) of First Allmerica; Secretary (since
Secretary 1999) of Allmerica Investments, Inc.; and Secretary (since 1999)
of Allmerica Financial Investment Management Services, Inc.
John P. Kavanaugh Director and Chief Investment Officer (since 1996) and
Director, Vice President and Vice President (since 1991) of First Allmerica; and Vice
Chief Investment Officer President (since 1998) of Allmerica Financial Investment
Management Services, Inc.
John F. Kelly Director (since 1996), Senior Vice President (since 1986),
Director, Vice President and General Counsel (since 1981) and Assistant Secretary (since
General Counsel 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 and President
Director (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 (since 1992),
Director 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 (since 1989) of
Director and Chairman of the Board First Allmerica; Director (since 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) and Vice
Director, Vice President President and Treasurer (since 1993) of First Allmerica;
Chief Financial Officer Treasurer (since 1993) of Allmerica Investments, Inc.; and
and Treasurer Treasurer (since 1993) of Allmerica Financial Investment
Management Services, Inc.
Richard M. Reilly Director (since 1996) and Vice President (since 1990) of First
Director, President and Allmerica; Director (since 1990) of Allmerica Investments, Inc.;
Chief Executive Officer 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 Allmerica;
Director 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 1990) of First
Director and Vice President 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 1987) of First
Director Allmerica
</TABLE>
<PAGE>
ITEM 26. PERSONS UNDER COMMON CONTROL WITH REGISTRANT
<TABLE>
<S><C>
Allmerica Financial Corporation
Delaware
| | | | | | | |
________________________________________________________________________________________________________________________________
100% 100% 100% 100% 100% 100% 100% 100%
Allmerica Financial Allmerica, Allmerica First Allmerica AFC Capital Allmerica First Sterling
Asset Profiles, Inc. Inc. Funding Financial Life Trust I Services Limited
Management, Inc. Corp. Insurance Corporation
Company
Massachusetts California Massachusetts Massachusetts Massachusetts Delaware Massachusetts Bermuda
| | |
| ___________________________________________________________ ________________
| | | | |
| 100% 99.2% 100% 100%
| Advantage Allmerica Allmerica First Sterling
| Insurance Trust Financial Life Reinsurance
| Network, Inc. Company, N.A. Insurance and Company
| Annuity Company Limited
|
| Delaware Federally Chartered Delaware Bermuda
| |
| ________________________________________________________________
| | | | |
| 100% 100% 100% 100%
| Allmerica Allmerica Allmerica Allmerica
| Investments, Investment Financial Financial
| Inc. Management Investment Services
| Company, Inc. Management Insurance
| Services, Inc. Agency, Inc.
|
| Massachusetts Massachusetts Massachusetts Massachusetts
|
________________________________________________________________
| | | |
100% 100% 100% 100%
Allmerica Sterling Risk Allmerica Allmerica
Property Management Benefits, Inc. Asset
& Casualty Services, Inc. Management,
Companies, Inc. Limited
Delaware Delaware Florida Bermuda
|
________________________________________________
| | |
100% 100% 100%
The Hanover Allmerica Citizens
Insurance Financial Insurance
Company Insurance Company
Brokers, Inc. of Illinois
New Hampshire Massachusetts Illinois
|
________________________________________________________________________________________________________________________________
| | | | | | | |
100% 100% 100% 100% 100% 100% 100% 100%
Allmerica Allmerica The Hanover Hanover Texas Citizens Massachusetts Allmerica AMGRO
Financial Plus American Insurance Corporation Bay Insurance Financial Inc.
Benefit Insurance Insurance Management Company Alliance
Insurance Agency, Inc. Company Company, Inc. Insurance
Company Company
Pennsylvania Massachusetts New Hampshire Texas Delaware New Hampshire New Hampshire Massachusetts
| |
________________________________________________ ________________
| | | |
100% 100% 100% 100%
Citizens Citizens Citizens Lloyds Credit
Insurance Insurance Insurance Corporation
Company Company Company
of Ohio of America of the
Midwest
Ohio Michigan Indiana Massachusetts
|
_________________
|
100%
Citizens
Management
Inc.
Michigan
_______________ ---------------- ----------------
Allmerica Greendale AAM
Equity Special Equity Fund
Index Pool Placements
Fund
Massachusetts Massachusetts Massachusetts
- -------- Grantor Trusts established for the benefit of First Allmerica,
Allmerica Financial Life, Hanover and Citizens
--------------- ----------------
Allmerica Allmerica
Investment Trust Securities
Trust
Massachusetts Massachusetts
- -------- Affiliated Management Investment Companies
...............
Hanover Lloyd's
Insurance
Company
Texas
- -------- Affiliated Lloyd's plan company, controlled by Underwriters
for the benefit of The Hanover Insurance Company
_______________ ________________
AAM Growth AAM High Yield
& Income Fund, L.L.C.
Fund L.P.
Delaware Massachusetts
________ L.P. or L.L.C. established for the benefit of First Allmerica,
Allmerica Financial Life, Hanover and Citizens
</TABLE>
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
<TABLE>
<CAPTION>
NAME ADDRESS TYPE OF BUSINESS
---- ------- ----------------
<S> <C> <C>
AAM Equity Fund 440 Lincoln Street Massachusetts Grantor Trust
Worcester MA 01653
AAM Growth & Income Fund, L.P. 440 Lincoln Street Limited Partnership
Worcester MA 01653
Advantage Insurance Network, Inc. 440 Lincoln Street Insurance Agency
Worcester MA 01653
AFC Capital Trust I 440 Lincoln Street Statutory Business Trust
Worcester MA 01653
Allmerica Asset Management Limited 440 Lincoln Street Investment advisory services
Worcester MA 01653
Allmerica Asset Management, Inc. 440 Lincoln Street Investment advisory services
Worcester MA 01653
Allmerica Benefits, Inc. 440 Lincoln Street Non-insurance medical services
Worcester MA 01653
Allmerica Equity Index Pool 440 Lincoln Street Massachusetts Grantor Trust
Worcester MA 01653
Allmerica Financial Alliance Insurance 100 North Parkway Multi-line property and casualty
Company Worcester MA 01605 insurance
Allmerica Financial Benefit Insurance 100 North Parkway Multi-line property and casualty
Company Worcester MA 01605 insurance
Allmerica Financial Corporation 440 Lincoln Street Holding Company
Worcester MA 01653
Allmerica Financial Insurance Brokers, 440 Lincoln Street Insurance Broker
Inc. Worcester MA 01653
Allmerica Financial Life Insurance and 440 Lincoln Street Life insurance, accident and
Annuity Company (formerly known as Worcester MA 01653 health insurance, annuities,
SMA Life Assurance Company) variable annuities and variable life
insurance
Allmerica Financial Services Insurance 440 Lincoln Street Insurance Agency
Agency, Inc. Worcester MA 01653
Allmerica Funding Corp. 440 Lincoln Street Special purpose funding vehicle
Worcester MA 01653 for commercial paper
Allmerica, Inc. 440 Lincoln Street Common employer for Allmerica
Worcester MA 01653 Financial Corporation entities
Allmerica Financial Investment 440 Lincoln Street Investment advisory services
Management Services, Inc. Worcester MA 01653
(formerly known as Allmerica
Institutional Services, Inc.
and 440 Financial Group of
Worcester, Inc.)
Allmerica Investment Management 440 Lincoln Street Investment advisory services
Company, Inc. Worcester MA 01653
Allmerica Investments, Inc. 440 Lincoln Street Securities, retail broker-dealer
Worcester MA 01653
Allmerica Investment Trust 440 Lincoln Street Investment Company
Worcester MA 01653
Allmerica Plus Insurance Agency, Inc. 440 Lincoln Street Insurance Agency
Worcester MA 01653
Allmerica Property & Casualty 440 Lincoln Street Holding Company
Companies, Inc. Worcester MA 01653
Allmerica Securities Trust 440 Lincoln Street Investment Company
Worcester MA 01653
Allmerica Services Corporation 440 Lincoln Street Internal administrative services
Worcester MA 01653 provider to Allmerica Financial
Corporation entities
Allmerica Trust Company, N.A. 440 Lincoln Street Limited purpose national trust
Worcester MA 01653 company
AMGRO, Inc. 100 North Parkway Premium financing
Worcester MA 01605
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
Citizens Corporation 440 Lincoln Street Holding Company
Worcester MA 01653
Citizens Insurance Company of America 645 West Grand River Multi-line property and casualty
Howell MI 48843 insurance
Citizens Insurance Company of Illinois 333 Pierce Road Multi-line property and casualty
Itasca IL 60143 insurance
Citizens Insurance Company of the 3950 Priority Way South Multi-line property and casualty
Midwest South Drive, Suite 200 insurance
Indianapolis IN 46280
Citizens Insurance Company of Ohio 8101 N. High Street Multi-line property and casualty
P.O. Box 342250 insurance
Columbus OH 43234
Citizens Management, Inc. 645 West Grand River Services management company
Howell MI 48843
Financial Profiles 5421 Avenida Encinas Computer software company
Carlsbad, CA 92008
First Allmerica Financial Life Insurance 440 Lincoln Street Life, pension, annuity, accident
Company (formerly State Mutual Life Worcester MA 01653 and health insurance company
Assurance Company of America)
First Sterling Limited 440 Lincoln Street Holding Company
Worcester MA 01653
First Sterling Reinsurance Company 440 Lincoln Street Reinsurance Company
Limited Worcester MA 01653
Greendale Special Placements Fund 440 Lincoln Street Massachusetts Grantor Trust
Worcester MA 01653
The Hanover American Insurance 100 North Parkway Multi-line property and casualty
Company Worcester MA 01605 insurance
The Hanover Insurance Company 100 North Parkway Multi-line property and casualty
Worcester MA 01605 insurance
Hanover Texas Insurance Management 801 East Campbell Road Attorney-in-fact for Hanover
Company, Inc. Richardson TX 75081 Lloyd's Insurance Company
Hanover Lloyd's Insurance Company 801 East Campbell Road Multi-line property and casualty
Richardson TX 75081 insurance
Lloyds Credit Corporation 440 Lincoln Street Premium financing service
Worcester MA 01653 franchises
Massachusetts Bay Insurance Company 100 North Parkway Multi-line property and casualty
Worcester MA 01605 insurance
Sterling Risk Management Services, Inc. 440 Lincoln Street Risk management services
Worcester MA 01653
</TABLE>
<PAGE>
ITEM 27. NUMBER OF CONTRACT OWNERS
As of July 31, 1999, there were 13,878 Contract Owners of qualified
Contracts and 20,808 Contract Owners of non-qualified Contracts.
As of July 31, 1999, there were no Contract Form A3028-99 Owners since
sales had not yet begun.
ITEM 28. INDEMNIFICATION
Article VIII of the Bylaws of Allmerica Financial Life Insurance and
Annuity Company (the Depositor) state: Each Director and each Officer of
the Corporation, whether or not in office, (and his executors or
administrators), shall be indemnified or reimbursed by the Corporation
against all expenses actually and necessarily incurred by him in the
defense or reasonable settlement of any action, suit, or proceeding in
which he is made a party by reason of his being or having been a Director
or Officer of the Corporation, including any sums paid in settlement or to
discharge 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.
ITEM 29. PRINCIPAL UNDERWRITERS
(a) Allmerica Investments, Inc. also acts as principal underwriter for the
following:
- VEL Account, VEL II Account, VEL Account III, Select Account III,
Inheiritage Account, Separate Accounts VA-A, VA-B, VA-C, VA-G, VA-H,
VA-K, VA-P, Allmerica Select Separate Account II, Group VEL Account,
Separate Account KG, Separate Account KGC, Fulcrum Separate Account,
Fulcrum Variable Life Separate Account, and Allmerica Select
Separate Account of Allmerica Financial Life Insurance and Annuity
Company.
- Inheiritage Account, VEL II Account, Separate Account I, Separate
Account VA-K, Separate Account VA-P, Allmerica Select Separate
Account II, Group VEL Account, Separate Account KG, Separate
Account KGC, Fulcrum Separate Account, and Allmerica Select
Separate Account of First Allmerica Financial Life Insurance
Company.
- Allmerica Investment Trust
(b) The Principal Business Address of each of the following Directors and
Officers of Allmerica Investments, Inc. is:
440 Lincoln Street
Worcester, Massachusetts 01653
<PAGE>
NAME POSITION OR OFFICE WITH UNDERWRITER
---- -----------------------------------
Emil J. Aberizk, Jr. Vice President
Edward T. Berger Vice President and Chief Compliance Officer
Mary Eldridge Secretary
Philip L. Heffernan Vice President
John F. Kelly Director
Daniel Mastrototaro Vice President
William F. Monroe, Jr. Vice President
David J. Mueller Vice President and Controller
John F. O'Brien Director
Stephen Parker President, Director and Chief Executive
Officer
Edward J. Parry, III Treasurer
Richard M. Reilly Director
Eric A. Simonsen Director
Mark G. Steinberg Senior Vice President
(c) As indicated in Part B (Statement of Additional Information) in
response to Item 20(c), the aggregate amount of commissions
retained by Allmerica Investments, Inc., the principal underwriter
of the Contracts, for sales of variable contracts funded by the
Registrant was $619.00 in 1998. No other commissions or other
compensation was received by the principal underwriter, directly
or indirectly, from the Registrant during the Registrant's last
fiscal year.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
Each account, book or other document required to be maintained by Section
31(a) of the 1940 Act and Rules 31a-1 to 31a-3 thereunder are maintained by
the Company at 440 Lincoln Street, Worcester, Massachusetts.
ITEM 31. MANAGEMENT SERVICES
The Company provides daily unit value calculations and related services for
the Company's separate accounts.
<PAGE>
ITEM 32. UNDERTAKINGS
(a) Subject to the terms and conditions of Section 15(d) of the Securities
Exchange Act of 1934, the undersigned Registrant hereby undertakes to
file with the Securities and Exchange Commission ("SEC") such
supplementary and periodic information, documents, and reports as may
be prescribed by any rule or regulation of the SEC heretofore or
hereafter duly adopted pursuant to authority conferred in that
section.
(b) The Registrant hereby undertakes to include as part of the application
to purchase a Contract a space that the applicant can check to request
a Statement of Additional Information.
(c) The Registrant hereby undertakes to deliver a Statement of Additional
Information and any financial statements promptly upon written or oral
request, according to the requirements of Form N-4.
(d) Insofar as indemnification for liability arising under the 1933 Act
may be permitted to Directors, Officers and Controlling Persons of
Registrant under any registration statement, underwriting agreement or
otherwise, Registrant has been advised that, in the opinion of the
Securities and Exchange Commission, such indemnification is against
public policy as expressed in the 1933 Act and is, therefore,
unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by Registrant of expenses
incurred or paid by a Director, Officer or Controlling Person of
Registrant in the successful defense of any action, suit or
proceeding) is asserted by such Director, Officer or Controlling
Person in connection with the securities being registered, Registrant
will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is
against public policy as expressed in the 1933 Act and will be
governed by the final adjudication of such issue.
(e) The Company hereby represents that the aggregate fees and charges
under the Contracts are reasonable in relation to the services
rendered, expenses expected to be incurred, and risks assumed by
the Company.
ITEM 33. REPRESENTATIONS CONCERNING WITHDRAWAL RESTRICTIONS ON SECTION 403(b)
PLANS AND UNDER THE TEXAS OPTIONAL RETIREMENT PROGRAM
Registrant, a separate account of Allmerica Financial Life Insurance and
Annuity Company ("Company"), states that it is (a) relying on Rule 6c-7
under the 1940 Act with respect to withdrawal restrictions under the Texas
Optional Retirement Program ("Program") and (b) relying on the "no-action"
letter (Ref. No. IP-6-88) issued on November 28, 1988 to the American
Council of Life Insurance, in applying the withdrawal restrictions of
Internal Revenue Code Section 403(b)(11). Registrant has taken the
following steps in reliance on the letter:
1. Appropriate disclosures regarding the redemption withdrawal
restrictions imposed by the Program and by Section 403(b)(11) have been
included in the prospectus of each registration statement used in
connection with the offer of the Company's variable contracts.
2. Appropriate disclosures regarding the redemption withdrawal
restrictions imposed by the Program and by Section 403(b)(11) have been
included in sales literature used in connection with the offer of the
Company's variable contracts.
3. Sales Representatives who solicit participants to purchase the
variable contracts have been instructed to specifically bring the
redemption withdrawal restrictions imposed by the Program and by
Section 403(b)(11) to the attention of potential participants.
4. A signed statement acknowledging the participant's understanding of
(I) the restrictions on redemption withdrawal imposed by the Program
and by Section 403(b)(11) and (ii) the investment alternatives
available under the employer's arrangement will be obtained from each
participant who purchases a variable annuity contract prior to or at
the time of purchase.
Registrant hereby represents that it will not act to deny or limit a
transfer request except to the extent that a Service-Ruling or written
opinion of counsel, specifically addressing the fact pattern involved and
taking into account the terms of the applicable employer plan, determines
that denial or limitation is necessary for the variable annuity contracts
to meet the requirements of the Program or of Section 403(b). Any transfer
request not so denied or limited will be effected as expeditiously as
possible.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940 the Registrant has duly caused this Pre-effective
Amendment No. 2 to its 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 7th day of October, 1999.
ALLMERICA SELECT SEPARATE ACCOUNT OF
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
By: /S/ Mary Eldridge
-------------------------------
Mary Eldridge, Secretary
Pursuant to the requirements of the Securities Act of 1933, this
Pre-effective Amendment No. 2 to the Registration Statement has been signed
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 October 7, 1999
--------------------------- Controller
Warren E. Barnes
Edward J. Parry III* Director, Vice President, Chief
--------------------------- Financial Officer and Treasurer
Richard M. Reilly* Director, President and
--------------------------- Chief Executive Officer
John F. O'Brien* Director and Chairman of
--------------------------- the Board
Bruce C. Anderson* Director
---------------------------
Robert E. Bruce* Director and Chief Information
--------------------------- Officer
John P. Kavanaugh* Director, Vice President and
--------------------------- Chief Investment Officer
John F. Kelly* Director, Vice President and
--------------------------- General Counsel
J. Barry May* Director
---------------------------
James R. McAuliffe* Director
---------------------------
Robert P. Restrepo, Jr.* Director
---------------------------
Eric A. Simonsen* Director and Vice President
---------------------------
Phillip E. Soule* Director
---------------------------
</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 July 1, 1999 duly executed
by such persons.
/s/ Sheila B. St. Hilaire
---------------------------------------
Sheila B. St. Hilaire, Attorney-in-Fact
<PAGE>
EXHIBIT TABLE
Exhibit 8(f) Directors' Power of Attorney
Exhibit 9 Opinion of Counsel
Exhibit 10 Consent of Independent Accountants
Exhibit 13 Schedule for Computation of Performance Quotations
Exhibit 15(d) Participation Agreement between the Company and Alliance
Capital Management L.P.
<PAGE>
September 1, 1999
Allmerica Financial Life Insurance and Annuity Company
440 Lincoln Street
Worcester MA 01653
RE: ALLMERICA SELECT SEPARATE ACCOUNT OF ALLMERICA
FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
File Nos.: 333-78245 and 811-6632
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 the Pre-effective Amendment No. 2 to the Registration
Statement for Allmerica Select Separate Account on Form N-4 under the
Securities Act of 1933 and amendment under the Investment Company Act of
1940, with respect to the Company's qualified and non-qualified variable
annuity contracts.
I am of the following opinion:
1. Allmerica Select 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 Allmerica Select Separate Account are not chargeable
with liabilities arising out of any other business the Company may conduct.
3. The variable annuity contracts, when issued in accordance with the
Prospectus contained in the Pre-effective Amendment No. 2 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
Pre-effective Amendment No. 2 to the Registration Statement for Allmerica
Select Separate Account on Form N-4 under the Securities Act of 1933 and
amendment under the Investment Company Act of 1940.
Very truly yours,
/s/ Sheila B. St. Hilaire
Sheila B. St. Hilaire
Assistant Vice President and Counsel
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Statement of Additional Information
constituting part of this Pre-effective Amendment No. 2 to the Registration
Statement of Allmerica Select Separate Account of Allmerica Financial Life
Insurance and Annuity Company on Form N-4 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, and our report dated March 26, 1999, relating to the
financial statements of Allmerica Select Separate Account of Allmerica
Financial Life Insurance and Annuity Company, both of which appear in such
Statement of Additional Information. We also consent to the reference to us
under the heading "Experts" in such Statement of Additional Information.
/s/ PRICEWATERHOUSECOOPERS LLP
PricewaterhouseCoopers LLP
Boston, Massachusetts
October 8, 1999
<PAGE>
<TABLE>
<S> <C>
SELECT REWARD - TABLE 2B Since Inception of Underlying Portfolio
1 Year Without Surrender
Select Emerging Markets Fund N/A
Select International Equity Fund (1.608341-1.400127)/1.400127 = 14.87%
T. Rowe Price International Stock Portfolio (1.397668-1.223300)/1.223300 = 14.25%
Select Aggressive Growth Fund (2.637252-2.418780)/2.418780 = 9.03%
Select Capital Appreciation Fund (1.877576-1.671896)/1.671896 = 12.30%
Select Value Opportunity Fund (0.988757-0.956095)/0.956095 = 3.42%
Alliance Premier Growth Portfolio (1.000000-0.685263)/0.685263 = 45.93%
Select Strategic Growth Fund N/A
Fidelity VIP Growth Portfolio (2.339717-1.700871)/1.700871 = 37.56%
Select Growth and Income Fund (2.291896-1.996161)/1.996161 = 14.82%
Fidelity VIP Equity-Income Portfolio (1.866604-1.695627)/1.695627 = 10.08%
Fidelity VIP High Income Portfolio (1.349633-1.430499)/1.430499 = (5.65%)
Select Income Fund (1.370585-1.300952)/1.300952 = 5.35%
Money Market Fund (1.226503-1.178817)/1.178817 = 4.05%
Since Inception of Underlying Portfolio
5 Years Without Surrender
Select Emerging Markets Fund N/A
Select International Equity Fund N/A
T. Rowe Price International Stock Portfolio N/A
Select Aggressive Growth Fund ((2.637252/1.405991)^(.200000))-1 = 13.41%
Select Capital Appreciation Fund N/A
Select Value Opportunity Fund ((0.988757/0.572942)^(.200000))-1 = 11.53%
Alliance Premier Growth Portfolio ((1.000000/0.313810)^(.200000))-1 = 26.09%
Select Strategic Growth Fund N/A
Fidelity VIP Growth Portfolio ((2.339717/0.938048)^(.200000))-1 = 20.06%
Select Growth and Income Fund ((2.291896/1.082071)^(.200000))-1 = 16.20%
Fidelity VIP Equity-Income Portfolio ((1.866604/0.846586)^(.200000))-1 = 17.13%
Fidelity VIP High Income Portfolio ((1.349633/0.949312)^(.200000))-1 = 7.29%
Select Income Fund ((1.370585/1.095502)^(.200000))-1 = 4.58%
Money Market Fund ((1.226503/1.019827)^(.200000))-1 = 3.76%
Since Inception of Underlying Portfolio
10 Years or Since Inception Without Surrender
Select Emerging Markets Fund (0.776018-1.000000)/1.000000 = (22.40%)
Select International Equity Fund ((1.608341/1.000003)^(.214202))-1 = 10.72%
T. Rowe Price International Stock Portfolio ((1.397668/0.963761)^(.210253))-1 = 8.13%
Select Aggressive Growth Fund ((2.637252/1.000290)^(.157124))-1 = 16.45%
Select Capital Appreciation Fund ((1.877576/0.999512)^(.271780))-1 = 18.69%
Select Value Opportunity Fund ((0.988757/0.491195)^(.176243))-1 = 13.13%
Alliance Premier Growth Portfolio ((1.0000000/0.250051)^(.153426))-1 = 23.70%
Select Strategic Growth Fund (0.963660-1.000000)/1.000000 = (3.63%)
Fidelity VIP Growth Portfolio ((2.339717/0.456228)^(.100000))-1 = 17.76%
Select Growth and Income Fund ((2.291896/0.993988)^(.157124))-1 = 14.03%
Fidelity VIP Equity-Income Portfolio ((1.866604/0.498345)^(.100000))-1 = 14.12%
Fidelity VIP High Income Portfolio ((1.349633/0.542404)^(.100000))-1 = 9.54%
Select Income Fund ((1.370585/1.000782)^(.157124))-1 = 5.06%
Money Market Fund ((1.226503/0.816152)^(.100000))-1 = 4.16%
<PAGE>
SELECT REWARD - TABLE 1B Since Inception of Sub-Account
1 Year Without Surrender
Select Emerging Markets Fund N/A
Select International Equity Fund (1.608341-1.400127)/1.400127 = 14.87%
T. Rowe Price International Stock Portfolio (1.397668-1.223300)/1.223300 = 14.25%
Select Aggressive Growth Fund (2.637252-2.418780)/2.418780 = 9.03%
Select Capital Appreciation Fund (1.877576-1.671896)/1.671896 = 12.30%
Select Value Opportunity Fund N/A
Select Strategic Growth Fund N/A
Fidelity VIP Growth Portfolio (2.339717-1.700871)/1.700871 = 37.56%
Select Growth and Income Fund (2.291896-1.996161)/1.996161 = 14.82%
Fidelity VIP Equity-Income Portfolio (1.866604-1.695627)/1.695627 = 10.08%
Fidelity VIP High Income Portfolio (1.349633-1.430499)/1.430499 = (5.65%)
Select Income Fund (1.370585-1.300952)/1.300952 = 5.35%
Money Market Fund (1.226503-1.178817)/1.178817 = 4.05%
Since Inception of Sub-Account
5 Years Without Surrender
Select Emerging Markets Fund N/A
Select International Equity Fund N/A
T. Rowe Price International Stock Portfolio N/A
Select Aggressive Growth Fund ((2.637252/1.405991)^(.200000))-1 = 13.41%
Select Capital Appreciation Fund N/A
Select Value Opportunity Fund N/A
Select Strategic Growth Fund N/A
Fidelity VIP Growth Portfolio N/A
Select Growth and Income Fund ((2.291896/1.082071)^(.200000))-1 = 16.20%
Fidelity VIP Equity-Income Portfolio N/A
Fidelity VIP High Income Portfolio N/A
Select Income Fund ((1.370585/1.095502)^(.200000))-1 = 4.58%
Money Market Fund ((1.226503/1.019827)^(.200000))-1 = 3.76%
Since Inception of Sub-Account
10 Years or Since Inception Without Surrender
Select Emerging Markets Fund (0.776018-1.000000)/1.000000 = (22.40%)
Select International Equity Fund ((1.608341/1.000000)^(.214470))-1 = 10.73%
T. Rowe Price International Stock Portfolio ((1.397668/1.000000)^(.272636))-1 = 9.56%
Select Aggressive Growth Fund ((2.637252/1.000000)^(.158451))-1 = 16.61%
Select Capital Appreciation Fund ((1.877576/1.000000)^(.272385))-1 = 18.72%
Select Value Opportunity Fund (0.988757-1.000000)/1.000000 = (1.12%)
Select Strategic Growth Fund (0.963660-1.000000)/1.000000 = (3.63%)
Fidelity VIP Growth Portfolio ((2.339717/1.000000)^(.272636))-1 = 26.08%
Select Growth and Income Fund ((2.291896/1.000000)^(.158451))-1 = 14.04%
Fidelity VIP Equity-Income Portfolio ((1.866604/1.000000)^(.272636))-1 = 18.55%
Fidelity VIP High Income Portfolio ((1.349633/1.000000)^(.272636))-1 = 8.52%
Select Income Fund ((1.370585/1.000000)^(.158451))-1 = 5.12%
Money Market Fund ((1.226503/1.000000)^(.160440))-1 = 3.33%
<PAGE>
SELECT REWARD TABLE 2A Since Inception of Underlying Portfolio
1 Year With Complete Withdrawal
Select Emerging Markets Fund N/A
Select International Equity Fund (((1.608341-(.085*1.398322))/1.400127)-.0025)-1 = 6.13%
T. Rowe Price International Stock Portfolio (((1.397668-(.085*1.214173))/1.223300)-.0025)-1 = 5.57%
Select Aggressive Growth Fund (((2.637252-(.085*2.274435))/2.418780)-.0025)-1 = 0.79%
Select Capital Appreciation Fund (((1.877576-(.085*1.626792))/1.671896)-.0025)-1 = 3.78%
Select Value Opportunity Fund (((0.988757-(.085*0.845343))/0.956095)-.0025)-1 = (4.35%)
Alliance Premier Growth Portfolio (((1.000000-(.085*0.685263))/0.685263)-.0025)-1 = 37.18%
Select Strategic Growth Fund N/A
Fidelity VIP Growth Portfolio (((2.339717-(.085*1.700871))/1.700871)-.0025)-1 = 28.81%
Select Growth and Income Fund (((2.291896-(.085*1.992472))/1.996161)-.0025)-1 = 6.08%
Fidelity VIP Equity-Income Portfolio (((1.866604-(.085*1.612260))/1.695627)-.0025)-1 = 1.75%
Fidelity VIP High Income Portfolio (((1.349633-(.085*1.135058))/1.430499)-.0025)-1 = (12.65%)
Select Income Fund (((1.370585-(.085*1.175442))/1.300952)-.0025)-1 = (2.58%)
Money Market Fund (((1.226503-(.085*1.049680))/1.178817)-.0025)-1 = (3.77%)
Since Inception of Underlying Portfolio
5 Years With Complete Withdrawal
Select Emerging Markets Fund N/A
Select International Equity Fund N/A
T. Rowe Price International Stock Portfolio N/A
Select Aggressive Growth Fund (((2.637252-(.075*1.405991))/1.405991)^(.200000)-.0025)-1 = 12.23%
Select Capital Appreciation Fund N/A
Select Value Opportunity Fund (((0.988757-(.075*0.572942))/0.572942)^(.200000)-.0025)-1 = 10.29%
Alliance Premier Growth Portfolio (((1.000000-(.075*0.313810))/0.313810)^(.200000)-.0025)-1 = 25.24%
Select Strategic Growth Fund N/A
Fidelity VIP Growth Portfolio (((2.339717-(.075*0.938048))/0.938048)^(.200000)-.0025)-1 = 19.08%
Select Growth and Income Fund (((2.291896-(.075*1.082071))/1.082071)^(.200000)-.0025)-1 = 15.11%
Fidelity VIP Equity-Income Portfolio (((1.866604-(.075*0.846586))/0.846586)^(.200000)-.0025)-1 = 16.07%
Fidelity VIP High Income Portfolio (((1.349633-(.075*0.949312))/0.949312)^(.200000)-.0025)-1 = 5.88%
Select Income Fund (((1.370585-(.075*1.095502))/1.095502)^(.200000)-.0025)-1 = 3.05%
Money Market Fund (((1.226503-(.075*1.019827))/1.019827)^(.200000)-.0025)-1 = 2.18%
Since Inception of Underlying Portfolio
10 Years or Since Inception With Complete Withdrawal
Select Emerging Markets Fund (((0.776018-(.085*0.626018))/1.000000)-.0025)-1 = (27.97%)
Select International Equity Fund (((1.608341-(.075*1.000003))/1.000003)^(.214202)-.0025)-1 = 9.34%
T. Rowe Price International Stock Portfolio (((1.397668-(.075*0.963761))/0.963761)^(.210253)-.0025)-1 = 6.68%
Select Aggressive Growth Fund (((2.637252-(.055*1.000290))/1.000290)^(.157124)-.0025)-1 = 15.82%
Select Capital Appreciation Fund (((1.877576-(.085*0.999512))/0.999512)^(.271780)-.0025)-1 = 16.94%
Select Value Opportunity Fund (((0.988757-(.065*0.491195))/0.491195)^(.176243)-.0025)-1 = 12.22%
Alliance Premier Growth Portfolio (((1.000000-(.055*0.250051))/0.250051)^(.153426)-.0025)-1 = 23.18%
Select Strategic Growth Fund (((0.963660-(.085*0.813660))/1.000000)-.0025)-1 = (10.80%)
Fidelity VIP Growth Portfolio ((2.339717/0.456228)^(.100000)-.0025)-1 = 17.51%
Select Growth and Income Fund (((2.291896-(.055*0.993988))/0.993988)^(.157124)-.0025)-1 = 13.35%
Fidelity VIP Equity-Income Portfolio ((1.866604/0.498345)^(0.100000)-.0025)-1 = 13.87%
Fidelity VIP High Income Portfolio ((1.349633/0.542404)^(0.100000)-.0025)-1 = 9.29%
Select Income Fund (((1.370585-(.055*1.000782))/1.000782)^(.157124)-.0025)-1 = 4.15%
Money Market Fund ((1.226503/0.816152)^(0.100000)-.0025)-1 = 3.91%
<PAGE>
SELECT REWARD - TABLE 1A Since Inception of Sub-Account
1 Year With Complete Withdrawal
Select Emerging Markets Fund N/A
Select International Equity Fund (((1.608341-(.085*1.398322))/1.400127)-.0025)-1 = 6.13%
T. Rowe Price International Stock Portfolio (((1.397668-(.085*1.214173))/1.223300)-.0025)-1 = 5.57%
Select Aggressive Growth Fund (((2.637252-(.085*2.274435))/2.418780)-.0025)-1 = 0.79%
Select Capital Appreciation Fund (((1.877576-(.085*1.626792))/1.671896)-.0025)-1 = 3.78%
Select Value Opportunity Fund N/A
Select Strategic Growth Fund N/A
Fidelity VIP Growth Portfolio (((2.339717-(.085*1.700871))/1.700871)-.0025)-1 = 28.81%
Select Growth and Income Fund (((2.291896-(.085*1.992472))/1.996161)-.0025)-1 = 6.08%
Fidelity VIP Equity-Income Portfolio (((1.866604-(.085*1.612260))/1.695627)-.0025)-1 = 1.75%
Fidelity VIP High Income Portfolio (((1.349633-(.085*1.135058))/1.430499)-.0025)-1 = (12.65%)
Select Income Fund (((1.370585-(.085*1.175442))/1.300952)-.0025)-1 = (2.58%)
Money Market Fund (((1.226503-(.085*1.049680))/1.178817)-.0025)-1 = (3.77%)
Since Inception of Sub-Account
5 Years With Complete Withdrawal
Select Emerging Markets Fund N/A
Select International Equity Fund N/A
T. Rowe Price International Stock Portfolio N/A
Select Aggressive Growth Fund (((2.637252-(.075*1.405991))/1.405991)^(.200000)-.0025)-1 = 12.23%
Select Capital Appreciation Fund N/A
Select Value Opportunity Fund N/A
Select Strategic Growth Fund N/A
Fidelity VIP Growth Portfolio N/A
Select Growth and Income Fund (((2.291896-(.075*1.082071))/1.082071)^(.200000)-.0025)-1 = 15.11%
Fidelity VIP Equity-Income Portfolio N/A
Fidelity VIP High Income Portfolio N/A
Select Income Fund (((1.370585-(.075*1.095502))/1.095502)^(.200000)-.0025)-1 = 3.05%
Money Market Fund (((1.226503-(.075*1.019827))/1.019827)^(.200000)-.0025)-1 = 2.18%
Since Inception of Sub-Account
10 Years or Since Inception With Complete Withdrawal
Select Emerging Markets Fund (((0.776018-(.085*0.626018))/1.000000)-.0025)-1 = (27.97%)
Select International Equity Fund (((1.608341-(.075*1.000000))/1.000000)^(.214470)-.0025)-1 = 9.34%
T. Rowe Price International Stock Portfolio (((1.397668-(.085*1.000000))/1.000000)^(.272636)-.0025)-1 = 7.44%
Select Aggressive Growth Fund (((2.637252-(.055*1.000000))/1.000000)^(.158451)-.0025)-1 = 15.96%
Select Capital Appreciation Fund (((1.877576-(.085*1.000000))/1.000000)^(.272385)-.0025)-1 = 16.97%
Select Value Opportunity Fund (((0.988757-(.085*0.838757))/1.000000)-.0025)-1 = (8.50%)
Select Strategic Growth Fund (((0.963660-(.085*0.813660))/1.000000)-.0025)-1 = (10.80%)
Fidelity VIP Growth Portfolio (((2.339717-(.085*1.000000))/1.000000)^(.272636)-.0025)-1 = 24.54%
Select Growth and Income Fund (((2.291896-(.055*1.000000))/1.000000)^(.158451)-.0025)-1 = 13.35%
Fidelity VIP Equity-Income Portfolio (((1.866604-(.085*1.000000))/1.000000)^(.272636)-.0025)-1 = 16.79%
Fidelity VIP High Income Portfolio (((1.349633-(.085*1.000000))/1.000000)^(.272636)-.0025)-1 = 6.35%
Select Income Fund (((1.370585-(.055*1.000000))/1.000000)^(.158451)-.0025)-1 = 4.19%
Money Market Fund (((1.226503-(.055*1.000000))/1.000000)^(.160440)-.0025)-1 = 2.32%
</TABLE>
<PAGE>
PARTICIPATION AGREEMENT
AMONG
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY,
ALLMERICA INVESTMENTS, INC.,
ALLIANCE CAPITAL MANAGEMENT L.P.
AND
ALLIANCE FUND DISTRIBUTORS, INC.
DATED AS OF
SEPTEMBER 15, 1999
<PAGE>
PARTICIPATION AGREEMENT
THIS AGREEMENT, made and entered into as of the 15th day of
September, 1999 ("Agreement"), by and among Allmerica Financial Life
Insurance and Annuity Company, a Delaware life insurance company ("Insurer")
(on behalf of itself and its "Separate Account," defined below); Allmerica
Investments, Inc., a Massachusetts corporation ("Contracts Distributor"), the
principal underwriter with respect to the Contracts referred to below;
Alliance Capital Management L.P., a Delaware limited partnership ("Adviser"),
the investment adviser of the Fund referred to below; and Alliance Fund
Distributors, Inc., a Delaware corporation ("Distributor"), the Fund's
principal underwriter (collectively, the "Parties"),
WITNESSETH THAT:
WHEREAS Insurer, the Distributor, and Alliance Variable Products Series
Fund, Inc. (the "Fund") desire that Class A shares ("shares") of the Fund's
Premiere Growth Portfolio (the "Portfolio" or "Portfolios"; reference herein to
the "Fund" includes reference to the Portfolios to the extent the context
requires) be made available by Distributor to serve as underlying investment
media for those combination fixed and variable annuity contracts of Insurer that
are the subject of Insurer's Form N-4 registration statement filed with the
Securities and Exchange Commission (the "SEC"), File Nos. 333-78245 and 811-6632
(the "Contracts"), to be offered through Contracts Distributor and other
registered broker-dealer firms as agreed to by Insurer and Contracts
Distributor; and
1
<PAGE>
WHEREAS the Contracts provide for the allocation of net amounts
received by Insurer to separate series (the "Divisions"; reference herein to
the "Separate Account" includes reference to each Division to the extent the
context requires) of the Separate Account for investment in the shares of
corresponding Portfolios of the Fund that are made available through the
Separate Account to act as underlying investment media,
NOW, THEREFORE, in consideration of the mutual benefits and promises
contained herein, the Fund and Distributor will make shares of the Portfolios
available to Insurer for this purpose at net asset value and with no sales
charges, all subject to the following provisions:
SECTION 1. ADDITIONAL PORTFOLIOS
The Fund has and may, from time to time, add additional Portfolios,
which will become subject to this Agreement, if, upon the written consent of
each of the Parties hereto, they are made available as investment media for the
Contracts.
SECTION 2. PROCESSING TRANSACTIONS
2.1 TIMELY PRICING AND ORDERS.
The Adviser or its designated agent will provide closing net asset
value, dividend and capital gain information for each Portfolio to Insurer at
the close of trading on each day (a "Business Day") on which (a) the New York
Stock Exchange is open for regular trading, (b) the Fund calculates the
Portfolio's net asset value and (c) Insurer is open for business. The Fund or
its
2
<PAGE>
designated agent will use its best efforts to provide this information by
6:00 p.m., Eastern time. Insurer will use these data to calculate unit values,
which in turn will be used to process transactions that receive that same
Business Day's Separate Account Division's unit values. Such Separate Account
processing will be done the same evening, and corresponding orders with respect
to Fund shares will be placed the morning of the following Business Day. Insurer
will use its best efforts to place such orders with the Fund by 10:00 a.m.,
Eastern time.
2.2 TIMELY PAYMENTS.
Insurer will transmit orders for purchases and redemptions of Fund
shares to Distributor, and will wire payment for net purchases to a custodial
account designated by the Fund on the day the order for Fund shares is placed,
to the extent practicable. Payment for net redemptions will be wired by the Fund
to an account designated by Insurer on the same day as the order is placed, to
the extent practicable, and in any event be made within six calendar days after
the date the order is placed in order to enable Insurer to pay redemption
proceeds within the time specified in Section 22(e) of the Investment Company
Act of 1940, as amended (the "1940 Act").
2.3 REDEMPTION IN KIND.
The Fund reserves the right to pay any portion of a redemption in kind
of portfolio securities, if the Fund's board of directors (the "Board of
Directors") determines that it would be detrimental to the best interests of
shareholders to make a redemption wholly in cash.
3
<PAGE>
2.4 APPLICABLE PRICE.
The Parties agree that Portfolio share purchase and redemption orders
resulting from Contract owner purchase payments, surrenders, partial
withdrawals, routine withdrawals of charges, or other transactions under
Contracts will be executed at the net asset values as determined as of the close
of regular trading on the New York Stock Exchange on the Business Day that
Insurer receives such orders and processes such transactions, which, Insurer
agrees shall occur not earlier than the Business Day prior to Distributor's
receipt of the corresponding orders for purchases and redemptions of Portfolio
shares. For the purposes of this section, Insurer shall be deemed to be the
agent of the Fund for receipt of such orders from holders or applicants of
contracts, and receipt by Insurer shall constitute receipt by the Fund. All
other purchases and redemptions of Portfolio shares by Insurer, will be effected
at the net asset values next computed after receipt by Distributor of the order
therefor, and such orders will be irrevocable. Insurer hereby elects to reinvest
all dividends and capital gains distributions in additional shares of the
corresponding Portfolio at the record-date net asset values until Insurer
otherwise notifies the Fund in writing, it being agreed by the Parties that the
record date and the payment date with respect to any dividend or distribution
will be the same Business Day.
SECTION 3. COSTS AND EXPENSES
3.1 GENERAL.
Except as otherwise specifically provided herein, each Party will bear
all expenses incident to its performance under this Agreement.
4
<PAGE>
3.2 REGISTRATION.
The Fund will bear the cost of its registering as a management
investment company under the 1940 Act and registering its shares under the
Securities Act of 1933, as amended (the "1933 Act"), and keeping such
registrations current and effective; including, without limitation, the
preparation of and filing with the SEC of Forms N-SAR and Rule 24f-2 Notices
respecting the Fund and its shares and payment of all applicable registration or
filing fees with respect to any of the foregoing. Insurer will bear the cost of
registering the Separate Account as a unit investment trust under the 1940 Act
and registering units of interest under the Contracts under the 1933 Act and
keeping such registrations current and effective; including, without limitation,
the preparation and filing with the SEC of Forms N-SAR and Rule 24f-2 Notices
respecting the Separate Account and its units of interest and payment of all
applicable registration or filing fees with respect to any of the foregoing.
3.3 OTHER (NON-SALES-RELATED) EXPENSES.
The Fund will bear the costs of preparing, filing with the SEC and
setting for printing the Fund's prospectus, statement of additional information
and any amendments or supplements thereto (collectively, the "Fund Prospectus"),
periodic reports to shareholders, Fund proxy material and other shareholder
communications and any related requests for voting instructions from
Participants (as defined below). Insurer will bear the costs of preparing,
filing with the SEC and setting for printing, the Separate Account's prospectus,
statement of additional information and any amendments or supplements thereto
(collectively, the "Separate Account Prospectus"), any periodic reports to
owners, annuitants or participants under the Contracts (collectively,
"Participants"), and other Participant communications. The Fund and Insurer each
will bear the costs of printing in quantity
5
<PAGE>
and delivering to existing Participants the documents as to which it bears
the cost of preparation as set forth above in this Section 3.3, it being
understood that reasonable cost allocations will be made in cases where any
such Fund and Insurer documents are printed or mailed on a combined or
coordinated basis. If REQUESTED by Insurer, the Fund will provide annual
Prospectus text to Insurer on diskette for printing and binding with the
Separate Account Prospectus.
3.4 OTHER SALES-RELATED EXPENSES.
Expenses of distributing the Portfolio's shares and the Contracts will
be paid by Contracts Distributor and other parties, as they shall determine by
separate agreement.
3.5 PARTIES TO COOPERATE.
The Adviser, Insurer, Contracts Distributor, and Distributor each
agrees to cooperate with the others, as applicable, in arranging to print, mail
and/or deliver combined or coordinated prospectuses or other materials of the
Fund and Separate Account.
SECTION 4. LEGAL COMPLIANCE
4.1 TAX LAWS.
(a) The Adviser will use its best efforts to qualify and to maintain
qualification of each Portfolio as a regulated investment company ("RIC") under
Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"), and
the Adviser or Distributor will notify Insurer immediately upon having a
reasonable basis for believing that a Portfolio has ceased to so qualify or that
it might not so qualify in the future.
6
<PAGE>
(b) Insurer represents that it believes, in good faith, that the
Contracts will be treated as annuity contracts under applicable provisions of
the Code and that it will make every effort to maintain such treatment. Insurer
will notify the Fund and Distributor immediately upon having a reasonable basis
for believing that any of the Contracts have ceased to be so treated or that
they might not be so treated in the future.
(c) The Fund will use its best efforts to comply and to maintain each
Portfolio's compliance with the diversification requirements set forth in
Section 817(h) of the Code and Section 1.817-5(b) of the regulations under the
Code, and the Fund, Adviser or Distributor will notify Insurer immediately upon
having a reasonable basis for believing that a Portfolio has ceased to so comply
or that a Portfolio might not so comply in the future.
(d) Insurer represents that it believes, in good faith, that the
Separate Account is a "segregated asset account" and that interests in the
Separate Account are offered exclusively through the purchase of or transfer
into a "variable contract," within the meaning of such terms under Section
817(h) of the Code and the regulations thereunder. Insurer will make every
effort to continue to meet such definitional requirements, and it will notify
the Fund and Distributor immediately upon having a reasonable basis for
believing that such requirements have ceased to be met or that they might not be
met in the future.
(e) The Adviser will manage the Fund as a RIC in compliance with
Subchapter M of the Code and will use its best efforts to manage to be in
compliance with Section 817(h) of the Code
7
<PAGE>
and regulations thereunder. The Fund has adopted and will maintain procedures
for ensuring that the Fund is managed in compliance with Subchapter M and
Section 817(h) and regulations thereunder.
(f) Should the Distributor or Adviser become aware of a failure of
Fund, or any of its Portfolios, to be in compliance with Subchapter M of the
Code or Section 817(h) of the Code and regulations thereunder, they represent
and agree that they will immediately notify Insurer of such in writing.
4.2 INSURANCE AND CERTAIN OTHER LAWS.
(a) The Adviser will use its best efforts to cause the Fund to comply
with any applicable state insurance laws or regulations, to the extent
specifically requested in writing by Insurer. If it cannot comply, it will so
notify Insurer in writing.
(b) Insurer represents and warrants that (i) it is an insurance company
duly organized, validly existing and in good standing under the laws of the
State of Delaware and has full corporate power, authority and legal right to
execute, deliver and perform its duties and comply with its obligations under
this Agreement, (ii) it has legally and validly established and maintains the
Separate Account as a segregated asset account under Delaware Law, and (iii) the
Contracts comply in all material respects with all other applicable federal and
state laws and regulations.
(c) Insurer and Contracts Distributor represent and warrant that
Contracts Distributor is a business corporation duly organized, validly
existing, and in good standing under the laws of the
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<PAGE>
State of Massachusetts and has full corporate power, authority and legal
right to execute, deliver, and perform its duties and comply with its
obligations under this Agreement.
(d) Distributor represents and warrants that it is a business
corporation duly organized, validly existing, and in good standing under the
laws of the State of Delaware and has full corporate power, authority and legal
right to execute, deliver, and perform its duties and comply with its
obligations under this Agreement.
(e) Distributor represents and warrants that the Fund is a corporation
duly organized, validly existing, and in good standing under the laws of the
State of Maryland and has full power, authority, and legal right to execute,
deliver, and perform its duties and comply with its obligations under this
Agreement.
(f) Adviser represents and warrants that it is a limited partnership,
duly organized, validly existing and in good standing under the laws of the
State of Delaware and has full power, authority, and legal right to execute,
deliver, and perform its duties and comply with its obligations under this
Agreement.
4.3 SECURITIES LAWS.
(a) Insurer represents and warrants that (i) interests in the Separate
Account pursuant to the Contracts will be registered under the 1933 Act to the
extent required by the 1933 Act and the Contracts will be duly authorized for
issuance and sold in compliance with [State] law, (ii) the Separate Account is
and will remain registered under the 1940 Act to the extent required by the 1940
Act, (iii) the Separate Account does and will comply in all material respects
with the requirements of
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<PAGE>
the 1940 Act and the rules thereunder, (iv) the Separate Account's 1933 Act
registration statement relating to the Contracts, together with any
amendments thereto, will, at all times comply in all material respects with
the requirements of the 1933 Act and the rules thereunder, and (v) the
Separate Account Prospectus will at all times comply in all material respects
with the requirements of the 1933 Act and the rules thereunder.
(b) The Adviser and Distributor represent and warrant that (i) Fund
shares sold pursuant to this Agreement will be registered under the 1933 Act to
the extent required by the 1933 Act and duly authorized for issuance and sold in
compliance with Maryland law, (ii) the Fund is and will remain registered under
the 1940 Act to the extent required by the 1940 Act, (iii) the Fund will amend
the registration statement for its shares under the 1933 Act and itself under
the 1940 Act from time to time as required in order to effect the continuous
offering of its shares, (iv) the Fund does and will comply in all material
respects with the requirements of the 1940 Act and the rules thereunder, (v) the
Fund's 1933 Act registration statement, together with any amendments thereto,
will at all times comply in all material respects with the requirements of the
1933 Act and rules thereunder, and (vi) the Fund Prospectus will at all times
comply in all material respects with the requirements of the 1933 Act and the
rules thereunder.
(c) The Fund will register and qualify its shares for sale in
accordance with the laws of any state or other jurisdiction only if and to the
extent reasonably deemed advisable by the Fund, Insurer or any other life
insurance company utilizing the Fund.
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<PAGE>
(d) Distributor and Contracts Distributor each represents and warrants
that it is registered as a broker-dealer with the SEC under the Securities
Exchange Act of 1934, as amended, and is a member in good standing of the
National Association of Securities Dealers Inc. (the "NASD").
4.4 NOTICE OF CERTAIN PROCEEDINGS AND OTHER CIRCUMSTANCES.
(a) Distributor or the Fund shall immediately notify Insurer of (i) the
issuance by any court or regulatory body of any stop order, cease and desist
order, or other similar order with respect to the Fund's registration statement
under the 1933 Act or the Fund Prospectus, (ii) any request by the SEC for any
amendment to such registration statement or Fund Prospectus, (iii) the
initiation of any proceedings for that purpose or for any other purpose relating
to the registration or offering of the Fund's shares, or (iv) any other action
or circumstances that may prevent the lawful offer or sale of Fund shares in any
state or jurisdiction, including, without limitation, any circumstances in which
(x) the Fund's shares are not registered and, in all material respects, issued
and sold in accordance with applicable state and federal law or (y) such law
precludes the use of such shares as an underlying investment medium of the
Contracts issued or to be issued by Insurer. Distributor and the Fund will make
every reasonable effort to prevent the issuance of any such stop order, cease
and desist order or similar order and, if any such order is issued, to obtain
the lifting thereof at the earliest possible time.
(b) Insurer and Contracts Distributor shall immediately notify the Fund
of (i) the issuance by any court or regulatory body of any stop order, cease and
desist order or similar order with respect to the Separate Account's
registration statement under the 1933 Act relating to the Contracts or the
Separate Account Prospectus, (ii) any request by the SEC for any amendment to
such registration
11
<PAGE>
statement or Separate Account Prospectus, (iii) the initiation of any
proceedings for that purpose or for any other purpose relating to the
registration or offering of the Separate Account interests pursuant to the
Contracts, or (iv) any other action or circumstances that may prevent the
lawful offer or sale of said interests in any state or jurisdiction,
including, without limitation, any circumstances in which said interests are
not registered and, in all material respects, issued and sold in accordance
with applicable state and federal law. Insurer and Contracts Distributor will
make every reasonable effort to prevent the issuance of any such stop order,
cease and desist order or similar order and, if any such order is issued, to
obtain the lifting thereof at the earliest possible time.
4.5 INSURER TO PROVIDE DOCUMENTS.
Upon request, Insurer will provide the Fund and the Distributor one
complete copy of SEC registration statements, Separate Account Prospectuses,
reports, any preliminary and final voting instruction solicitation material,
applications for exemptions, requests for no-action letters, and amendments to
any of the above, that relate to the Separate Account or the Contracts,
contemporaneously with the filing of such document with the SEC or other
regulatory authorities.
4.6 FUND TO PROVIDE DOCUMENTS.
Upon request, the Fund will provide to Insurer one complete copy of SEC
registration statements, Fund Prospectuses, reports, any preliminary and final
proxy material, applications for exemptions, requests for no-action letters, and
all amendments to any of the above, that relate to the Fund or its shares,
contemporaneously with the filing of such document with the SEC or other
regulatory authorities.
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<PAGE>
SECTION 5. MIXED AND SHARED FUNDING
5.1 General.
The Fund has obtained an order exempting it from certain provisions of
the 1940 Act and rules thereunder so that the Fund is available for investment
by certain other entities, including, without limitation, separate accounts
funding variable life insurance policies and separate accounts of insurance
companies unaffiliated with Insurer ("Mixed and Shared Funding Order"). The
Parties recognize that the SEC has imposed terms and conditions for such orders
that are substantially identical to many of the provisions of this Section 5.
5.2 DISINTERESTED DIRECTORS.
The Fund agrees that its Board of Directors shall at all times consist
of directors a majority of whom (the "Disinterested Directors") are not
interested persons of Adviser or Distributor within the meaning of Section
2(a)(19) of the 1940 Act.
5.3 MONITORING FOR MATERIAL IRRECONCILABLE CONFLICTS.
The Fund agrees that its Board of Directors will monitor for the
existence of any material irreconcilable conflict between the interests of the
participants in all separate accounts of life insurance companies utilizing the
Fund, including the Separate Account. Insurer agrees to inform the Board of
Directors of the Fund of the existence of or any potential for any such material
irreconcilable conflict of which it is aware. The concept of a "material
irreconcilable conflict" is not defined by the 1940 Act or the rules thereunder,
but the Parties recognize that such a conflict may arise for a variety of
reasons, including, without limitation:
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<PAGE>
(a) an action by any state insurance or other regulatory
authority;
(b) a change in applicable federal or state insurance, tax or
securities laws or regulations, or a public ruling, private letter ruling,
no-action or interpretative letter, or any similar action by insurance, tax or
securities regulatory authorities;
(c) an administrative or judicial decision in any relevant
proceeding;
(d) the manner in which the investments of any Portfolio are
being managed;
(e) a difference in voting instructions given by variable annuity
contract and variable life insurance contract participants or by participants
of different life insurance companies utilizing the Fund; or
(f) a decision by a life insurance company utilizing the Fund to
disregard the voting instructions of participants.
Insurer will assist the Board of Directors in carrying out its
responsibilities by providing the Board of Directors with all information
reasonably necessary for the Board of Directors to consider any issue raised,
including information as to a decision by Insurer to disregard voting
instructions of Participants.
5.4 CONFLICT REMEDIES.
(a) It is agreed that if it is determined by a majority of the members
of the Board of Directors or a majority of the Disinterested Directors that a
material irreconcilable conflict exists, Insurer and the other life insurance
companies utilizing the Fund will, at their own expense and to the
14
<PAGE>
extent reasonably practicable (as determined by a majority of the
Disinterested Directors), take whatever steps are necessary to remedy or
eliminate the material irreconcilable conflict, which steps may include, but
are not limited to:
(i) withdrawing the assets allocable to some or all of the
separate accounts from the Fund or any Portfolio and
reinvesting such assets in a different investment medium,
including another Portfolio of the Fund, or submitting the
question whether such segregation should be implemented to
a vote of all affected participants and, as appropriate,
segregating the assets of any particular group (e.g.,
annuity contract owners or participants, life insurance
contract owners or all contract owners and participants of
one or more life insurance companies utilizing the Fund)
that votes in favor of such segregation, or offering
to the affected contract owners or participants the option
of making such a change; and
(ii) establishing a new registered investment company of the
type defined as a "Management Company" in Section 4(3) of
the 1940 Act or a new separate account that is operated as
a Management Company.
(b) If the material irreconcilable conflict arises because of Insurer's
decision to disregard Participant voting instructions and that decision
represents a minority position or would preclude a majority vote, Insurer may be
required, at the Fund's election, to withdraw the Separate Account's investment
in the Fund. No charge or penalty will be imposed as a result of such
withdrawal. Any such withdrawal must take place within six months after the Fund
gives notice to Insurer that this
15
<PAGE>
provision is being implemented, and until such withdrawal Distributor and the
Fund shall continue to accept and implement orders by Insurer for the
purchase and redemption of shares of the Fund.
(c) If a material irreconcilable conflict arises because a particular
state insurance regulator's decision applicable to Insurer conflicts with the
majority of other state regulators, then Insurer will withdraw the Separate
Account's investment in the Fund within six months after the Fund's Board of
Directors informs Insurer that it has determined that such decision has created
a material irreconcilable conflict, and until such withdrawal Distributor and
Fund shall continue to accept and implement orders by Insurer for the purchase
and redemption of shares of the Fund.
(d) Insurer agrees that any remedial action taken by it in resolving
any material irreconcilable conflict will be carried out at its expense and with
a view only to the interests of Participants.
(e) For purposes hereof, a majority of the Disinterested Directors will
determine whether or not any proposed action adequately remedies any material
irreconcilable conflict. In no event, however, will the Fund or Distributor be
required to establish a new funding medium for any Contracts. Insurer will not
be required by the terms hereof to establish a new funding medium for any
Contracts if an offer to do so has been declined by vote of a majority of
Participants materially adversely affected by the material irreconcilable
conflict.
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<PAGE>
5.5 NOTICE TO INSURER.
The Fund will promptly make known in writing to Insurer the Board of
Directors' determination of the existence of a material irreconcilable conflict,
a description of the facts that give rise to such conflict and the implications
of such conflict.
5.6 INFORMATION REQUESTED BY BOARD OF DIRECTORS.
Insurer and the Fund will at least annually submit to the Board of
Directors of the Fund such reports, materials or data as the Board of Directors
may reasonably request so that the Board of Directors may fully carry out the
obligations imposed upon it by the provisions hereof, and said reports,
materials and data will be submitted at any reasonable time deemed appropriate
by the Board of Directors. All reports received by the Board of Directors of
potential or existing conflicts, and all Board of Directors actions with regard
to determining the existence of a conflict, notifying life insurance companies
utilizing the Fund of a conflict, and determining whether any proposed action
adequately remedies a conflict, will be properly recorded in the minutes of the
Board of Directors or other appropriate records, and such minutes or other
records will be made available to the SEC upon request.
5.7 COMPLIANCE WITH SEC RULES.
If, at any time during which the Fund is serving an investment medium
for variable life insurance policies, 1940 Act Rules 6e-3(T) or, if applicable,
6e-2 are amended or Rule 6e-3 is adopted to provide exemptive relief with
respect to mixed and shared funding, the Parties agree that they will comply
with the terms and conditions thereof and that the terms of this Section 5 shall
be
17
<PAGE>
deemed modified if and only to the extent required in order also to comply
with the terms and conditions of such exemptive relief that is afforded by
any of said rules that are applicable.
SECTION 6. TERMINATION
6.1 EVENTS OF TERMINATION.
Subject to Section 6.4 below, this Agreement will terminate as to a
Portfolio:
(a) at the option of Insurer or Distributor upon at least six
months advance written notice to the other Parties, or
(b) at the option of the Fund upon (i) at least sixty days advance
written notice to the other parties, and (ii) approval by (x) a majority of the
disinterested Directors upon a finding that a continuation of this Contract is
contrary to the best interests of the Fund, or (y) a majority vote of the shares
of the affected Portfolio in the corresponding Division of the Separate Account
(pursuant to the procedures set forth in Section 10 of this Agreement for voting
Trust shares in accordance with Participant instructions).
(c) at the option of the Fund upon institution of formal proceedings
against Insurer or Contracts Distributor by the NASD, the SEC, any state
insurance regulator or any other regulatory body regarding Insurer's obligations
under this Agreement or related to the sale of the Contracts, the operation of
the Separate Account, or the purchase of the Fund shares, if, in each case, the
Fund reasonably determines that such proceedings, or the facts on which such
proceedings would be based,
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<PAGE>
have a material likelihood of imposing material adverse consequences on the
Portfolio to be terminated; or
(d) at the option of Insurer upon institution of formal proceedings
against the Fund, Adviser, or Distributor by the NASD, the SEC, or any state
insurance regulator or any other regulatory body regarding the Fund's,
Adviser's or Distributor's obligations under this Agreement or related to the
operation or management of the Fund or the purchase of Fund shares, if, in
each case, Insurer reasonably determines that such proceedings, or the facts
on which such proceedings would be based, have a material likelihood of
imposing material adverse consequences on Insurer, Contracts Distributor or
the Division corresponding to the Portfolio to be terminated; or
(e) at the option of any Party in the event that (i) the Portfolio's
shares are not registered and, in all material respects, issued and sold in
accordance with any applicable state and federal law or (ii) such law
precludes the use of such shares as an underlying investment medium of the
Contracts issued or to be issued by Insurer; or
(f) upon termination of the corresponding Division's investment in the
Portfolio pursuant to Section 5 hereof; or
(g) at the option of Insurer if the Portfolio ceases to qualify as a
RIC under Subchapter M of the Code or under successor or similar provisions; or
(h) at the option of Insurer if the Portfolio fails to comply with
Section 817(h) of the Code or with successor or similar provisions; or
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<PAGE>
(i) at the option of Insurer if Insurer reasonably believes that any
change in a Fund's investment adviser or investment practices will materially
increase the risks incurred by Insurer.
6.2 FUNDS TO REMAIN AVAILABLE.
Except (i) as necessary to implement Participant-initiated
transactions, (ii) as required by state insurance laws or regulations, (iii) as
required pursuant to Section 5 of this Agreement, or (iv) with respect to any
Portfolio as to which this Agreement has terminated, Insurer shall not (x)
redeem Fund shares attributable to the Contracts, or (y) prevent Participants
from allocating payments to or transferring amounts from a Portfolio that was
otherwise available under the Contracts, until, in either case, 90 calendar days
after Insurer shall have notified the Fund or Distributor of its intention to do
so.
6.3 SURVIVAL OF WARRANTIES AND INDEMNIFICATIONS.
All warranties and indemnifications will survive the termination of
this Agreement.
6.4 CONTINUANCE OF AGREEMENT FOR CERTAIN PURPOSES.
Notwithstanding any termination of this Agreement, the Distributor
shall continue to make available shares of the Portfolios pursuant to the terms
and conditions of this Agreement, for all Contracts in effect on the effective
date of termination of this Agreement (the "Existing Contracts"), except as
otherwise provided under Section 5 of this Agreement. Specifically, and without
limitation, the Distributor shall facilitate the sale and purchase of shares of
the Portfolios as necessary in order to process premium payments, surrenders and
other withdrawals, and transfers or reallocations of values under Existing
Contracts.
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<PAGE>
SECTION 7. PARTIES TO COOPERATE RESPECTING TERMINATION
The other Parties hereto agree to cooperate with and give reasonable
assistance to Insurer in taking all necessary and appropriate steps for the
purpose of ensuring that the Separate Account owns no shares of a Portfolio
after the Final Termination Date with respect thereto.
SECTION 8. ASSIGNMENT
This Agreement may not be assigned by any Party, except with the
written consent of each other Party.
SECTION 9. NOTICES
Notices and communications required or permitted by Section 2 hereof
will be given by means mutually acceptable to the Parties concerned. Each other
notice or communication required or permitted by this Agreement will be given to
the following persons at the following addresses and facsimile numbers, or such
other persons, addresses or facsimile numbers as the Party receiving such
notices or communications may subsequently direct in writing:
Allmerica Financial Life Insurance and Annuity Company
440 Lincoln Street
Worcester, MA 01653
Attention: Richard M. Reilly, President
Allmerica Investments, Inc.
440 Lincoln Street
Worcester, MA 01653
Attention: Stephen Parker, President
Alliance Fund Distributors, Inc.
21
<PAGE>
1345 Avenue of the Americas
New York NY 10105
Attn.: Edmund P. Bergan
FAX: (212) 969-2290
Alliance Capital Management L.P.
1345 Avenue of the Americas
New York NY 10105
Attn: Edmund P. Bergan
FAX: (212) 969-2290
SECTION 10. VOTING PROCEDURES
Subject to the cost allocation procedures set forth in Section 3
hereof, Insurer will distribute all proxy material furnished by the Fund to
Participants and will vote Fund shares in accordance with instructions received
from Participants. Insurer will vote Fund shares that are (a) not attributable
to Participants or (b) attributable to Participants, but for which no
instructions have been received, in the same proportion as Fund shares for which
said instructions have been received from Participants. Insurer agrees that it
will disregard Participant voting instructions only to the extent it would be
permitted to do so pursuant to Rule 6e-3 (T)(b)(15)(iii) under the 1940 Act if
the Contracts were variable life insurance policies subject to that rule. Other
participating life insurance companies utilizing the Fund will be responsible
for calculating voting privileges in a manner consistent with that of Insurer,
as prescribed by this Section 10.
22
<PAGE>
SECTION 11. FOREIGN TAX CREDITS
The Adviser agrees to consult in advance with Insurer concerning any
decision to elect or not to elect pursuant to Section 853 of the Code to pass
through the benefit of any foreign tax credits to the Fund's shareholders.
SECTION 12. INDEMNIFICATION
12.1 OF FUND, DISTRIBUTOR AND ADVISER BY INSURER.
(a) Except to the extent provided in Sections 12.1(b) and 12.1(c),
below, Insurer agrees to indemnify and hold harmless the Fund, Distributor and
Adviser, each of their directors and officers, and each person, if any, who
controls the Fund, Distributor or Adviser within the meaning of Section 15 of
the 1933 Act (collectively, the "Indemnified Parties" for purposes of this
Section 12. 1) against any and all losses, claims, damages, liabilities
(including amounts paid in settlement with the written consent of Insurer) or
actions in respect thereof (including, to the extent reasonable, legal and other
expenses), to which the Indemnified Parties may become subject under any
statute, regulation, at common law or otherwise, insofar as such losses, claims,
damages, liabilities or actions are related to the sale, acquisition, or holding
of the Fund's shares and:
(i) arise out of or are based upon any untrue statement or
alleged untrue statement of any material fact contained in
the Separate Account's 1933 Act registration statement, the
Separate Account Prospectus, the Contracts or, to the
extent prepared by Insurer or Contracts Distributor, sales
literature or advertising for the Contracts (or any
amendment or supplement to any of the foregoing), or arise
out of or are
23
<PAGE>
based upon the omission or the alleged omission to state
therein a material fact required to be stated therein or
necessary to make the statements therein not misleading;
provided that this agreement to indemnify shall not apply
as to any Indemnified Party if such statement or omission
or such alleged statement or omission was made in reliance
upon and in conformity with information furnished to
Insurer or Contracts Distributor by or on behalf of the
Fund, Distributor or Adviser for use in the Separate
Account's 1933 Act registration statement, the Separate
Account Prospectus, the Contracts, or sales literature or
advertising (or any amendment or supplement to any of the
foregoing); or
(ii) arise out of or as a result of any other statements or
representations (other than statements or representations
contained in the Fund's 1933 Act registration statement,
Fund Prospectus, sales literature or advertising of the
Fund, or any amendment or supplement to any of the
foregoing, not supplied for use therein by or on behalf of
Insurer or Contracts Distributor) or the negligent, illegal
or fraudulent conduct of Insurer or Contracts Distributor
or persons under their control (including, without
limitation, their employees and "Associated Persons," as
that term is defined in paragraph (m) of Article I of the
NASD's By-Laws), in connection with the sale or
distribution of the Contracts or Fund shares; or
(iii) arise out of or are based upon any untrue statement or
alleged untrue statement of any material fact contained in
the Fund's 1933 Act registration statement, Fund
Prospectus, sales literature or advertising of the Fund, or
any amendment or
24
<PAGE>
supplement to any of the foregoing, or the omission or
alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements
therein not misleading if such a statement or omission was
made in reliance upon and in conformity with information
furnished to the Fund, Adviser or Distributor by or on
behalf of Insurer or Contracts Distributor for use in the
Fund's 1933 Act registration statement, Fund Prospectus,
sales literature or advertising of the Fund, or any
amendment or supplement to any of the foregoing; or
(iv) arise as a result of any failure by Insurer or Contracts
Distributor to perform the obligations, provide the services
and furnish the materials required of them under the terms of
this Agreement.
(b) Insurer shall not be liable under this Section 12.1 with respect to
any losses, claims, damages, liabilities or actions to which an Indemnified
Party would otherwise be subject by reason of willful misfeasance, bad faith, or
gross negligence in the performance by that Indemnified Party of its duties or
by reason of that Indemnified Party's reckless disregard of obligations or
duties under this Agreement or to Distributor or to the Fund.
(c) Insurer shall not be liable under this Section 12.1 with respect to
any action against an Indemnified Party unless the Fund, Distributor or Adviser
shall have notified Insurer in writing within a reasonable time after the
summons or other first legal process giving information of the nature of the
action shall have been served upon such Indemnified Party (or after such
Indemnified Party shall have received notice of such service on any designated
agent), but failure to notify Insurer
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<PAGE>
of any such action shall not relieve Insurer from any liability which it may
have to the Indemnified Party against whom such action is brought otherwise
than on account of this Section 12. 1. In case any such action is brought
against an Indemnified Party, Insurer shall be entitled to participate, at
its own expense, in the defense of such action. Insurer also shall be
entitled to assume the defense thereof, with counsel approved by the
Indemnified Party named in the action, which approval shall not be
unreasonably withheld. After notice from Insurer to such Indemnified Party of
Insurer's election to assume the defense thereof, the Indemnified Party will
cooperate fully with Insurer and shall bear the fees and expenses of any
additional counsel retained by it, and Insurer will not be liable to such
Indemnified Party under this Agreement for any legal or other expenses
subsequently incurred by such Indemnified Party independently in connection
with the defense thereof, other than reasonable costs of investigation.
12.2 INDEMNIFICATION OF INSURER AND CONTRACTS DISTRIBUTOR BY
ADVISER.
(a) Except to the extent provided in Sections 12.2(d) and 12.2(e),
below, Adviser agrees to indemnify and hold harmless Insurer and Contracts
Distributor, each of their directors and officers, and each person, if any, who
controls Insurer or Contracts Distributor within the meaning of Section 15 of
the 1933 Act (collectively, the "Indemnified Parties" for purposes of this
Section 12.2) against any and all losses, claims, damages, liabilities
(including amounts paid in settlement with the written consent of Adviser) or
actions in respect thereof (including, to the extent reasonable, legal and other
expenses) to which the Indemnified Parties may become subject under any statute,
at common law or otherwise, insofar as such losses, claims, damages, liabilities
or actions are related to the sale, acquisition, or holding of the Fund's shares
and:
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<PAGE>
(i) arise out of or are based upon any untrue statement or
alleged untrue statement of any material fact contained in
the Fund's 1933 Act registration statement, Fund
Prospectus, sales literature or advertising of the Fund or,
to the extent not prepared by Insurer or Contracts
Distributor, sales literature or advertising for the
Contracts (or any amendment or supplement to any of the
foregoing), or arise out of or are based upon the omission
or the alleged omission to state therein a material fact
required to be stated therein or necessary to make the
statements therein not misleading; provided that this
agreement to indemnify shall not apply as to any
Indemnified Party if such statement or omission or such
alleged statement or omission was made in reliance upon and
in conformity with information furnished to Distributor,
Adviser or the Fund by or on behalf of Insurer or Contracts
Distributor for use in the Fund's 1933 Act registration
statement, Fund Prospectus, or in sales literature or
advertising (or any amendment or supplement to any of the
foregoing); or
(ii) arise out of or as a result of any other statements or
representations (other than statements or representations
contained in the Separate Account's 1933 Act registration
statement, Separate Account Prospectus, sales literature or
advertising for the Contracts, or any amendment or
supplement to any of the foregoing, not supplied for use
therein by or on behalf of Distributor, Adviser, or the
Fund) or the negligent, illegal or fraudulent conduct of
the Fund, Distributor, Adviser or persons under their
control (including, without limitation, their employees and
Associated Persons), in connection with the sale or
distribution of the Contracts or Fund shares; or
27
<PAGE>
(iii) arise out of or are based upon any untrue statement or
alleged untrue statement of any material fact contained in
the Separate Account's 1933 Act registration statement,
Separate Account Prospectus, sales literature or
advertising covering the Contracts, or any amendment or
supplement to any of the foregoing, or the omission or
alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements
therein not misleading, if such statement or omission was
made in reliance upon and in conformity with information
furnished to Insurer or Contracts Distributor by or on
behalf of the Fund, Distributor or Adviser for use in the
Separate Account's 1933 Act registration statement,
Separate Account Prospectus, sales literature or
advertising covering the Contracts, or any amendment or
supplement to any of the foregoing; or
(iv) arise as a result of any failure by the Fund, Adviser or
Distributor to perform the obligations, provide the
services and furnish the materials required of them under
the terms of this Agreement;
(b) Except to the extent provided in Sections 12.2(d) and 12.2(e)
hereof, Adviser agrees to indemnify and hold harmless the Indemnified Parties
from and against any and all losses, claims, damages, liabilities (including
amounts paid in settlement thereof with, except as set forth in Section 12.2(c)
below, the written consent of Adviser) or actions in respect thereof (including,
to the extent reasonable, legal and other expenses) to which the Indemnified
Parties may become subject directly or indirectly under any statute, at common
law or otherwise, insofar as such losses, claims, damages, liabilities or
actions directly or indirectly result from or arise out of the failure of any
Portfolio to
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operate as a regulated investment company in compliance with (i) Subchapter M
of the Code and regulations thereunder and (ii) Section 817(h) of the Code
and regulations thereunder (except to the extent that such failure is caused
by Insurer), including, without limitation, any income taxes and related
penalties, rescission charges, liability under state law to Contract owners
or Participants asserting liability against Insurer or Contracts Distributor
pursuant to the Contracts, the costs of any ruling and closing agreement or
other settlement with the Internal Revenue Service, and the cost of any
substitution by Insurer of shares of another investment company or portfolio
for those of any adversely affected Portfolio as a funding medium for the
Separate Account that Insurer deems necessary or appropriate as a result of
the noncompliance.
(c) The written consent of Adviser referred to in Section 12.2(b) above
shall not be required with respect to amounts paid in connection with any ruling
and closing agreement or other settlement with the Internal Revenue Service.
(d) Adviser shall not be liable under this Section 12.2 with respect to
any losses, claims; damages, liabilities or actions to which an Indemnified
Party would otherwise be subject by reason of willful misfeasance, bad faith, or
gross negligence in the performance by that Indemnified Party of its duties or
by reason of such Indemnified Party's reckless disregard of its obligations and
duties under this Agreement or to Insurer, Contracts Distributor or the Separate
Account.
(e) Adviser shall not be liable under this Section 12.2 with respect to
any action against an Indemnified Party unless Insurer or Contracts Distributor
shall have notified Adviser in writing within a reasonable time after the
summons or other first legal process giving information of the
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nature of the action shall have been served upon such Indemnified Party (or
after such Indemnified Party shall have received notice of such service on
any designated agent), but failure to notify Adviser of any such action shall
not relieve Adviser from any liability which it may have to the Indemnified
Party against whom such action is brought otherwise than on account of this
Section 12.2. In case any such action is brought against an Indemnified
Party, Adviser will be entitled to participate, at its own expense, in the
defense of such action. Adviser also shall be entitled to assume the defense
thereof (which shall include, without limitation, the conduct of any ruling
request and closing agreement or other settlement proceeding with the
Internal Revenue Service), with counsel approved by the Indemnified Party
named in the action, which approval shall not be unreasonably withheld. After
notice from Adviser to such Indemnified Party of Adviser's election to assume
the defense thereof, the Indemnified Party will cooperate fully with Adviser
and shall bear the fees and expenses of any additional counsel retained by
it, and Adviser will not be liable to such Indemnified Party under this
Agreement for any legal or other expenses subsequently incurred by such
Indemnified Party independently in connection with the defense thereof, other
than reasonable costs of investigation.
12.3 EFFECT OF NOTICE.
Any notice given by the indemnifying Party to an Indemnified Party
referred to in Section 12.1(c) or 12.2(e) above of participation in or control
of any action by the indemnifying Party will in no event be deemed to be an
admission by the indemnifying Party of liability, culpability or responsibility,
and the indemnifying Party will remain free to contest liability with respect to
the claim among the Parties or otherwise.
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SECTION 13. APPLICABLE LAW
This Agreement will be construed and the provisions hereof interpreted
under and in accordance with New York law, without regard for that state's
principles of conflict of laws.
SECTION 14. EXECUTION IN COUNTERPARTS
This Agreement may be executed simultaneously in two or more
counterparts, each of which taken together will constitute one and the same
instrument.
SECTION 15. SEVERABILITY
If any provision of this Agreement is held or made invalid by a court
decision, statute, rule or otherwise, the remainder of this Agreement will not
be affected thereby.
SECTION 16. RIGHTS CUMULATIVE
The rights, remedies and obligations contained in this Agreement are
cumulative and are in addition to any and all rights, remedies and obligations,
at law or in equity, that the Parties are entitled to under federal and state
laws.
SECTION 17. RESTRICTIONS ON SALES OF FUND SHARES
Insurer agrees that the Fund will be permitted (subject to the other
terms of this
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Agreement) to make its shares available to separate accounts of other
life insurance companies.
SECTION 18. HEADINGS
The Table of Contents and headings used in this Agreement are for
purposes of reference only and shall not limit or define the meaning of the
provisions of this Agreement.
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IN WITNESS WHEREOF, the Parties have caused this Agreement to be
executed in their names and on their behalf by and through their duly authorized
officers signing below.
ALLMERICA FINANCIAL LIFE INSURANCE
AND ANNUITY COMPANY
By:/s/ RICHARD M. REILLY
-------------------------------------
Name: Richard M. Reilly
Title: President
ALLMERICA INVESTMENTS, INC.
By:/s/ STEPHEN PARKER
-------------------------------------
Name: Stephen Parker
Title: President
ALLIANCE CAPITAL MANAGEMENT L.P.
By: Alliance Capital Management
Corporation, its General Partner
By:/s/ EDMUND P. BERGAN, JR.
-------------------------------------
Edmund P. Bergan, Jr.
Senior Vice President and General Counsel
ALLIANCE FUND DISTRIBUTORS, INC.
By:/s/ RICHARD A. WINGE
-------------------------------------
Richard A. Winge
Senior Vice President
33
