<PAGE>
File No. 33-71052
811-8814
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-4
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1933
Post-Effective Amendment No. 9
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 16
SEPARATE ACCOUNT VA-K OF
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(Exact Name of Registrant)
FIRST ALLMERICA FINANCIAL LIFE INSURANCE 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)
Abigail M. Armstrong, Secretary and Counsel
First 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
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X on May 1, 1998 pursuant to Paragraph (b) of Rule 485
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60 days after filing pursuant to Paragraph (a) (1) of Rule 485
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on (date) pursuant to Paragraph (a) (1) of Rule 485
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this post-effective amendment designates a new effective
----- date for a previously filed post-effective amendment
VARIABLE ANNUITY POLICIES
Pursuant to Reg. Section 270.24f-2 of the Investment Company Act of 1940 ("1940
Act"), Registrant hereby declares that an indefinite amount of its securities is
being registered under the Securities Act of 1933 ("1933 Act"). The Rule 24f-2
Notice for the issuer's fiscal year ended December 31, 1997 was filed on or
before March 30, 1998.
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CROSS REFERENCE SHEET SHOWING LOCATION IN PROSPECTUS OF
ITEMS CALLED FOR BY FORM N-4
FORM N-4 ITEM NO. CAPTION IN PROSPECTUSES
- ----------------- -----------------------
1. . . . . . . . . . . Cover Page
2. . . . . . . . . . . Special Terms
3. . . . . . . . . . . Summary; Annual and Transaction Expenses
4. . . . . . . . . . . Condensed Financial Information; Performance
Information
5. . . . . . . . . . . Prospectus: Description of the Company, the Variable
Account, the Trust, VIP, VIP II, T. Rowe Price, and
Delaware Group Premium Fund, Inc.
6. . . . . . . . . . . Charges and Deductions
7. . . . . . . . . . . Prospectus: The Variable Annuity Contracts
8. . . . . . . . . . . Prospectus: Electing the Form of Annuity and the
Annuity Date; Description of Variable Annuity Option;
Annuity Benefit Payments
9. . . . . . . . . . . Death Benefit
10 . . . . . . . . . . Prospectus: Payments; Computation of Values;
Distribution
11 . . . . . . . . . . Prospectus: Surrender; Partial Redemption Surrender;
Withdrawals; Charge For Surrender and Withdrawal;
Withdrawal Without Surrender Charge; Texas Optional
Retirement Program
12 . . . . . . . . . . Federal Tax Considerations
13 . . . . . . . . . . Legal Matters
14 . . . . . . . . . . Statement of Additional Information-Table of Contents
FORM N-4 ITEM NO. CAPTION IN STATEMENT OF ADDITIONAL INFORMATION
- ----------------- ----------------------------------------------
15 . . . . . . . . . . Cover Page
16 . . . . . . . . . . Table of Contents
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17 . . . . . . . . . . General Information and History
18 . . . . . . . . . . Services
19 . . . . . . . . . . Underwriters
20 . . . . . . . . . . Underwriters
21 . . . . . . . . . . Performance Information
22 . . . . . . . . . . Annuity Payments
23 . . . . . . . . . . Financial Statements
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE
COMPANY
ALLMERICA ADVANTAGE VARIABLE ANNUITY
PROFILE THIS PROFILE IS A SUMMARY OF SOME OF THE MORE
MAY 1, 1998 IMPORTANT POINTS THAT YOU SHOULD KNOW AND CONSIDER
BEFORE PURCHASING THE ALLMERICA ADVANTAGE VARIABLE
ANNUITY CONTRACT. THE CONTRACT IS MORE FULLY
DESCRIBED LATER IN THIS PROSPECTUS. PLEASE READ
THE PROSPECTUS CAREFULLY.
1. THE ALLMERICA ADVANTAGE VARIABLE ANNUITY CONTRACT
The Allmerica Advantage Variable Annuity contract is a contract between you and
First Allmerica Financial Life Insurance Company. It is designed to help you
accumulate assets for your retirement or other important financial goals on a
tax-deferred basis. The Allmerica Advantage Variable Annuity combines the
concept of professional money management with the attributes of an annuity
contract.
The Allmerica Advantage Variable Annuity offers a diverse selection of money
managers and investment options. You may allocate your payments among any of 18
investment portfolios, the Guarantee Period Accounts and the Fixed Account. This
range of investment choices enables you to allocate your money to meet your
particular investment needs.
Like all annuities, the contract has an ACCUMULATION PHASE and an ANNUITY PAYOUT
PHASE. During the ACCUMULATION PHASE you can make payments into the contract on
any frequency. Investment and interest gains accumulate tax deferred. You may
withdraw money from your contract during the ACCUMULATION PHASE. However, as
with other tax-deferred investments, you pay taxes on earnings and any untaxed
payments to the contract when you withdraw them. A federal tax penalty may apply
if you make a withdrawal prior to age 59 1/2.
During the ANNUITY PAYOUT PHASE you will receive regular payments from your
contract, provided you annuitize. Annuitization involves beginning a series of
payments from the capital that has built up in your contract. The amount of your
payments during the annuity payout phase will, in part, be determined by your
account's growth during the accumulation phase.
2. ANNUITY PAYMENTS
If you choose to annuitize your contract, you may select one of six annuity
options: (1) periodic payments for your lifetime; (2) periodic payments for your
lifetime, but for not less than 10 years; (3) periodic payments for your
lifetime with the guarantee that if payments to you are less than the
accumulated value, a refund of the remaining value will be paid: (4) periodic
payments for your lifetime and your survivor's lifetime; (5) periodic payments
for your lifetime and your survivor's lifetime with the payment to the survivor
being reduced to 2/3; and (6) periodic payments for a specified period of 1 to
30 years.
You also need to decide if you want your annuity payments on a variable basis
(i.e., subject to fluctuation based on investment performance), on a fixed basis
(with benefit payments guaranteed at a fixed amount), or on a combination
variable and fixed basis. Once payments begin, the annuity option cannot be
changed.
3. PURCHASING THIS CONTRACT
You can buy a contract through your financial representative, who can also help
you complete the proper forms. There is no fixed schedule for making payments
into this contract. Payments are not limited as to frequency, but there are
certain limitations as to amount. Currently, the initial payment must be at
least $600.
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In all cases, each subsequent payment must be at least $50. In addition, a
minimum of $1,000 is always required to establish a Guarantee Period Account.
4. INVESTMENT OPTIONS
You have full investment control over the contract. You may allocate money to
the following funds:
<TABLE>
<S> <C>
Select International Equity Fund Fidelity VIP Growth Portfolio
DGPF International Equity Series Equity Index Fund
Fidelity VIP Overseas Portfolio Select Growth and Income Fund
T. Rowe Price International Stock Fidelity VIP Equity-Income
Portfolio Portfolio
Select Aggressive Growth Fund Fidelity VIP II Asset Manager
Select Capital Appreciation Fund Portfolio
Select Value Opportunity Fund Fidelity VIP High Income Portfolio
Select Growth Fund Investment Grade Income Fund
Growth Fund Government Bond Fund
Money Market Fund
</TABLE>
You may also allocate money to the Fixed Account. The Fixed Account guarantees
principal and a minimum rate of interest (never less than 3% compounded
annually). In all states except New York, you also may allocate money to the
Guarantee Period Accounts which let you choose from among seven different
Guarantee Periods during which interest rates are guaranteed.
5. EXPENSES
Each year and upon surrender a $30.00 contract fee is deducted from your
contract. The contract fee is waived if the value of the contract is $50,000 or
more or if the contract is issued to and maintained by the Trustees of a 401(k)
plan. We also deduct insurance charges which amount to 1.45% annually of the
daily value of your contract value allocated to the variable investment options.
The insurance charges include a mortality and expense risk charge of 1.25% and
an administrative expense charge of 0.20%. There are also investment management
fees and other fund operating expenses that vary by fund.
If you decide to surrender your contract, make withdrawals or receive payments
under certain annuity options, we may impose a surrender charge between 1% and
8% of the payment withdrawn, based on when your payments were made. In states
where premium taxes are imposed, a premium tax charge will be deducted either
when withdrawals are made or annuity payments commence.
There is currently no charge for processing investment option transfers. We
reserve the right to assess a charge, not to exceed $25.00, for transfers after
your 12 free transfers.
The following chart is designed to help you understand the charges in your
contract. The column "Total Annual Charges" shows the total of the $30 contract
fee (which is represented as 0.05%), the 1.45% insurance charges and the
investment charges for each fund. The next two columns show you two examples of
the charges, in dollar amounts, you would pay under a contract. The examples
assume you invest $1,000 in a fund which earns 5% annually and that you withdraw
your money: (1) at the end of year 1, and (2) at the end of year 10. For year 1,
the Total Annual Charges are assessed as well as the surrender charges. For year
10, the
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example shows the aggregate of all the annual charges assessed for 10 years, but
there is no surrender charge. The premium tax is assumed to be 0% in both
examples.
<TABLE>
<CAPTION>
EXAMPLES:
TOTAL ANNUAL
EXPENSES AT
END OF
TOTAL ANNUAL TOTAL ANNUAL ----------------------
INSURANCE FUND TOTAL ANNUAL (1) (2)
FUND CHARGES CHARGES CHARGES 1 YEAR 10 YEARS
- ---------------------------------------------------- --------------- --------------- --------------- --------- -----------
<S> <C> <C> <C> <C> <C>
Select International Equity Fund.................... 1.50% 1.12% 2.62% $100 $ 292
DGPF International Equity Series.................... 1.50% 0.90% 2.40% $98 $ 270
Fidelity VIP Overseas Portfolio..................... 1.50% 0.92% 2.42% $98 $ 272
T. Rowe Price International Stock Portfolio......... 1.50% 1.05% 2.55% $99 $ 285
Select Aggressive Growth Fund....................... 1.50% 0.98% 2.48% $99 $ 278
Select Capital Appreciation Fund.................... 1.50% 1.10% 2.60% $100 $ 290
Select Value Opportunity Fund....................... 1.50% 1.04% 2.54% $99 $ 284
Select Growth Fund.................................. 1.50% 0.93% 2.43% $98 $ 273
Growth Fund......................................... 1.50% 0.52% 2.02% $94 $ 231
Fidelity VIP Growth Portfolio....................... 1.50% 0.69% 2.19% $96 $ 249
Equity Index Fund................................... 1.50% 0.44% 1.94% $94 $ 223
Select Growth and Income Fund....................... 1.50% 0.77% 2.27% $97 $ 257
Fidelity VIP Equity-Income Portfolio................ 1.50% 0.58% 2.08% $95 $ 238
Fidelity VIP II Asset Manager Portfolio............. 1.50% 0.65% 2.15% $96 $ 245
Fidelity VIP High Income Portfolio.................. 1.50% 0.71% 2.21% $96 $ 251
Investment Grade Income Fund........................ 1.50% 0.54% 2.04% $95 $ 233
Government Bond Fund................................ 1.50% 0.67% 2.17% $96 $ 247
Money Market Fund................................... 1.50% 0.35% 1.84% $93 $ 214
</TABLE>
The charges reflect any applicable expense reimbursements or fee waivers. For
more information, see the Fee Table in the Prospectus for the Contract.
6. TAXES
You will not pay taxes until you withdraw money from your contract. During the
accumulation phase, earnings are withdrawn first and are taxed as ordinary
income. If you make a withdrawal prior to age 59 1/2, you may be subject to a
10% federal tax penalty on the earnings. Payments during the annuity payout
phase are considered partly a return of your investment and partly earnings. You
will be subject to income taxes on the earnings portion of each payment.
However, if your contract is funded with pre-tax or tax deductible dollars (such
as a pension or profit sharing plan contribution), then the entire payment will
be taxable.
7. WITHDRAWALS
You can withdraw money from your contract at any time during the accumulation
phase. Any payment invested for more than nine years can be withdrawn without a
surrender charge. For amounts invested nine years or less, you can withdraw,
without a charge, the GREATEST of: (1) 100% of cumulative earnings; (2) 10% of
the contract value per calendar year; or (3) if you are an Owner and also the
Annuitant, an amount based on your life expectancy. (Similarly, no surrender
charge will apply if an amount is withdrawn based on the Annuitant's life
expectancy and the Owner is a trust or other non-natural person.)
You may also withdraw all or a portion of your money without a surrender charge
if, after the contract is issued and before age 65, you become disabled. Under
New York contracts, the disability must also exist for a continuous period of at
least 4 months. In addition, except in New York where not permitted by state
law, the surrender charge will be waived if, after the contract is issued, you
are diagnosed with a fatal illness or confined to medical care facility until
the later of one year from the issue date or 90 days.
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Any withdrawal from a Guarantee Period Account ("GPA") prior to the end of the
guarantee period will be subject to a market value adjustment which may increase
or decrease the value in the account. This adjustment will never impact your
original investment, nor will earnings in the GPA amount to less than an
effective annual rate of 3%.
8. PERFORMANCE
The value of your contract will vary up or down depending on the investment
performance of the funds you choose. The following chart illustrates past
returns for each fund from the inception date of each Sub-Account. The
performance figures reflect the contract fee, the insurance charges, the
investment charges and all other expenses of the fund. They do not reflect the
surrender charges which would reduce such performance if applied. Past
performance is not a guarantee of future results.
<TABLE>
<CAPTION>
CALENDAR YEAR
-------------------------------------
FUND 1997 1996 1995
- --------------------------------------------------------------------------------- ----------- ----------- -----------
<S> <C> <C> <C>
Select International Equity Fund................................................. 3.11% 20.07% 17.82%
DGPF International Equity Series................................................. 5.04% 18.18% 12.15%
Fidelity VIP Overseas Portfolio.................................................. 9.92% 11.46% 8.00%
T. Rowe Price International Stock Portfolio...................................... 1.58% 12.90% 9.44%
Select Aggressive Growth Fund.................................................... 16.97% 16.72% 30.31%
Select Capital Appreciation Fund................................................. 12.60% 7.11% N/A
Select Value Opportunity Fund.................................................... 23.03% 26.57% 15.83%
Select Growth Fund............................................................... 32.11% 20.14% 22.71%
Growth Fund...................................................................... 23.32% 18.34% 30.81%
Fidelity VIP Growth Portfolio.................................................... 21.68% 12.93% 33.35%
Equity Index Fund................................................................ 30.49% 20.42% 34.15%
Select Growth and Income Fund.................................................... 20.73% 19.40% 28.38%
Fidelity VIP Equity-Income Portfolio............................................. 26.24% 12.51% 33.08%
Fidelity VIP II Asset Manager Portfolio.......................................... 18.89% 12.83% 15.19%
Fidelity VIP High Income Portfolio............................................... 15.95% 12.27% 18.79%
Investment Grade Income Fund..................................................... 7.84% 1.93% 16.06%
Government Bond Fund............................................................. 5.54% 1.89% 11.34%
Money Market Fund................................................................ 3.92% 3.71% 4.22%
</TABLE>
9. DEATH BENEFIT
If the annuitant dies during the accumulation phase, we will pay the beneficiary
a death benefit. The death benefit is equal to the GREATEST of: (a) the
accumulated value increased for any positive market value adjustment; (b) gross
payments decreased proportionately to reflect any prior withdrawals; or (c) the
death benefit that would have been payable on the most recent contract
anniversary, increased for subsequent payments and decreased proportionately for
subsequent withdrawals.
This guaranteed death benefit works in the following way assuming no withdrawals
are made: On the first anniversary, the death benefit will be equal to the
greater of (a) the Accumulated Value (increased by any positive Market Value
Adjustment) or (b) gross payments. The higher of (a) or (b) will then be locked
in until the second anniversary, at which time the death benefit will be equal
to the greatest of (a) the Contract's then current Accumulated Value increased
by any positive Market Value Adjustment; (b) gross payments or (c) the locked-in
value of the death benefit at the first anniversary. The greatest of (a), (b) or
(c) will be locked in until the next Contract anniversary. This calculation will
then be repeated on each anniversary while the Contract remains in force and
prior to the Annuity Date. As noted above, the values of (b) and (c) will be
decreased proportionately if withdrawals are taken.
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10. OTHER INFORMATION
FREE LOOK PERIOD: If you cancel your contract within 10 days after receiving it
(or whatever period is required by your state), you will receive a refund in
accordance with the terms of the contract's "Right to Examine" provision.
DOLLAR COST AVERAGING: You may elect to automatically transfer money on a
periodic basis from the Money Market Fund, Government Bond Fund or Fixed Account
to one or more of the other investment options.
AUTOMATIC ACCOUNT REBALANCING: You may elect to automatically have your
contract's accumulated value periodically reallocated ("rebalanced") among your
chosen investment options to maintain your designated percentage allocation mix.
NO PROBATE: In most cases, the death benefit is payable to the beneficiary you
select without having to go through probate.
11. INQUIRIES
If you need more information about Allmerica Advantage, you may contact us at
1-800-533-7881 or send correspondence to:
Allmerica Advantage
First Allmerica Financial
P.O. Box 8632
Boston, Massachusetts 02266-8632
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FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY, WORCESTER, MA
DEFERRED COMBINATION VARIABLE AND FIXED ANNUITY CONTRACTS
This Prospectus describes interests under flexible payment deferred combination
variable and fixed annuity contracts issued either on a group basis or as
individual contracts by First Allmerica Financial Life Insurance Company
("Company") to individuals and businesses in connection with retirement plans
which may or may not qualify for special federal income tax treatment. (For
information about the tax status when used with a particular type of plan, see
"FEDERAL TAX CONSIDERATIONS.") Participation in a group contract will be
accounted for by the issuance of a certificate describing the individual's
interest under the group contract. Participation in an individual contract will
be evidenced by the issuance of an individual contract. Certificates and
individual contracts are collectively referred to herein as the "Contract(s)."
The following is a summary of information about these Contracts. More detailed
information can be found under the referenced captions in this Prospectus.
Contract values may accumulate on a variable basis in the Contract's Variable
Account, known as Separate Account VA-K. The assets of the Variable Account are
divided into Sub-Accounts, each investing exclusively in a corresponding
investment portfolio of Allmerica Investment Trust ("Trust"), Variable Insurance
Products Fund ("Fidelity VIP"), Variable Insurance Products Fund II ("Fidelity
VIP II"), T. Rowe Price International Series, Inc. ("T. Rowe Price"), or
Delaware Group Premium Fund, Inc. ("DGPF"). The following Underlying Funds are
available under the Contract:
<TABLE>
<S> <C>
ALLMERICA INVESTMENT TRUST FIDELITY VIP
Select International Equity Fund Overseas Portfolio
Select Aggressive Growth Fund Equity-Income Portfolio
Select Capital Appreciation Fund Growth Portfolio
Select Value Opportunity Fund High Income Portfolio
Select Growth Fund FIDELITY VIP II
Growth Fund Asset Manager Portfolio
Equity Index Fund T. ROWE PRICE
Select Growth and Income Fund T. Rowe Price International Stock
Investment Grade Income Fund Portfolio
Government Bond Fund DGPF
Money Market Fund International Equity Series
</TABLE>
In most jurisdictions, values may also be allocated on a fixed basis to the
Fixed Account, which is part of the Company's General Account, and, during the
accumulation period, to one or more of the Guarantee Period Accounts. Amounts
allocated to the Fixed Account earn interest at a guaranteed rate for one year
from the date allocated. Amounts allocated to a Guarantee Period Account earn a
fixed rate of interest for the duration of the applicable Guarantee Period. The
interest earned in the Guarantee Period Account is guaranteed if held for the
entire Guarantee Period. If removed prior to the end of the Guarantee Period,
the value may be increased or decreased by a Market Value Adjustment. Assets
supporting allocations to the Guarantee Period Accounts in the accumulation
phase are held in the Company's Separate Account GPA.
Additional information is contained in a Statement of Additional Information
("SAI") dated May 1, 1998, filed with the Securities and Exchange Commission and
incorporated herein by reference. The Table of Contents of the SAI is on page 4
of this Prospectus. The SAI is available upon request and without charge through
Allmerica Investments, Inc., telephone 1-800-533-7881.
THIS PROSPECTUS IS VALID ONLY WHEN ACCOMPANIED BY CURRENT PROSPECTUSES OF THE
TRUST, FIDELITY VIP, FIDELITY VIP II, T. ROWE PRICE AND DGPF. THE FIDELITY VIP
HIGH INCOME PORTFOLIO INVESTS IN HIGHER YIELDING, HIGHER RISK, LOWER-RATED DEBT
SECURITIES (SEE "INVESTMENT OBJECTIVES AND POLICIES.") INVESTORS SHOULD RETAIN A
COPY OF THIS PROSPECTUS FOR FUTURE REFERENCE.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
DATED MAY 1, 1998
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THE CONTRACTS ARE OBLIGATIONS OF FIRST ALLMERICA FINANCIAL LIFE INSURANCE
COMPANY, AND ARE DISTRIBUTED BY ALLMERICA INVESTMENTS, INC. THE CONTRACTS ARE
NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY BANK OR CREDIT
UNION. THE CONTRACTS ARE NOT INSURED BY THE U.S. GOVERNMENT, THE FEDERAL DEPOSIT
INSURANCE CORPORATION (FDIC), OR ANY OTHER FEDERAL AGENCY. INVESTMENTS IN THE
CONTRACTS ARE SUBJECT TO VARIOUS RISKS, INCLUDING THE FLUCTUATION OF VALUE AND
POSSIBLE LOSS OF PRINCIPAL.
THE CONTRACTS OFFERED BY THIS PROSPECTUS MAY NOT BE AVAILABLE IN ALL STATES.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY JURISDICTION IN WHICH
SUCH OFFERING MAY NOT LAWFULLY BE MADE. NO PERSON IS AUTHORIZED TO MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS.
2
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TABLE OF CONTENTS
<TABLE>
<S> <C>
STATEMENT OF ADDITIONAL INFORMATION TABLE OF CONTENTS................................... 4
SPECIAL TERMS........................................................................... 5
SUMMARY................................................................................. 7
ANNUAL AND TRANSACTION EXPENSES......................................................... 11
CONDENSED FINANCIAL INFORMATION......................................................... 15
PERFORMANCE INFORMATION................................................................. 17
DESCRIPTION OF THE COMPANY, THE VARIABLE ACCOUNT, THE TRUST,
FIDELITY VIP FUND, FIDELITY VIP II FUND, T. ROWE PRICE AND DGPF....................... 21
INVESTMENT OBJECTIVES AND POLICIES...................................................... 23
INVESTMENT ADVISORY SERVICES............................................................ 24
DESCRIPTION OF THE CONTRACT............................................................. 27
A. Payments......................................................................... 27
B. Right to Revoke Individual Retirement Annuity.................................... 28
C. Right to Revoke All Other Contracts.............................................. 28
D. Transfer Privilege............................................................... 28
Automatic Transfers and Automatic Account Rebalancing Options................... 28
E. Surrender........................................................................ 29
F. Withdrawals...................................................................... 30
Systematic Withdrawals.......................................................... 30
Life Expectancy Distributions................................................... 30
G. Death Benefit.................................................................... 31
Death of the Annuitant Prior to the Annuity Date................................ 31
Death of an Owner Who is Not Also the Annuitant Prior to the Annuity Date....... 31
Payment of the Death Benefit Prior to the Annuity Date.......................... 32
Death of the Annuitant On or After the Annuity Date............................. 32
H. The Spouse of the Owner as Beneficiary........................................... 32
I. Assignment....................................................................... 32
J. Electing the Form of Annuity and the Annuity Date................................ 33
K. Description of Variable Annuity Payout Options................................... 33
L. Annuity Benefit Payments......................................................... 34
The Annuity Unit................................................................ 34
Determination of the First and Subsequent Annuity Benefit Payments.............. 35
M. NORRIS Decision................................................................... 35
N. Computation of Values............................................................ 36
The Accumulation Unit........................................................... 36
Net Investment Factor........................................................... 36
CHARGES AND DEDUCTIONS.................................................................. 36
A. Variable Account Deductions...................................................... 37
Mortality and Expense Risk Charge............................................... 37
Administrative Expense Charge................................................... 37
Other Charges................................................................... 37
B. Contract Fee..................................................................... 37
C. Premium Taxes.................................................................... 38
D. Contingent Deferred Sales Charge................................................. 38
Charges for Surrender and Withdrawal............................................ 38
Reduction or Elimination of Surrender Charge.................................... 39
Withdrawal Without Surrender Charge............................................. 40
Surrenders...................................................................... 41
Charge at the Time Annuity Benefit Payments Begin............................... 41
E. Transfer Charge.................................................................. 41
GUARANTEE PERIOD ACCOUNTS............................................................... 41
</TABLE>
3
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<TABLE>
<S> <C>
FEDERAL TAX CONSIDERATIONS.............................................................. 43
A. Qualified and Non-Qualified Contracts............................................ 44
B. Taxation of the Contracts in General............................................. 44
Withdrawals Prior to Annuitization.............................................. 44
Annuity Payouts After Annuitization............................................. 45
Penalty on Distribution......................................................... 45
Assignments or Transfers........................................................ 45
Non-Natural Owners.............................................................. 45
Deferred Compensation Plans of State and Local Government and Tax-Exempt
Organizations................................................................. 46
C. Tax Withholding.................................................................. 46
D. Provisions Applicable to Qualified Employer Plans................................ 46
Corporate and Self-Employed Pension and Profit Sharing Plans.................... 46
Individual Retirement Annuities................................................. 46
Tax-Sheltered Annuities......................................................... 47
Texas Optional Retirement Program............................................... 47
REPORTS................................................................................. 47
LOANS (QUALIFIED CONTRACTS ONLY)........................................................ 47
ADDITION, DELETION OR SUBSTITUTION OF INVESTMENTS....................................... 48
CHANGES TO COMPLY WITH LAW AND AMENDMENTS............................................... 48
VOTING RIGHTS........................................................................... 49
DISTRIBUTION............................................................................ 49
SERVICES................................................................................ 49
LEGAL MATTERS........................................................................... 50
FURTHER INFORMATION..................................................................... 50
APPENDIX A -- MORE INFORMATION ABOUT THE FIXED ACCOUNT.................................. A-1
APPENDIX B -- SURRENDER CHARGES AND THE MARKET VALUE
ADJUSTMENT.............................................................. B-1
APPENDIX C -- DIFFERENCES UNDER THE EXECANNUITY PLUS VARIABLE ANNUITY
(FORM A3018-94)......................................................... C-1
STATEMENT OF ADDITIONAL INFORMATION
TABLE OF CONTENTS
GENERAL INFORMATION AND HISTORY......................................................... 2
TAXATION OF THE CONTRACT, THE VARIABLE ACCOUNT AND THE COMPANY.......................... 3
SERVICES................................................................................ 3
UNDERWRITERS............................................................................ 3
ANNUITY BENEFIT PAYMENTS................................................................ 4
EXCHANGE OFFER.......................................................................... 6
PERFORMANCE INFORMATION................................................................. 8
FINANCIAL STATEMENTS.................................................................... F-1
</TABLE>
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SPECIAL TERMS
ACCUMULATED VALUE: the sum of the value of all Accumulation Units in the
Sub-Accounts and of the value of all accumulations in the Fixed Account and
Guarantee Period Accounts credited to the Contract on any date before the
Annuity Date.
ACCUMULATION UNIT: a measure of the Owner's interest in a Sub-Account before
annuity benefit payments begin.
ANNUITANT: the person designated in the Contract upon whose life annuity benefit
payments are to be made.
ANNUITY DATE: the date on which annuity benefit payments begin as specified
pursuant to the Contract.
ANNUITY UNIT: a measure of the value of the periodic annuity benefit payments
under the Contract.
FIXED ACCOUNT: the part of the Company's General Account that guarantees
principal and a fixed minimum interest rate and to which all or a portion of a
payment or transfer under this Contract may be allocated.
FIXED ANNUITY PAYOUT: an Annuity in the payout phase providing for annuity
benefit payments which remain fixed in amount throughout the annuity benefit
payment period selected.
GENERAL ACCOUNT: all the assets of the Company other than those held in a
separate account.
GUARANTEE PERIOD: the number of years that a Guaranteed Interest Rate is
credited.
GUARANTEE PERIOD ACCOUNT: an account which corresponds to a Guaranteed Interest
Rate for a specified Guarantee Period and is supported by assets in a
non-unitized separate account.
GUARANTEED INTEREST RATE: the annual effective rate of interest, after daily
compounding, credited to a Guarantee Period Account.
MARKET VALUE ADJUSTMENT: a positive or negative adjustment assessed if any
portion of a Guarantee Period Account is withdrawn or transferred prior to the
end of its Guarantee Period.
OWNER: the person, persons or entity entitled to exercise the rights and
privileges under this Contract. Joint Owners are permitted if one of the two is
the Annuitant.
SUB-ACCOUNT: a subdivision of the Variable Account. Each Sub-Account available
under the Contract invests exclusively in the shares of a corresponding fund of
Allmerica Investment Trust ("Trust"); a corresponding portfolio of the Variable
Insurance Product Fund ("Fidelity VIP"), the Variable Insurance Products Fund II
("Fidelity VIP II") or the T. Rowe Price International Stock Portfolio of T.
Rowe Price International Series, Inc. ("T. Rowe Price"); or a corresponding
series of the Delaware Group Premium Fund, Inc. ("DGPF").
SURRENDER VALUE: the Accumulated Value of the Contract on full surrender after
application of any Contract fee, contingent deferred sales charge, and Market
Value Adjustment.
UNDERLYING FUNDS (OR FUNDS): the Growth Fund, Investment Grade Income Fund,
Money Market Fund, Equity Index Fund, Government Bond Fund, Select International
Equity Fund, Select Aggressive Growth Fund, Select Capital Appreciation Fund,
Select Growth Fund, Select Growth and Income Fund and Select Value Opportunity
Fund of Allmerica Investment Trust; Fidelity VIP High Income Portfolio, Fidelity
VIP Equity-Income Portfolio, Fidelity VIP Growth Portfolio and Fidelity VIP
Overseas Portfolio of Variable Insurance Products Fund; the Fidelity VIP II
Asset Manager Portfolio of Variable Insurance Products Fund II;
5
<PAGE>
the T. Rowe Price International Stock Portfolio of T. Rowe Price International
Series, Inc.; and the International Equity Series of Delaware Group Premium
Fund, Inc.
VALUATION DATE: a day on which the net asset value of the shares of any of the
Underlying Funds is determined and unit values of the Sub-Accounts are
determined. Valuation Dates currently occur on each day on which the New York
Stock Exchange is open for trading, as well as each day otherwise required.
VARIABLE ACCOUNT: Separate Account VA-K, one of the Company's separate accounts,
consisting of assets segregated from other assets of the Company. The investment
performance of the assets of the Variable Account is determined separately from
the other assets of the Company, and are not chargeable with liabilities arising
out of any other business which the Company may conduct.
VARIABLE ANNUITY PAYOUT: an Annuity in the payout phase providing for payments
varying in amount in accordance with the investment experience of certain Funds.
6
<PAGE>
SUMMARY
WHAT IS THE ALLMERICA ADVANTAGE VARIABLE ANNUITY?
The Allmerica Advantage variable annuity contract is an insurance contract
designed to help you, the Owner, accumulate assets for your retirement or other
important financial goals on a tax-deferred basis. The Contract combines the
concept of professional money management with the attributes of an annuity
contract. Features available through the Contract include:
- - A customized investment portfolio;
- - Experienced professional investment advisers;
- - Tax deferral on earnings;
- - Guarantees that can protect your beneficiaries during the accumulation phase;
- - Income that can be guaranteed for life;
- - Issue age up to your 90th birthday.
The Contract has two phases, an accumulation phase and, if you choose to
annuitize, an annuity payout phase. During the accumulation phase, your initial
payment and any additional payments you choose to make may be allocated among
the Sub-Accounts investing in the Underlying Funds, the Guarantee Period
Accounts and the Fixed Account. You select the investment options most
appropriate for your investment needs. As those needs change, you may also
change your allocation without incurring any tax consequences. The Contract's
Accumulated Value is based on the investment performance of the Funds and any
accumulations in the Guarantee Period and Fixed Accounts. No income taxes are
paid on any earnings under the Contract unless and until Accumulated Values are
withdrawn. In addition, during the accumulation phase, your beneficiaries
receive certain protections and guarantees in the event of the Annuitant's
death. See discussion below "WHAT HAPPENS UPON DEATH DURING THE ACCUMULATION
PHASE?"
WHAT HAPPENS IN THE ANNUITY PAYOUT PHASE?
During the annuity payout phase, the Annuitant can receive income based on
several annuity payout options. You choose the annuity payout option and the
date for annuity benefit payments to begin. You also decide whether you want
variable annuity benefit payments based on the investment performance of certain
Funds, fixed annuity benefit payments with payment amounts guaranteed by the
Company, or a combination of fixed and variable annuity benefit payments. Among
the payout options available during the annuity payout phase are:
- - periodic payments for your lifetime (assuming you are the Annuitant);
- - periodic payments for your life and the life of another person selected by
you;
- - periodic payments for your lifetime with guaranteed payments continuing to
your beneficiary for ten years in the event that you die before the end of ten
years;
- - periodic payments over a specified number of years (1 to 30); under this
option you may reserve the right to convert remaining payments to a lump-sum
payout by electing a "commutable" option.
7
<PAGE>
WHO ARE THE KEY PERSONS UNDER THE CONTRACT?
The Contract is between you, (the "Owner") and us, First Allmerica Financial
Life Insurance Company (the "Company"). Each Contract has an Owner (or an Owner
and a Joint Owner, in which case one of the two also must be the Annuitant), an
Annuitant and one or more beneficiaries. As Owner, you make payments, choose
investment allocations and select the Annuitant and beneficiary. The Annuitant
is the individual to receive annuity benefit payments under the Contract. The
beneficiary is the person who receives any payment on the death of the Owner or
Annuitant.
HOW MUCH CAN I INVEST AND HOW OFTEN?
The number and frequency of your payments are flexible, subject only to a $600
minimum for your initial payment and a $50 minimum for any additional payments.
(A lower initial payment amount is permitted for certain qualified plans and
where monthly payments are being forwarded directly from a financial
institution.) In addition, a minimum of $1,000 is always required to establish a
Guarantee Period Account.
WHAT ARE MY INVESTMENT CHOICES?
The Contract permits net payments to be allocated among the Sub-Accounts
investing in the Funds, the Guarantee Period Accounts (except in New York) and
in the Fixed Account.
VARIABLE ACCOUNT. You have a choice of Sub-Accounts investing in the following
18 Underlying Funds:
<TABLE>
<S> <C>
ALLMERICA INVESTMENT TRUST FIDELITY VIP
Select International Equity Fund Overseas Portfolio
Select Aggressive Growth Fund Equity-Income Portfolio
Select Capital Appreciation Fund Growth Portfolio
Select Value Opportunity Fund High Income Portfolio
Select Growth Fund FIDELITY VIP II
Growth Fund Asset Manager Portfolio
Equity Index Fund T. ROWE PRICE
Select Growth and Income Fund T. Rowe Price International Stock
Investment Grade Income Fund Portfolio
Government Bond Fund DGPF
Money Market Fund International Equity Series
</TABLE>
For a more detailed description of the Underlying Funds, see "INVESTMENT
OBJECTIVES AND POLICIES."
GUARANTEE PERIOD ACCOUNTS. Assets supporting the guarantees under the Guarantee
Period Accounts are held in the Company's Separate Account GPA, a non-unitized
insulated separate account. Values and benefits calculated on the basis of
Guarantee Period Account allocations, however, are obligations of the Company's
General Account. Amounts allocated to a Guarantee Period Account earn a
Guaranteed Interest Rate declared by the Company. The level of the Guaranteed
Interest Rate depends on the number of years of the Guarantee Period selected.
The Company may offer up to nine Guarantee Periods ranging from two to ten years
in duration. Once declared, the Guaranteed Interest Rate will not change during
the duration of the Guarantee Period. If amounts allocated to a Guarantee Period
Account are transferred, surrendered or applied to any annuity option at any
time other than the day following the last day of the applicable Guarantee
Period, a Market Value Adjustment will apply that may increase or decrease the
Account's value; 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."
8
<PAGE>
FIXED ACCOUNT. The Fixed Account is part of the General Account, which consists
of all the Company's assets other than those allocated to the Variable Account
and any other separate account. Allocations to the Fixed Account are guaranteed
as to principal and a minimum rate of interest. Additional excess interest may
be declared periodically at the Company's discretion. Furthermore, the initial
rate in effect on the date an amount is allocated to the Fixed Account will be
guaranteed for one year from that date. For more information about the Fixed
Account see APPENDIX A, "MORE INFORMATION ABOUT THE FIXED ACCOUNT."
THE GUARANTEE PERIOD ACCOUNTS ARE NOT AVAILABLE IN NEW YORK.
CAN I MAKE TRANSFERS AMONG THE 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. You will incur no current taxes on transfers while your money remains
in the Contract. See "C. Transfer Privilege." The first 12 transfers in a
Contract year are guaranteed to be free of a transfer charge. For each
subsequent transfer in a Contract year, the Company does not currently charge
but reserves the right to assess a processing charge guaranteed never to exceed
$25.
WHAT IF I NEED MY MONEY BEFORE THE ANNUITY PAYOUT PHASE BEGINS?
You may surrender the Contract or make withdrawals any time before the annuity
payout phase begins. Each year you can take without a surrender charge the
greatest of 100% of cumulative earnings, 10% of the Contract's Accumulated Value
or, if you are both an Owner and the Annuitant, an amount based on your life
expectancy. (Similarly, no surrender charge will apply if an amount is withdrawn
based on the Annuitant's life expectancy and the Owner is a trust or other
non-natural person.) A 10% tax penalty may apply on all amounts deemed to be
income if you are under age 59 1/2. Additional amounts may be withdrawn at any
time but may be subject to the surrender charge for payments that have not been
invested in the Contract for more than nine years. (A Market Value Adjustment
may apply to any withdrawal made from a Guarantee Period Account prior to the
expiration of the Guarantee Period.)
In addition, except where prohibited by state law, you may withdraw all or a
portion of your money without a surrender charge if, after the Contract is
issued, you are admitted to a medical care facility, become disabled or are
diagnosed with a fatal illness. For details and restrictions, see "Reduction or
Elimination of Surrender Charge."
WHAT HAPPENS UPON DEATH DURING THE ACCUMULATION PHASE?
If the Annuitant, Owner or Joint Owner should die before the Annuity Date, a
death benefit will be paid to the beneficiary. Upon the death of the Annuitant
(or an Owner who is also an Annuitant), the death benefit is equal to the
GREATEST of:
- - The Accumulated Value increased by any positive Market Value Adjustment;
- - Gross payments decreased proportionately to reflect withdrawals;
- - The death benefit that would have been payable on the most recent Contract
anniversary, increased for subsequent payments and decreased proportionately
for subsequent withdrawals.
This guaranteed death benefit works in the following way assuming no withdrawals
are made. On the first anniversary, the death benefit will be equal to the
greater of (a) the Accumulated Value (increased by any positive Market Value
Adjustment) or (b) gross payments. The higher of (a) or (b) will then be locked
in until the second anniversary, at which time the death benefit will be equal
to the greatest of (a) the Contract's then current Accumulated Value increased
by any positive Market Value Adjustment; (b) gross payments or (c) the locked-in
value of the death benefit at the first anniversary. The greatest of (a), (b) or
(c) will be locked in until the next Contract anniversary. This calculation will
then be repeated on each anniversary while the Contract
9
<PAGE>
remains in force and prior to the Annuity Date. As noted above, the values of
(b) and (c) will be decreased proportionately if withdrawals are taken.
At the death of an Owner who is not also the Annuitant during the accumulation
phase, the death benefit will equal the Accumulated Value of the Contract
increased by any positive Market Value Adjustment.
(If the Annuitant dies after the Annuity Date but before all guaranteed annuity
benefit payments have been made, the remaining payments will be paid to the
beneficiary at least as rapidly as under the annuity option in effect. See "G.
Death Benefit.")
WHAT CHARGES WILL I INCUR UNDER MY CONTRACT?
If the Accumulated Value is less than $50,000 on a Contract anniversary and at
surrender, the Company will deduct a $30 Contract fee from the Contract. The
Contract fee is waived for a Contract issued to and maintained by a trustee of a
401(k) plan.
Should you decide to surrender the Contract, make withdrawals, or receive
payments under certain annuity options, you may be subject to a contingent
deferred sales charge. If applicable, this charge will be between 1% and 8% of
payments withdrawn, based on when the payments were made.
Depending upon the state in which you live, a deduction for state and local
premium taxes, if any, may be made as described under "C. Premium Taxes."
The Company will deduct, on a daily basis, an annual mortality and expense risk
charge and administrative expense charge equal to 1.25% and 0.20%, respectively,
of the average daily net assets invested in each Portfolio. The Funds will incur
certain management fees and expenses described more fully in "Other Charges" and
in the Fund prospectuses accompanying this Prospectus.
For more information, see "CHARGES AND DEDUCTIONS."
CAN I EXAMINE THE CONTRACT?
Yes. The Contract will be delivered to you after your purchase. If you return
the Contract to the Company within ten days of receipt, the Contract will be
canceled. (There may be a longer period in certain states; see the "Right to
Examine" provision on the cover of the Contract.) If you cancel the Contract,
you will receive a refund of any amounts allocated to the Fixed and Guarantee
Period Accounts and the Accumulated Value of any amounts allocated to the
Sub-Accounts (plus any fees or charges that may have been deducted.) However,
for all New York Contracts and for any Contract issued as an Individual
Retirement Annuity ("IRA"), you will receive the greater of the amount described
above or your entire payment. See "B. Right to Revoke Individual Retirement
Annuity" and "C. Right to Revoke All Other Contracts."
CAN I MAKE FUTURE CHANGES UNDER MY CONTRACT?
There are several changes you can make after receiving the Contract:
- - You may assign your ownership to someone else, except under certain qualified
plans.
- - You may change the beneficiary, unless you have designated a beneficiary
irrevocably.
- - You may change your allocation of payments.
- - You may make transfers of Contract value among your current investments
without any tax consequences.
- - You may cancel the Contract within ten days of delivery (or longer if required
by law).
10
<PAGE>
ANNUAL AND TRANSACTION EXPENSES
The following tables show charges under the Contract, expenses of the
Sub-Accounts, and expenses of the Funds. In addition to the charges and expenses
described below, premium taxes are applicable in some states and deducted as
described under "C. Premium Taxes."
<TABLE>
<CAPTION>
YEARS FROM
CONTRACT CHARGES: DATE OF PAYMENT CHARGE
- ------------------------------------------------------------------------------ --------------- ---------
<S> <C> <C>
CONTINGENT DEFERRED SALES CHARGE: 0-2 8%
This charge may be assessed upon surrender, withdrawal or annuitization under 3 7%
any commutable period certain option or a noncommutable period certain option 4 6%
of less than ten years. The charge is a percentage of payments applied to the 5 5%
amount surrendered (in excess of any amount that is without a surrender 6 4%
charge) within the indicated time period. 7 3%
8 2%
9 1%
More than 9 0%
TRANSFER CHARGE:
The Company currently makes no charge for processing transfers and guarantees None
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.
CONTRACT FEE: $30
The fee is deducted annually and upon surrender prior to the Annuity Date when
Accumulated Value is less than $50,000. The fee is waived for Contracts issued
to and maintained by the trustee of a 401(k) plan.
SUB-ACCOUNT EXPENSES:
(on annual basis as percentage of average daily net assets)
Mortality and Expense Risk Charge: 1.25%
Administrative Expense Charge: 0.20%
---------
Total Asset Charge: 1.45%
</TABLE>
11
<PAGE>
UNDERLYING FUND EXPENSES:
In addition to the charges described above, certain fees and expenses are
deducted from the assets of the Underlying Funds. The levels of fees and
expenses vary among the Underlying Funds. The following table shows the expenses
of the Underlying Funds for 1997. For more information concerning fees and
expenses, see the prospectuses of the Underlying Funds.
<TABLE>
<CAPTION>
MANAGEMENT FEE TOTAL FUND EXPENSES
(AFTER ANY VOLUNTARY OTHER FUND (AFTER ANY APPLICABLE
FUND WAIVER) EXPENSES LIMITATIONS)
- -------------------------------------------------------- --------------------- ----------------- ---------------------
<S> <C> <C> <C>
Select International Equity Fund........................ 0.92%* 0.20% 1.12%(1)(4)
DGPF International Equity Series........................ 0.75% 0.15% 0.90%(2)
Fidelity VIP Overseas Portfolio......................... 0.75% 0.17% 0.92%(3)
T. Rowe Price International Stock Portfolio............. 1.05% 0.00% 1.05%
Select Aggressive Growth Fund........................... 0.89%* 0.09% 0.98%(1)(4)
Select Capital Appreciation Fund........................ 0.95%* 0.15% 1.10%(1)
Select Value Opportunity Fund........................... 0.90%** 0.14% 1.04%(1)(4)
Select Growth Fund...................................... 0.85% 0.08% 0.93%(1)(4)
Growth Fund............................................. 0.46%* 0.06% 0.52%(1)
Fidelity VIP Growth Portfolio........................... 0.60% 0.09% 0.69%(3)
Equity Index Fund....................................... 0.31% 0.13% 0.44%(1)
Select Growth and Income Fund........................... 0.70%* 0.07% 0.77%(1)(4)
Fidelity VIP Equity-Income Portfolio.................... 0.50% 0.08% 0.58%(3)
Fidelity VIP II Asset Manager Portfolio................. 0.55% 0.10% 0.65%(3)
Fidelity VIP High Income Portfolio...................... 0.59% 0.12% 0.71%
Investment Grade Income Fund............................ 0.44%* 0.10% 0.54%(1)
Government Bond Fund.................................... 0.50% 0.17% 0.67%
Money Market Fund....................................... 0.27% 0.08% 0.35%(1)
</TABLE>
* Effective September 1, 1997, the management fee rates for these funds were
revised. The management fees ratios shown in the table above have been adjusted
to assume that the revised rates took effect on January 1, 1997.
** The Select Value Opportunity Fund was formerly known as the "Small-Mid Cap
Value Fund." Effective April 1, 1997, the management fee rate of the former
Small-Mid Cap Value Fund was revised. In addition, effective April 1, 1997 and
until further notice, the management fee for this fund has been voluntarily
limited to an annual rate of 0.90% of average daily net assets. The management
fee ratio shown above for the Select Value Opportunity Fund has been adjusted to
assume that the revised rate and the voluntary limitation took effect on January
1, 1997. Had the voluntary limitation of 0.90% not been effective on January 1,
1997 and had the management fee rate revision discussed above been effective on
January 1, 1997, the management fee ratio and the total fund expense ratio would
have been 0.95% and 1.09%, respectively. The management fee limitation may be
terminated at any time.
(1) Until further notice, Allmerica Financial Investment Management Services,
Inc. ("Manager") has declared a voluntary expense limitation of 1.50% of average
net assets for the Select International Equity Fund, 1.35% for the Select
Aggressive Growth Fund and Select Capital Appreciation Fund, 1.25% for the
Select Value Opportunity Fund, 1.20% for the Growth Fund and Select Growth Fund,
1.10% for the Select Growth and Income Fund, 1.00% for the Investment Grade
Income Fund, and Government Bond Fund, and 0.60% for the Money Market Fund and
Equity Index Fund. The total operating expenses of the trust were less than
their respective expense limitations throughout 1997. The declaration of a
voluntary expense limitation in any year does not bind the Manager to declare
future expense limitations with respect to these funds.
(2) Effective July 1, 1997, Delaware International Advisers Ltd., the investment
adviser for the International Equity Series, has agreed to limit total annual
expenses of the fund to 0.95%. This limitation replaces a prior limitation of
0.80% that expired on June 30, 1997. The new limitation will be in effect
through October 31,
12
<PAGE>
1998. The fee ratios shown above have been adjusted to assume that the new
voluntary limitation took effect on January 1, 1997. In 1997, the actual ratio
of total expenses of the International Equity Series was 0.85% and the actual
management fee was 0.70%.
(3) A portion of the brokerage commissions the Portfolio paid was used to reduce
Fund expenses. In addition, certain funds entered into arrangements with their
custodian and transfer agent whereby credits realized as a result of uninvested
cash balances were used to reduce custodian and transfer agent expenses.
Including these reductions, total operating expenses would have been 0.90% for
the Fidelity VIP Overseas Portfolio; 0.57% for the Fidelity VIP Equity-Income
Portfolio; 0.64% for the Fidelity VIP II Asset Manager Portfolio and 0.67% for
the Fidelity VIP Growth Portfolio.
(4) These Funds have entered into agreements with brokers whereby the brokers
rebate a portion of commissions. Had these amounts been treated as reductions of
expenses, the total operating expenses would have been 1.10% for Select
International Equity Fund, 0.91% for Select Growth Fund, 0.74% for Select Growth
and Income Fund, 0.93% for Select Aggressive Growth, 0.98% for Select Value
Opportunity Fund and 0.50% for the Growth Fund .
EXAMPLES. The following examples demonstrate the cumulative expenses which
would be paid by the Owner 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 (the "SEC"). 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.
THE INFORMATION GIVEN UNDER THE FOLLOWING EXAMPLES SHOULD NOT BE CONSIDERED A
REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR
LESSER THAN THOSE SHOWN.
(1) If, at the end of the applicable time period, you surrender the Contract or
annuitize* under a commutable variable period certain option or a non-commutable
period certain option of less than ten years, you would pay the following
expenses on a $1,000 investment, assuming a 5% annual return on assets:
<TABLE>
<CAPTION>
FUND 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ----------------------------------------------------------------------------- --------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Select International Equity Fund............................................. $100 $ 148 $ 187 $ 292
DGPF International Equity Series............................................. $98 $ 142 $ 176 $ 270
Fidelity VIP Overseas Portfolio.............................................. $98 $ 142 $ 177 $ 272
T. Rowe Price International Stock Portfolio.................................. $99 $ 146 $ 184 $ 285
Select Aggressive Growth Fund................................................ $99 $ 144 $ 180 $ 278
Select Capital Appreciation Fund............................................. $100 $ 148 $ 186 $ 290
Select Value Opportunity Fund................................................ $99 $ 146 $ 183 $ 284
Select Growth Fund........................................................... $98 $ 143 $ 178 $ 273
Growth Fund.................................................................. $94 $ 131 $ 157 $ 231
Fidelity VIP Growth Portfolio................................................ $96 $ 136 $ 166 $ 249
Equity Index Fund............................................................ $94 $ 129 $ 153 $ 223
Select Growth and Income Fund................................................ $97 $ 138 $ 170 $ 257
Fidelity Equity-Income Portfolio............................................. $95 $ 133 $ 160 $ 238
Fidelity VIP II Asset Manager Portfolio...................................... $96 $ 135 $ 164 $ 245
Fidelity VIP High Income Portfolio........................................... $96 $ 137 $ 167 $ 251
Investment Grade Income Fund................................................. $95 $ 132 $ 158 $ 233
Government Bond Fund......................................................... $96 $ 135 $ 166 $ 247
Money Market Fund............................................................ $93 $ 126 $ 150 $ 214
</TABLE>
13
<PAGE>
(2) If you annuitize* under a life option or any non-commutable period certain
option of ten years or more at the end of the applicable time period or if you
do NOT surrender or annuitize the Contract, you would pay the following expenses
on a $1,000 investment, assuming 5% annual return on assets:
<TABLE>
<CAPTION>
FUND 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ----------------------------------------------------------------------------- ----------- --------- --------- -----------
<S> <C> <C> <C> <C>
Select International Equity Fund............................................. $ 26 $80 $137 $ 292
DGPF International Equity Series............................................. $ 24 $74 $126 $ 270
Fidelity VIP Overseas Portfolio.............................................. $ 24 $74 $127 $ 272
T. Rowe Price International Stock Portfolio.................................. $ 26 $78 $134 $ 285
Select Aggressive Growth Fund................................................ $ 25 $76 $130 $ 278
Select Capital Appreciation Fund............................................. $ 26 $80 $136 $ 290
Select Value Opportunity Fund................................................ $ 25 $78 $133 $ 284
Select Growth Fund........................................................... $ 24 $75 $128 $ 273
Growth Fund.................................................................. $ 20 $62 $107 $ 231
Fidelity VIP Growth Portfolio................................................ $ 22 $68 $116 $ 249
Equity Index Fund............................................................ $ 19 $60 $103 $ 223
Select Growth and Income Fund................................................ $ 23 $70 $120 $ 257
Fidelity Equity-Income Portfolio............................................. $ 21 $64 $110 $ 238
Fidelity VIP II Asset Manager Portfolio...................................... $ 22 $66 $114 $ 245
Fidelity VIP High Income Portfolio........................................... $ 22 $68 $117 $ 251
Investment Grade Income Fund................................................. $ 20 $63 $108 $ 233
Government Bond Fund......................................................... $ 22 $67 $115 $ 247
Money Market Fund............................................................ $ 19 $57 $99 $ 214
</TABLE>
Pursuant to requirements of the Investment Company Act of 1940 (the "1940 Act"),
the Contract fee has been reflected in the examples by a method intended to show
the "average" impact of the Contract fee on an investment in the Variable
Account. The total Contract fees collected under the Contracts by the Company
are divided by the total average net assets attributable to the Contracts. The
resulting percentage is 0.05% and the amount of the Contract fee is assumed to
be $0.50 in the examples. The Contract fee is deducted only when the accumulated
value is less than $50,000. Lower costs apply to Contracts issued and maintained
as part of a 401(k) plan.
* The Contract fee is not deducted after annuitization. No contingent deferred
sales charge is assessed at the time of annuitization in any Contract year under
an option including a life contingency or under any noncommutable period certain
option of ten years or more.
14
<PAGE>
CONDENSED FINANCIAL INFORMATION
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
SEPARATE ACCOUNT VA-K
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
<S> <C> <C> <C> <C>
SUB-ACCOUNTS 1997 1996 1995 1994
- -------------------------------------------------------------------- --------- --------- --------- ---------
SELECT INTERNATIONAL EQUITY FUND
Unit Value:
Beginning of Period............................................... 1.355 1.128 0.956 1.000
End of Period..................................................... 1.398 1.355 1.128 0.956
Units Outstanding at End of Period
(in thousands)..................................................... 8,076 5,068 2,093 446
DGPF INTERNATIONAL EQUITY SERIES
Unit Value:
Beginning of Period............................................... 1.319 1.115 0.993 1.000
End of Period..................................................... 1.387 1.319 1.115 0.993
Units Outstanding at End of Period
(in thousands)..................................................... 3,266 2,023 1,304 667
FIDELITY VIP OVERSEAS PORTFOLIO
Unit Value:
Beginning of Period............................................... 1.180 1.058 0.978 1.000
End of Period..................................................... 1.298 1.180 1.058 0.978
Units Outstanding at End of Period
(in thousands)..................................................... 3,601 3,114 2,804 1,697
T. ROWE PRICE INTERNATIONAL STOCK PORTFOLIO
Unit Value:
Beginning of Period............................................... 1.203 1.064 1.000 N/A
End of Period..................................................... 1.222 1.203 1.064 N/A
Units Outstanding at End of Period
(in thousands)..................................................... 4,536 2,506 542 N/A
SELECT AGGRESSIVE GROWTH FUND
Unit Value:
Beginning of Period............................................... 1.560 1.335 1.023 1.000
End of Period..................................................... 1.825 1.560 1.335 1.023
Units Outstanding at End of Period
(in thousands)..................................................... 7,947 5,681 2,907 1,211
SELECT CAPITAL APPRECIATION FUND
Unit Value:
Beginning of Period............................................... 1.482 1.115 1.000 N/A
End of Period..................................................... 1.670 1.482 1.115 N/A
Units Outstanding at End of Period
(in thousands)..................................................... 5,197 3,849 1,069 N/A
SELECT VALUE OPPORTUNITY FUND
Unit Value:
Beginning of Period............................................... 1.433 1.131 0.975 1.000
End of Period..................................................... 1.764 1.433 1.131 0.975
Units Outstanding at End of Period
(in thousands)..................................................... 5,466 3,037 1,614 795
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
SUB-ACCOUNTS 1997 1996 1995 1994
- -------------------------------------------------------------------- --------- --------- --------- ---------
<S> <C> <C> <C> <C>
SELECT GROWTH FUND
Unit Value:
Beginning of Period............................................... 1.562 1.229 1.057 1.000
End of Period..................................................... 2.064 1.562 1.229 1.057
Units Outstanding at End of Period
(in thousands)..................................................... 5,589 2,645 1,278 406
GROWTH FUND
Unit Value:
Beginning of Period............................................... 1.610 1.359 1.037 1.000
End of Period..................................................... 1.986 1.610 1.359 1.037
Units Outstanding at End of Period
(in thousands)..................................................... 7,404 4,652 2,436 947
FIDELITY VIP GROWTH PORTFOLIO
Unit Value:
Beginning of Period............................................... 1.620 1.433 1.073 1.073
End of Period..................................................... 1.972 1.620 1.433 1.073
Units Outstanding at End of Period
(in thousands)..................................................... 11,575 9,342 4,952 1,944
EQUITY INDEX FUND
Unit Value:
Beginning of Period............................................... 1.675 1.390 1.035 1.000
End of Period..................................................... 2.187 1.675 1.390 1.035
Units Outstanding at End of Period
(in thousands)..................................................... 5,712 2,417 947 189
SELECT GROWTH AND INCOME FUND
Unit Value:
Beginning of Period............................................... 1.582 1.324 1.030 1.000
End of Period..................................................... 1.911 1.582 1.324 1.030
Units Outstanding at End of Period
(in thousands)..................................................... 6,124 3,759 2,173 832
FIDELITY VIP EQUITY-INCOME PORTFOLIO
Unit Value:
Beginning of Period............................................... 1.610 1.430 1.073 1.000
End of Period..................................................... 2.034 1.610 1.430 1.073
Units Outstanding at End of Period
(in thousands)..................................................... 12,959 9,957 5,738 2,214
FIDELITY VIP II ASSET MANAGER PORTFOLIO
Unit Value:
Beginning of Period............................................... 1.284 1.137 0.985 1.000
End of Period..................................................... 1.527 1.284 1.137 0.985
Units Outstanding at End of Period
(in thousands)..................................................... 3,125 2,735 2.025 1,240
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
SUB-ACCOUNTS 1997 1996 1995 1994
- -------------------------------------------------------------------- --------- --------- --------- ---------
<S> <C> <C> <C> <C>
FIDELITY VIP HIGH INCOME PORTFOLIO
Unit Value:
Beginning of Period............................................... 1.330 1.184 0.995 1.000
End of Period..................................................... 1.543 1.330 1.184 0.995
Units Outstanding at End of Period
(in thousands)..................................................... 9,794 5,635 2,530 985
INVESTMENT GRADE INCOME FUND
Unit Value:
Beginning of Period............................................... 1.174 1.151 0.990 1.000
End of Period..................................................... 1.267 1.174 1.151 0.990
Units Outstanding at End of Period
(in thousands)..................................................... 3,889 2,854 1,677 1,677
GOVERNMENT BOND FUND
Unit Value:
Beginning of Period............................................... 1.136 1.113 0.998 1.000
End of Period..................................................... 1.199 1.136 1.113 0.998
Units Outstanding at End of Period
(in thousands)..................................................... 1,694 1,629 1,098 363
MONEY MARKET FUND
Unit Value:
Beginning of Period............................................... 1.105 1.064 1.020 1.000
End of Period..................................................... 1.149 1.105 1.064 1.020
Units Outstanding at End of Period
(in thousands)..................................................... 8,628 7,379 4,194 1,837
</TABLE>
PERFORMANCE INFORMATION
The Contract was first offered to the public in 1997. The Company, however, may
advertise "total return" and "average annual total return" performance
information based on the periods that the Sub-Accounts have been in existence
and the periods that the Underlying Funds have been in existence. Performance
results for all periods shown below are calculated with all charges assumed to
be those applicable to the Sub-Accounts, the Underlying Funds, and, in Tables 1A
and 2A, assuming that the Contract is surrendered at the end of the applicable
period and, alternatively, in Tables 1B and 2B, assuming that it is not
surrendered at the end of the applicable period. 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
17
<PAGE>
assumed to be reinvested. Thus the effective yield will be slightly higher than
the yield because of the compounding effect of this assumed reinvestment.
The yield of a Sub-Account investing in a Fund other than the Money Market Fund
refers to the annualized income generated by an investment in the Sub- Account
over a specified 30-day or one-month period. The yield is calculated by assuming
that the income generated by the investment during that 30-day or one-month
period is generated each period over a 12-month period and is shown as a
percentage of the investment.
Quotations of average annual total return 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 1.45%, the $30
annual Contract fee, Underlying Fund charges and the contingent deferred sales
charge which would be assessed if the investment were completely withdrawn at
the end of the specified period. Quotations of supplemental average total
returns, 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 contingent deferred
sales charge but 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 respectively; 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 the
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 INFORMATION SHOULD BE CONSIDERED IN LIGHT OF
THE INVESTMENT OBJECTIVES AND POLICIES AND RISK CHARACTERISTICS OF THE
UNDERLYING FUND IN WHICH THE SUB-ACCOUNT INVESTS AND THE MARKET CONDITIONS
DURING THE GIVEN TIME PERIOD, AND SHOULD NOT BE CONSIDERED AS A REPRESENTATION
OF WHAT MAY BE ACHIEVED IN THE FUTURE.
Performance information for a Sub-Account may be compared, in reports and
promotional literature, to: (1) the Standard & Poor's 500 Composite Stock Price
Index ("S&P 500"), Dow Jones Industrial Average ("DJIA"), Shearson Lehman
Aggregate Bond Index or other unmanaged indices so that investors may compare
the Sub-Account results with those of a group of unmanaged securities widely
regarded by investors as representative of the securities markets in general;
(2) other groups of variable annuity separate accounts or other investment
products tracked by Lipper Analytical Services, a widely used independent
research firm which ranks mutual funds and other investment products by overall
performance, investment objectives, and assets, or tracked by other services,
companies, publications, or persons, who rank such investment products on
overall performance or other criteria; or (3) the Consumer Price Index (a
measure for inflation) to assess the real rate of return from an investment in
the Sub-Account. Unmanaged indices may assume the reinvestment of dividends but
generally do not reflect deductions for administrative and management costs and
expenses.
At times, the Company may also advertise the ratings and other information
assigned to it by independent rating organizations such as A.M. Best Company
("A.M. Best"), Moody's Investors Service ("Moody's"), Standard & Poor's
Insurance Rating Services ("S&P") and Duff & Phelps. A.M. Best's and Moody's
ratings reflect their current opinion of the Company's relative financial
strength and operating performance in comparison to the norms of the life/health
insurance industry. S&P's and Duff & Phelps' ratings measure the ability of an
insurance company to meet its obligations under insurance policies it issues and
do not measure the ability of such companies to meet other non-policy
obligations. The ratings also do not relate to the performance of the Underlying
Funds.
18
<PAGE>
TABLE 1A
AVERAGE ANNUAL TOTAL RETURNS OF SUB-ACCOUNT
FOR PERIODS ENDING DECEMBER 31, 1997
SINCE INCEPTION OF SUB-ACCOUNT
(ASSUMING COMPLETE WITHDRAWAL OF THE INVESTMENT)
<TABLE>
<CAPTION>
FOR YEAR SINCE
ENDED INCEPTION OF
NAME OF UNDERLYING FUND 12/31/97 SUB-ACCOUNT
- ------------------------------------------------------------- ----------- ------------
Select International Equity Fund............................. -4.32% 8.22%
<S> <C> <C>
DGPF International Equity Series............................. -2.53% 7.89%
Fidelity VIP Overseas Portfolio.............................. 2.01% 5.89%
T. Rowe Price International Stock Portfolio.................. -5.74% 5.40%
Select Aggressive Growth Fund................................ 8.97% 16.56%
Select Capital Appreciation Fund............................. 4.60% 19.18%
Select Value Opportunity Fund................................ 15.03% 15.45%
Select Growth Fund........................................... 24.11% 20.63%
Growth Fund.................................................. 15.32% 19.33%
Fidelity VIP Growth Portfolio................................ 13.68% 19.10%
Equity Index Fund............................................ 22.49% 22.60%
Select Growth and Income Fund................................ 12.73% 18.05%
Fidelity VIP Equity-Income Portfolio......................... 18.24% 20.13%
Fidelity VIP II Asset Manager Portfolio...................... 10.89% 11.05%
Fidelity VIP High Income Portfolio........................... 7.95% 11.20%
Investment Grade Income Fund................................. 0.07% 5.17%
Government Bond Fund......................................... -2.06% 3.54%
Money Market Fund............................................ -3.57% 2.26%
</TABLE>
TABLE 1B
SUPPLEMENTAL AVERAGE ANNUAL TOTAL RETURNS OF SUB-ACCOUNT
FOR PERIODS ENDING DECEMBER 31, 1997
SINCE INCEPTION OF SUB-ACCOUNT
(ASSUMING NO WITHDRAWAL OF THE INVESTMENT)
<TABLE>
<CAPTION>
FOR YEAR SINCE
ENDED INCEPTION OF
NAME OF UNDERLYING FUND 12/31/97 SUB-ACCOUNT
- --------------------------------------------------------------- ---------- ------------
Select International Equity Fund............................... 3.11% 9.53%
<S> <C> <C>
DGPF International Equity Series............................... 5.04% 9.19%
Fidelity VIP Overseas Portfolio................................ 9.92% 7.25%
T. Rowe Price International Stock Portfolio.................... 1.58% 7.76%
Select Aggressive Growth Fund.................................. 16.97% 17.62%
Select Capital Appreciation Fund............................... 12.60% 21.11%
Select Value Opportunity Fund.................................. 23.03% 16.53%
Select Growth Fund............................................. 32.11% 21.59%
Growth Fund.................................................... 23.32% 20.33%
Fidelity VIP Growth Portfolio.................................. 21.68% 20.10%
Equity Index Fund.............................................. 30.49% 23.53%
Select Growth and Income Fund.................................. 20.73% 19.08%
Fidelity VIP Equity-Income Portfolio........................... 26.24% 21.11%
Fidelity VIP II Asset Manager Portfolio........................ 18.89% 12.28%
Fidelity VIP High Income Portfolio............................. 15.95% 12.40%
Investment Grade Income Fund................................... 7.84% 6.56%
Government Bond Fund........................................... 5.54% 4.98%
Money Market Fund.............................................. 3.92% 3.75%
</TABLE>
19
<PAGE>
TABLE 2A
AVERAGE ANNUAL TOTAL RETURNS OF SUB-ACCOUNT
FOR PERIODS ENDING DECEMBER 31, 1997
SINCE INCEPTION OF UNDERLYING FUND
(ASSUMING COMPLETE WITHDRAWAL OF THE INVESTMENT)
<TABLE>
<CAPTION>
10 YEARS OR
FOR YEAR SINCE
ENDED INCEPTION
NAME OF UNDERLYING FUND 12/31/97 5 YEARS IF LESS*
- --------------------------------------------------- ----------- ---------- --------------
Select International Equity Fund................... -4.32% N/A 8.21%
<S> <C> <C> <C>
DGPF International Equity Series................... -2.53% 9.30% 9.11%
Fidelity VIP Overseas Portfolio.................... 2.01% 11.81% 8.01%
T. Rowe Price International Stock Portfolio........ -5.74% N/A 5.10%
Select Aggressive Growth Fund...................... 8.97% 14.50% 17.43%
Select Capital Appreciation Fund................... 4.60% N/A 19.13%
Select Value Opportunity Fund...................... 15.03% N/A 14.59%
Select Growth Fund................................. 24.11% 12.85% 14.23%
Growth Fund........................................ 15.32% 14.08% 15.40%
Fidelity VIP Growth Portfolio...................... 13.68% 15.73% 15.47%
Equity Index Fund.................................. 22.49% 17.27% 17.82%
Select Growth and Income Fund...................... 12.73% 14.28% 13.23%
Fidelity VIP Equity-Income Portfolio............... 18.24% 17.89% 15.05%
Fidelity VIP II Asset Manager Portfolio............ 10.89% 10.67% 10.99%
Fidelity VIP High Income Portfolio................. 7.95% 11.61% 11.15%
Investment Grade Income Fund....................... 0.07% 5.12% 7.58%
Government Bond Fund............................... -2.06% 3.55% 5.01%
Money Market Fund.................................. -3.57% 2.27% 4.23%
</TABLE>
TABLE 2B
SUPPLEMENTAL AVERAGE ANNUAL TOTAL RETURNS OF SUB-ACCOUNT
FOR PERIODS ENDING DECEMBER 31, 1997
SINCE INCEPTION OF UNDERLYING FUND
(ASSUMING NO WITHDRAWAL OF THE INVESTMENT)
<TABLE>
<CAPTION>
10 YEARS OR
FOR YEAR SINCE
ENDED INCEPTION
NAME OF UNDERLYING FUND 12/31/97 5 YEARS IF LESS*
- --------------------------------------------------- ---------- ---------- --------------
Select International Equity Fund................... 3.11% N/A 9.52%
<S> <C> <C> <C>
DGPF International Equity Series................... 5.04% 9.98% 9.63%
Fidelity VIP Overseas Portfolio.................... 9.92% 12.44% 8.01%
T. Rowe Price International Stock Portfolio........ 1.58% N/A 6.47%
Select Aggressive Growth Fund...................... 16.97% 15.08% 17.79%
Select Capital Appreciation Fund................... 12.60% N/A 21.06%
Select Value Opportunity Fund...................... 23.03% N/A 15.23%
Select Growth Fund................................. 32.11% 13.46% 14.65%
Growth Fund........................................ 23.32% 14.66% 15.40%
Fidelity VIP Growth Portfolio...................... 21.68% 16.28% 15.47%
Equity Index Fund.................................. 30.49% 17.79% 17.92%
Select Growth and Income Fund...................... 20.73% 14.86% 13.66%
Fidelity VIP Equity-Income Portfolio............... 26.24% 18.40% 15.05%
Fidelity VIP II Asset Manager Portfolio............ 18.89% 11.32% 11.04%
Fidelity VIP High Income Portfolio................. 15.95% 12.24% 11.15%
Investment Grade Income Fund....................... 7.84% 5.92% 7.58%
Government Bond Fund............................... 5.54% 4.40% 5.37%
Money Market Fund.................................. 3.92% 3.17% 4.23%
</TABLE>
20
<PAGE>
* The inception dates of the Underlying Funds are: 4/29/85 for Growth Fund,
Investment Grade Income Fund and Money Market Fund; 9/28/90 for Equity Index
Fund; 8/26/91 for Government Bond Fund; 8/21/92 for Select Aggressive Growth
Fund, Select Growth Fund and Select Growth and Income Fund; 4/30/93 for Select
Value Opportunity Fund; 5/02/94 for Select International Equity Fund; 4/28/95
for Select Capital Appreciation Fund; 10/09/86 for Fidelity VIP Equity-Income
Portfolio and Fidelity VIP Growth Portfolio; 9/19/85 for Fidelity VIP High
Income Portfolio; 1/28/87 for Fidelity VIP Overseas Portfolio; 9/06/89 for
Fidelity VIP II Asset Manager Portfolio; 10/29/92 for DGPF International Equity
Series; and 3/31/94 for the T. Rowe Price International Stock Portfolio.
DESCRIPTION OF THE COMPANY, THE VARIABLE ACCOUNT, THE TRUST,
FIDELITY VIP FUND, FIDELITY VIP II FUND, T. ROWE PRICE AND DGPF
THE COMPANY. The Company is a life insurance company organized under the laws
of Delaware in July, 1974. Its 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, 1997, the
Company had over $9.4 billion in assets and over $26.6 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 an indirect 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. As of December 31, 1997, First Allmerica and its subsidiaries
(including the Company) had over $16.3 billion in combined assets and over $43.8
billion in life insurance in force.
The Company is a chartered member of the Insurance Marketplace Standard
Association ("IMSA"). Companies that belong to IMSA subscribe to a rigorous set
of standards that cover the various aspects of sales and service for
individually sold life insurance and annuities. IMSA members have adopted
policies and procedures that demonstrate a commitment to honesty, fairness and
integrity in all customer contacts involving sales and service of individual
life insurance and annuity products.
THE VARIABLE ACCOUNT. The Variable Account is a separate investment account of
the Company referred to as Separate Account VA-K. The assets used to fund the
variable portions of the Contracts are set aside in the Sub-Accounts of the
Variable Account, and are kept separate and apart from the general assets of the
Company. There are 18 Sub-Accounts available under the Contracts. Each
Sub-Account is administered and accounted for as part of the general business of
the Company, but the income, capital gains, or capital losses of each
Sub-Account are allocated to such Sub-Account, without regard to other income,
capital gains, or capital losses 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 Variable Account was authorized by vote of the Board of Directors of the
Company on November 1, 1990. The Variable Account meets the definition of a
"separate account" under federal securities law and is registered with the SEC
as a unit investment trust under the 1940 Act. Such registration does not
involve the supervision by the SEC of management or investment practices or
policies of the Variable Account or 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.
21
<PAGE>
ALLMERICA INVESTMENT TRUST. Allmerica Investment Trust ("Trust") is an
open-end, diversified management investment company registered with the SEC
under the 1940 Act. The Trust was established as a Massachusetts business trust
on October 11, 1984, for the purpose of providing a vehicle for the investment
of assets of various separate accounts established by the Company or other
affiliated insurance companies. Eleven investment portfolios of the Trust are
currently available under the Contract, each issuing a series of shares: the
Growth Fund, Investment Grade Income Fund, Money Market Fund, Equity Index Fund,
Government Bond Fund, Select International Equity Fund, Select Aggressive Growth
Fund, Select Capital Appreciation Fund, Select Growth Fund, Select Growth and
Income Fund and Select Value Opportunity 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. 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."
VARIABLE INSURANCE PRODUCTS FUND. 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. Four
of its investment portfolios are available under the Contract: Fidelity VIP High
Income Portfolio, Fidelity VIP Equity-Income Portfolio, Fidelity VIP Growth
Portfolio and Fidelity VIP Overseas 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, MA. 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. As part of their
operating expenses, the Portfolios of Fidelity VIP pay an investment management
fee to FMR. See "Investment Advisory Services to Fidelity VIP and Fidelity VIP
II."
VARIABLE INSURANCE PRODUCTS FUND II. Variable Insurance Products Fund II
("Fidelity VIP II"), managed by FMR (see discussion above) is an open-end,
diversified management investment company organized as a Massachusetts business
trust on March 21, 1988, and registered with the SEC under the 1940 Act. One of
its investment portfolios is available under the Contract: Fidelity VIP II Asset
Manager Portfolio.
T. ROWE PRICE INTERNATIONAL SERIES, INC. T. Rowe Price International Series,
Inc. ("T. Rowe Price"), managed by Rowe Price-Fleming International, Inc.
("Price-Fleming") (See "Investment Advisory Services to T. Rowe Price"), 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 Contracts: the T. Rowe Price
International Stock Portfolio.
DELAWARE GROUP PREMIUM FUND, INC. Delaware Group Premium Fund, Inc. ("DGPF") is
an open-end, diversified, management investment company registered with the SEC
under the 1940 Act. DGPF was established to provide a vehicle for the investment
of assets of various separate accounts supporting variable insurance contracts.
One investment portfolio ("Series") is available under the Contract, the
International Equity Series. The investment adviser for the International Equity
Series is Delaware International Advisers Ltd. ("Delaware International"). See
"Investment Advisory Services to DGPF."
22
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
A summary of investment objectives of each of the Underlying Funds is set forth
below. The Underlying Funds are listed by general investment risk
characteristics. MORE DETAILED INFORMATION REGARDING THE INVESTMENT OBJECTIVES,
RESTRICTIONS AND RISKS, EXPENSES PAID BY THE UNDERLYING FUNDS AND OTHER RELEVANT
INFORMATION REGARDING THE UNDERLYING INVESTMENT COMPANIES MAY BE FOUND IN THEIR
RESPECTIVE PROSPECTUSES, WHICH ACCOMPANY THIS PROSPECTUS AND SHOULD BE READ
CAREFULLY BEFORE INVESTING. The Statements of Additional Information of the
Underlying Funds are available upon request. There can be no assurance that the
investment objectives of the Underlying Funds can be achieved.
SELECT INTERNATIONAL EQUITY FUND OF THE TRUST -- The Select International Equity
Fund of the Trust seeks maximum long-term total return (capital appreciation and
income) primarily by investing in common stocks of established non-U.S.
companies.
DGPF INTERNATIONAL EQUITY SERIES -- The International Equity Series of DGPF
seeks long-term growth without undue risk to principal by investing primarily in
equity securities of foreign issuers providing the potential for capital
appreciation and income.
FIDELITY VIP OVERSEAS PORTFOLIO -- The Overseas Portfolio of Fidelity VIP seeks
long-term growth of capital primarily through investments in foreign securities
and provides a means for aggressive investors to diversify their own portfolios
by participating in companies and economies outside of the United States.
T. ROWE PRICE INTERNATIONAL STOCK PORTFOLIO -- The T. Rowe Price International
Stock Portfolio seeks long-term growth of capital through investments primarily
in common stocks of established, non-U.S. companies.
SELECT AGGRESSIVE GROWTH FUND -- The Select Aggressive Growth Fund of the Trust
seeks above-average capital appreciation by investing primarily in common stocks
of companies which are believed to have significant potential for capital
appreciation.
SELECT CAPITAL APPRECIATION FUND -- The Select Capital Appreciation Fund of the
Trust seeks long-term growth of capital in a manner consistent with the
preservation 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 invests primarily in common stock
of industries and companies which are believed to be experiencing favorable
demand for their products and services, and which operate in a favorable
competitive environment and regulatory climate.
SELECT VALUE OPPORTUNITY FUND -- The Select Value Opportunity Fund of the Trust
seeks long-term growth by investing principally in a 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.
SELECT GROWTH FUND -- The Select Growth Fund of the Trust seeks to achieve
long-term growth of capital by investing in a diversified portfolio consisting
primarily of common stocks selected on the basis of their long-term growth
potential.
GROWTH FUND -- The Growth Fund of the Trust is invested in common stocks and
securities convertible into common stocks that are believed to represent
significant underlying value in relation to current market prices. The objective
of the Growth Fund is to achieve long-term growth of capital. Realization of
current investment income, if any, is incidental to this objective.
FIDELITY VIP GROWTH PORTFOLIO -- The Growth Portfolio of Fidelity VIP 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.
23
<PAGE>
EQUITY INDEX FUND -- The Equity Index Fund of the Trust seeks to provide
investment results that correspond to the aggregate price and yield performance
of a representative selection of United States publicly traded common stocks.
The Equity Index Fund seeks to achieve its objective by attempting to replicate
the aggregate price and yield performance of the Standard & Poor's Composite
Index of 500 Stocks.
SELECT GROWTH AND INCOME FUND -- The 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.
FIDELITY VIP EQUITY-INCOME PORTFOLIO -- The Equity-Income Portfolio of Fidelity
VIP 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 II ASSET MANAGER PORTFOLIO -- The Asset Manager Portfolio of
Fidelity VIP II seeks high total return with reduced risk over the long term by
allocating its assets among domestic and foreign stocks, bonds and short-term
money market instruments.
FIDELITY VIP HIGH INCOME PORTFOLIO -- The High Income Portfolio of Fidelity VIP
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 often
are considered to be speculative, and involve greater risk of default or price
changes than securities assigned a high quality rating. See the Fidelity VIP
prospectus.
INVESTMENT GRADE INCOME FUND -- The Investment Grade Income Fund of the Trust is
invested in a diversified portfolio of fixed income securities with the
objective of seeking as high a level of total return (including both income and
capital appreciation) as is consistent with prudent investment management.
GOVERNMENT BOND FUND -- The Government Bond Fund of the Trust has the investment
objectives of seeking high income, preservation of capital and maintenance of
liquidity, primarily through investments in debt instruments issued or
guaranteed by the U.S. Government or its agencies or instrumentalities, and in
related options, futures and repurchase agreements.
MONEY MARKET FUND -- The Money Market Fund of the Trust is invested in a
diversified portfolio of high-quality, short-term money market instruments with
the objective of obtaining maximum current income consistent with the
preservation of capital and liquidity.
CERTAIN UNDERLYING FUNDS HAVE INVESTMENT OBJECTIVES AND/OR POLICIES SIMILAR TO
THOSE OF OTHER UNDERLYING FUNDS. THEREFORE, TO CHOOSE THE SUB-ACCOUNTS WHICH
BEST WILL MEET INDIVIDUAL NEEDS AND OBJECTIVES, CAREFULLY READ THE PROSPECTUSES
OF THE TRUST, FIDELITY VIP, FIDELITY VIP II, T. ROWE PRICE AND DGPF, ALONG WITH
THIS PROSPECTUS. IN SOME STATES, INSURANCE REGULATIONS MAY RESTRICT THE
AVAILABILITY OF PARTICULAR SUB-ACCOUNTS.
If there is a material change in the investment policy of a Fund, the Owner will
be notified of the change. If the Owner has accumulated Value allocated to that
Fund, he or she may have the Accumulated Value reallocated without charge to
another Fund or to the Fixed Account, 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 Trustees have overall
responsibility for the supervision of the affairs of the Trust. The Trustees
have entered into an agreement ("Management Agreement") with
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Allmerica Financial Investment Management Services, Inc. ("Manager") to handle
the day-to-day affairs of the Trust. The Manager, subject to review by the
Trustees, is responsible for the general management of the Funds of the Trust.
The Manager 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 who are
affiliated with the Manager.
Other than the expenses specifically assumed by the Manager under the Management
Agreement, all expenses incurred in the operation of the Trust are borne by it,
including fees and expenses associated with the registration and qualification
of the Trust's shares under the Securities Act of 1933 ("1933 Act"), other fees
payable to the SEC, independent public accountant, legal and custodian fees,
association membership dues, taxes, interest, insurance premiums, brokerage
commissions, fees and expenses of the Trustees who are not affiliated with the
Manager, expenses for proxies, prospectuses, reports to shareholders, and other
expenses.
For providing its services under the Management Agreement, the Manager 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>
<S> <C> <C>
Select International Equity Fund First $100 million 1.00%
Next $150 million 0.90%
Over $250 million 0.85%
Select Aggressive Growth Fund First $100 million 1.00%
Next $150 million 0.90%
Over $250 million 0.85%
Select Capital Appreciation Fund First $100 million 1.00%
Next $150 million 0.90%
Over $250 million 0.85%
Select Value Opportunity Fund First $100 million 1.00%
Next $150 million 0.85%
Next $250 million 0.80%
Next $250 million 0.75%
Over $750 million 0.70%
Select Growth Fund * 0.85%
Growth Fund First $250 million 0.60%
Next $250 million 0.40%
Over $500 million 0.35%
Equity Index Fund First $50 million 0.35%
Next $200 million 0.30%
Over $250 million 0.25%
Select Growth and Income Fund First $100 million 0.75%
Next $150 million 0.70%
Over $250 million 0.65%
Investment Grade Income Fund First $50 million 0.50%
Next $50 million 0.45%
Over $100 million 0.40%
Government Bond Fund * 0.50%
Money Market Fund First $50 million 0.35%
Next $200 million 0.25%
Over $250 million 0.20%
</TABLE>
* For the Government Bond Fund and the Select Growth Fund, the rate applicable
to the Manager does not vary according to the level of assets in the Fund.
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<PAGE>
The Manager's fee, computed for each Fund, will be paid from the assets of such
Fund. Pursuant to the Management Agreement with the Trust, the Manager has
entered into agreements ("Sub-Adviser Agreements") with other investment
advisers ("Sub-Advisers") under which each Sub-Adviser manages the investments
of one or more of the Funds of the Trust. Under the Sub-Adviser Agreement, the
Sub-Adviser is authorized to engage in portfolio transactions on behalf of the
applicable Fund, subject to such general or specific instructions as may be
given by the Trustees. The terms of a Sub-Adviser Agreement cannot be materially
changed without the approval of a majority in interest of the shareholders of
the affected Fund. The Manager is solely responsible for the payment of all fees
for investment management services to the Sub-Advisers. Allmerica Asset
Management, Inc., the Sub-Adviser for the Equity Index Fund, the Investment
Grade Income Fund, the Government Bond Fund and the Money Market Fund, is an
indirect wholly owned subsidiary of AFC and an affiliate of the Company.
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 this Prospectus.
INVESTMENT ADVISORY SERVICES TO FIDELITY VIP AND FIDELITY VIP II FUNDS -- For
managing investments and business affairs, each Portfolio pays a monthly fee to
FMR. The prospectuses of Fidelity VIP and VIP II contain additional information
concerning the Portfolios, including information about additional expenses paid
by the Portfolios, and should be read in conjunction with this Prospectus.
The Fidelity VIP High Income Portfolio pays a monthly fee to FMR at an annual
fee rate made up of the sum of two components:
1. A group fee rate based on the monthly average net assets of all the mutual
funds advised by FMR. On an annual basis this rate cannot rise above 0.37%,
and drops as total assets in all these funds rise.
2. An individual fund fee rate of 0.45% of the Fidelity VIP High Income
Portfolio's average net assets throughout the month.
One-twelfth of the annual management fee rate is applied to net assets averaged
over the most recent month, resulting in a dollar amount which is the management
fee for that month.
The fee rates of the Fidelity VIP Equity-Income, Fidelity VIP Growth, Fidelity
VIP II Asset Manager and Fidelity VIP Overseas Portfolios each are made of two
components:
1. A group fee rate based on the monthly average net assets of all of the
mutual funds advised by FMR. On an annual basis, this rate cannot rise above
0.52%, and drops as total assets in all these mutual funds rise.
2. An individual Portfolio fee rate of 0.20% for the Fidelity VIP Equity-Income
Portfolio, 0.30% for the Fidelity VIP Growth Portfolio, 0.25% for the
Fidelity VIP II Asset Manager Portfolio and 0.45% for the Fidelity VIP
Overseas Portfolio.
One-twelfth of the sum of these two rates is applied to the respective
Portfolio's net assets averaged over the most recent month, giving a dollar
amount which is the fee for that month.
Thus, the Fidelity VIP High Income 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. The Fidelity VIP Growth Portfolio
may have a fee as high as 0.82% of its average net assets. The Fidelity VIP II
Asset Manager Portfolio may have a fee as high as 0.77% of its average net
assets. The Fidelity VIP Overseas Portfolio may have a fee as high as 0.97% of
its average net assets. The actual fee rate may be less depending on the total
assets in the funds advised by FMR.
INVESTMENT ADVISORY SERVICES TO T. ROWE PRICE. The Investment Adviser for the
T. Rowe Price International Stock Portfolio is Rowe Price-Fleming International,
Inc. ("Price-Fleming"). Price-Fleming, founded in 1979 as a joint venture
between T. Rowe Price Associates, Inc. and Robert Fleming Holdings, Limited, is
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<PAGE>
one of America's largest international mutual fund asset managers with
approximately $30 billion under management in its offices in Baltimore, London,
Tokyo, Hong Kong, Singapore and Buenos Aires. To cover investment management and
operating expenses, the T. Rowe Price International Stock Portfolio pays Price-
Fleming a single, all-inclusive fee of 1.05% of its average daily net assets.
INVESTMENT ADVISORY SERVICES TO DGPF. Each Series of DGPF pays an investment
adviser an annual fee for managing the Portfolios and making the investment
decisions for the Series. The investment adviser for the International Equity
Series is Delaware International Advisers Ltd. ("Delaware International"). The
annual fee paid by the International Equity Series to Delaware International is
equal to 0.75% of the average daily net assets of the Series.
DESCRIPTION OF THE CONTRACT
A. PAYMENTS.
The Company's underwriting requirements, which include receipt of the initial
payment and allocation instructions by the Company at its Principal Office, must
be met before a Contract can be issued. These requirements also may include the
proper completion of an application; however, where permitted, the Company may
issue a Contract without completion of an application and/or signature for
certain classes of annuity Contracts. Payments are to be made payable to the
Company. A net payment is equal to the payment received less the amount of any
applicable premium tax.
The initial net payment will be credited to the Contract as of the date that all
issue requirements are properly met. If all issue requirements are not complied
with within five business days of the Company's receipt of the initial payment,
the payment will be returned unless the Owner specifically consents to the
holding of the initial payment until completion of any outstanding issue
requirements. Subsequent payments will be credited as of the Valuation Date
received at the Principal Office.
Payments are not limited as to frequency and number, but there are certain
limitations as to amount. Currently, the initial payment must be at least $600.
Under a salary deduction or monthly automatic payment plan, the minimum initial
payment is $50. In all cases, each subsequent payment must be at least $50.
Where the contribution on behalf of an employee under an employer-sponsored
retirement plan is less than $600 but more than $300 annually, the Company may
issue a Contract on the employee if the plan's average annual contribution per
eligible plan participant is at least $600. The minimum allocation to a
Guarantee Period Account is $1,000. If less than $1,000 is allocated to a
Guarantee Period Account, the Company reserves the right to apply that amount to
the Money Market Fund.
Generally, unless otherwise requested, all payments will be allocated among the
accounts in the same proportion that the initial net payment is allocated or, if
subsequently changed, according to the most recent allocation instructions. To
the extent permitted by state law, however, if the Contract is issued as an IRA
or is issued in New York, any portion of the initial net payment and additional
net payments received during the Contract's first 15 days measured from the
issue date, allocated to any Sub-Account and/or any Guarantee Period Account,
will be held in the Money Market Fund until the end of the 15-day period.
Thereafter, these amounts will be allocated as requested.
The Owner may change allocation instructions for new payments pursuant to a
written or telephone request. If telephone requests are elected by the Owner, a
properly completed authorization must be on file before telephone requests will
be honored. The policy of the Company and its agents and affiliates is that they
will not be responsible for losses resulting from acting upon telephone requests
reasonably believed to be genuine. The Company will employ reasonable procedures
to confirm that instructions communicated by telephone are genuine; otherwise,
the Company may be liable for any losses due to unauthorized or fraudulent
instructions. The procedures the Company follows for transactions initiated by
telephone include requirements that callers
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<PAGE>
on behalf of an Owner identify themselves by name and identify the Annuitant by
name, date of birth and social security number. All transfer instructions by
telephone are tape recorded.
B. RIGHT TO REVOKE INDIVIDUAL RETIREMENT ANNUITY.
An individual purchasing a Contract intended to qualify as an IRA may revoke the
Contract at any time within ten days after receipt of the Contract and receive a
refund. In order to revoke the Contract, the Owner must mail or deliver the
Contract to the agent through whom the Contract was purchased, to the Principal
Office at 440 Lincoln Street, Worcester, MA 01653, or to an authorized
representative. Mailing or delivery must occur within ten days after receipt of
the Contract for revocation to be effective.
Within seven days, the Company will provide a refund equal to the greater of (1)
gross payments, or (2) gross payments allocated to the Fixed Account and the
Guarantee Period Accounts plus the Accumulated Value of any amounts allocated to
the Variable Account plus any amounts deducted under the Contract or by the
Underlying Funds for taxes, charges or fees.
The liability of the Variable Account under this provision is limited to the
Owner's Accumulated Value in the Sub-Accounts on the date of cancellation. Any
additional amounts refunded to the Owner will be paid by the Company.
C. RIGHT TO REVOKE ALL OTHER CONTRACTS.
In New York, an Owner may revoke the Contract at any time within ten days after
receipt of the Contract, and receive a refund as described under "B. Right to
Revoke Individual Retirement Annuity," above.
In all other states, an Owner may return the Contract at any time within ten
days (or the number of days required by state law if more than ten) after
receipt of the Contract. The Company will pay to the Owner an amount equal to
the sum of (1) the difference between the amount paid, including fees, and any
amount allocated to the Variable Account, and (2) the Accumulated Value of
amounts allocated to the Variable Account as of the date the request is
received. If the Contract was purchased as an IRA, the IRA revocation right
described above may be utilized in lieu of the special surrender right.
D. TRANSFER PRIVILEGE.
Prior to the Annuity Date, the Owner may transfer amounts among available
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.
Currently, the Company makes no 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.
AUTOMATIC TRANSFERS (DOLLAR COST AVERAGING) AND AUTOMATIC ACCOUNT REBALANCING
OPTIONS. The Owner may elect automatic transfers of a predetermined dollar
amount, not less than $100, on a periodic basis (monthly, bi-monthly, quarterly,
semi-annually or annually) from the Money Market Fund, the Government Bond Fund
or the Fixed Account (the "source account") to one or more Underlying Funds.
Automatic transfers may not be made into the Fixed Account, the Guarantee Period
Accounts or, if applicable, the Fund being used as the source account. If an
automatic transfer would reduce the balance in the source account to
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<PAGE>
less than $100, the entire balance will be transferred proportionately to the
chosen Funds. Automatic transfers will continue until the amount in the source
account on a transfer date is zero or the Owner's request to terminate the
option is received by the Company. If additional amounts are allocated to the
source account after its balance has fallen to zero, this option will not
restart automatically, and the Owner must provide a new request to the Company.
The Owner may request automatic rebalancing of Sub-Account allocations on a
monthly, quarterly, semi-annual or annual basis in accordance with percentage
allocations specified by the Owner. As frequently as specified by the Owner, the
Company will review the percentage allocations in the Funds and, if necessary,
transfer amounts to ensure conformity with the designated percentage allocation
mix. If the amount necessary to re-establish the mix on any scheduled date is
less than $100, no transfer will be made. Automatic Account Rebalancing will
continue until the Owner's request to terminate or change the option is received
by the Company. As such, subsequent payments allocated in a manner different
from the percentage allocation mix in effect on the date the payment is received
will be allocated in accordance with the existing mix on the next scheduled date
unless the Owner's timely request to change the allocation mix is received by
the Company.
The Company reserves the right to limit the number of Funds that may be utilized
for automatic transfers and rebalancing, and to discontinue either option upon
advance written notice. Currently, Dollar Cost Averaging and Automatic Account
Rebalancing may not be in effect simultaneously. Either option may be elected
when the Contract is purchased or at a later date.
E. SURRENDER.
At any time prior to the Annuity Date, the Owner may surrender the Contract and
receive an amount equal to the Surrender Value. The Owner must return the
Contract and a signed, written request for surrender, satisfactory to the
Company, to the Principal Office. The amount payable to the Owner upon surrender
will be based on the Contract's Accumulated Value as of the Valuation Date on
which the request and the Contract are received at the Principal Office.
Before the Annuity Date, a contingent deferred sales charge may be deducted when
a Contract is surrendered if payments have been credited to the Contract during
the last nine full Contract years. See "CHARGES AND DEDUCTIONS." The Contract
fee will be deducted upon surrender of the Contract.
After the Annuity Date, only a Contract under which a commutable period certain
option has been elected may be surrendered. The Surrender Amount is the commuted
value of any unpaid installments, computed on the basis of the assumed interest
rate incorporated in such annuity benefit payments. No contingent deferred sales
charge is imposed after the Annuity Date.
Any amount surrendered normally is payable within seven days following the
Company's receipt of the surrender request. The Company reserves the right to
defer surrenders and withdrawals of amounts in each Sub-Account in any period
during which (1) trading on the New York Stock Exchange is restricted as
determined by the SEC or such Exchange is closed for other than weekends and
holidays, (2) the SEC has, by order, permitted such suspension, or (3) an
emergency, as determined by the SEC, exists such that disposal of portfolio
securities or valuation of assets of a separate account is not reasonably
practicable.
The right is reserved by the Company to defer surrenders and withdrawals of
amounts allocated to the Company's Fixed Account and Guarantee Period Accounts
for a period not to exceed six months.
The surrender rights of Owners who are participants under Section 403(b) plans
or who are participants in the Texas Optional Retirement Program ("Texas ORP")
are restricted; see "Tax-Sheltered Annuities" and "Texas Optional Retirement
Program."
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<PAGE>
For important tax consequences which may result from surrender, see "FEDERAL TAX
CONSIDERATIONS."
F. WITHDRAWALS.
At any time prior to the Annuity Date, the Owner may withdraw a portion of the
Accumulated Value of his or her Contract, subject to the limits stated below.
The Owner must submit a signed, written request for withdrawal, satisfactory to
the Company, to the Principal Office. The written request must indicate the
dollar amount the Owner wishes to receive and the accounts from which such
amount is to be withdrawn. The amount withdrawn equals the amount requested by
the Owner plus any applicable contingent deferred sales charge, as described
under "CHARGES AND DEDUCTIONS." In addition, amounts withdrawn from a Guarantee
Period Account prior to the end of the applicable Guarantee Period will be
subject to a Market Value Adjustment, as described under "GUARANTEE PERIOD
ACCOUNTS."
Where allocations have been made to more than one account, a percentage of the
withdrawal may be allocated to each such account. A withdrawal from a
Sub-Account will result in cancellation of a number of units equivalent in value
to the amount withdrawn, computed as of the Valuation Date that the request is
received at the Principal Office.
Each withdrawal must be in a minimum amount of $100. No withdrawal will be
permitted if the Accumulated Value remaining under the Contract would be reduced
to less than $1,000. Withdrawals will be paid in accordance with the time
limitations described under "E. Surrender."
For important restrictions on withdrawals which are applicable to Owners who are
participants under Section 403(b) plans or under the Texas ORP, see
"Tax-Sheltered Annuities" and "Texas Optional Retirement Program."
For important tax consequences which may result from withdrawals, see "FEDERAL
TAX CONSIDERATIONS."
SYSTEMATIC WITHDRAWALS. The Owner may elect an automatic schedule of
withdrawals (systematic withdrawals) from amounts in the Sub-Accounts and/or the
Fixed Account on a monthly, bi-monthly, quarterly, semi-annual or annual basis.
Systematic withdrawals from Guarantee Period Accounts are not available. The
minimum amount of each automatic withdrawal is $100, and will be subject to any
applicable withdrawal charges. If elected at the time of purchase, the Owner
must designate in writing the specific dollar amount of each withdrawal and the
percentage of this amount which should be taken from each designated Sub-Account
and/or the Fixed Account. Systematic withdrawals then will begin on the date
indicated on the application. If elected after the issue date, the Owner may
elect, by written request, a specific dollar amount and the percentage of this
amount to be taken from each designated Sub-Account and/or the Fixed Account, or
the Owner may elect to withdraw a specific percentage of the Accumulated Value
calculated as of the withdrawal dates, and may designate the percentage of this
amount which should be taken from each account. The first withdrawal will take
place on the date the written request is received at the Principal Office or, if
later, on a date specified by the Owner.
If a withdrawal would cause the remaining Accumulated Value to be less than
$1,000, systematic withdrawals will be discontinued. Systematic withdrawals will
cease automatically on the Annuity Date. The Owner may change or terminate
systematic withdrawals by written request only to the Principal Office.
LIFE EXPECTANCY DISTRIBUTIONS. Prior to the Annuity Date an Owner who also is
the Annuitant may elect to make a series of systematic withdrawals from the
Contract according to a life expectancy distribution ("LED") option by returning
a properly signed LED request form to the Principal Office. The LED option
permits the Owner to make systematic withdrawals from the Contract over his or
her lifetime. The amount withdrawn from the Contract changes each year, because
life expectancy changes each year that a person lives.
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<PAGE>
For example, actuarial tables indicate that a person age 70 has a life
expectancy of 16 years, but a person who attains age 86 has a life expectancy of
another 6.5 years.
If an Owner elects the LED option, in each calendar year a fraction of the
Accumulated Value is withdrawn based on the Owner's then life expectancy. The
numerator of the fraction is 1 (one), and the denominator of the fraction is the
remaining life expectancy of the Owner, as determined annually by the Company.
The resulting fraction, expressed as a percentage, is applied to the Accumulated
Value at the beginning of the year to determine the amount to be distributed
during the year. The Owner also may elect to receive distributions under an LED
option which is determined on the joint life expectancy of the Owner and a
beneficiary The Owner may elect monthly, bi-monthly, quarterly, semi-annual, or
annual distributions, and may terminate the LED option at any time. The LED
option will terminate automatically on the maximum Annuity Date permitted under
the Contract, at which time an Annuity Option must be elected. The Company also
may offer other systematic withdrawal options.
Where the Owner is a trust or other non-natural person, the Owner may elect the
LED option based on the Annuitant's life expectancy.
If an Owner makes withdrawals under the LED option prior to age 59 1/2, the
withdrawals may be treated by the Internal Revenue Service ("IRS") as premature
distributions from the Contract. The payments then would be taxed on an "income
first" basis and be subject to a 10% federal tax penalty. For more information,
see "FEDERAL TAX CONSIDERATIONS" and "B. Taxation of the Contracts in General."
G. DEATH BENEFIT.
In the event that the Annuitant, Owner or Joint Owner, if applicable, dies while
the Contract is in force, the Company will pay the beneficiary a death benefit,
except where the Contract is continued as provided in "H. The Spouse of the
Owner as Beneficiary." The amount of the death benefit and the time requirements
for receipt of payment may vary depending upon whether the Annuitant or an Owner
dies first, and whether death occurs prior to or after the Annuity Date.
DEATH OF THE ANNUITANT PRIOR TO THE ANNUITY DATE. At the death of the Annuitant
(including an Owner who is also the Annuitant), the benefit is equal to the
greatest of (a) the Accumulated Value under the Contract increased by any
positive Market Value Adjustment; (b) gross payments, decreased proportionately
to reflect withdrawals (for each withdrawal, the proportionate reduction is
calculated as the death benefit under this option immediately prior to the
withdrawal multiplied by the withdrawal amount and divided by the Accumulated
Value immediately prior to the withdrawal); or (c) the death benefit that would
have been payable on the most recent contract anniversary, increased for
subsequent payments and decreased proportionately for subsequent withdrawals.
This guaranteed death benefit works in the following way assuming no withdrawals
are made: On the first anniversary, the death benefit will be equal to the
greater of (a) the Accumulated Value (increased by any positive Market Value
Adjustment) or (b) gross payments. The higher of (a) or (b) will then be locked
in until the second anniversary, at which time the death benefit will be equal
to the greatest of (a) the Contract's then current Accumulated Value increased
by any positive Market Value Adjustment; (b) gross payments or (c) the locked-in
value of the death benefit at the first anniversary. The greatest of (a), (b) or
(c) will be locked in until the next Contract anniversary. This calculation will
then be repeated on each anniversary while the Contract remains in force and
prior to the Annuity Date. As noted above, the values of (b) and (c) will be
decreased proportionately if withdrawals are taken. See APPENDIX C, "THE DEATH
BENEFIT" for specific examples of death benefit calculations.
DEATH OF AN OWNER WHO IS NOT ALSO THE ANNUITANT PRIOR TO THE ANNUITY DATE. If
an Owner who is not also the Annuitant dies before the Annuity Date, the death
benefit will be the Accumulated Value increased by
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<PAGE>
any positive Market Value Adjustment. The death benefit never will be reduced by
a negative Market Value Adjustment.
PAYMENT OF THE DEATH BENEFIT PRIOR TO THE ANNUITY DATE. The death benefit
generally will be paid to the beneficiary in one sum within seven business days
of the receipt of due proof of death at the Principal Office unless the Owner
has specified a death benefit annuity option. Instead of payment in one sum, the
beneficiary may, by written request, elect to:
(1) defer distribution of the death benefit for a period no more than five
years from the date of death; or
(2) receive a life annuity or an annuity for a period certain not extending
beyond the beneficiary's life expectancy, with annuity benefit payments
beginning one year from the date of death.
If distribution of the death benefit is deferred under (1) or (2), any value in
the Guarantee Period Accounts will be transferred to the Sub-Account investing
in the Money Market Fund. The excess, if any, of the death benefit over the
Accumulated Value also will be added to the Money Market Fund. The beneficiary
may, by written request, effect transfers and withdrawals during the deferral
period and prior to annuitization under (2), but may not make additional
payments. The death benefit will reflect any earnings or losses experienced
during the deferral period. If there are multiple beneficiaries, the consent of
all is required.
With respect to the death benefit, the Accumulated Value under the Contract will
be based on the unit values next computed after due proof of the death has been
received.
DEATH OF THE ANNUITANT ON OR AFTER THE ANNUITY DATE. If the Annuitant's death
occurs on or after the Annuity Date but before completion of all guaranteed
annuity benefit payments, any unpaid amounts or installments will be paid to the
beneficiary. The Company must pay out the remaining payments at least as rapidly
as under the payment option in effect on the date of the Annuitant's death.
H. THE SPOUSE OF THE OWNER AS BENEFICIARY.
The Owner's spouse, if named as the sole beneficiary, may by written request
continue the Contract in lieu of receiving the amount payable upon death of the
Owner. Upon such election, the spouse will become the Owner and Annuitant
subject to the following: (1) any value in the Guarantee Period Accounts will be
transferred to the Money Market Fund; (2) the excess, if any, of the death
benefit over the Contract's Accumulated Value also will be added to the Money
Market Fund. This value never will be subject to a surrender charge when
withdrawn. Additional payments may be made; however, a surrender charge will
apply to these amounts if they have not been invested in the Contract for more
than nine years. All other rights and benefits provided in the Contract will
continue, except that any subsequent spouse of such new Owner will not be
entitled to continue the Contract upon such new Owner's death.
I. ASSIGNMENT.
The Contract, other than those sold in connection with certain qualified plans,
may be assigned by the Owner at any time prior to the Annuity Date and while the
Annuitant is alive. The Company will not be deemed to have knowledge of an
assignment unless it is made in writing and filed at the Principal Office. The
Company will not assume responsibility for determining the validity of any
assignment. If an assignment of the Contract is in effect on the Annuity Date,
the Company reserves the right to pay to the assignee, in one sum, that portion
of the Surrender Value of the Contract to which the assignee appears to be
entitled. The Company will pay the balance, if any, in one sum to the Owner in
full settlement of all liability under the Contract. The interest of the Owner
and of any beneficiary will be subject to any assignment.
For important tax liability which may result from assignments, see "FEDERAL TAX
CONSIDERATIONS."
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J. ELECTING THE FORM OF ANNUITY AND THE ANNUITY DATE.
The Annuity Date is selected by the Owner. To the extent permitted in your
state, the Annuity Date may be the first day of any month (1) before the
Annuitant's 85th birthday, if the Annuitant's age on the issue date of the
Contract is 75 or under, or (2) within ten years from the issue date of the
Contract and before the Annuitant's 90th birthday, if the Annuitant's age on the
issue date is between 76 and 90. The Owner may elect to change the Annuity Date
by sending a request to the Principal Office at least one month before the
Annuity date. The new Annuity Date must be the first day of any month occurring
before the Annuitant's 90th birthday, and must be within the life expectancy of
the Annuitant. The Company shall determine such life expectancy at the time a
change in Annuity Date is requested. The Internal Revenue Code (the "Code") and
the terms of qualified plans impose limitations on the age at which annuity
benefit payments may commence and the type of annuity option selected. See
"FEDERAL TAX CONSIDERATIONS" for further information.
Subject to certain restrictions described below, the Owner has the right (1) to
select the annuity option under which annuity benefit payments are to be made,
and (2) to determine whether payments are to be made on a fixed basis, a
variable basis, or a combination fixed and variable basis. Annuity benefit
payments are determined according to the annuity tables in the Contract, by the
annuity option selected, and by the investment performance of the accounts
selected.
To the extent a fixed annuity payout is selected, Accumulated Value will be
transferred to the Fixed Account of the Company, and the annuity benefit
payments will be fixed in amount. See APPENDIX A, "MORE INFORMATION ABOUT THE
FIXED ACCOUNT."
Under a variable annuity payout, a payment equal to the value of the fixed
number of Annuity Units in the Sub-Accounts is made monthly, quarterly,
semi-annually or annually. Since the value of an Annuity Unit in a Sub-Account
will reflect the investment performance of the Sub-Account, the amount of each
annuity benefit payment will vary.
The annuity option selected must produce an initial payment of at least $50 (a
lower amount may be required in some states). The Company reserves the right to
increase this minimum amount. If the annuity options selected does not produce
an initial payment which meet this minimum, a single payment may be made. Once
the Company begins making annuity benefit payments, the Annuitant cannot make
withdrawals or surrender the annuity benefit, except where the Annuitant has
elected a commutable period certain option. Beneficiaries entitled to receive
remaining payments under either a commutable or non-commutable "period certain"
option may elect instead to receive a lump sum settlement. See "K. Description
of Variable Annuity Options."
If the Owner does not elect otherwise, a variable life annuity with periodic
payments for ten years guaranteed will be purchased. Changes in either the
Annuity Date or annuity option can be made up to one month prior to the Annuity
Date.
K. DESCRIPTION OF VARIABLE ANNUITY PAYOUT OPTIONS.
The Company provides the variable annuity payout options described below.
Currently, variable annuity options may be funded through the Sub-Accounts
investing in the Select Growth and Income Fund, the Equity Index Fund, the
Growth Fund and the Money Market Fund.
The Company also provides these same options funded through the Fixed Account
(fixed annuity payout). Regardless of how payments were allocated during the
accumulation period, any of the variable payout options or the fixed payout
options may be selected, or any of the variable options may be selected in
combination with any of the fixed options. Other annuity options may be offered
by the Company. IRS regulations may not permit certain of the available annuity
options when used in connection with certain qualified Contracts.
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VARIABLE LIFE ANNUITY WITH PAYMENTS GUARANTEED FOR TEN YEARS. This variable
annuity is payable periodically during the lifetime of the payee with the
guarantee that if the payee should die before all payments have been made, the
remaining annuity benefit payments will continue to the beneficiary.
VARIABLE LIFE ANNUITY PAYABLE PERIODICALLY DURING LIFETIME OF THE ANNUITANT
ONLY. It would be possible under this option for the Annuitant to receive only
one annuity benefit payment if the Annuitant dies prior to the due date of the
second annuity benefit payment, two annuity benefit payments if the Annuitant
dies before the due date of the third annuity benefit payment, and so on.
Payments will continue, however, during the lifetime of the Annuitant, no matter
how long he or she lives.
UNIT REFUND VARIABLE LIFE ANNUITY. This is an annuity payable periodically
during the lifetime of the payee with the guarantee that if (1) exceeds (2),
then periodic variable annuity benefit payments will continue to the beneficiary
until the number of such payments equals the number determined in (1).
Where: (1) is the dollar amount of the Accumulated Value divided by the dollar
amount of the first payment, and
(2) is the number of payments paid prior to the death of the payee.
JOINT AND SURVIVOR VARIABLE LIFE ANNUITY. This variable annuity is payable
jointly to two payees during their joint lifetime, and then continues thereafter
during the lifetime of the survivor. The amount of each payment to the survivor
is based on the same number of Annuity Units which applied during the joint
lifetime of the two payees. One of the payees must be either the person
designated as the Annuitant or the beneficiary in the Contract. There is no
minimum number of payments under this option.
JOINT AND TWO-THIRDS SURVIVOR VARIABLE LIFE ANNUITY. This variable annuity is
payable jointly to two payees during their joint lifetime, and then continues
thereafter during the lifetime of the survivor. The amount of each periodic
payment to the survivor, however, is based upon two-thirds of the number of
Annuity Units which applied during the joint lifetime of the two payees. One of
the payees must be the person designated as the Annuitant in the Contract or the
beneficiary. There is no minimum number of payments under this option.
PERIOD CERTAIN VARIABLE ANNUITY. This variable annuity has periodic payments
for a stipulated number of years ranging from one to 30, and may be commutable
or non-commutable. A commutable option provides the Annuitant with the right to
request a lump sum payment of any remaining balance after annuity payments have
commenced. Under a non-commutable period certain option, the Annuitant may not
request a lump sum payment. See "ANNUITY BENEFIT PAYMENT" in the SAI.
It should be noted that the period certain option does not involve a life
contingency. In the computation of the payments under this option, the charge
for annuity rate guarantees, which includes a factor for mortality risks, is
made. Although not contractually required to do so, the Company currently
follows a practice of permitting persons receiving payments under a period
certain option to elect to convert to a variable annuity involving a life
contingency. The Company may discontinue or change this practice at any time,
but not with respect to election of the option made prior to the date of any
change in this practice.
L. ANNUITY BENEFIT PAYMENTS.
THE ANNUITY UNIT. On and after the Annuity Date, the Annuity Unit is a measure
of the value of the Annuitant's monthly annuity benefit payments under a
variable annuity option. The value of an Annuity Unit in each Sub-Account
initially was set at $1.00. The value of an Annuity Unit under a Sub-Account on
any Valuation Date thereafter is equal to the value of such unit on the
immediately preceding Valuation Date, multiplied by the product of (1) the net
investment factor of the Sub-Account for the current Valuation Period, and (2) a
factor to adjust benefits to neutralize the assumed interest rate. The assumed
interest rate, discussed below, is incorporated in the variable annuity options
offered in the Contract.
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DETERMINATION OF THE FIRST AND SUBSEQUENT ANNUITY BENEFIT PAYMENTS. The first
periodic annuity benefit payment is based upon the Accumulated Value as of a
date not more than four weeks preceding the date that the first annuity benefit
payment is due. Variable annuity benefit payments are due on the first of a
month, which is the date the payment is to be received by the Annuitant, and
currently are based on unit values as of the 15th day of the preceding month.
The Contract provides annuity rates which determine the dollar amount of the
first periodic payment under each form of annuity for each $1,000 of applied
value. For life contingency options and non-commutable period certain options of
ten or more years, (six or more under New York Contracts), the annuity value is
the Accumulated Value less any premium taxes and adjusted for any Market Value
Adjustment. For commutable period certain options or any period certain option
less than ten years, (less than six under New York Contracts), the value is the
Surrender Value less any premium tax. For a death benefit annuity, the annuity
value will be the amount of the death benefit. The annuity rates in the Contract
are based on a modification of the 1983(a) Individual Mortality Table on rates.
The amount of the first monthly payment depends upon the form of annuity
selected, the sex (however, see "M. NORRIS Decision") and age of the Annuitant
and the value of the amount applied under the annuity option. The variable
annuity options offered by the Company are based on a 3.5% assumed interest
rate. Variable payments are affected by the assumed interest rate used in
calculating the annuity option rates. Variable annuity benefit payments will
increase over periods when the actual net investment result of the Sub-Accounts
funding the annuity exceeds the equivalent of the assumed interest rate for the
period. Variable annuity benefit payments will decrease over periods when the
actual net investment result of the respective Sub-Account is less than the
equivalent of the assumed interest rate for the period.
The dollar amount of the first periodic annuity benefit payment under life
annuity options and non-commutable period certain options of ten years or more
(six or more under New York Contracts) is determined by multiplying (1) the
Accumulated Value applied under that option (after application of any Market
Value Adjustment and less premium tax, if any) divided by $1,000, by (2) the
applicable amount of the first monthly payment per $1,000 of value. For
commutable period certain options and any period certain option of less than ten
years (less than six years under New York Contracts), the Surrender Value less
premium taxes, if any, is used rather than the Accumulated Value. The dollar
amount of the first variable annuity benefit payment is then divided by the
value of an Annuity Unit of the selected Sub-Accounts to determine the number of
Annuity Units represented by the first payment. This number of Annuity Units
remains fixed under all annuity options except the joint and two-thirds survivor
annuity option. For each subsequent payment, the dollar amount of the variable
annuity benefit payment is determined by multiplying this fixed number of
Annuity Units by the value of an Annuity Unit on the applicable Valuation Date.
After the first benefit payment, the dollar amount of each periodic variable
annuity benefit payment will vary with subsequent variations in the value of the
Annuity Unit of the selected Sub-Accounts. The dollar amount of each fixed
amount annuity benefit payment is fixed and will not change, except under the
joint and two-thirds survivor annuity option.
From time to time, the Company may offer Owners both fixed and variable annuity
rates more favorable than those contained in the Contract. Any such rates will
be applied uniformly to all Owners of the same class.
For an illustration of a variable annuity benefit payment calculation using a
hypothetical example, see "ANNUITY BENEFIT PAYMENTS" in the SAI.
M. NORRIS DECISION
In the case of ARIZONA GOVERNING COMMITTEE V. NORRIS, the United States Supreme
Court ruled that, in connection with retirement benefit options offered under
certain employer-sponsored employee benefit plans, annuity options based on
sex-distinct actuarial tables are not permissible under Title VII of the Civil
Rights Act of 1964. The ruling requires that benefits derived from contributions
paid into a plan after August 1, 1983 be calculated without regard to the sex of
the employee. Annuity benefits attributable to payments received by
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the Company under a Contract issued in connection with an employer-sponsored
benefit plan affected by the NORRIS decision will be based on the greater of (1)
the Company's unisex non-guaranteed current annuity option rates, or (2) the
guaranteed unisex rates described in such Contract, regardless of whether the
Annuitant is male or female.
N. COMPUTATION OF VALUES.
THE ACCUMULATION UNIT. Each net payment is allocated to the accounts selected
by the Owner. Allocations to the Sub-Accounts are credited to the Contract in
the form of Accumulation Units. Accumulation Units are credited separately for
each Sub-Account. The number of Accumulation Units of each Sub-Account credited
to the Contract is equal to the portion of the net payment allocated to the
Sub-Account, divided by the dollar value of the applicable Accumulation Unit as
of the Valuation Date the payment is received at the Principal Office. The
number of Accumulation Units resulting from each payment will remain fixed
unless changed by a subsequent split of Accumulation Unit value, a transfer, a
withdrawal or surrender. The dollar value of an Accumulation Unit of each
Sub-Account varies from Valuation Date to Valuation Date based on the investment
experience of that Sub-Account, and will reflect the investment performance,
expenses and charges of its Underlying Funds. The value of an Accumulation Unit
was set at $1.00 on the first Valuation Date for each Sub-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.
The Accumulated Value under the Contract is determined by (1) multiplying the
number of Accumulation Units in each Sub-Account by the value of an Accumulation
Unit of that Sub-Account on the Valuation Date, (2) adding the products, and (3)
adding the amount of the accumulations in the Fixed Account and Guarantee Period
Accounts, if any.
NET INVESTMENT FACTOR. The Net Investment Factor is an index that measures the
investment performance of a Sub-Account from one Valuation Period to the next.
This factor is equal to 1.000000 plus the result from dividing (1) by (2) and
subtracting (3) and (4) where:
(1) is the investment income of a Sub-Account for the Valuation Period,
including realized or unrealized capital gains and losses during the
Valuation Period, adjusted for provisions made for taxes, if any;
(2) is the value of that Sub-Account's assets at the beginning of the
Valuation Period;
(3) is a charge for mortality and expense risks equal to 1.25% on an annual
basis of the daily value of the Sub-Account's assets; and
(4) is an administrative charge equal to 0.20% on an annual basis of the
daily value of the Sub-Account's assets.
The dollar value of an Accumulation Unit as of a given Valuation Date is
determined by multiplying the dollar value of the corresponding Accumulation
Unit as of the immediately preceding Valuation Date by the appropriate net
investment factor.
For an illustration of an Accumulation Unit calculation using a hypothetical
example see the SAI.
CHARGES AND DEDUCTIONS
Deductions under the Contract and charges against the assets of the Sub-Accounts
are described below. Other deductions and expenses paid out of the assets of the
Underlying Funds are described in the prospectuses and SAIs of the Trust,
Fidelity VIP, Fidelity VIP II, T. Rowe Price and DGPF.
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A. VARIABLE ACCOUNT DEDUCTIONS.
MORTALITY AND EXPENSE RISK CHARGE. The Company makes a daily charge equal to an
annual rate of 1.25% of the value of each Sub-Account's assets to cover the
mortality and expense risk which the Company assumes in relation to the variable
portion of the Contract. The charge is imposed during both the accumulation
phase and the annuity phase. The mortality risk arises from the Company's
guarantee that it will make annuity benefit payments in accordance with annuity
rate provisions established at the time the Contract is issued for the life of
the Annuitant (or in accordance with the annuity option selected), no matter how
long the Annuitant (or other payee) lives and no matter how long all Annuitants
as a class live. Therefore, the mortality charge is deducted during the annuity
phase on all Contracts, including those that do not involve a life contingency,
even though the Company does not bear direct mortality risk with respect to
variable annuity settlement options that do not involve life contingencies. The
expense risk arises from the Company's guarantee that the charges it makes will
not exceed the limits described in the Contract and in this Prospectus.
If the charge for mortality and expense risks is not sufficient to cover actual
mortality experience and expenses, the Company will absorb the losses. If
expenses are less than the amounts provided to the Company by the charge, the
difference will be a profit to the Company. To the extent this charge results in
a profit to the Company, such profit will be available for use by the Company
for, among other things, the payment of distribution, sales and other expenses.
Since mortality and expense risks involve future contingencies which are not
subject to precise determination in advance, it is not feasible to identify
specifically the portion of the charge which is applicable to each. The Company
estimates that a reasonable allocation might be 0.80% for mortality risk and
0.45% for expense risk.
ADMINISTRATIVE EXPENSE CHARGE. The Company assesses each Sub-Account with a
daily charge equal to an annual rate of 0.20% of the average daily net assets of
the Sub-Account. The charge is imposed during both the accumulation phase and
the annuity phase. The daily administrative expense charge is assessed to help
defray administrative expenses actually incurred in the administration of the
Sub-Account, without profits. There is no direct relationship, however, between
the amount of administrative expenses imposed on a given Contract and the amount
of expenses actually attributable to that Contract.
Deductions for the Contract fee (see B. below) 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
prospectus and SAI for the Fund contains additional information concerning
expenses of the Underlying Funds.
B. CONTRACT FEE.
A $30 Contract fee currently is deducted on the Contract anniversary date and
upon full surrender of the Contract if the Accumulated Value on any of these
dates is less than $50,000. The Contract fee is waived for Contracts issued to
and maintained by the trustee of a 401(k) plan. Where Contract value has been
allocated to more than one account, a percentage of the total Contract fee will
be deducted from the value in each account. The portion of the charge deducted
from each account will be equal to the percentage which the value in that
account bears to the Accumulated Value under the Contract. The deduction of the
Contract fee from a Sub-Account will result in cancellation of a number of
Accumulation Units equal in value to the percentage of the charge deducted from
that account.
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Where permitted by law, the Contract fee also may be waived for Contracts where,
on the date of issue, either the Owner or the Annuitant is within the class of
"eligible persons" as defined under the "Reduction and Elimination of Surrender
Charge" provision below.
C. PREMIUM TAXES.
Some states and municipalities impose a premium tax on variable annuity
contracts. State premium taxes currently range up to 3.5%.
The Company makes a charge for state and municipal premium taxes, when
applicable, and deducts the amount paid as a premium tax charge. The current
practice of the Company is to deduct the premium tax charge in one of two ways:
1. if the premium tax was paid by the Company when payments were received,
the premium tax charge is deducted on a pro-rata basis when withdrawals
are made, upon surrender of the Contract, or when annuity benefit
payments begin (the Company reserves the right instead to deduct the
premium tax charge for these Contracts at the time the payments are
received); or
2. the premium tax charge is deducted when annuity benefit payments begin.
In no event will a deduction be taken before the Company has incurred a tax
liability under applicable state law.
If no amount for premium tax was deducted at the time the payment was received,
but subsequently tax is determined to be due prior to the Annuity Date, the
Company reserves the right to deduct the premium tax from the Contract value at
the time such determination is made.
D. CONTINGENT DEFERRED SALES CHARGE.
No charge for sales expense is deducted from payments at the time the payments
are made. A contingent deferred sales charge, however, is deducted from the
Accumulated Value in the case of surrender and/or a withdrawal or at the time
annuity benefit payments begin, within certain time limits described below.
For purposes of determining the contingent deferred sales charge, the
Accumulated Value is divided into three categories: (1) New Payments -- payments
received by the Company during the nine years preceding the date of the
surrender; (2) Old Payments -- accumulated payments not defined as New Payments;
and (3) the amount available under the Withdrawal Without Surrender Charge
provision. See "Withdrawal Without Surrender Charge" below. For purposes of
determining the amount of any contingent deferred sales charge, surrenders will
be deemed to be taken first from amounts available as a Withdrawal Without
Surrender Charge, if any, then from Old Payments, and then from New Payments.
Amounts available as a Withdrawal Without Surrender Charge, followed by Old
Payments, may be withdrawn from the Contract at any time without the imposition
of a contingent deferred sales charge. If a withdrawal is attributable all or in
part to New Payments, a contingent deferred sales charge may apply.
CHARGES FOR SURRENDER AND WITHDRAWAL. If the Contract is surrendered, or if New
Payments are withdrawn while the Contract is in force and before the Annuity
Date, a contingent deferred sales charge may be imposed. The amount of the
charge will depend upon the number of years that the New Payments, if any, to
which the withdrawal is attributed have remained credited under the Contract.
For the purpose of calculating surrender charges for New Payments, all amounts
withdrawn are assumed to be deducted first from the earliest New Payment and
then from the next earliest New Payment and so on, until all New Payments have
been exhausted pursuant to the first-in-first-out ("FIFO") method of accounting.
(See "FEDERAL TAX CONSIDERATIONS" for a discussion of how withdrawals are
treated for income tax purposes.)
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The contingent deferred sales charges are as follows:
<TABLE>
<CAPTION>
YEARS FROM CHARGE AS PERCENTAGE OF
DATE OF PAYMENT NEW PAYMENTS WITHDRAWN
- ---------------- ---------------------------
<S> <C>
less than 2 8%
3 7%
4 6%
5 5%
6 4%
7 3%
8 2%
9 1%
Thereafter 0%
</TABLE>
The amount withdrawn equals the amount requested by the Owner plus the
contingent deferred sales charge, if any. The charge is applied as a percentage
of the New Payments withdrawn, but in no event will the total contingent
deferred sales charge exceed a maximum limit of 8.0% of total gross New
Payments. Such total charge equals the aggregate of all applicable contingent
deferred sales charges for surrender, withdrawals and annuitization.
REDUCTION OR ELIMINATION OF SURRENDER CHARGE. The Company will waive the
contingent deferred sales charge in the event that the Owner (or the Annuitant,
if the Owner is not an individual) becomes physically disabled after the issue
date of the Contract and before attaining age 65. Under New York Contracts, the
disability also must exist for a continuous period of at least 4 months. The
Company may require proof of such disability and continuing disability,
including written confirmation of receipt and approval of any claim for Social
Security Disability Benefits and reserves the right to obtain an examination by
a licensed physician of its choice and at its expense. In addition, except in
New York where not permitted by state law, the Company will waive the contingent
deferred sales charge in the event that an Owner (or the Annuitant, if the Owner
is not an individual) is: (1) admitted to a medical care facility and remains
confined there until the later of one year after the issue date or 90
consecutive days or (2) first diagnosed by a licensed physician as having a
fatal illness after the issue date of the Contract.
For purposes of the above provision, "medical care facility" means any
state-licensed facility or, in a state that does not require licensing, a
facility that is operating pursuant to state law, providing medically necessary
inpatient care which is prescribed 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; and
"physician" means a person other than the Owner, Annuitant or a member of one of
their families who is state licensed to give medical care or treatment and is
acting within the scope of that license.
Where contingent deferred sales charges have been waived under any one of three
situations discussed above, no additional payments under the Contract will be
accepted unless required by state law.
In addition, where permitted under state law, from time to time the Company may
allow a reduction in or elimination of the contingent deferred sales 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: (1) the size and type of group or class, and the
persistency expected from that group or class; (2) the total amount of payments
to be received, and the manner in which payments are remitted; (3) the purpose
for which the Contracts are being purchased, and whether that purpose makes it
likely that costs and expenses will be reduced; (4) other transactions where
sales expenses are likely to be reduced; or (5) the level of commissions paid to
registered representatives, selling broker-dealers or certain financial
institutions with respect to Contracts within the same group or class (for
example, broker-dealers who offer the Contract in connection
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with financial planning services offered on a fee-for-service basis). The
Company also may reduce or waive the contingent deferred sales charge, and/or
credit additional amounts on contracts, where either the Owner or the Annuitant
on the date of issue is within the following classes of individuals ("eligible
persons"): (1) any employee of the Company located at its home office or at
off-site locations if such employees are on the Company's home office payroll;
(2) any director of the Company; (3) any retiree who elected to retire on his/
her retirement date; (4) the immediate family members of those persons
identified in (1) through (3) above residing in the same household; and (5) any
beneficiary who receives a death benefit under a deceased employees or retiree's
progress sharing plan. For purposes of the above class of individuals, "the
Company" includes affiliates and subsidiaries; "immediate family members" means
children, siblings, parents and grandparents; "retirement date" means an
employee's early, normal or late retirement date as defined in the Company's
pension plan or any successor plan, and "progress sharing" means the First
Allmerica Financial Life Insurance Company Employee's Matched Savings Plan or
any successor plan.
Finally, if permitted under state law, contingent deferred sales charges will be
waived under a Section 403(b) Contract where the amount withdrawn is being
contributed to a life insurance policy issued by the Company as part of the
individual's Section 403(b) plan.
Any reduction or elimination in the amount or duration of the contingent
deferred sales charge will not discriminate unfairly among purchasers of the
Contract. The Company will not make any changes to this charge where prohibited
by law.
Pursuant to Section 11 of the 1940 Act and Rule 11a-2 thereunder, the contingent
deferred sales charge is modified to effect certain exchanges of existing
annuity contracts issued by the Company for the Contract. See "EXCHANGE OFFER"
in the SAI.
WITHDRAWAL WITHOUT SURRENDER CHARGE. In each calendar year, the Company will
waive the contingent deferred sales charge, if any, on an amount ("Withdrawal
Without Surrender Charge") equal to the greatest of (1), (2) or (3):
Where (1) is: 100% of Cumulative Earnings (calculated as the Accumulated
Value as of the Valuation Date the Company receives the
withdrawal request, or the following day, reduced by total
gross payments not previously withdrawn);
Where (2) is: 10% of the Accumulated Value as of the Valuation Date the
Company receives the withdrawal request, or the following
day, reduced by the total amount of any prior withdrawals
made in the same calendar year to which no contingent
deferred sales charge was applied; and
Where (3) is: The amount calculated under the Company's life expectancy
distribution option (see "Life Expectancy Distributions")
whether or not the withdrawal was part of such distribution
(applies only if Annuitant is also an Owner).
For example, an 81-year-old Owner/Annuitant with an Accumulated Value of
$15,000, of which $1,000 is Cumulative Earnings, would have a Withdrawal Without
Surrender Charge of $1,530 which is equal to the greatest of:
(1) Cumulative Earnings ($1,000);
(2) 10% of Accumulated Value ($1,500); or
(3) LED of 10.2% of Accumulated Value ($1,530).
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The Withdrawal Without Surrender Charge first will be deducted from Cumulative
Earnings. If the Withdrawal Without Surrender Charge exceeds Cumulative
Earnings, the excess amount will be deemed withdrawn from payments not
previously withdrawn on a last-in first-out ("LIFO") basis. If more than one
withdrawal is made during the year, on each subsequent withdrawal the Company
will waive the contingent deferred sales charge, if any, until the entire
Withdrawal Without Surrender Charge has been withdrawn. Amounts withdrawn from a
Guarantee Period Account prior to the end of the applicable Guarantee Period
will be subject to a Market Value Adjustment.
SURRENDERS. In the case of a complete surrender, the amount received by the
Owner is equal to the entire Accumulated Value under the Contract, net of the
applicable contingent deferred sales charge on New Payments, the Contract fee
and any applicable tax withholding, and adjusted for any applicable Market Value
Adjustment. Subject to the same rules applicable to withdrawals, the Company
will not assess a contingent deferred sales charge on an amount equal to the
Withdrawal Without Surrender Charge Amount, described above.
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 contingent deferred sales charge. Any such reallocation
will be at the unit values for the Sub-Accounts as of the Valuation Date on
which a written, signed request is received at the Principal Office.
For further information on surrender and withdrawal, including minimum limits on
amount withdrawn and amount remaining under the Contract in the case of
withdrawal, and important tax considerations, see "E. Surrender" and "F.
Withdrawals" under "DESCRIPTION OF THE CONTRACT," and see "FEDERAL TAX
CONSIDERATIONS"
CHARGE AT THE TIME ANNUITY BENEFIT PAYMENTS BEGIN. If any commutable period
certain option or a non-commutable period certain option for less than ten years
is chosen, a contingent deferred sales charge will be deducted from the
Accumulated Value of the Contract if the Annuity Date occurs at any time when
the surrender charge would still apply had the Contract been surrendered on the
Annuity Date.
No contingent deferred sales charge is imposed at the time of annuitization in
any Contract year under an option involving a life contingency or for any
non-commutable period certain option for ten years or more. A Market Value
Adjustment, however, may apply. See "GUARANTEE PERIOD ACCOUNTS." If the Owner of
a fixed annuity contract issued by the Company wishes to elect a variable
annuity option, the Company may permit such Owner to exchange, at the time of
annuitization, the fixed contract for a Contract offered in this Prospectus. The
proceeds of the fixed contract, minus any contingent deferred sales charge
applicable under the fixed contract if a period certain option is chosen, will
be applied towards the variable annuity option desired by the Owner. The number
of Annuity Units under the option will be calculated using the Annuity Unit
values as of the 15th of the month preceding the Annuity Date.
E. TRANSFER CHARGE.
The Company currently makes no charge for processing transfers. The Company
guarantees that the first 12 transfers in a Contract year will be free of
transfer charge, but reserves the right to assess a charge, guaranteed never to
exceed $25, for each subsequent transfer in a Contract year. For more
information, see "D. Transfer Privilege."
GUARANTEE PERIOD ACCOUNTS
Due to certain exemptive and exclusionary provisions in the securities laws,
interests in the Guarantee Period Accounts and the Company's Fixed Account are
not registered as an investment company under the provisions of the Securities
Act of 1933 (the "1933 Act") or the 1940 Act. Accordingly, the staff of the SEC
has not
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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 the 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. Except under New York Contracts, 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.
Each Guarantee Period Account provides for the accumulation of interest at a
Guaranteed Interest Rate. The Guaranteed Interest Rate on amounts allocated or
transferred to a Guarantee Period Account is determined from time to time by the
Company in accordance with market conditions. Once an interest rate is in effect
for a Guarantee Period Account, however, the Company may not change it during
the duration of the Guarantee Period. In no event will the Guaranteed Interest
Rate be less than 3%.
To the extent permitted by law, the Company reserves the right at any time to
offer Guarantee Periods with durations that differ from those which were
available when 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 Account. The minimum that may be allocated to establish a
Guarantee Period Account is $1,000. If less than $1,000 is allocated, the
Company reserves the right to apply that amount to the Money Market Fund. The
Owner may allocate amounts to any of the Guarantee Periods available.
At least 45 days, but not more than 75 days, prior to the end of a Guarantee
Period, the Company will notify the Owner in writing of the expiration of that
Guarantee Period. At the end of a Guarantee Period the Owner may transfer
amounts to the Sub-Accounts, the Fixed Account or establish a new Guarantee
Period Account of any duration then offered by the Company without a Market
Value Adjustment. If reallocation instructions are not received at the Principal
Office before the end of a Guarantee Period, the account value automatically
will be applied to a new Guarantee Period Account with the same duration unless
(1) less than $1,000 would remain in the Guarantee Period Account on the
expiration date, or (2) the Guarantee Period would extend beyond the Annuity
Date or is no longer available. In such cases, the Guarantee Period Account
value will be transferred to the Money Market Fund. Where amounts have been
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. This
practice may be discontinued or changed at the Company's discretion.
MARKET VALUE ADJUSTMENT. No Market Value Adjustment will be applied to
transfers, withdrawals, or a surrender from a Guarantee Period Account on the
expiration of its Guarantee Period. In addition, no negative Market Value
Adjustment will be applied to a death benefit although a positive Market Value
Adjustment, if any, will be applied to increase the value of the death benefit
when based on the Contract's Accumulated Value. See "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 account value. Amounts applied under an annuity option are treated
as withdrawals when calculating the Market Value Adjustment. The Market Value
Adjustment will be determined by multiplying the amount taken from each
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Guarantee Period Account before deduction of any Surrender Charge by the market
value factor. The market value factor for each Guarantee Period Account is equal
to:
[(1+i)/(1+j)](n/365) - 1
where: i is the Guaranteed Interest Rate expressed as a decimal (for
example 3% = 0.03) being credited to the current Guarantee
Period;
j is the new Guaranteed Interest Rate, expressed as a decimal,
for a Guarantee Period with a duration equal to the number of
years remaining in the current Guarantee Period, rounded to the
next higher number of whole years. If that rate is not available,
the Company will use a suitable rate or index allowed by the
Department of Insurance; and
n is the number of days remaining from the Effective Valuation
Date to the end of the current Guarantee Period.
Based on the application of this formula, the value of a Guarantee Period
Account will increase after the Market Value Adjustment is applied if the then
current market rates are lower than the rate being credited to the Guarantee
Period Account. Similarly, the value of a Guarantee Period Account will decrease
after the Market Value Adjustment is applied if the then current market rates
are higher than the rate being credited to the Guarantee Period Account. The
Market Value Adjustment is limited, however, so that even if the account value
is decreased after application of a Market Value Adjustment, it will equal or
exceed the Owner's principal plus 3% earnings per year less applicable Contract
fees. Conversely, if the then current market rates are lower and the account
value is increased after the Market Value Adjustment is applied, the increase in
value is also affected by the minimum guaranteed rate of 3% such that the amount
that will be added to the Guarantee Period Account is limited to the difference
between the amount earned and the 3% minimum guaranteed earnings. For examples
of how the Market Value Adjustment works, see APPENDIX B.
WITHDRAWALS. Prior to the Annuity Date, the Owner may make withdrawals of
amounts held in the Guarantee Period Accounts. Withdrawals from these accounts
will be made in the same manner and be subject to the same rules as set forth
under "E. Surrender" and "F. Withdrawals." In addition, the following provisions
also apply to withdrawals from a Guarantee Period Account: (1) a Market Value
Adjustment will apply to all withdrawals, including Withdrawals Without
Surrender Charge, unless made at the end of the Guarantee Period; and (2) the
Company reserves the right to defer payments of amounts withdrawn from a
Guarantee Period Account for up to six months from the date it receives the
withdrawal request. If deferred for 30 days or more, the Company will pay
interest on the amount deferred at a rate of at least 3%.
In the event that a Market Value Adjustment applies to a withdrawal of a portion
of the value of a Guarantee Period Account, it will be calculated on the amount
requested and deducted or added to the amount remaining in the Guarantee Period
Account. If the entire amount in a Guarantee Period Account is requested, the
adjustment will be made to the amount payable. If a contingent deferred sales
charge applies to the withdrawal, it will be calculated as set forth under "D.
Contingent Deferred Sales Charge" after application of the Market Value
Adjustment.
FEDERAL TAX CONSIDERATIONS
The effect of federal income taxes on the value of the 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.
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IT SHOULD BE RECOGNIZED THAT THE FOLLOWING DISCUSSION OF FEDERAL INCOME TAX
ASPECTS OF AMOUNTS RECEIVED UNDER VARIABLE ANNUITY CONTRACTS IS NOT EXHAUSTIVE,
DOES NOT PURPORT TO COVER ALL SITUATIONS, AND IS NOT INTENDED AS TAX ADVICE. A
QUALIFIED TAX ADVISER ALWAYS SHOULD BE CONSULTED WITH REGARD TO THE APPLICATION
OF LAW TO INDIVIDUAL CIRCUMSTANCES.
The Company intends to make a charge for any effect which the income, assets, or
existence of the Contract, the Variable Account or the Sub-Accounts may have
upon its tax. The Variable Account presently is not subject to tax, but the
Company reserves the right to assess a charge for taxes should the Variable
Account at any time become subject to tax. Any charge for taxes will be assessed
on a fair and equitable basis in order to preserve equity among classes of
Owners and with respect to each separate account as though that separate account
were a separate taxable entity.
The Variable Account is considered a part of and taxed with the operations of
the Company. The Company is taxed as a life insurance company under Subchapter L
of the Code. The Company files a consolidated tax return with its affiliates.
The IRS has issued regulations relating to the diversification requirements for
variable annuity and variable life insurance contracts under Section 817(h) of
the Code. The regulations provide that the investments of a segregated asset
account underlying a variable annuity contract are 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. If the investments
are not adequately diversified, 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 Funds of the Trust, the Portfolios of Fidelity
VIP and VIP II, the Portfolio of T. Rowe Price and the Series of DGPF will
comply with the current diversification requirements. In the event that future
IRS regulations and/or rulings would require Contract modifications in order to
remain in compliance with the diversification standards, the Company will make
reasonable efforts to comply, and it reserves the right to make such changes as
it deems appropriate for that purpose.
A. QUALIFIED AND NON-QUALIFIED CONTRACTS.
From a federal tax viewpoint there are two types of variable annuity contracts:
"qualified" contracts and "non-qualified" contracts. A qualified contract is one
that is purchased in connection with a retirement plan which meets the
requirements of Sections 401, 403, or 408 of the Code, while a non-qualified
contract is one that is not purchased in connection with one of the indicated
retirement plans. The tax treatment for certain withdrawals or surrenders will
vary, depending on whether they are made from a qualified contract or a non-
qualified contract. For more information on the tax provisions applicable to
qualified contracts, see Section D below.
B. TAXATION OF THE CONTRACTS IN GENERAL.
The Company believes that the Contract described in this Prospectus will, with
certain exceptions (see "Non-Natural Owners" below), be considered an annuity
contract under Section 72 of the Code. This section governs the taxation of
annuities. The following discussion concerns annuities subject to Section 72.
WITHDRAWALS PRIOR TO ANNUITIZATION. With certain exceptions, any increase in
the Contract's Accumulated Value is not taxable to the Owner until it is
withdrawn from the Contract. If the Contract is surrendered or amounts are
withdrawn prior to the Annuity Date, any withdrawal of investment gain in value
over the cost basis of the Contract will be taxed as ordinary income. Under the
current provisions of the Code, amounts received under an annuity contract prior
to annuitization (including payments made upon the death of the annuitant or
owner), generally are first attributable to any investment gains credited to the
contract over the taxpayer's "investment in the contract." Such amounts will be
treated as gross income subject to federal income taxation. "Investment in the
contract" is the total of all payments to the contract which were not
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excluded from the Owner's gross income less any amounts previously withdrawn
which were not included in income. Section 72(e)(11)(A)(ii) requires that all
non-qualified deferred annuity contracts issued by the same insurance company to
the same owner during a single calendar year be treated as one contract in
determining taxable distributions.
ANNUITY PAYOUTS AFTER ANNUITIZATION. When annuity benefit payments are
commenced under the Contract, generally a portion of each payment may be
excluded from gross income. The excludable portion generally is determined by a
formula that establishes the ratio that the 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 the investment in the Contract is recovered, a deduction for the
difference is allowed on the Annuitant's final tax return.
PENALTY ON DISTRIBUTION. A 10% penalty tax may be imposed on the withdrawal of
investment gains if the withdrawal is made prior to age 59 1/2. The penalty tax
will not be imposed on withdrawals taken on or after age 59 1/2, or if the
withdrawal follows the death of the Owner (or, if the Owner is not an
individual, the death of the primary Annuitant, as defined in the Code) or, in
the case of the Owner's "total disability" (as defined in the Code).
Furthermore, under Section 72 of the Code, this penalty tax will not be imposed,
irrespective of age, if the amount received is one of a series of "substantially
equal" periodic payments made at least annually for the life or life expectancy
of the payee. This requirement is met when the Owner elects to have
distributions made over the Owner's life expectancy, or over the joint life
expectancy of the Owner and beneficiary. The requirement that the amount be paid
out as one of a series of "substantially equal" periodic payments is met when
the number of units withdrawn to make each distribution is substantially the
same. Any modification, other than by reason of death or disability, of
distributions which are part of a series of substantially equal periodic
payments that occurs before the Owner's age 59 1/2 or five years, will subject
the Owner to the 10% penalty tax on the prior distributions. In addition to the
exceptions above, the penalty tax will not apply to withdrawals from a qualified
Contract made to an employee who has terminated employment after reaching age
55.
In a Private Letter Ruling, the IRS took the position that where distributions
from a variable annuity contract were determined by amortizing the accumulated
value of the contract over the taxpayer's remaining life expectancy (such as
under the Contract's LED option), and the option could be changed or terminated
at any time, the distributions failed to qualify as part of a "series of
substantially equal payments" within the meaning of Section 72 of the Code. The
distributions, therefore, were subject to the 10% federal penalty tax. This
Private Letter Ruling may be applicable to an Owner who receives distributions
under the LED option prior to age 59 1/2. Subsequent Private Letter Rulings,
however, have treated LED-type withdrawal programs as effectively avoiding the
10% penalty tax. The position of the IRS on this issue is unclear.
ASSIGNMENTS OR TRANSFERS. If the Owner transfers (assigns) the Contract to
another individual as a gift prior to the Annuity Date, the Code provides that
the Owner will incur taxable income at the time of the transfer. An exception is
provided for certain transfers between spouses. The amount of taxable income
upon such taxable transfer is equal to any investment gain in value over the
Owner's cost basis at the time of the transfer. The transfer also is subject to
federal gift tax provisions. Where the Owner and Annuitant are different
persons, the change of ownership of the Contract to the Annuitant on the Annuity
Date, as required under the Contract, is a gift and will be taxable to the Owner
as such; however, the Owner will not incur taxable income. Instead, the
Annuitant will incur taxable income upon receipt of annuity benefit payments as
discussed above.
NON-NATURAL OWNERS. As a general rule, deferred annuity contracts owned by
"non-natural persons" (e.g., a corporation) are not treated as annuity contracts
for federal tax purposes, and the investment income attributable to
contributions made after February 28, 1986 is taxed as ordinary income that is
received or accrued by the owner during the taxable year. This rule does not
apply to annuity contracts purchased with a single payment when the annuity date
is no later than a year from the issue date or to deferred annuities owned by
qualified employer plans, estates, employers with respect to a terminated
pension plan, and entities other
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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. In addition, plan assets are treated as property of the
employer, and are subject to the claims of the employer's general creditors.
C. TAX WITHHOLDING.
The Code requires withholding with respect to payments or distributions from
non-qualified contracts and IRAs, unless a taxpayer elects not to have
withholding. A 20% withholding requirement applies to distributions from most
other qualified contracts. In addition, the Code requires reporting to the IRS
of the amount of income received with respect to payment or distributions from
annuities.
The tax treatment of certain withdrawals or surrenders of the non-qualified
Contracts offered by this Prospectus will vary according to whether the amount
withdrawn or surrendered is allocable to an investment in the Contract made
before or after certain dates.
D. PROVISIONS APPLICABLE TO QUALIFIED EMPLOYER PLANS.
The tax rules applicable to qualified retirement plans, as defined by the Code,
are complex and vary according to the type of plan. Benefits under a qualified
plan may be subject to that plan's terms and conditions irrespective of the
terms and conditions of any annuity contract used to fund such benefits. As
such, the following is simply a general description of various types of
qualified plans that may use the Contract. Before purchasing any annuity
contract for use in funding a qualified plan, more specific information should
be obtained.
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 competent advice as to the suitability
of the Contracts to their specific needs and as to applicable Code limitations
and tax consequences.
The Company can provide prototype plans for certain pension or profit sharing
plans for review by the plan's legal counsel. For information, ask your
financial representative.
INDIVIDUAL RETIREMENT ANNUITIES. Section 408 of the Code permits eligible
individuals to contribute to an individual retirement program known as an
Individual Retirement Annuity ("IRA"). Note: This term covers all IRAs permitted
under Section 408(b) of the Code, including Roth IRAs. IRAs are subject to
limits on the amounts that may be contributed, the persons who may be eligible,
and on the time when distributions may commence. In addition, certain
distributions from other types of retirement plans may be "rolled over," on a
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tax-deferred basis, to an IRA. Purchasers of an IRA Contract will be provided
with supplementary information as may be required by the IRS or other
appropriate agency, and will have the right to revoke the Contract as described
in this Prospectus. See "B. Right to Revoke Individual Retirement Annuity."
Eligible employers that meet specified criteria may establish simplified
employee pension plans (SEP-IRAs) or SIMPLE IRA plans 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 contracts purchased for employees under annuity plans
adopted by public school systems and certain organizations which are tax-exempt
under Section 501(c)(3) of the Code are excludable from the gross income of such
employees to the extent that total annual payments do not exceed the maximum
contribution permitted under the Code. Purchasers of TSA contracts should seek
competent advice as to eligibility, limitations on permissible payments and
other tax consequences associated with the contracts.
Withdrawals or other distributions attributable to salary reduction
contributions (including earnings thereon) made to a TSA contract after December
31, 1988, may not begin before the employee attains age 59 1/2, separates from
service, dies or becomes disabled. In the case of hardship, an Owner may
withdraw amounts contributed by salary reduction, but not the earnings on such
amounts. Even though a distribution may be permitted under these rules (e.g.,
for hardship or after separation from service), it may be subject to a 10%
penalty tax as a premature distribution, in addition to income tax.
TEXAS OPTIONAL RETIREMENT PROGRAM. Distributions under a TSA contract issued to
participants in the Texas Optional Retirement Program may not be received except
in the case of the participant's death, retirement or termination of employment
in the Texas public institutions of higher education. These additional
restrictions are imposed under the Texas Government Code and a prior opinion of
the Texas Attorney General.
REPORTS
An Owner is sent a report semi-annually which states certain financial
information about the Underlying Funds. The Company also will furnish an annual
report to the Owner containing a statement of his or her account, including
Accumulation Unit values and other information as required by applicable law,
rules and regulations.
LOANS (QUALIFIED CONTRACTS ONLY)
Loans are available to Owners of TSA Contracts (i.e., contracts issued under
Section 403(b) of the Code) and to Contracts issued to plans qualified under
Sections 401(a) and 401(k) of the Code. Loans are subject to provisions of the
Code and to applicable qualified retirement plan rules. Tax advisors and plan
fiduciaries should be consulted prior to exercising loan privileges.
Loaned amounts will be withdrawn first from Sub-Account and Fixed Account values
on a pro-rata basis until exhausted. Thereafter, any additional amounts will be
withdrawn from the Guarantee Period Accounts (pro rata by duration and LIFO
within each duration), subject to any applicable Market Value Adjustments. The
maximum loan amount will be determined under the Company's maximum loan formula.
The minimum loan amount is $1,000. Loans will be secured by a security interest
in the Contract and the amount borrowed will be transferred to a loan asset
account within the Company's General Account, where it will accrue interest at a
specified rate below the then-current loan rate. Generally, loans must be repaid
within five years or less, and repayments must be made quarterly and in
substantially equal amounts. Repayments will be allocated pro rata in accordance
with the most recent payment allocation, except that any allocations to a
Guarantee Period Account will be allocated instead to the Money Market Fund.
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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 Funds 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 the 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 separate accounts of the
Company and its affiliates which issue variable life contracts ("mixed
funding"). Shares of the 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 neither the Company nor any of the underlying
investment companies currently foresee any such disadvantages to either variable
life 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
Contracts to reflect the substitution or change, and will notify Owners of all
such changes. If the Company deems it to be in the best interest of Owners, and
subject to any approvals that may be required under applicable law, the Variable
Account or any Sub-Accounts may be operated as a management company under the
1940 Act, may be deregistered under the 1940 Act if registration is no longer
required, or may be combined with other Sub-Accounts or other separate accounts
of the Company.
The Company reserves the right, subject to compliance with applicable law, to:
(1) transfer assets from the Variable Account or any of its Sub-Accounts to
another of the Company's separate accounts or sub-accounts having assets of the
same class; (2) to operate the Variable Account or any Sub-Account as a
management investment company under the 1940 Act or in any other form permitted
by law; (3) to deregister the Variable Account under the 1940 Act in accordance
with the requirements of the 1940 Act; (4) to substitute the shares of any other
registered investment company for the Underlying Fund shares held by a
Sub-Account, in the event that Underlying Fund shares are unavailable for
investment, or if the Company determines that further investment in such
Underlying Fund shares is inappropriate in view of the purpose of the
Sub-Account; (5) to change the methodology for determining the net investment
factor; and (6) to change the names of the Variable Account or of the
Sub-Accounts. In no event will the changes described above be made without
notice to Owners in accordance with the 1940 Act.
CHANGES TO COMPLY WITH LAW AND AMENDMENTS
The Company reserves the right, without the consent of Owners, to suspend sales
of the Contract as presently offered, and to make any change to provisions of
the Contract to comply with, or give Owners the benefit of,
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any federal or state statute, rule or regulation, including but not limited to
requirements for annuity contracts and retirement plans under the Code and
pertinent regulations or any state statute or regulation.
VOTING RIGHTS
The Company will vote Underlying Fund shares held by each Sub-Account in
accordance with instructions received from Owners and, after the Annuity Date,
from the Annuitants. Each person having a voting interest in a Sub-Account will
be provided with proxy materials of the 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
which are received. The Company also will vote shares in a Sub-Account that it
owns and which are not attributable to Contract in the same proportion. If the
1940 Act or any rules thereunder should be amended or if the present
interpretation of the 1940 Act or such rules should change, and as a result the
Company determines that it is permitted to vote shares in its own right, whether
or not such shares are attributable to the Contract, the Company reserves the
right to do so.
The number of votes which an Owner or Annuitant may cast will be determined by
the Company as of the record date established by the 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 period, the number of Underlying Fund
shares attributable to each Annuitant will be determined by dividing the reserve
held in each Sub-Account for the Annuitant's Variable Annuity by the net asset
value of one Underlying Fund share. Ordinarily, the Annuitant's voting interest
in the Underlying Fund will decrease as the reserve for the Variable Annuity is
depleted.
DISTRIBUTION
The Contracts offered by this Prospectus may be purchased from representatives
of Allmerica Investments, Inc., a registered broker-dealer under the Securities
and Exchange Act of 1934 and a member of the National Association of Securities
Dealers, Inc. ("NASD"). Allmerica Investments, Inc., 440 Lincoln Street,
Worcester, MA 01653, is also the principal underwriter and distributor and is an
indirect wholly owned subsidiary of First Allmerica. The Contract also may be
purchased from certain independent broker-dealers which are NASD members.
The Company pays commissions, not to exceed 5.0% of payments, to registered
representatives of Allmerica Investments, Inc. Alternative commission schedules
are available with lower initial commission amounts based on payments, plus
ongoing annual compensation of up to 1% of Contract value. Managers who
supervise the agents will receive overriding commissions ranging up to no more
than 2% of payments.
The Company intends to recoup commissions and other sales expenses through a
combination of anticipated contingent deferred sales charges and profits from
the Company's General Account. Commissions paid on the Contract, including
additional incentives or payments, do not result in any additional charge to
Owners or to the Variable Account. Any contingent deferred sales charges
assessed on the Contract will be retained by the Company except for amounts it
may pay to Allmerica Investments, Inc. for services it performs and expenses it
may incur as principal underwriter and general distributor. Owners may direct
any inquiries to their financial representative or to Annuity Client Services,
First Allmerica Financial Life Insurance Company, 440 Lincoln Street, Worcester,
MA 01653, Telephone 1-800-533-7881.
SERVICES
The Company receives fees from the investment advisers or other service
providers of certain Underlying Funds in return for providing certain services
to Owners. Currently, the Company receives service fees with respect to the
Fidelity VIP Overseas Portfolio, Fidelity VIP Equity-Income Portfolio, Fidelity
VIP Growth Portfolio, Fidelity VIP High Income Portfolio, and Fidelity VIP II
Asset Manager Portfolio, at an annual rate
49
<PAGE>
of 0.10% of the aggregate net asset value, respectively, of the shares of such
Underlying Funds held by the Variable Account. With respect to the T. Rowe Price
International Stock Portfolio, the Company receives service fees at an annual
rate of 0.15% per annum of the aggregate net asset value of shares held by the
Variable Account. The Company may in the future render services for which it
will receive compensation from the investment advisers or other service
providers of other Underlying Funds.
LEGAL MATTERS
There are no legal proceedings pending to which the Variable Account is a party.
FURTHER INFORMATION
A Registration Statement under the 1933 Act relating to this offering has been
filed with the SEC. Certain portions of the Registration Statement and
amendments have been omitted in this Prospectus pursuant to the rules and
regulations of the SEC. The omitted information may be obtained from the SEC's
principal office in Washington, D.C., upon payment of the SEC's prescribed fees.
50
<PAGE>
APPENDIX A
MORE INFORMATION ABOUT THE FIXED ACCOUNT
Because of exemption and exclusionary provisions in the securities laws,
interests in the Fixed Account are not generally subject to regulation under the
provisions of the Securities Act of 1933 or the Investment Company Act of 1940.
Disclosures regarding the fixed portion of the annuity contract and the Fixed
Account may be subject to the provisions of the Securities Act of 1933
concerning the accuracy and completeness of statements made in the Prospectus.
The disclosures in this APPENDIX A have not been reviewed by the Securities and
Exchange Commission.
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 separate
accounts. 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 Contracts, the minimum
interest which may be credited on amounts allocated to the Fixed Account is 3%
compounded annually. Additional "Excess Interest" may or may not be credited at
the sole discretion of the Company.
If a Contract is surrendered, or if an amount in excess of the Withdrawal
Without Surrender Charge is withdrawn while the Contract is in force and before
the Annuity Date, a contingent deferred sales charge is imposed if such event
occurs before the payments attributable to the surrender or withdrawal have been
credited to the Contract for at least nine full Contract years.
A-1
<PAGE>
APPENDIX B
SURRENDER CHARGES AND THE MARKET VALUE ADJUSTMENT
PART 1: SURRENDER CHARGES
FULL SURRENDER -- Assume a payment of $50,000 is made on the issue date and no
additional payments are made. Assume there are no withdrawals and that the
Withdrawal Without Surrender Charge Amount is equal to the greater of 10% of the
current Accumulated Value or the accumulated earnings in the Contract. The table
below presents examples of the surrender charge resulting from a full surrender,
based on Hypothetical Accumulated Values.
<TABLE>
<CAPTION>
HYPOTHETICAL WITHDRAWAL SURRENDER
CONTRACT ACCUMULATED WITHOUT SURRENDER CHARGE SURRENDER
YEAR VALUE CHARGE AMOUNT PERCENTAGE CHARGE
- ------------- -------------- ----------------- ---------------- ------------
<S> <C> <C> <C> <C>
1 $ 54,000.00 $ 5,400.00 8% $ 3,888.00
2 58,320.00 8,320.00 8% 4,000.00
3 62,985.60 12,985.60 7% 3,500.00
4 68,024.45 18,024.45 6% 3,000.00
5 73,466.40 23,466.40 5% 2,500.00
6 79,343.72 29,343.72 4% 2,000.00
7 85,691.21 35,691.21 3% 1,500.00
8 92,546.51 42,546.51 2% 1,000.00
9 99,950.23 49,950.23 1% 500.00
10 107,946.25 57,946.25 0% 0.00
</TABLE>
WITHDRAWALS -- Assume a payment of $50,000 is made on the issue date and no
additional payments are made. Assume that the Withdrawal Without Surrender
Charge Amount is equal to the greater of 10% of the current Accumulated Value or
the accumulated earnings in the Contract and there are withdrawals as detailed
below. The table below presents examples of the surrender charge resulting from
withdrawals, based on Hypothetical Accumulated Value.
<TABLE>
<CAPTION>
HYPOTHETICAL WITHDRAWAL SURRENDER
CONTRACT ACCUMULATED WITHOUT SURRENDER CHARGE SURRENDER
YEAR VALUE WITHDRAWALS CHARGE AMOUNT PERCENTAGE CHARGE
- ------------- ------------ ------------ ----------------- ---------------- -----------
<S> <C> <C> <C> <C> <C>
1 $ 54,000.00 $0.00 $ 5,400.00 8% $ 0.00
2 58,320.00 0.00 8,320.00 8% 0.00
3 62,985.60 0.00 12,985.60 7% 0.00
4 68,024.45 30,000.00 18,024.45 6% 718.53
5 41,066.40 10,000.00 4,106.68 5% 294.67
6 33,551.72 5,000.00 3,355.17 4% 65.79
7 30,835.85 10,000.00 3,083.59 3% 207.49
8 22,502.72 15,000.00 2,250.27 2% 254.99
9 8,102.94 0.00 810.29 1% 0.00
10 8,751.17 0.00 1,248.45 0% 0.00
</TABLE>
B-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 $62,985.60 at the end
of three years.
4. No transfers of withdrawals affecting this Guarantee Period Account have
been made.
5. Surrender charges, if any, are calculated in the same manner as shown in the
examples in Part 1.
NEGATIVE MARKET VALUE ADJUSTMENT (UNCAPPED)
Assume that on the date of surrender, the current rate (j) is 10.00% or 0.10
<TABLE>
<S> <C> <C>
The market value factor = [(1+i)/(1+j)] to the power of n/365 - 1
= [(1+.08)/(1+.10)] to the power of 2555/365 - 1
= (.98182) to the power of 7 - 1
= -.12054
The market value = the market value factor multiplied by the withdrawal
adjustment
= -.12054 X $62,985.60
= -$7,592.11
</TABLE>
POSITIVE MARKET VALUE ADJUSTMENT (UNCAPPED)
Assume that on the date of surrender, the current rate (j) is 7.00% or 0.07
<TABLE>
<S> <C> <C>
The market value factor = [(1+i)/(1+j)] to the power of n/365 - 1
= [(1+.08)/(1+.07)] to the power of 2555/365 - 1
= (1.0093) to the power of 7 - 1
= .06694
The market value = the market value factor multiplied by the withdrawal
adjustment
= .06694 X $62,985.60
= $4,216.26
</TABLE>
B-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>
<S> <C> <C>
The market value factor = [(1+i)/(1+j)] to the power of n/365 - 1
= [(1+.08)/(1+.11)] to the power of 2555/365 - 1
= (.97297) to the power of 7 - 1
= -.17454
The market value = Minimum of the market value factor multiplied by the
adjustment withdrawal or the negative of the excess interest earned
over 3%
= Minimum (-.17454 X $62,985.60 or -$8,349.25)
= Minimum (-$10,993.51 or -$8,349.25)
= -$8,349.25
</TABLE>
POSITIVE MARKET VALUE ADJUSTMENT (CAPPED)
Assume that on the date of surrender, the current rate (j) is 6.00% or 0.06
<TABLE>
<S> <C> <C>
The market value factor = [(1+i)/(1+j)] to the power of n/365 - 1
= [(1+.08)/(1+.06)] to the power of 2555/365 - 1
= (1.01887) to the power of 7 - 1
= .13981
The market value = Minimum of the market value factor multiplied by the
adjustment withdrawal or the excess interest earned over 3%
= Minimum of (.13981 X $62,985.60 or $8,349.25)
= Minimum of ($8,806.02 or $8,349.25)
= $8,349.25
</TABLE>
B-3
<PAGE>
APPENDIX C
DIFFERENCES UNDER THE EXECANNUITY PLUS VARIABLE ANNUITY
(FORM A3018-94)
1. The Guarantee Period Accounts are not available under Form A3018.1-94 or
A3018.44-94 (referred to collectively as Form 3018-94). Note: the Guarantee
Period Accounts are not available in New York under either A3018-94 or
A3025-96GRC.
2. The waiver of surrender charge offered under the Allmerica Advantage
Contract (Form A3025-96GRC) for disability prior to age 65, fatal illness or
confinement to a medical care facility is not available under A3018-94. Note:
only the disability waiver is available in New York under A3025-96GRC.
3. The Owner, if a natural person, and the Annuitant must be the same under
Form A3018-94 and joint Owners are not permitted. Under A3025-96, the Owner and
the Annuitant may be different and joint Owners are permitted if one of the two
joint Owners is also the Annuitant.
4. The death benefit under A3018-94 that is payable upon the death of the
Owner/Annuitant is "stepped up" every fifth year rather than annually. Stated
another way, the highest accumulated value on any fifth year anniversary is
locked in rather than the highest accumulated value on any policy anniversary.
In addition, under the death benefit in 3018-94, gross payments are simply
reduced by subsequent withdrawals by subtracting the amount of the withdrawal
from the total gross payments. Under A3025-96, gross payments are reduced
proportionately by withdrawals (in the same proportion that the Accumulated
Value is reduced by the withdrawal.)
5. A3018-94 allows the Owner, in each calendar year, to withdraw without a
surrender charge the greater of (1) 10% of the Accumulated Value as of December
31 of the prior calendar year (in the first calendar, the amount is 10% of gross
payments), and (2) the life expectancy distribution. The Withdrawal Without
Surrender Charge amount is deducted first from Old Payments, then from New
Payments in the order that such payments were received pursuant to the FIFO
(first-in-first-out) method of accounting.
6. The following transfer provision applies to Form A3018-94:
At any time prior to the Annuity Date, subject to the Company's current rules,
an Owner may have amounts transferred among the Sub-Accounts or from the
Sub-Accounts to the General Account. Transfer values will be effected at the
Accumulation Value next computed after receipt of the transfer request. The
Company will make transfers pursuant to a written request, or, if a properly
completed authorization, is on file pursuant to a telephone request.
Except for General Account transfers made under the automatic transfer option
(Dollar Cost Averaging), transfers from the General Account will only be
permitted if there has been at least a ninety (90) day period since the last
transfer from the General Account and the amount transferred from the General
Account in each transfer does not exceed the lesser of $100,000 or 25% of the
Accumulated Value under the Policy.
The Company reserves the right to impose limitations on transfers including, but
not limited to (1) the minimum amount that may be transferred; (2) the minimum
amount that must remain in a Sub-Account following a transfer; (3) the minimum
period of time between transfers involving the General Account; and (4) the
maximum amount that may be transferred.
AUTOMATIC TRANSFERS (DOLLAR COST AVERAGING) AND AUTOMATIC ACCOUNT
REBALANCING. The Owner may elect automatic transfers of a predetermined amount,
not less than $100, on a periodic basis (monthly, bimonthly, or quarterly) from
the Money Market Fund or the Government Bond Fund (the "source account") to one
or more of the Sub-Accounts. Automatic transfers may not be made into the
General Account or, if applicable, the Sub-Account being used as the source
account. The General Account also may be used as the
C-1
<PAGE>
source account from which periodic automatic transfers will be made to any of
the Sub-Accounts provided that (1) the amount of each monthly transfer cannot
exceed 10% of the Policy value in the General Account as of the date of the
first transfer; (2) each bimonthly transfer cannot exceed 20% of the Policy
value in the General Accounts of the date of the first transfer; and (3) each
quarterly transfer cannot exceed 25% of Policy value in the General Account as
of the date of the first transfer. If an automatic transfer would reduce the
balance in the source account to less than $100, the entire balance will be
transferred proportionately to the chosen Sub-Accounts. Automatic transfers will
continue until the amount in the source account on a transfer date is zero or
the Owner's request to terminate the option is received by the Company. If
additional amounts are allocated to the source account after its balance has
fallen to zero, this option will not restart automatically and the Owner must
provide a new request to the Company.
The Owner may request automatic rebalancing of Sub-Account allocations on a
monthly, quarterly, semi-annual or annual basis in accordance with percentage
allocations specified by the Owner. As frequently as requested by the Owner, the
Company will review the percentage allocations in the Sub-Accounts and, if
necessary, transfer amounts to ensure conformity with the designated percentage
allocation mix. If the amount necessary to re-establish the mix on any scheduled
date is less than $100, no transfer will be made. Automatic Account Rebalancing
will continue until the Owner's request to terminate the option is received by
the Company.
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. The first automatic transfer and all
subsequent transfers of that request in the same Policy year count as one
transfer towards the 12 transfers which are guaranteed to be free of a transfer
charge each Policy year. Currently automatic transfers and automatic rebalancing
may not be in effect simultaneously.
C-2
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
STATEMENT OF ADDITIONAL INFORMATION
OF
INDIVIDUAL AND GROUP VARIABLE ANNUITY CONTRACT FUNDED THROUGH
SUB-ACCOUNTS OF
SEPARATE ACCOUNT VA-K
INVESTING IN SHARES OF ALLMERICA INVESTMENT TRUST, VARIABLE INSURANCE
PRODUCTS FUND, VARIABLE INSURANCE PRODUCTS FUND II, T. ROWE PRICE INTERNATIONAL
SERIES, INC., AND DELAWARE GROUP PREMIUM FUND, INC.
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS. IT SHOULD BE
READ IN CONJUNCTION WITH THE PROSPECTUS FOR THE ABOVE SUB-ACCOUNTS OF SEPARATE
ACCOUNT VA-K DATED MAY 1, 1998 ("THE PROSPECTUS"). THE PROSPECTUS MAY BE
OBTAINED FROM ANNUITY CLIENT SERVICES, FIRST ALLMERICA FINANCIAL LIFE INSURANCE
COMPANY, 440 LINCOLN STREET, WORCESTER, MASSACHUSETTS 01653, TELEPHONE
1-800-533-7881.
DATED MAY 1, 1998
1
<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
EXCHANGE OFFER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
PERFORMANCE INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . 8
FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . F-1
GENERAL INFORMATION AND HISTORY
Separate Account VA-K (the "Variable Account") is a separate investment account
of First Allmerica Financial Life Insurance Company (the "Company") established
by vote of its Board of Directors on August 20, 1991. The Company, organized
under the laws of Massachusetts in 1844, is the fifth oldest life insurance
company in America. As of December 31, 1997, the Company and its subsidiaries
had over $16.3 billion in combined assets and over $43.8 billion of life
insurance in force. Effective October 16, 1995, the Company converted from a
mutual life insurance company, known as State Mutual Life Assurance Company of
America, to a stock life insurance company and adopted its present name. The
Company is a wholly owned subsidiary of Allmerica Financial Corporation ("AFC").
The Company's principal office (the "Principal Office") is located at 440
Lincoln Street, Worcester, Massachusetts 01653, telephone (508) 855-1000.
The Company is subject to the laws of the Commonwealth of Massachusetts
governing insurance companies and to regulation by the Commissioner of Insurance
in Massachusetts. In addition, the Company is subject to the insurance laws and
regulations of other states and jurisdictions in which it is licensed to
operate.
Currently, 18 Sub-Accounts of the Variable Account are available under the
Allmerica Advantage contract (the "Contract") and ExecAnnuity Plus contract
(Form A3018-94), a predecessor contract no longer being sold. Each Sub-Account
invests in a corresponding investment portfolio of Allmerica Investment Trust
(the "Trust"), Variable Insurance Products Fund ("Fidelity VIP"), Variable
Insurance Products Fund II ("Fidelity VIP II"), T. Rowe Price International
Series, Inc. ("T. Rowe Price") or Delaware Group Premium Fund, Inc. ("DGPF").
The Trust is managed by Allmerica Financial Investment Management Services, Inc.
Fidelity VIP and Fidelity VIP II are managed by Fidelity Management and Research
Company ("FMR"). The T. Rowe Price International Stock Portfolio of T. Rowe
Price is managed by Rowe Price-Fleming International, Inc. ("Price-Fleming").
The International Equity Series of DGPF is managed by Delaware International
Advisers Ltd. ("International Advisers").
The Trust, Fidelity VIP, Fidelity VIP II, T. Rowe Price and DGPF are open-end,
diversified management
2
<PAGE>
investment companies. Eleven different funds of the Trust are available
under the Contract: the Growth Fund, Investment Grade Income Fund, Money
Market Fund, Equity Index Fund, Government Bond Fund, Select International
Equity Fund, Select Aggressive Growth Fund, Select Capital Appreciation Fund,
Select Growth Fund, Select Growth and Income Fund and Select Value
Opportunity Fund. Four of the portfolios of Fidelity VIP are available under
the Contract: the Fidelity VIP High Income Portfolio, Fidelity VIP
Equity-Income Portfolio, Fidelity VIP Growth Portfolio, and Fidelity VIP
Overseas Portfolio. One portfolio of Fidelity VIP II is available under the
Contract: the Fidelity VIP II Asset Manager Portfolio. One portfolio of T.
Rowe Price is available under the Contract: the T. Rowe Price International
Stock Portfolio. The International Equity Series is the only Series of DGPF
available under the Contract. Each Fund, Portfolio and Series 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 contracts, 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 contracts 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 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, 1997 and
1996 and for each of the three years in the period ended December 31, 1997,
and the financial statements of the Separate Account VA-K Allmerica Advantage
Variable Annuity and ExecAnnuity Plus Variable Annuity of First Allmerica
Financial Life Insurance Company as of December 31, 1997 and for the periods
indicated, included in this Statement of Additional Information constituting
part of this Registration Statement, have been so included in reliance on the
reports of Price Waterhouse LLP, independent accountants, given on the
authority of said firm as experts in auditing and accounting.
The financial statements of the Company included herein should be considered
only as bearing on the ability of the Company to meet its obligations under
the Contract.
UNDERWRITERS
Allmerica Investments, Inc. ("Allmerica Investments"), a registered
broker-dealer under the Securities Exchange Act of 1934 and a member of the
National Association of Securities Dealers, Inc. ("NASD"), serves
3
<PAGE>
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 the Company, and
presently is indirectly wholly owned by the Company.
The Contract offered by this Prospectus is offered continuously, and may be
purchased from NASD registered representatives of Allmerica Investments and
from certain independent broker-dealers which are NASD members and whose
representatives are authorized by applicable law to sell variable annuity
contracts.
Commissions are paid by the Company to its licensed insurance agents on sales
of the Contract. 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.
All persons selling the Contract are required to be licensed by their
respective state insurance authorities for the sale of variable annuity
policies. Registered representatives of Allmerica Investments receive
commissions of up to 5% (4% on contracts originally issued as part of a
401(k) plan) of payments. Independent broker-dealers receive commission of
5%, a portion of which is paid to their registered representatives.
The aggregate amounts of commissions paid to representatives of Allmerica
Investments, Inc. with respect to sales of the contracts were $3,098,387.25
in 1997, $2,563,703.47 in 1996 and $1,636,106.50 in 1995.
Commissions are paid by the Company, and do not result in any charge to
Owners or to the Variable Account in addition to the charges described under
"CHARGES AND DEDUCTIONS" in the Prospectus.
ANNUITY BENEFIT PAYMENTS
The method by which the Accumulated Value under the Contract is determined is
described in detail under "Computation of Values" in the Prospectus.
ILLUSTRATION OF ACCUMULATION UNIT CALCULATION USING HYPOTHETICAL EXAMPLE.
The Accumulation Unit calculation for a daily Valuation Period may be
illustrated by the following hypothetical example: Assume that the assets of
a Sub-Account at the beginning of a one-day Valuation Period were $5,000,000;
that the value of an Accumulation Unit on the previous date was $1.135000;
and that during the Valuation Period, the investment income and net realized
and unrealized capital gains exceed net realized and unrealized capital
losses by $1,675. The Accumulation Unit Value at the end of the current
Valuation Period would be calculated as follows:
<TABLE>
<S> <C>
(1) Accumulation Unit Value -- Previous Valuation Period. . . . . . . $ 1.135000
(2) Value of Assets -- Beginning of Valuation Period. . . . . . . . . $5,000,000
(3) Excess of Investment Income and Net Gains Over Capital Losses . . $1,675
(4) Adjusted Gross Investment Rate for the Valuation Period (3)
divided by (2) . . . . . . . . . . . . . . . . . . . . . . . . . 0.000335
(5) Annual Charge (one-day equivalent of 1.45% per annum) . . . . . . 0.000040
(6) Net Investment Rate (4) - (5) . . . . . . . . . . . . . . . . . 0.000295
4
<PAGE>
(7) Net Investment Factor 1.000000 + (6) . . . . . . . . . . . . . . 1.000295
(8) Accumulation Unit Value -- Current Period (1) x (7) . . . . . . . $ 1.135335
</TABLE>
Conversely, if unrealized capital losses and charges for expenses and taxes
exceeded investment income and net realized capital gains by $1,675, the
Accumulated Unit Value at the end of the Valuation Period would have been
$1.134574.
The method for determining the amount of annuity benefit payments is
described in detail under "Determination of the First and Subsequent Annuity
Benefit Payments" in the Prospectus.
ILLUSTRATION OF VARIABLE ANNUITY BENEFIT PAYMENT CALCULATION USING
HYPOTHETICAL EXAMPLE. The determination of the Annuity Unit value and the
variable annuity benefit payment may be illustrated by the following
hypothetical example: Assume an Annuitant has 40,000 Accumulation Units in a
Variable Account, and that the value of an Accumulation Unit on the Valuation
Date used to determine the amount of the first variable annuity benefit
payment is $1.120000. Therefore, the Accumulation Value of the Contract is
$44,800 (40,000 x $1.120000). Assume also that the Owner elects an option
for which the first monthly payment is $6.57 per $1,000 of Accumulated Value
applied. Assuming no premium tax or contingent deferred sales charge, the
first monthly payment would be 44.800 multiplied by $6.57, or $294.34.
Next, assume that the Annuity Unit value for the assumed rate of 3.5% per
annum for the Valuation Date as of which the first payment was calculated was
$1.100000. Annuity Unit values will not be the same as Accumulation Unit
Values because the former reflect the 3.5% assumed interest rate used in the
annuity rate calculations. When the Annuity Unit value of $1.100000 is
divided into the first monthly payment the number of Annuity Units
represented by that payment is determined to be 267.5818. The value of this
same number of Annuity Units will be paid in each subsequent month under most
options. Assume further that the net investment factor for the Valuation
Period applicable to the next annuity benefit payment is 1.000190.
Multiplying this factor by .999906 (the one-day adjustment factor for the
assumed interest rate of 3.5% per annum) produces a factor of 1.000096. This
then is multiplied by the Annuity Unit value on the immediately preceding
Valuation Date (assumed here to be $1.105000). The result is an Annuity Unit
value of $1.105106 for the current monthly payment. The current monthly
payment then is determined by multiplying the number of Annuity Units by the
current Annuity Unit value, or 267.5818 times $1.105106, which produces a
current monthly payment of $295.71.
METHOD FOR DETERMINING COMMUTED VALUE ON VARIABLE ANNUITY PERIOD CERTAIN
OPTIONS AND ILLUSTRATION USING HYPOTHETICAL EXAMPLE. The Contract offers
both commutable and non-commutable period certain annuity options. A
commutable option gives the Annuitant the right to exchange any remaining
payments for a lump sum payment based on the commuted value. The Commuted
Value is the present value of remaining payments calculated at 3.5% interest.
The determination of the Commuted Value may be illustrated by the following
hypothetical example.
Assume a commutable period certain option is elected. The number of Annuity
Units upon which each payment is based would be calculated using the
Surrender Value less any premium tax rather than the Accumulated Value.
Assume this results in 250.0000 Annuity Units. Assume the Commuted Value is
requested with 60 monthly payments remaining and a current Annuity Unit Value
of $1.200000. Based on these assumptions, the dollar amount of remaining
payments would be $300 a month for 60 months. The present value at 3.5% of
all remaining payments would be $16,560.72.
5
<PAGE>
EXCHANGE OFFER
A. VARIABLE ANNUITY CONTRACT EXCHANGE OFFER
The Company will permit Owners of certain variable annuity contracts issued
by Allmerica Financial Life Insurance and Annuity Company ("AFLIAC"),
described below, to exchange their contracts at net asset value for the
variable annuity contracts described in the Prospectus, which is issued on
Form No. A3025-96 or a state variation thereof ("new Contract"). The Company
reserves the right to suspend this exchange offer at any time.
This offer applies to the exchange of Elective Payment Variable Annuity
contracts issued by AFLIAC on Forms A3012-79 and A3013-79 ("Elective Payment
Exchanged Contract," all such contracts having numbers with a "JQ" or "JN"
prefix), and Single Payment Variable Annuity contracts issued on Forms
A3014-79 and A3015-79 ("Single Payment Exchanged Contract," all such
contracts having numbers with a "KQ" or "KN" prefix). These contracts are
referred to collectively as the "Exchanged Contract." To effect an exchange,
the Company should receive (1) a completed application for the new Contract,
(2) the contract being exchanged, and (3) a signed Letter of Awareness.
CONTINGENT DEFERRED SALES CHARGE COMPUTATION. No surrender charge otherwise
applicable to the Exchanged Contract will be assessed as a result of the
exchange. Instead, the contingent deferred sales charge under the new
Contract will be computed as if the payments that had been made to the
Exchanged Contract were made to the new Contract, as of the date of issue of
the Exchanged Contract. Any additional payments to the new Contract after
the exchange will be subject to the contingent deferred sales charge
computation outlined in the new Contract and Prospectus; i.e., the charge
will be computed based on the number of years that the additional payment (or
portion of that payment) that is being withdrawn has been credited to the new
Contract.
SUMMARY OF DIFFERENCES BETWEEN EXCHANGED CONTRACT AND THE NEW CONTRACT. The
new Contract and the Exchanged Contract differ substantially as summarized
below. There may be additional differences important to a person considering
an exchange, and the Prospectuses for the new Contract and the Exchanged
Contract should be reviewed carefully before the exchange request is
submitted to the Company.
CONTINGENT DEFERRED SALES CHARGE. The contingent deferred sales charge under
the new Contract, as described in the Prospectus, imposes higher charge
percentages against the excess amount redeemed than the Exchanged Contract
and, in the case of a Single Payment Exchanged Contract, applies the charge
for a greater number of years. In addition, if an Elective Payment Exchanged
Contract was issued more than nine years before the date of an exchange under
this offer, additional payments to the Exchanged Contract would not be
subject to a surrender charge. New payments to the new Contract may be
subject to a charge if withdrawn prior to the surrender charge period
described in the Prospectus.
CONTRACT FEE. Under the new Contract, the Company deducts a $30 fee on each
Contract anniversary and at surrender if the Accumulated Value is less than
$50,000. This fee is waived if the new Contract is part of a 401(k) plan.
No Contract fees are charged on the Single Payment Exchanged Contract. A $9
semi-annual fee is charged on the Elective Payment Variable Exchanged
Contract if the Accumulated Value is $10,000 or less.
VARIABLE ACCOUNT ADMINISTRATIVE EXPENSE CHARGE. Under the new Contract, the
Company assesses each Sub-Account a daily administrative expense charge at an
annual rate of 0.20% of the average daily net assets of the Sub-Account. No
administrative expense charge based on a percentage of Sub-Account assets is
imposed under the Exchanged Contract.
TRANSFER CHARGE. No charge for transfers is imposed under the Exchanged
Contract. Currently, no transfer charge is imposed under the new Contract;
however, the Company reserves the right to assess a charge not to exceed $25
for each transfer after the twelfth in any Contract year.
6
<PAGE>
ANNUITY TABLES. The Exchanged Contract contains higher guaranteed annuity
rates.
INVESTMENTS. Accumulated Values and payments under the new Contract may be
allocated to significantly more investment options than are available under
the Exchanged Contract.
DEATH BENEFIT. The Exchanged Contract offers a death benefit that is
guaranteed to be the greater of a Contract's Accumulated Value or gross
payments made (less withdrawals). At the time an exchange is processed, the
Accumulated Value of the Exchanged Contract becomes the "payment" for the new
Contract. Therefore, prior purchase payments made under the Exchanged
Contract (if higher than the Exchanged Contract's Accumulated Value) no
longer are a basis for determining the death benefit under the new Contract.
Consequently, whether the initial minimum death benefit under the new
Contract is greater than, equal to, or less than, the death benefit of the
Exchanged Contract depends on whether the Accumulated Value transferred to
the new Contract is greater than, equal to, or less than, the gross payments
under the Exchanged Contract. In addition, under the Exchanged Contract, the
amount of any prior withdrawals is subtracted from the value of the death
benefit. Under the new Contract, where there is a reduction in the death
benefit amount due to a prior withdrawal, the value of the death benefit is
reduced in the same proportion that the new Contract's Accumulated Value was
reduced on the date of the withdrawal.
B. FIXED ANNUITY EXCHANGE OFFER
This exchange offer also applies to all fixed annuity contracts issued by
the Company's subsidiary, Allmerica Financial Life Insurance and Annuity
Company. A fixed annuity contract to which this exchange offer applies may
be exchanged at net asset value for the Contract described in this
Prospectus, subject to the same provisions for effecting the exchange and for
applying the new Contract's contingent deferred sales charge as described
above for variable annuity contracts. This Prospectus should be read
carefully before making such exchange. Unlike a fixed annuity, the new
Contract's value is not guaranteed and will vary depending on the investment
performance of the Underlying Funds to which it is allocated. The new
Contract has a different charge structure than a fixed annuity contract,
which includes not only a contingent deferred sales charge that may vary from
that of the class of contracts to which the exchanged fixed contract belongs,
but also contract fees, mortality and expense risk charges (for the Company's
assumption of certain mortality and expense risks), administrative expense
charges, transfer charges (for transfers permitted among Sub-Accounts and the
Fixed Account), and expenses incurred by the Underlying Funds. Additionally,
the interest rates offered under the Fixed Account of the new Contract and
the Annuity Tables for determining minimum annuity benefit payments may be
different from those offered under the exchanged fixed contract.
C. EXERCISE OF "FREE-LOOK PROVISION" AFTER ANY EXCHANGE
Persons who, under the terms of this exchange offer, exchange their contract
for the new Contract and subsequently revoke the new Contract within the time
permitted, as described in the sections of this Prospectus captioned "Right
to Revoke Individual Retirement Annuity" and "Right to Revoke All Other
Contracts," will have their exchanged contract automatically reinstated as of
the date of revocation. The refunded amount will be applied as the new
current Accumulated Value under the reinstated contract, which may be more or
less than it would have been had no exchange and reinstatement occurred. The
refunded amount will be allocated initially among the Fixed Account and
Sub-Accounts of the reinstated contract in the same proportion that the value
in the Fixed Account and the value in each Sub-Account bore to the
transferred Accumulated Value on the date of the exchange of the contract for
the new Contract. For purposes of calculating any contingent deferred sales
charge under the reinstated contract, the reinstated contract will be deemed
to have been issued and to have received past purchase payments as if there
had been no exchange.
7
<PAGE>
PERFORMANCE INFORMATION
Performance information for a Sub-Account may be compared, in reports and
promotional literature, to certain indices described in the Prospectus under
"PERFORMANCE INFORMATION." In addition, the Company may provide
advertising, sales literature, periodic publications or other material
information on various topics of interest to Owners and prospective Owners.
These topics may include the relationship between sectors of the economy and
the economy as a whole and its effect on various securities markets,
investment strategies and techniques (such as value investing, market timing,
dollar cost averaging, asset allocation, constant ratio transfer and account
rebalancing), the advantages and disadvantages of investing in tax-deferred
and taxable investments, customer profiles and hypothetical purchase and
investment scenarios, financial management and tax and retirement planning,
and investment alternatives to certificates of deposit and other financial
instruments, including comparisons between the Contract and the
characteristics of and market for such financial instruments. Total return
data 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.
TOTAL RETURN
"Total Return" refers to the total of the income generated by an investment
in a Sub-Account and of the changes of value of the principal invested (due
to realized and unrealized capital gains or losses) for a specified period,
reduced by the Sub-Account's asset charge and any applicable contingent
deferred sales charge which would be assessed upon complete withdrawal of the
investment.
Total Return figures are calculated by standardized methods prescribed by
rules of the Securities and Exchange Commission (the "SEC"). The quotations
are computed by finding the average annual compounded rates of return over
the specified periods that would equate the initial amount invested to the
ending redeemable values, according to the following formula:
(n)
P(1 + T) = ERV
Where: P = a hypothetical initial payment to the Variable Account
of $1,000
T = average annual total return
n = number of years
ERV = the ending redeemable value of the $1,000 payment at
the end of the specified period
The calculation of Total Return includes the annual charges against the
assets of the Sub-Account. This charge is 1.45% 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 contingent deferred sales
charge, if any, applicable at the end of the period is included in the
calculation, according to the following schedule:
8
<PAGE>
<TABLE>
<CAPTION>
YEARS FROM DATE OF CHARGE AS PERCENTAGE OF
PAYMENT TO NEW PURCHASE PAYMENTS
DATE OF WITHDRAWAL WITHDRAWN*
<S> <C>
0-2 8%
3 7%
4 6%
5 5%
6 4%
7 3%
8 2%
9 1%
Thereafter 0%
</TABLE>
* Subject to the maximum limit described in the Prospectus.
No contingent deferred sales charge is deducted upon expiration of the
periods specified above. In each calendar year, a certain amount (withdrawal
without surrender charge amount, as described in the Prospectus) is not
subject to the contingent deferred sales charge.
The calculations of Total Return include the deduction of the $30 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 unrealized capital
gains or losses) for a specified period reduced by the Sub-Account's asset
charges. It is assumed, however, that the investment is NOT withdrawn at the
end of each period.
The quotations of Supplemental Total Return are computed by finding the
average annual compounded rates of return over the specified periods that
would equate the initial amount invested to the ending values, according to
the following formula:
(n)
P(1 + T) = EV
Where: P = a hypothetical initial payment to the Variable Account
of $1,000
T = average annual total return
n = number of years
EV = the ending value of the $1,000 payment at the end of
the specified period
The calculation of Supplemental Total Return reflects the 1.45% 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 contingent deferred sales charge that would be
applicable if the Contract was surrendered at the end of the period.
The calculations of Supplemental Total Return include the deduction of the
$30 annual Contract fee.
9
<PAGE>
YIELD AND EFFECTIVE YIELD - THE MONEY MARKET SUB-ACCOUNT
Set forth below is yield and effective yield information for the Money Market
Sub-Account for the seven-day period ended December 31, 1997:
Yield 5.05%
Effective Yield 5.17%
Yield and effective yield figures are calculated by standardized methods
prescribed by rules of the SEC. Under those methods, the yield quotation is
computed by determining the net change (exclusive of capital changes) in the
value of a hypothetical pre-existing account having a balance of one
accumulation unit of the Sub-Account at the beginning of the period,
subtracting a charge reflecting the annual 1.45% deduction for mortality and
expense risk and the administrative charge, dividing the difference by the
value of the account at the beginning of the same period to obtain the base
period return, and then multiplying the return for a seven-day base period by
(365/7), with the resulting yield carried to the nearest hundredth of one
percent.
The Money Market Sub-Account computes effective yield by compounding the
unannualized base period return by using the formula:
(365/7)
Effective Yield = [(base period return + 1) ] - 1
The calculations of yield and effective yield reflect the $30 annual Contract
fee.
FINANCIAL STATEMENTS
Financial Statements are included for First Allmerica Financial Life
Insurance Company and for its Separate Account VA-K.
10
<PAGE>
FIRST ALLMERICA
FINANCIAL LIFE
INSURANCE COMPANY
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholder of
First Allmerica Financial Life Insurance Company
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, of shareholder's equity, and of cash flows
present fairly, in all material respects, the financial position of First
Allmerica Financial Life Insurance Company and its subsidiaries at December 31,
1997 and 1996, and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/s/ Price Waterhouse LLP
Price Waterhouse LLP
Boston, Massachusetts
February 3, 1998
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
(IN MILLIONS) 1997 1996 1995
----------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
REVENUES
Premiums................................... $2,311.0 $2,236.3 $2,222.8
Universal life and investment product
policy fees............................... 237.3 197.2 172.4
Net investment income...................... 641.8 670.8 710.5
Net realized investment gains.............. 76.5 66.8 19.1
Realized gain from sale of mutual fund
processing business....................... -- -- 20.7
Other income............................... 117.6 108.4 109.3
--------- --------- ---------
Total revenues......................... 3,384.2 3,279.5 3,254.8
--------- --------- ---------
BENEFITS, LOSSES AND EXPENSES
Policy benefits, claims, losses and loss
adjustment expenses....................... 2,004.6 1,957.0 2,010.3
Policy acquisition expenses................ 425.1 470.1 470.9
Loss from cession of disability income
business.................................. 53.9 -- --
Other operating expenses................... 523.7 503.2 468.7
--------- --------- ---------
Total benefits, losses and expenses.... 3,007.3 2,930.3 2,949.9
--------- --------- ---------
Income before federal income taxes......... 376.9 349.2 304.9
--------- --------- ---------
FEDERAL INCOME TAX EXPENSE (BENEFIT)
Current.................................... 83.3 96.8 119.7
Deferred................................... 14.2 (15.7) (37.0)
--------- --------- ---------
Total federal income tax expense....... 97.5 81.1 82.7
--------- --------- ---------
Income before minority interest................ 279.4 268.1 222.2
Minority interest.............................. (79.4) (74.6) (73.1)
--------- --------- ---------
Income before extraordinary item............... 200.0 193.5 149.1
Extraordinary item -- demutualization
expenses...................................... -- -- (12.1)
--------- --------- ---------
Net income..................................... $ 200.0 $ 193.5 $ 137.0
--------- --------- ---------
--------- --------- ---------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-1
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
(IN MILLIONS) 1997 1996
-------------------------------------------------------- ---------- ----------
<S> <C> <C>
ASSETS
Investments:
Fixed maturities at fair value (amortized cost of
$6,992.8 and $7,279.1)............................. $ 7,253.5 $ 7,461.5
Equity securities at fair value (cost of $341.1 and
$327.9)............................................ 479.0 473.1
Mortgage loans...................................... 567.5 650.1
Real estate......................................... 50.3 120.7
Policy loans........................................ 141.9 132.4
Other long term investments......................... 148.3 128.8
---------- ----------
Total investments............................... 8,640.5 8,966.6
---------- ----------
Cash and cash equivalents............................. 213.9 175.9
Accrued investment income............................. 141.8 148.6
Deferred policy acquisition costs..................... 965.5 822.7
---------- ----------
Reinsurance receivables:
Future policy benefits.............................. 307.1 102.8
Outstanding claims, losses and loss adjustment
expenses........................................... 626.7 663.8
Unearned premiums................................... 32.9 46.2
Other............................................... 73.5 62.8
---------- ----------
Total reinsurance receivables................... 1,040.2 875.6
---------- ----------
Deferred federal income taxes......................... -- 66.9
Premiums, accounts and notes receivable............... 554.4 533.0
Other assets.......................................... 373.0 304.4
Closed block assets................................... 806.7 810.8
Separate account assets............................... 9,755.4 6,233.0
---------- ----------
Total assets.................................... $22,491.4 $18,937.5
---------- ----------
---------- ----------
LIABILITIES
Policy liabilities and accruals:
Future policy benefits.............................. $ 2,598.5 $ 2,613.7
Outstanding claims, losses and loss adjustment
expenses........................................... 2,825.0 2,944.1
Unearned premiums................................... 846.8 822.5
Contractholder deposit funds and other policy
liabilities........................................ 1,852.7 2,060.4
---------- ----------
Total policy liabilities and accruals........... 8,123.0 8,440.7
---------- ----------
Expenses and taxes payable............................ 662.6 617.5
Reinsurance premiums payable.......................... 37.7 31.4
Short term debt....................................... 33.0 38.4
Deferred federal income taxes......................... 12.9 --
Long term debt........................................ 2.6 2.7
Closed block liabilities.............................. 885.6 899.4
Separate account liabilities.......................... 9,749.7 6,227.2
---------- ----------
Total liabilities............................... 19,507.1 16,257.3
---------- ----------
Minority interest..................................... 748.9 784.0
Commitments and contingencies (Notes 13 and 18)
SHAREHOLDER'S EQUITY
Common stock, $10 par value, 1 million shares
authorized, 500,000 shares issued and outstanding... 5.0 5.0
Additional paid in capital............................ 453.7 392.4
Unrealized appreciation on investments, net........... 209.3 131.4
Retained earnings..................................... 1,567.4 1,367.4
---------- ----------
Total shareholder's equity...................... 2,235.4 1,896.2
---------- ----------
Total liabilities and shareholder's equity...... $22,491.4 $18,937.5
---------- ----------
---------- ----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-2
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
(IN MILLIONS) 1997 1996 1995
----------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
COMMON STOCK
Balance at beginning of period............. $ 5.0 $ 5.0 $ --
Demutualization transaction................ -- -- 5.0
--------- --------- ---------
Balance at end of period................... 5.0 5.0 5.0
--------- --------- ---------
ADDITIONAL PAID-IN-CAPITAL
Balance at beginning of period............. 392.4 392.4 --
Contributed from parent.................... 61.3 -- 392.4
--------- --------- ---------
Balance at end of period................... 453.7 392.4 392.4
--------- --------- ---------
RETAINED EARNINGS
Balance at beginning of period............. 1,367.4 1,173.9 1,071.4
Net income prior to demutualization........ -- -- 93.2
--------- --------- ---------
1,367.4 1,173.9 1,164.6
Demutualization transaction................ -- -- (34.5)
Net income subsequent to demutualization... 200.0 193.5 43.8
--------- --------- ---------
Balance at end of period................... 1,567.4 1,367.4 1,173.9
--------- --------- ---------
NET UNREALIZED APPRECIATION ON INVESTMENTS
Balance at beginning of period............. 131.4 153.0 (79.0)
Effect of transfer of securities from
held-to-maturity to available-for-sale:
Net appreciation on available-for-sale
debt securities........................ -- -- 22.4
Provision for deferred federal income taxes
and minority interest..................... -- -- (9.6)
--------- --------- ---------
-- -- 12.8
--------- --------- ---------
Net appreciation (depreciation) on
available for sale securities............. 170.9 (35.1) 466.0
(Benefit) provision for deferred federal
income taxes.............................. (59.8) 11.8 (163.1)
Minority interest.......................... (33.2) 1.7 (83.7)
--------- --------- ---------
209.3 (21.6) 219.2
--------- --------- ---------
Balance at end of period................... 209.3 131.4 153.0
--------- --------- ---------
Total shareholder's equity............. $2,235.4 $1,896.2 $1,724.3
--------- --------- ---------
--------- --------- ---------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-3
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
(IN MILLIONS) 1997 1996 1995
-------------------------------------------- ---------- ---------- ----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.............................. $ 200.0 $ 193.5 $ 137.0
Adjustments to reconcile net income to
net cash provided by operating
activities:
Minority interest................... 79.4 74.6 73.1
Net realized gains.................. (77.8) (66.8) (39.8)
Net amortization and depreciation... 31.6 44.7 57.7
Deferred federal income taxes....... 14.2 (15.7) (37.0)
Change in deferred acquisition
costs............................... (189.7) (73.9) (38.4)
Change in premiums and notes
receivable, net of reinsurance...... (15.1) (16.8) (42.0)
Change in accrued investment
income.............................. 7.1 16.7 7.0
Change in policy liabilities and
accruals, net....................... (134.9) (184.3) 116.2
Change in reinsurance receivable.... 27.2 123.8 (75.6)
Change in expenses and taxes
payable............................. 49.4 26.0 7.5
Separate account activity, net...... -- 5.2 (0.1)
Loss from cession of disability
income business..................... 53.9 -- --
Payment related to cession of
disability income business.......... (207.0) -- --
Other, net.......................... 20.4 38.5 (33.8)
---------- ---------- ----------
Net cash (used in) provided by
operating activities......... (141.3) 165.5 131.8
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from disposals and maturities
of available-for-sale fixed
maturities............................. 2,947.9 3,985.8 2,738.4
Proceeds from disposals of
held-to-maturity fixed maturities...... -- -- 271.3
Proceeds from disposals of equity
securities............................. 162.7 228.7 120.0
Proceeds from disposals of other
investments............................ 116.3 99.3 40.5
Proceeds from mortgages matured or
collected.............................. 204.7 176.9 230.3
Purchase of available-for-sale fixed
maturities............................. (2,596.0) (3,771.1) (3,273.3)
Purchase of equity securities........... (67.0) (90.9) (254.0)
Purchase of other investments........... (175.0) (168.0) (24.8)
Proceeds from sale of mutual fund
processing business.................... -- -- 32.9
Capital expenditures.................... (15.3) (12.8) (14.1)
Other investing activities, net......... 1.3 4.3 4.7
---------- ---------- ----------
Net cash provided by (used in)
investing activities................ 579.6 452.2 (128.1)
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Deposits and interest credited to
contractholder deposit funds........... 457.6 268.7 445.8
Withdrawals from contractholder deposit
funds.................................. (647.1) (905.0) (1,069.9)
Change in short term debt............... (5.4) 10.4 (4.8)
Change in long term debt................ (0.1) (0.1) 0.2
Dividends paid to minority
shareholders........................... (9.4) (3.9) (4.1)
Additional paid in capital.............. 0.1 -- 392.4
Payments to policyholders' membership
interests.............................. -- -- (27.9)
Subsidiary treasury stock purchased, at
cost................................... (195.0) (42.0) (20.9)
---------- ---------- ----------
Net cash used in financing
activities................... (399.3) (671.9) (289.2)
---------- ---------- ----------
Net change in cash and cash equivalents..... 39.0 (54.2) (285.5)
Net change in cash held in the Closed
Block...................................... (1.0) (6.5) (17.6)
Cash and cash equivalents, beginning of
period..................................... 175.9 236.6 539.7
---------- ---------- ----------
Cash and cash equivalents, end of period.... $ 213.9 $ 175.9 $ 236.6
---------- ---------- ----------
---------- ---------- ----------
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid........................... $ 3.6 $ 18.6 $ 4.1
Income taxes paid....................... $ 66.3 $ 72.0 $ 90.6
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-4
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
First Allmerica Financial Life Insurance Company ("FAFLIC", or the "Company")
was organized as a mutual life insurance company until October 16, 1995. FAFLIC
converted to a stock life insurance company pursuant to a plan of reorganization
effective October 16, 1995 and became a wholly owned subsidiary of Allmerica
Financial Corporation ("AFC"). The consolidated financial statements have been
prepared as if FAFLIC were organized as a stock life insurance company for all
periods presented. Thus, generally accepted accounting principles for stock life
insurance companies have been applied retroactively for all periods presented.
The consolidated financial statements of FAFLIC include the accounts of
Allmerica Financial Life Insurance and Annuity Company ("AFLIAC"), its wholly
owned life insurance subsidiary, non-insurance subsidiaries (principally
brokerage and investment advisory subsidiaries), and Allmerica Property and
Casualty Companies, Inc. (a 65.78%-owned non-insurance holding company). The
Closed Block assets and liabilities at December 31, 1997 and 1996, and its
results of operations subsequent to demutualization are presented in the
consolidated financial statements as single line items. Unless specifically
stated, all disclosures contained herein supporting the consolidated financial
statements at December 31, 1997 and 1996, and the years then ended exclude the
Closed Block related amounts. All significant intercompany accounts and
transactions have been eliminated.
Minority interest relates to the Company's investment in Allmerica P&C (APY) and
its only significant subsidiary, The Hanover Insurance Company ("Hanover").
Hanover's 82.5%-owned subsidiary is Citizens Corporation, the holding company
for Citizens Insurance Company of America ("Citizens"). Minority interest also
includes an amount related to the minority interest in Citizens Corporation.
APY and a wholly-owned subsidiary of AFC merged on July 16, 1997. Through the
merger, AFC acquired all of the outstanding common stock of Allmerica P&C that
it did not already own in exchange for cash and stock. The merger has been
accounted for as a purchase. A total of $90.6 million, representing the excess
of the purchase price over the fair values of the net assets acquired, net of
deferred taxes, has been allocated to goodwill and is being amortized over a
40-year period. Additional information pertaining to the merger agreement is
included in Note 2, significant transactions.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amount of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
B. CLOSED BLOCK
As of October 16, 1995, the Company established and began operating a closed
block (the "Closed Block") for the benefit of the participating policies
included therein, consisting of certain individual life insurance participating
policies, individual deferred annuity contracts and supplementary contracts not
involving life contingencies which were in force on October 16, 1995; such
policies constitute the "Closed Block Business". The purpose of the Closed Block
is to protect the policy dividend expectations of such FAFLIC dividend paying
policies and contracts after the demutualization. Unless the Commissioner
consents to an earlier termination, the Closed Block will continue to be in
effect until the date none of the Closed Block policies are in force. On October
16, 1995, FAFLIC, allocated to the Closed Block, assets in an amount that is
expected to produce cash flows which, together with future revenues from the
Closed Block Business, are reasonably sufficient to support the Closed Block
Business, including provision for payment of policy
F-5
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
benefits, certain future expenses and taxes and for continuation of policyholder
dividend scales in effect in 1994 so long as the experience underlying such
dividend scales continues. The Company expects that the factors underlying such
experience will fluctuate in the future and policyholder dividend scales for
Closed Block Business will be set accordingly.
Although the assets and income allocated to the Closed Block inure solely to the
benefit of the holders of policies included in the Closed Block, the excess of
Closed Block liabilities over Closed Block assets at October 16, 1995 measured
on a GAAP basis represent the expected future post-tax income from the Closed
Block which may be recognized in income over the period the policies and
contracts in the Closed Block remain in force.
If the actual income from the Closed Block in any given period equals or exceeds
the expected income for such period as determined at October 16, 1995, the
expected income would be recognized in income for that period. Further, any
excess of the actual income over the expected income would also be recognized in
income to the extent that the aggregate expected income for all prior periods
exceeded the aggregate actual income. Any remaining excess of actual income over
expected income would be accrued as a liability for policyholder dividends in
the Closed Block to be paid to the Closed Block policyholders. This accrual for
future dividends effectively limits the actual Closed Block income recognized in
income to the Closed Block income expected to emerge from operation of the
Closed Block as determined as of October 16, 1995.
If, over the period the policies and contracts in the Closed Block remain in
force, the actual income from the Closed Block is less than the expected income
from the Closed Block, only such actual income (which could reflect a loss)
would be recognized in income. If the actual income from the Closed Block in any
given period is less than the expected income for that period and changes in
dividends scales are inadequate to offset the negative performance in relation
to the expected performance, the income inuring to shareholders of the Company
will be reduced. If a policyholder dividend liability had been previously
established in the Closed Block because the actual income to the relevant date
had exceeded the expected income to such date, such liability would be reduced
by this reduction in income (but not below zero) in any periods in which the
actual income for that period is less than the expected income for such period.
C. VALUATION OF INVESTMENTS
In accordance with the provisions of Statement of Financial Accounting Standards
No. 115 ("Statement No. 115"), "ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND
EQUITY SECURITIES", the Company is required to classify its investments into one
of three categories: held-to-maturity, available-for-sale or trading. The
Company determines the appropriate classification of debt securities at the time
of purchase and reevaluates such designation as of each balance sheet date.
In November 1995, the Financial Accounting Standards Board ("FASB") issued a
Special Report, A GUIDE TO IMPLEMENTATION OF STATEMENT 115 ON ACCOUNTING FOR
CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES, which permitted companies to
reclassify securities, where appropriate, based on the new guidance. As a
result, the Company transferred securities with amortized cost and fair value of
$696.4 million and $725.6 million, respectively, from the held-to-maturity
category to the available-for-sale category, which resulted in a net increase in
shareholder's equity of $12.8 million.
Marketable equity securities and debt securities are classified as
available-for-sale. Available-for-sale securities are carried at fair value,
with the unrealized gains and losses, net of tax, reported in a separate
component of shareholders' equity. The amortized cost of debt securities is
adjusted for amortization of premiums and accretion of discounts to maturity.
Such amortization is included in investment income.
Mortgage loans on real estate are stated at unpaid principal balances, net of
unamortized discounts and reserves. Reserves on mortgage loans are based on
losses expected by the Company to be realized on transfers
F-6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
of mortgage loans to real estate (upon foreclosure), on the disposition or
settlement of mortgage loans and on mortgage loans which the Company believes
may not be collectible in full. In establishing reserves, the Company considers,
among other things, the estimated fair value of the underlying collateral.
Fixed maturities and mortgage loans that are delinquent are placed on
non-accrual status, and thereafter interest income is recognized only when cash
payments are received.
Policy loans are carried principally at unpaid principal balances.
During 1997, the Company committed to a plan to dispose of all real estate
assets by the end of 1998. As a result of this decision real estate held by the
Company and real estate joint ventures were written down to the estimated fair
value less cost to sell. Depreciation is not recorded on these assets while they
are held for disposal.
Realized investment gains and losses, other than those related to separate
accounts for which the Company does not bear the investment risk, are reported
as a component of revenues based upon specific identification of the investment
assets sold. When an other-than-temporary impairment of the value of a specific
investment or a group of investments is determined, a realized investment loss
is recorded. Changes in the valuation allowance for mortgage loans and real
estate are included in realized investment gains or losses.
D. FINANCIAL INSTRUMENTS
In the normal course of business, the Company enters into transactions involving
various types of financial instruments, including debt, investments such as
fixed maturities, mortgage loans and equity securities, investment and loan
commitments, and interest rate futures contracts. These instruments involve
credit risk and also may be subject to risk of loss due to interest rate
fluctuation. The Company evaluates and monitors each financial instrument
individually and, when appropriate, obtains collateral or other security to
minimize losses.
Derivative financial instruments are accounted for under three different
methods: fair value accounting, deferral accounting and accrual accounting.
Interest rate swap contracts used to hedge interest rate risk are accounted for
using a combination of the fair value method and accrual method, with changes in
fair value reported in unrealized gains and losses in equity consistent with the
underlying hedged security, and the net payment or receipt on the swaps reported
in net investment income. Foreign currency swap contracts used to hedge foreign
currency exchange risk are accounted for using a combination of the fair value
method and accrual method, with changes in fair value reported in unrealized
gains and losses in equity consistent with the underlying hedged security, and
the net payment or receipt on the swaps reported in net investment income.
Futures contracts used to hedge interest rate risk are accounted for using the
deferral method, with gains and losses deferred in unrealized gains and losses
in equity and recognized in earnings in conjunction with the earnings
recognition of the underlying hedged item. Other swap contracts entered into for
investment purposes are accounted for using the fair value method, with changes
in fair value reported in realized investment gains and losses in earnings.
E. CASH AND CASH EQUIVALENTS
Cash and cash equivalents includes cash on hand, amounts due from banks and
highly liquid debt instruments purchased with an original maturity of three
months or less.
F. DEFERRED POLICY ACQUISITION COSTS
Acquisition costs consist of commissions, underwriting costs and other costs,
which vary with, and are primarily related to, the production of revenues.
Property and casualty, group life and group health insurance business
acquisition costs are deferred and amortized over the terms of the insurance
policies. Acquisition
F-7
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
costs related to universal life products, variable annuities and contractholder
deposit funds are deferred and amortized in proportion to total estimated gross
profits from investment yields, mortality, surrender charges and expense margins
over the expected life of the contracts. This amortization is reviewed annually
and adjusted retrospectively when the Company revises its estimate of current or
future gross profits to be realized from this group of products, including
realized and unrealized gains and losses from investments. Acquisition costs
related to fixed annuities and other life insurance products are deferred and
amortized, generally in proportion to the ratio of annual revenue to the
estimated total revenues over the contract periods based upon the same
assumptions used in estimating the liability for future policy benefits.
Deferred acquisition costs for each life product and property and casualty line
of business are reviewed to determine if they are recoverable from future
income, including investment income. If such costs are determined to be
unrecoverable, they are expensed at the time of determination. Although
realization of deferred policy acquisition costs is not assured, management
believes it is more likely than not that all of these costs will be realized.
The amount of deferred policy acquisition costs considered realizable, however,
could be reduced in the near term if the estimates of gross profits or total
revenues discussed above are reduced. The amount of amortization of deferred
policy acquisition costs could be revised in the near term if any of the
estimates discussed above are revised.
G. PROPERTY AND EQUIPMENT
Property, equipment and leasehold improvements are stated at cost, less
accumulated depreciation and amortization. Depreciation is provided using the
straight-line or accelerated method over the estimated useful lives of the
related assets which generally range from 3 to 30 years. Amortization of
leasehold improvements is provided using the straight-line method over the
lesser of the term of the leases or the estimated useful life of the
improvements.
H. SEPARATE ACCOUNTS
Separate account assets and liabilities represent segregated funds administered
and invested by the Company for the benefit of certain pension, variable annuity
and variable life insurance contractholders. Assets consist principally of
bonds, common stocks, mutual funds and short-term obligations at market value.
The investment income, gains and losses of these accounts generally accrue to
the contractholders and, therefore, are not included in the Company's net
income. Appreciation and depreciation of the Company's interest in the separate
accounts, including undistributed net investment income, is reflected in
shareholder's equity or net investment income.
I. POLICY LIABILITIES AND ACCRUALS
Future policy benefits are liabilities for life, health and annuity products.
Such liabilities are established in amounts adequate to meet the estimated
future obligations of policies in force. The liabilities associated with
traditional life insurance products are computed using the net level premium
method for individual life and annuity policies, and are based upon estimates as
to future investment yield, mortality and withdrawals that include provisions
for adverse deviation. Future policy benefits for individual life insurance and
annuity policies are computed using interest rates ranging from 2 1/2% to 6% for
life insurance and 2% to 9 1/2% for annuities. Estimated liabilities are
established for group life and health policies that contain experience rating
provisions. Mortality, morbidity and withdrawal assumptions for all policies are
based on the Company's own experience and industry standards. Liabilities for
universal life include deposits received from customers and investment earnings
on their fund balances, less administrative charges. Universal life fund
balances are also assessed mortality and surrender charges. Liabilities for
outstanding claims, losses and loss adjustment expenses are estimates of
payments to be made on property and casualty and health insurance for reported
losses and estimates of losses incurred but not reported. These liabilities are
determined using case basis evaluations and statistical analyses and represent
estimates of the ultimate cost of all losses incurred but not paid. These
estimates are continually reviewed and adjusted as necessary; such adjustments
are reflected in
F-8
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
current operations. Estimated amounts of salvage and subrogation on unpaid
property and casualty losses are deducted from the liability for unpaid claims.
Premiums for property and casualty, group life, and accident and health
insurance are reported as earned on a pro-rata basis over the contract period.
The unexpired portion of these premiums is recorded as unearned premiums.
Contractholder deposit funds and other policy liabilities include
investment-related products such as guaranteed investment contracts, deposit
administration funds and immediate participation guarantee funds and consist of
deposits received from customers and investment earnings on their fund balances.
All policy liabilities and accruals are based on the various estimates discussed
above. Although the adequacy of these amounts cannot be assured, management
believes that it is more likely than not that policy liabilities and accruals
will be sufficient to meet future obligations of policies in force. The amount
of liabilities and accruals, however, could be revised in the near term if the
estimates discussed above are revised.
J. PREMIUM AND FEE REVENUE AND RELATED EXPENSES
Premiums for individual life and health insurance and individual and group
annuity products, excluding universal life and investment-related products, are
considered revenue when due. Property and casualty and group life, accident and
health insurance premiums are recognized as revenue over the related contract
periods. Benefits, losses and related expenses are matched with premiums,
resulting in their recognition over the lives of the contracts. This matching is
accomplished through the provision for future benefits, estimated and unpaid
losses and amortization of deferred policy acquisition costs. Revenues for
investment-related products consist of net investment income and contract
charges assessed against the fund values. Related benefit expenses primarily
consist of net investment income credited to the fund values after deduction for
investment and risk charges. Revenues for universal life products consist of net
investment income, and mortality, administration and surrender charges assessed
against the fund values. Related benefit expenses include universal life benefit
claims in excess of fund values and net investment income credited to universal
life fund values. Certain policy charges that represent compensation for
services to be provided in future periods are deferred and amortized over the
period benefited using the same assumptions used to amortize capitalized
acquisition costs.
K. POLICYHOLDER DIVIDENDS
Prior to demutualization, certain life, health and annuity insurance policies
contained dividend payment provisions that enabled the policyholder to
participate in the earnings of the Company. The amount of policyholders'
dividends was determined annually by the Board of Directors. The aggregate
amount of policyholders' dividends was related to the actual interest,
mortality, morbidity and expense experience for the year and the Company's
judgment as to the appropriate level of statutory surplus to be retained. Upon
demutualization, certain participating individual life insurance policies and
individual annuity and supplemental contracts were transferred to the Closed
Block. The Closed Block was funded to protect the dividend expectations of such
policies and contracts. Accordingly, these policies no longer participate in the
earnings and surplus of the Open Block. Subsequent to demutualization, the
Company ceased issuance of participating policies.
Prior to demutualization, the participating life insurance in force was 16.2% of
the face value of total life insurance in force at December 31, 1994. The
premiums on participating life, health and annuity policies were 11.3% and 6.4%
of total life, health and annuity statutory premiums prior to demutualization in
1995 and 1994, respectively. Total policyholders' dividends were $23.3 million
and $32.8 million prior to demutualization in 1995 and 1994, respectively.
F-9
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
L. FEDERAL INCOME TAXES
AFC, its life insurance subsidiaries, FAFLIC, AFLIAC, and its non-life insurance
domestic subsidiaries file a life-nonlife consolidated United States Federal
income tax return. Entities included within the consolidated group are
segregated into either a life insurance or non-life insurance company subgroup.
The consolidation of these subgroups is subject to certain statutory
restrictions on the percentage of eligible non-life insurance company taxable
operating losses that can be applied to offset life insurance company taxable
income. APY and its subsidiaries will be included in the AFC consolidated return
as part of the non-life insurance company subgroup for the period July 17, 1997
through December 31, 1997. For the period January 1, 1997 through July 16, 1997,
APY and its subsidiaries will file a separate consolidated United States Federal
income tax return.
The Board of Directors has delegated to AFC management, the development and
maintenance of appropriate Federal Income Tax allocation policies and
procedures, which are subject to written agreement between the companies. The
Federal income tax for all subsidiaries in the consolidated return of AFC is
calculated on a separate return basis. Any current tax liability is paid to AFC.
Tax benefits resulting from taxable operating losses or credits of AFC's
subsidiaries are not reimbursed to the subsidiary until such losses or credits
can be utilized by the subsidiary on a separate return basis.
Deferred income taxes are generally recognized when assets and liabilities have
different values for financial statement and tax reporting purposes, and for
other temporary taxable and deductible differences as defined by Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes (SFAS No.
109). These differences result primarily from loss reserves, policy acquisition
expenses, and unrealized appreciation/depreciation on investments.
M. NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued Statement No. 131, Disclosures About Segments of
an Enterprise and Related Information. This statement establishes standards for
the way that public enterprises report information about operating segments in
annual financial statements and requires that selected information about those
operating segments be reported in interim financial statements. This statement
supersedes Statement No. 14, Financial Reporting for Segments of a Business
Enterprise. Statement No. 131 requires that all public enterprises report
financial and descriptive information about their reportable operating segments.
Operating segments are defined as components of an enterprise about which
separate financial information is available that is evaluated regularly by the
chief operating decision maker in deciding how to allocate resources and in
assessing performance. This statement is effective for fiscal years beginning
after December 15, 1997. The Company anticipates no impact from the adoption of
Statement No. 131.
In June 1997, the FASB also issued Statement No. 130, Reporting Comprehensive
Income, which established standards for the reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements. All items that are required to be recognized under
accounting standards as components of comprehensive income are to be reported in
a financial statement that is displayed with the same prominence as other
financial statements. This statement stipulates that comprehensive income
reflect the change in equity of an enterprise during a period from transactions
and other events and circumstances from non-owner sources. This statement is
effective for fiscal years beginning after December 15, 1997. The Company
anticipates that the adoption of Statement No. 130 will result primarily in
reporting the changes in unrealized gains and losses on investments in debt and
equity securities in comprehensive income.
N. RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the current year
presentation.
F-10
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
2. SIGNIFICANT TRANSACTIONS
On February 3, 1997, AFC Capital Trust (the "Trust"), a subsidiary business
trust of AFC, issued $300 million Series A Capital Securities, which pay
cumulative dividends at a rate of 8.207% semiannually commencing August 15,
1997. The Trust exists for the sole purpose of issuing the Capital Securities
and investing the proceeds thereof in an equivalent amount of 8.207% Junior
Subordinated Deferrable Interest Debentures due 2027 of AFC (the "Subordinated
Debentures"). Through certain guarantees, the Subordinated Debentures and the
terms of related agreements, AFC has irrevocably and unconditionally guaranteed
the obligations of the Trust under the Capital Securities. Net proceeds from the
offering of approximately $296.3 million are intended to fund a portion of the
acquisition of the 24.2 million publicly-held shares of APY pursuant to an
Agreement and Plan of Merger dated February 19, 1997.
The merger of APY and a wholly-owned subsidiary of AFC was consummated on July
16, 1997. Through the merger, AFC acquired all of the outstanding common stock
of APY that FAFLIC did not already own in exchange for cash of $425.6 million
and approximately 9.7 million shares of AFC stock valued at $372.5 million. At
consummation of this transaction AFC owned 59.5% through FAFLIC and 40.5%
directly.
The merger has been accounted for as a purchase by AFC. Total consideration of
approximately $798.1 million has been allocated to the minority interest in the
assets and liabilities based on estimates of their fair values. The minority
interest acquired totaled $703.5 million. A total of $90.6 million representing
the excess of the purchase price over the fair values of the net assets
acquired, net of deferred taxes, has been allocated to goodwill and is being
amortized over a 40-year period.
The pushdown of goodwill to APY resulted in an increase to the consolidated
equity of FAFLIC of $61.3 million as additional paid in capital. The effects of
this transaction on the 1997 results of the Company are as follows:
<TABLE>
<CAPTION>
INCREASE (DECREASE)
-------------------
<S> <C>
Revenue........................................................................................ $ (6.7)
-----
-----
Realized capital gains included in revenue..................................................... $ (4.9)
-----
-----
Net income..................................................................................... $ (6.1)
-----
-----
Unrealized appreciation on investments......................................................... $ 4.4
-----
-----
</TABLE>
In December 1997, APY redeemed 5,735.3 shares of its issued and outstanding
common stock owned by AFC for $195 million in cash and securities. The effect of
this transaction was to increase FAFLIC's ownership of APY by 6.3%.
On April 14, 1997, the Company entered into an agreement in principle to
transfer the Company's individual disability income under a 100% coinsurance
agreement to Metropolitan Life Insurance Company. The coinsurance agreement
became effective October 1, 1997. The transaction has resulted in the
recognition of a $53.9 million pre-tax loss in the first quarter of 1997.
Effective January 1, 1998, the Company entered into an agreement with
Reinsurance Group of America, Inc. to reinsure the mortality risk on the
universal life and variable universal life blocks of business. Management
believes that this agreement will not have a material effect on the results of
operations or financial position of the Company.
Pursuant to the plan of reorganization effective October 16, 1995, AFC issued
37.5 million shares of its common stock to eligible policyholders. AFC also
issued 12.6 million shares of its common stock at a price of
F-11
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
$21.00 per share in a public offering, resulting in net proceeds of $248.0
million, and issued Senior Debentures in the principal amount of $200.0 million
which resulted in net proceeds of $197.2 million. AFC contributed $392.4 million
of these proceeds to FAFLIC.
Effective March 31, 1995, the Company entered into an agreement with TSSG, a
division of First Data Corporation, pursuant to which the Company sold its
mutual fund processing business and agreed not to engage in this business for
four years after that date. In accordance with this agreement, the Company
received proceeds of $32.1 million. A gain of $13.5 million, net of taxes of
$7.2 million, was recorded in March 1995. Additionally, the Company received a
non-recurring $3.1 million contingent payment, net of taxes of $1.7 million, in
1996, related to the aforementioned sale.
3. INVESTMENTS
A. SUMMARY OF INVESTMENTS
The Company accounts for its investments, all of which are classified as
available-for-sale, in accordance with SFAS No. 115.
The amortized cost and fair value of available-for-sale fixed maturities and
equity securities were as follows:
<TABLE>
<CAPTION>
1997
-----------------------------------------------
GROSS GROSS
DECEMBER 31 AMORTIZED UNREALIZED UNREALIZED FAIR
(IN MILLIONS) COST (1) GAINS LOSSES VALUE
- ---------------------------------------- --------- ---------- ----------- --------
<S> <C> <C> <C> <C>
U.S. Treasury securities and U.S.
government and agency securities....... $ 265.3 $ 9.5 $ 0.9 $ 273.9
States and political subdivisions....... 2,200.6 78.3 3.1 2,275.8
Foreign governments..................... 110.8 8.5 2.2 117.1
Corporate fixed maturities.............. 4,041.6 175.1 12.2 4,204.5
Mortgage-backed securities.............. 374.5 9.7 2.0 382.2
--------- ---------- ----------- --------
Total fixed maturities.................. $ 6,992.8 $281.1 $ 20.4 $7,253.5
--------- ---------- ----------- --------
--------- ---------- ----------- --------
Equity securities....................... $ 341.1 $141.9 $ 4.0 $ 479.0
--------- ---------- ----------- --------
--------- ---------- ----------- --------
<CAPTION>
1996
-----------------------------------------------
GROSS GROSS
DECEMBER 31 AMORTIZED UNREALIZED UNREALIZED FAIR
(IN MILLIONS) COST (1) GAINS LOSSES VALUE
- ---------------------------------------- --------- ---------- ----------- --------
<S> <C> <C> <C> <C>
U.S. Treasury securities and U.S.
government and agency securities....... $ 273.6 $ 9.3 $ 1.6 $ 281.3
States and political subdivisions....... 2,236.9 48.5 7.7 2,277.7
Foreign governments..................... 108.0 7.3 -- 115.3
Corporate fixed maturities.............. 4,277.5 140.3 15.7 4,402.1
Mortgage-backed securities.............. 383.1 4.7 2.7 385.1
--------- ---------- ----------- --------
Total fixed maturities.................. $ 7,279.1 $210.1 $ 27.7 $7,461.5
--------- ---------- ----------- --------
--------- ---------- ----------- --------
Equity securities....................... $ 327.9 $148.9 $ 3.7 $ 473.1
--------- ---------- ----------- --------
--------- ---------- ----------- --------
</TABLE>
(1) Amortized cost for fixed maturities and cost for equity securities.
In connection with AFLIAC's voluntary withdrawal of its license in New York,
AFLIAC agreed with the New York Department of Insurance to maintain, through a
custodial account in New York, a security deposit, the market value of which
will at all times equal 102% of all outstanding general account liabilities of
AFLIAC for New York policyholders, claimants and creditors. At December 31,
1997, the amortized cost and market
F-12
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
value of assets on deposit were $276.8 million and $291.7 million, respectively.
At December 31, 1996, the amortized cost and market value of assets on deposit
were $284.9 million and $292.2 million, respectively.
In addition, fixed maturities, excluding those securities on deposit in New
York, with an amortized cost of $105.1 million and $98.0 million were on deposit
with various state and governmental authorities at December 31, 1997 and 1996,
respectively.
There were no contractual fixed maturity investment commitments at December 31,
1997 and 1996, respectively.
The amortized cost and fair value by maturity periods for fixed maturities are
shown below. Actual maturities may differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without call
or prepayment penalties, or the Company may have the right to put or sell the
obligations back to the issuers. Mortgage backed securities are included in the
category representing their ultimate maturity.
<TABLE>
<CAPTION>
1997
--------------------
DECEMBER 31 AMORTIZED FAIR
(IN MILLIONS) COST VALUE
- ---------------------------------------- --------- --------
<S> <C> <C>
Due in one year or less................. $ 464.5 $ 467.7
Due after one year through five years... 2,142.9 2,225.7
Due after five years through ten
years.................................. 2,137.3 2,217.1
Due after ten years..................... 2,248.1 2,343.0
--------- --------
Total................................... $ 6,992.8 $7,253.5
--------- --------
--------- --------
</TABLE>
The proceeds from voluntary sales of available-for-sale securities and the gross
realized gains and gross realized losses on those sales were as follows:
<TABLE>
<CAPTION>
PROCEEDS FROM
FOR THE YEARS ENDED DECEMBER 31 VOLUNTARY GROSS GROSS
(IN MILLIONS) SALES GAINS LOSSES
- --------------------------------------------- ------------------ ----- ------
<S> <C> <C> <C>
1997
Fixed maturities............................. $1,894.8 $27.6 $ 16.2
Equity securities............................ $ 145.5 $55.8 $ 1.3
1996
Fixed maturities............................. $2,432.8 $19.3 $ 30.5
Equity securities............................ $ 228.1 $56.1 $ 1.3
1995
Fixed maturities............................. $1,612.3 $23.7 $ 33.0
Equity securities............................ $ 122.2 $23.1 $ 6.9
</TABLE>
F-13
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
Unrealized gains and losses on available-for-sale and other securities, are
summarized as follows:
<TABLE>
<CAPTION>
EQUITY
SECURITIES
FOR THE YEARS ENDED DECEMBER 31 FIXED AND OTHER
(IN MILLIONS) MATURITIES (1) TOTAL
- ------------------------------------------------------------ ---------- ----------- -------
<S> <C> <C> <C>
1997
Net appreciation, beginning of year......................... $ 71.3 $ 60.1 $ 131.4
Net appreciation (depreciation) on available-for-sale
securities.............................................. 83.2 (5.9) 77.3
Appreciation due to AFC purchase of minority interest of
Allmerica P&C........................................... 50.7 59.6 110.3
Net depreciation from the effect on deferred policy
acquisition costs and on policy liabilities............. (16.7) -- (16.7)
Provision for deferred federal income taxes and minority
interest................................................ (65.9) (27.1) (93.0)
---------- ----------- -------
51.3 26.6 77.9
---------- ----------- -------
Net appreciation, end of year............................... $122.7 $ 86.6 $ 209.3
---------- ----------- -------
---------- ----------- -------
1996
Net appreciation, beginning of year......................... $108.7 $ 44.3 $ 153.0
Net (depreciation) appreciation on available-for-sale
securities.............................................. (94.1) 35.9 (58.2)
Net appreciation from the effect on deferred policy
acquisition costs and on policy liabilities............. 23.1 -- 23.1
Provision for deferred federal income taxes and minority
interest................................................ 33.6 (20.1) 13.5
---------- ----------- -------
(37.4) 15.8 (21.6)
---------- ----------- -------
Net appreciation, end of year............................. $ 71.3 $ 60.1 $ 131.4
---------- ----------- -------
---------- ----------- -------
1995
Net appreciation (depreciation), beginning of year.......... $(89.4) $ 10.4 $ (79.0)
Effect of transfer of securities between classifications:
Net appreciation on available-for-sale securities......... 29.2 -- 29.2
Net depreciation from the effect of accounting change on
deferred policy acquisition costs and on policy
liabilities............................................. (6.8) -- (6.8)
Provision for deferred federal income taxes and minority
interest................................................ (9.6) -- (9.6)
---------- ----------- -------
12.8 -- 12.8
---------- ----------- -------
Net appreciation on available-for-sale securities........... 465.4 87.5 552.9
Net depreciation from the effect on deferred policy
acquisition costs and on policy liabilities................ (86.9) (86.9)
Provision for deferred federal income taxes and minority
interest................................................... (193.2) (53.6) (246.8)
---------- ----------- -------
185.3 33.9 219.2
---------- ----------- -------
Net appreciation, end of year............................... $108.7 $ 44.3 $ 153.0
---------- ----------- -------
---------- ----------- -------
</TABLE>
(1) Includes net appreciation on other investments of $1.8 million, $0.6
million, and 2.2 million in 1997, 1996 and 1995, respectively.
B. MORTGAGE LOANS AND REAL ESTATE
FAFLIC's mortgage loans and real estate are diversified by property type and
location. Real estate investments have been obtained primarily through
foreclosure. Mortgage loans are collateralized by the related properties and
generally are no more than 75% of the property's value at the time the original
loan is made.
F-14
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
The carrying values of mortgage loans and real estate investments net of
applicable reserves were as follows:
<TABLE>
<CAPTION>
DECEMBER 31
(IN MILLIONS) 1997 1996
- ---------------------------------------- ------ --------
<S> <C> <C>
Mortgage loans.......................... $567.5 $ 650.1
Real estate:
Held for sale......................... 50.3 110.4
Held for production of income......... -- 10.3
------ --------
Total real estate................... 50.3 120.7
------ --------
Total mortgage loans and real estate.... $617.8 $ 770.8
------ --------
------ --------
</TABLE>
Reserves for mortgage loans were $20.7 million and $19.6 million at December 31,
1997 and 1996, respectively.
During 1997, the Company committed to a plan to dispose of all real estate
assets by the end of 1998. As a result, real estate assets with a carrying
amount of $54.7 million were written down to the estimated fair value less cost
to sell of $50.3 million, and a net realized investment loss of $4.4 million was
recognized. Depreciation is not recorded on these assets while they are held for
disposal.
There were no non-cash investing activities, including real estate acquired
through foreclosure of mortgage loans, in 1997. During 1996 and 1995, non-cash
investing activities included real estate acquired through foreclosure of
mortgage loans, which had a fair value of $0.9 million and $26.1 million,
respectively.
At December 31, 1997, contractual commitments to extend credit under commercial
mortgage loan agreements amounted to approximately $39.4 million, of which $10.0
million related to the Closed Block. These commitments generally expire within
one year.
Mortgage loans and real estate investments comprised the following property
types and geographic regions:
<TABLE>
<CAPTION>
DECEMBER 31
(IN MILLIONS) 1997 1996
- ---------------------------------------- ------ --------
<S> <C> <C>
Property type:
Office building....................... $265.1 $ 317.1
Residential........................... 66.6 95.4
Retail................................ 132.8 177.0
Industrial/warehouse.................. 107.2 124.8
Other................................. 66.8 91.0
Valuation allowances.................. (20.7) (34.5)
------ --------
Total................................... $617.8 $ 770.8
------ --------
------ --------
Geographic region:
South Atlantic........................ 173.4 227.0
Pacific............................... 152.8 154.4
East North Central.................... 102.0 119.2
Middle Atlantic....................... 73.8 112.6
West South Central.................... 34.9 41.6
New England........................... 46.9 50.9
Other................................. 54.7 99.6
Valuation allowances.................. (20.7) (34.5)
------ --------
Total................................... $617.8 $ 770.8
------ --------
------ --------
</TABLE>
F-15
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
At December 31, 1997, scheduled mortgage loan maturities were as follows: 1998
- -- $136.4 million; 1999 -- $70.8 million; 2000 -- $129.2 million; 2001 -- $26.4
million; 2002 -- $29.9 million; and $174.8 million thereafter. Actual maturities
could differ from contractual maturities because borrowers may have the right to
prepay obligations with or without prepayment penalties and loans may be
refinanced. During 1997, the Company did not refinance any mortgage loans based
on terms which differed from those granted to new borrowers.
C. INVESTMENT VALUATION ALLOWANCES
Investment valuation allowances which have been deducted in arriving at
investment carrying values as presented in the consolidated balance sheets and
changes thereto are shown below.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED BALANCE AT
DECEMBER 31 BALANCE AT DECEMBER
(IN MILLIONS) JANUARY 1 ADDITIONS DEDUCTIONS 31
- ------------------------- ---------- --------- ---------- ----------
<S> <C> <C> <C> <C>
1997
Mortgage loans........... $19.6 $ 2.5 $ 1.4 $20.7
Real estate.............. 14.9 6.0 20.9 --
----- --------- ----- -----
Total................ $34.5 $ 8.5 $22.3 $20.7
----- --------- ----- -----
----- --------- ----- -----
1996
Mortgage loans........... $33.8 $ 5.5 $19.7 $19.6
Real estate.............. 19.6 -- 4.7 14.9
----- --------- ----- -----
Total................ $53.4 $ 5.5 $24.4 $34.5
----- --------- ----- -----
----- --------- ----- -----
1995
Mortgage loans........... $47.2 $ 1.5 $14.9 $33.8
Real estate.............. 22.9 (0.6) 2.7 19.6
----- --------- ----- -----
Total................ $70.1 $ 0.9 $17.6 $53.4
----- --------- ----- -----
----- --------- ----- -----
</TABLE>
The carrying value of impaired loans was $30.5 million and $33.6 million, with
related reserves of $13.8 million and $11.9 million as of December 31, 1997 and
1996, respectively. All impaired loans were reserved as of December 31, 1997 and
1996.
The average carrying value of impaired loans was $30.8 million, $50.4 million
and $117.9 million, with related interest income while such loans were impaired
of $3.2 million, $5.8 million and $9.3 million as of December 31, 1997, 1996 and
1995, respectively.
D. FUTURES CONTRACTS
The Company purchases long futures contracts and sells short futures contracts
on margin to hedge against interest rate fluctuations associated with the sale
of Guaranteed Investment Contracts ("GICs"). The Company is exposed to interest
rate risk from the time of sale of the GIC until the receipt of the deposit and
purchase of the underlying asset to back the liability. The Company's exposure
to credit risk under futures contracts is limited to the margin deposited with
the broker. The Company only trades futures contracts with nationally recognized
brokers, which the Company believes have adequate capital to ensure that there
is minimal danger of default. The Company does not require collateral or other
securities to support financial instruments with credit risk.
There were no futures contracts outstanding at December 31, 1997, and $(33.0)
million notional amount of short contracts at December 31, 1996. The notional
amounts of the contracts represent the extent of the
F-16
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
Company's investment but not the future cash requirements, as the Company
generally settles open positions prior to maturity. The fair value of futures
contracts outstanding were $(32.4) million at December 31, 1996.
Gains and losses on hedge contracts related to interest rate fluctuations are
deferred and recognized in income over the period being hedged corresponding to
related guaranteed investment contracts. If instruments being hedged by futures
contracts are disposed, any unamortized gains or losses on such contracts are
included in the determination of the gain or loss from the disposition. There
were no deferred hedging gains (losses) in 1997. Deferred hedging gains were
$0.5 million and $5.6 million in 1996 and 1995, respectively. Gains and losses
on hedge contracts that are deemed ineffective by the Company are realized
immediately.
A reconciliation of the notional amount of futures contracts is as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
(IN MILLIONS) 1997 1996 1995
- --------------------------------------------- ------ ------ ------
<S> <C> <C> <C>
Contracts outstanding, beginning of year..... $(33.0) $ 74.7 $126.6
New contracts................................ (0.2) (1.1) 349.2
Contracts terminated......................... 33.2 (106.6) (401.1)
------ ------ ------
Contracts outstanding, end of year........... -- $(33.0) $ 74.7
------ ------ ------
------ ------ ------
</TABLE>
E. FOREIGN CURRENCY SWAP CONTRACTS
The Company enters into foreign currency swap contracts to hedge exposure to
currency risk on foreign fixed maturity investments. Interest and principal
related to foreign fixed maturity investments payable in foreign currencies, at
current exchange rates, are exchanged for the equivalent payment translated at a
specific currency exchange rate. The Company's maximum exposure to counterparty
credit risk is the difference between the foreign currency exchange rate, as
agreed upon in the swap contract, and the foreign currency spot rate on the date
of the exchange. The fair values of the foreign currency swap contracts
outstanding were $0.1 million and $(9.2) million at December 31, 1997 and 1996,
respectively. Changes in the fair value of contracts are reported in unrealized
gains or losses, consistent with the reporting for the underlying hedged
security. The Company does not require collateral or other security to support
financial instruments with credit risk.
The difference between amounts paid and received on foreign currency swap
contracts is reflected in the net investment income related to the underlying
assets and is not material in 1997, 1996 and 1995. Any gain or loss on the
termination of swap contracts is deferred and recognized with any gain or loss
on the hedged transaction. The Company had no deferred gains or losses on
foreign currency swap contracts.
A reconciliation of the notional amount of swap contracts is as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
(IN MILLIONS) 1997 1996 1995
- --------------------------------------------- ------ ------ ------
<S> <C> <C> <C>
Contracts outstanding, beginning of year..... $ 68.6 $104.6 $118.7
New contracts................................ 5.0 -- --
Contracts expired............................ (18.2) (36.0) --
Contracts terminated......................... -- -- (14.1)
------ ------ ------
Contracts outstanding, end of year........... $ 55.4 $ 68.6 $104.6
------ ------ ------
------ ------ ------
</TABLE>
Expected maturities of foreign currency swap contracts are $25.0 million in
1999, $11.6 million in 2000 and $18.8 million thereafter. There are no expected
maturities of foreign currency swap contracts in 1998, 2001 and 2002.
F-17
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
F. INTEREST RATE SWAP CONTRACTS
The Company enters into interest rate swap contracts to hedge exposure to
interest rate fluctuations. Under these swap contracts, the Company agrees to
exchange, at specified intervals, the difference between fixed and floating
interest amounts calculated on an agreed-upon notional principal amount. As with
foreign currency swap contracts, the primary risk associated with these
transactions is the inability of the counterparty to meet its obligation. The
Company regularly assesses the financial strength of its counterparties and
generally enters into forward or swap agreements with counterparties rated "A"
or better by the nationally recognized rating agencies. Because the underlying
principal of swap contracts is not exchanged, the Company's maximum exposure to
counterparty credit risk is the difference in payments exchanged, which at
December 31, 1997 was not material to the Company. The Company does not require
collateral or other security to support financial instruments with credit risk.
The net amount receivable or payable is recognized over the life of the swap
contract as an adjustment to net investment income. The (decrease) or increase
in net investment income related to interest rate swap contracts was $(0.4)
million, $0.6 million and $0.7 million for the years ended December 31, 1997,
1996 and 1995, respectively. The fair values of interest rate swap contracts
outstanding were $(2.3) million at December 31, 1997. There were no interest
rate contracts outstanding at December 31, 1996. Changes in the fair value of
contracts are reported as an unrealized gain or loss, consistent with the
underlying hedged security. Any gain or loss on the termination of interest rate
swap contracts accounted for as hedges are deferred and recognized with the gain
or loss on the hedged transaction. The Company had no deferred gain or loss on
interest rate swap contracts in 1997 or 1996.
A reconciliation of the notional amount of interest rate and other swap
contracts is as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
(IN MILLIONS) 1997 1996 1995
- --------------------------------------------- ------ ------ ------
<S> <C> <C> <C>
Contracts outstanding, beginning of year..... $ 5.0 $ 17.5 $ 22.8
New contracts................................ 244.7 63.6 --
Contracts expired............................ (5.6) (17.5) (5.3)
------ ------ ------
Contracts outstanding, end of year........... $244.1 $ 63.6 $ 17.5
------ ------ ------
------ ------ ------
</TABLE>
Expected maturities of interest rate swap contracts outstanding at December 31,
1997 are as follows: $5.0 million in 1998, and $239.1 million in 2000 and
thereafter. There are no expected maturities of interest rate contracts in 1999.
G. OTHER SWAP CONTRACTS
The Company enters into security return-linked swap contracts and insurance
portfolio-linked swap contracts for investment purposes. Under the security
return-linked contracts, the Company agrees to exchange cash flows according to
the performance of a specified security or portfolio of securities. Under the
insurance portfolio-linked swap contracts, the Company agrees to exchange cash
flows according to the performance of a specified underwriter's portfolio of
insurance business. As with interest rate swap contracts, the primary risk
associated with these transactions is the inability of the counterparty to meet
its obligation. The Company regularly assesses the financial strength of its
counterparties and generally enters into forward or swap agreements with
counterparties rated "A" or better by the nationally recognized rating agencies.
Because the underlying principal of swap contracts is not exchanged, the
Company's maximum exposure to counterparty credit risk is the difference in
payments exchanged, which at December 31, 1997, were not material to the
Company. Swap contracts also subject the Company to market risk associated with
changes in interest rates. The Company does not require collateral or other
security to support financial instruments with credit risk.
F-18
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
The swap contracts are marked to market with any gain or loss recognized
currently. The net amount receivable or payable under these contracts is
recognized when the contracts are marked to market. The fair values of swap
contracts outstanding were $(0.1) million and $0.1 million at December 31, 1997
and 1996, respectively. The net decrease in realized investment gains related to
other swap contracts was $(1.6) million for the year ended December 31, 1997.
There were no realized investment gains on other swap contracts recognized in
1996 and 1995.
A reconciliation of the notional amount of other swap contracts is as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
(IN MILLIONS) 1997 1996 1995
- --------------------------------------------- ------ ------ ------
<S> <C> <C> <C>
Contracts outstanding, beginning of year..... $ 58.6 $ -- $ --
New contracts................................ 192.1 58.6 --
Contracts expired............................ (211.6) -- --
Contracts terminated......................... (24.1) -- --
------ ------ ------
Contracts outstanding, end of year........... $ 15.0 $ 58.6 $ --
------ ------ ------
------ ------ ------
</TABLE>
Expected maturities of other swap contracts outstanding at December 31, 1997 are
as follows: $10 million in 1999 and $5 million in 2001. There are no expected
maturities of such other swap contracts in 1998, 2000, or 2002.
H. OTHER
At December 31, 1997, FAFLIC had no concentration of investments in a single
investee exceeding 10% of shareholder's equity, except for investments with the
U.S. Treasury with a carrying value of $262.5 million.
4. INVESTMENT INCOME AND GAINS AND LOSSES
A. NET INVESTMENT INCOME
The components of net investment income were as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
(IN MILLIONS) 1997 1996 1995
- --------------------------------------------- ------ ------ ------
<S> <C> <C> <C>
Fixed maturities............................. $541.9 $553.8 $555.1
Mortgage loans............................... 57.5 69.5 97.0
Equity securities............................ 10.6 11.1 13.2
Policy loans................................. 10.9 10.3 20.3
Real estate.................................. 20.1 40.8 48.7
Other long-term investments.................. 12.4 19.9 7.5
Short-term investments....................... 12.8 10.6 21.2
------ ------ ------
Gross investment income...................... 666.2 716.0 763.0
Less investment expenses..................... (24.4) (45.2) (52.5)
------ ------ ------
Net investment income........................ $641.8 $670.8 $710.5
------ ------ ------
------ ------ ------
</TABLE>
At December 31, 1997, mortgage loans on non-accrual status were $3.6 million
which were all restructured loans. There were no fixed maturities which were on
non-accrual status at December 31, 1997. The effect of non-accruals, compared
with amounts that would have been recognized in accordance with the original
terms of the investments, had no impact in 1997, and reduced net income by $0.5
million and $0.6 million in 1996 and 1995, respectively.
F-19
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
The payment terms of mortgage loans may from time to time be restructured or
modified. The investment in restructured mortgage loans, based on amortized
cost, amounted to $40.3 million, $51.3 million and $98.9 million at December 31,
1997, 1996 and 1995, respectively. Interest income on restructured mortgage
loans that would have been recorded in accordance with the original terms of
such loans amounted to $3.9 million, $7.7 million and $11.1 million in 1997,
1996 and 1995, respectively. Actual interest income on these loans included in
net investment income aggregated $4.2 million, $4.5 million and $7.1 million in
1997, 1996 and 1995, respectively.
There were no fixed maturities or mortgage loans which were non-income producing
for the twelve months ended December 31, 1997.
Included in other long-term investments is income from limited partnerships of
$7.8 million, $13.7 million and $0.1 million in 1997, 1996 and 1995
respectively.
B. REALIZED INVESTMENT GAINS AND LOSSES
Realized gains (losses) on investments were as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
(IN MILLIONS) 1997 1996 1995
- --------------------------------------------- ------ ------ ------
<S> <C> <C> <C>
Fixed maturities............................. $ 14.7 $ (9.7) $ (7.0)
Mortgage loans............................... (1.2) (2.4) 1.4
Equity securities............................ 53.6 54.8 16.2
Real estate.................................. 12.8 21.1 5.3
Other........................................ (3.4) 3.0 3.2
------ ------ ------
Net realized investment gains................ $ 76.5 $ 66.8 $ 19.1
------ ------ ------
------ ------ ------
</TABLE>
5. FAIR VALUE DISCLOSURES OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments", requires
disclosure of fair value information about certain financial instruments
(insurance contracts, real estate, goodwill and taxes are excluded) for which it
is practicable to estimate such values, whether or not these instruments are
included in the balance sheet. The fair values presented for certain financial
instruments are estimates which, in many cases, may differ significantly from
the amounts which could be realized upon immediate liquidation. In cases where
market prices are not available, estimates of fair value are based on discounted
cash flow analyses which utilize current interest rates for similar financial
instruments which have comparable terms and credit quality. Fair values of
interest rate futures were not material at December 31, 1997 and 1996.
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments:
CASH AND CASH EQUIVALENTS
For these short-term investments, the carrying amount approximates fair value.
FIXED MATURITIES
Fair values are based on quoted market prices, if available. If a quoted market
price is not available, fair values are estimated using independent pricing
sources or internally developed pricing models using discounted cash flow
analyses.
F-20
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
EQUITY SECURITIES
Fair values are based on quoted market prices, if available. If a quoted market
price is not available, fair values are estimated using independent pricing
sources or internally developed pricing models.
MORTGAGE LOANS
Fair values are estimated by discounting the future contractual cash flows using
the current rates at which similar loans would be made to borrowers with similar
credit ratings. The fair value of below investment grade mortgage loans are
limited to the lesser of the present value of the cash flows or book value.
POLICY LOANS
The carrying amount reported in the consolidated balance sheets approximates
fair value since policy loans have no defined maturity dates and are inseparable
from the insurance contracts.
REINSURANCE RECEIVABLES
The carrying amount reported in the consolidated balance sheets approximates
fair value.
INVESTMENT CONTRACTS (WITHOUT MORTALITY FEATURES)
Fair values for the Company's liabilities under guaranteed investment type
contracts are estimated using discounted cash flow calculations using current
interest rates for similar contracts with maturities consistent with those
remaining for the contracts being valued. Other liabilities are based on
surrender values.
DEBT
The carrying value of short-term debt reported in the balance sheet approximates
fair value. The fair value of long-term debt was estimated using market quotes,
when available, and, when not available, discounted cash flow analyses.
F-21
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
The estimated fair values of the financial instruments were as follows:
<TABLE>
<CAPTION>
1997 1996
-------------------- --------------------
DECEMBER 31 CARRYING FAIR CARRYING FAIR
(IN MILLIONS) VALUE VALUE VALUE VALUE
- --------------------------------------------- --------- -------- --------- --------
<S> <C> <C> <C> <C>
FINANCIAL ASSETS
Cash and cash equivalents.................. $ 213.9 $ 213.9 $ 175.9 $ 175.9
Fixed maturities........................... 7,253.5 7,253.5 7,461.5 7,461.5
Equity securities.......................... 479.0 479.0 473.1 473.1
Mortgage loans............................. 567.5 597.0 650.1 675.7
Policy loans............................... 141.9 141.9 132.4 132.4
--------- -------- --------- --------
$ 8,655.8 $8,685.3 $ 8,893.0 $8,918.6
--------- -------- --------- --------
--------- -------- --------- --------
FINANCIAL LIABILITIES
Guaranteed investment contracts............ $ 985.2 $1,004.7 $ 1,101.3 $1,119.2
Supplemental contracts without life
contingencies............................ 22.4 22.4 23.1 23.1
Dividend accumulations..................... 87.8 87.8 87.3 87.3
Other individual contract deposit funds.... 57.9 55.7 76.9 74.3
Other group contract deposit funds......... 714.8 715.5 789.1 788.3
Individual annuity contracts............... 907.4 882.2 935.6 911.7
Short-term debt............................ 33.0 33.0 38.4 38.4
Long-term debt............................. 2.6 2.6 2.7 2.7
--------- -------- --------- --------
$ 2,811.1 $2,803.9 $ 3,054.4 $3,045.0
--------- -------- --------- --------
--------- -------- --------- --------
</TABLE>
6. CLOSED BLOCK
Included in other income in the Consolidated Statement of Income for 1997 and
1996 is a net pre-tax contribution from the Closed Block of $9.1 million and
$8.6 million, respectively. Summarized financial information of the Closed Block
as of December 31, 1997 and 1996 and for the period ended December 31, 1997 and
1996 is as follows:
<TABLE>
<CAPTION>
DECEMBER 31
(IN MILLIONS) 1997 1996
- ----------------------------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
Assets
Fixed maturities, at fair value (amortized cost of $400.1 and $397.2, respectively).......... $ 412.9 $ 403.9
Mortgage loans............................................................................... 112.0 114.5
Policy loans................................................................................. 218.8 230.2
Cash and cash equivalents.................................................................... 25.1 24.1
Accrued investment income.................................................................... 14.1 14.3
Deferred policy acquisition costs............................................................ 18.2 21.1
Other assets................................................................................. 5.6 2.7
--------- ---------
Total assets............................................................................... $ 806.7 $ 810.8
--------- ---------
--------- ---------
Liabilities
Policy liabilities and accruals.............................................................. $ 875.1 $ 883.4
Other liabilities............................................................................ 10.4 16.0
--------- ---------
Total liabilities.......................................................................... $ 885.5 $ 899.4
--------- ---------
--------- ---------
</TABLE>
F-22
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
<TABLE>
<CAPTION>
DECEMBER 31
(IN MILLIONS) 1997 1996
- ----------------------------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
Revenues
Premiums..................................................................................... $ 58.3 $ 61.7
Net investment income........................................................................ 53.4 52.6
Realized investment loss..................................................................... 1.3 (0.7)
--------- ---------
Total revenues................................................................................. 113.0 113.6
--------- ---------
Benefits and expenses
Policy benefits.............................................................................. 100.5 101.2
Policy acquisition expenses.................................................................. 3.0 3.2
Other operating expenses..................................................................... 0.4 0.6
--------- ---------
Total benefits and expenses.................................................................... 103.9 105.0
--------- ---------
Contribution from the Closed Block............................................................. $ 9.1 $ 8.6
--------- ---------
--------- ---------
Cash flows
Cash flows from operating activities:
Contribution from the Closed Block......................................................... $ 9.1 $ 8.6
Initial cash transferred to the Closed Block............................................... -- --
Change in deferred policy acquisition costs, net........................................... 2.9 3.4
Change in premiums and other receivables................................................... -- 0.2
Change in policy liabilities and accruals.................................................. (11.6) (13.9)
Change in accrued investment income........................................................ 0.2 2.3
Deferred Taxes............................................................................. (5.1) 1.0
Change in other assets..................................................................... (2.9) (1.6)
Change in expenses and taxes payable....................................................... (2.0) 1.7
Other, net................................................................................. (1.2) 1.4
--------- ---------
Net cash (used in) provided by operating activities............................................ (10.6) 3.1
--------- ---------
Cash flows from investing activities:
Sales, maturities and repayments of investments............................................ 161.6 188.1
Purchases of investments................................................................... (161.4) (196.9)
Other, net................................................................................. 11.4 12.2
--------- ---------
Net cash provided by (used in) investing activities............................................ 11.6 3.4
--------- ---------
Net increase in cash and cash equivalents...................................................... 1.0 6.5
Cash and cash equivalents, beginning of year................................................... 24.1 17.6
--------- ---------
Cash and cash equivalents, end of year......................................................... $ 25.1 $ 24.1
--------- ---------
--------- ---------
</TABLE>
On October 16, 1995, there were no valuation allowances transferred to the
Closed Block on mortgage loans. There are no valuation allowances on mortgage
loans in the Closed Block at December 31, 1997 or 1996, respectively.
Many expenses related to Closed Block operations are charged to operations
outside the Closed Block; accordingly, the contribution from the Closed Block
does not represent the actual profitability of the Closed Block operations.
Operating costs and expenses outside of the Closed Block are, therefore,
disproportionate to the business outside the Closed Block.
F-23
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
7. DEBT
Short- and long-term debt consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31
(IN MILLIONS) 1997 1996
- ------------------------------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
Short-Term
Commercial paper............................................................................... $ 33.0 $ 37.8
Other.......................................................................................... -- 0.6
--------- ---------
Total short-term debt............................................................................ $ 33.0 $ 38.4
--------- ---------
--------- ---------
Long-term debt................................................................................... $ 2.6 $ 2.7
--------- ---------
--------- ---------
</TABLE>
FAFLIC issues commercial paper primarily to manage imbalances between operating
cash flows and existing commitments. Commercial paper borrowing arrangements are
supported by various lines of credit. At December 31, 1997, the weighted average
interest rate for outstanding commercial paper was approximately 5.8%.
At December 31, 1997, AFC had approximately $140.0 million in committed lines of
credit provided by U.S. banks, of which $107.2 million was available for
borrowing. These lines of credit generally have terms of less than one year, and
require the Company to pay annual commitment fees limited to 0.07% of the
available credit. Interest that would be charged for usage of these lines of
credit is based upon negotiated arrangements.
During 1996, the Company utilized repurchase agreements to finance certain
investments. These repurchase agreements were settled by the end of 1996.
In October, 1995, AFC issued $200.0 million face amount of Senior Debentures for
proceeds of $197.2 million net of discounts and issuance costs. These securities
have an effective interest rate of 7.65%, and mature on October 16, 2025.
Interest is payable semiannually on October 15 and April 15 of each year. The
Senior Debentures are subject to certain restrictive covenants, including
limitations on issuance of or disposition of stock of restricted subsidiaries
and limitations on liens. AFC is in compliance with all covenants. The primary
source of cash for repayment of the debt by AFC is dividends from FAFLIC and
APY.
Interest expense was $3.6 million, $16.8 million and $4.3 million in 1997, 1996
and 1995, respectively. Interest paid on the credit agreement during 1997 was
approximately $2.8 million. Interest expense during 1996 also included $11.0
million related to interest payments on repurchase agreements. All interest
expense is recorded in other operating expenses.
8. FEDERAL INCOME TAXES
Provisions for federal income taxes have been calculated in accordance with the
provisions of SFAS No. 109. A summary of the federal income tax expense
(benefit) in the consolidated statements of income is shown below:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
(IN MILLIONS) 1997 1996 1995
- ------------------------------------------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Federal income tax expense (benefit)
Current............................................................................ $ 83.3 $ 96.8 $ 119.7
Deferred........................................................................... 14.2 (15.7) (37.0)
--------- --------- ---------
Total................................................................................ $ 97.5 $ 81.1 $ 82.7
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-24
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
The federal income taxes attributable to the consolidated results of operations
are different from the amounts determined by multiplying income before federal
income taxes by the expected federal income tax rate. The sources of the
difference and the tax effects of each were as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
(IN MILLIONS) 1997 1996 1995
- ------------------------------------------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Expected federal income tax expense.................................................. $ 131.8 $ 122.3 $ 105.6
Tax-exempt interest................................................................ (37.9) (35.3) (32.2)
Differential earnings amount....................................................... - (10.2) (7.6)
Dividend received deduction........................................................ (3.2) (1.6) (4.0)
Changes in tax reserve estimates................................................... 7.8 4.7 19.3
Other, net......................................................................... (1.0) 1.2 1.6
--------- --------- ---------
Federal income tax expense........................................................... $ 97.5 $ 81.1 $ 82.7
--------- --------- ---------
--------- --------- ---------
</TABLE>
Until conversion to a stock life insurance company, FAFLIC, as a mutual company,
reduced its deduction for policyholder dividends by the differential earnings
amount. This amount was computed, for each tax year, by multiplying the average
equity base of the FAFLIC/AFLIAC consolidated group, as determined for tax
purposes, by the estimate of an excess of an imputed earnings rate over the
average mutual life insurance companies' earnings rate. The differential
earnings amount for each tax year was subsequently recomputed when actual
earnings rates were published by the Internal Revenue Service (IRS). The
differential earnings amount included in 1996 related to an adjustment for the
1994 tax year based on the actual mutual life insurance companies' earnings rate
issued by the IRS in 1996. As a stock life company, FAFLIC is no longer required
to reduce its policyholder dividend deduction by the differential earnings
amount.
The deferred income tax liability (asset) represents the tax effects of
temporary differences attributable to the Company's consolidated federal tax
return group. As a result of the purchase discussed in Note 2, all companies
will file a single consolidated federal income tax return for tax years ending
on and after December 31, 1997. Deferred tax amounts presented for 1996 reflect
the combination of the former FAFLIC/ AFLIAC consolidated group with the former
APY consolidated group. Its components were as follows:
<TABLE>
<CAPTION>
DECEMBER 31
(IN MILLIONS) 1997 1996
- --------------------------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
Deferred tax (assets) liabilities
AMT carryforwards.......................................................................... $ (15.6) $ (16.3)
Loss reserve discounting................................................................... (391.6) (355.1)
Deferred acquisition costs................................................................. 291.8 249.4
Employee benefit plans..................................................................... (48.0) (41.4)
Investments, net........................................................................... 175.4 128.5
Bad debt reserve........................................................................... (14.3) (26.2)
Other, net................................................................................. 15.2 (5.8)
--------- ---------
Deferred tax (asset) liability, net.......................................................... $ 12.9 $ (66.9)
--------- ---------
--------- ---------
</TABLE>
Gross deferred income tax assets totaled $469.5 million and $444.8 million at
December 31, 1997 and 1996, respectively. Gross deferred income tax liabilities
totaled $482.4 million and $377.9 million at December 31, 1997 and 1996,
respectively.
The Company believes, based on the its recent earnings history and its future
expectations, that the Company's taxable income in future years will be
sufficient to realize all deferred tax assets. In determining the adequacy of
future income, management considered the future reversal of its existing
temporary differences and available tax planning strategies that could be
implemented, if necessary. At December 31, 1997, there are available alternative
minimum tax credit carryforwards of $15.6 million.
F-25
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
The Company's federal income tax returns are routinely audited by the IRS, and
provisions are routinely made in the financial statements in anticipation of the
results of these audits. The IRS has examined the FAFLIC/ AFLIAC consolidated
group's federal income tax returns through 1991. The IRS has also examined the
former Allmerica P&C consolidated group's federal income tax returns through
1991. The Company has appealed certain adjustments proposed by the IRS with
respect to the federal income tax returns for 1989, 1990, and 1991 for both the
FAFLIC/AFLIAC consolidated group as well as the former Allmerica P&C
consolidated group. Also, certain adjustments proposed by the IRS with respect
to FAFLIC/AFLIAC's federal income tax returns for 1982 and 1983 remain
unresolved. If upheld, these adjustments would result in additional payments;
however, the Company will vigorously defend its position with respect to these
adjustments. In management's opinion, adequate tax liabilities have been
established for all years. However, the amount of these tax liabilities could be
revised in the near term if estimates of the Company's ultimate liability are
revised.
9. PENSION PLANS
FAFLIC provides retirement benefits to substantially all of its employees under
three separate defined benefit pension plans. Effective January 1, 1995, the
Company adopted a defined benefit cash balance formula, under which the Company
annually provides an allocation to each eligible employee based on a percentage
of that employee's salary, similar to a defined contribution plan arrangement.
The 1997 and 1996 allocations were based on 7.0% of each eligible employee's
salary. In addition to the cash balance allocation, certain transition group
employees, who have met specified age and service requirements as of December
31, 1994, are eligible for a grandfathered benefit based primarily on the
employees' years of service and compensation during their highest five
consecutive plan years of employment. The Company's policy for the plans is to
fund at least the minimum amount required by the Employee Retirement Income
Security Act of 1974.
Components of net pension expense were as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
(IN MILLIONS) 1997 1996 1995
- -------------------------------------------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Service cost -- benefits earned during the year....................................... $ 19.9 $ 19.0 $ 19.7
Interest accrued on projected benefit obligations..................................... 23.5 21.9 21.1
Actual return on assets............................................................... (64.0) (42.2) (89.3)
Net amortization and deferral......................................................... 29.0 9.3 66.1
--------- --------- ---------
Net pension expense................................................................... $ 8.4 $ 8.0 $ 17.6
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-26
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
The following table summarizes the combined status of the three pension plans.
At December 31, 1997 and 1996 the plans' assets exceeded their projected benefit
obligations.
<TABLE>
<CAPTION>
DECEMBER 31
(IN MILLIONS) 1997 1996
- ----------------------------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested benefit obligation.................................................................... $ 332.6 $ 308.9
Unvested benefit obligation.................................................................. 7.5 6.6
--------- ---------
Accumulated benefit obligation................................................................. $ 340.1 $ 315.5
--------- ---------
--------- ---------
Pension liability included in Consolidated Balance Sheets:
Projected benefit obligation................................................................. $ 370.4 $ 344.2
Plan assets at fair value.................................................................... 395.5 347.8
--------- ---------
Plan assets greater (less) than projected benefit obligation............................... 25.1 3.6
Unrecognized net (gain) loss from past experience............................................ (44.9) (9.1)
Unrecognized prior service benefit........................................................... (13.9) (11.5)
Unamortized transition asset................................................................. (26.2) (24.7)
--------- ---------
Net pension liability.......................................................................... $ (59.9) $ (41.7)
--------- ---------
--------- ---------
</TABLE>
As a result of AFC's purchase of the minority shares of APY, certain pension
liabilities were reduced by $11.7 million to reflect their fair value as of the
purchase date.
Determination of the projected benefit obligations was based on a weighted
average discount rate of 7.0% in 1997 and 1996 and the assumed long-term rate of
return on plan assets was 9.0%. The actuarial present value of the projected
benefit obligations was determined using assumed rates of increase in future
compensation levels ranging from 5.0% to 5.5%. Plan assets are invested
primarily in various separate accounts and the general account of FAFLIC. The
plans also hold stock of AFC.
The Company has three separate defined contribution 401(k) plans for its
employees. The Company matches employee elective 401(k) contributions, up to a
maximum percentage determined annually by the Board of Directors. During 1997
and 1996, the Company matched 50% of employees' contributions up to 6.0% of
eligible compensation. The total expenses related to these plans were $3.3
million and $5.5 million, in 1997 and 1996, respectively. In addition to these
plans, the Company has a defined contribution plan for substantially all of its
agents. The Plan expense in 1997 and 1996, was $2.8 million and $2.0 million,
respectively.
On January 1, 1998, substantially all of the aforementioned defined benefit and
defined contribution 401k plans were merged with the existing benefit plans of
FAFLIC. The transfer of benefit plans will not have a material impact on the
results of operations or financial position of the Company.
10. OTHER POSTRETIREMENT BENEFIT PLANS
In addition to the Company's pension plans, the Company currently provides
postretirement medical and death benefits to certain full-time employees and
dependents, under several plans sponsored by FAFLIC, Hanover, and Citizens.
Generally, employees become eligible at age 55 with at least 15 years of
service. Spousal coverage is generally provided for up to two years after death
of the retiree. Benefits include hospital, major medical, and a payment at death
equal to retirees' final compensation up to certain limits. Effective January 1,
1996, the Company revised these benefits so as to establish limits on future
benefit payments and to restrict eligibility to current employees. The medical
plans have varying copayments and deductibles, depending on the plan. These
plans are unfunded.
F-27
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
The plan changes, effective January 1, 1996, resulted in a negative plan
amendment (change in eligibility and medical benefits) of $26.8 million and
curtailment (no future increases in life insurance) of $5.3 million. The
negative plan amendment will be amortized as prior service cost over the average
number of years to full eligibility (approximately 9 years or $3.0 million per
year). Of the $5.3 million curtailment gain, $3.3 million has been deducted from
unrecognized loss and $2.0 million has been recorded as a reduction of the net
periodic postretirement benefit expense.
The plans' funded status reconciled with amounts recognized in the Company's
consolidated balance sheet were as follows:
<TABLE>
<CAPTION>
DECEMBER 31
(IN MILLIONS) 1997 1996
- ---------------------------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees.................................................................................... $ 40.7 $ 40.4
Fully eligible active plan participants..................................................... 7.0 7.5
Other active plan participants.............................................................. 24.1 24.4
--------- ---------
71.8 72.3
Plan assets at fair value..................................................................... -- --
--------- ---------
Accumulated postretirement benefit obligation in excess of plan assets........................ 71.8 72.3
Unrecognized prior service benefit............................................................ 15.3 23.8
Unrecognized loss............................................................................. (0.8) (5.0)
--------- ---------
Accrued postretirement benefit costs.......................................................... $ 86.3 $ 91.1
--------- ---------
--------- ---------
</TABLE>
The components of net periodic postretirement benefit expense were as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
(IN MILLIONS) 1997 1996 1995
- ---------------------------------------------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Service cost............................................................................ $ 3.0 $ 3.2 $ 4.2
Interest cost........................................................................... 4.6 4.6 6.9
Amortization of gain.................................................................... (2.8) (2.8) (0.5)
--------- --------- ---------
Net periodic postretirement benefit expense............................................. $ 4.8 $ 5.0 $ 10.6
--------- --------- ---------
--------- --------- ---------
</TABLE>
As a result of AFC's purchase of the minority shares of APY, certain
postretirement liabilities were reduced by $6.1 million to reflect their fair
value as of the purchase date.
For purposes of measuring the accumulated postretirement benefit obligation at
December 31, 1997, health care costs were assumed to increase 8.0% in 1998,
declining thereafter until the ultimate rate of 5.5% is reached in 2001 and
remains at that level thereafter. The health care cost trend rate assumption has
a significant effect on the amounts reported. For example, increasing the
assumed health care cost trend rates by one percentage point in each year would
increase the accumulated postretirement benefit obligation at December 31, 1997
by $4.9 million, and the aggregate of the service and interest cost components
of net periodic postretirement benefit expense for 1997 by $0.6 million.
The weighted-average discount rate used in determining the accumulated
postretirement benefit obligation was 7.0% at December 31, 1997 and 1996.
As described in Note 9, all of the postretirement benefit plans of the Company
were merged with the existing plans of FAFLIC, effective January 1, 1998.
F-28
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
11. DIVIDEND RESTRICTIONS
Massachusetts, Delaware, New Hampshire and Michigan have enacted laws governing
the payment of dividends to stockholders by insurers. These laws affect the
dividend paying ability of FAFLIC, AFLIAC, Hanover and Citizens, respectively.
Dividends from FAFLIC and APY (from Hanover) to AFC will be the primary source
of cash for repayment of the debt and capital securities by AFC and payment of
dividends to AFC stockholders.
Massachusetts' statute limits the dividends an insurer may pay in any twelve
month period, without the prior permission of the Commonwealth of Massachusetts
Insurance Commissioner, to the greater of (i) 10% of its statutory policyholder
surplus as of the preceding December 31 or (ii) the individual company's
statutory net gain from operations for the preceding calendar year (if such
insurer is a life company), or its net income for the preceding calendar year
(if such insurer is not a life company). In addition, under Massachusetts law,
no domestic insurer shall pay a dividend or make any distribution to its
shareholders from other than unassigned funds unless the Commissioner shall have
approved such dividend or distribution. No dividends were declared nor paid
during 1997,1996 or 1995. During 1998, FAFLIC could pay dividends of $196.3
million to AFC without prior approval of the Commissioner. On January 12, 1998
FAFLIC declared a dividend of $50 million to AFC of which $18 million was paid
in February, 1998.
Pursuant to Delaware's statute, the maximum amount of dividends and other
distributions that an insurer may pay in any twelve month period, without the
prior approval of the Delaware Commissioner of Insurance, is limited to the
greater of (i) 10% of its policyholders' surplus as of the preceding December 31
or (ii) the individual company's statutory net gain from operations for the
preceding calendar year (if such insurer is a life company) or its net income
(not including realized capital gains) for the preceding calendar year (if such
insurer is not a life company). Any dividends to be paid by an insurer, whether
or not in excess of the aforementioned threshold, from a source other than
statutory earned surplus would also require the prior approval of the Delaware
Commissioner of Insurance. No dividends were paid by AFLIAC to FAFLIC during
1997, 1996 or 1995. During 1998, AFLIAC could pay dividends of $33.9 million to
FAFLIC without prior approval.
Pursuant to New Hampshire's statute, the maximum dividends and other
distributions that an insurer may pay in any twelve month period, without the
prior approval of the New Hampshire Insurance Commissioner, is limited to 10% of
such insurer's statutory policyholder surplus as of the preceding December 31.
Hanover declared dividends to Allmerica P&C totaling $120.0 million, 105.0
million and 40.0 million during 1997, 1996 and 1995, respectively. During 1998,
the maximum dividend and other distributions that could be paid to Allmerica P&C
by Hanover, without prior approval of the Insurance Commissioner, was
approximately $127.6 million.
Pursuant to Michigan's statute, the maximum dividends and other distributions
that an insurer may pay in any twelve month period, without prior approval of
the Michigan Insurance Commissioner, is limited to the greater of 10% of
policyholders' surplus as of December 31 of the immediately preceding year or
the statutory net income less realized gains, for the immediately preceding
calendar year. Citizens Insurance paid dividends to Citizens Corporation
totaling $6.3 million and $3.0 million during 1996 and 1995, respectively. No
dividends were paid by Citizens Insurance during 1997. During, 1998, Citizens
Insurance could pay dividends of $86.9 million to Citizens Corporation without
prior approval.
F-29
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
12. SEGMENT INFORMATION
The Company offers financial products and services in two major areas: Risk
Management and Retirement and Asset Accumulation. Within these broad areas, the
Company conducts business principally in five operating segments.
The Risk Management group includes two segments: Regional Property and Casualty
and Corporate Risk Management Services.
The Regional Property and Casualty segment includes property and casualty
insurance products, such as automobile insurance, homeowners insurance,
commercial multiple-peril insurance, and workers' compensation insurance. These
products are offered by Allmerica P&C through its operating subsidiaries,
Hanover and Citizens. Substantially all of the Regional Property and Casualty
segment's earnings are generated in Michigan and the Northeast (Connecticut,
Massachusetts, New York, New Jersey, New Hampshire, Rhode Island, Vermont and
Maine). The Corporate Risk Management Services segment includes group life and
health insurance products and services which assist employers in administering
employee benefit programs and in managing the related risks.
The Retirement and Asset Accumulation group includes three segments: Allmerica
Financial Services, Institutional Services and Allmerica Asset Management. The
Allmerica Financial Services segment includes variable annuities, variable
universal life-type, traditional and health insurance products distributed via
retail channels to individuals across the country. The Institutional Services
segment includes primarily group retirement products such as 401(k) plans,
tax-sheltered annuities and GIC contracts which are distributed to institutions
across the country via work-site marketing and other arrangements. Allmerica
Asset Management is a Registered Investment Advisor which provides investment
advisory services primarily to affiliates and to other institutions, such as
insurance companies and pension plans.
Summarized below is financial information with respect to business segments for
the year ended and as of December 31.
<TABLE>
<CAPTION>
DECEMBER 31
(IN MILLIONS) 1997 1996 1995
- --------------------------------------------------------------------------- ---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Risk Management
Regional Property and Casualty......................................... $ 2,275.3 $ 2,196.6 $ 2,109.0
Corporate Risk Management.............................................. 396.3 361.5 328.5
---------- ---------- ----------
Subtotal............................................................... 2,671.6 2,558.1 2,437.5
Retirement and Asset Accumulation
Allmerica Financial Services........................................... 470.6 450.9 487.1
Institutional Services................................................. 243.4 270.7 330.2
Allmerica Asset Management............................................. 8.7 8.8 4.4
---------- ---------- ----------
Subtotal............................................................... 722.7 730.4 821.7
Eliminations............................................................. (10.1) (8.7) (4.4)
---------- ---------- ----------
Total...................................................................... $ 3,384.2 $ 3,279.8 $ 3,254.8
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
F-30
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
<TABLE>
<CAPTION>
DECEMBER 31
(IN MILLIONS) 1997 1996 1995
- --------------------------------------------------------------------------- ---------- ---------- ----------
Income from continuing operations before income taxes:
<S> <C> <C> <C>
Risk Management
Regional Property and Casualty......................................... $ 206.4 $ 197.7 $ 206.3
Corporate Risk Management.............................................. 19.3 20.7 18.3
---------- ---------- ----------
Subtotal............................................................... 225.7 218.4 224.6
Retirement and Asset Accumulation
Allmerica Financial Services........................................... 87.4 76.9 35.2
Institutional Services................................................. 62.4 52.8 42.8
Allmerica Asset Management............................................. 1.4 1.1 2.3
---------- ---------- ----------
Subtotal............................................................... 151.2 130.8 80.3
---------- ---------- ----------
Total...................................................................... $ 376.9 $ 349.2 $ 304.9
---------- ---------- ----------
---------- ---------- ----------
Identifiable assets:
Risk Management
Regional Property and Casualty......................................... $ 5,710.4 $ 5,703.9 $ 5,741.8
Corporate Risk Management.............................................. 568.8 522.1 458.9
---------- ---------- ----------
Subtotal............................................................... 6,279.2 6,226.0 6,200.7
Retirement and Asset Accumulation
Allmerica Financial Services........................................... 12,049.6 8,822.4 7,218.6
Institutional Services................................................. 4,158.5 3,886.7 4,280.9
Allmerica Asset Management............................................. 4.1 2.4 2.1
---------- ---------- ----------
Subtotal............................................................... 16,212.2 12,711.5 11,501.6
---------- ---------- ----------
Total...................................................................... $ 22,491.4 $ 18,937.5 $ 17,702.3
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
13. LEASE COMMITMENTS
Rental expenses for operating leases, principally with respect to buildings,
amounted to $33.6 million, $34.9 million and $36.4 million in 1997, 1996 and
1995, respectively. At December 31, 1997, future minimum rental payments under
non-cancelable operating leases were approximately $72.5 million, payable as
follows: 1998 -- $24.8 million; 1999 -- $19.8 million; 2000 -- $13.6 million;
2001 -- $7.9 million; and $6.4 million thereafter. It is expected that, in the
normal course of business, leases that expire will be renewed or replaced by
leases on other property and equipment; thus, it is anticipated that future
minimum lease commitments will not be less than the amounts shown for 1998.
14. REINSURANCE
In the normal course of business, the Company seeks to reduce the loss that may
arise from catastrophes or other events that cause unfavorable underwriting
results by reinsuring certain levels of risk in various areas of exposure with
other insurance enterprises or reinsurers. Reinsurance transactions are
accounted for in accordance with the provisions of SFAS No. 113, ACCOUNTING AND
REPORTING FOR REINSURANCE OF SHORT DURATION AND LONG DURATION CONTRACTS.
Amounts recoverable from reinsurers are estimated in a manner consistent with
the claim liability associated with the reinsured policy. Reinsurance contracts
do not relieve the Company from its obligations to policyholders. Failure of
reinsurers to honor their obligations could result in losses to the Company;
consequently, allowances are established for amounts deemed uncollectible. The
Company determines the appropriate amount of reinsurance based on evaluation of
the risks accepted and analyses prepared by consultants and reinsurers and on
market conditions (including the availability and pricing of reinsurance). The
Company also
F-31
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
believes that the terms of its reinsurance contracts are consistent with
industry practice in that they contain standard terms with respect to lines of
business covered, limit and retention, arbitration and occurrence. Based on its
review of its reinsurers' financial statements and reputations in the
reinsurance marketplace, the Company believes that its reinsurers are
financially sound.
The Company is subject to concentration of risk with respect to reinsurance
ceded to various residual market mechanisms. As a condition to the ability to
conduct certain business in various states, the Company is required to
participate in various residual market mechanisms and pooling arrangements which
provide various insurance coverages to individuals or other entities that are
otherwise unable to purchase such coverage voluntarily provided by private
insurers. These market mechanisms and pooling arrangements include the
Massachusetts Commonwealth Automobile Reinsurers ("CAR"), the Maine Workers'
Compensation Residual Market Pool ("MWCRP") and the Michigan Catastrophic Claims
Association ("MCCA"). At December 31, 1997, CAR was the only reinsurer which
represented 10% or more of the Company's reinsurance business. As a servicing
carrier in Massachusetts, the Company cedes a significant portion of its private
passenger and commercial automobile premiums to CAR. Net premiums earned and
losses and loss adjustment expenses ceded to CAR in 1997, 1996 and 1995 were
$32.3 million and $28.2 million, $38.0 million and $21.8 million, and $49.1
million and $33.7 million, respectively.
The Company ceded to MCCA premiums earned and losses and loss adjustment
expenses in 1997, 1996 and 1995 of $9.8 million and $(0.8) million, $50.5
million and $(52.9) million, and $66.8 million and $62.9 million, respectively.
Because the MCCA is supported by assessments permitted by statute, and all
amounts billed by the Company to CAR, MWCRP and MCCA have been paid when due,
the Company believes that it has no significant exposure to uncollectible
reinsurance balances.
The effects of reinsurance were as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
(IN MILLIONS) 1997 1996 1995
- ------------------------------------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Life and accident and health insurance premiums:
Direct....................................................................... $ 417.4 $ 389.1 $ 438.9
Assumed...................................................................... 110.7 87.8 71.0
Ceded........................................................................ (170.1) (138.9) (150.3)
--------- --------- ---------
Net premiums................................................................... $ 358.0 $ 338.0 $ 359.6
--------- --------- ---------
--------- --------- ---------
Property and casualty premiums written:
Direct....................................................................... $ 2,068.5 $ 2,039.7 $ 2,039.4
Assumed...................................................................... 103.1 108.7 125.0
Ceded........................................................................ (179.8) (234.0) (279.1)
--------- --------- ---------
Net premiums................................................................... $ 1,991.8 $ 1,914.4 $ 1,885.3
--------- --------- ---------
--------- --------- ---------
Property and casualty premiums earned:
Direct....................................................................... $ 2,046.2 $ 2,018.5 $ 2,021.7
Assumed...................................................................... 102.0 112.4 137.7
Ceded........................................................................ (195.1) (232.6) (296.2)
--------- --------- ---------
Net premiums................................................................... $ 1,953.1 $ 1,898.3 $ 1,863.2
--------- --------- ---------
--------- --------- ---------
Life insurance and other individual policy benefits, claims, losses and loss
adjustment expenses:
Direct....................................................................... $ 656.4 $ 606.5 $ 741.0
Assumed...................................................................... 61.6 44.9 38.5
Ceded........................................................................ (158.8) (77.8) (69.5)
--------- --------- ---------
Net policy benefits, claims, losses and loss adjustment expenses............... $ 559.2 $ 573.6 $ 710.0
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-32
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
(IN MILLIONS) 1997 1996 1995
- ------------------------------------------------------------------------------- --------- --------- ---------
Property and casualty benefits, claims, losses and loss adjustment expenses:
<S> <C> <C> <C>
Direct....................................................................... $ 1,464.9 $ 1,299.8 $ 1,383.3
Assumed...................................................................... 101.2 85.8 146.1
Ceded........................................................................ (120.6) (2.2) (229.1)
--------- --------- ---------
Net policy benefits, claims, losses, and loss adjustment expenses.............. $ 1,445.5 $ 1,383.4 $ 1,300.3
--------- --------- ---------
--------- --------- ---------
</TABLE>
15. DEFERRED POLICY ACQUISITION COSTS
The following reflects changes to the deferred policy acquisition asset:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
(IN MILLIONS) 1997 1996 1995
- ---------------------------------------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Balance at beginning of year...................................................... $ 822.7 $ 735.7 $ 802.8
Acquisition expenses deferred................................................... 617.7 560.8 504.8
Amortized to expense during the year............................................ (476.0) (483.5) (470.3)
Adjustment to equity during the year............................................ (11.1) 9.7 (50.4)
Transferred to the Closed Block................................................. -- -- (24.8)
Adjustment for cession of term life insurance................................... -- -- (26.4)
Adjustment for cession of disability income insurance........................... (38.6) -- --
Adjustment for revision of universal and variable universal life insurance
mortality assumptions......................................................... 50.8 -- --
--------- --------- ---------
Balance at end of year............................................................ $ 965.5 $ 822.7 $ 735.7
--------- --------- ---------
--------- --------- ---------
</TABLE>
At October 1, 1997, the Company revised the mortality assumptions for universal
life and variable universal life product lines. These revisions resulted in a
$50.8 million recapitalization of deferred policy acquisition costs.
16. LIABILITIES FOR OUTSTANDING CLAIMS, LOSSES AND LOSS ADJUSTMENT EXPENSES
The Company regularly updates its estimates of liabilities for outstanding
claims, losses and loss adjustment expenses as new information becomes available
and further events occur which may impact the resolution of unsettled claims for
its property and casualty and its accident and health lines of business. Changes
in prior estimates are reflected in results of operations in the year such
changes are determined to be needed and recorded.
The liability for future policy benefits and outstanding claims, losses and loss
adjustment expenses related to the Company's accident and health business was
$533.6 million, $471.7 million and $446.9 million at December 31, 1997, 1996 and
1995, respectively. Accident and health claim liabilities were re-estimated for
all prior years and were decreased by $0.2 million and $0.6 million in 1997 and
1996, respectively, and increased by $17.6 million in 1995. Unfavorable
development in the accident and health business during 1995 was primarily due to
reserve strengthening and adverse experience in the Company's individual
disability line of business. Effective October 1, 1997, the Company ceded
substantially all of its individual disability income line of business, under a
100% coinsurance agreement to Metropolitan Life Insurance Company. At December
31, 1997, the individual disability income reserves ceded under this agreement
were $249.0 million, representing 46.7% of the Company's total accident and
health reserves.
F-33
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
The following table provides a reconciliation of the beginning and ending
property and casualty reserve for unpaid losses and loss adjustment expenses
(LAE):
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
(IN MILLIONS) 1997 1996 1995
- ------------------------------------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Reserve for losses and LAE, beginning of the year.............................. $ 2,744.1 $ 2,896.0 $ 2,821.7
Incurred losses and LAE, net of reinsurance recoverable:
Provision for insured events of the current year............................. 1,564.1 1,513.3 1,427.3
Decrease in provision for insured events of prior years...................... (127.9) (141.4) (137.6)
--------- --------- ---------
Total incurred losses and LAE.................................................. 1,436.2 1,371.9 1,289.7
--------- --------- ---------
Payments, net of reinsurance recoverable:
Losses and LAE attributable to insured events of current year................ 775.1 759.6 652.2
Losses and LAE attributable to insured events of prior years................. 732.1 627.6 614.3
--------- --------- ---------
Total payments................................................................. 1,507.2 1,387.2 1,266.5
--------- --------- ---------
Change in reinsurance recoverable on unpaid losses............................. (50.2) (136.6) 51.1
--------- --------- ---------
Other(1) (7.5) -- --
--------- --------- ---------
Reserve for losses and LAE, end of year........................................ $ 2,615.4 $ 2,744.1 $ 2,896.0
--------- --------- ---------
--------- --------- ---------
</TABLE>
(1) Includes purchase accounting adjustments.
As part of an ongoing process, the property and casualty reserves have been
re-estimated for all prior accident years and were decreased by $127.9 million,
$141.4 million and $137.6 million in 1997, 1996 and 1995, respectively.
The decrease in favorable development on prior years' reserves of $13.5 million
in 1997 results primarily from a $24.6 million decrease in favorable development
at Hanover to $58.4 million, partially offset by an $11.1 million increase in
favorable development at Citizens to $69.5 million. The decrease in Hanover's
favorable development of $24.6 million in 1997 reflects a decrease in favorable
development of $25.0 million, to $17.4 million in the personal automobile line,
as well as a decrease in favorable development of $8.5 million, to unfavorable
development of $2.8 million in the commercial multiple peril line. These
decreases were partially offset by an increase in favorable development in the
workers' compensation line of $11.5 million, to $28.8 million. The increase in
favorable development at Citizens in 1997 reflects improved severity in the
workers' compensation line where favorable development increased $13.9 million,
to $35.7 million and in the commercial multiple peril line where favorable
development increased $7.0 million to $4.3 million, partially offset by less
favorable development in the personal automobile line, where favorable
development decreased $10.5 million to $22.5 million in 1997.
The increase in favorable development on prior years' reserves of $3.8 million
in 1996 results primarily from an $11.4 million increase in favorable
development at Citizens. The increase in Citizens' favorable development of
$11.4 million in 1996 reflects improved severity in the personal automobile
line, where favorable development increased $28.6 million to $33.0 million in
1996, partially offset by less favorable development in the workers'
compensation line of $10.9 million Hanover's favorable development, including
voluntary and involuntary pools, decreased $7.7 million in 1996 to $82.9
million, primarily attributable to a decrease in favorable development in the
workers' compensation line of $19.8 million. Favorable development in the
personal automobile line also decreased $4.7 million, to $42.4 million in 1996.
These decreases were offset by increases in favorable development of $1.9
million and $5.6 million, to $12.6 million and $5.7 million, in the commercial
automobile and commercial multiple peril lines, respectively. Favorable
development in other lines increased by $8.8 million, primarily as a result of
environmental reserve strengthening in 1995. Favorable development in Hanover's
voluntary and involuntary pools increased $3.7 million to $4.1 million during
1996.
F-34
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
Citizens' favorable development in 1997 primarily reflects a modest shift over
the past few years of the workers' compensation business to Western and Northern
Michigan, which have demonstrated more favorable loss experience than Eastern
Michigan.
Citizens' favorable development in 1996 and 1995 primarily reflects the
initiatives taken by the Company to manage medical costs in both the automobile
and workers' compensation lines, as well as the impact of the Michigan Supreme
Court ruling on workers' compensation indemnity payments in 1995, which
decreases the maximum amount to be paid for indemnity cases on all existing and
future claims.
Hanover's favorable development from 1995 to 1997 primarily reflects favorable
legislation related to workers' compensation, improved safety features in
automobiles, improved driving habits and a moderation of medical costs and
inflation.
In 1995, Hanover's favorable development was primarily attributable to a
re-estimate of reserves with respect to certain types of workers' compensation
policies including large deductibles and excess of loss policies. In addition,
during 1995 Hanover refined its estimation of unallocated loss adjustment
expenses which increased favorable development in that year.
This favorable development reflects the Regional Property and Casualty
subsidiaries' reserving philosophy consistently applied over these periods.
Due to the nature of the business written by the Regional Property and Casualty
subsidiaries, the exposure to environmental liabilities is relatively small and
therefore their reserves are relatively small compared to other types of
liabilities. Loss and LAE reserves related to environmental damage and toxic
tort liability, included in the total reserve for losses and LAE were $53.1
million and $50.8 million, net of reinsurance of $15.7 million and $20.2 million
at the end of 1997 and 1996, respectively. The Regional Property and Casualty
subsidiaries do not specifically underwrite policies that include this coverage,
but as case law expands policy provisions and insurers' liability beyond the
intended coverage, the Regional Property and Casualty subsidiaries may be
required to defend such claims. Due to their unusual nature and absence of
historical claims data, reserves for these claims are not determined using
historical experience to project future losses. The Company estimated its
ultimate liability for these claims based upon currently known facts, reasonable
assumptions where the facts are not known, current law and methodologies
currently available. Although these claims are not material, their existence
gives rise to uncertainty and is discussed because of the possibility, however
remote, that they may become material. The Company believes that,
notwithstanding the evolution of case law expanding liability in environmental
claims, recorded reserves related to these claims for environmental liability
are adequate. In addition, the Company is not aware of any litigation or pending
claims that may result in additional material liabilities in excess of recorded
reserves. The environmental liability could be revised in the near term if the
estimates used in determining the liability are revised.
17. MINORITY INTEREST
The Company's interest in Allmerica P&C is represented by ownership of 65.8%,
59.5% and 58.3% of the outstanding shares of common stock at December 31, 1997,
1996 and 1995, respectively. Earnings and shareholder's equity attributable to
minority shareholders are included in minority interest in the consolidated
financial statements.
F-35
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
18. CONTINGENCIES
REGULATORY AND INDUSTRY DEVELOPMENTS
Unfavorable economic conditions may contribute to an increase in the number of
insurance companies that are under regulatory supervision. This may result in an
increase in mandatory assessments by state guaranty funds, or voluntary payments
by, solvent insurance companies to cover losses to policyholders of insolvent or
rehabilitated companies. Mandatory assessments, which are subject to statutory
limits, can be partially recovered through a reduction in future premium taxes
in some states. The Company is not able to reasonably estimate the potential
effect on it of any such future assessments or voluntary payments.
LITIGATION
In July 1997, a lawsuit was instituted in Louisiana against AFC and certain of
its subsidiaries by individual plaintiffs alleging fraud, unfair or deceptive
acts, breach of contract, misrepresentation and related claims in the sale of
life insurance policies. In October 1997, plaintiffs voluntarily dismissed the
Louisiana suit and refiled the action in Federal District Court in Worcester,
Massachusetts. The plaintiffs seek to be certified as a class. The case is in
early stages of discovery and the Company is evaluating the claims. Although the
Company believes it has meritorious defenses to plaintiffs' claims, there can be
no assurance that the claims will be resolved on a basis which is satisfactory
to the Company.
On June 23, 1995, the governor of Maine approved a legislative settlement for
the Maine Workers' Compensation Residual Market Pool deficit for the years 1988
through 1992. The settlement provides for an initial funding of $220.0 million
toward the deficit. The insurance carriers were liable for $65.0 million and
employers would contribute $110.0 million payable through surcharges on premiums
over the course of the next ten years. The major insurers are responsible for
90% of the $65.0 million. Hanover's allocated share of the settlement is
approximately $4.2 million, which was paid in December 1995. The remainder of
the deficit of $45.0 million will be paid by the Maine Guaranty Fund, payable in
quarterly contributions over ten years. A group of smaller carriers filed
litigation to appeal the settlement. Although the Company believes that adequate
reserves have been established for any additional liability, there can be no
assurance that the appeal will be resolved on a basis which is satisfactory to
the Company.
The Company has been named a defendant in various other legal proceedings
arising in the normal course of business. In the opinion of management, based on
the advice of legal counsel, the ultimate resolution of these proceedings will
not have a material effect on the Company's consolidated financial statements.
However, liabilities related to these proceedings could be established in the
near term if estimates of the ultimate resolution of these proceedings are
revised.
RESIDUAL MARKETS
The Company is required to participate in residual markets in various states.
The results of the residual markets are not subject to the predictability
associated with the Company's own managed business, and are significant to the
workers' compensation line of business and both the private passenger and
commercial automobile lines of business.
YEAR 2000
The Year 2000 Issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
computer programs that have date-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or
F-36
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices, or engage
in similar normal business activities. Although the Company does not believe
that there is a material contingency associated with the Year 2000 project,
there can be no assurance that exposure for material contingencies will not
arise.
19. STATUTORY FINANCIAL INFORMATION
The Company and its insurance subsidiaries are required to file annual
statements with state regulatory authorities prepared on an accounting basis
prescribed or permitted by such authorities (statutory basis). Statutory surplus
differs from shareholder's equity reported in accordance with generally accepted
accounting principles for stock life insurance companies primarily because
policy acquisition costs are expensed when incurred, investment reserves are
based on different assumptions, postretirement benefit costs are based on
different assumptions and reflect a different method of adoption, life insurance
reserves are based on different assumptions and income tax expense reflects only
taxes paid or currently payable. Statutory net income and surplus are as
follows:
<TABLE>
<CAPTION>
(IN MILLIONS) 1997 1996 1995
- ------------------------------------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Statutory net income (Combined)
Property and Casualty Companies.............................................. $ 190.3 $ 155.3 $ 155.3
Life and Health Companies.................................................... 191.2 133.3 134.3
Statutory Shareholder's Surplus (Combined)
Property and Casualty Companies.............................................. $ 1,279.8 $ 1,201.6 $ 1,128.4
Life and Health Companies.................................................... 1,221.3 1,120.1 965.6
</TABLE>
F-37
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of First Allmerica Financial Life Insurance Company
and Policyowners of the Separate Account VA-K Allmerica Advantage Variable
Annuity and ExecAnnuity Plus Variable Annuity of First Allmerica Financial
Life Insurance Company.
In our opinion, the accompanying statements of assets and liabilities and the
related statements of operations and of changes in net assets present fairly,
in all material respects, the financial position of each of the Sub-Accounts
(Growth, Investment Grade Income, Money Market, Equity Index, Government
Bond, Select Aggressive Growth, Select Growth, Select Growth and Income,
Select Value Opportunity, Select International Equity, Select Capital
Appreciation, DGPF International Equity, Fidelity VIP High Income, Fidelity
VIP Equity-Income, Fidelity VIP Growth, Fidelity VIP Overseas, Fidelity VIP
II Asset Manager and T. Rowe Price International Stock) constituting the
Separate Account VA-K Allmerica Advantage Variable Annuity and ExecAnnuity
Plus Variable Annuity of First Allmerica Financial Life Insurance Company at
December 31, 1997, the results of each of their operations for the year then
ended and the changes in each of their net assets for each of the two years
in the period then ended, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of First
Allmerica Financial Life Insurance Company's management; our responsibility
is to express an opinion on these financial statements based on our audits.
We conducted our audits of these financial statements in accordance with
generally accepted auditing standards which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of investments at December 31, 1997 by correspondence with the
Funds, provide a reasonable basis for the opinion expressed above.
/s/ Price Waterhouse LLP
PRICE WATERHOUSE LLP
Boston, Massachusetts
March 25, 1998
<PAGE>
SEPARATE ACCOUNT VA-K ALLMERICA ADVANTAGE VARIABLE ANNUITY AND EXECANNUITY PLUS
VARIABLE ANNUITY
STATEMENTS OF ASSETS AND LIABILITIES
DECEMBER 31, 1997
<TABLE>
<CAPTION>
INVESTMENT GOVERNMENT
GROWTH GRADE INCOME MONEY MARKET EQUITY INDEX BOND
----------- ------------ ------------ ------------ ----------
<S> <C> <C> <C> <C> <C>
ASSETS (NOTES 3 AND 7):
Investments in shares of Allmerica
Investment Trust.............................. $14,702,877 $4,927,230 $9,913,963 $12,491,032 $2,031,954
Investments in shares of Fidelity Variable
Insurance Products Funds (VIP)................ -- -- -- -- --
Investment in shares of T. Rowe Price
International Series, Inc..................... -- -- -- -- --
Investment in shares of Delaware Group
Premium Fund, Inc............................. -- -- -- -- --
----------- ------------ ------------ ------------ ----------
Total assets.................................. 14,702,877 4,927,230 9,913,963 12,491,032 2,031,954
LIABILITIES:
Payable to First Allmerica Financial Life
Insurance
Company (Sponsor)............................. 5,104 -- 728 3,916 --
----------- ------------ ------------ ------------ ----------
Net assets.................................... $14,697,773 $4,927,230 $9,913,235 $12,487,116 $2,031,954
----------- ------------ ------------ ------------ ----------
----------- ------------ ------------ ------------ ----------
Net asset distribution by category:
Qualified variable annuity policies........... $ 9,945,249 $3,472,994 $6,518,177 $ 8,439,504 $1,027,730
Non-qualified variable annuity policies....... 4,742,524 1,454,236 3,385,058 4,037,612 1,004,224
Value of annuitant mortality fluctuation
reserve................................... . 10,000 -- 10,000 10,000 --
----------- ------------ ------------ ------------ ----------
$14,697,773 $4,927,230 $9,913,235 $12,487,116 $2,031,954
----------- ------------ ------------ ------------ ----------
----------- ------------ ------------ ------------ ----------
Qualified units outstanding, December 31,
1997.......................................... 5,008,238 2,741,274 5,672,918 3,859,412 856,998
Net asset value per qualified unit, December 31,
1997.......................................... $ 1.985778 $ 1.266927 $ 1.148999 $ 2.186733 $1.199221
Non-qualified units outstanding, December 31,
1997.......................................... 2,393,281 1,147,845 2,954,796 1,850,986 837,398
Net asset value per non-qualified unit, December
31, 1997...................................... $ 1.985778 $ 1.266927 $ 1.148999 $ 2.186733 $1.199221
<CAPTION>
SELECT SELECT GROWTH SELECT VALUE
AGGRESSIVE GROWTH SELECT GROWTH AND INCOME OPPORTUNITY*
----------------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
ASSETS (NOTES 3 AND 7):
Investments in shares of Allmerica
Investment Trust.............................. $14,504,866 $11,535,657 $11,700,820 $9,641,949
Investments in shares of Fidelity Variable
Insurance Products Funds (VIP)................ -- -- -- --
Investment in shares of T. Rowe Price
International Series, Inc..................... -- -- -- --
Investment in shares of Delaware Group
Premium Fund, Inc............................. -- -- -- --
----------------- ------------- ------------- ------------
Total assets.................................. 14,504,866 11,535,657 11,700,820 9,641,949
LIABILITIES:
Payable to First Allmerica Financial Life
Insurance
Company (Sponsor)............................. -- -- 6,390 --
----------------- ------------- ------------- ------------
Net assets.................................... $14,504,866 $11,535,657 $11,694,430 $9,641,949
----------------- ------------- ------------- ------------
----------------- ------------- ------------- ------------
Net asset distribution by category:
Qualified variable annuity policies........... $10,428,942 $ 7,890,052 $ 7,233,497 $6,575,244
Non-qualified variable annuity policies....... 4,075,924 3,645,605 4,450,933 3,066,705
Value of annuitant mortality fluctuation
reserve................................... . -- -- 10,000 --
----------------- ------------- ------------- ------------
$14,504,866 $11,535,657 $11,694,430 $9,641,949
----------------- ------------- ------------- ------------
----------------- ------------- ------------- ------------
Qualified units outstanding, December 31,
1997.......................................... 5,713,803 3,822,581 3,786,170 3,727,803
Net asset value per qualified unit, December 31,
1997.......................................... $ 1.825219 $ 2.064064 $ 1.910505 $ 1.763839
Non-qualified units outstanding, December 31,
1997.......................................... 2,233,116 1,766,227 2,334,950 1,738,654
Net asset value per non-qualified unit, December
31, 1997...................................... $ 1.825219 $ 2.064064 $ 1.910505 $ 1.763839
</TABLE>
* Name changed. See Note 1.
The accompanying notes are an integral part of these financial statements.
SA-1
<PAGE>
SEPARATE ACCOUNT VA-K ALLMERICA ADVANTAGE VARIABLE ANNUITY AND EXECANNUITY PLUS
VARIABLE ANNUITY
STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED)
DECEMBER 31, 1997
<TABLE>
<CAPTION>
SELECT SELECT DGPF
INTERNATIONAL CAPITAL INTERNATIONAL FIDELITY VIP FIDELITY VIP
EQUITY APPRECIATION EQUITY HIGH INCOME EQUITY-INCOME
------------ ------------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
ASSETS (NOTES 3 AND 7):
Investments in shares of Allmerica
Investment Trust.............................. $11,290,918 $ 8,679,364 $ -- $ -- $ --
Investments in shares of Fidelity Variable
Insurance Products Funds (VIP)................ -- -- -- 15,115,689 26,355,237
Investment in shares of T. Rowe Price
International Series, Inc..................... -- -- -- -- --
Investment in shares of Delaware Group
Premium Fund, Inc............................. -- -- 4,528,266 -- --
------------ ------------- ------------ ------------ ------------
Total assets.................................. 11,290,918 8,679,364 4,528,266 15,115,689 26,355,237
LIABILITIES:
Payable to First Allmerica Financial Life
Insurance
Company (Sponsor)............................. -- -- -- -- --
------------ ------------- ------------ ------------ ------------
Net assets.................................... $11,290,918 $ 8,679,364 $ 4,528,266 $15,115,689 $26,355,237
------------ ------------- ------------ ------------ ------------
------------ ------------- ------------ ------------ ------------
Net asset distribution by category:
Qualified variable annuity policies........... $ 7,740,118 $ 6,095,554 $ 3,072,907 $ 9,440,907 $17,405,192
Non-qualified variable annuity policies....... 3,550,800 2,583,810 1,455,359 5,674,782 8,950,045
Value of annuitant mortality fluctuation
reserve................................... . -- -- -- -- --
------------ ------------- ------------ ------------ ------------
$11,290,918 $ 8,679,364 $ 4,528,266 $15,115,689 $26,355,237
------------ ------------- ------------ ------------ ------------
------------ ------------- ------------ ------------ ------------
Qualified units outstanding, December 31,
1997.......................................... 5,536,478 3,650,026 2,216,222 6,117,259 8,558,404
Net asset value per qualified unit, December 31,
1997.......................................... $ 1.398022 $ 1.670003 $ 1.386552 $ 1.543323 $ 2.033696
Non-qualified units outstanding, December 31,
1997.......................................... 2,539,874 1,547,188 1,049,623 3,676,989 4,400,876
Net asset value per non-qualified unit, December
31, 1997...................................... $ 1.398022 $ 1.670003 $ 1.386552 $ 1.543323 $ 2.033696
<CAPTION>
T. ROWE
FIDELITY FIDELITY VIP PRICE
VIP FIDELITY VIP II INTERNATIONAL
GROWTH OVERSEAS ASSET MANAGER STOCK
----------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
ASSETS (NOTES 3 AND 7):
Investments in shares of Allmerica
Investment Trust.............................. $ -- $ -- $ -- $ --
Investments in shares of Fidelity Variable
Insurance Products Funds (VIP)................ 22,827,717 4,673,801 4,771,994 --
Investment in shares of T. Rowe Price
International Series, Inc..................... -- -- -- 5,544,079
Investment in shares of Delaware Group
Premium Fund, Inc............................. -- -- -- --
----------- ------------ ------------- ------------
Total assets.................................. 22,827,717 4,673,801 4,771,994 5,544,079
LIABILITIES:
Payable to First Allmerica Financial Life
Insurance
Company (Sponsor)............................. -- -- -- --
----------- ------------ ------------- ------------
Net assets.................................... $22,827,717 $ 4,673,801 $ 4,771,994 $5,544,079
----------- ------------ ------------- ------------
----------- ------------ ------------- ------------
Net asset distribution by category:
Qualified variable annuity policies........... $15,120,366 $ 3,237,443 $ 3,503,745 $3,616,832
Non-qualified variable annuity policies....... 7,707,351 1,436,358 1,268,249 1,927,247
Value of annuitant mortality fluctuation
reserve................................... . -- -- -- --
----------- ------------ ------------- ------------
$22,827,717 $ 4,673,801 $ 4,771,994 $5,544,079
----------- ------------ ------------- ------------
----------- ------------ ------------- ------------
Qualified units outstanding, December 31,
1997.......................................... 7,667,233 2,494,364 2,294,365 2,959,062
Net asset value per qualified unit, December 31,
1997.......................................... $ 1.972076 $ 1.297903 $ 1.527109 $1.222290
Non-qualified units outstanding, December 31,
1997.......................................... 3,908,242 1,106,677 830,490 1,576,752
Net asset value per non-qualified unit, December
31, 1997...................................... $ 1.972076 $ 1.297903 $ 1.527109 $1.222290
</TABLE>
The accompanying notes are an integral part of these financial statements.
SA-2
<PAGE>
SEPARATE ACCOUNT VA-K ALLMERICA ADVANTAGE VARIABLE ANNUITY AND EXECANNUITY PLUS
VARIABLE ANNUITY
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
INVESTMENT GOVERNMENT
GROWTH GRADE INCOME MONEY MARKET EQUITY INDEX BOND
---------- ------------ ------------ ------------ ----------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends..................................... $ 170,276 $263,167 $516,480 $ 110,855 $102,465
---------- ------------ ------------ ------------ ----------
EXPENSES (NOTE 4):
Mortality and expense risk fees............... 137,518 48,741 119,272 97,460 22,062
Administrative expense fees................... 22,387 7,935 19,416 15,865 3,591
---------- ------------ ------------ ------------ ----------
Total expenses.............................. 159,905 56,676 138,688 113,325 25,653
---------- ------------ ------------ ------------ ----------
Net investment income (loss)................ 10,371 206,491 377,792 (2,470) 76,812
---------- ------------ ------------ ------------ ----------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
Realized gain distributions from portfolio
sponsors.................................... 2,308,885 -- -- 332,299 --
Net realized gain (loss) from sales of
investments................................. 138,749 9,652 -- 113,305 (2,027)
---------- ------------ ------------ ------------ ----------
Net realized gain (loss).................... 2,447,634 9,652 -- 445,604 (2,027)
Net unrealized gain (loss).................... (384,729) 95,127 -- 1,411,233 22,859
---------- ------------ ------------ ------------ ----------
Net realized and unrealized gain............ 2,062,905 104,779 -- 1,856,837 20,832
---------- ------------ ------------ ------------ ----------
Net increase in net assets from
operations................................ $2,073,276 $311,270 $377,792 $1,854,367 $ 97,644
---------- ------------ ------------ ------------ ----------
---------- ------------ ------------ ------------ ----------
<CAPTION>
SELECT SELECT GROWTH SELECT VALUE
AGGRESSIVE GROWTH SELECT GROWTH AND INCOME OPPORTUNITY*
----------------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends..................................... $ -- $ 33,246 $ 119,664 $ 52,859
----------------- ------------- ------------- ------------
EXPENSES (NOTE 4):
Mortality and expense risk fees............... 144,461 93,924 108,204 83,766
Administrative expense fees................... 23,517 15,290 17,614 13,636
----------------- ------------- ------------- ------------
Total expenses.............................. 167,978 109,214 125,818 97,402
----------------- ------------- ------------- ------------
Net investment income (loss)................ (167,978) (75,968) (6,154) (44,543)
----------------- ------------- ------------- ------------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
Realized gain distributions from portfolio
sponsors.................................... 1,126,096 582,419 985,230 1,269,781
Net realized gain (loss) from sales of
investments................................. 143,103 58,851 62,028 50,672
----------------- ------------- ------------- ------------
Net realized gain (loss).................... 1,269,199 641,270 1,047,258 1,320,453
Net unrealized gain (loss).................... 774,210 1,458,284 545,994 154,795
----------------- ------------- ------------- ------------
Net realized and unrealized gain............ 2,043,409 2,099,554 1,593,252 1,475,248
----------------- ------------- ------------- ------------
Net increase in net assets from
operations................................ $1,875,431 $2,023,586 $1,587,098 $1,430,705
----------------- ------------- ------------- ------------
----------------- ------------- ------------- ------------
</TABLE>
* Name changed. See Note 1.
The accompanying notes are an integral part of these financial statements.
SA-3
<PAGE>
SEPARATE ACCOUNT VA-K ALLMERICA ADVANTAGE VARIABLE ANNUITY AND EXECANNUITY PLUS
VARIABLE ANNUITY
STATEMENTS OF OPERATIONS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
SELECT DGPF FIDELITY
INTERNATIONAL SELECT CAPITAL INTERNATIONAL VIP FIDELITY VIP
EQUITY APPRECIATION EQUITY HIGH INCOME EQUITY-INCOME
------------- -------------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends..................................... $254,851 $ -- $ 97,768 $ 555,516 $ 278,988
------------- -------------- ------------- ----------- -------------
EXPENSES (NOTE 4):
Mortality and expense risk fees............... 112,688 85,778 44,469 135,349 258,842
Administrative expense fees................... 18,345 13,963 7,240 22,034 42,137
------------- -------------- ------------- ----------- -------------
Total expenses.............................. 131,033 99,741 51,709 157,383 300,979
------------- -------------- ------------- ----------- -------------
Net investment income (loss)................ 123,818 (99,741) 46,059 398,133 (21,991)
------------- -------------- ------------- ----------- -------------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
Realized gain distributions from portfolio
sponsors.................................... 354,949 -- -- 68,659 1,402,693
Net realized gain (loss) from sales of
investments................................. 43,796 19,575 53,177 32,656 366,416
------------- -------------- ------------- ----------- -------------
Net realized gain (loss).................... 398,745 19,575 53,177 101,315 1,769,109
Net unrealized gain (loss).................... (336,142) 1,077,745 14,007 1,123,721 3,031,743
------------- -------------- ------------- ----------- -------------
Net realized and unrealized gain............ 62,603 1,097,320 67,184 1,225,036 4,800,852
------------- -------------- ------------- ----------- -------------
Net increase in net assets from
operations................................ $186,421 $ 997,579 $113,243 $1,623,169 $4,778,861
------------- -------------- ------------- ----------- -------------
------------- -------------- ------------- ----------- -------------
<CAPTION>
FIDELITY VIP
FIDELITY VIP FIDELITY VIP II T. ROWE PRICE
GROWTH OVERSEAS ASSET MANAGER INTERNATIONAL STOCK
------------ ------------ ------------- -------------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends..................................... $ 104,466 $ 64,086 $122,118 $50,810
------------ ------------ ------------- -------
EXPENSES (NOTE 4):
Mortality and expense risk fees............... 236,352 51,919 50,747 55,400
Administrative expense fees................... 38,476 8,451 8,262 9,018
------------ ------------ ------------- -------
Total expenses.............................. 274,828 60,370 59,009 64,418
------------ ------------ ------------- -------
Net investment income (loss)................ (170,362) 3,716 63,109 (13,608)
------------ ------------ ------------- -------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
Realized gain distributions from portfolio
sponsors.................................... 467,608 254,403 306,331 71,981
Net realized gain (loss) from sales of
investments................................. 226,022 74,812 57,413 20,604
------------ ------------ ------------- -------
Net realized gain (loss).................... 693,630 329,215 363,744 92,585
Net unrealized gain (loss).................... 3,146,128 25,917 281,812 (71,013)
------------ ------------ ------------- -------
Net realized and unrealized gain............ 3,839,758 355,132 645,556 21,572
------------ ------------ ------------- -------
Net increase in net assets from
operations................................ $3,669,396 $358,848 $708,665 $ 7,964
------------ ------------ ------------- -------
------------ ------------ ------------- -------
</TABLE>
The accompanying notes are an integral part of these financial statements.
SA-4
<PAGE>
SEPARATE ACCOUNT VA-K ALLMERICA ADVANTAGE VARIABLE ANNUITY AND EXECANNUITY PLUS
VARIABLE ANNUITY
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
INVESTMENT GRADE
GROWTH INCOME MONEY MARKET
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
----------------------- ---------------------- --------------------------
1997 1996 1997 1996 1997 1996
----------- ---------- ---------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
INCREASE IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss)................ $ 10,371 $ 38,304 $ 206,491 $ 143,680 $ 377,792 $ 231,800
Net realized gain (loss).................... 2,447,634 681,759 9,652 5,539 -- --
Net unrealized gain (loss).................. (384,729) 232,097 95,127 (62,588) -- --
----------- ---------- ---------- ---------- ------------ ------------
Net increase in net assets from
operations................................ 2,073,276 952,160 311,270 86,631 377,792 231,800
----------- ---------- ---------- ---------- ------------ ------------
FROM CAPITAL TRANSACTIONS (NOTE 5):
Net purchase payments....................... 1,060,800 739,773 503,732 233,136 40,462,298 32,861,317
Withdrawals................................. (358,269) (114,023) (265,487) (171,118) (692,901) (130,645)
Annuity benefits............................ (50,924) (13,839) (29,778) -- (6,827) --
Other transfers from (to) the General
Account of First
Allmerica Financial Life Insurance Company
(Sponsor)................................. 4,483,612 2,614,933 1,056,635 1,272,488 (38,381,882) (29,271,690)
Net decrease in investment by First
Allmerica
Financial Life Insurance Company
(Sponsor)................................. -- -- -- -- -- --
----------- ---------- ---------- ---------- ------------ ------------
Net increase in net assets from capital
transactions.............................. 5,135,219 3,226,844 1,265,102 1,334,506 1,380,688 3,458,982
----------- ---------- ---------- ---------- ------------ ------------
Net increase in net assets.................. 7,208,495 4,179,004 1,576,372 1,421,137 1,758,480 3,690,782
NET ASSETS:
Beginning of year............................. 7,489,278 3,310,274 3,350,858 1,929,721 8,154,755 4,463,973
----------- ---------- ---------- ---------- ------------ ------------
End of year................................... $14,697,773 $7,489,278 $4,927,230 $3,350,858 $ 9,913,235 $ 8,154,755
----------- ---------- ---------- ---------- ------------ ------------
----------- ---------- ---------- ---------- ------------ ------------
<CAPTION>
EQUITY INDEX GOVERNMENT BOND
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
----------------------- ----------------------
1997 1996 1997 1996
----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
INCREASE IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss)................ $ (2,470) $ 10,161 $ 76,812 $ 64,625
Net realized gain (loss).................... 445,604 77,056 (2,027) 188
Net unrealized gain (loss).................. 1,411,233 409,676 22,859 (35,778)
----------- ---------- ---------- ----------
Net increase in net assets from
operations................................ 1,854,367 496,893 97,644 29,035
----------- ---------- ---------- ----------
FROM CAPITAL TRANSACTIONS (NOTE 5):
Net purchase payments....................... 1,081,244 482,934 213,001 247,401
Withdrawals................................. (264,978) (78,172) (96,612) (52,111)
Annuity benefits............................ (10,484) (1,770) (28,876) --
Other transfers from (to) the General
Account of First
Allmerica Financial Life Insurance Company
(Sponsor)................................. 5,777,329 1,833,771 (2,805) 402,587
Net decrease in investment by First
Allmerica
Financial Life Insurance Company
(Sponsor)................................. -- -- -- --
----------- ---------- ---------- ----------
Net increase in net assets from capital
transactions.............................. 6,583,111 2,236,763 84,708 597,877
----------- ---------- ---------- ----------
Net increase in net assets.................. 8,437,478 2,733,656 182,352 626,912
NET ASSETS:
Beginning of year............................. 4,049,638 1,315,982 1,849,602 1,222,690
----------- ---------- ---------- ----------
End of year................................... $12,487,116 $4,049,638 $2,031,954 $1,849,602
----------- ---------- ---------- ----------
----------- ---------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
SA-5
<PAGE>
SEPARATE ACCOUNT VA-K ALLMERICA ADVANTAGE VARIABLE ANNUITY AND EXECANNUITY PLUS
VARIABLE ANNUITY
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
SELECT GROWTH
AGGRESSIVE GROWTH SELECT GROWTH AND INCOME
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
-------------------------- -------------------------- -------------
1997 1996 1997 1996 1997
------------ ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
INCREASE IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss)................ $ (167,978) $ (92,505) $ (75,968) $ (25,425) $ (6,154)
Net realized gain (loss).................... 1,269,199 695,787 641,270 613,146 1,047,258
Net unrealized gain (loss).................. 774,210 318,604 1,458,284 (131,357) 545,994
------------ ------------ ------------ ------------ -------------
Net increase in net assets from
operations................................ 1,875,431 921,886 2,023,586 456,364 1,587,098
------------ ------------ ------------ ------------ -------------
FROM CAPITAL TRANSACTIONS (NOTE 5):
Net purchase payments....................... 1,341,539 1,124,705 835,614 368,392 1,048,608
Withdrawals................................. (305,223) (192,120) (404,348) (100,399) (193,939)
Annuity benefits............................ (39,679) -- (16,279) (505) (46,768)
Other transfers from (to) the General
Account of First
Allmerica Financial Life Insurance Company
(Sponsor)................................. 2,771,542 3,126,490 4,966,459 1,747,558 3,351,952
Net decrease in investment by First
Allmerica
Financial Life Insurance Company
(Sponsor)................................. -- -- -- -- --
------------ ------------ ------------ ------------ -------------
Net increase in net assets from capital
transactions.............................. 3,768,179 4,059,075 5,381,446 2,015,046 4,159,853
------------ ------------ ------------ ------------ -------------
Net increase in net assets.................. 5,643,610 4,980,961 7,405,032 2,471,410 5,746,951
NET ASSETS:
Beginning of year............................. 8,861,256 3,880,295 4,130,625 1,659,215 5,947,479
------------ ------------ ------------ ------------ -------------
End of year................................... $ 14,504,866 $ 8,861,256 $ 11,535,657 $ 4,130,625 $ 11,694,430
------------ ------------ ------------ ------------ -------------
------------ ------------ ------------ ------------ -------------
<CAPTION>
SELECT VALUE OPPORTUNITY* SELECT INTERNATIONAL
EQUITY
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
-------------------------- ------------------------
1996 1997 1996 1997 1996
------------- ------------ ------------ ----------- -----------
<S> <C> <C> <C> <C> <C>
INCREASE IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss)................ $ 1,282 $ (44,543) $ (11,281) $ 123,818 $ 64,030
Net realized gain (loss).................... 461,680 1,320,453 277,796 398,745 29,039
Net unrealized gain (loss).................. 310,343 154,795 398,558 (336,142) 823,745
------------- ------------ ------------ ----------- -----------
Net increase in net assets from
operations................................ 773,305 1,430,705 665,073 186,421 916,814
------------- ------------ ------------ ----------- -----------
FROM CAPITAL TRANSACTIONS (NOTE 5):
Net purchase payments....................... 539,958 785,030 483,782 820,658 614,329
Withdrawals................................. (140,420) (191,683) (104,127) (295,438) (117,248)
Annuity benefits............................ (8,993) (23,501) -- (13,488) (206)
Other transfers from (to) the General
Account of First
Allmerica Financial Life Insurance Company
(Sponsor)................................. 1,906,939 3,289,488 1,481,737 3,724,706 3,094,150
Net decrease in investment by First
Allmerica
Financial Life Insurance Company
(Sponsor)................................. -- -- -- -- (131)
------------- ------------ ------------ ----------- -----------
Net increase in net assets from capital
transactions.............................. 2,297,484 3,859,334 1,861,392 4,236,438 3,590,894
------------- ------------ ------------ ----------- -----------
Net increase in net assets.................. 3,070,789 5,290,039 2,526,465 4,422,859 4,507,708
NET ASSETS:
Beginning of year............................. 2,876,690 4,351,910 1,825,445 6,868,059 2,360,351
------------- ------------ ------------ ----------- -----------
End of year................................... $ 5,947,479 $ 9,641,949 $ 4,351,910 $11,290,918 $ 6,868,059
------------- ------------ ------------ ----------- -----------
------------- ------------ ------------ ----------- -----------
</TABLE>
* Name changed. See Note 1.
The accompanying notes are an integral part of these financial statements.
SA-6
<PAGE>
SEPARATE ACCOUNT VA-K ALLMERICA ADVANTAGE VARIABLE ANNUITY AND EXECANNUITY PLUS
VARIABLE ANNUITY
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
SELECT CAPITAL DGPF INTERNATIONAL FIDELITY VIP
APPRECIATION EQUITY HIGH INCOME
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
---------------------- ---------------------- -----------------------
1997 1996 1997 1996 1997 1996
---------- ---------- ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
INCREASE IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss)................ $ (99,741) $ (52,920) $ 46,059 $ 18,870 $ 398,133 $ 161,602
Net realized gain (loss).................... 19,575 17,447 53,177 37,484 101,315 61,826
Net unrealized gain (loss).................. 1,077,745 107,965 14,007 283,194 1,123,721 358,716
---------- ---------- ---------- ---------- ----------- ----------
Net increase in net assets from
operations................................. 997,579 72,492 113,243 339,548 1,623,169 582,144
---------- ---------- ---------- ---------- ----------- ----------
FROM CAPITAL TRANSACTIONS (NOTE 5):
Net purchase payments....................... 785,054 608,529 353,682 233,964 1,482,581 723,087
Withdrawals................................. (126,447) (46,052) (135,450) (53,330) (405,233) (293,705)
Annuity benefits............................ (9,343) -- (16,256) -- (55,849) --
Other transfers from (to) the General
Account of First
Allmerica Financial Life Insurance Company
(Sponsor).................................. 1,326,507 3,593,390 1,543,988 694,782 4,974,409 3,489,636
Net decrease in investment by First
Allmerica
Financial Life Insurance Company
(Sponsor).................................. -- (293) -- -- -- --
---------- ---------- ---------- ---------- ----------- ----------
Net increase in net assets from capital
transactions............................... 1,975,771 4,155,574 1,745,964 875,416 5,995,908 3,919,018
---------- ---------- ---------- ---------- ----------- ----------
Net increase in net assets.................. 2,973,350 4,228,066 1,859,207 1,214,964 7,619,077 4,501,162
NET ASSETS:
Beginning of year............................. 5,706,014 1,477,948 2,669,059 1,454,095 7,496,612 2,995,450
---------- ---------- ---------- ---------- ----------- ----------
End of year................................... $8,679,364 $5,706,014 $4,528,266 $2,669,059 $15,115,689 $7,496,612
---------- ---------- ---------- ---------- ----------- ----------
---------- ---------- ---------- ---------- ----------- ----------
<CAPTION>
FIDELITY VIP
EQUITY-INCOME
YEAR ENDED
DECEMBER 31,
------------------------
1997 1996
----------- -----------
<S> <C> <C>
INCREASE IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss)................ $ (21,991) $ (162,132)
Net realized gain (loss).................... 1,769,109 458,295
Net unrealized gain (loss).................. 3,031,743 1,248,212
----------- -----------
Net increase in net assets from
operations................................. 4,778,861 1,544,375
----------- -----------
FROM CAPITAL TRANSACTIONS (NOTE 5):
Net purchase payments....................... 1,864,708 1,597,272
Withdrawals................................. (843,227) (447,210)
Annuity benefits............................ (120,661) (334)
Other transfers from (to) the General
Account of First
Allmerica Financial Life Insurance Company
(Sponsor).................................. 4,640,969 5,137,162
Net decrease in investment by First
Allmerica
Financial Life Insurance Company
(Sponsor).................................. -- --
----------- -----------
Net increase in net assets from capital
transactions............................... 5,541,789 6,286,890
----------- -----------
Net increase in net assets.................. 10,320,650 7,831,265
NET ASSETS:
Beginning of year............................. 16,034,587 8,203,322
----------- -----------
End of year................................... $26,355,237 $16,034,587
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
SA-7
<PAGE>
SEPARATE ACCOUNT VA-K ALLMERICA ADVANTAGE VARIABLE ANNUITY AND EXECANNUITY PLUS
VARIABLE ANNUITY
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
FIDELITY VIP II
FIDELITY VIP GROWTH FIDELITY VIP OVERSEAS ASSET MANAGER
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
------------------------ ---------------------- ----------------------
1997 1996 1997 1996 1997 1996
----------- ----------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
INCREASE IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss)................ $ (170,362) $ (142,524) $ 3,716 $ (14,868) $ 63,109 $ 41,742
Net realized gain (loss).................... 693,630 712,950 329,215 103,032 363,744 103,715
Net unrealized gain (loss).................. 3,146,128 763,924 25,917 278,463 281,812 224,931
----------- ----------- ---------- ---------- ---------- ----------
Net increase in net assets from
operations................................. 3,669,396 1,334,350 358,848 366,627 708,665 370,388
----------- ----------- ---------- ---------- ---------- ----------
FROM CAPITAL TRANSACTIONS (NOTE 5):
Net purchase payments....................... 2,174,564 1,968,785 384,685 432,886 421,034 281,584
Withdrawals................................. (568,844) (355,601) (115,779) (125,016) (145,853) (112,588)
Annuity benefits............................ (96,880) -- (21,985) -- -- (344)
Other transfers from (to) the General
Account of First
Allmerica Financial Life Insurance Company
(Sponsor).................................. 2,514,411 5,091,480 392,931 35,103 276,851 670,429
Net decrease in investment by First
Allmerica
Financial Life Insurance Company
(Sponsor).................................. -- -- -- -- -- (128)
----------- ----------- ---------- ---------- ---------- ----------
Net increase in net assets from capital
transactions............................... 4,023,251 6,704,664 639,852 342,973 552,032 838,953
----------- ----------- ---------- ---------- ---------- ----------
Net increase in net assets.................. 7,692,647 8,039,014 998,700 709,600 1,260,697 1,209,341
NET ASSETS:
Beginning of year............................. 15,135,070 7,096,056 3,675,101 2,965,501 3,511,297 2,301,956
----------- ----------- ---------- ---------- ---------- ----------
End of year................................... $22,827,717 $15,135,070 $4,673,801 $3,675,101 $4,771,994 $3,511,297
----------- ----------- ---------- ---------- ---------- ----------
----------- ----------- ---------- ---------- ---------- ----------
<CAPTION>
T. ROWE PRICE
INTERNATIONAL STOCK
YEAR ENDED
DECEMBER 31,
----------------------
1997 1996
---------- ----------
<S> <C> <C>
INCREASE IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss)................ $ (13,608) $ 3,704
Net realized gain (loss).................... 92,585 18,645
Net unrealized gain (loss).................. (71,013) 183,913
---------- ----------
Net increase in net assets from
operations................................. 7,964 206,262
---------- ----------
FROM CAPITAL TRANSACTIONS (NOTE 5):
Net purchase payments....................... 543,817 303,150
Withdrawals................................. (148,536) (34,333)
Annuity benefits............................ (16,280) --
Other transfers from (to) the General
Account of First
Allmerica Financial Life Insurance Company
(Sponsor).................................. 2,143,189 1,962,471
Net decrease in investment by First
Allmerica
Financial Life Insurance Company
(Sponsor).................................. -- (234)
---------- ----------
Net increase in net assets from capital
transactions............................... 2,522,190 2,231,054
---------- ----------
Net increase in net assets.................. 2,530,154 2,437,316
NET ASSETS:
Beginning of year............................. 3,013,925 576,609
---------- ----------
End of year................................... $5,544,079 $3,013,925
---------- ----------
---------- ----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
SA-8
<PAGE>
SEPARATE ACCOUNT VA-K ALLMERICA ADVANTAGE VARIABLE ANNUITY AND
EXECANNUITY PLUS VARIABLE ANNUITY
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- ORGANIZATION
Separate Account VA-K, which funds the Allmerica Advantage and ExecAnnuity
Plus variable annuity contracts (the Allmerica Advantage and ExecAnnuity Plus
contracts) in addition to other contracts (the Delaware contracts), is a
separate investment account of First Allmerica Financial Life Insurance Company
(the Company). The Company is a wholly-owned subsidiary of Allmerica Financial
Corporation (AFC). Separate Account VA-K was established on April 1, 1994 for
the purpose of separating from the general assets of the Company those assets
used to fund certain variable annuity contracts issued by the Company. Under
applicable insurance law, the assets and liabilities of Separate Account VA-K
are clearly identified and distinguished from the other assets and liabilities
of the Company. Separate Account VA-K cannot be charged with liabilities arising
out of any other business of the Company.
Separate Account VA-K is registered as a unit investment trust under the
Investment Company Act of 1940, as amended (the 1940 Act). Separate Account VA-K
currently offers eighteen Sub-Accounts under the Allmerica Advantage and
ExecAnnuity Plus variable annuity contracts. Each Sub-Account invests
exclusively in a corresponding investment portfolio of Allmerica Investment
Trust (the Trust) managed by Allmerica Investment Management Company, Inc., a
wholly-owned subsidiary of the Company; or of the Variable Insurance Products
Fund (Fidelity VIP); or the Variable Insurance Products Fund II (Fidelity VIP
II) managed by Fidelity Management & Research Company (FMR); or of the Delaware
Group Premium Fund, Inc. (DGPF) managed by Delaware International Advisers, Ltd.
or of the T. Rowe Price International Series, Inc. (T. Rowe Price) managed by T.
Rowe Price-Fleming International, Inc. The Trust, Fidelity VIP, Fidelity VIP II,
DGPF, and T. Rowe Price (the Funds) are open-end, diversified management
investment companies registered under the 1940 Act.
Separate Account VA-K funds two types of variable annuity contracts,
"qualified" contracts and "non-qualified" contracts. A qualified contract is one
that is purchased in connection with a retirement plan which meets the
requirements of Section 401, 403, or 408 of the Internal Revenue Code, while a
non-qualified contract is one that is not purchased in connection with one of
the indicated retirement plans. The tax treatment for certain withdrawals or
surrenders will vary according to whether they are made from a qualified
contract or a non-qualified contract.
Effective April 1, 1997, the investment portfolio of the Trust, which was
formerly known as Small Cap Value Fund, changed its name to Small-Mid Cap Value
Fund. At the Meeting of Shareholders of the Small Cap Value Fund, held on March
18, 1997, shareholders approved the name change and the revisions in the
investment objective of the Fund from investing primarily in small cap value
stocks to investing primarily in small and mid-cap value stocks. Effective
January 9, 1998, this portfolio changed its name to Select Value Opportunity
Fund.
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 Trust, Fidelity VIP, Fidelity VIP
II, DGPF, or T. Rowe Price. 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
SA-9
<PAGE>
SEPARATE ACCOUNT VA-K ALLMERICA ADVANTAGE VARIABLE ANNUITY AND
EXECANNUITY PLUS VARIABLE ANNUITY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
and are reinvested in additional shares of the respective investment portfolio
of the Trust, Fidelity VIP, Fidelity VIP II, or DGPF, or T. Rowe Price at net
asset value.
FEDERAL INCOME TAXES -- The Company is taxed as a "life insurance company"
under Subchapter L of the Internal Revenue Code (the Code) and files a
consolidated federal income tax return. The Company anticipates no tax liability
resulting from the operations of Separate Account VA-K. Therefore, no provision
for income taxes has been charged against Separate Account VA-K.
ANNUITANT MORTALITY FLUCTUATION RESERVE -- A strengthening reserve is
required for doing business in the State of New York. The purpose of the reserve
is to provide for future mortality experience which is less favorable than that
assumed in pricing the annuity. This reserve is funded by the Company.
NOTE 3 -- INVESTMENTS
The number of shares owned, aggregate cost, and net asset value per share of
each Sub-Account's investment in the Trust, DGPF, Fidelity VIP, Fidelity VIP II,
and T. Rowe Price at December 31, 1997 were as follows:
<TABLE>
<CAPTION>
PORTFOLIO INFORMATION
---------------------------------
NET ASSET
NUMBER OF AGGREGATE VALUE
INVESTMENT PORTFOLIO SHARES COST PER SHARE
- ------------------------------------------------------- ---------- ---------- ---------
<S> <C> <C> <C>
ALLMERICA INVESTMENT TRUST:
Growth............................................... 6,085,628 $14,683,499 $ 2.416
Investment Grade Income.............................. 4,430,962 4,811,944 1.112
Money Market......................................... 9,913,963 9,913,963 1.000
Equity Index......................................... 4,537,244 10,555,425 2.753
Government Bond...................................... 1,940,739 2,024,705 1.047
Select Aggressive Growth............................. 6,519,041 12,794,562 2.225
Select Growth........................................ 6,369,772 10,054,592 1.811
Select Growth and Income............................. 7,539,188 10,541,420 1.552
Select Value Opportunity*............................ 5,929,858 8,966,155 1.626
Select International Equity.......................... 8,419,775 10,651,090 1.341
Select Capital Appreciation.......................... 5,114,534 7,400,037 1.697
DELAWARE GROUP PREMIUM FUND, INC.:
DGPF International Equity............................ 291,770 4,131,284 15.520
FIDELITY VARIABLE INSURANCE PRODUCTS FUND:
High Income.......................................... 1,113,085 13,404,795 13.580
Equity-Income........................................ 1,085,471 20,906,315 24.280
Growth............................................... 615,302 17,911,701 37.100
Overseas............................................. 243,427 4,193,561 19.200
FIDELITY VARIABLE INSURANCE PRODUCTS FUND II:
Asset Manager........................................ 264,964 4,034,515 18.010
T. ROWE PRICE INTERNATIONAL SERIES, INC.:
International Stock.................................. 435,171 5,412,438 12.740
</TABLE>
* Name changed. See Note 1.
SA-10
<PAGE>
SEPARATE ACCOUNT VA-K ALLMERICA ADVANTAGE VARIABLE ANNUITY AND
EXECANNUITY PLUS VARIABLE ANNUITY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 4 -- RELATED PARTY TRANSACTIONS
The Company makes a charge of 1.25% per annum based on the average daily net
assets of each Sub-Account at each valuation date for mortality and expense
risks. The Company also charges each Sub-Account .20% per annum based on the
average daily net assets of each Sub-Account for administrative expenses. These
charges are deducted from the daily value of each Sub-Account and are paid to
the Company on a daily basis.
For contracts issued on Form A3018-94, (ExecAnnuity Plus) a contract fee is
currently deducted on the contract anniversary date and upon full surrender of
the contract when the accumulated value is $50,000 or less. The fee is the
lesser of $30 or 3% of the accumulated value on the contract anniversary or full
surrender date. For contracts issued on Form A3025-96 (Allmerica Advantage), a
contract fee of $30 is deducted on the anniversary date and upon full surrender
when the accumulated value is less than $50,000. The fee is currently waived for
all contracts (ExecAnnuity Plus and Allmerica Advantage) originally issued to
and maintained by the trustee of a 401(k) plan. For the years ended December 31,
1997 and 1996, contract fees deducted from accumulated value in Separate Account
VA-K amounted to $53,748 and $32,942, respectively. These amounts are included
on the statements of changes in net assets with other transfers to the General
Account.
Allmerica Investments, Inc., (Allmerica Investments), a wholly-owned
subsidiary of the Company, is principal underwriter and general distributor of
Separate Account VA-K, and does not receive any compensation for sales of the
contracts. Commissions are paid to registered representatives of Allmerica
Investments by the Company. As the current series of contracts have a contingent
deferred sales charge, no deduction is made for sales charges at the time of the
sale. For the years ended December 31, 1997 and 1996, the Company received
$112,096 and $89,161, respectively, for contingent deferred sales charges
applicable to Separate Account VA-K.
NOTE 5 -- CONTRACTOWNERS AND SPONSOR TRANSACTIONS
Transactions from contractowners and sponsor were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1996
-------------------------------- --------------------------------
UNITS AMOUNT UNITS AMOUNT
-------------- ---------------- -------------- ----------------
<S> <C> <C> <C> <C>
Growth
Issuance of Units......................... 3,856,709 $ 6,807,108 2,689,044 $ 3,915,587
Redemption of Units....................... (1,107,973) (1,671,889) (472,373) (688,743)
-------------- ---------------- -------------- ----------------
Net increase............................ 2,748,736 $ 5,135,219 2,216,671 $ 3,226,844
-------------- ---------------- -------------- ----------------
-------------- ---------------- -------------- ----------------
Investment Grade Income
Issuance of Units......................... 1,749,993 $ 2,065,954 1,558,583 $ 1,771,457
Redemption of Units....................... (714,488) (800,852) (382,111) (436,951)
-------------- ---------------- -------------- ----------------
Net increase............................ 1,035,505 $ 1,265,102 1,176,472 $ 1,334,506
-------------- ---------------- -------------- ----------------
-------------- ---------------- -------------- ----------------
Money Market
Issuance of Units......................... 48,644,659 $ 52,132,820 40,492,715 $ 43,992,135
Redemption of Units....................... (47,395,744) (50,752,132) (37,307,774) (40,533,153)
-------------- ---------------- -------------- ----------------
Net increase............................ 1,248,915 $ 1,380,688 3,184,941 $ 3,458,982
-------------- ---------------- -------------- ----------------
-------------- ---------------- -------------- ----------------
</TABLE>
SA-11
<PAGE>
SEPARATE ACCOUNT VA-K ALLMERICA ADVANTAGE VARIABLE ANNUITY AND
EXECANNUITY PLUS VARIABLE ANNUITY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 5 -- CONTRACTOWNERS AND SPONSOR TRANSACTIONS (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1996
-------------------------------- --------------------------------
UNITS AMOUNT UNITS AMOUNT
-------------- ---------------- -------------- ----------------
<S> <C> <C> <C> <C>
Equity Index
Issuance of Units......................... 4,341,062 $ 7,761,304 1,683,713 $ 2,524,616
Redemption of Units....................... (1,048,062) (1,178,193) (213,226) (287,853)
-------------- ---------------- -------------- ----------------
Net increase............................ 3,293,000 $ 6,583,111 1,470,487 $ 2,236,763
-------------- ---------------- -------------- ----------------
-------------- ---------------- -------------- ----------------
Government Bond
Issuance of Units......................... 988,942 $ 1,104,697 1,198,325 $ 1,340,640
Redemption of Units....................... (923,062) (1,019,989) (668,009) (742,763)
-------------- ---------------- -------------- ----------------
Net increase............................ 65,880 $ 84,708 530,316 $ 597,877
-------------- ---------------- -------------- ----------------
-------------- ---------------- -------------- ----------------
Select Aggressive Growth
Issuance of Units......................... 3,615,384 $ 5,729,756 3,476,884 $ 5,148,108
Redemption of Units....................... (1,349,496) (1,961,577) (702,506) (1,089,033)
-------------- ---------------- -------------- ----------------
Net increase............................ 2,265,888 $ 3,768,179 2,774,378 $ 4,059,075
-------------- ---------------- -------------- ----------------
-------------- ---------------- -------------- ----------------
Select Growth
Issuance of Units......................... 3,637,661 $ 6,526,459 1,617,304 $ 2,428,335
Redemption of Units....................... (693,697) (1,145,013) (250,104) (413,289)
-------------- ---------------- -------------- ----------------
Net increase............................ 2,943,964 $ 5,381,446 1,367,200 $ 2,015,046
-------------- ---------------- -------------- ----------------
-------------- ---------------- -------------- ----------------
Select Growth and Income
Issuance of Units......................... 3,020,023 $ 5,126,925 1,911,110 $ 2,899,312
Redemption of Units....................... (658,695) (967,072) (324,767) (601,828)
-------------- ---------------- -------------- ----------------
Net increase............................ 2,361,328 $ 4,159,853 1,586,343 $ 2,297,484
-------------- ---------------- -------------- ----------------
-------------- ---------------- -------------- ----------------
Select Value Opportunity*
Issuance of Units......................... 2,948,039 $ 4,567,624 2,074,671 $ 2,767,822
Redemption of Units....................... (518,267) (708,290) (651,697) (906,430)
-------------- ---------------- -------------- ----------------
Net increase............................ 2,429,772 $ 3,859,334 1,422,974 $ 1,861,392
-------------- ---------------- -------------- ----------------
-------------- ---------------- -------------- ----------------
Select International Equity
Issuance of Units......................... 3,815,598 $ 5,231,183 3,317,612 $ 4,016,114
Redemption of Units....................... (807,150) (994,745) (342,978) (425,220)
-------------- ---------------- -------------- ----------------
Net increase............................ 3,008,448 $ 4,236,438 2,974,634 $ 3,590,894
-------------- ---------------- -------------- ----------------
-------------- ---------------- -------------- ----------------
Select Capital Appreciation
Issuance of Units......................... 2,194,137 $ 3,142,169 3,022,961 $ 4,545,450
Redemption of Units....................... (845,948) (1,166,398) (242,970) (389,876)
-------------- ---------------- -------------- ----------------
Net increase............................ 1,348,189 $ 1,975,771 2,779,991 $ 4,155,574
-------------- ---------------- -------------- ----------------
-------------- ---------------- -------------- ----------------
* Name changed. See Note 1.
</TABLE>
SA-12
<PAGE>
SEPARATE ACCOUNT VA-K ALLMERICA ADVANTAGE VARIABLE ANNUITY AND
EXECANNUITY PLUS VARIABLE ANNUITY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 5 -- CONTRACTOWNERS AND SPONSOR TRANSACTIONS (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1996
-------------------------------- --------------------------------
UNITS AMOUNT UNITS AMOUNT
-------------- ---------------- -------------- ----------------
<S> <C> <C> <C> <C>
DGPF International Equity Series
Issuance of Units......................... 1,702,945 $ 2,323,514 939,862 $ 1,218,847
Redemption of Units....................... (460,013) (577,550) (220,703) (343,431)
-------------- ---------------- -------------- ----------------
Net increase............................ 1,242,932 $ 1,745,964 719,159 $ 875,416
-------------- ---------------- -------------- ----------------
-------------- ---------------- -------------- ----------------
Fidelity VIP High Income
Issuance of Units......................... 5,269,060 $ 7,412,189 3,701,898 $ 4,748,732
Redemption of Units....................... (1,109,363) (1,416,281) (597,658) (829,714)
-------------- ---------------- -------------- ----------------
Net increase............................ 4,159,697 $ 5,995,908 3,104,240 $ 3,919,018
-------------- ---------------- -------------- ----------------
-------------- ---------------- -------------- ----------------
Fidelity VIP Equity-Income
Issuance of Units......................... 5,374,700 $ 9,755,802 5,187,199 $ 7,828,082
Redemption of Units....................... (2,372,916) (4,214,013) (967,488) (1,541,192)
-------------- ---------------- -------------- ----------------
Net increase............................ 3,001,784 $ 5,541,789 4,219,711 $ 6,286,890
-------------- ---------------- -------------- ----------------
-------------- ---------------- -------------- ----------------
Fidelity VIP Growth
Issuance of Units......................... 4,152,143 $ 7,285,409 6,329,864 $ 9,735,642
Redemption of Units....................... (1,919,113) (3,262,158) (1,939,256) (3,030,978)
-------------- ---------------- -------------- ----------------
Net increase............................ 2,233,030 $ 4,023,251 4,390,608 $ 6,704,664
-------------- ---------------- -------------- ----------------
-------------- ---------------- -------------- ----------------
Fidelity VIP Overseas
Issuance of Units......................... 1,131,666 $ 1,415,776 1,251,615 $ 1,397,091
Redemption of Units....................... (644,595) (775,924) (941,427) (1,054,118)
-------------- ---------------- -------------- ----------------
Net increase............................ 487,071 $ 639,852 310,188 $ 342,973
-------------- ---------------- -------------- ----------------
-------------- ---------------- -------------- ----------------
Fidelity VIP II Asset Manager
Issuance of Units......................... 890,693 $ 1,251,997 1,058,577 $ 1,333,039
Redemption of Units....................... (500,670) (699,965) (348,866) (494,086)
-------------- ---------------- -------------- ----------------
Net increase............................ 390,023 $ 552,032 709,711 $ 838,953
-------------- ---------------- -------------- ----------------
-------------- ---------------- -------------- ----------------
T. Rowe Price International Stock
Issuance of Units......................... 2,394,797 $ 2,924,911 2,092,157 $ 2,382,195
Redemption of Units....................... (364,946) (402,721) (127,988) (151,141)
-------------- ---------------- -------------- ----------------
Net increase............................ 2,029,851 $ 2,522,190 1,964,169 $ 2,231,054
-------------- ---------------- -------------- ----------------
-------------- ---------------- -------------- ----------------
</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"
SA-13
<PAGE>
SEPARATE ACCOUNT VA-K ALLMERICA ADVANTAGE VARIABLE ANNUITY AND
EXECANNUITY PLUS VARIABLE ANNUITY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 6 -- DIVERSIFICATION REQUIREMENTS (CONTINUED)
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 Separate Account VA-K satisfies the current
requirements of the regulations, and it intends that Separate Account VA-K will
continue to meet such requirements.
NOTE 7 -- PURCHASES AND SALES OF SECURITIES
Cost of purchases and proceeds from sales of the Trust, DGPF, Fidelity VIP,
Fidelity VIP II, and T. Rowe Price shares by Separate Account VA-K during the
year ended December 31, 1997 were as follows:
<TABLE>
<CAPTION>
INVESTMENT PORTFOLIO PURCHASES SALES
- ----------------------------------------------------------------- ------------ ----------
<S> <C> <C>
ALLMERICA INVESTMENT TRUST:
Growth......................................................... $ 8,394,047 $ 933,921
Investment Grade Income........................................ 2,030,637 559,044
Money Market................................................... 27,585,756 25,826,548
Equity Index................................................... 7,507,539 589,712
Government Bond................................................ 996,969 835,449
Select Aggressive Growth....................................... 5,465,563 739,266
Select Growth.................................................. 6,219,834 331,937
Select Growth and Income....................................... 5,604,415 457,383
Select Value Opportunity*...................................... 5,359,724 275,152
Select International Equity.................................... 5,042,509 327,304
Select Capital Appreciation.................................... 2,270,488 394,458
DELAWARE GROUP PREMIUM FUND, INC.:
International Equity........................................... 2,145,517 353,494
FIDELITY VARIABLE INSURANCE PRODUCTS FUND:
High Income.................................................... 6,925,372 462,672
Equity-Income.................................................. 9,123,743 2,201,245
Growth......................................................... 6,008,720 1,688,223
Overseas....................................................... 1,453,886 555,915
FIDELITY VARIABLE INSURANCE PRODUCTS FUND II:
Asset Manager.................................................. 1,426,758 505,286
T. ROWE PRICE INTERNATIONAL SERIES, INC.:
International Stock............................................ 2,765,411 184,848
------------ ----------
Totals....................................................... $106,326,888 $37,221,857
------------ ----------
------------ ----------
</TABLE>
* Name changed. See Note 1.
SA-14
<PAGE>
PART C. OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(a) FINANCIAL STATEMENTS
Financial Statements Included in Part A
None
Financial Statements Included in Part B
Financial Statements for First Allmerica Financial Life Insurance Company
Financial Statements for Separate Account VA-K of First Allmerica Financial
Life Insurance Company
Financial Statements Included in Part C
None
(b) EXHIBITS
EXHIBIT 1 Vote of Board of Directors Authorizing Establishment of
Registrant dated August 20, 1991 is filed herewith.
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 is filed
herewith.
(b) Sales Agreements are filed herewith.
(c) General Agent's Agreement is filed herewith.
(d) Career Agent Agreement with Commission Schedule is filed
herewith.
(e) Registered Representative's Agreement is filed herewith.
EXHIBIT 4 Policy Form A is filed herewith. Specimen Policy Form B was
previously filed on May 1, 1996 in Post-Effective Amendment No. 6
and is incorporated by reference herein.
EXHIBIT 5 Application Form is filed herewith. Specimen Application Form B
was previously filed on May 1, 1996 in Post-Effective Amendment
No. 6 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 October 1,
1995 in Post-Effective Amendment No. 4 and are incorporated by
reference herein. The Depositor's Revised Bylaws were previously
filed on April 30, 1996 in Post-Effective Amendment No. 5 and are
incorporated by reference herein.
EXHIBIT 7 Not Applicable.
EXHIBIT 8 (a) Fidelity Services Agreement was previously filed on April
30, 1996 in Post-Effective
<PAGE>
Amendment No. 5 and is incorporated by reference herein.
(b) An Amendment to the Fidelity Service Agreement, effective as
of January 1, 1997, was previously filed on May 1, 1997 in
Post-Effective Amendment No. 8 and is incorporated by
reference herein.
(c) Fidelity Service Contract, effective January 1, 1997, was
previously filed on May 1, 1997 in Post-Effective Amendment
No. 8 and is incorporated by reference herein.
(d) T. Rowe Price Service Agreement is filed herewith.
(e) BFDS Agreements for lockbox and mailroom services are 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 Not Applicable.
EXHIBIT 14 Not Applicable.
EXHIBIT 15 (a) Participation Agreement with Allmerica Investment Trust is
filed herewith.
(b) Participation Agreement, as amended, with Variable Insurance
Products Fund is filed herewith.
(c) Participation Agreement, as amended, with Variable Insurance
Products Fund II is filed herewith.
(d) Form of Participation Agreement with Delaware Group Premium
Fund, Inc. and Amendment is filed herewith.
(e) Participation Agreement with T. Rowe Price International
Series, Inc. is filed herewith.
ITEM 25. DIRECTORS AND PRINCIPAL OFFICERS OF THE DEPOSITOR
The principal business address of all the following Directors and Officers
is:
440 Lincoln Street
Worcester, Massachusetts 01553
DIRECTORS AND PRINCIPAL OFFICERS OF THE COMPANY
<PAGE>
NAME AND POSITION PRINCIPAL OCCUPATION(S) DURING
WITH COMPANY PAST FIVE YEARS
----------------- ------------------------------
Bruce C. Anderson Director of First Allmerica since 1996;
Director and Vice President Vice President, First Allmerica since
1984
Abigail M. Armstrong Secretary of First Allmerica since 1996;
Secretary and Counsel Counsel, First Allmerica since 1991
Robert E. Bruce Director and Chief Information Officer
Director, Vice President and of First Allmerica since 1997; Vice
Chief Information Officer President of First Allmerica since
1995; Corporate Manager, Digital
Equipment Corporation 1979 to 1995
John P. Kavanaugh Director and Chief Investment Officer of
Director, Vice President and First Allmerica since 1996; Vice
Chief Investment Officer President, First Allmerica since 1991
John F. Kelly Director of First Allmerica since 1996;
Director, Senior Vice President, Senior Vice President, First Allmerica
General Counsel and Assistant since 1986; General Counsel, First
Secretary Allmerica since 1981; Assistant
Secretary, First Allmerica since 1991
J. Barry May Director of First Allmerica since 1996;
Director Director and President, The Hanover
Insurance Company since 1996; Vice
President, The Hanover Insurance
Company 1993 to 1996; General Manager,
The Hanover Insurance Company 1989 to
1993
James R. McAuliffe Director of First Allmerica since 1996;
Director Director of Citizens Insurance Company
of America since 1992; President since
1994, and CEO since 1996; Vice
President, First Allmerica 1982 to 1994
and Chief Investment Officer, First
Allmerica 1986 to 1994
John F. O'Brien Director, Chairman of the Board,
Director, Chairman of the Board, President and Chief Executive Officer,
President and Chief Executive First Allmerica since 1989
Officer
Edward J. Parry, III Director and Chief Financial Officer of
Director, Vice President, First Allmerica since 1996; Vice
Chief Financial Officer and President and Treasurer, First
Treasurer Allmerica since 1993; Assistant Vice
President, 1992 to 1993
Richard M. Reilly Director of First Allmerica since 1996;
Director and Vice President Vice President, First Allmerica since
1990; Director, Allmerica Investments,
Inc. since 1990; Director and
President, Allmerica Financial
Investment Management Services, Inc.
since 1990
Eric A. Simonsen Director of First Allmerica since 1996;
Director and Vice President Vice President, First Allmerica since
1990; Chief Financial Officer, First
Allmerica 1990 to 1996
Phillip E. Soule Director of First Allmerica since 1996;
Director and Vice President Vice President, First Allmerica since
1987
ITEM 26. PERSONS UNDER COMMON CONTROL WITH REGISTRANT
See attached organizational chart.
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
<TABLE>
<CAPTION>
NAME ADDRESS TYPE OF BUSINESS
---- ------- ----------------
<S> <C> <C>
AAM Equity Fund 440 Lincoln Street Massachusetts Grantor Trust
Worcester MA 01653
AFC Capital Trust I 440 Lincoln Street Statutory Business Trust
Worcester MA 01653
Allmerica Asset 440 Lincoln Street Investment advisory services
Management Limited Worcester MA 01653
Allmerica Asset 440 Lincoln Street Investment advisory services
Management, Inc. Worcester MA 01653
Allmerica Benefits, 440 Lincoln Street Non-insurance medical services
Inc. Worcester MA 01653
Allmerica Equity Index 440 Lincoln Street Massachusetts Grantor Trust
Pool Worcester MA 01653
Allmerica Financial 100 North Parkway Multi-line property and casualty
Alliance Insurance Worcester MA 01605 insurance
Company
Allmerica Financial 100 North Parkway Multi-line property and casualty
Benefit Insurance Worcester MA 01605 insurance
Company
Allmerica Financial 440 Lincoln Street Holding Company
Corporation Worcester MA 01653
Allmerica Financial 440 Lincoln Street Insurance Broker
Insurance Brokers, Inc. Worcester MA 01653
Allmerica Financial 440 Lincoln Street Life insurance, accident and
Life Insurance and Worcester MA 01653 health insurance, annuities,
Annuity Company variable annuities and
(formerly known as SMA variable life insurance
Life Assurance Company)
Allmerica Financial 440 Lincoln Street Insurance Agency
Services Insurance Worcester MA 01653
Agency, Inc.
Allmerica Funding Corp. 440 Lincoln Street Special purpose funding vehicle
Worcester MA 01653 for commercial paper
Allmerica Funds 440 Lincoln Street Investment Company
Worcester MA 01653
Allmerica, Inc. 440 Lincoln Street Common employer for Allmerica
Worcester MA 01653 Financial Corporation entities
Allmerica Institutional 440 Lincoln Street Accounting, marketing and
Services, Inc. Worcester MA 01653 shareholder services for
(formerly known as 440 investment companies
Financial Group of
Worcester, Inc.)
Allmerica Investment 440 Lincoln Street Investment advisory services
Management
<PAGE>
Company, Inc. Worcester MA 01653
Allmerica Investments, Inc. 440 Lincoln Street Securities, retail broker-dealer
Worcester MA 01653
Allmerica Investment 440 Lincoln Street Investment Company
Trust Worcester MA 01653
Allmerica Plus 440 Lincoln Street Insurance Agency
Insurance Agency, Inc. Worcester MA 01653
Allmerica Property & 440 Lincoln Street Holding Company
Casualty Companies, Inc. Worcester MA 01653
Allmerica Securities 440 Lincoln Street Investment Company
Trust Worcester MA 01653
Allmerica Services 440 Lincoln Street Internal administrative services
Corporation Worcester MA 01653 provider to Allmerica
Financial Corporation entities
Allmerica Trust Company, 440 Lincoln Street Limited purpose national trust
N.A. Worcester MA 01653 company
AMGRO, Inc. 100 North Parkway Premium financing
Worcester MA 01605
APC Funding Corp. 440 Lincoln Street Special purpose funding vehicle
Worcester MA 01653 for commercial paper
Beltsville Drive 440 Lincoln Street Real estate partnership
Limited Partnership Worcester MA 01653
Citizens Corporation 440 Lincoln Street Holding Company
Worcester MA 01653
Citizens Insurance 645 West Grand River Multi-line property and casualty
Company of America Howell MI 48843 insurance
Citizens Insurance 333 Pierce Road Multi-line property and casualty
Company of Illinois Itasca IL 60143 insurance
Citizens Insurance 3950 Priority Way South Multi-line property and
Company of the Midwest Drive, Suite 200 casualty insurance
Indianapolis IN 46280
Citizens Insurance 8101 N. High Street Multi-line property and casualty
Company of Ohio P.O. Box 342250 insurance
Columbus OH 43234
Citizens Management, Inc. 645 West Grand River Services management company
Howell MI 48843
First Allmerica 440 Lincoln Street Life, pension, annuity, accident
Financial Life Worcester MA 01653 and health insurance company
Insurance Company
(formerly State Mutual
Life Assurance Company
of America)
<PAGE>
First Sterling Limited 440 Lincoln Street Holding Company
Worcester MA 01653
First Sterling 440 Lincoln Street Reinsurance Company
Reinsurance Company Worcester MA 01653
Limited
Greendale Special 440 Lincoln Street Massachusetts Grantor Trust
Placements Fund Worcester MA 01653
The Hanover American 100 North Parkway Multi-line property and
Insurance Company Worcester MA 01605 casualty insurance
The Hanover Insurance 100 North Parkway Multi-line property and
Company Worcester MA 01605 casualty insurance
Hanover Texas Insurance 801 East Campbell Road Attorney-in-fact for Hanover
Management Company, Inc. Richardson TX 75081 Lloyd's Insurance Company
Hanover Lloyd's Insurance 801 East Campbell Road Multi-line property and
Company Richardson TX 75081 casualty insurance
Linder Skokie Real Estate 440 Lincoln Street Real estate holding company
Corporation Worcester MA 01653
Lloyds Credit Corporation 440 Lincoln Street Premium financing service
Worcester MA 01653 franchises
Logan Wells Water Company, 603 Heron Drive Water Company serving land
Inc. Bridgeport NJ 08014 development investment
Massachusetts Bay 100 North Parkway Multi-line property and
Insurance Company Worcester MA 01605 casualty insurance
SMA Financial Corp. 440 Lincoln Street Holding Company
Worcester MA 01653
Somerset Square, Inc. 440 Lincoln Street Real estate holding company
Worcester MA 01653
Sterling Risk Management 440 Lincoln Street Risk management services
Services, Inc. Worcester MA 01653
</TABLE>
ITEM 27. NUMBER OF CONTRACT OWNERS
As of February 27, 1998, there were 5,350 Contract Owners of qualified
Contracts and 1,320 Contract Owners of non-qualified Contracts.
ITEM 28. INDEMNIFICATION
To the fullest extent permissible under Massachusetts General Laws, no
director shall be personally liable to the Company or any policyholder for
monetary damages for any breach of fiduciary duty as a director,
notwithstanding any provision of law to the contrary; provided, however,
that this provision shall not eliminate or limit the liability of a director:
<PAGE>
1. for and breach of the director's duty of loyalty to the Company or its
policyholders;
2. for acts or omissions not in good faith, or which involve intentional
misconduct or a knowing violation of law;
3. for liability, if any, imposed on directors of mutual insurance companies
pursuant to M.G.L.A. c. 156B Section 61 or M.G.L.A. c.156B Section 62;
4. for any transactions from which the director derived an improper
personal benefit.
ITEM 29. PRINCIPAL UNDERWRITERS
(a) Allmerica Investments, Inc. also acts as principal underwriter for the
following:
- VEL Account, VEL II Account, Inheiritage Account, Separate Accounts
VA-A, VA-B, VA-C, VA-G, VA-H, VA-K, Allmerica Select Separate Account
II, Group VEL Account, Separate Account KG, Separate Account KGC,
Fulcrum Separate Account, Fulcrum Variable Life Separate Account,
Allmerica Select Separate Account of Allmerica Financial Life
Insurance and Annuity Company
- Inheiritage Account, VEL II Account, Separate Account I, Separate
Account VA-K, Separate Account VA-P, Group VEL Account, Separate
Account KG, Separate Account KGC, Fulcrum Separate Account, Fulcrum
Variable Life 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
NAME POSITION OR OFFICE WITH UNDERWRITER
---- -----------------------------------
Abigail M. Armstrong Secretary and Counsel
Emil J. Aberizk, Jr. Vice President
Edward T. Berger Vice President and Chief Compliance Officer
Richard F. Betzler, Jr. Vice President
Philip J. Coffey Vice President
Thomas P. Cunningham Vice President, Chief Financial Officer and
Controller
John F. Kelly Director
<PAGE>
William F. Monroe, Jr. Vice President
David J. Mueller Vice President
John F. O'Brien Director
Stephen Parker President, Director and Chief Executive Officer
Edward J. Parry, III Treasurer
Richard M. Reilly Director
Eric A. Simonsen Director
Mark G. Steinberg Senior Vice President
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.
ITEM 32. UNDERTAKINGS
(a) Subject to the terms and conditions of Section 15(d) of the Securities
Exchange Act of 1934, the undersigned Registrant hereby undertakes to
file with the Securities and Exchange Commission ("SEC") such
supplementary and periodic information, documents, and reports as may be
prescribed by any rule or regulation of the SEC heretofore or hereafter
duly adopted pursuant to authority conferred in that section.
(b) The Registrant hereby undertakes to include in the prospectus a postcard
that the applicant can remove to send for a Statement of Additional
Information.
(c) The Registrant hereby undertakes to deliver a Statement of Additional
Information promptly upon written or oral request, according to the
requirements of Form N-4.
(d) Insofar as indemnification for liability arising under the 1933 Act may
be permitted to Directors, Officers and Controlling Persons of Registrant
under any registration statement, underwriting agreement or otherwise,
Registrant has been advised that, in the opinion of the SEC, such
indemnification is against public policy as expressed in the 1933 Act and
is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by
Registrant of expenses incurred or paid by a Director, Officer or
Controlling Person of Registrant in
<PAGE>
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 Policies are reasonable in relation to the services rendered,
expenses expected to be incurred, and risks assumed by the Company.
ITEM 33. REPRESENTATIONS CONCERNING WITHDRAWAL RESTRICTIONS ON SECTION 403(b)
PLANS AND UNDER THE TEXAS OPTIONAL RETIREMENT PROGRAM
Registrant, a separate account of First Allmerica Financial Life Insurance
Company ("Company"), states that it is (a) relying on Rule 6c-7 under the
1940 Act with respect to withdrawal restrictions under the Texas Optional
Retirement Program ("Program") and (b) relying on the "no-action" letter
(Ref. No. IP-6-88) issued on November 28, 1988 to the American Council of
Life Insurance, in applying the withdrawal restrictions of Internal Revenue
Code Section 403(b)(11). Registrant has taken the following steps in
reliance on the letter:
1. Appropriate disclosures regarding the redemption/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 certifies that it meets all of the
requirements for effectiveness of this Registration Statement pursuant to Rule
485(b) under the Securities Act of 1933 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereto duly
authorized, in the City of Worcester, and Commonwealth of Massachusetts on the
15th day of April, 1998.
SEPARATE ACCOUNT VA-K OF
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
By: /s/ Abigail M. Armstrong
--------------------------------
Abigail M. Armstrong, Secretary
Pursuant to the requirements of the Securities Act of 1933, this Amendment to
the Registration Statement has been signed by the following persons in the
capacities and on the date indicated.
SIGNATURES TITLE DATE
/s/ John F. O'Brien Director, President and Chief April 15, 1998
- ------------------------- Executive Officer
John F. O'Brien
/s/ Bruce C. Anderson Director and Vice President
- -------------------------
Bruce C. Anderson
/s/ Robert E. Bruce Director, Vice President and Chief
- ------------------------- Information Officer
Robert E. Bruce
/s/ John P. Kavanaugh Director, Vice President and
- ------------------------- Chief Investment Officer
John P. Kavanaugh
/s/ John F. Kelly Director, Senior Vice President
- ------------------------- and General Counsel
John F. Kelly
/s/ J. Barry May Director
- -------------------------
J. Barry May
/s/ James R. McAuliffe Director
- -------------------------
James R. McAuliffe
/s/ Edward J. Parry, III Director, Vice President, Chief
- ------------------------- Financial Officer and Treasurer
Edward J. Parry, III
/s/ Richard M. Reilly Director and Vice President
- -------------------------
Richard M. Reilly
/s/ Eric A. Simonsen Director and Vice President
- -------------------------
Eric A. Simonsen
/s/ Philip E. Soule Director and Vice President
- -------------------------
Phillip E. Soule
<PAGE>
EXHIBIT TABLE
Exhibit 1 Vote of Board of Directors
Exhibit 3(a) Underwriting and Administrative Services Agreement
Exhibit 3(b) Sales Agreements
Exhibit 3(c) General Agent's Agreement
Exhibit 3(d) Career Agent Agreement with Commission Schedule
Exhibit 3(e) Registered Representative's Agreement
Exhibit 4 Policy Form A
Exhibit 5 Application Form A
Exhibit 8(d) T. Rowe Price Service Agreement
Exhibit 8(e) BFDS Agreements
Exhibit 9 Opinion of Counsel
Exhibit 10 Consent of Independent Accountants
Exhibit 15(a) Participation Agreement with Allmerica Investment Trust
Exhibit 15(b) Participation Agreement, as amended, with Variable Insurance
Products Fund
Exhibit 15(c) Participation Agreement, as amended, with Variable Insurance
Products Fund II
Exhibit 15(d) Form of Participation Agreement with Delaware Group Premium Fund,
Inc. and Amendment
Exhibit 15(e) Participation Agreement with T. Rowe Price Series International,
Inc.
<PAGE>
STATE MUTUAL LIFE ASSURANCE COMPANY OF AMERICA
Worcester, Massachusetts
************
The following is taken from the minutes of a regular meeting of the Board of
Directors of State Mutual Life Assurance Company of America held on August 20,
1991, a quorum present:
"On motion duly made and seconded, it was:
"Voted:
"1. That pursuant to the provisions of Section 132G of Massachusetts General
Laws, Chapter 175, appropriate officers of the Company are authorized to
establish from time to time and to maintain individual customer and
pooled separate accounts independent of the Company's general investment
account. Such separate accounts shall be in addition to those
previously authorized by the Board and shall be established and
maintained subject to the following:
"(a) Separate accounts may be established from time to time in order
to provide equity or other investment choices to certain contract
holders of the Company who elect to participate therein.
"(b) Contract holders who elect to participate shall be issued group
or individual annuity contracts or other policies or contracts
("contracts"), which contracts (other than contracts described in
paragraph (c) below) shall provide that benefits or contractual
payments shall vary, in whole or in part, so as to reflect the
investment results of the separate account or accounts in which
amounts received in connection with such contract have been
placed.
"(c) In addition to contracts described in paragraph (b), separate
account contracts may provide that benefits shall be payable in
fixed amounts and that contract values shall be guaranteed by the
Company as to principal amount or such separate account
contracts may provide a guarantee by the Company of principal and
a stated rate of interest.
"(d) The Company may, with respect to any separate account it
establishes and registers with the Securities and Exchange
Commission, provide to contract holders with interests in any
such separate account appropriate voting rights with respect to
the management of such separate account and the investment of
assets therein.
<PAGE>
"(e) As is the case with respect to all separate accounts previously
established by the Company, the portion of the assets of each
separate account established by the Company equal to the separate
account reserves and other contract liabilities shall not be
chargeable with liabilities arising out of any other business the
Company may conduct.
"(f) The establishment of a separate account shall be reported to the
Board or Executive Committee.
"2. That appropriate officers of the Company are authorized to determine
investment objectives and appropriate underwriting criteria, investment
management policies and other requirements necessary or desirable for
the operation and management of the Company's separate accounts.
"3. That appropriate officers of the Company are authorized to initially
fund separate accounts established by the Company on such basis as they
deem appropriate, with the amounts and sources of such funding to be
reported to the Company's Investment Committee.
"4. That appropriate officers of the Company are authorized to contract with
an independent investment manager to manage one or more of the Company's
separate accounts directly, or indirectly through agreement with a
Company affiliate or subsidiary, or in any other manner they determine
to be appropriate."
A true copy, attest: /s/ Elaine D. Marcoux
---------------------
Assistant Secretary
<PAGE>
UNDERWRITING AND
ADMINISTRATIVE SERVICES AGREEMENT
AGREEMENT made this 26th day of November, 1997 between and among First Allmerica
Financial Life Insurance Company, a Massachusetts corporation (the "Company"),
each of its separate investment accounts (the "Accounts") which is a
registered investment company under the Investment Company Act of 1940 (the
"1940 Act"), as may be established by the Company from time-to-time, and
Allmerica Investments, Inc., a Massachusetts corporation (the "Distributor").
WITNESSETH:
WHEREAS, the Company and the respective Accounts issue certain variable annuity
contracts or variable insurance policies (the "contracts") which may be deemed
to be securities under the Securities Act of 1933 (the "1933 Act"), and the laws
of some states;
WHEREAS, the Distributor, an affiliate of the Company, is registered as a
broker-dealer with the Securities and Exchange Commission ("SEC") under the
Securities Exchange Act of 1934 (the "1934 Act") and is a member of the National
Association of Securities Dealers, Inc. ("NASD");
WHEREAS, the parties desire to have the Distributor act as principal underwriter
for the Accounts set forth in Exhibit A, as may be amended from time-to-time by
mutual consent of the parties, and to assume full responsibility for the
securities activities of all "persons associated" (as that term is defined in
Section 3(a)(18) of the 1934 Act) with the Distributor and engaged directly or
indirectly in the variable contract operation (the "associated persons");
WHEREAS, the parties desire to have the Company perform certain administrative
services in connection with the sale and servicing of the contracts.
NOW, THEREFORE, in consideration of the covenants and mutual promises of the
parties made to each other, it is hereby covenanted and agreed as follows:
1. The Distributor will act as the exclusive principal underwriter for the
Accounts and as such will assume full responsibility for the securities
activities of all the associated persons in connection with the sale of the
contracts. The Distributor will train the associated persons, use its best
efforts to prepare them to complete satisfactorily the applicable NASD and
state examinations so that they may be qualified, register the associated
persons as its registered representatives before they engage in the sale of
the contracts, and supervise and control them in the performance of such
activities. Notwithstanding anything in this Agreement to the contrary,
the Distributor may enter into sales agreements with independent
broker-dealers for the sale of the contracts. All such sales agreements
entered into by the Distributor with independent broker-dealers shall
provide that each independent broker-dealer will assume full responsibility
for continued compliance by itself and its associated persons with the NASD
Rules of Fair Practice and Federal and state securities laws.
2. The Distributor will assume full responsibility for the continued
compliance by itself and its associated persons with the NASD Rules of Fair
Practice and Federal and state securities laws, to the extent applicable in
connection with the sale of the contracts. The Distributor, directly or
through the Company as its agent, will make timely filings with the SEC,
NASD, and any other securities regulatory authorities of all reports and
any sales literature relating to the Accounts required by law to be filed
by the Distributor.
3. The Company will prepare and submit to the Accounts (a) all registration
statements and prospectuses (including amendments) and all reports required
by law to be filed by the Accounts with Federal and state securities
regulatory authorities, and (b) all notices, proxies, proxy statements, and
periodic
- 1 -
<PAGE>
reports that are to be transmitted to persons having voting rights with
respect to the Accounts.
4. The Company will, except as otherwise provided in this Agreement, bear the
cost of all services and expenses, including legal services and expenses,
filing fees, and other fees incurred in connection with (a) registering and
qualifying the Accounts and the contracts, and (b) preparing, printing, and
distributing all registration statements and prospectuses (including
amendments), contracts, notices, periodic reports, proxy solicitation
material, sales literature, and advertising filed or distributed in
connection with the sale of the contracts.
All cost associated with the variable contract compliance function
including, but not limited to, fees and expenses associated with qualifying
and licensing associated persons with Federal and state regulatory
authorities and the NASD and with performing compliance-related
administrative services, shall be allocated to the Company. To the extent
that the Distributor incurs out-of-pocket expenses in connection with the
variable contracts compliance function, the Company shall reimburse the
Distributor for such expenses. To the extent that such costs are in
connection with services provided by employees of the Company, they shall
be charged to the Company. The determination and allocation of all such
costs shall be pursuant to the Cost Distribution Policy as stated in the
Consolidated Service Agreement (effective January 1, 1993) among the
Allmerica Financial group of affiliated companies, as may be amended from
time.
5. All purchase payments made under the contracts will be forwarded by or on
behalf of Contract Owners directly to the Company and shall become the
exclusive property of the Company. The Company agrees to pay on behalf of
Distributor all sales commissions and any other remuneration due in
connection with the sale of the contracts by associated persons of the
Distributor and any independent broker-dealers having a sales agreement
with the Distributor. The Distributor or the Company as agent for the
Distributor shall pay all other remuneration due any other person for
activities relating to the sale of the contracts. The Company shall
reimburse the Distributor fully and completely for all amounts paid by the
Distributor to any person pursuant to this Section.
6. The Company will, as the Distributor's agent, (a) maintain and preserve in
accordance with Rules 17a-3 and 17a-4 under the 1934 Act all books and
records required to be maintained by the Distributor in connection with the
offer and sale of the contracts being offered for sale pursuant to this
Agreement, which books and records shall remain the property of the
Distributor, and shall at all times be subject to inspection by the SEC in
accordance with Section 17(a) of the 1934 Act, and all other regulatory
bodies having jurisdiction, and (b) send a written confirmation for each
such transaction reflecting the facts of the transaction and showing that
it is being sent on behalf of the Distributor acting in the capacity of
agent for the Accounts, in conformance with the requirements of Rule 10b-10
of the 1934 Act.
7. Each party hereto shall advise the others promptly of (a) any action of the
SEC or any authorities of any state or territory of which it has knowledge,
affecting registration or qualification of the Accounts or the contracts,
or the right to offer the contracts for sale, and (b) the happening of any
event which makes untrue any statement, or which requires the making of any
change in the registration statement or prospectus in order to make the
statements therein not misleading.
8. The Company agrees to be responsible to the Accounts for all sales and
administrative expenses incurred in connection with the administration of
the contracts and the Accounts other than applicable taxes arising from
income and capital gains of the Accounts and any other taxes arising from
the existence and operation of the Accounts.
9. As compensation for services performed and expenses incurred under this
Agreement, the Company will receive the charges and deductions as provided
in each outstanding series of the Company's contracts. Distributor will
receive the compensation provided for in Section 4, and may receive such
additional compensation, if any, as may be agreed upon by the parties from
time-to-time.
- 2 -
<PAGE>
10. Each party hereto agrees to furnish any other state insurance commissioner
or regulatory authority with jurisdiction over the contracts with any
information or reports in connection with services provided under this
Agreement which may be requested in order to ascertain whether the variable
insurance product operations of the Company are being conducted in a manner
consistent with applicable statutes, rules and regulations.
11. This Agreement shall upon execution become effective as of the date first
above written, and
(a) Unless otherwise terminated, this Agreement shall continue in effect
from year-to-year;
(b) This Agreement may be terminated by any party at any time upon giving
60 days' written notice to the other parties hereto; and
(c) This Agreement shall automatically terminate in the event of its
assignment.
12. The initial Accounts covered by this Agreement are set forth in Appendix A.
This Agreement, including Appendix A, may be amended at any time by mutual
consent of the parties.
13. This Agreement shall be governed by and construed in accordance with the
laws of Massachusetts.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the day
and year first above written.
FIRST ALLMERICA FINANCIAL LIFE INSURANCE
COMPANY
By: /s/ David J. Mueller
-------------------------------------
Title: Vice President
ALLMERICA INVESTMENTS, INC.
By: /s/ Thomas P. Cunningham
-------------------------------------
Title: Vice President
- 3 -
<PAGE>
Appendix A
SEPARATE ACCOUNTS OF FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
AS OF SEPTEMBER 1, 1997
VEL II Account
Inheiritage Account
Group VEL Account
Separate Account I
Separate Account VA-K
Separate Account VA-P
Allmerica Select Separate Account
Separate Account KG
Separate Account KGC
- 4 -
<PAGE>
SALES
AGREEMENT ALLMERICA INVESTMENTS, INC.
440 Lincoln Street
Worcester, Massachusetts 01653
- ------------------------------------------------------------------------------
Agreement, effective as of _________________, 19___, by and between Allmerica
Investments, Inc., a Massachusetts corporation (herein "Allmerica"), ________
__________________________________________________________________________, a
_____________________________ corporation (herein the "Broker-Dealer") and the
affiliates of Broker-Dealer listed on Exhibit "A" attached hereto, each
affiliate being referred to herein as a "General Agent".
Allmerica, subject to the terms and conditions set forth in this Agreement,
authorizes and appoints each General Agent to solicit applications for the
sale of Contracts. Each General Agent accepts this appointment and each
General Agent and the Broker-Dealer agree to the terms and conditions set
forth below.
DEFINITIONS
INSURANCE COMPANIES - All Contracts will be issued by First Allmerica
Financial Life Insurance Company (herein "First Allmerica") or by Allmerica
Financial Life Insurance and Annuity Company (herein "Allmerica Financial
Life"), a subsidiary of First Allmerica. The Principal Office of First
Allmerica and Allmerica Financial Life (herein collectively referred to as
"the Insurance Companies") is located at 440 Lincoln Street, Worcester,
Massachusetts 01653.
CONTRACTS - The variable annuity and variable life insurance contracts of the
Insurance Companies listed on the attached Commission Schedule(s), for which
Allmerica Investments, Inc., an affiliate of First Allmerica, has been
appointed the exclusive distributor and principal underwriter.
REGISTERED REPRESENTATIVES - Individuals affiliated with each General Agent
and the Broker-Dealer who are licensed as life insurance agents in those
jurisdictions in which applications for the sale of Contracts are to be
solicited and who are also duly registered with the National Association of
Securities Dealers, Inc. (herein "NASD") in compliance with the '34 Act.
'33 ACT - The Securities Act of 1933, as amended.
'34 ACT - The Securities Exchange Act of 1934, as amended.
RELATIONSHIP OF PARTIES
SECTION 1. Nothing in this Agreement will be construed to create the
relationship of employer and employee between Allmerica or either Insurance
Company and any General Agent, the Broker-Dealer or any Registered
Representative. General Agents and Registered Representatives will be free
to exercise their independent judgment as to the time, place and manner of
solicitation and servicing of business underwritten by the Insurance
Companies. However, General Agents, the Broker-Dealer and Registered
Representatives shall have no authority to act on behalf of Allmerica or the
1
<PAGE>
Insurance Companies in a manner which does not conform to applicable
statutes, ordinances, or governmental regulations or to reasonable rules
adopted from time to time by Allmerica or the Insurance Companies.
LIMITATIONS ON AUTHORITY
SECTION 2. General Agents, the Broker-Dealer and Registered Representatives
will have no authority to accept risks of any kind; to make, alter or
discharge Contracts; to waive forfeitures or exclusions; to alter or amend
any papers received from either Insurance Company; to deliver any life
insurance Contract or any document, agreement or endorsement changing the
amount of insurance coverage if the General Agent, the Broker-Dealer or the
soliciting Registered Representative know or have reason to believe that the
insured is uninsurable; or to accept any payment unless the payment meets the
minimum payment requirement for the Contract established by the Insurance
Company.
LICENSING AND REGISTRATION
SECTION 3. Each General Agent is hereby authorized to recommend Registered
Representatives for appointment by the Insurance Companies and only
individuals so recommended by a General Agent shall become Registered
Representatives hereunder. Allmerica shall arrange for the Insurance
Companies to apply for life insurance agent appointments in the appropriate
jurisdictions for such recommended Registered Representatives. Until
Contracts of First Allmerica are offered for sale, applications for
appointments shall only be made on behalf of Allmerica Financial Life.
Notwithstanding the foregoing, the Insurance Companies and Allmerica reserve
the right to refuse to appoint any proposed Registered Representative and/or
to terminate any Registered Representative who has been appointed by the
Insurance Companies.
AGREEMENTS BY GENERAL AGENT AND BROKER-DEALER
SECTION 4. The Broker-Dealer agrees that at all times when performing its
duties under this Agreement it shall be duly registered as a securities
broker-dealer under the '34 Act, be a member in good standing of the NASD,
and be duly licensed or registered as a securities broker-dealer in each
jurisdiction where such licensing or registration is required in connection
with the sale of the Contracts or the supervision of Registered
Representatives who solicit applications for the Contracts.
Each General Agent agrees that at all times when performing its duties under
this Agreement it shall be duly licensed to sell Contracts in each
jurisdiction in which General Agent intends to perform hereunder.
Each General Agent and the Broker-Dealer shall be responsible for carrying
out their sales and administrative obligations under this Agreement in
continued compliance with the NASD Rules of Fair Practice, federal and state
securities laws and regulations, and state insurance laws and regulations.
Each General Agent and the Broker-Dealer agree to offer the Contracts for
sale through their Registered Representatives and to offer such Contracts
only in accordance with the prospectus. General Agents, the Broker-Dealer
and Registered Representatives are not authorized to give any information or
make any representations concerning such Contracts other
2
<PAGE>
than those contained in the prospectus or in such sales literature or
advertising as may be authorized by Allmerica.
Each General Agent and the Broker-Dealer agree that they shall be fully
responsible for ensuring that no person shall offer or sell Contracts on
their behalf until such person is appropriately licensed, registered or
otherwise qualified to offer and sell such Contracts under the state and
federal securities laws and the insurance laws of each jurisdiction in which
such person intends to solicit.
Each General Agent and the Broker-Dealer agree to train, supervise and be
solely responsible for the conduct of their Registered Representatives in the
solicitation and sale of the Contracts and for the supervision as to their
strict compliance with Allmerica's rules and procedures, the NASD rules of
Fair Practice, and applicable rules and regulations of any other governmental
or other agency that has jurisdiction over the offering for sale of the
Contracts.
Each General Agent and the Broker-Dealer shall take reasonable steps to
ensure that their Registered Representatives shall not make recommendations
to an applicant to purchase a Contract in the absence of reasonable grounds
to believe that the purchase of such Contract is suitable for such applicant.
Such determination will be based upon, but will not be limited to,
information furnished to a Registered Representative after reasonable inquiry
of such applicant concerning the applicant's insurance and investment
objectives, financial situation and needs.
Each General Agent and the Broker-Dealer agree that Registered
Representatives shall conduct their business with respect to the Contracts at
all times in compliance with all applicable federal and state laws and
regulations and shall be subject to a standard of conduct including, but not
limited to, the following:
(a) A Registered Representative shall not solicit or participate in the sale
of the Contracts in any jurisdiction until such Registered Representative
is trained and licensed.
(b) A Registered Representative shall not solicit for the sale of Contracts
without delivering the then currently effective prospectus for such
Contracts and any then applicable amendments or supplements thereto,
including the current prospectus(es) for any fund(s) in which Contract
separate account(s) invest.
(c) A Registered Representative shall have no authority to advertise for or
on behalf of the Insurance Companies or Allmerica without express written
authorization from Allmerica.
AGREEMENTS BY ALLMERICA
SECTION 5. Allmerica agrees that at all times while this Agreement remains
in force that it shall be a registered broker-dealer under the '34 Act and be
a member in good standing of the NASD.
3
<PAGE>
During the term of this Agreement, Allmerica will provide to, or cause to be
provided to, each General Agent and the Broker-Dealer, without charge, as
many copies of the prospectus(es) for the Contracts (and any amendments, or
supplements thereto), the current prospectus(es) for any underlying fund(s)
and applications for the Contracts as each General Agent and the
Broker-Dealer may reasonably request. Upon termination of the Agreement, any
prospectuses, applications, and other materials and supplies furnished by
Allmerica to General Agents and the Broker-Dealer shall be promptly returned
to Allmerica.
Allmerica agrees to promptly notify each General Agent and the Broker-Dealer
of newly declared effective prospectus(es) for the Contracts and any
amendments or supplements thereto.
Allmerica agrees to keep each General Agent and the Broker-Dealer informed of
all jurisdictions in which the Insurance Companies are licensed to sell the
Contracts and in which the Contracts may be offered for sale.
SUBMISSION OF APPLICATIONS; DELIVERY OF CONTRACTS; REJECTED BUSINESS
SECTION 6. Each General Agent or the Broker-Dealer will submit, or cause to
be submitted, directly to the Principal Office of the Insurance Companies all
Contract applications solicited by their Registered Representatives. Each
General Agent or the Broker-Dealer will deliver, or cause to be delivered,
within 10 days of the date of issue all Contracts issued on applications
submitted by the General Agent, the Broker-Dealer or their Registered
Representatives. Each General Agent or the Broker-Dealer will promptly
return, or cause to be returned, to the Insurance Companies any Contract
which is declined by the applicant or which cannot be delivered within the
time permitted by the Insurance Company's rules.
ILLUSTRATIONS AND PROPOSALS
SECTION 7. General Agents, the Broker-Dealer and Registered Representatives
will not furnish any prospective Contract owner with an illustration of the
financial or other aspects of a Contract or a proposal for a Contract unless
the same has been either furnished by the Insurance Companies or prepared
from computer software or other material furnished or approved by the
Insurance Companies. Any illustration or proposal will conform to standards
of completeness and accuracy established by the Insurance Companies. If the
proposal or illustration was not furnished by the Insurance Companies, each
General Agent or the Broker-Dealer will retain in its records for
availability to the Insurance Companies a copy thereof or the means to
duplicate the same. Any computer software or materials furnished by either
Insurance Company will be and remain its property.
ACCOUNTING FOR FUNDS COLLECTED
SECTION 8. In accordance with the rules of the Insurance Companies, each
General Agent and the Broker-Dealer will account for and remit immediately to
the Principal Office of the Insurance Companies all funds received or
collected for or on behalf of either Insurance Company without deduction for
any commissions, or other claim the General Agent, the Broker-Dealer or any
Registered Representative may have against either Insurance Company or
Allmerica and will make such reports and file such
4
<PAGE>
substantiating documents and records as the Insurance Companies may
reasonably require.
INDEMNIFICATION
SECTION 9. Each General Agent and the Broker-Dealer, jointly and severally,
shall indemnify and hold Allmerica and the Insurance Companies and their
officers, directors and employees harmless from any liability arising from
any act or omission of the General Agent, the Broker-Dealer or of any
affiliate of the Broker-Dealer, or any officer, director, employee of the
General Agent or the Broker-Dealer or of their Registered Representatives,
including but not limited to, any fines, penalties, attorney's fees, costs of
settlement, damages or financial loss. Each General Agent and the
Broker-Dealer expressly authorize Allmerica and the Insurance Companies,
without precluding them from exercising any other remedy they may have, to
charge against all compensation due or to become due to the General Agent or
the Broker-Dealer under this Agreement, any monies paid on any liability
incurred by Allmerica or the Insurance Companies by reason of any such act or
omission of any General Agent, the Broker-Dealer, any affiliate of the
Broker-Dealer, or of any officer, director, employee of a General Agent or
the Broker-Dealer or of their Registered Representatives.
Allmerica shall indemnify and hold each General Agent and the Broker-Dealer
and their officers, directors, employees and registered representatives
harmless from any liability arising from any act or omission of Allmerica,
the Insurance Companies or any affiliate of Allmerica or any of the Insurance
Companies (collectively the "Allmerica Companies"), or any officer, director
or employee of the Allmerica Companies, including but not limited to, any
fines, penalties, reasonable attorney's fees, costs of settlement, damages or
financial loss.
The indemnifications provided by this Section shall survive termination of
this Agreement.
If a Contract is not delivered to the Contract owner within 10 days of the
date of issue of the Contract and if after delivery the owner returns the
Contract to the Insurance Company and receives a full refund of all payments
made, in any situation where the failure to deliver in a timely manner was
due to the inaction or negligence of a General Agent, the Broker-Dealer or a
Registered Representative, the difference between the payments refunded and
the cash value of the Contract on the date the Contract is received by the
Insurance Company at its Principal Office shall be reimbursed to the
Insurance Company by the offending General Agent or the Broker-Dealer in any
case where the cash value is less than the payments refunded. Any such
reimbursement shall be paid to the affected Insurance Company within 30 days
of receipt of a written request for payment.
COMMISSION REFUNDS
SECTION 10. If a Contract owner rescinds a Contract or exercises a right to
surrender a Contract for return of all payments made, the soliciting General
Agent or the Broker-Dealer will repay the appropriate Insurance Company the
amount of any
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commissions received on the payments returned within 10 days of receipt of a
written request for repayment.
BASIS OF COMPENSATION
SECTION 11. While this Agreement remains in force, the Insurance Companies
agree to pay each General Agent commissions in accordance with the Commission
Schedule(s) attached hereto and incorporated herein, from which amounts the
General Agent agrees to pay its Registered Representatives. Commission
payments will be made for each Contract issued pursuant to an application
solicited by duly appointed Registered Representatives.
TIME OF PAYMENT OF COMMISSIONS
SECTION 12. A payment will not be considered made until it has been received
by the Insurance Company at its Principal Office. On payments made,
commissions will be paid at regular intervals in accordance with the rules of
the Insurance Companies.
TERMINATION
SECTION 13. This Agreement shall automatically terminate immediately and
without notice upon any General Agent's or the Broker-Dealer's ceasing to
comply with any of the terms and conditions of this Agreement or upon the
dissolution, bankruptcy or insolvency of a General Agent or the Broker-Dealer.
Whether or not there is a breach of this Agreement, the Broker-Dealer or
Allmerica may terminate this Agreement by giving ten (10) days' written
notice to the other party at any time during the first year hereof, and by
giving thirty (30) days' written notice after the expiration of the first
year hereof.
Upon termination of this Agreement all authorizations, rights and obligations
shall cease except the obligation to pay commissions due on payments received
prior to termination for Contracts in effect on the date of termination, or
for Contracts to be issued pursuant to applications received by the Insurance
Companies prior to termination. Except as provided in the preceding
sentence, no further commissions shall be paid after termination of this
Agreement.
RIGHT OF SET-OFF
SECTION 14. Allmerica and the Insurance Companies will have a lien on any
commissions payable under this Agreement, whether or not such payments are
now due or hereafter become due, and may apply any such monies to the
satisfaction of indebtedness to Allmerica or to either Insurance Company to
the extent permitted by law.
NON-WAIVER OF BREACH
SECTION 15. Waiver of any breach of any provision of this Agreement will not
be construed as a waiver of the provision or of the right of Allmerica to
enforce said provision thereafter.
ASSIGNABILITY
SECTION 16. This Agreement is not transferable. Without the written consent
of Allmerica and the Insurance Companies, no rights or interest in or to
commissions will be subject to assignment, and any attempted assignment, sale
or transfer of any commissions without such written consents will immediately
make this Agreement
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void and be a release to Allmerica and to the Insurance Companies in full of
any and all of their obligations hereunder.
RESERVATION OF RIGHT TO CHANGE
SECTION 17. Allmerica reserves the right at any time, and from time to time,
to change prospectively the terms and conditions of this Agreement, including
but not limited to, the rates of commissions. Any change will become
effective on the date specified in a notice or, if later, 10 days after the
notice is given to each General Agent and the Broker-Dealer. However, the
requirement to give advance notice shall not apply if the change becomes
necessary or expedient by reason of legislation or the requirements of any
governmental body and, in the opinion of Allmerica, it is not reasonably
possible to meet the 10 day requirement. Changes will not be retroactive and
will apply only to life insurance coverage solicited or annuity payments made
on or after the effective date of the change.
COMPLAINTS AND INVESTIGATIONS
SECTION 18. Each General Agent, the Broker-Dealer and Allmerica agree to
cooperate fully in any customer complaint, insurance or securities regulatory
proceeding or judicial proceeding with respect to the General Agent, the
Broker-Dealer, Allmerica, the Insurance Companies, their affiliates or their
Registered Representatives to the extent that such customer complaint or
proceeding is in connection with Contracts marketed under this Agreement. To
the extent required, Allmerica will arrange for the Insurance Companies to
cooperate in any such complaint or proceeding. Without limiting the
foregoing:
(a) General Agents and the Broker-Dealer will be notified promptly by
Allmerica or the Insurance Companies of any written customer complaint or
notice of any regulatory proceeding or judicial proceeding of which they
become aware including the General Agent, the Broker-Dealer or any
Registered Representative which may be related to the issuance of any
Contract marketed under this Agreement. Each General Agent or the
Broker-Dealer will promptly notify Allmerica of any written customer
complaint or notice of any regulatory proceeding or judicial proceeding
received by the General Agent or the Broker-Dealer including the General
Agent, the Broker-Dealer or any of their Registered Representatives which
may be related to the issuance of any Contract marketed under this
Agreement or any activity in connection with any such Contract(s).
(b) In the case of a customer complaint, each General Agent, the
Broker-Dealer, Allmerica and the Insurance Companies will cooperate in
investigating such complaint and any proposed response to such complaint
will be sent to the other parties to this Agreement for approval not less
than five business days prior to its being sent to the customer or
regulatory authority, except that if a more prompt response is required,
the proposed response shall be communicated by telephone or facsimile
transmission.
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CONFIDENTIALITY
SECTION 19. Allmerica agrees that the names and addresses of all customers
and prospective customers of each General Agent and the Broker-Dealer and of
any company or person affiliated with a General Agent or the Broker-Dealer,
and the names and addresses of any Registered Representatives of the
Broker-Dealer which may come to the attention of Allmerica exclusively as a
result of its relationship with a General Agent and the Broker-Dealer or any
affiliated company and not from any independent source, are confidential and
shall not be used by Allmerica, the Insurance Companies, or any company or
person affiliated with Allmerica or the Insurance Companies, nor divulged to
any party for any purpose whatsoever, except as may be necessary in
connection with the administration and marketing of the Contracts sold by or
through General Agents, including responses to specified requests to the
Insurance Companies for service by Contract owners or efforts to prevent the
replacement of such Contracts or to encourage the exercise of options under
the terms of the Contracts. In no event shall the names and addresses of
such customers, prospective customers and Registered Representatives be
furnished by Allmerica to any other company or person, including but not
limited to, any of their managers, registered representatives, or brokers who
are not Registered Representatives of the Broker-Dealer, any company
affiliated with Allmerica or any manager, agency, or broker of such company,
or any securities broker-dealer or any insurance agent affiliated with such
broker-dealer. The intent of this section is that Allmerica, the Insurance
Companies or companies or persons affiliated with them shall not utilize, or
permit to be utilized, their knowledge of each General Agent, the
Broker-Dealer or of any affiliated companies which is derived exclusively as
a result of the relationships created through the sale of the Contracts.
Notwithstanding the foregoing provisions of this Section 19, nothing herein
shall prohibit Allmerica, the Insurance Companies or any company or person
affiliated with Allmerica or the Insurance Companies from (i) seeking
business relationships and entering into separate sales agreements with
Registered Representatives of the Broker-Dealer if the names of said
Registered Representatives were obtained from independent sources and not
exclusively as a result of Allmerica's relationship with a General Agent and
the Broker-Dealer; (ii) from entering into separate sales agreements with
Registered Representatives of the Broker-Dealer upon the request and at the
initiation of said Registered Representatives; or (iii) divulging the names
and addresses of any such customers, prospective customers, Registered
Representatives, or other companies or persons described in the preceding
paragraph in connection with any customer complaint or insurance or
securities regulatory proceeding described in Section 18.
BONDING
SECTION 20. Each General Agent and the Broker-Dealer agree to furnish such
bond or bonds as Allmerica may require. Upon failure or inability of a
General Agent or the Broker-Dealer to obtain or renew any such bonds, this
Agreement shall terminate at Allmerica's discretion upon notice by Allmerica.
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NOTICE
SECTION 21. Whenever this Agreement requires a notice to be given, the
requirement will be considered to have been met, in the case of notice to the
Insurance Companies or to Allmerica, if delivered or mailed postage prepaid
to the address specified on page 1 of this Agreement and, in the case of
notice to a General Agent or the Broker-Dealer, if delivered or mailed
postage prepaid to the intended recipient's principal place of business.
CAPTIONS
SECTION 22. Captions are used for informational purposes only and no caption
shall be construed to affect the substance of any provision of this Agreement.
EFFECTIVENESS; ENTIRE CONTRACT; PRIOR AGREEMENTS
SECTION 23. This Agreement contains the entire contract between the parties.
Upon execution it will replace all previous agreements between each General
Agent or the Broker-Dealer and Allmerica and the Insurance Companies, or any
of them, relating to the solicitation of Contracts. It is hereby understood
and agreed that any other agreement or representation, commitment, promise or
statement of any nature, whether oral or written, relating to or purporting
to relate to the relationship of the parties is hereby rendered null and
void.
IN WITNESS WHEREOF, the parties have executed this Agreement in duplicate to
take effect on its effective date.
*For: _________________________________ For: Allmerica Investments, Inc.
Name of General Agent
By:__________________________________ By:________________________________
Name:________________________________ Name:______________________________
Title:_______________________________ Title:_____________________________
Date:________________________________ Date:______________________________
For: __________________________________
Name of Broker-Dealer
By:__________________________________
Name:________________________________
Title:_______________________________
Date:________________________________
* A separate signature line is required for each General Agent affiliate of the
Broker-Dealer.
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SALES
AGREEMENT ALLMERICA INVESTMENTS, INC.
440 Lincoln Street
Worcester, Massachusetts 01653
- ------------------------------------------------------------------------------
Agreement, effective as of _________________, 19___, by and between Allmerica
Investments, Inc., a Massachusetts corporation (herein "Allmerica") and
_________________________________________________________________, a
________________________ corporation (herein "Broker-Dealer").
Allmerica, subject to the terms and conditions set forth in this Agreement,
authorizes and appoints Broker-Dealer to solicit applications for the sale of
Contracts. Broker-Dealer accepts this appointment and agrees to the terms
and conditions set forth below.
DEFINITIONS
INSURANCE COMPANIES - All Contracts will be issued by First Allmerica
Financial Life Insurance Company (herein "First Allmerica") or by Allmerica
Financial Life Insurance and Annuity Company (herein "Allmerica Financial
Life"), a subsidiary of First Allmerica. The Principal Office of First
Allmerica and Allmerica Financial Life (herein collectively referred to as
"the Insurance Companies") is located at 440 Lincoln Street, Worcester,
Massachusetts 01653.
CONTRACTS - The variable annuity and variable life insurance contracts of the
Insurance Companies listed on the attached Commission Schedule(s), for which
Allmerica Investments, Inc., an affiliate of First Allmerica, has been
appointed the exclusive distributor and principal underwriter.
REGISTERED REPRESENTATIVES - Individuals affiliated with Broker-Dealer who
are licensed as life insurance agents in those jurisdictions in which
applications for the sale of Contracts are to be solicited and who are also
duly registered with the National Association of Securities Dealers, Inc.
(herein "NASD") in compliance with the '34 Act.
'33 ACT - The Securities Act of 1933, as amended.
'34 ACT - The Securities Exchange Act of 1934, as amended.
RELATIONSHIP OF PARTIES
SECTION 1. Nothing in this Agreement will be construed to create the
relationship of employer and employee between Allmerica or either Insurance
Company and any Broker-Dealer or Registered Representative. Broker-Dealer
and each Registered Representative will be free to exercise their independent
judgment as to the time, place and manner of solicitation and servicing of
business underwritten by the Insurance Companies. However, neither
Broker-Dealer nor any Registered Representative shall have authority to act
on behalf of Allmerica or the Insurance
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Companies in a manner which does not conform to applicable statutes,
ordinances, or governmental regulations or to reasonable rules adopted from
time to time by Allmerica or the Insurance Companies.
LIMITATIONS OF AUTHORITY
SECTION 2. Neither Broker-Dealer nor any Registered Representative will have
authority to accept risks of any kind; to make, alter or discharge Contracts;
to waive forfeitures or exclusions; to alter or amend any papers received
from either Insurance Company; to deliver any life insurance Contract or any
document, agreement or endorsement changing the amount of insurance coverage
if Broker-Dealer or the soliciting Registered Representative knows or has
reason to believe that the insured is uninsurable; or to accept any payment
unless the payment meets the minimum payment requirement for the Contract
established by the Insurance Company.
LICENSING AND REGISTRATION
SECTION 3. Broker-Dealer is hereby authorized to recommend Registered
Representatives for appointment by the Insurance Companies and only
individuals so recommended by Broker-Dealer shall become Registered
Representatives hereunder. Allmerica shall arrange for the Insurance
Companies to apply for life insurance agent appointments in the appropriate
jurisdictions for such recommended Registered Representatives of
Broker-Dealer.
Notwithstanding the foregoing, the Insurance Companies and Allmerica reserve
the right to refuse to appoint any proposed Registered Representative and/or
to terminate any Registered Representative or firm who has been appointed by
the Insurance Companies.
AGREEMENTS BY BROKER-DEALER
SECTION 4. Broker-Dealer agrees that at all times when performing its duties
under this Agreement it shall be duly registered as a securities
broker-dealer under the '34 Act, be a member in good standing of the NASD,
and be duly licensed or registered as a securities broker-dealer in each
jurisdiction where such licensing or registration is required in connection
with the sale of the Contracts or the supervision of Registered
Representatives who solicit applications for the Contracts.
Broker-Dealer agrees that at all times when performing its duties under this
Agreement it shall be duly licensed to sell Contracts in each jurisdiction in
which Broker-Dealer intends to perform hereunder.
Broker-Dealer shall be responsible for carrying out its sales and
administrative obligations under this Agreement in continued compliance with
the NASD Rules of Fair Practice, federal and state securities laws and
regulations, and state insurance laws and regulations. Broker-Dealer agrees
to offer the Contracts for sale through its Registered Representatives and to
offer such Contracts only in accordance with the prospectus. Broker-Dealer
and Registered Representative(s) are not authorized to give any information
or make any representations concerning such Contracts other than
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those contained in the prospectus or in such sales literature or advertising
as may be authorized by Allmerica.
Broker-Dealer agrees that it shall take reasonable steps to ensure that no
person shall offer or sell Contracts on its behalf until such person is
appropriately licensed, registered or otherwise qualified to offer and sell
such Contracts under the state and federal securities laws and the insurance
laws of each jurisdiction in which such person intends to solicit.
Broker-Dealer agrees to train, supervise and be solely responsible for the
conduct of its Registered Representatives in the solicitation and sale of the
Contracts and for the supervision as to their strict compliance with
Allmerica's rules and procedures, the NASD rules of Fair Practice, and
applicable rules and regulations of any other governmental or other agency
that has jurisdiction over the offering for sale of the Contracts.
Broker-Dealer shall take reasonable steps to ensure that its Registered
Representatives shall not make recommendations to an applicant to purchase a
Contract in the absence of reasonable grounds to believe that the purchase of
such Contract is suitable for such applicant. Such determination will be
based upon, but will not be limited to, information furnished to a Registered
Representative after reasonable inquiry of such applicant concerning the
applicant's insurance and investment objectives, financial situation and
needs.
Broker-Dealer shall take reasonable steps to ensure that Registered
Representatives of Broker-Dealer shall conduct their business with respect to
the Contracts at all times in compliance with all applicable federal and
state laws and regulations and shall be subject to a standard of conduct
including, but not limited to, the following:
(a) A Registered Representative shall not solicit or participate in the sale
of the Contracts in any jurisdiction until such Registered Representative
is trained and licensed.
(b) A Registered Representative shall not solicit applications for the sale of
the Contracts without delivering the then currently effective prospectus
for such Contracts and any then applicable amendments or supplements
thereto, including the current prospectus(es) for any fund(s) in which
Contract separate account(s) invest.
(c) A Registered Representative shall have no authority to advertise for or
on behalf of the Insurance Companies or Allmerica without express written
authorization from Allmerica.
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AGREEMENTS BY ALLMERICA
SECTION 5. Allmerica agrees that at all times while this Agreement remains
in force that it shall be a registered Broker-Dealer under the '34 Act and be
a member in good standing of the NASD.
During the term of this Agreement, Allmerica will provide Broker-Dealer,
without charge, with as many copies of the prospectus(es) for the Contracts
(and any amendments, or supplements thereto), the current prospectus(es) for
any underlying fund(s) and applications for the Contracts as Broker-Dealer
may reasonably request. Upon termination of the Agreement, any prospectuses,
applications, and other materials and supplies furnished by Allmerica to
Broker-Dealer shall be promptly returned to Allmerica by Broker-Dealer.
Allmerica agrees to promptly notify Broker-Dealer of newly declared effective
prospectus(es) for the Contracts and any amendments or supplements thereto.
Allmerica agrees to keep Broker-Dealer informed of all jurisdictions in which
the Insurance Companies are licensed to sell the Contracts and in which the
Contracts may be offered for sale.
SUBMISSION OF APPLICATIONS; DELIVERY OF CONTRACTS; REJECTED BUSINESS
SECTION 6. Broker-Dealer will submit, or cause to be submitted, directly to
the Principal Office of the Insurance Companies all Contract applications
solicited by Registered Representatives of the Broker-Dealer. Broker-Dealer
will deliver, or cause to be delivered, within 10 days of its receipt by
Broker-Dealer all Contracts issued on applications submitted by Broker-Dealer
or its Registered Representatives and will ensure that any Contract
endorsement, amendment or other agreement is properly executed by the
Contract owner at the time of Contract delivery. Broker-Dealer will promptly
return, or cause to be returned, to the Insurance Companies any Contract
which is declined by the applicant or which cannot be delivered within the
time permitted by the Insurance Company's rules.
ILLUSTRATIONS AND PROPOSALS
SECTION 7. Neither Broker-Dealer nor any Registered Representative of
Broker-Dealer will furnish any prospective Contract owner with an
illustration of the financial or other aspects of a Contract or a proposal
for a Contract unless the same has been either furnished by the Insurance
Companies or prepared from computer software or other material furnished or
approved by the Insurance Companies. Any illustration or proposal will
conform to standards of completeness and accuracy established by the
Insurance Companies. If the proposal or illustration was not furnished by
the Insurance Companies, Broker-Dealer will retain in its records for
availability to the Insurance Companies a copy thereof or the means to
duplicate the same. Any computer software or materials furnished by either
Insurance Company will be and remain its property.
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ACCOUNTING FOR FUNDS COLLECTED
SECTION 8. In accordance with the rules of the Insurance Companies,
Broker-Dealer will account for and remit immediately to the Principal Office
of the Insurance Companies all funds received or collected by Broker-Dealer
or by Registered Representatives of Broker-Dealer for or on behalf of either
Insurance Company without deduction for any commissions, or other claim
Broker-Dealer or the Registered Representative may have against either
Insurance Company or Allmerica and will make such reports and file such
substantiating documents and records as the Insurance Companies may
reasonably require.
INDEMNIFICATION
SECTION 9. Broker-Dealer shall indemnify and hold Allmerica and the
Insurance Companies and their officers, directors and employees harmless from
any liability arising from any act or omission of Broker-Dealer or of any
affiliate of Broker-Dealer, or any officer, director, employee of
Broker-Dealer or of its Registered Representatives, including but not limited
to, any fines, penalties, attorney's fees, costs of settlement, damages or
financial loss. Broker-Dealer expressly authorizes Allmerica and the
Insurance Companies, without precluding them from exercising any other remedy
they may have, to charge against all compensation due or to become due to
Broker-Dealer under this Agreement, any monies paid on any liability incurred
by Allmerica or the Insurance Companies by reason of any such act or omission
of Broker-Dealer, or any affiliate of Broker-Dealer, or of any officer,
director, employee of Broker-Dealer or of its Registered Representatives.
Allmerica shall indemnify and hold Broker-Dealer, its affiliates and their
officers, directors and employees harmless from any liability arising from
any act or omission of Allmerica, the Insurance Companies or any affiliate of
Allmerica or any of the Insurance Companies (collectively the "Allmerica
Companies"), or any officer, director or employee of the Allmerica Companies,
including but not limited to, any fines, penalties, reasonable attorney's
fees, costs of settlement damages or financial loss.
The indemnifications provided by this Section shall survive termination of this
Agreement.
If a Contract is not delivered to the Contract owner within 10 days of its
receipt by the Broker-Dealer and if after delivery the owner returns the
Contract to the Insurance Company and receives a full refund of all payments
made, in any situation where the failure to deliver in a timely manner was due
to the inaction or negligence of the Broker-Dealer or a Registered
Representative of Broker-Dealer, the difference between the payments refunded
and the cash value of the Contract on the date the Contract is received by the
Insurance Company at its Principal Office shall be reimbursed to the Insurance
Company by the Broker-Dealer in any case where the cash value is less than the
payments refunded. Any such reimbursement shall be paid by the Broker-Dealer to
the affected Insurance Company within 30 days of Broker-Dealer's receipt of a
written request for payment.
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If Broker-Dealer utilizes delivery receipts as part of its Contract delivery
rules and procedures, the date of execution of the delivery receipt by the
Contract owner shall be deemed to be the date of Contract delivery for
purposes of this Agreement.
COMMISSION REFUNDS
SECTION 10. If a Contract owner rescinds a Contract or exercises the
Contract's Right to Examine privilege (i.e., free-look), then Broker-Dealer
will repay the appropriate Insurance Company the amount of any commissions
received on the payments returned within 10 days of Broker-Dealer's receipt
of a written request for repayment.
BASIS OF COMPENSATION
SECTION 11. While this Agreement remains in force, the Insurance Companies
agree to pay Broker-Dealer commissions in accordance with the Commission
Schedule(s) attached hereto and incorporated herein, from which amounts
Broker-Dealer agrees to pay its Registered Representatives. Commission
payments will be made to Broker-Dealer for each Contract issued pursuant to
an application solicited by duly appointed Registered Representatives of
Broker-Dealer.
TIME OF PAYMENT OF COMMISSIONS
SECTION 12. A payment will not be considered made until it has been received
by the Insurance Company at its Principal Office. On payments made,
commissions will be paid at regular intervals in accordance with the rules of
the Insurance Companies.
TERMINATION
SECTION 13. This Agreement shall automatically terminate immediately and
without notice upon Broker-Dealer's or Allmerica's ceasing to comply with any
of the terms and conditions of this Agreement or upon the dissolution,
bankruptcy or insolvency of Broker-Dealer or Allmerica.
Whether or not there is a breach of this Agreement, Broker-Dealer or
Allmerica may terminate this Agreement by giving ten (10) days' written
notice to the other party at any time during the first year hereof, and by
giving thirty (30) days' written notice after the expiration of the first
year hereof.
Upon termination of this Agreement all authorizations, rights and obligations
shall cease except the obligation to pay commissions due on payments received
prior to termination for Contracts in effect on the date of termination, or
for Contracts to be issued pursuant to applications received by the Insurance
Companies prior to termination. Except as provided in the preceding
sentence, no further commissions shall be paid after termination of this
Agreement.
RIGHT TO SET-OFF
SECTION 14. Allmerica and the Insurance Companies will have a lien on any
commissions payable under this Agreement, whether or not such payments are
now due or hereafter become due, and may apply any such monies to the
satisfaction of indebtedness to Allmerica or to either Insurance Company to
the extent permitted by law.
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NON-WAIVER OF BREACH
SECTION 15. Waiver of any breach of any provision of this Agreement will not
be construed as a waiver of the provision or of the right of Allmerica or
Broker-Dealer to enforce said provision thereafter.
ASSIGNABILITY
SECTION 16. This Agreement is not transferable. Without the written consent
of Allmerica and the Insurance Companies, no rights or interest in or to
commissions will be subject to assignment, and any attempted assignment, sale
or transfer of any commissions without such written consents will be void and
of no effect hereunder.
RESERVATION OF RIGHT TO CHANGE
SECTION 17. Allmerica reserves the right at any time, and from time to time,
to change prospectively the terms and conditions of this Agreement, including
but not limited to, the rates of commissions. Any change will become
effective on the date specified in a notice or, if later, 30 days after the
notice is given to Broker-Dealer. However, the requirement to give advance
notice shall not apply if the change becomes necessary or expedient by reason
of legislation or the requirements of any governmental body and, in the
opinion of Allmerica, it is not reasonably possible to meet the 30 day
requirement. Changes will not be retroactive and will apply only to life
insurance coverage solicited or annuity payments made on or after the
effective date of the change.
COMPLAINTS AND INVESTIGATIONS
SECTION 18. Broker-Dealer and Allmerica agree to cooperate fully in any
customer complaint, insurance or securities regulatory proceeding or judicial
proceeding with respect to Broker-Dealer, Allmerica, the Insurance Companies,
their affiliates or their Registered Representatives to the extent that such
customer complaint or proceeding is in connection with Contracts marketed
under this Agreement. To the extent required, Allmerica will arrange for the
Insurance Companies to cooperate in any such complaint or proceeding.
Without limiting the foregoing:
(a) Broker-Dealer will be notified promptly by Allmerica or the Insurance
Companies of any written customer complaint or notice of any regulatory
proceeding or judicial proceeding of which they become aware including
Broker-Dealer or any Registered Representative of Broker-Dealer which may
be related to the issuance of any Contract marketed under this Agreement.
Broker-Dealer will promptly notify Allmerica of any written customer
complaint, or notice of any regulatory proceeding or judicial proceeding
received by Broker-Dealer, with respect to Broker-Dealer or any of its
Registered Representatives in connection with any Contract marketed under
this Agreement or any activity in connection with any such Contract(s).
(b) In the case of a customer complaint specified above, Broker-Dealer,
Allmerica and the Insurance Companies will cooperate in investigating
such complaint and any proposed response to such complaint will be sent
to the other party of this Agreement for approval not less than five
business days prior to its being sent to the customer or regulatory
authority, except that if a more prompt
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response is required, the proposed response shall be communicated by
telephone or facsimile transmission.
CONFIDENTIALITY
SECTION 19. Allmerica agrees that the names and addresses of all customers
and prospective customers of Broker-Dealer and of any company or person
affiliated with Broker-Dealer, and the names and addresses of any Registered
Representatives of Broker-Dealer which may come to the attention of Allmerica
exclusively as a result of its relationship with Broker-Dealer or any
affiliated company and not from any independent source, are confidential and
shall not be used by Allmerica, the Insurance Companies, or any company or
person affiliated with Allmerica or the Insurance Companies, nor divulged to
any party for any purpose whatsoever, except as may be necessary in
connection with the administration and marketing of the Contracts sold by or
through Broker-Dealer, including responses to specified requests to the
Insurance Companies for service by Contract owners or efforts to prevent the
replacement of such Contracts or to encourage the exercise of options under
the terms of the Contracts. In no event shall the names and addresses of
such customers, prospective customers and Registered Representatives be
furnished by Allmerica to any other company or person, including but not
limited to, any of their managers, registered representatives, or brokers who
are not Registered Representatives of Broker-Dealer, any company affiliated
with Allmerica or any manager, agency, or broker of such company, or any
securities broker-dealer or any insurance agent affiliated with such
broker-dealer. The intent of this section is that Allmerica, the Insurance
Companies or companies or persons affiliated with them shall not utilize, or
permit to be utilized, their knowledge of Broker-Dealer or of any affiliated
companies which is derived exclusively as a result of the relationships
created through the sale of the Contracts.
Notwithstanding the foregoing provisions of this Section 19, nothing herein
shall prohibit Allmerica, the Insurance Companies or any company or person
affiliated with Allmerica or the Insurance Companies from (i) seeking
business relationships and entering into separate sales agreements with
Registered Representatives of Broker-Dealer if the names of said Registered
Representatives were obtained from independent sources and not exclusively as
a result of Allmerica's relationship with Broker-Dealer; (ii) from entering
into separate sales agreements with Registered Representatives of
Broker-Dealer upon the request and at the initiation of said Registered
Representatives; or (iii) divulging the names and addresses of any such
customers, prospective customers, Registered Representatives, or other
companies or persons described in the preceding paragraph in connection with
any customer complaint or insurance or securities regulatory proceeding
described in Section 18. PROVIDED, HOWEVER, that Allmerica shall not enter
into separate sales agreements with Registered Representatives of
Broker-Dealer while such Registered Representatives are affiliated with
Broker-Dealer.
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BONDING
SECTION 20. Broker-Dealer represents that it shall maintain bonding in the
form, type, and amount required under the NASD Rules of Fair Practice.
NOTICE
SECTION 21. Whenever this Agreement requires a notice to be given, the
requirement will be considered to have been met, in the case of notice to the
Insurance Companies or to Allmerica, if delivered or mailed postage prepaid
to the address specified on page 1 of this Agreement and, in the case of
notice to Broker-Dealer, if delivered or mailed postage prepaid to the
intended recipient's principal place of business.
CAPTIONS
SECTION 22. Captions are used for informational purposes only and no caption
shall be construed to affect the substance of any provision of this Agreement.
EFFECTIVENESS; ENTIRE CONTRACT; PRIOR AGREEMENTS
SECTION 23. This Agreement contains the entire contract between the parties.
Upon execution it will replace all previous agreements between Broker-Dealer
and Allmerica and the Insurance Companies, or any of them, relating to the
solicitation of Contracts. It is hereby understood and agreed that any other
agreement or representation, commitment, promise or statement of any nature,
whether oral or written, relating to or purporting to relate to the
relationship of the parties is hereby rendered null and void.
IN WITNESS WHEREOF, the parties have executed this Agreement in duplicate to
take effect on its effective date.
*For: _________________________________ For: Allmerica Investments, Inc.
Name of Broker-Dealer
By:__________________________________ By:________________________________
Name:________________________________ Name:______________________________
Title:_______________________________ Title:_____________________________
Date:________________________________ Date:______________________________
9
<PAGE>
ALLMERICA ALLMERICA 440 Lincoln Street GENERAL AGENT'S
FINANCIAL INVESTMENTS, INC. Worcester, MA 01653 AGREEMENT
- --------------------------------------------------------------------------------
Allmerica Investments, Inc. ("Company") hereby appoints
__________________________________________________
("General Agent") as local supervisor for the purpose of training and
supervising all associated persons and registered representatives of Company
assigned to _________________________________________________________
("Agency") engaged in the solicitation, sale or service of variable life
insurance and variable annuity contracts offered by Allmerica Financial Life
Insurance and Annuity Company and/or First Allmerica Financial Life Insurance
Company, mutual funds, limited partnerships and general securities (collectively
"Investment Products and Services") offered and/or distributed by Company. This
appointment is effective as of the date accepted by General Agent and
acknowledged by Company.
1. SUPERVISION: General Agent agrees to supervise all registered
representatives assigned to Agency, both those operating from Agency and
those operating from detached locations, consistent with the standards of
conduct outlined in Company's Business Conduct Guide, Company's Statement
of Compliance for the Office of Supervisory Jurisdiction and Branch
Offices, the Program for Allmerica Financial Life/Allmerica Investments
Office Examinations, and the procedures and requirements outlined in other
Company manuals, memoranda and other publications, as may be amended from
time to time.
General Agent agrees to be responsible for Investment Products and Services
activity conducted through Agency by monitoring Investment Products and
Services activity in order to ensure that the business is processed in
accordance with regulatory and Company standards and to notify Company of
any irregularities and/or deficiencies.
General Agent agrees to be responsible for the maintenance and periodic
review of the books and records of Agency, as required by Company.
On at least an annual basis, General Agent agrees to conduct and/or
participate, in coordination with Company's compliance personnel, an agency
compliance meeting which all registered representatives assigned to Agency
shall attend. If for any reason a registered representative does not
attend agency compliance meeting, General Agent will schedule a personal
interview, on at least an annual basis, for the purpose of reviewing
activity of registered representative with respect to Investment Products
and Services and to discuss the compliance topics reviewed at agency
compliance meeting.
General Agent agrees to acquire and/or comply with all of the applicable
laws, rules and regulations (General Securities Principal Registration) of
the Securities and Exchange Commission (SEC), National Association of
Securities Dealers, Inc. (NASD) and all other federal and state laws and
regulations.
General Agent agrees to maintain all NASD registrations required to
supervise the solicitation and sale of Investment Products and Services
offered through Agency. General Agent will maintain all state securities
licenses and state insurance licenses as may be required to offer and
solicit Investment Products and Services.
2. LIMITATIONS OF AUTHORITY: General Agent has no authority to accept any
risk on Company's behalf, to issue, make, alter or discharge any contract,
to extend the time of payments, to waive or extend any contract obligation
or condition, or to alter or amend any communication sent by Company
without express authority in writing from an officer of Company.
3. ASSIGNABILITY: No assignment, sale or transfer of this Agreement or any
of the rights, claims or interests under it may be made by General Agent
without the prior written consent of Company. An assignment, sale or
transfer by General Agent without written consent of Company will
immediately make this Agreement void and shall be a release in full to
Company of any and all of its obligations under this Agreement.
4. AGENCY STAFFING: General Agent agrees to recruit, train and supervise
registered representatives to solicit Investment Products and Services
offered through Company. General Agent agrees to develop a sales force of
sufficient size and quality to adequately penetrate the market with
Investment Products and Services of Company.
<PAGE>
5. BUSINESS AUTHORIZED: General Agent agrees to act for Company in the
solicitation of orders only for those Investment Products and Services for
which Company has executed sales agreements. General Agent shall monitor
his/her registered representatives on a continuing basis to prevent the
offering or the selling of Investment Products and Services not offered by
Company and to prevent registered representatives of Company from
exercising discretionary authority on behalf of any of their clients.
6. SUBMISSION OF APPLICATIONS/ACCOUNTING FOR FUNDS COLLECTED: General Agent
agrees to establish and maintain at Agency procedures, as outlined in
Company manuals, concerning the collection, recording and transmittal of
all applications and/or payments collected on behalf of Company, any
issuer, or any sponsor.
General Agent agrees to be responsible to Company for monies collected by
registered representatives and for any securities, certificates, payments,
receipts and other Company papers in the possession of registered
representatives and employees of Agency.
Purchase checks for Investment Products and Services are to be client
personal checks, cashier's checks or money orders made payable to either
the Company, appropriate issuer, sponsor or other designated agent.
Purchase checks may not be made payable to registered representative,
General Agent or any personal or Agency Accounts.
7. REVIEW OF INVESTMENT PRODUCT BUSINESS: General Agent agrees, in accordance
with Company procedures, to conduct periodic reviews of Investment Product
and Services business of each registered representative. Such review of
Investment Product and Services business shall include, but not be limited
to, reviews for adequate NASD registrations and state securities and/or
insurance licensing of registered representative, prompt transmittal of
applications, checks and other pertinent items to Agency and subsequently
to Home Office, the correct use of applications and proper mode of payment
and the suitability of Investment Products and Service based on client's
financial profile and objectives.
8. BOOKS AND RECORDS: General Agent agrees to maintain a regular and
accurate record of all Investment Products and Services transactions of
Agency, including any journal, account books, records, papers, customer
account files or any other material, as required by Company. General Agent
agrees, at such times that Company may request, to make detailed report to
Company, on forms furnished for that purpose, showing an accurate
accounting of all monies and other items received for, or on behalf of
Company.
General Agent agrees that all records, files and papers are, and remain,
property of Company and will at all times be freely exhibited for the
purpose of examinations and inspection by duly authorized personnel of
Company.
Upon termination, all records revert to Company and should be turned over
to a Company representative.
9. DISTRIBUTION AND USE OF ADVERTISING MATERIAL, CORRESPONDENCE: General
Agent agrees not to directly or indirectly recommend or distribute any
advertising and/or sales literature to registered representatives
(including but not limited to prospectuses, illustrations, circulars, form
letters or postal cards, business cards, stationary, booklets, schedules,
broadcasting and other sales material of any kind) concerning Company
and/or the offering of Investment Products and Services until the material
has been approved in writing by a registered principal in the Company's
Compliance Department.
General Agent also agrees to obtain from his/her registered
representatives, at the time of development, copies of all correspondence
pertaining to the solicitations and/or sale of any Investment Products and
Services or to any other aspect of their Investment Products and Services
business, and to forward the correspondence to Home Office to allow for the
review and endorsement of correspondence in writing, on an official record
of Company, by a registered principal in the Company's Compliance
Department. General Agent shall periodically inspect Registered
Representatives' materials, sales literature and correspondence to ensure
compliance with Company requirements.
10. COMPENSATION: General Agent, subject to the provisions of this Agreement,
will be allowed expense reimbursement or allowances and overriding
commissions on payments collected on all Investment Product sales solicited
by Registered Representatives assigned to General Agent and effected
through Agency at rates established and published by Company, as may be
amended from time to time.
<PAGE>
11. COMMISSIONS: Company will pay commissions to General Agent, after
concession payments are made to Company by an issuer or sponsor, in
connection with sales of Investment Products and Services effected through
General Agent's personal solicitation. Such commissions will be paid on
the same basis and terms as specified in Company's Registered
Representative Agreement, which is incorporated herein by reference and as
may be amended from time to time.
12. TERMINATION WITHOUT CAUSE: General Agent and Company may terminate this
Agreement at any time without cause.
13. RELATIONSHIP OF PARTIES: Nothing contained in this Agreement is to be
construed to create the relationship of employer and employee between
Company and General Agent. General Agent, however, is to always comply
with all of the applicable laws, rules and regulations of the SEC, NASD,
federal and state authorities as well as Company's rules, regulations and
procedures concerning methods of conducting Investment Products and
Services business, as may be amended from time to time.
14. EFFECTIVENESS OF CONTRACT: This Agreement between General Agent and
Company is not binding until Agreement has been duly executed by both
parties. This Agreement supersedes all previous agreements, whether oral
or written. This Agreement shall not cancel or affect any right, claim or
interest General Agent may have concerning commissions now due or hereafter
to become due under preceding agreements between General Agent and Company.
Neither shall Agreement cancel, terminate or affect in any way any lien,
right or interest which Company may have, or may hereafter acquire, with
respect to commissions or equities to General Agent under any other
agreement with Company, any provision of any such agreement which, by its
terms or by implications, continues beyond termination of such agreement.
IN WITNESS THEREOF, this Agreement has been executed by the undersigned on the
dates indicated below.
Allmerica Investments, Inc.
By: By:
---------------------------------- ----------------------------------
General Agent Signature Home Office Principal
Date: Date:
-------------------------------- --------------------------------
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE 440 Lincoln Street
INSURANCE COMPANY Worcester, MA 01653 CAREER AGENT AGREEMENT
- --------------------------------------------------------------------------------
First Allmerica Financial Life Insurance Company (the "Company") does hereby
appoint_____________________________ of _________________________________
("Career Agent") its Agent to solicit applications for insurance and annuities
and to submit such applications through the office of
__________________________________________ ("General Agent"), this appointment
to be effective on _____________________________.
Career Agent accepts this appointment, subject to the terms and provisions set
forth in this Agreement.
WITNESSETH:
Career Agent will solicit applications for coverages offered by the Company and
for which he/she is duly licensed. Career Agent is authorized to collect and
pay over to General Agent premiums on coverages solicited by him/her. Career
Agent shall not delegate any authority granted under this Agreement and shall
not appoint any solicitors or subagents to act on his/her behalf.
TERRITORY AND CLASSES OF BUSINESS
Territory SECTION 1. The district within which Career Agent may
solicit insurance and annuity applications for the Company
is the district assigned to General Agent.
Permissible SECTION 2. Career Agent agrees that in the sale and service
Activity of insurance and annuities he/she will act only on behalf of
the Company and such of its affiliates as he/she is
authorized to represent; and he/she will not engage in any
other activity for remuneration or profit which requires
his/her personal services without first obtaining the
consent of the Company. If the Company makes arrangements
with another business entity to make any of its products
available to Career Agents, this will constitute consent to
Career Agent to enter into an arrangement with such entity
to sell and service such products on its behalf. If, with
the consent of the Company, Career Agent engages in any
personal service activities for remuneration or profit,
he/she will, upon request of the Company, disclose the
amount of time expended and the amount of income derived
from such other activities.
STATUS, DUTIES AND AUTHORITY
Relationship SECTION 3. Nothing in this Agreement will be construed to
of Parties create the relationship of employer and employee between the
Company and Career Agent. Within the scope of his/her
authority, Career Agent will be free to exercise his/her
independent judgment as to the time, place and manner of
solicitation and servicing of business underwritten by the
Company. However, he/she will have no authority to act in a
manner which does not conform to applicable statutes,
ordinances or governmental regulations pertaining to the
conduct of the business or to reasonable rules adopted, from
time to time, by the Company.
-1-
<PAGE>
Limitations SECTION 4. Career Agent will have no authority to accept
on Authority risks of any kind; to make, alter or discharge contracts of
insurance or annuities; to waive forfeitures or exclusions;
to fix any premium for hazardous or substandard risks; to
alter or amend any papers received by him/her from the
Company; to deliver any policy of insurance or any document,
agreement or endorsement changing the amount of insurance
coverage if Career Agent knows or has reason to believe that
the insured is uninsurable; to collect any premium after the
expiration of the policy grace period except in connection
with a policy reinstatement; to accept payment of any
premium unless the premium meets the minimum premium
requirement for the policy established by the Company; or to
contract any debt rendering or purporting to render the
Company liable therefor, without express authority in
writing from an authorized officer of the Company.
Implied SECTION 5. Career Agent will have no power or authority
Authority other than as expressly provided in this Agreement and no
other power or authority shall be implied from the grant or
denial of power specifically mentioned in this Agreement.
Duty of SECTION 6. Career Agent agrees that he/she will not
Compliance; intentionally violate any applicable state or Federal law,
Negative ruling or regulation pertaining to the insurance business or
Obligations any rule or regulation of the Company. Career Agent will
not knowingly engage in any activity which is detrimental to
the best interests of the Company or any of its affiliates.
Neither while this Career Agent Agreement is in force nor
for a period of two years following the termination of this
Agreement will Career Agent directly or indirectly interfere
with the relationship of the Company or any of its
affiliates with any agent or broker.
Policy While this Agreement remains in force, Career Agent agrees
Termination that he/she will not, directly or indirectly, replace or
and Replacement induce or attempt to induce any policyholder to terminate or
replace any policy issued by the Company or any of its
affiliates except when permitted by the rules of the issuing
insurer. For a period of two years following termination of
this Agreement, Career Agent agrees that he/she will not,
directly or indirectly, replace or induce or attempt to
induce any policyholder serviced through the office of the
General Agent to terminate or replace any policy issued by
the Company or any of its affiliates.
SOLICITATION OF INSURANCE AND ANNUITIES
Submission of SECTION 7. Career Agent will submit through General Agent
Applications; all Company policy applications solicited by him/her,
Delivery of whether or not it appears the proposed insured is an
Policies; acceptable risk under the rules of the Company. Career
Rejected Agent will deliver, or cause to be delivered, in accordance
Business with the rules of the Company all policies issued on
applications submitted by him/her and will return to General
Agent any policy which is declined by the applicant or which
cannot be delivered within the time permitted by the
Company's rules. If an application is declined by the
Company or is accepted at a rate higher than standard which
is not acceptable to the applicant, with the Company's
permission Career Agent may place the coverage with another
insurance company.
-2-
<PAGE>
Limitation on SECTION 8. Career Agent will not solicit any insurance or
Solicitation annuities in any jurisdiction in which he/she is not
licensed nor will he/she solicit by mail or otherwise any
insurance or annuities outside the district assigned to
General Agent without first receiving consent of the Company
and ascertaining that he/she is properly licensed to solicit
such insurance or annuities.
Advertising SECTION 9. The Company, through General Agent, will make
Material, Rate available to Career Agent a supply of canvassing and
Books, Forms, advertising materials, stationery, books, records and forms
etc. necessary or suitable to properly solicit insurance and
annuities. Career Agent will not print, publish or
distribute any advertisement, circular, statement or
document relating to the business of the Company or any of
its affiliates or use any title or language descriptive of
his/her status without the prior approval of the Company.
Policyowner Solely to assist Career Agent in rendering service to
Service Aids policyowners, Career Agent may use whatever aids, such as
data cards, computer printouts, etc. as may be available.
All such aids, whether furnished by the Company or otherwise
- including any copies thereof - shall be the property of
the Company.
Illustrations Career Agent will not furnish any prospective insured or
and Proposals policyowner an illustration of the financial or other
aspects of a policy or a proposal for a policy of the
Company unless the same has been either furnished by the
Company or prepared from computer software or other material
furnished or approved by the Company. Any illustration or
proposal delivered by Career Agent will conform to standards
of completeness and accuracy established by the Company. If
the proposal or illustration was not furnished by the
Company, Career Agent will retain in his/her records for
availability to the Company a copy thereof or the means to
duplicate the same. Any computer software or materials
furnished by the Company will be and remain its property.
Return of Upon termination of this Agreement, Career Agent will return
Materials, etc. to the Company all manuals, computer software, policyholder
data cards, policyholder files, stationery and business
cards and other material which, by the terms of this Section
or otherwise, is the property of the Company.
Accounting for SECTION 10. In accordance with the rules of the Company,
Funds Collected Career Agent will account for and remit immediately through
General Agent all funds received or collected by him/her for
or on behalf of the Company without deduction for any
commissions, fees, or other claim he/she may have against
the Company and will make such reports and file such
substantiating documents and records as the Company or
General Agent may require.
Liability for SECTION 11. If the Company pays Career Agent commissions or
Refund of fees in advance of receipt of the premium on which the
Commissions payment is based, the amount by which the payment to Career
and Fees Agent exceeds, at any time, the amount attributable to the
premiums paid will constitute a personal debt of Career
Agent payable on demand. If the Company returns premiums on
a policy for any reason whatsoever (other than as a part of
claim settlement) or rescinds or cancels a policy for any
reason whatsoever or if a policyholder exercises a right to
surrender
-3-
<PAGE>
the policy for return of all premiums paid, Career Agent
will pay on demand the amount of any commissions received on
the premiums returned.
Notwithstanding the foregoing, after this Agreement has been
in force for 10 complete years and prior to the date the
Agreement is terminated for cause, unearned commissions paid
in advance on policies the premiums for which are being paid
under the Company's Monthly Automatic Premium (MAP) Plan or
other annualized commission arrangement that are repayable
because of a lapse or surrender of the policy may only be
recovered by set-off from first year and renewal commissions
and fees otherwise payable by the Company or its affiliates
to Career Agents.
COMPENSATION
Basis of SECTION 12. Career Agent's compensation will be a
Compensation combination of commissions and fees payable on premiums for
individual and group life, health and annuity policies
placed with the Company. The amount of commissions and fees
payable for individual insurance and annuity policies will
be determined by the further provisions of this Agreement
and the published rules of the Company. The amount of
commissions and fees payable on group life and health
insurance and group annuity policies solicited by Career
Agent will be specified in separate agreements related
solely to that class of business.
Commissions payable on premiums on a policy resulting from
conversion, exchange, replacement or the exercise of an
option to purchase additional insurance will be determined
by Company rules in effect at the time of the conversion,
exchange, replacement or exercise of the option.
Published Rules The Company may, by published rule, limit the amount of
Affecting premium on which commissions or fees are payable and limit,
Compensation defer, or exclude commissions or fees because of the nature
of the transaction, discretionary nature of the premium or
other circumstances.
Payor All compensation due Career Agent under this Agreement will
be paid by First Allmerica Financial Life Insurance Company
(First Allmerica), an affiliate of the Company, as the
common paymaster.
Time of Payment SECTION 13. A premium will not be considered paid until it
of Commissions has been received by the Company at its Principal Office.
On premiums paid or allocated prior to the 15th day of the
month, commissions and fees will be paid on the last
business day of the month. On premiums paid or allocated
subsequent to the 15th day of the month, commissions and
fees will be paid on the 15th day of the following month, or
on the last business day preceding such pay date, if such
pay date is not a business day.
-4-
<PAGE>
TERMINATION AND ITS EFFECT ON COMMISSIONS AND FEES
Termination SECTION 14. This Agreement may be terminated for cause and
for Cause without notice if Career Agent:
(a) misappropriates any funds belonging to or received on
behalf of the Company or any of its affiliates; or
(b) withholds any funds or other property belonging to the
Company or any of its affiliates after the same should
have been reported and transmitted to the Company or
its affiliate or after a demand has been made for the
same; or
(c) commits any willful or dishonest act which injures the
Company or any of its affiliates; or
(d) commits any intentional act which violates any
applicable Fair Trade Practices Act and thereby injures
the Company or any of its affiliates; or
(e) intentionally performs any act prohibited by law or
intentionally omits any act required by law with the
result that the Company or any of its affiliates is
subject to disciplinary action; or
(f) willfully violates any of the provisions of this
Agreement.
Forfeiture of SECTION 15. No commissions or fees will be paid following
Commissions termination of this Agreement, if it is terminated for
and Fees cause, nor will commissions or fees continue to be paid
after termination of this Agreement if Career Agent breaches
any of its terms or conditions by the commission of an act
prohibited by its terms.
Termination SECTION 16. Notwithstanding the foregoing, and whether or
Without Cause not there is a breach of this Agreement, either party may
terminate this Agreement during its first year by giving 10
days' notice in writing to the other party of the intention
to do so and thereafter by giving 30 days' notice in writing
to the other party of the intention to do so.
Effect of Certain SECTION 17. If this Agreement terminates without breach of
Terminations any of its provisions by Career Agent:
(a) by reason of the death of Career Agent; or
(b) by reason of the permanent Total Disability of Career
Agent; or
(c) by reason of retirement of Career Agent under the
Career Agents' Retirement Plan established and
maintained by the Company; or
(d) by reason of employment of Career Agent by the Company
or any of its affiliates in some capacity other than as
a Career Agent;
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<PAGE>
commissions will continue to be paid to Career Agent only as
provided in the Exhibits attached hereto.
After termination of this Agreement by reason of the
permanent Total Disability of Career Agent, if Career Agent
recovers from said disability, this Agreement may be
reinstated. If Career Agent recovers from disability and
this Agreement is not reinstated, commissions will be
payable on premiums paid thereafter only if they would have
been payable if Section 18 had applied on termination.
Effect of Other SECTION 18. If this Agreement terminates without breach of
Terminations any of its provisions by Career Agent for any reason other
Without Cause than asset forth in Section 17, commissions will continue to
be paid to Career Agent only as provided in the Exhibits
attached hereto.
GENERAL PROVISIONS
Right of SECTION 19. The Company, for its own benefit, for the
Set-Off benefit of its affiliates and for the benefit of the General
Agent, will have a lien on any commissions and fees payable
under this Agreement, whether or not the commissions are now
due or hereafter become due, and may apply any such monies
to the satisfaction of indebtedness to any of said persons
to the extent permitted by law.
Non-waiver SECTION 20. Waiver of any breach of any provision of this
of Breach Agreement will not be construed as a waiver of the provision
or of the right of the Company to enforce said provision
thereafter.
Assignability SECTION 21. This Agreement is not transferable. Without
the consent of the Company, no rights or interest in or to
commissions or fees will be subject to assignment, other
than a collateral assignment of commissions and fees, and
any attempted absolute assignment, sale or transfer of this
Agreement or of any commissions or fees without the written
consent of the Company will immediately make this Agreement
void and be a release to the Company in full of any and all
of its obligations hereunder.
Errors and SECTION 22. Career Agent agrees to maintain errors and
Omissions omissions insurance coverage meeting the Company's minimum
Coverage coverage requirements and to furnish the Company proof of
such coverage upon request. If any lawsuit is brought
against the Company as a result of any alleged action, error
or omission of Career Agent and if (1) Career Agent has
maintained errors and omissions coverage which complies with
the Company's minimum requirements, and (2) the alleged
action, error or omission of Career Agent was not committed
intentionally or with dishonest, fraudulent or criminal
intent, Career Agent agrees to reimburse the Company and its
affiliates for all costs of the lawsuit, including
attorney's fees, and all damages resulting therefrom up to
the Company's Career Agent liability limit. The minimum
coverage requirements and Career Agent liability limit will
be set forth in a bulletin or announcement published by the
Company and are subject to change at any time. Distribution
of the bulletin or announcement in the usual manner will
constitute notice to Career Agent. If any lawsuit is
brought against the Company as a result of any alleged
Career Agent action, error or omission and if Career Agent
(1) did not maintain at least the
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<PAGE>
required minimum errors and omissions coverage, or (2) did
maintain such coverage but Career Agent's action, error or
omission was committed intentionally or with dishonest,
fraudulent or criminal intent, Career Agent agrees to
reimburse the Company and its affiliates for all costs of
the lawsuit, including attorney's fees, and all damages
resulting therefrom unless the court determines the suit to
be groundless and without merit.
Reservation of SECTION 23. The Company reserves the right at any time to
Right to Change change the terms and conditions of this Agreement,
including but not limited to, the rates of commissions and
fees, or to discontinue the payment of any commissions and
fees described in the Exhibits attached hereto.
Effective Date SECTION 24. Any change will become effective on the date
of Change specified in a notice or, if later, 30 days after the notice
is given to Career Agent. However, the requirement to give
advance notice shall not apply if the change becomes
necessary or expedient by reason of legislation or the
requirements of any governmental body and, in the opinion of
the Company, it is not reasonably possible to meet the 30
day requirement. Changes will not be retroactive and will
apply only to units of coverage solicited on or after the
effective date of the change. Notice of any change may be
given by a Company bulletin or announcement and distribution
of the bulletin or announcement in the usual manner will
constitute notice to Career Agent.
Arbitration SECTION 25. By his/her execution of this Agreement, Career
Agent agrees to settle any dispute, claim or controversy
arising between Career Agent and the Company by arbitration
pursuant to the then current rules of the American
Arbitration Association. Judgment upon any award rendered
in the arbitration may be entered in any court of competent
jurisdiction.
All applicable disputes shall be referred to three
arbitrators, one to be chosen by each party, and the third
by the two so chosen. If either party refuses or neglects
to appoint an arbitrator within thirty days after the
receipt of written notice from the other party requesting it
to do so, the requesting party may nominate two arbitrators
who shall choose the third. In the event the two
arbitrators do not agree on the selection of the third
arbitrator within thirty days after both arbitrators have
been named, then the third arbitrator shall be selected
pursuant to the then current rules of the American
Arbitration Association. The decision of the majority of
the arbitrators shall be final and binding upon all parties.
The expenses of the arbitrators and of the arbitration shall
be equally divided between all parties. Arbitration is the
sole remedy for disputes arising under this Career Agent
Agreement.
General Agent SECTION 26. General Agent means the General Agent
identified on the face page or any other General Agent in
charge from time to time of a general agency office to which
Career Agent is assigned.
Definitions SECTION 27. As used in this Agreement, including the
Exhibits attached hereto:
"Replacement" means a transaction in which a new life or
disability insurance policy or a new annuity contract is to
be purchased, and by reason of the transaction, all or a
portion of
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<PAGE>
any existing life or disability insurance policy or any
existing annuity contract has been or is to be lapsed,
forfeited, reduced in face amount, surrendered, assigned to
the replacing insurer, placed on a reduced paid-up basis or
under another nonforfeiture provision or terminated, or
subjected to borrowing or withdrawals, whether in a single
sum or under a schedule of borrowing or withdrawals over a
period of time.
"Total Disability" means the inability of the Career Agent,
because of injury or sickness, to perform the duties of any
occupation for which he/she is reasonably fitted by
training, education or experience. During the first 24
months of total disability, Career Agent will be considered
to have met the foregoing requirement if he/she is unable to
perform the duties of his/her regular occupation and is not
performing the duties of any other occupation. Total
disability will be considered permanent after it has existed
6 months and thereafter while it continues.
"Flexible premium policy" means an individual insurance or
annuity policy under which the policyowner may unilaterally
vary the amount and timing of premium payments.
"Unit of Coverage" means all benefits of a policy which have
the same date of issue, except as modified by Company
published rules. Usually all the benefits specified in the
policy Schedule of Benefits and in each Supplementary
Schedule of Benefits constitute a unit of coverage.
"Policy Year," as to each unit of coverage, means a period
of 1 year commencing on its date of issue and each
anniversary thereof.
"Monthaversary," as to each unit of coverage, means its date
of issue and the corresponding day of each month thereafter.
"Basic premium," for each unit of coverage, means the sum of
the basic or target premiums for each benefit in the unit,
as determined from the Company's Rate Manual.
"Excess premium" means premium paid in any policy year in
excess of basic or target premium.
"Agreement" means this entire agreement, including all
Exhibits and commission and fee schedules attached thereto.
Other Exhibits issued hereafter will become a part of this
Agreement on their effective date.
Notice SECTION 28. Whenever this Agreement requires a notice to be
given, the requirement will be considered to have been met,
in the case of notice to the Company, if delivered or mailed
postage prepaid to General Agent at the agency office or to
a Vice President in the Company's Allmerica Financial
Services Operation and, in the case of notice to Career
Agent, if left at the usual place for him/her to pick up
mail within the agency office, or by mailing postage
prepaid, to Career Agent's last home address known to the
Company or to such other address as may be designated by
Career Agent.
-8-
<PAGE>
Captions SECTION 29. Captions are used for informational purposes
only and no caption shall be construed to affect the
substance of any provision of this Agreement.
Effectiveness; SECTION 30. This Agreement contains the entire contract
Entire Contract; between the parties. Upon execution it will replace all
Prior Agreements previous agreements between Career Agent and the Company
relating to the solicitation of insurance and annuity
policies except as the previous agreement relates to the
payment of commissions and fees on policies solicited prior
to the effective date of this Agreement. For purposes of
determining vestings on termination, the date of the
earliest prior Career Agent Agreement executed by Career
Agent during his current period of continuous service with
the Company and its life insurance affiliate, Allmerica
Financial Life Insurance and Annuity Company, will be
considered the date of this Agreement. It is hereby
understood and agreed that any other agreement or
representation, commitment, promise or statement of any
nature, whether oral or written, relating to or purporting
to relate to the relationship of the parties is hereby
rendered null and void.
IT IS UNDERSTOOD THAT THIS IS AN "AT WILL" RELATIONSHIP WHICH MAY BE TERMINATED
BY EITHER PARTY WITHOUT CAUSE OR REASON AS PROVIDED FOR IN SECTION 16.
IN WITNESS WHEREOF, the parties have executed this Agreement in triplicate to
take effect on its effective date.
First Allmerica Financial Life Insurance Company
By:
--------------------------------------------------
Vice President
--------------------------------------------------
Career Agent
Approved:
--------------------------------------------------
General Agent
-9-
<PAGE>
Commission Schedule for Variable Annuity Policies:
--------------------------------------------------
Writing Agent 5% of all initial and subsequent payment amounts
General Agent 2.0% of all initial and subsequent payment amounts
Middle Management Overrides will be paid to fully-licensed and NASD
registered Middle Management in an amount of 10% of
commissions earned on policies written by career agents
in their first two contract years or trainee agents in
their first five contract years.
<PAGE>
Registered
[LOGO] ALLMERICA Allmerica 440 Lincoln Street Representative's
FINANCIAL(R) Investments, Inc. Worcester, MA 01653 Agreement
- --------------------------------------------------------------------------------
Allmerica Investments, Inc. ("Company") hereby appoints ________________________
("Registered Representative") for the purpose of selling and servicing variable
contracts offered by Allmerica Financial Life Insurance and Annuity Company,
mutual funds, limited partnerships and other investment products and services
(collectively "Investment Products and Services") offered and distributed by
Company. Registered Representative will submit Investment Products and Services
business through the office of _________________________________________________
("General Agent") or successor at ______________________________________________
("Agency") or successor. This appointment is effective as of the date accepted
by Registered Representative and acknowledged by General Agent.
1. DUTY OF COMPLIANCE/SUPERVISION: Registered Representative is assigned to
the above named Agency and General Agent for the purposes of training,
supervision and recordkeeping. Registered Representative agrees to comply
with all of the applicable laws, rules and regulations of the Securities
and Exchange Commission (SEC), National Association of Securities Dealers,
Inc. (NASD) and all other applicable federal and state insurance and
securities laws and regulations.
Registered Representative agrees to comply with all procedures and
requirements outlined in Company manuals, memoranda and other publications
as may be amended from time-to-time.
Registered Representative agrees to abide by Company's Compliance Program
including his/her mandatory attendance, on at least an annual basis, at
Agency's Compliance Meeting(s) and/or Interview(s). Failure to attend
Compliance Meeting and/or Interview is grounds for immediate termination
for cause.
2. LIMITATIONS OF AUTHORITY: Registered Representative may not delegate any
authority granted under this Agreement and shall not appoint any
solicitors or subagents to act on his/her behalf. Registered
Representative may not sign and/or submit any customer applications or
orders on behalf of any individual who is not fully qualified as a
Registered Representative of Company.
Registered Representative will only offer for sale those Investment
Products and Services for which he/she is properly NASD registered,
securities-licensed through Company and, if required by state law, state
insurance-licensed through Allmerica Financial Life Insurance and Annuity
Company, and for which Company has fully executed sales agreements with
the sponsor or issuer. To participate in the sale of Investment Products
and Services for which no agreement has been executed is to "sell-away"
from Company and is grounds for immediate termination of this Agreement
upon written notice to Registered Representative.
Registered Representative will maintain his/her NASD registration solely
through Company and will provide full disclosure to Company of his/her
background. Registered Representative agrees to notify Company immediately
of any matter requiring disclosure on the NASD Form U-4, Uniform
Application for Securities Industry Registration, including but not
limited to any income generating business activity, other than personal,
passive investment, which is outside the scope of Registered
Representative's Agreement with Company.
Customer accounts or applications may only be accepted on behalf of
Company based on approval by a Home Office principal. Registered
Representative has no authority to accept any risk on Company's behalf, to
incur any indebtedness or liability on behalf of Company and understands
and agrees to Company's prohibition against assuming discretionary
authority over client investments.
3. ASSIGNABILITY: No assignment, sale or transfer of this Agreement or any of
the rights, claims or interests under it may be made by Registered
Representative without the prior written consent of Company. Such
assignment, sale or transfer by Registered Representative without written
consent of Company will immediately make this Agreement void, and will be
a release in full to Company of any and all of its obligations hereunder.
4. SUBMISSION OF APPLICATIONS/ACCOUNTING FOR FUNDS COLLECTED: All
applications and/or payments collected by Registered Representative on
behalf of Company or any issuer or sponsor are to be delivered immediately
to Registered Representative's Agency no later than noon of the business
day following receipt by Registered Representative.
Investment Product and Services purchase checks are to be client personal
checks, cashier's checks or money orders made payable to either the
Company, appropriate issuer, sponsor or other designated agent. Such
checks may not be made payable to Registered Representative, General Agent
or any personal or Agency account.
5. SUITABILITY/RESPONSIBILITY TO EXPLAIN INVESTMENT PRODUCTS: Registered
Representative agrees to make Investment Product and Services
recommendations to clients only after obtaining sufficient information
regarding a client's financial background, goals and objectives so as to
make a reasonable determination that the proposed Investment Product
and/or Service is suitable based on such background, goals and
objectives. Registered Representative agrees to fully explain the risks,
terms and conditions of the purchase of an Investment Product or Service
and that he/she will not make untrue statements, interpretations,
misrepresentations nor omit or evade material facts concerning such
Investment Product or Service.
6. DISTRIBUTION AND USE OF ADVERTISING MATERIAL, CORRESPONDENCE: Registered
Representative agrees not to directly or indirectly use or distribute
any advertising or sales literature material (including but not limited
to prospectuses, illustrations, circulars, form letters or postal cards,
business cards, stationery, booklets, schedules, broadcasting and other
sales material of any kind) concerning Company and/or the offering of
Investment Products and Services of any kind until the material has been
approved by Company in writing.
Registered Representative also agrees to provide to General Agent copies
of all correspondence pertaining to the solicitation of execution of any
Investment Products and Services transaction, and to any other aspect of
his/her Investment Products and Services business in order to allow for
the review and endorsement of the correspondence in writing, on an
official internal record of Company by a registered principal located at
Home Office.
SMAE-050NS (11/95)
<PAGE>
7. RECORDKEEPING: Registered Representative agrees, in accordance with
Company guidelines and requirements, to cooperate in the maintenance of
complete customer account files and other records at the assigned Agency
which pertain to the conduct of Investment Products and Services business
through Company. Customer account files of Registered Representative are
to be considered the property of Company and are not to be taken from the
immediate Agency premises for any purpose.
8. COMMISSIONS: Commissions for the sale of Investment Products and Services
offered or effected by Registered Representative will be paid after
compensation for those sales is paid to Company. Commissions for
Investment Products and Services will be paid at the rates established and
published by Company.
Commissions may be changed by Company at any time without advance notice.
However, this policy shall not be applied retroactively to divest any
Registered Representative of specific commission amounts already due
him/her.
Registered Representative agrees not to share commissions with
non-qualified representatives or with clients.
Under certain circumstances, i.e., termination of agents subject to
variable contract commission vesting, retirement or death, Registered
Representative or his/her estate may be entitled to receive continuing
commissions from Company for transactions conducted prior to the cessation
of his/her service with Company. Continuing commissions will be paid based
on vesting schedules established and published by Company, as may be
amended from time-to-time.
If Company or any issuer or sponsor returns or waives payments on any
application or order, commissions will not be due or payable on the
payments. Registered Representative shall repay to Company on demand any
commissions already received by Registered Representative with respect to
such returned or waived payments.
Where cancellation of any Investment Products and Services order results
in expense or loss to Company, Registered Representative is liable for
reimbursement to Company of the expense or loss including but not limited
to any sales charge levied by an issuer and any decline in the price of an
Investment Product, as of the time of cancellation.
In the event Registered Representative becomes party to a Career Builder
Supplemental Agreement (Supplemental Agreement) with First Allmerica
Financial Life Insurance Company ("First Allmerica"), and its affiliate,
Allmerica Financial Life Insurance and Annuity Company, commissions
payable under this Registered Representative's Agreement will be credited
to the Reserve Account described in such Supplemental Agreement during the
period such Supplemental Agreement is in effect and will be paid to
Registered Representative only as provided therein.
Company reserves the right to pay commissions to the Registered
Representative for Investment Products and Services sold or performed by
utilizing one check issued by Allmerica Financial or one of its
wholly-owned subsidiaries. Such check may also contain compensation for
traditional life, health and disability policies as well as other products
and services sold by Registered Representatives through Allmerica
Financial.
9. RIGHT OF OFF-SET: Company, for its own benefit and/or the benefit of its
affiliates, will have a lien on any commissions and other compensation
payable under this Agreement, and may deduct any monies owed Company or
affiliates from such commissions or other compensation to the extent
permitted by law.
10. TERMINATION FOR CAUSE: If Registered Representative withholds or
misappropriates monies, securities, certificates, payments, receipts,
"sells-away," commits any willful or dishonest act which, in the sole
discretion of Company, is detrimental to Company, or fails to comply with
any of the conditions, duties or obligations of this Agreement, this
Agreement will immediately terminate without notice.
11. TERMINATIONS WITHOUT CAUSE: Registered Representative or company may
terminate this Agreement without cause during the first twelve (12) months
following the date this Agreement is executed by providing ten (10) days'
notice in writing to the other party of the intention to terminate. After
the first twelve (12) months, Registered Representative or Company may
terminate this Agreement without cause upon thirty (30) days' notice in
writing of the intention to terminate.
In the event Registered Representative terminates his/her Career Agent
Agreement with First Allmerica Financial Life Insurance Company, this
Agreement will be terminated upon written notice as described herein.
12. RELATIONSHIP OF PARTIES: Nothing contained in this Agreement is to be
construed to create the relationship of employer and employee between
Company and Registered Representative or between Company's General Agent
and Registered Representative. Registered Representative shall exercise
his/her own judgment concerning the individual(s) to whom he/she will
solicit Investment Products and Services as well as the time, place and
manner of the solicitations. Registered Representative, however, shall
comply with all applicable laws, rules and regulations of the SEC, NASD,
federal and state authorities as well as Company's rules, regulations
and procedures concerning the conduct of Investment Products and
Services business, as may be amended from time-to-time.
13. EFFECTIVENESS OF CONTRACT: This Agreement constitutes the entire contract
between Registered Representative and Company.
Registered Representative accepts the appointment, subject to all of the
conditions and provisions set forth in this Agreement. This Agreement
supersedes all previous agreements, whether oral or written between the
parties, and no modification, except to attached Compensation Schedules
(if any), will be valid unless made in writing and signed by both parties.
IN WITNESS WHEREOF, this Agreement has been executed by the undersigned on the
____________________________________ day of
_________________________ ,19 _______. Allmerica Investments, Inc.
By__________________________
__________________________________ ____________________________
Registered Representative General Agent
<PAGE>
DEFINITIONS
1. "Accumulation Unit" means a measure of the value of a Sub-Account before
annuity payments begin.
2. "Annuity Date" means the date on which annuity payments are to begin. If the
Owner has not elected an Optional Annuity Date, such payments will begin on the
Normal Annuity Date specified on page 3.
3. "Annuity Unit" means a measure of the value of annuity payments under a
Variable Annuity Option of the policy.
4. "Company" means First Allmerica Financial Life Insurance Company.
5. "Fund" means any registered investment company or any portfolio series of
such a company.
6. "General Account" means all assets of the Company which are not allocated to
the Separate Account.
7. "Policy Year" means a period of one year computed from the Date of Issue, or
from an anniversary of the Date of Issue.
8. "Principal Office" means the Company's office located at 440 Lincoln Street,
Worcester, Massachusetts, 01653 (1-800-533-7881).
9. "Separate Account" means the Company's separate investment account known as
Separate Account VA-K. The investment performance of the assets of the Separate
Account is determined separately from the other assets of the Company.
10. "Sub-Account" means each subdivision of Separate Account VA-K. The assets of
each Sub-Account are invested exclusively in shares of a corresponding Fund.
11. "Surrender Value" means the Accumulated Value of the policy (described on
page 7) less any applicable surrender charges (as specified on page 10), and
policy fee (as specified on page 8).
12. "Valuation Date" means the time as of which the values of all units of
variable annuity policies are determined. Valuation Dates occur at the close of
business on each day on which the New York Stock Exchange is open for trading.
13. "Valuation Period" means the interval between two consecutive Valuation
Dates.
14. "Written Request" or "Written Notice" means a request or notice in writing
satisfactory to the Company and filed at its Principal Office.
Form A3018.44-94 (5)
<PAGE>
OWNERSHIP AND BENEFICIARY
1. Owner The Annuitant must be the Owner of this policy unless the Owner is not
an individual. Prior to the Annuity Date the Owner may vote at meetings of
policy owners as provided in the Voting Rights provision. The Owner may exercise
all the other rights and options granted in this policy or by the Company,
subject to the consent of any irrevocable Beneficiary. The consent of the
Annuitant, if the Annuitant is not the Owner, or any revocable Beneficiary is
not required for the exercise of any ownership rights. The Owner may be changed
subject to the requirement that the Owner and Annuitant must be the same where
the Owner is an individual.
2. Assignment Only the Owner may assign this policy. An absolute assignment will
transfer ownership to the assignee. The policy may also be collaterally assigned
as security. The limitations on ownership rights while the collateral assignment
is in force are set forth in the assignment. An assignment will take place only
when the Company has received Written Notice and recorded the change at the
Principal Office. The Company will not be deemed to know of any assignment of
this policy until it has received Written Notice. When recorded, the assignment
will take effect as of the date the Written Notice was signed. Any rights
created by the change will be subject to any payment made or action taken by the
Company before the change was recorded.
The Company will not be responsible for the validity of any assignment or the
extent of any assignee's interest. On the Annuity Date the Company may pay to
the assignee that portion of the Surrender Value of this policy which is due.
Such payment will be made in one sum. Any remaining Surrender Value will be paid
in one sum to the Owner. Such payment will discharge all liability under this
policy. The interests of the Annuitant and the Beneficiary will be subject to
any assignment.
3. Beneficiary The Beneficiary is as named in the application unless changed in
accord with the terms of this policy. All death benefits provided by this policy
will be divided equally among the surviving Beneficiaries, unless the Owner
directs otherwise.
Unless the Owner directs otherwise, the interest of a Beneficiary who dies
before the Annuitant will pass to any surviving Beneficiaries in proportion to
their share in the proceeds. If there is no surviving Beneficiary, the deceased
Beneficiary's interest will pass to the Owner.
The Owner may declare the choice of any Beneficiary to be revocable or
irrevocable. A revocable Beneficiary may be changed at a later time. An
irrevocable Beneficiary must consent in writing to any change. Unless otherwise
specifically indicated, the Beneficiary will be considered to be revocable.
4. Change of Beneficiary The Owner may change any Beneficiary, except an
irrevocable one, any time while this policy is in force. Such change may be made
only by Written Request, and will be subject to the rights of any assignee of
record. When the Company receives the Request, the change will take place as of
the date it was signed, even if the Annuitant is not living on the date the
Company receives the Request. Any rights created by the change will be subject
to any payment made or action taken by the Company before the change was
recorded.
5. Protection of Proceeds To the extent allowed by law, the proceeds of this
policy and any payments made under it will be exempt from attachment by the
claims of creditors of the payee. Neither the Annuitant nor the Beneficiary can
assign, transfer, commute, anticipate or encumber the proceeds or payments
unless given that right by the Owner.
Form A3018.44-94 (6)
<PAGE>
ELECTIVE PAYMENTS
1. Elective Payments Prior to the Annuity Date and while this policy is in
force, the Owner may make additional payments under this policy. Each additional
payment must be at least $50. In no event may the sum of all elective payments
exceed the maximum specified on page 3.
Upon Written Request, the maximum specified on page 3 will be increased to an
amount acceptable to the Company under its then current rules.
2. Net Payments Each Net Payment is equal to the gross elective payment less the
amount of any premium tax, if applicable, which must be paid by the Company as a
result of the payment being credited to the policy.
3. Net Payment Allocations Net Payments will be allocated on a percentage basis
among the General Account and/or the Sub-Accounts as specified by the Owner in
the policy application. If a Net Payment is to be allocated between two or more
accounts, not less than $10 may be allocated to any account. If the percentage
allocation elected by the Owner would result in an allocation of less than $10
to any one of such accounts, the Company reserves the right to apply such amount
to one of the other accounts in accordance with Company rules and procedures.
The Owner may change the allocation of future Net Payments at any time on
Written Request.
POLICY VALUES
1. Accumulation Unit Values The dollar value of an Accumulation Unit under a
Sub-Account as of any Valuation Date is determined by multiplying the dollar
value of an Accumulation Unit as of the immediately preceding Valuation Date by
the Net Investment Factor for the Valuation Period at the end of which the
Accumulation Unit value is being determined.
Accumulation Units are credited to the policy for benefits funded by a
Sub-Account. The number of Accumulation Units so credited is equal to the
specified portion of the Net Payment divided by the dollar value of an
applicable Accumulation Unit as of the Valuation Date such payment is applied.
On any date prior to the Annuity Date the Accumulated Value of this policy is
the sum of the value of all Accumulation Units then credited to the Separate
Account plus the value of any General Account accumulations.
2. Annuity Unit Values The value of an Annuity Unit under a Sub-Account on any
Valuation Date is equal to the value of such Unit on the immediately preceding
Valuation Date multiplied by the product of:
(a) a discount factor equivalent to an assumed rate of interest of 3 1/2% per
annum; and
(b) the Net Investment Factor of the Sub-Account funding such Variable Annuity
payments for the applicable Valuation Period.
The dollar value of an Annuity Unit as of any date other than a Valuation Date
shall be equal to its value as of the immediately preceding Valuation Date.
The dollar amount of each monthly variable annuity payment shall be equal to the
number of Annuity Units multiplied by the applicable value of the Annuity Unit,
except that under Annuity Option IV-B, monthly annuity payments payable to the
surviving payee shall be based upon 2/3rds of the number of Annuity Units which
applied during the joint lifetime of the two payees.
3. Adjusted Gross Investment Rate The Adjusted Gross Investment Rate of a
Sub-Account for any Valuation Period is equal to:
(a)(i) the investment income of such Sub-Account for the Valuation Period,
plus capital gains and minus capital losses of such Sub-Account for the
Valuation Period, whether realized or unrealized; minus
(ii) an amount for capital gains taxes and any other taxes based on
income of, assets in, or the existence of such Sub-account, whichever may
be applicable; divided by
(b) the amount of such Sub-Account's assets at the beginning of the
Valuation Period.
The Adjusted Gross Investment Rate may be positive or negative.
Form A3018.44-94 (7)
<PAGE>
POLICY VALUES (Continued from page 7)
4. Net Investment Rate and Net Investment Factor The Net Investment Rate of a
Sub-Account for any Valuation Period shall be equal to the Adjusted Gross
Investment Rate for such Valuation Period decreased by (a) a factor equivalent
to .0125 per annum for mortality and expense risks and (b) a factor equivalent
to .0020 per annum for administrative charges associated with each sub-account.
Such factors may be decreased by the Board of Directors of the Company. In no
event shall they exceed the maximum stated in the Guarantees provision. The Net
Investment Factor is 1.000000 plus the Net Investment Rate.
5. Policy Value of the General Account allocations to the General Account are
not converted into accumulation units but are credited interest at a rate
periodically set by the Company. For one year from the date a payment allocated
to the General Account is received at the Company's Principal Office, the rate
of interest credited to that payment will be the Initial Rate in effect on such
date. Thereafter, the rate of interest for that payment will be the greater of:
(a) the Company's Current Interest Rate or
(b) an interest rate of 3% compounded annually thereafter.
The policy value of the General Account will be at least equal to the minimum
required by the law in the state in which this policy is delivered.
6. Policy Fee The Company will deduct a policy fee on each policy anniversary
prior to the Annuity Date and on the date the policy is surrendered. The amount
of the fee will be the lesser of $30 or 3% of the policy's accumulated value on
the anniversary or surrender date, whichever is applicable.
Where the policy value has been allocated to more than one account, the policy
fee will be deducted from the accumulated value of each account in the same
proportion as such value bears to the total policy value. No policy fee will be
deducted if the Accumulated Value on the date the fee would otherwise have been
deducted exceeds $50,000.
TRANSFERS BEFORE ANNUITY DATE
Prior to the Annuity Date, the Owner may transfer amounts between the General
Account and the Sub-Accounts or among the Sub-Accounts. Transfers will be made
pursuant to a Written Request made to the Company's Principal Office. Subject to
the restrictions described herein, all transfers shall be made on the Valuation
Date coincident with or next following the date the Written Request is received.
The minimum and maximum amounts that may be transferred shall be determined by
the Company according to its then current rules. In no event will the Company's
rules provide for a minimum transfer of more than $1,000. The maximum transfer
amount will not be less than the lesser of $100,000 or 10% of the Accumulated
Value under the policy.
Transfers to any Sub-Account from the General Account and to the General Account
from any Sub-Account are permitted only if there has been at least a 120-day
period since the last transfer from the General Account. There is no limit on
the number of transfers among the Sub-Accounts.
If a transfer would reduce the policy value of the account from which the
transfer is to be made to less than $500, the Company reserves the right to
include such remaining value in the amount transferred.
There will be no charge for the first six transfers per policy year. A transfer
charge of up to $25 may be imposed on each additional transfer and deducted from
the amount that is transferred.
Form A3018.44-94 (8)
<PAGE>
GUARANTEES
The Company makes the following guarantees for this policy:
(a) The factors deducted from the Adjusted Gross Investment Rate of a
Sub-Account to obtain its Net Investment Rate will not exceed the
equivalent of (a) .0125 per annum for mortality and expense risks and (b)
.0020 per annum for administrative charges.
(b) The Policy Fee and Surrender Charge will not exceed the amount specified
in this policy.
(c) The interest rate in effect on the date a payment to the General Account
is received at the Principal Office is guaranteed for one year.
(d) The dollar amount of variable annuity payments will not be affected by
variations in actual mortality experience from the mortality assumptions
used in determining the first annuity payment.
The Company assumes the risk that actual mortality experience and expenses may
exceed the maximum charges made to cover such mortality and expenses. If actual
mortality experience and expenses exceed the amounts provided for such costs,
the Company will absorb the resultant losses. If actual mortality experience and
expenses are less than the amounts provided for such costs, the difference will
be a profit to the Company.
SURRENDER - PARTIAL REDEMPTIONS
1. Surrender Privilege The Owner may, by Written Request, surrender this policy
for its Surrender Value prior to the Annuity Date. The Surrender Value will be
based on the Accumulated Value as of the Valuation Date coincident with or next
following the date the Company receives the Written Request at its Principal
Office.
The Surrender Value for amounts allocated to the Separate Account shall be paid
within 7 days from the date of receipt of such Written Request except that the
Company reserves the right to defer surrenders and partial redemptions of
amounts allocated to the Separate Account during any period when (1) trading on
the New York Stock Exchange is restricted as determined by the Securities and
Exchange Commission or such Exchange is closed for other than weekends and
holidays, (2) the Securities and Exchange Commission by order has permitted such
suspension, or (3) an emergency exists as determined by the Securities and
Exchange Commission such that disposal of portfolio securities or valuation of
assets of the Separate Account is not reasonably practicable.
The Surrender Value for amounts allocated to the General Account shall normally
be paid within 7 days from the date of receipt of such Written Request is
received. If payment of amounts allocated to the General Account is not mailed
or delivered within ten days from the date of receipt of such Written Request,
the amount deferred will earn interest during the period of deferment at a rate
not less than 3%; however no interest shall be paid if such interest is less
than $25 or the delay in payment is pursuant to New York law. When surrendered,
this policy terminates. The Company will then have no further liability under
this policy.
2. Partial Redemption Privilege The Owner may, by Written Request, redeem a part
of the Accumulated Value of this policy, subject to the terms of this provision.
This privilege may be exercised before the Annuity Date and before the
Annuitant's death.
The amount of each Partial Redemption must be at least $200. No partial
Redemption will be permitted if less than $1,000 would remain credited to the
policy after payment of the amount requested to be redeemed and deduction of any
applicable charge.
The Written Request must indicate the dollar amount to be paid and should
specify the account(s) from which value(s) is/are to be redeemed. If a Partial
Redemption is requested, the dollar amount of the request will be paid to the
Owner. In Addition, the amount of any applicable Redemption Charge will be
deducted from the Accumulated Value on a last-in, first-out basis. The time
limits of the Surrender Privilege provision will apply to Partial Redemptions.
3. Ten Percent Withdrawal In each calendar year, Partial Redemptions not in
excess of (a) less (b) below may be made without any Redemption Charge:
(a) ten percent of the Accumulated Value as of December 31 of the prior
calendar year or, if the policy is in its first calendar year, ten percent
of the total gross payments;
Form A3018.44-94 (9)
<PAGE>
SURRENDER - PARTIAL REDEMPTIONS (continued from page 9)
(b) the total amount of any prior Partial Redemptions to which no Redemption
Charge was applied during the same Calendar year.
Any amounts redeemed in excess of (a) less (b) will be subject to a Redemption
Charge. This right shall be noncumulative from calendar year to calendar year.
4. Life Expectancy Distribution Benefit In each Calendar Year and prior to the
Annuity Date, the amount of the life expectancy distributions (LED) that exceeds
the Ten Percent Withdrawal, if any, may be withdrawn without charge. If an Owner
elects LED, each year a fraction of the Accumulated Value is withdrawn based on
the Owner's then life expectancy. The numerator of the fraction is 1 (one) and
the denominator of the fraction is the remaining life expectancy of the Owner,
as determined annually.
LED distributions will cease on the Annuity Date. The Owner must surrender the
policy on the Annuity Date or choose an annuity option to commence on such Date.
If the Owner does not choose an annuity option. Option I described on page (13)
will apply.
5. Surrender and Redemption Charge If the Owner surrenders the policy or takes a
Partial Redemption before the Annuity Date and while the Policy is in force, a
withdrawal charge may be imposed.
First, to determine this charge, the Company will deduct the sum of all prior
partial redemptions, excluding any LED amounts, from the payments made to date
in the order that such payments were received, beginning with the oldest
payment.
Second, the Company will then withdraw any amounts available to be redeemed
without charge for the current Calendar Year in accordance with the 10%
Withdrawal privilege. This amount will then be deducted from the remaining
payments in the order that such payments were received.
Third, the Company will withdraw any amounts available to be redeemed without
charge under the LED Benefit provision.
Fourth, the Company will make withdrawals from the remaining payments in the
order that they were received and will compute any applicable charges in
accordance with the following table of surrender charges until the total amount
withdrawn equals the amount of the partial withdrawal plus the withdrawal charge
or until all remaining payments have been exhausted:
<TABLE>
<CAPTION>
Policy Years Measured From Charge As A
Date of Premium Payment Percentage Of the
To Date of Withdrawal Payments Withdrawn
- ----------------------------- ---------------------
<S> <C>
10 Years or more No Charge
9 1%
8 2%
7 3%
6 4%
5 5%
4 6%
3 7%
1-2 8%
</TABLE>
The withdrawal charge will then be deducted from the Accumulated Value on a
last-in first-out basis.
DEATH BENEFITS
If the Annuitant dies while this Policy is in force prior to the Annuity Date,
the Company will pay as a Death Benefit the Accumulated Value of the policy as
of the Valuation Date coincident with or next following the date of receipt by
the Company at its Principal Office of due proof of the Annuitant's death.
If, however, the Annuitant dies prior to the Annuity Date and before the policy
anniversary nearest the Annuitant's 75th birthday, the Company will pay as a
Death Benefit the greatest of:
(a) The Accumulated Value of this policy as of the Valuation Date Coincident
with or next following the date of receipt by the Company at its Principal
Office of due proof of the Annuitant's death;
(b) The sum of the gross Elective Payments made under this policy, less the
amount of all partial redemptions; or
(c) The minimum Death Benefit that would have been payable on the most recent
fifth year policy anniversary occurring prior to the Annuitant's 60th
birthday, plus any payments made after that date and less any withdrawals
taken after that date.
Form A3018.44-94 (10)
<PAGE>
DEATH BENEFITS (continued from page 10)
The Death Benefit is payable to the Beneficiary in one sum. Payment will be made
within 7 days of the date on which due proof of death is received at the
Company's principal office. In lieu of such payment the Beneficiary may, by
Written Request, elect that:
(a) payment of the one sum be delayed for a period not to exceed 5 years from
the date of the Annuitant's death;
(b) the Death Benefit be paid in installments. Installments must begin within
one year from the date of the Annuitant's death and must be payable over a
period certain not extending beyond the life expectancy of the
Beneficiary; or
(c) all or a portion of the Death Benefit be used to provide an annuity for
the Beneficiary. Annuity benefits must begin within one year from the date
of the Annuitant's death. Benefits must be payable over the life of the
Beneficiary.
Annuity benefits will be provided in accord with the Annuity Options of this
policy. Death benefits deferred or paid under options (a) and (b) will be valued
according to the Policy Values Provision.
If the Annuitant dies prior to the Annuity Date while this policy is in force
leaving his or her spouse as Beneficiary, at the Written Request of the
Beneficiary, and with the consent of the Company:
(a) the Death Benefit will not be paid on the Annuitant's death; however, all
or a portion of the Death Benefit may be withdrawn without charge within
one year of the date on which notice of death is received at the Company's
principal office;
(b) the Beneficiary will become the Owner;
(c) the Beneficiary will become the Annuitant; and
(d) all other rights and benefits provided in this Policy will continue.
This option may only be elected upon the death of the Annuitant named at Date of
Issue.
If the Annuitant dies on or after the Annuity Date but before the completion of
all guaranteed annuity payments, any remaining payments will be paid to the
Beneficiary. These remaining payments must be paid at least as rapidly as under
the payment option in effect on the date of the Annuitant's death. If there is
more than one Beneficiary, the Death Benefit will be paid in one sum. This sum
will be the commuted value of any unpaid payments certain; commuted as of the
Valuation Date coincident with or next following receipt by the Company at its
Principal Office of due proof of death. Such commuted value will be computed on
the basis of the interest rate used in the determination of the annuity benefit.
Form A3018.1-94 (11)
<PAGE>
ANNUITY OPTIONS
1. Annuity Benefit The Owner may choose the form of benefit to be paid to the
Annuitant. The benefit will be limited to the Annuity Options set forth below,
and any other option offered by the Company for this class of policies.
If the Owner does not choose an option, Option I will apply.
This policy will be endorsed on the Annuity Date. The endorsement will set forth
the benefits payable to the Annuitant.
2. Funding of Annuity Options Variable Annuity Options may be funded through the
Growth Fund, the Money Market Fund, and/or the Equity Index Fund unless
otherwise changed by endorsement. All Fixed Annuity Options are funded through
the General Account.
3. Death Benefit Annuity The Owner may direct that all or part of any Death
Benefit payable before the Annuity Date be paid to the Beneficiary under one or
more of the Annuity Options provided in this policy.
If the Annuitant dies before the Annuity Date and before the Owner has chosen an
Annuity Option, the Beneficiary may choose an option.
A corporate or fiduciary Beneficiary may choose only Option V or X.
4. Proof of Age and Survival of Payee Proof of the payee's date of birth is a
condition precedent to payment of any annuity benefits under this policy. The
proof must be satisfactory to the Company, and must be received at its Principal
Office.
The Company may require evidence that a payee is living. Such evidence must be
satisfactory to the Company and may be required before any annuity payment is
made under this policy.
5. Minimum Payments Every Annuity Option must be paid on a monthly basis. The
initial monthly payment must be at least $20. If the chosen option produces an
initial monthly payment of less than $20, the Accumulated Value or Death Benefit
will be paid in one sum. A single payment of the Accumulated Value will be made
to the Owner. A single payment of the Death Benefit will be made to the
Beneficiary.
The Annuity Value may be divided and applied to provide both a variable and
fixed annuity benefit, except that the amount so applied to each form of benefit
must produce an initial monthly payment of at least $20.
6. Payment Period Annuity payments to any payee shall cease with the last
payment due prior to the date of death of such payee (or surviving payee in the
case of joint payees) or with the later completion of all guaranteed payments,
as the case may be.
7. Number of Variable Annuity Units The number of Variable Annuity Units
determining the annuity benefits payable hereunder shall be equal to the dollar
amount of the first monthly benefit divided by the value of the Variable Annuity
Unit as of the Valuation Date used to calculate the dollar amount of the first
payment. Once payments have begun, the number of Variable Annuity Units will
remain fixed unless a split has been made as herein provided.
8. Annuity Value The Annuity Value to be applied under an Annuity Option will be
the amount described below; less any premium taxes, if applicable, payable by
the Company as a result of the Annuity Option selection:
(a) If Option V or X is chosen at any time--the Surrender Value.
(b) If Option I, II, III, IV-A, IV-B, VI, VII, VIII, IX-A, IX-B or any other
Option offered by the Company involving a life contingency is chosen --
the Accumulated Value.
(c) If a Death Benefit Annuity is payable at any time--the amount of the Death
Benefit.
The amount applied under a Variable Annuity Option will be based on the
Accumulation Unit value on a Valuation Date not more than four weeks (uniformly
applied) preceding the Annuity Date.
Form A3018.44-94 (12)
<PAGE>
DESCRIPTION OF ANNUITY OPTIONS
1. Monthly Payments The amount of the first payment under Options I through III
and VI through VIII will be determined on the basis of:
(a) the age nearest birthday of the payee on the Annuity Date;
(b) the sex of the payee; and
(c) the Annuity Value applied under the Option.
The amount of the first monthly payment under Options IV-A, IV-B, IX-A and IX-B
will be determined on the basis of:
(a) the Adjusted Ages of the payees on the Annuity Date;
(b) the sex of the payee; and
(c) the Annuity Value applied under the Option.
The amount of the first payment under Options V and X will be based on the
number of years certain selected and the Annuity Value applied.
The amount of each subsequent payment under Options I, II, III, IV-A, IV-B and V
will vary in accordance with the value of the Variable Annuity Units. The amount
of each subsequent payment under Options VI through VIII, IX-A, IX-B, and X will
be in the same amount as the first payment; except that under Option IX-B, after
the death of the first payee, the amount of each payment to the surviving payee
shall be 2/3rds of the amount of the first payment.
All Annuity Options are based on an interest rate of 3 1/2% per annum.
2. Rates The first payment under an Annuity Option for each $1,000 of Annuity
Value applied will be the greater of:
(a) the rate per $1,000 of Annuity Value applied specified in the Company's
published Non-Guaranteed Current Annuity Option rates applicable to this
class of policies; or
(b) the rate set forth in this policy for the applicable Annuity Option.
3. Brief Description of Options
OPTIONS I AND VI--VARIABLE OR FIXED LIFE
ANNUITY WITH 120 MONTHLY PAYMENTS
GUARANTEED
Monthly payments during the life of the payee. If the payee dies before 120
payments have been made, the monthly payments will continue to the Beneficiary
until a total of 120 payments have been made.
OPTIONS II AND VII--VARIABLE OR FIXED LIFE ANNUITY
Monthly payments during the life of the payee.
OPTIONS III AND VIII--UNIT REFUND VARIABLE OR FIXED LIFE ANNUITY
Monthly payments during the life of the payee. If the payee dies, the monthly
payments will be continued to the Beneficiary if (a) exceeds (b) below.
(a) the dollar amount of the Annuity Value applied under this option, divided
by the first monthly payment.
(b) the number of monthly payments made under this option before the death of
the payee.
If (a) exceeds (b), the monthly payments will continue until the total number of
payments equals the number determined in (a).
Form A3018.44-94 (13)
<PAGE>
DESCRIPTION OF ANNUITY OPTIONS (continued from page 13)
OPTIONS IV-A AND IX-A--JOINT AND SURVIVOR VARIABLE OR FIXED LIFE ANNUITY
Monthly payments jointly to two payees during their joint lives. One of the
payees must be the Annuitant. If this option is chosen after the Annuitant dies,
one of the payees must be the Beneficiary. The payments will continue during the
life of the survivor. The monthly payment to the survivor will be the same
amount which was paid during the joint lives of the two payees.
OPTIONS IV-B AND IX-B--JOINT AND TWO-
THIRDS SURVIVOR VARIABLE OR FIXED LIFE
ANNUITY
Monthly payments jointly to two payees during their joint lives. One of the
payees must be the Annuitant. If this option is chosen after the Annuitant dies,
one of the payees must be the Beneficiary. The payments will continue during the
life of the survivor. The monthly payment to the survivor will be 2/3rds of the
amount which was paid during the joint lives of the two payees.
OPTIONS V AND X--VARIABLE OR FIXED ANNUITY CERTAIN
Monthly payments for a number of years. The number of years selected may be from
1 to 30.
Form A3018.1-94 (14)
<PAGE>
<TABLE>
<CAPTION>
============================= Annuity Option Tables ============================
Showing Amount of First Monthly Annuity Benefit Payment
For Each $1,000 of Annuity Value Applied
- --------------------------------------------------------------------------------
Age Option I--Variable Option II--Variable Option III--Variable
Nearest OPTION VI--Fixed OPTION VII--Fixed OPTION VIII--Fixed
Birthday
- --------------------------------------------------------------------------------
Life Annuity Unit Refund
with 120 Monthly Life Life
Payments Guaranteed Annuity Anuity
---------------------------------------------------------------------
<S> <C> <C> <C> <C>
MALE
50 4.37 4.41 4.26
51 4.43 4.48 4.32
52 4.50 4.55 4.38
53 4.58 4.63 4.45
54 4.65 4.71 4.51
55 4.73 4.80 4.58
56 4.82 4.89 4.66
57 4.91 4.98 4.74
58 5.00 5.09 4.82
59 5.10 5.20 4.90
60 5.20 5.32 4.99
61 5.31 5.44 5.09
62 5.43 5.58 5.19
63 5.55 5.72 5.29
64 5.67 5.87 5.40
65 5.81 6.04 5.52
66 5.94 6.22 5.64
67 6.09 6.40 5.77
68 6.24 6.60 5.91
69 6.39 6.82 6.05
70 6.55 7.05 6.20
71 6.71 7.29 6.36
72 6.87 7.55 6.52
73 7.04 7.82 6.70
74 7.21 8.12 6.88
75 7.38 8.43 7.07
FEMALE
50 4.04 4.05 3.98
51 4.09 4.11 4.03
52 4.14 4.16 4.08
53 4.20 4.22 4.13
54 4.26 4.29 4.19
55 4.33 4.35 4.25
56 4.40 4.42 4.31
57 4.47 4.50 4.37
58 4.54 4.58 4.44
59 4.62 4.66 4.51
60 4.71 4.75 4.58
61 4.79 4.85 4.66
62 4.89 4.95 4.75
63 4.99 5.06 4.83
64 5.09 5.18 4.93
65 5.20 5.30 5.02
66 5.32 5.43 5.13
67 5.44 5.57 5.23
68 5.57 5.72 5.35
69 5.71 5.88 5.47
70 5.86 6.06 5.60
71 6.01 6.25 5.74
72 6.17 6.45 5.88
73 6.33 6.67 6.03
74 6.51 6.91 6.20
75 6.69 7.17 6.37
- --------------------------------------------------------------------------------
</TABLE>
Form A3018.44-94 (15) (Continued on page 16)
<PAGE>
======================= Annuity Option Tables (Continued) ======================
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Option IV-A-Variable Option IV-B-Variable
Option IX-A-Fixed Option IX-B-Fixed
Joint and Survivor Joint and Two Thirds Survivor
Life Annuity Life Annuity
MALE MALE
- -----------------------------------------------------------------------------------------
50 55 60 65 70 75 80 50 55 60 65 70 75 80
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
50 3.70 3.77 3.82 3.86 3.89 3.91 3.93 4.03 4.16 4.31 4.47 4.65 4.83 5.02
55 3.92 4.01 4.08 4.14 4.17 4.20 4.33 4.50 4.69 4.89 5.10 5.32
F
E 60 4.22 4.34 4.43 4.50 4.54 4.72 4.95 5.19 5.44 5.69
M
A 65 4.61 4.77 4.90 4.98 5.25 5.55 5.87 6.18
L
E 70 5.16 5.38 5.54 5.99 6.39 6.79
75 5.92 6.23 7.03 7.57
80 7.00 8.50
- -----------------------------------------------------------------------------------------
</TABLE>
Rates for Age combinations not shown will be furnished by the Company upon
request.
Form A3018.44-94 (16) (Continued on page 17)
<PAGE>
======================= Annuity Option Tables (Continued) ======================
<TABLE>
<CAPTION>
--------------------------------------------
OPTION V-Variable
OPTION X-Fixed
--------------------------------------------
Annuity Certain
Number of for a specified
Years Certain Number of Years
--------------------------------------------
<S> <C>
1 84.65
2 43.05
3 29.19
4 22.27
5 18.12
6 15.35
7 13.38
8 11.90
9 10.75
10 9.83
11 9.09
12 8.46
13 7.94
14 7.49
15 7.10
16 6.76
17 6.47
18 6.20
19 5.97
20 5.75
21 5.56
22 5.39
23 5.24
24 5.09
25 4.96
26 4.84
27 4.73
28 4.63
29 4.53
30 4.45
--------------------------------------------
</TABLE>
Form A3018.1-94 (17)
<PAGE>
GENERAL PROVISIONS
1. Entire Contract The entire contract consists of this policy and the written
application, a copy of which is attached at issue. All statements made in the
application shall be deemed representations and not warranties. The Company will
not use any statement to void this policy or defend a claim under it unless that
statement is in the application.
2. Misstatement of Age or Sex If a payee's age or sex is misstated, the Company
will adjust all benefits under this policy to those that the Annuity Value
applied would have purchased at the correct age and sex. Any underpayments
already made by the Company will be made up immediately. Any overpayments made
by the Company will be charged against the benefits due after the adjustment.
Any overpayment or underpayment will be charged or credited with interest, as
applicable, at a rate of 6%.
3. Modifications Agents are not authorized to modify this contract. Agents may
not extend the time or modify the conditions for making payments.
4. Incontestability Except for non-payment of the Initial Elective Payment, this
policy cannot be contested after it has been in force for two years from the
Date of Issue.
5. Change of Annuity Date The Owner may elect to change the Annuity Date at any
time by Written Request. Such request must be received at the Company's
Principal Office at least one month before the new Annuity Date and must be the
first day of any month;
(a) on or after the Annuitant's 50th birthday; and
(b) before the Annuitant's 85th birthday.
The Annuity Date must be within the life expectancy of the Annuitant. The
Company shall determine such expectancy at the time a change in Annuity Date is
requested.
6. Annual Report The Company will furnish an annual report to the Owner
containing a statement of the number and value of the Accumulation Units
credited to the Sub-accounts, the policy value of the General Account, and any
other information required by applicable law, rules and regulations.
7. Addition, Deletion, or Substitution of Investments The Company reserves the
right, subject to compliance with applicable law, to make additions to,
deletions from, or substitutions for the shares of a Fund that are held by the
Sub-Accounts or that the Sub-Accounts may purchase. The Company reserves the
right to eliminate the shares of any Fund if the shares of a Fund are no longer
available for investment or if, in the Company's judgment, further investment in
any eligible Fund should become inappropriate in view of the purposes of the
Sub-Accounts.
The Company will not substitute shares attributable to any interest in a
Sub-Account without notice to the Owner and any prior approval of the Securities
and Exchange Commission required by the Investment Company Act of 1940. This
shall not prevent the Separate Account from purchasing other securities for
other series or classes of policies, or from permitting a conversion between
series or classes of policies or contracts on the basis of requests made by
owners.
Form A3018.44-94 (18)
<PAGE>
GENERAL PROVISIONS (continued from page 18)
The Company reserves the right to establish additional Sub-Accounts and to make
such Sub-Accounts available to any class or series of policies as the Company
deems appropriate. Each new Sub-Account would invest in a new investment company
or in shares of another open-end investment company. Subject to obtaining any
required approvals or any consents required by applicable law, the Company also
reserves the right to eliminate or combine existing Sub-Accounts and to transfer
the assets of one or more Sub-Accounts to any other Sub-Accounts.
In the event of any substitution or change, the Company may, by appropriate
endorsement, make such changes in this and other policies as may be necessary or
appropriate to reflect the substitution or change. If the Company considers it
to be in the best interests of policyholders, the Separate Account or any
Sub-Account(s) may be operated as a management company under the Investment
Company Act of 1940, or it may be deregistered under that Act in the event
registration is no longer required, or it may be combined with other separate
accounts of the Company.
No material changes in the investment policy of the Separate Account or any
Sub-Account(s) will be made without approval pursuant to the applicable
insurance laws of the State of New York
8. Change of Name Subject to compliance with applicable law, the Company
reserves the right to change the names of the Separate Account or the
Sub-Accounts.
9. Federal Tax Considerations The Company intends to make a charge for any
effect which the income, assets or existence of the Separate Account may have
upon its tax. The Separate Account presently is not subject to tax, but the
Company reserves the right to assess a charge for taxes if the Separate Account
at any time becomes subject to tax.
10. Splitting of Units Subject to the prior approval of the Superintendent of
Insurance, the Company reserves the right to split the value of an Accumulation
Unit, an Annuity Unit, or both, if such action is deemed to be in the best
interest of the Owners, the Annuitants and the Company. In effecting any such
split of unit value, strict equity will be preserved and such split will have no
material effect upon the benefits, provisions or investment return of this
policy or upon the Owner, the Annuitant, any Beneficiary, or the Company. A
split may be effected either to increase or decrease the number of units.
11. Insulation of Separate Account The investment performance of assets of the
Separate Account is determined separately from the other assets of the Company.
The assets of the Separate Account are not chargeable with liabilities arising
out of any other business which the Company may conduct.
Form A3018.44-94 (19)
<PAGE>
NOTICE - VOTING RIGHTS
Each Owner is entitled to vote at meetings of policy Owners of those
Sub-Accounts to which payments are currently allocated under this policy;
provided, however, that after the Annuity Date only the Annuitant shall have the
right to vote at such meetings.
Prior to the Annuity Date, the number of votes which an Owner may cast at a
meeting of Sub-Account Owners shall be determined by dividing the dollar value
of the Accumulation Units of the Sub-Account by the net asset value of one Fund
share.
After the Annuity Date, an Annuitant under a variable annuity option may cast
the number of votes equal to:
(i) the amount of the reserve held in each Sub-Account to meet the annuity
obligations related to such Annuitant under the policy; divided by
(ii) the value of an applicable Accumulation Unit as of the record date for the
meeting.
Proper written notice of such meetings, as required by law, shall be given to
each Owner or Annuitant.
Owners and Annuitants entitled to vote, and the number of votes which each may
cast, shall be determined as of a record date within 90 days of the date of the
meeting. To be entitled to vote, a policy Owner must be an Owner on both the
record date as of which the number of votes is determined and the date of the
meeting. In determining the number of votes a person may cast, fractional votes
shall be disregarded.
Elective Payment Variable Annuity Policy. Annuity Benefit payable to
Annuitant commencing at Annuity Date. Death Benefit payable at death of
Annuitant prior to Annuity Date. Non-Participating.
Form A3018.1-94 (20)
<PAGE>
First Allmerica
Financial Life 440 Lincoln Street Variable Annuity Application
Insurance Company Worcester, MA 01653 Print clearly in black ink.
- ------------------------------------------------------------
1. ANNUITANT
- ------------------------------------------------------------
First Middle Last
_______________________________________________________
Street Address Apt.
_______________________________________________________
City State Zip
_______________________________________________________
Daytime Telephone Sex Date of Birth
(___) ___________ / / Male / / Female _____________
S.S. #
_______________________________________________________
- ------------------------------------------------------------
2. OWNER (Complete Only if Different from Annuitant)
- ------------------------------------------------------------
First Middle Last
_______________________________________________________
Street Address Apt.
_______________________________________________________
City State Zip
_______________________________________________________
S.S. #/ Tax ID #
_______________________________________________________
- ------------------------------------------------------------
3. BENEFICIARY
- ------------------------------------------------------------
Primary / / 10 Day Common Disaster Clause
_______________________________________________________
Contingent
_______________________________________________________
- ------------------------------------------------------------
4. TYPE OF PLAN
- ------------------------------------------------------------
/ / 401(a) Pens/Prof. Sh. / / Non-Qual. Def. Comp.
/ / 401(k) Prof. Sh. / / Non-Qualified
/ / 403(b) TSA / / Other
/ / 408(b) IRA _____________________
/ / 408(k) SEP-IRA
- ------------------------------------------------------------
5. INITIAL PAYMENT
- ------------------------------------------------------------
Initial Payment Amount $ _________________________
If IRA or SEP-IRA application, the applicant has
received Disclosure Buyer's Guide and this payment
is a (check one)
/ / Rollover / / Trustee to Trustee Transfer
/ / Regular or SEP-IRA Payment for Tax Year ___________
- ------------------------------------------------------------
6. ANNUITY COMMENCEMENT DATE
- ------------------------------------------------------------
First of Month After Age / / 65 / / 70
<PAGE>
First of (Month) _______________ (Year) _______________
- ------------------------------------------------------------
7. PRINCIPAL OFFICE AMENDMENTS
- ------------------------------------------------------------
- ------------------------------------------------------------
8. REPLACEMENT
- ------------------------------------------------------------
Will the proposed policy replace or change any existing
annuity or insurance policy? / / No / / Yes
(If yes, list company name and policy number)
____________________________________________________________
- ------------------------------------------------------------
9. ALLOCATION OF PAYMENTS
- ------------------------------------------------------------
AIT = Allmerica Investment Trust
DGPF = Delaware Group Premium Fund, Inc.
VIPF = Fidelity Management & Research Company
_ _ _._% Fixed Interest (187-188)
_ _ _._% AIT Growth (021-022)
_ _ _._% AIT Investment Grade Income (023-024)
_ _ _._% AIT Money Market (025-026)
_ _ _._% AIT Equity Index (027-028)
_ _ _._% AIT Government Bond (029-030)
_ _ _._% AIT Select Aggressive Growth (081-082)
_ _ _._% AIT Select Growth (083-084)
_ _ _._% AIT Select Growth and Income (085-086)
_ _ _._% AIT Small Cap Value Fund (087-088)
_ _ _._% AIT Select International Equity (091-092)
_ _ _._% AIT Select Capital Appreciation (095-096)
_ _ _._% DGPF International Equity Series (089-090)
_ _ _._% T. Rowe Price International Stock (093-094)
_ _ _._% VIPF High Income (031-032)
_ _ _._% VIPF Equity Income (033-034)
_ _ _._% VIPF Growth (035-036)
_ _ _._% VIPF Overseas (037-038)
_ _ _._% VIPF II Asset Manager (039-040)
_ _ _._% _______________________________
1 0 0.0% Total
_ _ _ _
Note: If the policy applied for provides for a full refund of the initial
payment under its "Right to Examine" provision, that portion of each payment not
allocated to the General account will be allocated solely to the Money Market
account during its first 15 days. Reallocation will then be made as specified.
- --------------------------------------------------------------------------------
10. SIGNATURES
- --------------------------------------------------------------------------------
It is understood, and agreed that: (1) the above information is true and
complete to the best of my knowledge; (2) this application, a copy of
which will be attached to the policy when issued, will become a part of
the policy issued; (3) no agent is authorized to modify the terms of the
prospectus, this application or any policy. I acknowledge receipt of a
current prospectus describing the policy I am applying for. I understand
that annuity payments and other values, when based on the investment
experience of a separate account, are variable and not guaranteed as to
fixed dollar amount.
____________________________ ______________________________________
Signed at (City and State) Date
____________________________ ______________________________________
Signature of Owner Signature of Registered Representative
SML-1286 NY (1/94) Rev 9/95
<PAGE>
- --------------------------------------------------------------------------------
11. SYSTEMATIC TRANSFERS
- --------------------------------------------------------------------------------
/ / I wish to effect Automatic Periodic Transfers.
/ / I wish to effect Constant Ratio Transfers.
Systematic Transfer Application must be attached.
- --------------------------------------------------------------------------------
12. MONTHLY AUTOMATIC PAYMENTS (MAP)
- --------------------------------------------------------------------------------
/ / I wish to authorize monthly deductions from my checking account for
application to this policy.
MAP authorization and voided check must be attached.
- --------------------------------------------------------------------------------
13. OPTIONAL PAYMENT REMINDER
- --------------------------------------------------------------------------------
/ / I wish to receive periodic reminders that I can include with future
remittances.
Payment Reminder request must be attached.
- --------------------------------------------------------------------------------
14. REMARKS
- --------------------------------------------------------------------------------
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
THE FOLLOWING SECTIONS MUST BE COMPLETED BY THE REGISTERED REPRESENTATIVE
- --------------------------------------------------------------------------------
15. REPLACEMENT
- --------------------------------------------------------------------------------
a) Have you reviewed the insurance replacement regulation of the state
in which this contract will be delivered? Do you understand the
definition of replacement as set forth therein?
/ / Yes / / No
b) To the best of your knowledge and belief, will the contract being
applied for replace life insurance or annuity contracts in this or
any other company? If yes, list policies in Section 8.
/ / Yes / / No
- --------------------------------------------------------------------------------
16. SUITABILITY INFORMATION
- --------------------------------------------------------------------------------
NASD rules require that a reasonable effort be made to obtain the
following information. All items relate to the owner unless issued to a
Plan Trustee in which case the items relate to the annuitant.
Name of Employer U.S. Citizen Tax Bracket
___________________________________ / / Yes / / No ____________%
Address of Employer (No. & Street)
__________________________________
City State Zip Occupation
__________________________________ _________________________________
Gross Annual Income $_______ Savings $_______ Financial Objective
/ / Retirement / / Other______________
Is the owner an associated "person" of another Broker/Dealer?
/ / Yes / / No
________________________________________________________
(PRINCIPAL OFFICE USE ONLY)
Signature of Registered Representative/Principal
________________________________________________________
- --------------------------------------------------------------------------------
I decline to furnish answers to those questions left blank in Section 16 above.
Signed at (City and State) Date
- --------------------------------------------------------------------------------
Full Signature of Owner OR Annuitant, if the Owner is a Plan Trustee
- --------------------------------------------------------------------------------
I certify that (1) no written sales materials other than those approved by the
Principal Office were used, and (2) I have reasonable grounds to believe the
purchase of the policy applied for is suitable for the owner.
Date Signature of Registered Representative % Print Full Name Code Agency
- --------------------------------------------------------------------------------
Date Signature of Registered Representative % Print Full Name Code Agency
- --------------------------------------------------------------------------------
Date Signature of Registered Representative % Print Full Name Code Agency
- --------------------------------------------------------------------------------
Date Signature of Registered Representative % Print Full Name Code Agency
- --------------------------------------------------------------------------------
<PAGE>
LETTER AGREEMENT
June 4, 1997
Allmerica Financial Life Insurance and Annuity Company
First Allmerica Financial Life Insurance Company
Ladies and Gentlemen:
Effective as of October 1, 1996, this letter sets forth the agreement
("Agreement") between Allmerica Financial Life Insurance and Annuity Company
(formerly known as SMA Life Assurance Company) ("Company A") and First Allmerica
Financial Life Insurance Company (formerly known as State Mutual Life Assurance
Company of America) ("Company B") (each a "Company" and collectively "you,"
"your" or the "Companies"), on the one hand, and Rowe Price-Fleming
International, Inc. ("RPFI") (referred to as "we," or "RPFI") on the other ,
concerning certain administrative services to be provided by each of you, with
respect to the T. Rowe Price International Series, Inc. (the "Fund").
1. THE FUND. The Fund is a Maryland Corporation registered with the
Securities and Exchange Commission (the "SEC") under the Investment Company
Act of 1940, as amended (the "Act") as an open-end diversified management
investment company. The Fund serves as a funding vehicle for variable
annuity contracts and variable life insurance contracts and, as such,
sells its shares to insurance companies and their separate accounts. With
respect to various provisions of the Act, the SEC requires that owners of
variable annuity contracts and variable life insurance contracts be
provided with materials and rights afforded to shareholders of a
publicly-available SEC-registered mutual fund.
2. THE COMPANIES. Company A is a Delaware life insurance company, and Company
B is a Massachusetts life insurance company. Each Company issues
variable annuity contracts (the "Contracts") supported by one or more
separate accounts (individually a "Separate Account" and collectively the
"Separate Accounts") which are registered with the SEC as unit investment
trusts, or which are properly exempt from registration. Each of the
Companies has entered into a participation agreement with the Fund
(individually a "Participation Agreement" and collectively the
"Participation Agreements") pursuant to which each Company purchases shares
of the T. Rowe Price International Stock Portfolio of the Fund for the
Separate Accounts supporting the Company's Contracts.
<PAGE>
Allmerica Financial Life Insurance and Annuity Company
First Allmerica Financial Life Insurance Company
June 4, 1997
Page 2
3. RPFI. RPFI serves as the investment adviser to the T. Rowe Price
International Series, Inc. RPFI supervises and assists in the overall
management of the Fund's affairs under an investment management agreement
with the Fund (the "Management Agreement"), subject to the overall
authority of the Fund's Board of Directors in accordance with Maryland law.
Under the Management Agreement, RPFI is compensated for providing
investment advisory and certain administrative services (either directly or
through affiliates).
4. ADMINISTRATIVE SERVICES. You have agreed to assist us, as we may request
from time to time, with the provision of administrative services to the
Fund, as they may relate to the investment in a Fund by the Separate
Accounts. It is anticipated that such services may include (but shall not
be limited to): the mailing of Fund reports, notices, proxies and proxy
statements and other informational materials to holder of the Contracts
supported by the Separate Accounts; the maintenance of separate records for
each holder of the Contracts reflecting shares purchased and redeemed and
share balances; the preparation of various reports for submission to Fund
directors; the provision of advice and recommendations concerning the
operation of the series of the Funds as funding vehicles for the Contracts;
the provision of shareholder support services with respect to the Separate
Account portfolios serving as funding vehicles for the Contracts; telephone
support for holders of Contracts with respect to inquiries about the Fund;
and the provision of other administrative services as shall be mutually
agreed upon from time to time.
5. PAYMENT FOR ADMINISTRATIVE SERVICES. In consideration of the
administrative services to be provided by each of the Companies, we
shall make payments to each of the Companies on a quarterly basis
("Payments") from our assets, including our bona fide profits as investment
adviser to the Fund, an amount equal to 15 basis points (0.15%) per annum
of the average aggregate net asset value of shares of the Fund held by
the Separate Accounts under the Participation Agreements, PROVIDED,
HOWEVER, that such payments shall only be payable with respect to the Fund
for each calendar quarter during which the aggregate dollar value of shares
of the Fund purchased pursuant to a Participation Agreement by the
insurance companies in the aggregate exceeds $50,000,000. Subject to the
terms of paragraph 6 hereof, RPFI shall be responsible for payments due
pursuant to this Paragraph 5 with respect to the purchase of shares of the
Fund managed by RPFI. For purposes of computing the payment to each
Company contemplated under this Paragraph 5, the average aggregate net
asset value of shares of the Fund held by the Separate Accounts over a
quarterly period shall be computed by totaling each Separate Account's
aggregate investment (share net asset value multiplied by total number of
shares held by the Separate Account) on each business day during the
calendar quarter, and dividing by the total number of business days during
such quarter. The Payments contemplated by this Paragraph 5 shall be
calculated by RPFI at the end of each calendar quarter and will be paid to
each Company within 30 business days thereafter.
<PAGE>
Allmerica Financial Life Insurance and Annuity Company
First Allmerica Financial Life Insurance Company
June 4, 1997
Page 3
6. UNIFIED PAYMENT PROCEDURE. You have agreed that in order to simplify the
procedure by which Payments required to be made by RPFI pursuant to
Paragraph 5 hereof are made to the Companies, the obligations of RPFI to
make such Payments to each Company can be fulfilled by the remittance of a
single, unified Payment (the "Unified Payment"). The Unified Payment shall
be made by RPFI to Company A, accompanied by a written statement setting
forth the respective amounts due to each of the Companies. Company A in
turn, agrees that it will remit Company B's portion of each Unified Payment
to Company B as soon as practicable after Company A's receipt of such
Unified Payment, unless a different arrangement is agreed to between
Company A and Company B. Company B agrees that the obligation of RPFI to
make payments to it pursuant to paragraph 5 hereof shall be satisfied upon
receipt of the applicable Unified Payment by Company A.
7. NATURE OF PAYMENTS. The parties to this Agreement recognize and agree that
RPFI's payments to the Companies relate to administrative services only and
do not constitute payment in any manner for investment advisory services or
for costs of distribution of the Contracts or of Fund shares; and further,
that these payments are not otherwise related to investment advisory or
distribution services or expenses, or administrative services which RPFI is
required to provide to owners of the Contracts pursuant to the terms
thereof. You represent that you may legally receive the payments
contemplated by the Agreement.
8. TERM. This Agreement shall remain in full force and effect for an initial
term of two years, and shall automatically renew for successive one-year
periods unless any party informs each of the other parties upon 60-days
written notice of its intent not to continue this Agreement. This
Agreement and all obligations hereunder shall terminate automatically with
respect to a Company and its relationship with a Fund upon the redemption
of the Company's and its Separate Accounts investment in the Fund, or upon
termination of the Company's Participation Agreement with the Fund.
9. AMENDMENT. This Agreement may be amended only upon mutual agreement
of all of the parties hereto in writing.
10. COUNTERPARTS. This Agreement may be executed in counterparts, each of
which shall be deemed an original but all of which shall together
constitute one and the same instrument.
<PAGE>
Allmerica Financial Life Insurance and Annuity Company
First Allmerica Financial Life Insurance Company
June 4, 1997
Page 4
If this Agreement is consistent with your understanding of the matters we
discussed concerning your administrative services, kindly sign below and return
a signed copy to us.
Very truly yours,
ROWE PRICE-FLEMING
INTERNATIONAL, INC.
By: /s/ Nancy M. Morris
------------------------------------------
Name: Nancy M. Morris
----------------------------------------
Title: Vice President
----------------------------------------
Acknowledged and Agreed to:
ALL MERICA FINANCIAL LIFE INSURANCE
AND ANNUITY COMPANY
By: /s/ Richard M. Reilly
------------------------------
Name: Richard M. Reilly
------------------------------
Title: President
------------------------------
FIRST ALLMERICA FINANCIAL LIFE
INSURANCE COMPANY
By: /s/ Richard M. Reilly
------------------------------
Name: Richard M. Reilly
------------------------------
Title: Vice President
------------------------------
<PAGE>
AGREEMENT FOR LOCKBOX SERVICES
This Agreement is entered into as of July 1, 1997, by and between Boston
Financial Data Services Inc. ("BFDS") and First Allmerica Financial Life
Insurance Company, its subsidiaries and affiliates ("Customer") for the
lockbox services provided in the Exhibit(s) attached hereto and hereby made a
part of this Agreement.
WHEREFORE the parties hereto in consideration of the mutual covenants
contained herein and intending to be legally bound, agree as follows:
A. SERVICES:
Upon Customer's authorization of the postmaster in Boston to permit employees
of BFDS to access the P.O. Box specified and subject to the terms and
conditions of this Agreement, BFDS hereby agrees to provide Customer with the
services described in the Exhibit(s) attached hereto.
B. INVOICES:
As compensation for services hereunder, Customer shall pay BFDS mutually
agreed upon fees and expenses as specified in Exhibit _A_. These fees will
remain in effect for a period of three years with an allowable increase in
year two and three no greater than the calculated Northeast CPI for the
previous period. In addition, BFDS will charge such account for all
reasonable out-of-pocket expenses, such as courier fees, incurred by BFDS in
connection with any rent paid by BFDS for the P.O. Box. Payment on all
invoices submitted by BFDS shall be due net thirty (30) days from receipt of
invoice.
C. TERMINATION:
This Agreement may be terminated by either party with material cause at any
time by 30 days prior written notice to the other, and without cause at any
time by 90 days prior written notice to the other. Either party may
terminate this Agreement at any time on notice to the other in the event of
dissolution or insolvency or the commencement of any proceedings under any
bankruptcy or insolvency law by or against the other.
D. LIABILITY AND INDEMNIFICATION:
Notwithstanding anything to the contrary contained herein, neither party, in
performing its duties under this Agreement, shall be liable to the other
except for gross negligence or willful misconduct. Neither party shall be
liable for special or consequential damages. BFDS shall maintain fidelity
bonding of at least $1,000,000.00 for claims arising from fraudulent or
dishonest acts on the part of any BFDS employee, which shall be underwritten
by reputable insurer(s) licensed to do business in the Commonwealth of
Massachusetts and having an A. M. Best rating of "A" or better. Within ten
(10) days from Customer's request therefor, BFDS shall provide to Customer
either (a) copies of all relevant insurance policies, or (b) Certificates of
Insurance reasonably specifying the policies required hereunder.
E. FORCE MAJEURE:
Neither party shall be responsible for delays or failure in performance
resulting from causes beyond its control, including, without limitation, acts
of God, riots, acts of war, governmental regulations, fire, communication
line failures, power failures, earthquakes, or other disasters.
F. NO ADVERTISEMENT:
BFDS shall not (a) make any mention of this Agreement in any advertisement or
promotional material; or (b) issue or release any publicity statement or
release concerning this Agreement or the services provided, or to be
provided,
<PAGE>
hereunder, without the written consent of Customer being first obtained.
G. SOLICITATION:
BFDS shall not solicit any of Customer's employees while said employees are
employed by Customer, and for one (1) year following the date that Customer's
employee has terminated employment with Customer, unless otherwise expressly
agreed in writing by Customer.
H. CONFIDENTIALITY:
As used herein, the term "confidential information" shall mean non-public
information that either party designates as confidential, or which, under the
circumstances, ought to be treated as confidential. Confidential information
may be in any tangible form, including without limitation written or printed
text or documents, audio or video tapes, CD's or disks and computer disks or
tapes, whether in machine readable or user readable form. Confidential
information shall include without limitation information relating directly or
indirectly to the marketing or promotion of either party's products, released
or unreleased software or other programs, trade secrets, business policies
and/or practices, and any information received by or about third parties,
including claimants, that either party is obligated to treat as confidential.
Customer and BFDS hereby acknowledge and agree that, in providing sufficient
information or access to BFDS to allow BFDS to perform in accordance with
this Agreement, or otherwise allowing BFDS to perform as required hereunder,
Customer and/or its agents, servants, customers or employees may disclose to
BFDS, or BFDS may otherwise obtain, certain information that is confidential
and/or proprietary to Customer and/or its agents, servants, employees,
customers or the dependents thereof. Customer and BFDS hereby also
acknowledge and agree that, in providing sufficient information or access to
Customer to allow Customer to perform in accordance with this Agreement, or
otherwise allowing Customer to perform as required hereunder, BFDS and/or its
agents, servants, customers or employees may disclose to Customer, or
Customer may otherwise obtain, certain information that is confidential
and/or proprietary to BFDS and/or its agents, servants, employees, customers
or the dependents thereof. Accordingly, the parties hereby agree to keep
such information confidential and prevent its unauthorized disclosure. Each
party shall: (a) not make any copies of the other's (and/or its agents'
servants' or employees', or customers') confidential information without
first obtaining the written consent of such other and/or the appropriate
individual(s) therefor; (b) not utilize any confidential information of the
other (and/or any confidential information of its agents, servants,
employees, or customers) except in the furtherance of the obligations and
responsibilities specified hereunder, and for no other purpose(s) whatsoever;
and (c) return any such confidential information in its possession to the
other immediately upon (i) the other's demand therefor, (ii) the
accomplishment of the purpose for which such confidential information is or
was held or obtained, or (iii) the expiration or other termination of this
Agreement. In the event of any breach or threatened breach by either party
(or any of either party's agents, servants, vendors, principles, owners,
affiliated persons or employees) of the covenants, agreements and/or
conditions contained in this section, the other party and/or the appropriate
agents, servants, employees, claimants, or customers shall be entitled to an
injunction prohibiting such breach in addition to any other legal and/or
equitable remedies available to them and/or the appropriate individual(s) in
connection with such breach. The parties acknowledge that any confidential
information disclosed to it is valuable, proprietary and unique and that any
disclosure thereof in breach of this Agreement shall result in irreparable
harm. The agreements, covenants and conditions contained in this section
shall survive the expiration or any earlier termination of this Agreement.
I. ASSIGNMENT:
II.
Notwithstanding the foregoing, Customer may, without the consent of BFDS,
assign or transfer this Agreement to any present or future affiliate or
<PAGE>
subsidiary of First Allmerica Financial Life Insurance Company. BFDS agrees
to release Customer from all obligations under this Agreement in the event
that such obligations are assumed under the preceding sentence by a
corporation or entity whose financial responsibility is equivalent to or
greater than that of Customer. As used herein, the term "Customer" shall
include First Allmerica Financial Life Insurance Company and all of its
present or future affiliates or subsidiaries, including without limitation
all corporate successors of any of the foregoing that may result from merger,
consolidation, reorganization, demutualization or conversion. As used
herein, the term "affiliate" shall include any entity controlling, controlled
by or under common control with, First Allmerica Financial Life Insurance
Company, or which following a merger, consolidation, demutualization or
reorganization involving First Allmerica Financial Life Insurance Company is
controlled by an entity that controlled First Allmerica Financial Life
Insurance Company or that First Allmerica Financial Life Insurance Company
controlled or that was under common control with First Allmerica Financial
Life Insurance Company, in each case, prior to such merger, consolidation,
demutualization or reorganization. BFDS may not, without the consent of
Customer, assign or transfer this Agreement to any present or future
affiliate or subsidiary of Boston Financial Data Services, Inc.
J. NOTICE:
Any notice under this Agreement shall be deemed to have been given if sent by
mail, postage prepaid, to the following addresses: if to Customer - First
Allmerica Financial Life Insurance Company, 440 Lincoln Street, Worcester, MA
01653, Attn: Manager, Cash Management, N479; or such other address as
Customer may designate by written notice to BFDS; if to BFDS - Boston
Financial Data Service, Inc., 2 Heritage Drive, No. Quincy, MA 02171,
Attention: Cash Management Services, 1st Floor.
K. SEVERABILITY:
Each and every covenant, provision, term and clause contained in this
Agreement is severable from the others, and each such covenant, provision,
term and clause shall be valid and effective notwithstanding the invalidity
or unenforceability of any other such covenant, provision, term or clause.
L. ENTIRE AGREEMENT:
This Agreement constitutes the entire Agreement between the parties hereto
and supersedes any prior agreement with respect to the subject matter hereof,
whether written or oral, and may not be changed or otherwise terminated,
orally or otherwise, except as expressly provided herein or by an instrument
in writing signed by a duly authorized representative of Customer and BFDS.
M. GOVERNING LAW:
This Agreement shall be governed by the laws of the Commonwealth of
Massachusetts.
The Exhibits attached hereto are hereby made a part of this Agreement.
Additional Exhibits may be added to this Agreement if set forth in a writing
signed by a duly authorized representative of both parties. If any terms are
inconsistent between this Agreement and any Exhibits attached hereto, the
terms of this Agreement shall prevail.
IN WITNESS WHEREOF, the parties hereto by their duly authorized
representatives have executed this Agreement effective as of the date first
written above.
BOSTON FINANCIAL DATA SERVICES, INC.
BY: /s/ STEPHEN HILL
<PAGE>
EXHIBIT A
(ALLMERICA FINANCIAL FEE PROPOSAL BOSTON FINANCIAL DATA SERVICES MAY 1997)
(REV. 7-14-97)
<PAGE>
Allmerica Financial
440 Lincoln Street
Worcester, MA 01653
Re: Retail Lockbox Agreement (Page 1 of 3)
Boston Financial Data Services Inc, ("BFDS") is pleased to establish a
lockbox service for your organization. The lockbox will be operated in
conjunction with Post Office Box No (the "P.O. Box") (See Attached) Boston,
MA, our unique zip code of 02266, and your deposit account(s) at Bank of
Boston entitled (the "Account").
We understand that you have authorized the postmaster in Boston to
permit employees of BFDS to access the P.O. Box. Subject to the terms of
this Agreement, BFDS hereby agrees to provide the following services:
1. BFDS will collect all mail received at the P.O. Box at
various times each day.
2. All checks removed by BFDS from the P.O. Box will be deposited
into the Account as instructed within the client's operating
procedures.
3. BFDS shall not have any responsibilities to read any letter
or other communication received in the P.O. Box, although
checks received with any letter or other communication will
be deposited in the Account. Likewise, any post-dated check
which BFDS determines will be received by the drawee bank by
the date of such check will be deposited in the Account.
BFDS is authorized to endorse checks deposited in the Account
with the endorsement "absence of endorsement guaranteed" or
other similar endorsements and you agree to indemnify BFDS
against any loss, cost or expense resulting from such
endorsement.
4. All processing, depositing and collection of checks shall be
subject to the established procedures followed from time to
time by BFDS in connection with any regular deposit received
by BFDS.
5. Checks returned unpaid because of insufficient funds will be
automatically forwarded for collection a second time; if
unpaid after the second presentation, such checks, together
with advice of debit, will be sent to you.
6. As compensation for services hereunder, you shall pay BFDS mutually
agreed upon fees and expenses.
These fees are to be applied to your account and will remain in effect
for a period of three years with an allowable increase in year two and
three no greater than the calculated Northeast CPI for the previous
period. In addition, BFDS will charge the Account for all out-of-pocket
expenses, such as courier fees, incurred by BFDS in connection with any
rent paid by BFDS for the P.O. Box.
7. This Agreement may be terminated by either party at any time by 90- days
prior written notice to the other, provided that BFDS may terminate this
Agreement at any time on notice to you in the event of your dissolution
or
<PAGE>
insolvency or the commencement of any proceedings under any bankruptcy or
insolvency law or by or against you.
8. BFDS, in performing its duties under this Agreement, shall not be liable
to you except for gross negligence or willful misconduct. BFDS shall
not be responsible for delays or failure in performance resulting from
causes beyond its control including, without limitation, acts of God,
strikes, lockouts, riots, acts of war, governmental regulations, fire,
communication line failures, power failures, earthquakes or other
disasters. BFDS shall also not be liable for special or consequential
damages.
9. Any notice under this Agreement shall be deemed to have been given if
sent by mail, postage prepaid, to the following addresses: If to you,
the address set forth on page one hereof, or to such other address as
you may designate by written notice to BFDS; if to BFDS, Boston
Financial Data Service, Inc., 2 Heritage Drive, No. Quincy, MA 02171,
Attention: Cash Management Services, 1st Floor.
10. This Agreement constitutes the entire Agreement between the parties
hereto and supersedes any prior agreement with respect to the subject
matter hereof, whether written or oral.
11. BFDS hereby agrees that all records which it maintains on behalf of
Allmerica are property of Allmerica, and further agrees to surrender
promptly to Allmerica such records upon Allmerica's request. However,
BFDS has the right to make copies of such records, in its discretion.
To the extent that any records maintained on behalf of Allmerica are
subject to section 31a-1 under the Investment Company Act of 1940 ("1940
Act"), BFDS agrees to preserve such records for the periods prescribed
by rule 31a-2 under the 1940 Act.
12. Each party hereto shall cooperate with each other party and all
appropriate governmental authorities (including without limitation the
SEC, the NASD, and state insurance regulators) and shall permit such
authorities reasonable access to its books and records in conjunction
with any investigation or inquiry relating to the services to be
provided by BFDS. Notwithstanding the generality of the foregoing, each
party hereto further agrees to furnish the Insurance Commissioner of any
state with any information or reports in connection with services
provided under this Agreement which such Commissioner may reasonably
request in order to ascertain whether the variable contracts operations
of Allmerica are being conducted in a manner consistent with the state's
regulations concerning variable contracts and any other applicable law
or regulation.
13. This Agreement shall be governed by the laws of the Commonwealth of
Massachusetts.
BOSTON FINANCIAL DATA SERVICES INC.
BY: /s/ Stephen Hill
TITLE: Vice President
DATE: 11/4/97
ALLMERICA FINANCIAL
BY: /s/ Edward A. Ostrout
TITLE: Assistant Treasurer
DATE: 11/5/97
<PAGE>
Service Level Agreement
Boston Financial Data Services
First Allmerica Financial Life Insurance Company
and
Allmerica Financial Life Insurance and Annuity Company
THIS AGREEMENT is entered into as of this _____ day of January, 1998 by and
among First Allmerica Financial Life Company and Allmerica Financial Life
Insurance and Annuity Company (collectively, "Allmerica") and Boston Financial
Data Services, Inc., ("BFDS").
WHEREAS, Allmerica and BFDS have entered into a Retail Lockbox Agreement and
Allmerica wishes to obtain from BFDS additional mailroom services in connection
with said Retail Lockbox Agreement,
NOW, THEREFORE, in consideration of their mutual promises, Allmerica and BFDS
hereby agree as follows:
1. SERVICES
BFDS hereby agrees to provide Customer with Services ("Services")
according to the specifications ("Service Levels") described in the
following Exhibits(s), which are attached hereto and made a part of this
Agreement:
1. Exhibit B "Boston Financial Data Services--Operations Support Services--
Service
Level Agreement--Allmerica Financial"
2. Exhibit C "Allmerica Financial--Notes for BFDS on Allmerica's intended
Procedures"
Additional Exhibits may be added to this Agreement if set forth in a writing
signed by duly authorized representatives of both parties. If any terms are
inconsistent between this Agreement and any exhibits attached hereto, the
terms of this Agreement shall prevail.
Material failure to provide the Services and Service Levels set forth in the
Exhibits shall be considered a Default for the purposes of section 4.
TERMINATION.
2. COMPENSATION
As compensation for services hereunder, Customer shall pay BFDS mutually
agreed upon fees and expenses as specified in Exhibit A.
<PAGE>
3. LIMITATION OF LIABILITY
Notwithstanding anything to the contrary contained herein, neither party, in
performing its duties under this Agreement, shall be liable to the other
except for gross negligence or willful misconduct. Neither party shall be
liable for special or consequential damages. BFDS shall maintain fidelity
bonding of at least $1,000,000 for claims arising from fraudulent or
dishonest acts on the part of any BFDS employee, which shall be underwritten
by reputable insurers(s) licensed to do business in the Commonwealth of
Massachusetts and having an A.M. Best rating of "A" or better. Within ten
(10) days from Customer's request therefor, BFDS shall provide to Customer
either (a) copies of all relevant insurance Policies, or (b) Certificates of
Insurance reasonably specifying the policies required hereunder.
Neither party shall not responsible for delays or failure in performance
resulting from causes beyond its control including, without limitation,
acts, of God, strikes, lockouts, rots, acts of war, governmental
regulations, fire, communication line failures, power failures, earthquakes
or other disasters.
4. TERMINATION
This Agreement may be terminated: (a) by either party at any time by 90 days
prior written notice to the other; (b) at any time by mutual written consent
of the parties; or (c) by either party immediately, upon notice to the other
party that the other party is in Default. The occurrence of any one or more
of the following events shall constitute a Default under the Agreement by
the party to whom the event relates:
(a) Any failure or refusal by a party to substantially perform or satisfy
any material term or condition of the Agreement, if such failure or
refusal continues for more than 30 days after the earlier of (i) notice
thereof to such defaulting party by the other party, or (ii) actual
knowledge by the failing party that it is failing to perform or satisfy a
material term or condition of the Agreement.
(b) The voluntary or involuntary bankruptcy or insolvency of a party, the
voluntary or involuntary dissolution or liquidation of a party, the
admission in writing by a party of its inability to pay its debts as
they mature, or the assignment by a party for the benefit of creditors.
- 2 -
<PAGE>
5. NOTICES
Any notice shall be sufficiently given when sent by registered or certified
mail to the other party at the address of such party set forth below or at
such other address as such party may from time to time specify in writing to
the other party.
If to the Fund:
Boston Financial Data Services, Inc.
2 Heritage Drive
North Quincy, MA 02171
If to Allmerica:
First Allmerica Financial Life Insurance Company
440 Lincoln Street
Worcester, MA 01653
Attention: William Hayward, Vice President
Allmerica Financial Life Insurance and Annuity Company
440 Lincoln Street
Worcester, MA 01653
Attention: William Hayward, Vice President
6. RECORDS
BFDS hereby agrees that all records which it maintains on behalf of
Allmerica are the property of Allmerica, and further agrees to surrender
promptly to Allmerica such records upon Allmerica's request. However, BFDS
has the right to make copies of such records, in its discretion. To the
extent that any records maintained on behalf of Allmerica are subject to
section 312a-1 under the Investment Company Act of 1940 ("1940 Act") BFDS
agrees to preserve such records for the periods prescribed by Rule 31a-2
under the 1940 Act.
7. COUNTERPARTS
This Agreement may be executed simultaneously in two or more counterparts,
each of which taken together shall constitute one and the same instrument.
8. SEVERABILITY
Each and every covenant, profession, term and clause contained in this
Agreement is severable from the others, and each such covenant, provision,
term and clause shall be valid and effective notwithstanding the invalidity
or unenforceability of any other such covenant, provision, term, or clause.
If any provision of the Agreement shall be held or made invalid by a court
decision, statute, rule or otherwise, the remainder of the Agreement shall
not be affected thereby.
- 3 -
<PAGE>
9. ASSIGNMENT
Customer may, without the consent of BFDS, assign or transfer this Agreement
to any present or future affiliate or subsidiary of First Allmerica
Financial Life Insurance Company. As used herein, the term "affiliate"
shall include any entity controlling, controlled by or under common control
with, First Allmerica Financial Life Insurance Company. BFDS may not,
without the consent of Customer, assign or transfer this Agreement to any
present or future affiliate or subsidiary of BFDS. This Agreement or any of
the rights and obligations hereunder may not be assigned by any party
without the prior written consent of all parties hereto.
10. REGULATORY AUTHORITIES
Each party hereto shall cooperate with each other party and all appropriate
governmental authorities (including without limitation the SEC, the NASD,
and state insurance regulators) and shall permit such authorities reasonable
access to its books and records in connection with any investigation or
inquiry relating to this Agreement or the transactions contemplated hereby.
Notwithstanding the generality of the foregoing, each party hereto further
agrees to furnish the Insurance Commissioner of any state with any
information or reports in connection with services provided under this
Agreement which such Commissioner may request in order to ascertain whether
the insurance operations of the Company are being conducted in a manner
consistent with applicable laws and regulations.
11. CAPTIONS
The captions in this Agreement are included for convenience of reference
only and in no way define or delineate any of the provisions hereof or
otherwise affect their construction or effect.
12. CONTROLLING LAW
This Agreement shall be governed by and its provisions shall be construed in
accordance with the laws of the Commonwealth of Massachusetts.
- 4 -
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to
be executed in its name and on behalf by its duly authorized representative
and its seal to be hereunder affixed hereto as of the date specified below.
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
By: /s/ William Hayward
-----------------------------------------------------
Title: Vice President & Managing Director
-----------------------------------------------------
Date: 2/6/98
-----------------------------------------------------
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
By: /s/ William Hayward
-----------------------------------------------------
Title: Vice President & Managing Director
-----------------------------------------------------
Date: 2/6/98
-----------------------------------------------------
BOSTON FINANCIAL DATA SERVICES, INC.
By: /s/ John E. Ciardi
-----------------------------------------------------
Title: Vice President - Operations Support Services
-----------------------------------------------------
Date: 2/4/98
-----------------------------------------------------
- 5 -
<PAGE>
April 15, 1998
First Allmerica Financial Life Insurance Company
440 Lincoln Street
Worcester, MA 01653
RE: SEPARATE ACCOUNT VA-K (EXECANNUITY PLUS/ALLMERICA ADVANTAGE)
OF FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
FILE #'S: 33-71052 AND 811-8814
Gentlemen:
In my capacity as Counsel of First Allmerica Financial Life Insurance Company
(the "Company"), I have participated in the preparation of the Post-Effective
Amendment to the Registration Statement for Separate Account VA-K on Form N-4
under the Securities Act of 1933 and the Investment Company Act of 1940, with
respect to the Company's qualified and non-qualified variable annuity
contracts/certificates.
I am of the following opinion:
1. Separate Account VA-K is a separate account of the Company validly existing
pursuant to the Massachusetts Insurance Code and the regulations issued
thereunder.
2. The assets held in Separate Account VA-K are not chargeable with
liabilities arising out of any other business the Company may conduct.
3. The individual variable annuity contracts/certificates, when issued in
accordance with the Prospectus contained in the Registration Statement and
upon compliance with applicable local law, will be legal and binding
obligations of the Company in accordance with their terms and when sold
will be legally issued, fully paid and non-assessable.
In arriving at the foregoing opinion, I have made such examination of law and
examined such records and other documents as in my judgment are necessary or
appropriate.
I hereby consent to the filing of this opinion as an exhibit to this
Post-Effective Amendment to the Registration Statement of Separate Account VA-K
filed under the Securities Act of 1933.
Very truly yours,
/s/ Sylvia Kemp-Orino
Sylvia Kemp-Orino
Assistant Vice President and Counsel
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to use in the Statement of Additional Information
constituting part of this Post-Effective Amendment No. 9 to the Registration
Statement of the Separate Account VA-K of First Allmerica Financial Life
Insurance Company on Form N-4 of our report dated February 3, 1998, relating
to the financial statements of First Allmerica Financial Life Insurance
Company, and our report dated March 25, 1998, relating to the financial
statements of the Separate Account VA-K Allmerica Advantage Variable Annuity
and ExecAnnuity Plus Variable Annuity of First Allmerica Financial Life
Insurance Company, both of which appear in such Statement of Additional
Information. We also consent to the reference to us under the heading
"Experts" in such Statement of Additional Information.
/s/ Price Waterhouse LLP
Price Waterhouse LLP
Boston, Massachusetts
April 23, 1998
<PAGE>
PARTICIPATION AGREEMENT
AMONG
ALLMERICA INVESTMENT TRUST
ALLMERICA INVESTMENT MANAGEMENT COMPANY, INC.
AND
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
DATED AS OF
FEBRUARY 25, 1998
<PAGE>
TABLE OF CONTENTS
Page
----
ARTICLE I Purchase of Fund Shares 4
ARTICLE II Representations and Warranties 5
ARTICLE III Prospectuses, Reports to Shareholders
and Proxy Statements, Voting 6
ARTICLE IV Sales Material and Information 8
ARTICLE V Fees and Expenses 9
ARTICLE VI Diversification 9
ARTICLE VII Potential Conflicts 10
ARTICLE VIII Indemnification 11
ARTICLE IX Applicable Law 15
ARTICLE X Termination 15
ARTICLE XI Notices 17
ARTICLE XII Miscellaneous 17
SCHEDULE A Separate Accounts and Variable Products A-1
SCHEDULE B Portfolios of Allmerica Investment Trust B-1
SCHEDULE C Proxy Voting Procedures C-1
2
<PAGE>
THIS AGREEMENT, made and entered into as of the 25th day of February, 1998 by
and among: FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY (hereinafter the
"Company"), a Massachusetts corporation, on its own behalf and on behalf of each
separate account of the Company set forth on Schedule A hereto, as may be
amended from time to time (each such account hereinafter referred to as the
"Account"); ALLMERICA INVESTMENT TRUST, an unincorporated Massachusetts business
trust (hereinafter the "Fund"), and ALLMERICA INVESTMENT MANAGEMENT COMPANY,
INC. (hereinafter the "Adviser"), a Massachusetts corporation
WHEREAS, the Fund engages in business as an open-end management investment
company and is available to act as (i) the investment vehicle for separate
accounts established by insurance companies for individual and group life
insurance policies and annuity contracts with variable accumulation and/or
pay-out provisions (hereinafter referred to individually and/or collectively as
"Variable Products") and (ii) the investment vehicle for certain qualified
pension and retirement plans (hereinafter "Qualified Plans"); and
WHEREAS, insurance companies desiring to utilize the Fund as an investment
vehicle under their Variable Products enter into participation agreements with
the Fund and the Adviser (the "Participating Insurance Companies");
WHEREAS, shares of the Fund are divided into several series of shares, each
representing the interest in a particular managed portfolio of securities and
other assets (each such series hereinafter referred to as a "Portfolio"), any
one or more of which may be made available under this Agreement, as may be
amended from time to time by mutual agreement of the parties hereto; and
WHEREAS, the Fund has applied for an order from the Securities and Exchange
Commission, granting Participating Insurance Companies and Variable Insurance
Product separate accounts exemptions from the provisions of Sections 9(a),
13(a), 15(a), and 15(b) of the Investment Company Act of 1940, as amended
(hereinafter the "1940 Act"), and Rules 6e-2(b)(15) and 6e-3(T)(b)(15)
thereunder, to the extent necessary to permit shares of the Fund to be sold to
and held by separate accounts of both affiliated and unaffiliated life insurance
companies and Qualified Plans (hereinafter the "Shared Funding Exemptive
Order"); and
WHEREAS, the Fund is registered as an open-end management investment
company under the 1940 Act and its shares are registered under the Securities
Act of 1933, as amended (hereinafter the "1933 Act"); and
WHEREAS, the Adviser is duly registered as an investment adviser under the
Investment Advisers Act of 1940, as amended, and any applicable state securities
laws and manages each of the certain portfolios of the Fund and retains
Sub-Advisers for the daily investment and reinvestment of the assets of each
portfolio; and
WHEREAS, Allmerica Investments, Inc. (the "Distributor") is registered as a
broker/dealer under the Securities Exchange Act of 1934, as amended (hereinafter
the "1934 Act"), is a member in good standing of the National Association of
Securities Dealers, Inc. (hereinafter "NASD"); and
WHEREAS, the Company has registered or will register certain Variable
Products under the 1933 Act; and
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<PAGE>
WHEREAS, each Account is a duly organized, validly existing segregated
asset account, established by resolution or under authority of the Board of
Directors of the Company, to set aside and invest assets attributable to the
aforesaid Variable Products, and the Company has registered or will register
each Account as a unit investment trust under the 1940 Act; and
WHEREAS, to the extent permitted by applicable insurance laws and
regulations, the Company intends to purchase, on behalf of each Account, shares
in the Portfolios set forth in Schedule B attached to this Agreement, to fund
certain of the aforesaid Variable Insurance Products and the Fund is authorized
to sell such shares to each such Account at net asset value;
NOW, THEREFORE, in consideration of their mutual promises, the parties
hereto agree as follows:
ARTICLE I. PURCHASE OF FUND SHARES
1.1. The Fund agrees to make available for purchase by the Company shares
of the Fund and shall execute orders placed for each Account on a daily basis at
the net asset value next computed after receipt by the Fund or its designee of
such order. For purposes of this Section 1.1, the Company shall be the designee
of the Fund for receipt of such orders from each Account and receipt by such
designee of an order prior to the close of regular trading on the New York Stock
Exchange ("NYSE") shall constitute receipt by the Fund; provided that the Fund
receives notice of such order by 10:00 a.m. Eastern time on the next following
Business Day. "Business Day" shall mean any day on which the New York Stock
Exchange is open for trading and on which the Fund calculates its net asset
value pursuant to the rules of the Securities and Exchange Commission.
1.2. The Fund, so long as this Agreement is in effect, agrees to make its
shares available indefinitely for purchase at the applicable net asset value per
share by the Company and its Accounts on those days on which the Fund calculates
its net asset value pursuant to rules of the Securities and Exchange Commission
and the Fund shall use reasonable efforts to calculate such net asset value on
each day which the New York Stock Exchange is open for trading. Notwithstanding
the foregoing, the Board of Trustees of the Fund (hereinafter the "Board") may
refuse to permit the Fund to sell shares of any Portfolio to any person, or
suspend or terminate the offering of shares of any Portfolio if such action is
required by law or by regulatory authorities having jurisdiction or is, in the
sole discretion of the Board acting in good faith and in light of their
fiduciary duties under federal and any applicable state laws, necessary in the
best interests of the shareholders of such Portfolio.
1.3. The Fund agrees that shares of the Fund will be sold only to
Participating Insurance Companies and their separate accounts and to certain
Qualified Plans. No shares of any Portfolio will be sold to the general public.
1.4. The Fund agrees to redeem for cash, on the Company's request, any
full or fractional shares of the Fund held by the Company, executing such
requests on a daily basis at the net asset value next computed after receipt by
the Fund or its designee of the request for redemption. For purposes of this
Section 1.4, the Company shall be the designee of the Fund for receipt of
requests for redemption from each Account and receipt by such designee of a
request prior to the close of regular trading on the NYSE shall constitute
receipt by the Fund, provided that the Fund receives notice of such request for
redemption on the next following Business Day.
4
<PAGE>
1.5. The Company agrees that purchases and redemptions of Portfolio shares
offered by the then current prospectus of the Fund shall be made in accordance
with the provisions of such prospectus.
1.6. The Company shall pay for Fund shares no later than the next Business
Day after an order to purchase Fund shares is made in accordance with the
provisions of Section 1.1 hereof. Payment shall be in federal funds transmitted
by wire.
1.7. Issuance and transfer of the Fund's shares will be by book entry
only. Stock certificates will not be issued to the Company or any Account.
Shares ordered from the Fund will be recorded in an appropriate title for each
Account or the appropriate subaccount of each Account.
1.9. The Fund shall furnish same day notice (by wire or telephone,
followed by written confirmation) to the Company of any income, dividends or
capital gain distributions payable on the Fund's shares. The Company hereby
elects to receive all such income dividends and capital gain distributions as
are payable on the Portfolio shares in additional shares of that Portfolio. The
Company reserves the right to revoke this election and to receive all such
income dividends and capital gain distributions in cash. The Fund shall notify
the Company of the number of shares so issued as payment of such dividends and
distributions.
1.10. The Fund shall make the net asset value per share for each Portfolio
available to the Company on a daily basis as soon as reasonably practical after
the net asset value per share is calculated (normally by 6:30 p.m. Eastern time)
and shall use its best efforts to make such net asset value per share available
by 7:00 p.m. Eastern time.
ARTICLE II. REPRESENTATIONS AND WARRANTIES
2.1. The Company represents and warrants that the Variable Products are or
will be registered under the 1933 Act; that the Variable Products will be issued
and sold in compliance in all material respects with all applicable federal and
state laws, and that the sale of the Variable Products shall comply in all
material respects with state insurance suitability requirements. The Company
further represents and warrants that it is an insurance company duly organized
and in good standing under applicable law, that it has legally and validly
established each Account as a segregated asset account under Section 2932 of the
Delaware Insurance Code, and that it has registered or, prior to any issuance
or sale of the Variable Products, will register each Account as a unit
investment trust in accordance with the provisions of the 1940 Act to serve as a
segregated investment account for the Variable Products.
2.2. The Fund represents and warrants that Fund shares sold pursuant to
this Agreement shall be registered under the 1933 Act, duly authorized for
issuance and sold in compliance with the laws of the Commonwealth of
Massachusetts and all applicable federal and state securities laws, and that the
Fund is and shall make every effort to remain registered under the 1940 Act.
The Fund shall amend the registration statement for its shares under the 1933
Act and the 1940 Act from time to time as required in order to effect the
continuous offering of its shares. The Fund shall register and qualify the
shares for sale in accordance with the laws of the various states only if and to
the extent deemed advisable by the Fund.
2.3. The Fund represents that it is currently qualified as a Regulated
Investment Company under Subchapter M of the Internal Revenue Code of 1986, as
amended (the "Code"), and that it will make every effort to maintain such
qualification (under Subchapter M or any successor or similar provision)
5
<PAGE>
and that it will notify the Company promptly upon having a reasonable basis for
believing that it has ceased to so qualify or that it might not so qualify in
the future.
2.4. The Company represents that the Variable Products are currently
treated as life insurance policies or annuity contracts under applicable
provisions of the Code, that it will make every effort to maintain such
treatment, and that it will notify the Fund immediately upon having a reasonable
basis for believing that the Variable Products have ceased to be so treated or
that they might not be so treated in the future.
2.5. The Fund represents that to the extent that it decides to finance
distribution expenses pursuant to Rule 12b-1 under the 1940 Act, the Fund
undertakes to have its board of Trustees, a majority of whom are not interested
persons of the Fund, formulate and approve any plan under Rule 12b-1 to finance
distribution expenses.
2.6. The Fund makes no representation as to whether any aspect of its
operations (including, but not limited to, fees and expenses and investment
policies) complies with the insurance laws or regulations of the various states.
2.7. The Fund represents that it is lawfully organized and validly
existing under the laws of the Commonwealth of Massachusetts and that it does
and will comply in all material respects with the 1940 Act.
2.8. The Adviser represents and warrants that it is and shall remain duly
registered in all material respects under all applicable federal and state
securities laws and that it will perform its obligations for the Fund in
compliance in all material respects with the laws of its state of domicile and
any applicable state and federal securities laws.
2.9. The Fund represents and warrants that its Trustees, officers,
employees, and other individuals/entities dealing with the money and/or
securities of the Fund are and shall continue to be at all times covered by a
blanket fidelity bond or similar coverage for the benefit of the Fund in an
amount not less than the minimal coverage as required currently by Rule 17g-(1)
of the 1940 Act or related provisions as may be promulgated from time to time.
The aforesaid blanket fidelity bond shall include coverage for larceny and
embezzlement and shall be issued by a reputable bonding company.
2.10. The Company represents and warrants that all of its directors,
officers, employees, investment advisers, and other individuals/entities dealing
with the money and/or securities of the Fund are covered by a blanket fidelity
bond or similar coverage, in an amount not less $5 million. The aforesaid,
which includes coverage for larceny and embezzlement, shall be issued by a
reputable bonding company. The Company agrees to make all reasonable efforts to
see that this bond or another bond containing these provisions is always in
effect, and agrees to notify the Fund and the Distributor promptly in writing in
the event that such coverage no longer applies.
ARTICLE III. PROSPECTUSES, REPORTS TO SHAREHOLDERS AND PROXY STATEMENTS; VOTING
3.1. The Fund or its designee shall provide the Company with as many
printed copies of the Fund's current prospectus and statement of additional
information as the Company may reasonably request. If requested by the Company,
in lieu of providing printed copies, the Fund shall provide camera-ready film or
computer diskettes containing the Fund's prospectus and statement of additional
6
<PAGE>
information, and such other assistance as is reasonably necessary in order for
the Company once each year (or more frequently if the prospectus and/or
statement of additional information for the Fund is amended during the year) to
have the prospectus for the Variable Products and the Fund's prospectus printed
together in one document, and to have the statement of additional information
for the Fund and the statement of additional information for the Variable
Products printed together in one document. Alternatively, the Company may print
the Fund's prospectus and/or its statement of additional information in
combination with other fund companies' prospectuses and statements of additional
information.
3.2. Except as provided in this Section 3.2., all expenses of printing and
distributing Fund prospectuses and statements of additional information shall be
the expense of the Company. For any prospectuses and statements of additional
information provided by the Company to the existing owners of Variable Products
who currently own shares of one or more of the Fund's Portfolios, in order to
update disclosure as required by the 1933 Act and/or the 1940 Act, the cost of
printing shall be borne by the Fund. If the Company chooses to receive
camera-ready film or computer diskettes in lieu of receiving printed copies of
the Fund's prospectus, the Fund will reimburse the Company in an amount equal to
the product of x and y where x is the number of such prospectuses distributed to
owners of the Variable Products who currently own shares of one or more of the
Fund's Portfolios, and y is the Fund's per unit cost of typesetting and printing
the Fund's prospectus. The same procedures shall be followed with respect to
the Fund's statement of additional information. The Company agrees to provide
the Fund or its designee with such information as may be reasonably requested by
the Fund to assure that the Fund's expenses do not include the cost of printing
any prospectuses or statements of additional information other than those
actually distributed to existing owners of the Variable Products.
3.3. The Fund's statement of additional information shall be obtainable
from the Fund, the Company or such other person as the Fund may designate, as
agreed upon by the parties.
3.4. The Fund, at its expense, shall provide the Company with copies of
its proxy statements, reports to shareholders, and other communications (except
for prospectuses and statements of additional information, which are covered in
section 3.1) to shareholders in such quantity as the Company shall reasonably
require for distribution to contract owners. The Fund or its designee shall
bear the cost of printing, duplicating, and mailing of these documents to
current contract owners, and the Company shall bear the cost for such documents
used for purposes other than distribution to current contract owners.
3.5. If and to the extent required by law the Company shall:
(i) solicit voting instructions from contract owners;
(ii) vote the Fund shares in accordance with instructions received
from contract owners; and
(iii) vote Fund shares for which no instructions have been received
in the same proportion as Fund shares of such Portfolio for
which instructions have been received,
so long as and to the extent that the Securities and Exchange Commission
continues to interpret the 1940 Act to require pass-through voting privileges
for variable contract owners. The Company reserves the right to vote Fund
shares held in any segregated asset account in its own right, to the extent
permitted by law. The Fund and the Company shall follow the procedures, and
shall have the corresponding
7
<PAGE>
responsibilities, for the handling of proxy and voting instruction
solicitations, as set forth in Schedule C attached hereto and incorporated
herein by reference. Participating Insurance Companies shall be responsible for
ensuring that each of their separate accounts participating in the Fund
calculates voting privileges in a manner consistent with the standards set forth
on Schedule C, which standards will also be provided to the other Participating
Insurance Companies, if any.
3.6. The Fund will comply with all provisions of the 1940 Act requiring
voting by shareholders, including Sections 16(a) and, if and when applicable,
16(b). Further, the Fund will act in accordance with the Securities and
Exchange Commission's interpretation of the requirements of Section 16(a) with
respect to periodic elections of trustees and with whatever rules the Commission
may promulgate with respect thereto.
3.7. The Fund shall use reasonable efforts to provide Fund prospectuses,
reports to shareholders, proxy materials and other Fund communications (or
camera-ready equivalents) to the Company sufficiently in advance of the
Company's mailing dates to enable the Company to complete, at reasonable cost,
the printing, assembling and/or distribution of the communications in accordance
with applicable laws and regulations.
ARTICLE IV. SALES MATERIAL AND INFORMATION
4.1. The Company shall furnish, or shall cause to be furnished, to the
Fund or its designee, each piece of sales literature or other promotional
material in which the Fund or the Adviser(s) is named, at least fifteen Business
Days prior to its use. No such material shall be used if the Fund or its
designee reasonably objects to such use within fifteen Business Days after
receipt of such material.
4.2. The Company shall not give any information or make any
representations or statements on behalf of the Fund or concerning the Fund in
connection with the sale of the Variable Products other than the information or
representations contained in the registration statement or prospectus for the
Fund shares, as such registration statement and prospectus may be amended or
supplemented from time to time, or in reports or proxy statements for the Fund,
or in sales literature or other promotional material approved by the Fund or its
designee, except with the permission of the Fund.
4.3. The Fund or its designee shall furnish, or shall cause to be
furnished, to the Company or its designee, each piece of sales literature or
other promotional material in which the Company and/or its separate account(s)
is named at least fifteen Business Days prior to its use. No such material
shall be used if the Company or its designee reasonably objects to such use
within fifteen Business Days after receipt of such material.
4.4. The Fund and the Adviser shall not give any information or make any
representations on behalf of the Company or concerning the Company, each
Account, or the Variable Products, other than the information or representations
contained in a registration statement or prospectus for the Variable Products,
as such registration statement and prospectus may be amended or supplemented
from time to time, or in published reports for each Account which are in the
public domain or approved by the Company for distribution to contract owners, or
in sales literature or other promotional material approved by the Company or its
designee, except with the permission of the Company.
4.5. The Fund will provide to the Company at least one complete copy of
all registration statements, prospectuses, statements of additional information,
reports, proxy statements, sales literature
8
<PAGE>
and other promotional materials, applications for exemptions, requests for
no-action letters, and all amendments to any of the above, that relate to the
Fund or its shares, which are relevant to the Company or the Variable Products.
4.6. The Company will provide to the Fund at least one complete copy of
all registration statements, prospectuses, statements of additional information,
reports, solicitations for voting instructions, sales literature and other
promotional materials, applications for exemptions, requests for no action
letters, and all amendments to any of the above, that relate to the investment
in the Fund under the Variable Products.
4.7. For purposes of this Article IV, the phrase "sales literature or
other promotional material" includes, but is not limited to, any of the
following that refer to the Fund or any affiliate of the Fund: advertisements
(such as material published, or designed for use in, a newspaper, magazine, or
other periodical, radio, television, telephone or tape recording, videotape
display, signs or billboards, motion pictures, or other public media), sales
literature (I.E., any written communication distributed or made generally
available to customers or the public, including brochures, circulars, research
reports, market letters, form letters, seminar texts, reprints or excerpts of
any other advertisement, sales literature, or published article), educational or
training materials or other communications distributed or made generally
available to some or all agents or employees, and registration statements,
prospectuses, statements of additional information, shareholder reports, and
proxy materials.
ARTICLE V. FEES AND EXPENSES
5.1. The Fund shall pay no fee or other compensation to the Company under
this Agreement, except that if the Fund or any Portfolio adopts and implements a
plan pursuant to Rule 12b-1 to finance distribution expenses, then the
Distributor may make payments to the Company or to the distributor for the
Variable Products if and in amounts agreed to by the Distributor in writing.
5.2. All expenses incident to performance by the Fund under this Agreement
shall be paid by the Fund, other than expenses assumed by the Adviser under the
Management Agreement between the Fund and the Adviser or by another party. The
Fund shall see to it that all its shares are registered and authorized for
issuance in accordance with applicable federal law and, if and to the extent
deemed advisable by the Fund, in accordance with applicable state laws prior to
their sale. The Fund shall bear the expenses for the cost of registration and
qualification of the Fund's shares, preparation and filing of the Fund's
prospectus and registration statement, proxy materials and reports, setting the
prospectus in type, setting in type and printing the proxy materials and reports
to shareholders (including the costs of printing a prospectus that constitutes
an annual report), the preparation of all statements and notices required by any
federal or state law, and all taxes on the issuance or transfer of the Fund's
shares.
ARTICLE VI. DIVERSIFICATION
6.1. The Fund will at all times invest money from the Variable Products
in such a manner as to ensure that the Variable Products will be treated as
variable contracts under the Code and the regulations issued thereunder.
Without limiting the scope of the foregoing, the Fund will at all times
comply with Section 817(h) of the Code and Treasury Regulation 1.817-5,
relating to the diversification requirements for variable annuity, endowment,
or life insurance contracts and any amendments or other modifications to such
Section or Regulations. In the event of a breach of this Article VI by the
Fund, it will take all reasonable steps (a) to notify Company of such breach
and (b) to adequately diversify the Fund so as to achieve compliance within
the grace period afforded by Regulation 1.817-5.
9
<PAGE>
ARTICLE VII. POTENTIAL CONFLICTS
7.1. The Board will monitor the Fund for the existence of any material
irreconcilable conflict between the interests of the contract owners of all
separate accounts investing in the Fund. An irreconcilable material conflict
may arise for a variety of reasons, including: (a) an action by any state
insurance regulatory authority; (b) a change in applicable federal or state
insurance, tax, or securities laws or regulations, or a public ruling, private
letter ruling, no-action or interpretative letter, or any similar action by
insurance, tax, or securities regulatory authorities; (c) an administrative or
judicial decision in any relevant proceeding; (d) the manner in which the
investments of any Portfolio are being managed; (e) a difference in voting
instructions given by Variable Insurance Product owners; or (f) a decision by a
Participating Insurance Company to disregard the voting instructions of contract
owners. The Board shall promptly inform the Company if it determines that an
irreconcilable material conflict exists and the implications thereof.
7.2. Each of the Company and the Adviser will report any potential or
existing conflicts of which it is aware to the Board. Each of the Company and
the Adviser will assist the Board in carrying out its responsibilities under SEC
rules and regulations. The Adviser, and the participating insurance companies
and participating qualified plans will at least annually submit to the Board
such reports, materials, or data as the Board may reasonably request so that the
Board may fully carry out the obligations imposed upon by the conditions
contained in the Shared Funding Exemptive Order, and said reports, materials,
and data will be submitted more frequently if deemed appropriate by the Board.
7.3. If it is determined by a majority of the Board, or a majority of its
members, who are not "interested persons" of the Fund, the Adviser or the
Company as that term is defined in the 1940 Act (hereinafter "disinterested
members"), that a material irreconcilable conflict exists, the Company and other
Participating Insurance Companies shall, at their expense and to the extent
reasonably practicable (as determined by a majority of the disinterested
directors), take whatever steps are necessary to remedy or eliminate the
irreconcilable material conflict, up to and including: (1) withdrawing the
assets allocable to some or all of the separate accounts from the Fund or any
Portfolio and reinvesting such assets in a different investment medium,
including (but not limited to) another Portfolio of the Fund, or submitting the
question whether such segregation should be implemented to a vote of all
affected contract owners and, as appropriate, segregating the assets of any
appropriate group (I.E., annuity contract owners, life insurance policy owners,
or variable contract owners of one or more Participating Insurance Companies)
that votes in favor of such segregation, or offering to the affected contract
owners the option of making such a change; and (2) establishing a new registered
management investment company or managed separate account.
7.4. If a material irreconcilable conflict arises because of a decision by
the Company to disregard contract owner voting instructions and that decision
represents a minority position or would preclude a majority vote, the Company
may be required, at the Fund's election, to withdraw the affected Account's
investment in the Fund and terminate this Agreement with respect to such Account
(at the Company's expense); provided, however that such withdrawal and
termination shall be limited to the extent required by the foregoing material
irreconcilable conflict as determined by a majority of the disinterested members
of the Board.
7.5. If a material irreconcilable conflict arises because a particular
state insurance regulator's decision applicable to the Company conflicts with
the majority of other state regulators, then the
10
<PAGE>
Company will withdraw the affected Account's investment in the Fund and
terminate this Agreement with respect to such Account within six months after
the Board informs the Company in writing that it has determined that such
decision has created an irreconcilable material conflict; provided, however,
that such withdrawal and termination shall be limited to the extent required by
the foregoing material irreconcilable conflict as determined by a majority of
the disinterested members of the Board. Until the end of the foregoing six
month period, the Distributor and Fund shall continue to accept and implement
orders by the Company for the purchase (and redemption) of shares of the Fund.
7.6. For purposes of Sections 7.3 through 7.5 of this Agreement, a
majority of the disinterested members of the Board shall determine whether any
proposed action adequately remedies any irreconcilable material conflict, but in
no event will the Fund be required to establish a new funding medium for the
Variable Products. The Company shall not be required by Section 7.3 to
establish a new funding medium for the Variable Products if an offer to do so
has been declined by vote of a majority of contract owners materially adversely
affected by the irreconcilable material conflict.
7.7. If and to the extent that Rule 6e-2 and Rule 6e-3(T) are amended, or
Rule 6e-3 is adopted, to provide exemptive relief from any provision of the 1940
Act or the rules promulgated thereunder with respect to mixed or shared funding,
or if the Fund obtains a Shared Exemptive Order which requires provisions that
are materially different from the provisions of this Agreement, then (a) the
Fund and/or the Participating Insurance Companies, as appropriate, shall take
such steps as may be necessary to comply with Rules 6e-2 and 6e-3(T), as
amended, and Rule 6e-3, as adopted, or to the terms of the Shared Exemptive
Order, to the extent applicable; and (b) Sections 3.4, 3.5, 7.1, 7.2, 7.3, 7.4,
and 7.5 of this Agreement shall continue in effect only to the extent that terms
and conditions substantially identical to such Sections are contained in such
Rule(s) as so amended or adopted.
ARTICLE VIII. INDEMNIFICATION
8.1. INDEMNIFICATION BY THE COMPANY
8.1(a) The Company agrees to indemnify and hold harmless the Fund and the
Adviser, each of their respective officers, employees, and Trustees or
Directors, and each person, if any, who controls the Fund or the Adviser within
the meaning of Section 15 of the 1933 Act (collectively, the "Indemnified
Parties" and individually, "Indemnified Party," for purposes of this Section
8.1) against any and all losses, claims, damages, liabilities (including amounts
paid in settlement with the written consent of the Company) or litigation
(including legal and other expenses), to which the Indemnified Parties may
become subject under any statute, regulation, at common law or otherwise,
insofar as such losses, claims, damages, liabilities or expenses (or actions in
respect thereof) or settlements are related to the sale or acquisition of the
Fund's shares or the Variable Products and:
(i) arise out of or are based upon any untrue statements or alleged untrue
statements of any material fact contained in the registration statement or
prospectus for the Variable Products or contained in the Variable Products
or sales literature for the Variable Products (or any amendment or
supplement to any of the foregoing), or arise out of or are based upon the
omission or the alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not
misleading, provided that this agreement to indemnify shall not apply as to
any Indemnified Party if such statement or omission or such alleged
statement or omission was made in reliance upon and in conformity with
information furnished to the Company by or on behalf of the Fund for use in
the registration statement or prospectus for the Variable Products or in
the Variable Products or sales literature (or any amendment or
11
<PAGE>
supplement) or otherwise for use in connection with the sale of the
Variable Products or Fund shares; or
(ii) arise out of or as a result of statements or representations (other
than statements or representations contained in the registration statement,
prospectus or sales literature of the Fund not supplied by the Company, or
persons under its control and other than statements or representations
authorized by the Fund or an Adviser) or unlawful conduct of the Company or
persons under its control, with respect to the sale or distribution of the
Variable Products or Fund shares; or
(iii) arise out of or as a result of any untrue statement or alleged
untrue statement of a material fact contained in a registration statement,
prospectus, or sales literature of the Fund or any amendment thereof or
supplement thereto or the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the
statements therein not misleading, if such a statement or omission was made
in reliance upon and in conformity with information furnished to the Fund
by or on behalf of the Company; or
(iv) arise as a result of any failure by the Company to provide the
services and furnish the materials under the terms of this Agreement; or
(v) arise out of or result from any material breach of any representation
and/or warranty made by the Company in this Agreement or arise out of or
result from any other material breach of this Agreement by the Company, as
limited by and in accordance with the provisions of Sections 8.1(b) and
8.1(c) hereof.
8.1(b). The Company shall not be liable under this indemnification
provision with respect to any losses, claims, damages, liabilities or litigation
incurred or assessed against an Indemnified Party as such may arise from such
Indemnified Party's willful misfeasance, bad faith, or gross negligence in the
performance of such Indemnified Party's duties or by reason of such Indemnified
Party's reckless disregard of obligations or duties under this Agreement.
8.1(c). The Company shall not be liable under this indemnification
provision with respect to any claim made against an Indemnified Party unless
such Indemnified Party shall have notified the Company in writing within a
reasonable time after the summons or other first legal process giving
information of the nature of the claim shall have been served upon such
Indemnified Party (or after such Indemnified Party shall have received notice of
such service on any designated agent), but failure to notify the Company of any
such claim shall not relieve the Company from any liability which it may have to
the Indemnified Party against whom such action is brought otherwise than on
account of this indemnification provision. In case any such action is brought
against the Indemnified Parties, the Company shall be entitled to participate,
at its own expense, in the defense of such action. The Company also shall be
entitled to assume the defense thereof, with counsel satisfactory to the party
named in the action. After notice from the Company to such party of the
Company's election to assume the defense thereof, the Indemnified Party shall
bear the fees and expenses of any additional counsel retained by it, and the
Company will not be liable to such party under this Agreement for any legal or
other expenses subsequently incurred by such party independently in connection
with the defense thereof other than reasonable costs of investigation.
12
<PAGE>
8.1(d). The Indemnified Parties will promptly notify the Company of the
commencement of any litigation or proceedings against them in connection with
the issuance or sale of the Fund shares or the Variable Products or the
operation of the Fund.
8.2. INDEMNIFICATION BY THE ADVISER
8.2(a). The Adviser agrees, with respect to each Portfolio that it manages,
to indemnify and hold harmless the Company, each of its directors, officers, and
employees, and each person, if any, who controls the Company within the meaning
of Section 15 of the 1933 Act (collectively, the "Indemnified Parties" and
individually, "Indemnified Party," for purposes of this Section 8.2) against any
and all losses, claims, damages, liabilities (including amounts paid in
settlement with the written consent of the Adviser) or litigation (including
legal and other expenses) to which the Indemnified Parties may become subject
under any statute, regulation, at common law or otherwise, insofar as such
losses, claims, damages, liabilities or expenses (or actions in respect thereof)
or settlements are related to the sale or acquisition of shares of the Portfolio
that it manages or the Variable Products and:
(i) arise out of or are based upon any untrue statement or alleged untrue
statement of any material fact contained in the registration statement or
prospectus or sales literature of the Fund (or any amendment or supplement
to any of the foregoing), or arise out of or are based upon the omission or
the alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading,
provided that this agreement to indemnify shall not apply as to any
Indemnified Party if such statement or omission or such alleged statement
or omission was made in reliance upon and in conformity with information
furnished to the Fund by or on behalf of the Company for use in the
registration statement or prospectus for the Fund or in sales literature
(or any amendment or supplement) or otherwise for use in connection with
the sale of the Variable Products or Portfolio shares; or
(ii) arise out of or as a result of statements or representations (other
than statements or representations contained in the registration statement,
prospectus or sales literature for the Variable Products not supplied by
the Fund or persons under its control and other than statements or
representations authorized by the Company) or unlawful conduct of the Fund,
Adviser(s) or Distributor or persons under their control, with respect to
the sale or distribution of the Variable Products or Portfolio shares; or
(iii) arise out of or as a result of any untrue statement or alleged
untrue statement of a material fact contained in a registration statement,
prospectus, or sales literature covering the Variable Products, or any
amendment thereof or supplement thereto, or the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statement or statements therein not misleading, if
such statement or omission was made in reliance upon information furnished
to the Company by or on behalf of the Fund; or
(iv) arise as a result of any failure by the Fund to provide the services
and furnish the materials under the terms of this Agreement; or
(v) arise out of or result from any material breach of any representation
and/or warranty made by the Adviser in this Agreement or arise out of or
result from any other material breach of this Agreement by the Adviser; as
limited by and in accordance with the provisions of Sections 8.2(b) and
8.2(c) hereof.
13
<PAGE>
8.2(b). The Adviser shall not be liable under this indemnification
provision with respect to any losses, claims, damages, liabilities or litigation
incurred or assessed against an Indemnified Party as such may arise from such
Indemnified Party's willful misfeasance, bad faith, or gross negligence in the
performance of such Indemnified Party's duties or by reason of such Indemnified
Party's reckless disregard of obligations and duties under this Agreement.
8.2(c). The Adviser shall not be liable under this indemnification
provision with respect to any claim made against an Indemnified Party unless
such Indemnified Party shall have notified the Adviser in writing within a
reasonable time after the summons or other first legal process giving
information of the nature of the claim shall have been served upon such
Indemnified Party (or after such Indemnified Party shall have received notice of
such service on any designated agent), but failure to notify the Adviser of any
such claim shall not relieve the Adviser from any liability which it may have to
the Indemnified Party against whom such action is brought otherwise than on
account of this indemnification provision. In case any such action is brought
against the Indemnified Parties, the Adviser will be entitled to participate, at
its own expense, in the defense thereof. The Adviser also shall be entitled to
assume the defense thereof, with counsel satisfactory to the party named in the
action. After notice from the Adviser to such party of the Adviser's election
to assume the defense thereof, the Indemnified Party shall bear the fees and
expenses of any additional counsel retained by it, and the Adviser will not be
liable to such party under this Agreement for any legal or other expenses
subsequently incurred by such party independently in connection with the defense
thereof other than reasonable costs of investigation.
8.2(d). The Company agrees promptly to notify the Adviser of the
commencement of any litigation or proceedings against it or any of its officers
or directors in connection with the issuance or sale of the Variable Products or
the operation of each Account.
8.3. INDEMNIFICATION BY THE FUND
8.3(a). The Fund agrees to indemnify and hold harmless the Company, and
each of its directors and officers and each person, if any, who controls the
Company within the meaning of Section 15 of the 1933 Act (hereinafter
collectively, the "Indemnified Parties" and individually, "Indemnified Party,"
for purposes of this Section 8.3) against any and all losses, claims, damages,
liabilities (including amounts paid in settlement with the written consent of
the Fund) or litigation (including legal and other expenses) to which the
Indemnified Parties may become subject under any statute, regulation, at common
law or otherwise, insofar as such losses, claims, damages, liabilities or
expenses (or actions in respect thereof), litigation or settlements result from
the gross negligence, bad faith or willful misconduct of the Board or any member
thereof, are related to the operations of the Fund and:
(i) arise as a result of any failure by the Fund to provide the services
and furnish the materials under the terms of this Agreement; or
(ii) arise out of or result from any material breach of any representation
and/or warranty made by the Fund in this Agreement or arise out of or
result from any other material breach of this Agreement by the Fund, as
limited and in accordance with the provisions of Sections 8.3(b) and
8.3(a);
8.3(b). The Fund shall not be liable under this indemnification provision
with respect to any losses, claims, damages, liabilities or litigation incurred
or assessed against an Indemnified Party as may arise from such Indemnified
Party's gross negligence, bad faith, or willful misconduct the performance of
14
<PAGE>
such Indemnified Party's duties or by reason of such Indemnified Party's
reckless disregard of obligations and duties under this Agreement.
8.3(c). The Fund shall not be liable under this indemnification provision
with respect to any claim made against an Indemnified Party unless such
Indemnified Party shall have notified the Fund in writing within a reasonable
time after the summons or other first legal process giving information of the
nature of the claim shall have been served upon such Indemnified Party (or after
such Indemnified Party shall have received notice of such service on any
designated agent), but failure to notify the Fund of any such claim shall not
relieve the Fund from any liability which it may have to the Indemnified Party
against whom such action is brought otherwise than on account of this
indemnification provision. In case any such action is brought against the
Indemnified Parties, the Fund will be entitled to participate, at its own
expense, in the defense thereof. The Fund also shall be entitled to assume the
defense thereof, with counsel satisfactory to the party named in the action.
After notice from the Fund to such party of the Fund's election to assume the
defense thereof, the Indemnified Party shall bear the fees and expenses of any
additional counsel retained by it, and the Fund will not be liable to such party
under this Agreement for any legal or other expenses subsequently incurred by
such party independently in connection with the defense thereof other than
reasonable costs of investigation.
8.3(d). The Company agrees promptly to notify the Fund of the commencement
of any litigation or proceedings against it or any of its respective officers or
directors in connection with this Agreement, the issuance or sale of the
Variable Products, with respect to the operation of either Account, or the sale
or acquisition of shares of the Fund.
ARTICLE IX. APPLICABLE LAW
9.1. This Agreement shall be construed and the provisions hereof
interpreted under and in accordance with the laws of the Commonwealth of
Massachusetts.
9.2. This Agreement shall be subject to the provisions of the 1933, 1934
and 1940 Acts, and the rules and regulations and rulings thereunder, including
such exemptions from those statutes, rules and regulations as the Securities and
Exchange Commission may grant (including, but not limited to, the Shared Funding
Exemptive Order) and the terms hereof shall be interpreted and construed in
accordance therewith.
ARTICLE X. TERMINATION
10.1. This Agreement shall continue in full force and effect until the
first to occur of:
10.1(a) termination by any party for any reason by at least sixty (60)
days advance written notice delivered to the other parties; or
10.1(b) termination by the Company by written notice to the Fund and the
Adviser with respect to any Portfolio based upon the Company's determination
that shares of such Portfolio are not reasonably available to meet the
requirements of the Variable Products; or
10.1(c) termination by the Company by written notice to the Fund and the
Adviser with respect to any Portfolio in the event any of the Portfolio's shares
are not registered, issued or sold in accordance with applicable state and/or
federal law or such law precludes the use of such shares as the underlying
investment media of the Variable Products issued or to be issued by the Company;
or
15
<PAGE>
10.1(d) termination by the Company by written notice to the Fund and the
Adviser with respect to any Portfolio in the event that such Portfolio ceases to
qualify as a Regulated Investment Company under Subchapter M of the Code or
under any successor or similar provision, or if the Company reasonably believes
that the Fund may fail to so qualify; or
10.1(e) termination by the Company by written notice to the Fund and the
Adviser with respect to any Portfolio in the event that such Portfolio fails to
meet the diversification requirements specified in Article VI hereof; or
10.1(f) termination by the Fund by written notice to the Company if the
Fund shall determine, in its sole judgment exercised in good faith, that the
Company and/or its affiliated companies has suffered a material adverse change
in its business, operations, financial condition or prospects since the date of
this Agreement or is the subject of material adverse publicity, or
10.1(g) termination by the Company by written notice to the Fund and the
Adviser, if the Company shall determine, in its sole judgment exercised in good
faith, that either the Fund or the Adviser has suffered a material adverse
change in its business, operations, financial condition or prospects since the
date of this Agreement or is the subject of material adverse publicity; or
10.2. Notwithstanding any termination of this Agreement, the Fund shall,
at the option of the Company, continue to make available additional shares of
the Fund pursuant to the terms and conditions of this Agreement, for all
Variable Products in effect on the effective date of termination of this
Agreement (hereinafter referred to as "Existing Variable Products").
Specifically, without limitation, the owners of the Existing Variable Products
shall be permitted to direct reallocation of investments in the Portfolios of
the Fund, redemption of investments in the Portfolios of the Fund and/or
investment in the Portfolios of the Fund upon the making of additional purchase
payments under the Existing Variable Products. The parties agree that this
Section 10.2 shall not apply to any termination under Article VII and the effect
of such Article VII termination shall be governed by Article VII of this
Agreement.
10.3. The provisions of Article VIII Indemnification shall survive any
termination of this Agreement pursuant to this Article X Termination.
10.4. The Company shall not redeem Fund shares attributable to the
Variable Products (as distinct from Fund shares attributable to the Company's
assets held in the Account) except (i) as necessary to implement contract owner
initiated or approved transactions, or (ii) as required by state and/or federal
laws or regulations or judicial or other legal precedent of general application
(hereinafter referred to as a "Legally Required Redemption") or (iii) as
permitted by an order of the Securities and Exchange Commission pursuant to
Section 26(b) of the 1940 Act. Upon request, the Company will promptly furnish
to the Fund the opinion of counsel for the Company (which counsel shall be
reasonably satisfactory to the Fund) to the effect that any redemption pursuant
to clause (ii) above is a Legally Required Redemption. Furthermore, except in
cases where permitted under the terms of the Variable Products, the Company
shall not prevent contract owners from allocating payments to a Portfolio that
was otherwise available under the Variable Products without first giving the
Fund 90 days prior written notice of its intention to do so.
16
<PAGE>
ARTICLE XI. NOTICES
Any notice shall be sufficiently given when hand delivered or sent by
registered or certified mail to the other party at the address of such party set
forth below or at such other address as such party may from time to time specify
in writing to the other party.
If to the Fund:
Allmerica Investment Trust
440 Lincoln Street
Worcester, MA 01653
Attention: George M. Boyd, Esq.
If to Adviser:
Allmerica Investment Management Company, Inc.
440 Lincoln Street
Worcester, MA 01653
Attention: Abigail M. Armstrong, Esq.
If to the Company:
First Allmerica Financial Life Insurance Company
440 Lincoln Street
Worcester, Massachusetts 01653
Attention: Richard M. Reilly, President
ARTICLE XII. MISCELLANEOUS
12.1. A copy of the Fund's Agreement and Declaration of Trust, as may be
amended from time to time, is on file with the Secretary of the Commonwealth of
Massachusetts. Notice is hereby given that this instrument is executed by the
Fund's Trustees as Trustees and not individually, and the Fund's obligations
under this Agreement are not binding upon any of the Trustees or Shareholders of
the Fund, but are binding only upon the assets and property of the Fund.
12.2. Subject to the requirements of legal process and regulatory
authority, each party hereto shall treat as confidential the names and addresses
of the owners of the Variable Products and all information reasonably identified
as confidential in writing by any other party hereto and, except as permitted by
this Agreement, shall not disclose, disseminate or utilize such names and
addresses and other confidential information until such time as it may come into
the public domain without the express written consent of the affected party.
12.3. The captions in this Agreement are included for convenience of
reference only and in no way define or delineate any of the provisions hereof or
otherwise affect their construction or effect.
12.4. This Agreement may be executed simultaneously in two or more
counterparts, each of which taken together shall constitute one and the same
instrument.
12.5. If any provision of this Agreement shall be held or made invalid by
a court decision, statute, rule or otherwise, the remainder of the Agreement
shall not be affected thereby.
17
<PAGE>
12.6. Each party hereto shall cooperate with each other party and all
appropriate governmental authorities (including without limitation the
Securities and Exchange Commission, the National Association of Securities
Dealers and state insurance regulators) and shall permit such authorities
reasonable access to its books and records in connection with any investigation
or inquiry relating to this Agreement or the transactions contemplated hereby.
Notwithstanding the generality of the foregoing, each party hereto further
agrees to furnish the California Insurance Commissioner with any information or
reports in connection with services provided under this Agreement which such
Commissioner may request in order to ascertain whether the insurance operations
of the Company are being conducted in a manner consistent with the California
Insurance Regulations and any other applicable law or regulations.
12.7. The rights, remedies and obligations contained in this Agreement are
cumulative and are in addition to any and all rights, remedies and obligations
at law or in equity, which the parties hereto are entitled to under state and
federal laws.
12.8. This Agreement or any of the rights and obligations hereunder may
not be assigned by any party without the prior written consent of all parties
hereto; provided, however, that the Adviser may assign this Agreement or any
rights or obligations hereunder to any affiliate of or company controlled by or
under common control with the Adviser, if such assignee is duly licensed and
registered to perform the obligations of the Adviser under this Agreement.
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to be
executed in its name and on its behalf by its duly authorized representative and
its seal to be hereunder affixed hereto as of the date specified above.
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
By: /s/ Joseph W. MacDougall, Jr.
---------------------------------------
NAME: Joseph W. MacDougall, Jr.
TITLE: Vice President
ALLMERICA INVESTMENT TRUST
By: /s/ Thomas P. Cunningham
---------------------------------------
NAME: Thomas P. Cunningham
TITLE: Vice President & Treasurer
ALLMERICA INVESTMENT MANAGEMENT COMPANY, INC.
By: /s/ Richard F. Betzler, Jr.
---------------------------------------
NAME: Richard F. Betzler, Jr.
TITLE: Vice President
18
<PAGE>
SCHEDULE A
SEPARATE ACCOUNTS AND VARIABLE PRODUCTS
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
VARIABLE LIFE PRODUCTS
SEPARATE ACCOUNT PRODUCT NAME 1933 ACT # 1940 ACT #
- ---------------- ------------ ---------- ----------
<S> <C> <C> <C>
VEL II VEL ('93) 33-71056 811-8130
Inheiritage Inheiritage 33-74184 811-8304
Select Inheiritage
Group VEL Group VEL 33-06383 811-7663
<CAPTION>
VARIABLE ANNUITY PRODUCTS
SEPARATE ACCOUNT PRODUCT NAME 1933 ACT # 1940 ACT #
- ---------------- ------------ ---------- ----------
<S> <C> <C> <C>
VA-K ExecAnnuity Plus 93 33-71052 811-8814
Allmerica Advantage
Allmerica Select Separate Account Allmerica Select Resource I 33-71058 811-8116
Allmerica Select Resource II
Separate Account I Variable Annuities 33-47858 811-6666
- ----------------------------------------------------------------------------------------------------
</TABLE>
A-1
<PAGE>
SCHEDULE B
PORTFOLIOS OF
ALLMERICA INVESTMENT TRUST
Select Emerging Markets Fund
Select International Equity Fund
Select Aggressive Growth Fund
Select Capital Appreciation Fund
Select Value Opportunity Fund
Select Strategic Growth Fund
Select Growth Fund
Growth Fund
Equity Index Fund
Select Growth and Income Fund
Select Income Fund
Investment Grade Income Fund
Government Bond Fund
Money Market Fund
B-1
<PAGE>
SCHEDULE C
PROXY VOTING PROCEDURES
The following is a list of procedures and corresponding responsibilities for the
handling of proxies and voting instructions relating to the Fund. The defined
terms herein shall have the meanings assigned in the Participation Agreement
except that the term "Company" shall also include the department or third party
assigned by the Company to perform the steps delineated below.
- - The proxy proposals are given to the Company by the Fund as early as
possible before the date set by the Fund for the shareholder meeting to
enable the Company to consider and prepare for the solicitation of voting
instructions from owners of the Variable Products and to facilitate the
establishment of tabulation procedures. At this time the Fund will inform
the Company of the Record, Mailing and Meeting dates. This will be done
verbally approximately two months before meeting.
- - Promptly after the Record Date, the Company will perform a "tape run," or
other activity, which will generate the names, addresses and number of
units which are attributed to each contract owner/policyholder (the
"Customer") as of the Record Date. Allowance should be made for account
adjustments made after this date that could affect the status of the
Customers' accounts as of the Record Date.
Note: The number of proxy statements is determined by the activities
described above. The Company will use its best efforts to call in the
number of Customers to the Fund, as soon as possible, but no later than
two weeks after the Record Date.
- - The Fund's Annual Report must be sent to each Customer by the Company
either before or together with the Customers' receipt of voting instruction
solicitation material. The Fund will provide the last Annual Report to the
Company pursuant to the terms of Section 3.43 of the Agreement to which
this Schedule relates.
- - The text and format for the Voting Instruction Cards ("Cards" or "Card") is
provided to the Company by the Fund. The Company, at its expense, shall
produce and personalize the Voting Instruction Cards. The Fund or its
affiliate must approve the Card before it is printed. Allow approximately
2-4 business days for printing information on the Cards. Information
commonly found on the Cards includes:
- name (legal name as found on account registration)
- address
- fund or account number
- coding to state number of units
- individual Card number for use in tracking and verification of votes
(already on Cards as printed by the Fund).
(This and related steps may occur later in the chronological process due to
possible uncertainties relating to the proposals.)
C-1
<PAGE>
- - During this time, the Fund will develop, produce and pay for the Notice of
Proxy and the Proxy Statement (one document). Printed and folded notices
and statements will be sent to Company for insertion into envelopes
(envelopes and return envelopes are provided and paid for by the Company).
Contents of envelope sent to Customers by the Company will include:
- Voting Instruction Card(s)
- One proxy notice and statement (one document)
- return envelope (postage pre-paid by Company) addressed to the Company
or its tabulation agent
- "urge buckslip" - optional, but recommended. (This is a small, single
sheet of paper that requests Customers to vote as quickly as possible
and that their vote is important. One copy will be supplied by the
Fund.)
- cover letter - optional, supplied by Company and reviewed and approved
in advance by the Fund.
- - The above contents should be received by the Company approximately 3-5
business days before mail date. Individual in charge at Company reviews
and approves the contents of the mailing package to ensure correctness and
completeness. Copy of this approval sent to the Fund.
- - Package mailed by the Company.
* The Fund must allow at least a 15-day solicitation time to the Company
as the shareowner. (A 5-week period is recommended.) Solicitation
time is calculated as calendar days from (but NOT including,) the
meeting, counting backwards.
- - Collection and tabulation of Cards begins. Tabulation usually takes place
in another department or another vendor depending on process used. An
often used procedure is to sort Cards on arrival by proposal into vote
categories of all yes, no, or mixed replies, and to begin data entry.
Note: Postmarks are not generally needed. A need for postmark information
would be due to an insurance company's internal procedure and has not been
required by the Fund in the past.
- - Signatures on Card checked against legal name on account registration which
was printed on the Card.
Note: For Example, if the account registration is under "John A. Smith,
Trustee," then that is the exact legal name to be printed on the Card and
is the signature needed on the Card.
- - If Cards are mutilated, or for any reason are illegible or are not signed
properly, they are sent back to Customer with an explanatory letter and a
new Card and return envelope. The mutilated or illegible Card is
disregarded and considered to be NOT RECEIVED for purposes of vote
tabulation. Any Cards that have been "kicked out" (e.g. mutilated,
illegible) of the procedure are "hand verified," i.e., examined as to why
they did not complete the system. Any questions on those Cards are usually
remedied individually.
- - There are various control procedures used to ensure proper tabulation of
votes and accuracy of that tabulation. The most prevalent is to sort the
Cards as they first arrive into categories depending upon their vote; an
estimate of how the vote is progressing may then be calculated. If the
initial estimates and the actual vote do not coincide, then an internal
audit of that vote should occur. This may entail a recount.
C-2
<PAGE>
- - The actual tabulation of votes is done in units which is then converted to
shares. (It is very important that the Fund receives the tabulations stated
in terms of a percentage and the number of SHARES.) The Fund must review
and approve tabulation format.
- - Final tabulation in shares is verbally given by the Company to the Fund on
the morning of the meeting not later than 10:00 a.m. Eastern time. The
Fund may request an earlier deadline if reasonable and if required to
calculate the vote in time for the meeting.
- - A Certification of Mailing and Authorization to Vote Shares will be
required from the Company as well as an original copy of the final vote.
The Fund will provide a standard form for each Certification.
- - The Company will be required to box and archive the Cards received from the
Customers. In the event that any vote is challenged or if otherwise
necessary for legal, regulatory, or accounting purposes, the Fund will be
permitted reasonable access to such Cards.
- - All approvals and "signing-off" may be done orally, but must always be
followed up in writing.
C-3
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PARTICIPATION AGREEMENT
Among
VARIABLE INSURANCE PRODUCTS FUND,
FIDELITY DISTRIBUTORS CORPORATION
and
STATE MUTUAL LIFE ASSURANCE COMPANY OF AMERICA
THIS AGREEMENT, made and entered into as of the 18th day of February,
1994 by and among STATE MUTUAL LIFE ASSURANCE COMPANY OF AMERICA, (hereinafter
the "Company"), a Massachusetts corporation, on its own behalf and on behalf of
each segregated asset account of the Company set forth on Schedule A hereto as
may be amended from time to time (each such account hereinafter referred to as
the "Account"), and the VARIABLE INSURANCE PRODUCTS FUND, an unincorporated
business trust organized under the laws of the Commonwealth of Massachusetts
(hereinafter the "Fund") and FIDELITY DISTRIBUTORS CORPORATION (hereinafter the
"Underwriter"), a Massachusetts corporation.
WHEREAS, the Fund engages in business as an open-end management
investment company and is available to act as the investment vehicle for
separate accounts established for variable life insurance policies and variable
annuity contracts (collectively, the "Variable Insurance Products") to be
offered by insurance companies which have entered into participation agreements
with the Fund and the Underwriter (hereinafter "Participating Insurance
Companies"); and
WHEREAS, the beneficial interest in the Fund is divided into several
series of shares, each designated a "Portfolio" and representing the interest in
a particular managed portfolio of securities and other assets; and
WHEREAS, the Fund has obtained an order from the Securities and
Exchange Commission, dated October 15, 1985 (File No. 812-6102), granting
Participating Insurance Companies and variable annuity and variable life
insurance separate accounts exemptions from the provisions of sections 9(a),
13(a), 15(a), and 15(b) of the Investment Company Act of 1940, as amended,
(hereinafter the "1940 Act") and Rules 6e-2(b) (15) and 6e-3(T) (b) (15)
thereunder, to the extent necessary to permit shares of the Fund to be sold to
and held by variable annuity and variable life insurance separate accounts of
both affiliated and unaffiliated life insurance companies (hereinafter the
"Shared Funding Exemptive Order"); and
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WHEREAS, the Fund is registered as an open-end management investment
company under the 1940 Act and its shares are registered under the Securities
Act of 1933, as amended (hereinafter the "1933 Act"); and
WHEREAS, Fidelity Management & Research Company (the "Adviser") is duly
registered as an investment adviser under the federal Investment Advisers Act of
1940 and any applicable state securities law; and
WHEREAS, the Company has registered or will register certain variable
life insurance and variable annuity contracts under the 1933 Act; and
WHEREAS, each Account is a duly organized, validly existing segregated
asset account, established by resolution of the Board of Directors of the
Company, on the date shown for such Account on Schedule A hereto, to set aside
and invest assets attributable to the aforesaid variable annuity contracts; and
WHEREAS, the Company has registered or will register each Account as a
unit investment trust under the 1940 Act; and
WHEREAS, the Underwriter is registered as a broker dealer with the
Securities and Exchange Commission ("SEC") under the Securities Exchange Act of
1934, as amended, (hereinafter the "1934 Act"), and is a member in good standing
of the National Association of Securities Dealers, Inc. (hereinafter "NASD");
and
WHEREAS, to the extent permitted by applicable insurance laws and
regulations, the Company intends to purchase shares in the Portfolios on behalf
of each Account to fund certain of the aforesaid variable life and variable
annuity contracts and the Underwriter is authorized to sell such shares to unit
investment trusts such as each Account at net asset value;
NOW, THEREFORE, in consideration of their mutual promises, the Company,
the Fund and the Underwriter agree as follows:
ARTICLE I. SALE OF FUND SHARES
1.1. The Underwriter agrees to sell to the Company those shares of the
Fund which each Account orders, executing such orders on a daily basis at the
net asset value next computed after receipt by the Fund or its designee of the
order for the shares of the Fund. For purposes of this Section 1.1, the Company
shall be the designee of the Fund for receipt of such orders from each Account
and receipt by such designee shall constitute receipt by the Fund; provided that
the Fund receives notice of such order by 9:30 a.m. Boston time on the next
following Business Day. "Business Day" shall mean any day on which the New York
Stock Exchange is open for trading and on which the Fund calculates its net
asset value pursuant to the rules of the Securities and Exchange Commission.
2
<PAGE>
1.2. The Fund agrees to make its shares available indefinitely for
purchase at the applicable net asset value per share by the Company and its
Accounts on those days on which the Fund calculates its net asset value pursuant
to rules of the Securities and Exchange Commission and the Fund shall use
reasonable efforts to calculate such net asset value on each day which the New
York Stock Exchange is open for trading. Notwithstanding the foregoing, the
Board of Trustees of the Fund (hereinafter the "Board") may refuse to sell
shares of any Portfolio to any person, or suspend or terminate the offering of
shares of any Portfolio if such action is required by law or by regulatory
authorities having jurisdiction or is, in the sole discretion of the Board
acting in good faith and in light of their fiduciary duties under federal and
any applicable state laws, necessary in the best interests of the shareholders
of such Portfolio.
1.3. The Fund and the Underwriter agree that shares of the Fund will
be sold only to Participating Insurance Companies and their separate accounts.
No shares of any Portfolio will be sold to the general public.
1.4. The Fund and the Underwriter will not sell Fund shares to any
insurance company or separate account unless an agreement containing provisions
substantially the same as Articles I, III, V, VII and Section 2.5 of Article II
of this Agreement is in effect to govern such sales.
1.5. The Fund agrees to redeem for cash, on the Company's request, any
full or fractional shares of the Fund held by the Company, executing such
requests on a daily basis at the net asset value next computed after receipt by
the Fund or its designee of the request for redemption. For purposes of this
Section 1.5, the Company shall be the designee of the Fund for receipt of
requests for redemption from each Account and receipt by such designee shall
constitute receipt by the Fund; provided that the Fund receives notice of such
request for redemption on the next following Business Day.
1.6. The Company agrees to purchase and redeem the shares of each
Portfolio offered by the then current prospectus of the Fund and in accordance
with the provisions of such prospectus. The Company agrees that all net amounts
available under the variable annuity contracts with the form number(s) which are
listed on Schedule A attached hereto and incorporated herein by this reference,
as such Schedule A may be amended from time to time hereafter by mutual written
agreement of all the parties hereto, (the "Contracts") shall be invested in the
Fund, in such other Funds advised by the Adviser as may be mutually agreed to in
writing by the parties hereto, or in the Company's general account, provided
that such amounts may also be invested in an investment company other than the
Fund if (a) such other investment company, or series thereof, has investment
objectives or policies that are substantially different from the investment
objectives and policies of all the Portfolios of the Fund; or (b) the Company
gives the Fund and the Underwriter 45 days written notice of its intention to
make such other investment company available as a funding vehicle for the
Contracts; or (c) such other investment company was available as a funding
vehicle for the Contracts prior to the date of this Agreement and the Company so
informs the Fund and Underwriter prior to their signing this Agreement (a list
of such funds appearing on Schedule C to this Agreement); or (d) the Fund or
Underwriter consents to the use of such other investment company.
3
<PAGE>
1.7. The Company shall pay for Fund shares on the next Business Day
after an order to purchase Fund shares is made in accordance with the provisions
of Section 1.1 hereof. Payment shall be in federal funds transmitted by wire.
For purpose of Section 2.10 and 2.11, upon receipt by the Fund of the federal
funds so wired, such funds shall cease to be the responsibility of the Company
and shall become the responsibility of the Fund.
1.8. Issuance and transfer of the Fund's shares will be by book entry
only. Stock certificates will not be issued to the Company or any Account.
Shares ordered from the Fund will be recorded in an appropriate title for each
Account or the appropriate subaccount of each Account.
1.9. The Fund shall furnish same day notice (by wire or telephone,
followed by written confirmation) to the Company of any income, dividends or
capital gain distributions payable on the Fund's shares. The Company hereby
elects to receive all such income dividends and capital gain distributions as
are payable on the Portfolio shares in additional shares of that Portfolio. The
Company reserves the right to revoke this election and to receive all such
income dividends and capital gain distributions in cash. The Fund shall notify
the Company of the number of shares so issued as payment of such dividends and
distributions.
1.10. The Fund shall make the net asset value per share for each
Portfolio available to the Company on a daily basis as soon as reasonably
practical after the net asset value per share is calculated and shall use its
best efforts to make such net asset value per share available by 7 p.m. Boston
time.
ARTICLE II. REPRESENTATIONS AND WARRANTIES
2.1. The Company represents and warrants that the Contracts are or
will be registered under the 1933 Act; that the Contracts will be issued and
sold in compliance in all material respects with all applicable Federal and
State laws and that the sale of the Contracts shall comply in all material
respects with state insurance suitability requirements. The Company further
represents and warrants that it is an insurance company duly organized and in
good standing under applicable law and that it has legally and validly
established each Account prior to any issuance or sale thereof as a segregated
asset account under Section 132G of Chapter 175 of the Insurance Code of the
Commonwealth of Massachusetts and has registered or, prior to any issuance or
sale of the Contracts, will register each Account as a unit investment trust in
accordance with the provisions of the 1940 Act to serve as a segregated
investment account for the Contracts.
2.2. The Fund represents and warrants that Fund shares sold pursuant
to this Agreement shall be registered under the 1933 Act, duly authorized for
issuance and sold in compliance with the laws of the Commonwealth of
Massachusetts and all applicable federal and state securities laws and that the
Fund is and shall remain registered under the 1940 Act. The Fund shall amend
the Registration Statement for its shares under the 1933 Act and the 1940 Act
4
<PAGE>
from time to time as required in order to effect the continuous offering of its
shares. The Fund shall register and qualify the shares for sale in accordance
with the laws of the various states only if and to the extent deemed advisable
by the Fund or the Underwriter.
2.3. The Fund represents that it is currently qualified as a Regulated
Investment Company under Subchapter M of the Internal Revenue Code of 1986, as
amended, (the "Code") and that it will make every effort to maintain such
qualification (under Subchapter M or any successor or similar provision) and
that it will notify the Company immediately upon having a reasonable basis for
believing that it has ceased to so qualify or that it might not so qualify in
the future.
2.4. The Company represents that the Contracts are currently treated
as life insurance or annuity contracts, under applicable provisions of the Code
and that it will make every effort to maintain such treatment and that it will
notify the Fund and the Underwriter immediately upon having a reasonable basis
for believing that the Contracts have ceased to be so treated or that they might
not be so treated in the future.
2.5. The Fund currently does not intend to make any payments to
finance distribution expenses pursuant to Rule 12b-1 under the 1940 Act or
otherwise, although it may make such payments in the future. The Fund has
adopted a "no fee" or "defensive" Rule 12b-1 Plan under which it makes no
payments for distribution expenses. To the extent that it decides to finance
distribution expenses pursuant to Rule 12b-1, the Fund undertakes to have a
board of trustees, a majority of whom are not interested persons of the Fund,
formulate and approve any plan under Rule 12b-1 to finance distribution
expenses.
2.6. The Fund makes no representation as to whether any aspect of its
operations (including, but not limited to, fees and expenses and investment
policies) complies with the insurance laws or regulations of the various states
except that the Fund represents that the Fund's investment policies, fees and
expenses are and shall at all times remain in compliance with the laws of the
Commonwealth of Massachusetts and the Fund and the Underwriter represent that
their respective operations are and shall at all times remain in material
compliance with the laws of the Commonwealth of Massachusetts to the extent
required to perform this Agreement.
2.7. The Underwriter represents and warrants that it is a member in
good standing of the NASD and is registered as a broker-dealer with the SEC.
The Underwriter further represents that it will sell and distribute the Fund
shares in accordance with the laws of the Commonwealth of Massachusetts and all
applicable state and federal securities laws, including without limitation the
1933 Act, the 1934 Act, and the 1940 Act.
2.8. The Fund represents that it is lawfully organized and validly
existing under the laws of the Commonwealth of Massachusetts and that it does
and will comply in all material respects with the 1940 Act.
2.9. The Underwriter represents and warrants that the Adviser is and
shall remain duly registered in all material respects under all applicable
federal and state securities laws and
5
<PAGE>
that the Adviser shall perform its obligations for the Fund in compliance in
all material respects with the laws of the Commonwealth of Massachusetts and
any applicable state and federal securities laws.
2.10. The Fund and Underwriter represent and warrant that all of their
directors, officers, employees, investment advisers, and other
individuals/entities dealing with the money and/or securities of the Fund are
and shall continue to be at all times covered by a blanket fidelity bond or
similar coverage for the benefit of the Fund in an amount not less than the
minimal coverage as required currently by Rule 17g-(1) of the 1940 Act or
related provisions as may be promulgated from time to time. The aforesaid Bond
shall include coverage for larceny and embezzlement and shall be issued by a
reputable bonding company.
2.11. The Company represents and warrants that all of its directors,
officers, employees, investment advisers, and other individuals/entities dealing
with the money and/or securities of the Fund are covered by a blanket fidelity
bond or similar coverage for the benefit of the Fund, in an amount not less $5
million. The aforesaid includes coverage for larceny and embezzlement is issued
by a reputable bonding company. The Company agrees to make all reasonable
efforts to see that this bond or another bond containing these provisions is
always in effect, and agrees to notify the Fund and the Underwriter in the event
that such coverage no longer applies.
ARTICLE III. PROSPECTUSES AND PROXY STATEMENTS; VOTING
3.1. The Underwriter shall provide the Company (at the Company's
expense) with as many copies of the Fund's current prospectus as the Company may
reasonably request. If requested by the Company in lieu thereof, the Fund shall
provide such documentation (including a final copy of the new prospectus as set
in type at the Fund's expense) and other assistance as is reasonably necessary
in order for the Company once each year (or more frequently if the prospectus
for the Fund is amended) to have the prospectus for the Contracts and the Fund's
prospectus printed together in one document (such printing to be at the
Company's expense).
3.2. The Fund's prospectus shall state that the Statement of
Additional Information for the Fund is available from the Underwriter (or in the
Fund's discretion, the Prospectus shall state that such Statement is available
from the Fund), and the Underwriter (or the Fund), at its expense, shall print
and provide such Statement free of charge to the Company and to any owner of a
Contract or prospective owner who requests such Statement.
3.3. The Fund, at its expense, shall provide the Company with copies
of its proxy material, reports to shareholders, and other communications to
shareholders in such quantity as the Company shall reasonably require for
distributing to Contract owners.
3.4. If and to the extent required by law the Company shall:
(i) solicit voting instructions from Contract owners;
6
<PAGE>
(ii) vote the Fund shares in accordance with instructions
received from Contract owners; and
(iii) vote Fund shares for which no instructions have been
received in the same proportion as Fund shares of such
portfolio for which instructions have been received,
so long as and to the extent that the Securities and Exchange Commission
continues to interpret the 1940 Act to require pass-through voting privileges
for variable contract owners. The Company reserves the right to vote Fund
shares held in any segregated asset account in its own right, to the extent
permitted by law. Participating Insurance Companies shall be responsible for
assuring that each of their separate accounts participating in the Fund
calculates voting privileges in a manner consistent with the standards set forth
on Schedule B attached hereto and incorporated herein by this reference, which
standards will also be provided to the other Participating Insurance Companies.
3.5. The Fund will comply with all provisions of the 1940 Act
requiring voting by shareholders, and in particular the Fund will either provide
for annual meetings or comply with Section 16(c) of the 1940 Act (although the
Fund is not one of the trusts described in Section 16(c) of that Act) as well as
with Sections 16(a) and, if and when applicable, 16(b). Further, the Fund will
act in accordance with the Securities and Exchange Commission's interpretation
of the requirements of Section 16(a) with respect to periodic elections of
trustees and with whatever rules the Commission may promulgate with respect
thereto.
ARTICLE IV. SALES MATERIAL AND INFORMATION
4.1. The Company shall furnish, or shall cause to be furnished, to the
Fund or its designee, each piece of sales literature or other promotional
material in which the Fund or its investment adviser or the Underwriter is
named, at least fifteen Business Days prior to its use. No such material shall
be used if the Fund or its designee reasonably objects to such use within
fifteen Business Days after receipt of such material.
4.2. The Company shall not give any information or make any
representations or statements on behalf of the Fund or concerning the Fund in
connection with the sale of the Contracts other than the information or
representations contained in the registration statement or prospectus for the
Fund shares, as such registration statement and prospectus may be amended or
supplemented from time to time, or in reports or proxy statements for the Fund,
or in sales literature or other promotional material approved by the Fund or its
designee or by the Underwriter, except with the permission of the Fund or the
Underwriter or the designee of either.
4.3. The Fund, Underwriter, or its designee shall furnish, or shall
cause to be furnished, to the Company or its designee, each piece of sales
literature or other promotional material in which the Company and/or its
separate account(s), is named at least fifteen Business Days prior to its use.
No such material shall be used if the Company or its designee reasonably objects
to such use within fifteen Business Days after receipt of such material.
7
<PAGE>
4.4. The Fund and the Underwriter shall not give any information or
make any representations on behalf of the Company or concerning the Company,
each Account, or the Contracts other than the information or representations
contained in a registration statement or prospectus for the Contracts, as such
registration statement and prospectus may be amended or supplemented from time
to time, or in published reports for each Account which are in the public domain
or approved by the Company for distribution to Contract owners, or in sales
literature or other promotional material approved by the Company or its
designee, except with the permission of the Company.
4.5. The Fund will provide to the Company at least one complete copy
of all registration statements, prospectuses, Statements of Additional
Information, reports, proxy statements, sales literature and other promotional
materials, applications for exemptions, requests for no-action letters, and all
amendments to any of the above, that relate to the Fund or its shares,
contemporaneously with the filing of such document with the Securities and
Exchange Commission or other regulatory authorities.
4.6. The Company will provide to the Fund at least one complete copy
of all registration statements, prospectuses, Statements of Additional
Information, reports, solicitations for voting instructions, sales literature
and other promotional materials, applications for exemptions, requests for no
action letters, and all amendments to any of the above, that relate to the
Contracts or each Account, contemporaneously with the filing of such document
with the SEC or other regulatory authorities.
4.7. For purposes of this Article IV, the phrase "sales literature or
other promotional material" includes, but is not limited to, advertisements
(such as material published, or designed for use in, a newspaper, magazine, or
other periodical, radio, television, telephone or tape recording, videotape
display, signs or billboards, motion pictures, or other public media), sales
literature (I.E., any written communication distributed or made generally
available to customers or the public, including brochures, circulars, research
reports, market letters, form letters, seminar texts, reprints or excerpts of
any other advertisement, sales literature, or published article), educational or
training materials or other communications distributed or made generally
available to some or all agents or employees, and registration statements,
prospectuses, Statements of Additional Information, shareholder reports, and
proxy materials.
ARTICLE V. FEES AND EXPENSES
5.1. The Fund and Underwriter shall pay no fee or other compensation
to the Company under this agreement, except that if the Fund or any Portfolio
adopts and implements a plan pursuant to Rule 12b-1 to finance distribution
expenses, then the Underwriter may make payments to the Company or to the
underwriter for the Contracts if and in amounts agreed to by the Underwriter in
writing and such payments will be made out of existing fees otherwise payable to
the Underwriter, past profits of the Underwriter or other resources available to
the
8
<PAGE>
Underwriter. No such payments shall be made directly by the Fund. Currently,
no such payments are contemplated.
5.2. All expenses incident to performance by the Fund under this
Agreement shall be paid by the Fund. The Fund shall see to it that all its
shares are registered and authorized for issuance in accordance with applicable
federal law and, if and to the extent deemed advisable by the Fund, in
accordance with applicable state laws prior to their sale. The Fund shall bear
the expenses for the cost of registration and qualification of the Fund's
shares, preparation and filing of the Fund's prospectus and registration
statement, proxy materials and reports, setting the prospectus in type, setting
in type and printing the proxy materials and reports to shareholders (including
the costs of printing a prospectus that constitutes an annual report) and, the
preparation of all statements and notices required by any federal or state law,
all taxes on the issuance or transfer of the Fund's shares.
5.3. The Company shall bear the expenses of printing and distributing
the Fund's prospectus to owners of Contracts issued by the Company and of
distributing the Fund's proxy materials and reports to such Contract owners.
ARTICLE VI. DIVERSIFICATION
6.1. The Fund will at all times invest money from the Contracts in
such a manner as to ensure that the Contracts will be treated as variable
contracts under the Code and the regulations issued thereunder. Without
limiting the scope of the foregoing, the Fund will at all times comply with
Section 817(h) of the Code and Treasury Regulation 1.817-5, relating to the
diversification requirements for variable annuity, endowment, or life insurance
contracts and any amendments or other modifications to such Section or
Regulations. In the event of a breach of this Article VI by the Fund, it will
take all reasonable steps (a) to notify Company of such breach and (b) to
adequately diversify the Fund so as to achieve compliance with the grace period
afforded by Regulation 817-5.
ARTICLE VII. POTENTIAL CONFLICTS
7.1. The Board will monitor the Fund for the existence of any material
irreconcilable conflict between the interests of the contract owners of all
separate accounts investing in the Fund. An irreconcilable material conflict
may arise for a variety of reasons, including: (a) an action by any state
insurance regulatory authority; (b) a change in applicable federal or state
insurance, tax, or securities laws or regulations, or a public ruling, private
letter ruling, no-action or interpretative letter, or any similar action by
insurance, tax, or securities regulatory authorities; (c) an administrative or
judicial decision in any relevant proceeding; (d) the manner in which the
investments of any Portfolio are being managed; (e) a difference in voting
instructions given by variable annuity contract and variable life insurance
contract owners; or (f) a decision by an insurer to disregard the voting
instructions of contract owners. The Board shall
9
<PAGE>
promptly inform the Company if it determines that an irreconcilable material
conflict exists and the implications thereof.
7.2. The Company will report any potential or existing conflicts of
which it is aware to the Board. The Company will assist the Board in carrying
out its responsibilities under the Shared Funding Exemptive Order, by providing
the Board with all information reasonably necessary for the Board to consider
any issues raised. This includes, but is not limited to, an obligation by the
Company to inform the Board whenever contract owner voting instructions are
disregarded.
7.3. If it is determined by a majority of the Board, or a majority of
its disinterested trustees, that a material irreconcilable conflict exists, the
Company and other Participating Insurance Companies shall, at their expense and
to the extent reasonably practicable (as determined by a majority of the
disinterested trustees), take whatever steps are necessary to remedy or
eliminate the irreconcilable material conflict, up to and including: (1),
withdrawing the assets allocable to some or all of the separate accounts from
the Fund or any Portfolio and reinvesting such assets in a different investment
medium, including (but not limited to) another Portfolio of the Fund, or
submitting the question whether such segregation should be implemented to a vote
of all affected Contract owners and, as appropriate, segregating the assets of
any appropriate group (I.E., annuity contract owners, life insurance contract
owners, or variable contract owners of one or more Participating Insurance
Companies) that votes in favor of such segregation, or offering to the affected
contract owners the option of making such a change; and (2), establishing a new
registered management investment company or managed separate account.
7.4. If a material irreconcilable conflict arises because of a
decision by the Company to disregard contract owner voting instructions and that
decision represents a minority position or would preclude a majority vote, the
Company may be required, at the Fund's election, to withdraw the affected
Account's investment in the Fund and terminate this Agreement with respect to
such Account; provided, however that such withdrawal and termination shall be
limited to the extent required by the foregoing material irreconcilable conflict
as determined by a majority of the disinterested members of the Board. Any such
withdrawal and termination must take place within six (6) months after the Fund
gives written notice that this provision is being implemented, and until the end
of that six month period the Underwriter and Fund shall continue to accept and
implement orders by the Company for the purchase (and redemption) of shares of
the Fund.
7.5. If a material irreconcilable conflict arises because a particular
state insurance regulator's decision applicable to the Company conflicts with
the majority of other state regulators, then the Company will withdraw the
affected Account's investment in the Fund and terminate this Agreement with
respect to such Account within six months after the Board informs the Company in
writing that it has determined that such decision has created an irreconcilable
material conflict; provided, however, that such withdrawal and termination shall
be limited to the extent required by the foregoing material irreconcilable
conflict as determined by a majority of the disinterested members of the Board.
Until the end of the foregoing six month period, the Underwriter and Fund shall
continue to accept and implement orders by the Company for the purchase (and
redemption) of shares of the Fund.
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<PAGE>
7.6. For purposes of Sections 7.3 through 7.6 of this Agreement, a
majority of the disinterested members of the Board shall determine whether any
proposed action adequately remedies any irreconcilable material conflict, but in
no event will the Fund be required to establish a new funding medium for the
Contracts. The Company shall not be required by Section 7.3 to establish a new
funding medium for the Contracts if an offer to do so has been declined by vote
of a majority of Contract owners materially adversely affected by the
irreconcilable material conflict. In the event that the Board determines that
any proposed action does not adequately remedy any irreconcilable material
conflict, then the Company will withdraw the Account's investment in the Fund
and terminate this Agreement within six (6) months after the Board informs the
Company in writing of the foregoing determination, provided, however, that such
withdrawal and termination shall be limited to the extent required by any such
material irreconcilable conflict as determined by a majority of the
disinterested members of the Board.
7.7. If and to the extent that Rule 6e-2 and Rule 6e-3(T) are amended,
or Rule 6e-3 is adopted, to provide exemptive relief from any provision of the
Act or the rules promulgated thereunder with respect to mixed or shared funding
(as defined in the Shared Funding Exemptive Order) on terms and conditions
materially different from those contained in the Shared Funding Exemptive Order,
then (a) the Fund and/or the Participating Insurance Companies, as appropriate,
shall take such steps as may be necessary to comply with Rules 6e-2 and 6e-3(T),
as amended, and Rule 6e-3, as adopted, to the extent such rules are applicable;
and (b) Sections 3.4, 3.5, 7.1, 7.2, 7.3, 7.4, and 7.5 of this Agreement shall
continue in effect only to the extent that terms and conditions substantially
identical to such Sections are contained in such Rule(s) as so amended or
adopted.
ARTICLE VIII. INDEMNIFICATION
8.1. INDEMNIFICATION BY THE COMPANY
8.1(a). The Company agrees to indemnify and hold harmless the Fund and
each trustee of the Board and officers and each person, if any, who controls the
Fund within the meaning of Section 15 of the 1933 Act (collectively, the
"Indemnified Parties" for purposes of this Section 8.1) against any and all
losses, claims, damages, liabilities (including amounts paid in settlement with
the written consent of the Company) or litigation (including legal and other
expenses), to which the Indemnified Parties may become subject under any
statute, regulation, at common law or otherwise, insofar as such losses, claims,
damages, liabilities or expenses (or actions in respect thereof) or settlements
are related to the sale or acquisition of the Fund's shares or the Contracts
and:
(i) arise out of or are based upon any untrue statements or alleged
untrue statements of any material fact contained in the Registration
Statement or prospectus for the Contracts or contained in the Contracts
or sales literature 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
11
<PAGE>
fact required to be stated therein or necessary to make the statements
therein not misleading, provided that this agreement to indemnify shall
not apply as to any Indemnified Party if such statement or omission or
such alleged statement or omission was made in reliance upon and in
conformity with information furnished to the Company by or on behalf of
the Fund for use in the Registration Statement or prospectus for the
Contracts or in the Contracts or sales literature (or any amendment or
supplement) or otherwise for use in connection with the sale of the
Contracts or Fund shares; or
(ii) arise out of or as a result of statements or representations
(other than statements or representations contained in the Registration
Statement, prospectus or sales literature of the Fund not supplied by
the Company, or persons under its control) or wrongful conduct of the
Company or persons under its control, with respect to the sale or
distribution of the Contracts or Fund Shares; or
(iii) arise out of any untrue statement or alleged untrue statement
of a material fact contained in a Registration Statement, prospectus,
or sales literature of the Fund or any amendment thereof or supplement
thereto or the omission or alleged omission to state therein a material
fact required to be stated therein or necessary to make the statements
therein not misleading if such a statement or omission was made in
reliance upon information furnished to the Fund by or on behalf of the
Company; or
(iv) arise as a result of any failure by the Company to provide the
services and furnish the materials under the terms of this Agreement;
or
(v) arise out of or result from any material breach of any
representation and/or warranty made by the Company in this Agreement or
arise out of or result from any other material breach of this Agreement
by the Company, as limited by and in accordance with the provisions of
Sections 8.1(b) and 8.1(c) hereof.
8.1(b). The Company shall not be liable under this indemnification
provision with respect to any losses, claims, damages, liabilities or
litigation incurred or assessed against an Indemnified Party as such
may arise from such Indemnified Party's willful misfeasance, bad faith,
or gross negligence in the performance of such Indemnified Party's
duties or by reason of such Indemnified Party's reckless disregard of
obligations or duties under this Agreement or to the Fund, whichever is
applicable.
8.1(c). The Company shall not be liable under this indemnification
provision with respect to any claim made against an Indemnified Party
unless such Indemnified Party shall have notified the Company in
writing within a reasonable time after the summons or other first legal
process giving information of the nature of the claim shall have been
served upon such Indemnified Party (or after such Indemnified Party
shall have received notice of such service on any designated agent),
but failure to
12
<PAGE>
notify the Company of any such claim shall not relieve the Company
from any liability which it may have to the Indemnified Party against
whom such action is brought otherwise than on account of this
indemnification provision. In case any such action is brought against
the Indemnified Parties, the Company shall be entitled to participate,
at its own expense, in the defense of such action. The Company also
shall be entitled to assume the defense thereof, with counsel
satisfactory to the party named in the action. After notice from the
Company to such party of the Company's election to assume the defense
thereof, the Indemnified Party shall bear the fees and expenses of any
additional counsel retained by it, and the Company will not be liable
to such party under this Agreement for any legal or other expenses
subsequently incurred by such party independently in connection with
the defense thereof other than reasonable costs of investigation.
8.1(d). The Indemnified Parties will promptly notify the Company of
the commencement of any litigation or proceedings against them in
connection with the issuance or sale of the Fund Shares or the
Contracts or the operation of the Fund.
8.2. INDEMNIFICATION BY THE UNDERWRITER
8.2(a). The Underwriter agrees to indemnify and hold harmless the
Company and each of its directors and officers and each person, if any, who
controls the Company within the meaning of Section 15 of the 1933 Act
(collectively, the "Indemnified Parties" for purposes of this Section 8.2)
against any and all losses, claims, damages, liabilities (including amounts paid
in settlement with the written consent of the Underwriter) or litigation
(including 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 expenses (or actions in respect thereof) or
settlements are related to the sale or acquisition of the Fund's shares or the
Contracts and:
(i) arise out of or are based upon any untrue statement or
alleged untrue statement of any material fact contained in
the Registration Statement or prospectus or sales
literature of the Fund (or any amendment or supplement to
any of the foregoing), or arise out of or are based upon
the omission or the alleged omission to state therein a
material fact required to be stated therein or necessary to
make the statements therein not misleading, provided that
this agreement to indemnify shall not apply as to any
Indemnified Party if such statement or omission or such
alleged statement or omission was made in reliance upon and
in conformity with information furnished to the Underwriter
or Fund by or on behalf of the Company for use in the
Registration Statement or prospectus for the Fund or in
sales literature (or any amendment or supplement) or
otherwise for use in connection with the sale of the
Contracts or Fund shares; or
(ii) arise out of or as a result of statements or
representations (other than statements or representations
contained in the Registration Statement,
13
<PAGE>
prospectus or sales literature for the Contracts not
supplied by the Underwriter or persons under its control)
or wrongful conduct of the Fund, Adviser or Underwriter or
persons under their control, with respect to the sale or
distribution of the Contracts or Fund shares; or
(iii) arise out of any untrue statement or alleged untrue
statement of a material fact contained in a Registration
Statement, prospectus, or sales literature covering the
Contracts, or any amendment thereof or supplement thereto,
or the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to
make the statement or statements therein not misleading, if
such statement or omission was made in reliance upon
information furnished to the Company by or on behalf of the
Fund; or
(iv) arise as a result of any failure by the Fund to provide the
services and furnish the materials under the terms of this
Agreement (including a failure, whether unintentional or in
good faith or otherwise, to comply with the diversification
requirements specified in Article VI of this Agreement); or
(v) arise out of or result from any material breach of any
representation and/or warranty made by the Underwriter in
this Agreement or arise out of or result from any other
material breach of this Agreement by the Underwriter; as
limited by and in accordance with the provisions of
Sections 8.2(b) and 8.2(c) hereof.
8.2(b). The Underwriter shall not be liable under this indemnification
provision with respect to any losses, claims, damages, liabilities or litigation
to which an Indemnified Party would otherwise be subject by reason of such
Indemnified Party's willful misfeasance, bad faith, or gross negligence in the
performance of such Indemnified Party's duties or by reason of such Indemnified
Party's reckless disregard of obligations and duties under this Agreement or to
each Company or the Account, whichever is applicable.
8.2(c). The Underwriter shall not be liable under this indemnification
provision with respect to any claim made against an Indemnified Party unless
such Indemnified Party shall have notified the Underwriter in writing within a
reasonable time after the summons or other first legal process giving
information of the nature of the claim shall have been served upon such
Indemnified Party (or after such Indemnified Party shall have received notice of
such service on any designated agent), but failure to notify the Underwriter of
any such claim shall not relieve the Underwriter from any liability which it may
have to the Indemnified Party against whom such action is brought otherwise than
on account of this indemnification provision. In case any such action is
brought against the Indemnified Parties, the Underwriter will be entitled to
participate, at its own expense, in the defense thereof. The Underwriter also
shall be entitled to assume the defense thereof, with counsel satisfactory to
the party named in the action. After notice from the Underwriter to such party
of the Underwriter's election to assume the defense thereof, the Indemnified
Party shall bear the fees and expenses of any additional counsel retained by it,
and the Underwriter will not be liable to such party under this Agreement for
any legal or other expenses
14
<PAGE>
subsequently incurred by such party independently in connection with the
defense thereof other than reasonable costs of investigation.
8.2(d). The Company agrees promptly to notify the Underwriter of the
commencement of any litigation or proceedings against it or any of its officers
or directors in connection with the issuance or sale of the Contracts or the
operation of each Account.
8.3. INDEMNIFICATION BY THE FUND
8.3(a). The Fund agrees to indemnify and hold harmless the Company,
and each of its directors and officers and each person, if any, who controls the
Company within the meaning of Section 15 of the 1933 Act (collectively, the
"Indemnified Parties" for purposes of this Section 8.3) against any and all
losses, claims, damages, liabilities (including amounts paid in settlement with
the written consent of the Fund) or litigation (including legal and other
expenses) to which the Indemnified Parties may become subject under any statute,
at common law or otherwise, insofar as such losses, claims, damages, liabilities
or expenses (or actions in respect thereof) or settlements result from the gross
negligence, bad faith or willful misconduct of the Board or any member thereof,
are related to the operations of the Fund and:
(i) arise as a result of any failure by the Fund to provide the
services and furnish the materials under the terms of this
Agreement (including a failure to comply with the
diversification requirements specified in Article VI of
this Agreement);or
(ii) arise out of or result from any material breach of any
representation and/or warranty made by the Fund in this
Agreement or arise out of or result from any other material
breach of this Agreement by the Fund;
as limited by and in accordance with the provisions of Sections 8.3(b) and
8.3(c) hereof.
8.3(b). The Fund shall not be liable under this indemnification
provision with respect to any losses, claims, damages, liabilities or litigation
incurred or assessed against an Indemnified Party as such may arise from such
Indemnified Party's willful misfeasance, bad faith, or gross negligence in the
performance of such Indemnified Party's duties or by reason of such Indemnified
Party's reckless disregard of obligations and duties under this Agreement or to
the Company, the Fund, the Underwriter or each Account, whichever is applicable.
8.3(c). The Fund shall not be liable under this indemnification
provision with respect to any claim made against an Indemnified Party unless
such Indemnified Party shall have notified the Fund in writing within a
reasonable time after the summons or other first legal process giving
information of the nature of the claim shall have been served upon such
Indemnified Party (or after such Indemnified Party shall have received notice of
such service on any designated agent), but failure to notify the Fund of any
such claim shall not relieve the Fund from any liability which it may have to
the Indemnified Party against whom such action is brought otherwise than on
account of this indemnification provision. In case any such action is brought
against the
15
<PAGE>
Indemnified Parties, the Fund will be entitled to participate, at its own
expense, in the defense thereof. The Fund also shall be entitled to assume the
defense thereof, with counsel satisfactory to the party named in the action.
After notice from the Fund to such party of the Fund's election to assume the
defense thereof, the Indemnified Party shall bear the fees and expenses of any
additional counsel retained by it, and the Fund will not be liable to such
party under this Agreement for any legal or other expenses subsequently
incurred by such party independently in connection with the defense thereof
other than reasonable costs of investigation.
8.3(d). The Company and the Underwriter agree promptly to notify the
Fund of the commencement of any litigation or proceedings against it or any of
its respective officers or directors in connection with this Agreement, the
issuance or sale of the Contracts, with respect to the operation of either
Account, or the sale or acquisition of shares of the Fund.
ARTICLE IX. APPLICABLE LAW
9.1. This Agreement shall be construed and the provisions hereof
interpreted under and in accordance with the laws of the Commonwealth of
Massachusetts.
9.2. This Agreement shall be subject to the provisions of the 1933,
1934 and 1940 acts, and the rules and regulations and rulings thereunder,
including such exemptions from those statutes, rules and regulations as the
Securities and Exchange Commission may grant (including, but not limited to, the
Shared Funding Exemptive Order) and the terms hereof shall be interpreted and
construed in accordance therewith.
ARTICLE X. TERMINATION
10.1. This Agreement shall continue in full force and effect until
the first to occur of:
(a) termination by any party for any reason by 180 (six months) days
advance written notice delivered to the other parties; or
(b) termination by the Company by written notice to the Fund and the
Underwriter with respect to any Portfolio based upon the Company's
determination that shares of such Portfolio are not reasonably
available to meet the requirements of the Contracts; or
(c) termination by the Company by written notice to the Fund and the
Underwriter with respect to any Portfolio in the event any of the
Portfolio's shares are not registered, issued or sold in accordance
with applicable state and/or federal law or such law precludes the
use of such shares as the underlying investment media of the
Contracts issued or to be issued by the Company; or
16
<PAGE>
(d) termination by the Company by written notice to the Fund and the
Underwriter with respect to any Portfolio in the event that such
Portfolio ceases to qualify as a Regulated Investment Company under
Subchapter M of the Code or under any successor or similar
provision, or if the Company reasonably believes that the Fund may
fail to so qualify; or
(e) termination by the Company by written notice to the Fund and the
Underwriter with respect to any Portfolio in the event that such
Portfolio fails to meet the diversification requirements specified
in Article VI hereof; or
(f) termination by either the Fund or the Underwriter by written notice
to the Company, if either one or both of the Fund or the Underwriter
respectively, shall determine, in their sole judgment exercised in
good faith, that the Company and/or its affiliated companies has
suffered a material adverse change in its business, operations,
financial condition or prospects since the date of this Agreement or
is the subject of material adverse publicity; or
(g) termination by the Company by written notice to the Fund and the
Underwriter, if the Company shall determine, in its sole judgment
exercised in good faith, that either the Fund or the Underwriter has
suffered a material adverse change in its business, operations,
financial condition or prospects since the date of this Agreement or
is the subject of material adverse publicity; or
(h) termination by the Fund or the Underwriter by written notice to the
Company, if the Company gives the Fund and the Underwriter the
written notice specified in Section 1.6(b) hereof and at the time
such notice was given there was no notice of termination outstanding
under any other provision of this Agreement; provided, however any
termination under this Section 10.1(h) shall be effective forty five
(45) days after the notice specified in Section 1.6(b) was given.
10.2. EFFECT OF TERMINATION. Notwithstanding any termination of this
Agreement, the Fund and the Underwriter shall at the option of the Company,
continue to make available additional shares of the Fund pursuant to the terms
and conditions of this Agreement, for all Contracts in effect on the effective
date of termination of this Agreement (hereinafter referred to as "Existing
Contracts"). Specifically, without limitation, the owners of the Existing
Contracts shall be permitted to reallocate investments in the Fund, redeem
investments in the Fund and/or invest in the Fund upon the making of additional
purchase payments under the Existing Contracts. The parties agree that this
Section 10.2 shall not apply to any terminations under Article VII and the
effect of such Article VII terminations shall be governed by Article VII of this
Agreement.
10.3 The Company shall not redeem Fund shares attributable to the
Contracts (as opposed to Fund shares attributable to the Company's assets held
in the Account) except (i) as necessary to implement Contract Owner initiated or
approved transactions, or (ii) as required by state and/or federal laws or
regulations or judicial or other legal precedent of general application
(hereinafter referred to as a "Legally Required Redemption"). Upon request, the
Company will promptly furnish to the Fund and the
17
<PAGE>
Underwriter the opinion of counsel for the Company (which counsel shall be
reasonably satisfactory to the Fund and the Underwriter) to the effect that any
redemption pursuant to clause (ii) above is a Legally Required Redemption.
Furthermore, except in cases where permitted under the terms of the Contracts,
the Company shall not prevent Contract Owners from allocating payments to a
Portfolio that was otherwise available under the Contracts without first giving
the Fund or the Underwriter 90 days notice of its intention to do so.
ARTICLE XI. NOTICES
Any notice shall be sufficiently given when sent by registered or
certified mail to the other party at the address of such party set forth below
or at such other address as such party may from time to time specify in writing
to the other party.
If to the Fund:
82 Devonshire Street
Boston, Massachusetts 02109
Attention: Treasurer
If to the Company:
State Mutual Life Assurance Company of America
440 Lincoln Street
Worcester, MA 01653
Attention: Rod Vessels
If to the Underwriter:
82 Devonshire Street
Boston, Massachusetts 02109
Attention: Treasurer
ARTICLE XII. MISCELLANEOUS
12.1 All persons dealing with the Fund must look solely to the
property of the Fund for the enforcement of any claims against the Fund as
neither the Board, officers, agents or shareholders assume any personal
liability for obligations entered into on behalf of the Fund.
12.2 Subject to the requirements of legal process and regulatory
authority, each party hereto shall treat as confidential the names and addresses
of the owners of the Contracts and all information reasonably identified as
confidential in writing by any other party hereto and, except as permitted by
this Agreement, shall not disclose, disseminate or utilize such names and
addresses and other confidential information until such time as it may come into
the public domain without the express written consent of the affected party.
18
<PAGE>
12.3 The captions in this Agreement are included for convenience of
reference only and in no way define or delineate any of the provisions hereof or
otherwise affect their construction or effect.
12.4 This Agreement may be executed simultaneously in two or more
counterparts, each of which taken together shall constitute one and the same
instrument.
12.5 If any provision of this Agreement shall be held or made invalid
by a court decision, statute, rule or otherwise, the remainder of the Agreement
shall not be affected thereby.
12.6 Each party hereto shall cooperate with each other party and all
appropriate governmental authorities (including without limitation the SEC, the
NASD and state insurance regulators) and shall permit such authorities
reasonable access to its books and records in connection with any investigation
or inquiry relating to this Agreement or the transactions contemplated hereby.
Notwithstanding the generality of the foregoing, each party hereto further
agrees to furnish the California Insurance Commissioner with any information or
reports in connection with services provided under this Agreement which such
Commissioner may request in order to ascertain whether the insurance operations
of the Company are being conducted in a manner consistent with the California
Insurance Regulations and any other applicable law or regulations.
12.7 The rights, remedies and obligations contained in this Agreement
are cumulative and are in addition to any and all rights, remedies and
obligations, at law or in equity, which the parties hereto are entitled to under
state and federal laws.
12.8. This Agreement or any of the rights and obligations hereunder
may not be assigned by any party without the prior written consent of all
parties hereto; provided, however, that the Underwriter may assign this
Agreement or any rights or obligations hereunder to any affiliate of or company
under common control with the Underwriter, if such assignee is duly licensed and
registered to perform the obligations of the Underwriter under this Agreement.
12.9. The Company shall furnish, or shall cause to be furnished, to
the Fund or its designee copies of the following reports:
(a) the Company's annual statement prepared under statutory
accounting principles) and annual report (prepared under
generally accepted accounting principles ("GAAP")), as soon as
practical and in any event within 90 days after the end of each
fiscal year;
(b) the Company's quarterly statements (statutory and GAAP), as
soon as practical and in any event within 45 days after the end
of each quarterly period:
19
<PAGE>
(c) any financial statement, proxy statement, notice or report of
the Company sent to stockholders and/or policyholders, as soon
as practical after the delivery thereof to stockholders;
(d) any registration statement (without exhibits) and financial
reports of the Company filed with the Securities and Exchange
Commission or any state insurance regulator, as soon as
practical after the filing thereof;
(e) any other report submitted to the Company by independent
accountants in connection with any annual, interim or special
audit made by them of the books of the Company, as soon as
practical after the receipt thereof.
IN WITNESS WHEREOF, each of the parties hereto has caused this
Agreement to be executed in its name and on its behalf by its duly authorized
representative and its seal to be hereunder affixed hereto as of the date
specified below.
STATE MUTUAL LIFE ASSURANCE COMPANY OF AMERICA
By its authorized officer,
By: /s/ Richard M. Reilly
-----------------------------
Title: Vice President
-----------------------------
Date: 2/18/94
-----------------------------
VARIABLE INSURANCE PRODUCTS FUND
By its authorized officer,
By: /s/ J. Gary Burkhead
-----------------------------
Title: Senior Vice President
-----------------------------
Date: 3/2/94
-----------------------------
FIDELITY DISTRIBUTORS CORPORATION
By its authorized officer,
By: /s/ Kurt A. Lange
-----------------------------
Title: President
-----------------------------
Date: 2/28/94
-----------------------------
20
<PAGE>
SCHEDULE A
SEPARATE ACCOUNTS AND ASSOCIATED CONTRACTS
<TABLE>
<S> <C>
Name of Separate Account and Contracts Funded
DATE ESTABLISHED BY BOARD OF DIRECTORS BY SEPARATE ACCOUNT
Inheiritage Account, August 20, 1991 Variable Inheiritage Form Number 1026.1-94
VEL II - August 20, 1991 VEL '94 - Form Number 1018.1-94
VA-K - August 20, 1991 Exec-Annuity Plus - Form Number A3018.44-94
</TABLE>
21
<PAGE>
SCHEDULE B
PROXY VOTING PROCEDURE
The following is a list of procedures and corresponding responsibilities for the
handling of proxies relating to the Fund by the Underwriter, the Fund and the
Company. The defined terms herein shall have the meanings assigned in the
Participation Agreement except that the term "Company" shall also include the
department or third party assigned by the Insurance Company to perform the steps
delineated below.
1. The number of proxy proposals is given to the Company by the Underwriter as
early as possible before the date set by the Fund for the shareholder
meeting to facilitate the establishment of tabulation procedures. At this
time the Underwriter will inform the Company of the Record, Mailing and
Meeting dates. This will be done verbally approximately two months before
meeting.
2. Promptly after the Record Date, the Company will perform a "tape run" or
other activity, which will generate the names, addresses and number of units
which are attributed to each contractowner/policyholder (the "Customer") as
of the Record Date. Allowance should be made for account adjustments made
after this date that could affect the status of the Customers' accounts as
of the Record Date.
Note: The number of proxy statements is determined by the activities
described in Step #2. The Company will use its best efforts to call in the
number of Customers to Fidelity, as soon as possible, but no later than two
weeks after the Record Date.
3. The Fund's Annual Report must be sent to each Customer by the Company either
before or together with the Customers' receipt of a proxy statement.
Underwriter will provide at least one copy of the last Annual Report to the
Company.
4. The text and format for the Voting Instruction Cards ("Cards" or "Card") is
provided to the Company by the Fund. The Company, at its expense, shall
produce and personalize the Voting Instruction Cards. The Legal Department
of the Underwriter or its affiliate ("Fidelity Legal") must approve the Card
before it is printed. Allow approximately 2-4 business days for printing
information on the Cards. Information commonly found on the Cards includes:
a. name (legal name as found on account registration)
b. address
c. Fund or account number
d. coding to state number of units
e. individual Card number for use in tracking and verification of votes
(already on Cards as printed by the Fund)
(This and related steps may occur later in the chronological process due to
possible uncertainties relating to the proposals.)
22
<PAGE>
5. During this time, Fidelity Legal will develop, produce, and the Fund
will pay for the Notice of Proxy and the Proxy Statement (one document).
Printed and folded notices and statements will be sent to Company for
insertion into envelopes (envelopes and return envelopes are provided
and paid for by the Insurance Company). Contents of envelope sent to
Customers by Company will include:
a. Voting Instruction Card(s)
b. One proxy notice and statement (one document)
c. return envelope (postage pre-paid by Company) addressed to the
Company or its tabulation agent
d. "urge buckslip" - optional, but recommended. (This is a small,
single sheet of paper that requests Customers to vote as
quickly as possible and that their vote is important. One
copy will be supplied by the Fund.)
e. cover letter - optional, supplied by Company and reviewed and
approved in advance by Fidelity Legal.
6. The above contents should be received by the Company approximately 3-5
business days before mail date. Individual in charge at Company reviews
and approves the contents of the mailing package to ensure correctness
and completeness. Copy of this approval sent to Fidelity Legal.
7. Package mailed by the Company.
* The Fund MUST allow at least a 15-day solicitation time to the
Company as the shareowner. (A 5-week period is recommended.)
Solicitation time is calculated as calendar days from (but NOT
including) the meeting, counting backwards.
8. Collection and tabulation of Cards begins. Tabulation usually takes
place in another department or another vendor depending on process used.
An often used procedure is to sort Cards on arrival by proposal into
vote categories of all yes, no, or mixed replies, and to begin data
entry.
Note: Postmarks are not generally needed. A need for postmark
information would be due to an insurance company's internal procedure
and has not been required by Fidelity in the past.
9. Signatures on Card checked against legal name on account registration
which was printed on the Card.
Note: For Example, If the account registration is under "Bertram C.
Jones, Trustee," then that is the exact legal name to be printed on the
Card and is the signature needed on the Card.
23
<PAGE>
10. If Cards are mutilated, or for any reason are illegible or are not
signed properly, they are sent back to Customer with an explanatory
letter, a new Card and return envelope. The mutilated or illegible Card
is disregarded and considered to be NOT RECEIVED for purposes of vote
tabulation. Any Cards that have "kicked out" (e.g. mutilated,
illegible) of the procedure are "hand verified," i.e., examined as to
why they did not complete the system. Any questions on those Cards are
usually remedied individually.
11. There are various control procedures used to ensure proper tabulation of
votes and accuracy of that tabulation. The most prevalent is to sort
the Cards as they first arrive into categories depending upon their
vote; an estimate of how the vote is progressing may then be calculated.
If the initial estimates and the actual vote do not coincide, then an
internal audit of that vote should occur. This may entail a recount.
12. The actual tabulation of votes is done in units which is then converted
to shares. (It is very important that the Fund receives the tabulations
stated in terms of a percentage and the number of SHARES.) Fidelity
Legal must review and approve tabulation format.
13. Final tabulation in shares is verbally given by the Company to Fidelity
Legal on the morning of the meeting not later than 10:00 a.m. Boston
time. Fidelity Legal may request an earlier deadline if required to
calculate the vote in time for the meeting.
14. A Certification of Mailing and Authorization to Vote Shares will be
required from the Company as well as an original copy of the final vote.
Fidelity Legal will provide a standard form for each Certification.
15. The Company will be required to box and archive the Cards received from
the Customers. In the event that any vote is challenged or if otherwise
necessary for legal, regulatory, or accounting purposes, Fidelity Legal
will be permitted reasonable access to such Cards.
16. All approvals and "signing-off" may be done orally, but must always be
followed up in writing.
24
<PAGE>
SCHEDULE C
Other investment companies currently available under variable annuities or
variable life insurance issued by the Company:
Allmerica Investment Trust
Delaware Group Premium Fund, Inc.
25
<PAGE>
Amendment to Schedule A to the Participation Agreement
among
Variable Insurance Products Fund
Fidelity Distributors Corporation
and
First Allmerica Financial Life Insurance Company
Whereas, First Allmerica Financial Life Insurance Company (the "Company";
formerly State Mutual Life Assurance Insurance Company of America), Variable
Insurance Products Fund, and Fidelity Distributors Corporation have previously
entered into a Participation Agreement dated February 18, 1994 ("Participation
Agreement"); and
Whereas, the Participation Agreement provides for the amendment of Schedule A
thereto by mutual written consent, the parties from time-to-time have so amended
Schedule A, and the parties now wish to consolidate said prior amendments to
Schedule A into a single document and to update Schedule A;
Now, therefore, the parties do hereby agree:
1. To amend and update Schedule A to the Participation Agreement by adopting the
attached Schedule A, dated July 15, 1997, and by substituting the attached
Schedule A for and any all prior amendments to Schedule A, as may have been
adopted from time-to-time.
In witness whereof, each of the parties has caused this agreement to be executed
in its name and on its behalf by its duly authorized representative as of the
date specified below.
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
By: /s/ Richard M. Reilly
-------------------------
Name: Richard M. Reilly
-------------------------
Title: President
-------------------------
Date: July 16, 1997
-------------------------
VARIABLE INSURANCE PRODUCTS FUND II FIDELITY DISTRIBUTORS CORPORATION
By: /s/ By: /s/
------------------------- ------------------------
Name: Name:
------------------------- ------------------------
Title: Title:
------------------------- ------------------------
Date: Date:
------------------------- ------------------------
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
Schedule A, as amended, to Participation Agreement dated February 18, 1994
(Dated 7/15/97)
Separate Account* Product Name Registration.
- ---------------- ------------ ------------
VEL II VEL '93 33-71056
(Variable Life) Policy Form 1018.1-94 811-8130
Inheiritage Inheiritage 33-74184
(Variable Life) Policy Form 1026.1-94 811-8304
Group VEL Group VEL 333-06383
(Variable Life) Policy Form 1029.1-94 811-7663
VA-K ExecAnnuity Plus 33-71052
(Annuity) Policy Form A3018-94 811-8814
Separate Account I Group IRA 33-47858
(Annuity) Policy Forms 811-8814
GA-IRA-2.00-92
GAC-IRA-2.00-92
Allmerica Select Select Resource 33-71058
(Annuity) Policy Form 811-8116
A3020-94 GRC
* The establishment of the Separate Accounts was authorized by vote of the Board
of Directors dated August 21, 1991.
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PARTICIPATION AGREEMENT
Among
VARIABLE INSURANCE PRODUCTS FUND II,
FIDELITY DISTRIBUTORS CORPORATION
and
STATE MUTUAL LIFE ASSURANCE COMPANY OF AMERICA
THIS AGREEMENT, made and entered into as of the 1st day of March, 1994
by and among STATE MUTUAL LIFE ASSURANCE COMPANY OF AMERICA, (hereinafter the
"Company"), a Massachusetts corporation, on its own behalf and on behalf of each
segregated asset account of the Company set forth on Schedule A hereto as may be
amended from time to time (each such account hereinafter referred to as the
"Account"), and the VARIABLE INSURANCE PRODUCTS FUND II, an unincorporated
business trust organized under the laws of the Commonwealth of Massachusetts
(hereinafter the "Fund") and FIDELITY DISTRIBUTORS CORPORATION (hereinafter the
"Underwriter"), a Massachusetts corporation.
WHEREAS, the Fund engages in business as an open-end management
investment company and is available to act as the investment vehicle for
separate accounts established for variable life insurance policies and variable
annuity contracts (collectively, the "Variable Insurance Products") to be
offered by insurance companies which have entered into participation agreements
with the Fund and the Underwriter (hereinafter "Participating Insurance
Companies"); and
WHEREAS, the beneficial interest in the Fund is divided into several
series of shares, each designated a "Portfolio" and representing the interest in
a particular managed portfolio of securities and other assets; and
WHEREAS, the Fund has obtained an order from the Securities and
Exchange Commission, dated September 17, 1986 (File No. 812-6422), granting
Participating Insurance Companies and variable annuity and variable life
insurance separate accounts exemptions from the provisions of sections 9(a),
13(a), 15(a), and 15(b) of the Investment Company Act of 1940, as amended,
(hereinafter the "1940 Act") and Rules 6e-2(b) (15) and 6e-3(T) (b) (15)
thereunder, to the extent necessary to permit shares of the Fund to be sold to
and held by variable annuity and variable life insurance separate accounts of
both affiliated and unaffiliated life insurance companies (hereinafter the
"Shared Funding Exemptive Order"); and
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WHEREAS, the Fund is registered as an open-end management investment
company under the 1940 Act and its shares are registered under the Securities
Act of 1933, as amended (hereinafter the "1933 Act"); and
WHEREAS, Fidelity Management & Research Company (the "Adviser") is duly
registered as an investment adviser under the federal Investment Advisers Act of
1940 and any applicable state securities law; and
WHEREAS, the Company has registered or will register certain variable
life insurance and variable annuity contracts under the 1933 Act; and
WHEREAS, each Account is a duly organized, validly existing segregated
asset account, established by resolution of the Board of Directors of the
Company, on the date shown for such Account on Schedule A hereto, to set aside
and invest assets attributable to the aforesaid variable annuity contracts; and
WHEREAS, the Company has registered or will register each Account as a
unit investment trust under the 1940 Act; and
WHEREAS, the Underwriter is registered as a broker dealer with the
Securities and Exchange Commission ("SEC") under the Securities Exchange Act of
1934, as amended, (hereinafter the "1934 Act"), and is a member in good standing
of the National Association of Securities Dealers, Inc. (hereinafter "NASD");
and
WHEREAS, to the extent permitted by applicable insurance laws and
regulations, the Company intends to purchase shares in the Portfolios on behalf
of each Account to fund certain of the aforesaid variable life and variable
annuity contracts and the Underwriter is authorized to sell such shares to unit
investment trusts such as each Account at net asset value;
NOW, THEREFORE, in consideration of their mutual promises, the Company,
the Fund and the Underwriter agree as follows:
ARTICLE I. SALE OF FUND SHARES
1.1. The Underwriter agrees to sell to the Company those shares of the
Fund which each Account orders, executing such orders on a daily basis at the
net asset value next computed after receipt by the Fund or its designee of the
order for the shares of the Fund. For purposes of this Section 1.1, the Company
shall be the designee of the Fund for receipt of such orders from each Account
and receipt by such designee shall constitute receipt by the Fund; provided that
the Fund receives notice of such order by 9:30 a.m. Boston time on the next
following Business Day. "Business Day" shall mean any day on which the New York
Stock Exchange is open for trading and on which the Fund calculates its net
asset value pursuant to the rules of the Securities and Exchange Commission.
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1.2. The Fund agrees to make its shares available indefinitely for
purchase at the applicable net asset value per share by the Company and its
Accounts on those days on which the Fund calculates its net asset value pursuant
to rules of the Securities and Exchange Commission and the Fund shall use
reasonable efforts to calculate such net asset value on each day which the New
York Stock Exchange is open for trading. Notwithstanding the foregoing, the
Board of Trustees of the Fund (hereinafter the "Board") may refuse to sell
shares of any Portfolio to any person, or suspend or terminate the offering of
shares of any Portfolio if such action is required by law or by regulatory
authorities having jurisdiction or is, in the sole discretion of the Board
acting in good faith and in light of their fiduciary duties under federal and
any applicable state laws, necessary in the best interests of the shareholders
of such Portfolio.
1.3. The Fund and the Underwriter agree that shares of the Fund will
be sold only to Participating Insurance Companies and their separate accounts.
No shares of any Portfolio will be sold to the general public.
1.4. The Fund and the Underwriter will not sell Fund shares to any
insurance company or separate account unless an agreement containing provisions
substantially the same as Articles I, III, V, VII and Section 2.5 of Article II
of this Agreement is in effect to govern such sales.
1.5. The Fund agrees to redeem for cash, on the Company's request, any
full or fractional shares of the Fund held by the Company, executing such
requests on a daily basis at the net asset value next computed after receipt by
the Fund or its designee of the request for redemption. For purposes of this
Section 1.5, the Company shall be the designee of the Fund for receipt of
requests for redemption from each Account and receipt by such designee shall
constitute receipt by the Fund; provided that the Fund receives notice of such
request for redemption on the next following Business Day.
1.6. The Company agrees to purchase and redeem the shares of each
Portfolio offered by the then current prospectus of the Fund and in accordance
with the provisions of such prospectus. The Company agrees that all net amounts
available under the variable annuity contracts with the form number(s) which are
listed on Schedule A attached hereto and incorporated herein by this reference,
as such Schedule A may be amended from time to time hereafter by mutual written
agreement of all the parties hereto, (the "Contracts") shall be invested in the
Fund, in such other Funds advised by the Adviser as may be mutually agreed to in
writing by the parties hereto, or in the Company's general account, provided
that such amounts may also be invested in an investment company other than the
Fund if (a) such other investment company, or series thereof, has investment
objectives or policies that are substantially different from the investment
objectives and policies of all the Portfolios of the Fund; or (b) the Company
gives the Fund and the Underwriter 45 days written notice of its intention to
make such other investment company available as a funding vehicle for the
Contracts; or (c) such other investment company was available as a funding
vehicle for the Contracts prior to the date of this Agreement and the Company so
informs the Fund and Underwriter prior to their signing this Agreement (a list
of such funds appearing on Schedule C to this Agreement); or (d) the Fund or
Underwriter consents to the use of such other investment company.
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1.7. The Company shall pay for Fund shares on the next Business Day
after an order to purchase Fund shares is made in accordance with the provisions
of Section 1.1 hereof. Payment shall be in federal funds transmitted by wire.
For purpose of Section 2.10 and 2.11, upon receipt by the Fund of the federal
funds so wired, such funds shall cease to be the responsibility of the Company
and shall become the responsibility of the Fund.
1.8. Issuance and transfer of the Fund's shares will be by book entry
only. Stock certificates will not be issued to the Company or any Account.
Shares ordered from the Fund will be recorded in an appropriate title for each
Account or the appropriate subaccount of each Account.
1.9. The Fund shall furnish same day notice (by wire or telephone,
followed by written confirmation) to the Company of any income, dividends or
capital gain distributions payable on the Fund's shares. The Company hereby
elects to receive all such income dividends and capital gain distributions as
are payable on the Portfolio shares in additional shares of that Portfolio. The
Company reserves the right to revoke this election and to receive all such
income dividends and capital gain distributions in cash. The Fund shall notify
the Company of the number of shares so issued as payment of such dividends and
distributions.
1.10. The Fund shall make the net asset value per share for each
Portfolio available to the Company on a daily basis as soon as reasonably
practical after the net asset value per share is calculated and shall use its
best efforts to make such net asset value per share available by 7 p.m. Boston
time.
ARTICLE II. REPRESENTATIONS AND WARRANTIES
2.1. The Company represents and warrants that the Contracts are or
will be registered under the 1933 Act; that the Contracts will be issued and
sold in compliance in all material respects with all applicable Federal and
State laws and that the sale of the Contracts shall comply in all material
respects with state insurance suitability requirements. The Company further
represents and warrants that it is an insurance company duly organized and in
good standing under applicable law and that it has legally and validly
established each Account prior to any issuance or sale thereof as a segregated
asset account under Section 132G of Chapter 175 of the Insurance Code of the
Commonwealth of Massachusetts and has registered or, prior to any issuance or
sale of the Contracts, will register each Account as a unit investment trust in
accordance with the provisions of the 1940 Act to serve as a segregated
investment account for the Contracts.
2.2. The Fund represents and warrants that Fund shares sold pursuant
to this Agreement shall be registered under the 1933 Act, duly authorized for
issuance and sold in compliance with the laws of the Commonwealth of
Massachusetts and all applicable federal and state securities laws and that the
Fund is and shall remain registered under the 1940 Act. The Fund shall amend
the Registration Statement for its shares under the 1933 Act and the 1940 Act
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from time to time as required in order to effect the continuous offering of its
shares. The Fund shall register and qualify the shares for sale in accordance
with the laws of the various states only if and to the extent deemed advisable
by the Fund or the Underwriter.
2.3. The Fund represents that it is currently qualified as a Regulated
Investment Company under Subchapter M of the Internal Revenue Code of 1986, as
amended, (the "Code") and that it will make every effort to maintain such
qualification (under Subchapter M or any successor or similar provision) and
that it will notify the Company immediately upon having a reasonable basis for
believing that it has ceased to so qualify or that it might not so qualify in
the future.
2.4. The Company represents that the Contracts are currently treated
as life insurance or annuity contracts, under applicable provisions of the Code
and that it will make every effort to maintain such treatment and that it will
notify the Fund and the Underwriter immediately upon having a reasonable basis
for believing that the Contracts have ceased to be so treated or that they might
not be so treated in the future.
2.5. The Fund currently does not intend to make any payments to
finance distribution expenses pursuant to Rule 12b-1 under the 1940 Act or
otherwise, although it may make such payments in the future. The Fund has
adopted a "no fee" or "defensive" Rule 12b-1 Plan under which it makes no
payments for distribution expenses. To the extent that it decides to finance
distribution expenses pursuant to Rule 12b-1, the Fund undertakes to have a
board of trustees, a majority of whom are not interested persons of the Fund,
formulate and approve any plan under Rule 12b-1 to finance distribution
expenses.
2.6. The Fund makes no representation as to whether any aspect of its
operations (including, but not limited to, fees and expenses and investment
policies) complies with the insurance laws or regulations of the various states
except that the Fund represents that the Fund's investment policies, fees and
expenses are and shall at all times remain in compliance with the laws of the
Commonwealth of Massachusetts and the Fund and the Underwriter represent that
their respective operations are and shall at all times remain in material
compliance with the laws of the Commonwealth of Massachusetts to the extent
required to perform this Agreement.
2.7. The Underwriter represents and warrants that it is a member in
good standing of the NASD and is registered as a broker-dealer with the SEC.
The Underwriter further represents that it will sell and distribute the Fund
shares in accordance with the laws of the Commonwealth of Massachusetts and all
applicable state and federal securities laws, including without limitation the
1933 Act, the 1934 Act, and the 1940 Act.
2.8. The Fund represents that it is lawfully organized and validly
existing under the laws of the Commonwealth of Massachusetts and that it does
and will comply in all material respects with the 1940 Act.
2.9. The Underwriter represents and warrants that the Adviser is and
shall remain duly registered in all material respects under all applicable
federal and state securities laws and
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that the Adviser shall perform its obligations for the Fund in compliance in
all material respects with the laws of the Commonwealth of Massachusetts and
any applicable state and federal securities laws.
2.10. The Fund and Underwriter represent and warrant that all of their
directors, officers, employees, investment advisers, and other
individuals/entities dealing with the money and/or securities of the Fund are
and shall continue to be at all times covered by a blanket fidelity bond or
similar coverage for the benefit of the Fund in an amount not less than the
minimal coverage as required currently by Rule 17g-(1) of the 1940 Act or
related provisions as may be promulgated from time to time. The aforesaid Bond
shall include coverage for larceny and embezzlement and shall be issued by a
reputable bonding company.
2.11. The Company represents and warrants that all of its directors,
officers, employees, investment advisers, and other individuals/entities dealing
with the money and/or securities of the Fund are covered by a blanket fidelity
bond or similar coverage for the benefit of the Fund, in an amount not less $5
million. The aforesaid includes coverage for larceny and embezzlement is issued
by a reputable bonding company. The Company agrees to make all reasonable
efforts to see that this bond or another bond containing these provisions is
always in effect, and agrees to notify the Fund and the Underwriter in the event
that such coverage no longer applies.
ARTICLE III. PROSPECTUSES AND PROXY STATEMENTS; VOTING
3.1. The Underwriter shall provide the Company (at the Company's
expense) with as many copies of the Fund's current prospectus as the Company may
reasonably request. If requested by the Company in lieu thereof, the Fund shall
provide such documentation (including a final copy of the new prospectus as set
in type at the Fund's expense) and other assistance as is reasonably necessary
in order for the Company once each year (or more frequently if the prospectus
for the Fund is amended) to have the prospectus for the Contracts and the Fund's
prospectus printed together in one document (such printing to be at the
Company's expense).
3.2. The Fund's prospectus shall state that the Statement of
Additional Information for the Fund is available from the Underwriter (or in the
Fund's discretion, the Prospectus shall state that such Statement is available
from the Fund), and the Underwriter (or the Fund), at its expense, shall print
and provide such Statement free of charge to the Company and to any owner of a
Contract or prospective owner who requests such Statement.
3.3. The Fund, at its expense, shall provide the Company with copies
of its proxy material, reports to shareholders, and other communications to
shareholders in such quantity as the Company shall reasonably require for
distributing to Contract owners.
3.4. If and to the extent required by law the Company shall:
(i) solicit voting instructions from Contract owners;
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(ii) vote the Fund shares in accordance with instructions
received from Contract owners; and
(iii) vote Fund shares for which no instructions have been
received in the same proportion as Fund shares of such
portfolio for which instructions have been received,
so long as and to the extent that the Securities and Exchange Commission
continues to interpret the 1940 Act to require pass-through voting privileges
for variable contract owners. The Company reserves the right to vote Fund
shares held in any segregated asset account in its own right, to the extent
permitted by law. Participating Insurance Companies shall be responsible for
assuring that each of their separate accounts participating in the Fund
calculates voting privileges in a manner consistent with the standards set forth
on Schedule B attached hereto and incorporated herein by this reference, which
standards will also be provided to the other Participating Insurance Companies.
3.5. The Fund will comply with all provisions of the 1940 Act
requiring voting by shareholders, and in particular the Fund will either provide
for annual meetings or comply with Section 16(c) of the 1940 Act (although the
Fund is not one of the trusts described in Section 16(c) of that Act) as well as
with Sections 16(a) and, if and when applicable, 16(b). Further, the Fund will
act in accordance with the Securities and Exchange Commission's interpretation
of the requirements of Section 16(a) with respect to periodic elections of
trustees and with whatever rules the Commission may promulgate with respect
thereto.
ARTICLE IV. SALES MATERIAL AND INFORMATION
4.1. The Company shall furnish, or shall cause to be furnished, to the
Fund or its designee, each piece of sales literature or other promotional
material in which the Fund or its investment adviser or the Underwriter is
named, at least fifteen Business Days prior to its use. No such material shall
be used if the Fund or its designee reasonably objects to such use within
fifteen Business Days after receipt of such material.
4.2. The Company shall not give any information or make any
representations or statements on behalf of the Fund or concerning the Fund in
connection with the sale of the Contracts other than the information or
representations contained in the registration statement or prospectus for the
Fund shares, as such registration statement and prospectus may be amended or
supplemented from time to time, or in reports or proxy statements for the Fund,
or in sales literature or other promotional material approved by the Fund or its
designee or by the Underwriter, except with the permission of the Fund or the
Underwriter or the designee of either.
4.3. The Fund, Underwriter, or its designee shall furnish, or shall
cause to be furnished, to the Company or its designee, each piece of sales
literature or other promotional material in which the Company and/or its
separate account(s), is named at least fifteen Business Days prior to its use.
No such material shall be used if the Company or its designee reasonably objects
to such use within fifteen Business Days after receipt of such material.
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4.4. The Fund and the Underwriter shall not give any information or
make any representations on behalf of the Company or concerning the Company,
each Account, or the Contracts other than the information or representations
contained in a registration statement or prospectus for the Contracts, as such
registration statement and prospectus may be amended or supplemented from time
to time, or in published reports for each Account which are in the public domain
or approved by the Company for distribution to Contract owners, or in sales
literature or other promotional material approved by the Company or its
designee, except with the permission of the Company.
4.5. The Fund will provide to the Company at least one complete copy
of all registration statements, prospectuses, Statements of Additional
Information, reports, proxy statements, sales literature and other promotional
materials, applications for exemptions, requests for no-action letters, and all
amendments to any of the above, that relate to the Fund or its shares,
contemporaneously with the filing of such document with the Securities and
Exchange Commission or other regulatory authorities.
4.6. The Company will provide to the Fund at least one complete copy
of all registration statements, prospectuses, Statements of Additional
Information, reports, solicitations for voting instructions, sales literature
and other promotional materials, applications for exemptions, requests for no
action letters, and all amendments to any of the above, that relate to the
Contracts or each Account, contemporaneously with the filing of such document
with the SEC or other regulatory authorities.
4.7. For purposes of this Article IV, the phrase "sales literature or
other promotional material" includes, but is not limited to, advertisements
(such as material published, or designed for use in, a newspaper, magazine, or
other periodical, radio, television, telephone or tape recording, videotape
display, signs or billboards, motion pictures, or other public media), sales
literature (I.E., any written communication distributed or made generally
available to customers or the public, including brochures, circulars, research
reports, market letters, form letters, seminar texts, reprints or excerpts of
any other advertisement, sales literature, or published article), educational or
training materials or other communications distributed or made generally
available to some or all agents or employees, and registration statements,
prospectuses, Statements of Additional Information, shareholder reports, and
proxy materials.
ARTICLE V. FEES AND EXPENSES
5.1. The Fund and Underwriter shall pay no fee or other compensation
to the Company under this agreement, except that if the Fund or any Portfolio
adopts and implements a plan pursuant to Rule 12b-1 to finance distribution
expenses, then the Underwriter may make payments to the Company or to the
underwriter for the Contracts if and in amounts agreed to by the Underwriter in
writing and such payments will be made out of existing fees otherwise payable to
the Underwriter, past profits of the Underwriter or other resources available to
the
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Underwriter. No such payments shall be made directly by the Fund.
Currently, no such payments are contemplated.
5.2. All expenses incident to performance by the Fund under this
Agreement shall be paid by the Fund. The Fund shall see to it that all its
shares are registered and authorized for issuance in accordance with applicable
federal law and, if and to the extent deemed advisable by the Fund, in
accordance with applicable state laws prior to their sale. The Fund shall bear
the expenses for the cost of registration and qualification of the Fund's
shares, preparation and filing of the Fund's prospectus and registration
statement, proxy materials and reports, setting the prospectus in type, setting
in type and printing the proxy materials and reports to shareholders (including
the costs of printing a prospectus that constitutes an annual report) and, the
preparation of all statements and notices required by any federal or state law,
all taxes on the issuance or transfer of the Fund's shares.
5.3. The Company shall bear the expenses of printing and distributing
the Fund's prospectus to owners of Contracts issued by the Company and of
distributing the Fund's proxy materials and reports to such Contract owners.
ARTICLE VI. DIVERSIFICATION
6.1. The Fund will at all times invest money from the Contracts in
such a manner as to ensure that the Contracts will be treated as variable
contracts under the Code and the regulations issued thereunder. Without
limiting the scope of the foregoing, the Fund will at all times comply with
Section 817(h) of the Code and Treasury Regulation 1.817-5, relating to the
diversification requirements for variable annuity, endowment, or life insurance
contracts and any amendments or other modifications to such Section or
Regulations. In the event of a breach of this Article VI by the Fund, it will
take all reasonable steps (a) to notify Company of such breach and (b) to
adequately diversify the Fund so as to achieve compliance with the grace period
afforded by Regulation 817-5.
ARTICLE VII. POTENTIAL CONFLICTS
7.1. The Board will monitor the Fund for the existence of any material
irreconcilable conflict between the interests of the contract owners of all
separate accounts investing in the Fund. An irreconcilable material conflict
may arise for a variety of reasons, including: (a) an action by any state
insurance regulatory authority; (b) a change in applicable federal or state
insurance, tax, or securities laws or regulations, or a public ruling, private
letter ruling, no-action or interpretative letter, or any similar action by
insurance, tax, or securities regulatory authorities; (c) an administrative or
judicial decision in any relevant proceeding; (d) the manner in which the
investments of any Portfolio are being managed; (e) a difference in voting
instructions given by variable annuity contract and variable life insurance
contract owners; or (f) a decision by an insurer to disregard the voting
instructions of contract owners. The Board shall
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promptly inform the Company if it determines that an irreconcilable material
conflict exists and the implications thereof.
7.2. The Company will report any potential or existing conflicts of
which it is aware to the Board. The Company will assist the Board in carrying
out its responsibilities under the Shared Funding Exemptive Order, by providing
the Board with all information reasonably necessary for the Board to consider
any issues raised. This includes, but is not limited to, an obligation by the
Company to inform the Board whenever contract owner voting instructions are
disregarded.
7.3. If it is determined by a majority of the Board, or a majority of
its disinterested trustees, that a material irreconcilable conflict exists, the
Company and other Participating Insurance Companies shall, at their expense and
to the extent reasonably practicable (as determined by a majority of the
disinterested trustees), take whatever steps are necessary to remedy or
eliminate the irreconcilable material conflict, up to and including: (1),
withdrawing the assets allocable to some or all of the separate accounts from
the Fund or any Portfolio and reinvesting such assets in a different investment
medium, including (but not limited to) another Portfolio of the Fund, or
submitting the question whether such segregation should be implemented to a vote
of all affected Contract owners and, as appropriate, segregating the assets of
any appropriate group (I.E., annuity contract owners, life insurance contract
owners, or variable contract owners of one or more Participating Insurance
Companies) that votes in favor of such segregation, or offering to the affected
contract owners the option of making such a change; and (2), establishing a new
registered management investment company or managed separate account.
7.4. If a material irreconcilable conflict arises because of a
decision by the Company to disregard contract owner voting instructions and that
decision represents a minority position or would preclude a majority vote, the
Company may be required, at the Fund's election, to withdraw the affected
Account's investment in the Fund and terminate this Agreement with respect to
such Account; provided, however that such withdrawal and termination shall be
limited to the extent required by the foregoing material irreconcilable conflict
as determined by a majority of the disinterested members of the Board. Any such
withdrawal and termination must take place within six (6) months after the Fund
gives written notice that this provision is being implemented, and until the end
of that six month period the Underwriter and Fund shall continue to accept and
implement orders by the Company for the purchase (and redemption) of shares of
the Fund.
7.5. If a material irreconcilable conflict arises because a particular
state insurance regulator's decision applicable to the Company conflicts with
the majority of other state regulators, then the Company will withdraw the
affected Account's investment in the Fund and terminate this Agreement with
respect to such Account within six months after the Board informs the Company in
writing that it has determined that such decision has created an irreconcilable
material conflict; provided, however, that such withdrawal and termination shall
be limited to the extent required by the foregoing material irreconcilable
conflict as determined by a majority of the disinterested members of the Board.
Until the end of the foregoing six month period, the Underwriter and Fund shall
continue to accept and implement orders by the Company for the purchase (and
redemption) of shares of the Fund.
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7.6. For purposes of Sections 7.3 through 7.6 of this Agreement, a
majority of the disinterested members of the Board shall determine whether any
proposed action adequately remedies any irreconcilable material conflict, but in
no event will the Fund be required to establish a new funding medium for the
Contracts. The Company shall not be required by Section 7.3 to establish a new
funding medium for the Contracts if an offer to do so has been declined by vote
of a majority of Contract owners materially adversely affected by the
irreconcilable material conflict. In the event that the Board determines that
any proposed action does not adequately remedy any irreconcilable material
conflict, then the Company will withdraw the Account's investment in the Fund
and terminate this Agreement within six (6) months after the Board informs the
Company in writing of the foregoing determination, provided, however, that such
withdrawal and termination shall be limited to the extent required by any such
material irreconcilable conflict as determined by a majority of the
disinterested members of the Board.
7.7. If and to the extent that Rule 6e-2 and Rule 6e-3(T) are amended,
or Rule 6e-3 is adopted, to provide exemptive relief from any provision of the
Act or the rules promulgated thereunder with respect to mixed or shared funding
(as defined in the Shared Funding Exemptive Order) on terms and conditions
materially different from those contained in the Shared Funding Exemptive Order,
then (a) the Fund and/or the Participating Insurance Companies, as appropriate,
shall take such steps as may be necessary to comply with Rules 6e-2 and 6e-3(T),
as amended, and Rule 6e-3, as adopted, to the extent such rules are applicable;
and (b) Sections 3.4, 3.5, 7.1, 7.2, 7.3, 7.4, and 7.5 of this Agreement shall
continue in effect only to the extent that terms and conditions substantially
identical to such Sections are contained in such Rule(s) as so amended or
adopted.
ARTICLE VIII. INDEMNIFICATION
8.1. INDEMNIFICATION BY THE COMPANY
8.1(a). The Company agrees to indemnify and hold harmless the Fund and
each trustee of the Board and officers and each person, if any, who controls the
Fund within the meaning of Section 15 of the 1933 Act (collectively, the
"Indemnified Parties" for purposes of this Section 8.1) against any and all
losses, claims, damages, liabilities (including amounts paid in settlement with
the written consent of the Company) or litigation (including legal and other
expenses), to which the Indemnified Parties may become subject under any
statute, regulation, at common law or otherwise, insofar as such losses, claims,
damages, liabilities or expenses (or actions in respect thereof) or settlements
are related to the sale or acquisition of the Fund's shares or the Contracts
and:
(i) arise out of or are based upon any untrue statements or alleged
untrue statements of any material fact contained in the Registration
Statement or prospectus for the Contracts or contained in the Contracts
or sales literature 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
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fact required to be stated therein or necessary to make the statements
therein not misleading, provided that this agreement to indemnify shall
not apply as to any Indemnified Party if such statement or omission or
such alleged statement or omission was made in reliance upon and in
conformity with information furnished to the Company by or on behalf of
the Fund for use in the Registration Statement or prospectus for the
Contracts or in the Contracts or sales literature (or any amendment or
supplement) or otherwise for use in connection with the sale of the
Contracts or Fund shares; or
(ii) arise out of or as a result of statements or representations
(other than statements or representations contained in the Registration
Statement, prospectus or sales literature of the Fund not supplied by
the Company, or persons under its control) or wrongful conduct of the
Company or persons under its control, with respect to the sale or
distribution of the Contracts or Fund Shares; or
(iii) arise out of any untrue statement or alleged untrue statement
of a material fact contained in a Registration Statement, prospectus,
or sales literature of the Fund or any amendment thereof or supplement
thereto or the omission or alleged omission to state therein a material
fact required to be stated therein or necessary to make the statements
therein not misleading if such a statement or omission was made in
reliance upon information furnished to the Fund by or on behalf of the
Company; or
(iv) arise as a result of any failure by the Company to provide the
services and furnish the materials under the terms of this Agreement;
or
(v) arise out of or result from any material breach of any
representation and/or warranty made by the Company in this Agreement or
arise out of or result from any other material breach of this Agreement
by the Company, as limited by and in accordance with the provisions of
Sections 8.1(b) and 8.1(c) hereof.
8.1(b). The Company shall not be liable under this indemnification
provision with respect to any losses, claims, damages, liabilities or
litigation incurred or assessed against an Indemnified Party as such
may arise from such Indemnified Party's willful misfeasance, bad faith,
or gross negligence in the performance of such Indemnified Party's
duties or by reason of such Indemnified Party's reckless disregard of
obligations or duties under this Agreement or to the Fund, whichever is
applicable.
8.1(c). The Company shall not be liable under this indemnification
provision with respect to any claim made against an Indemnified Party
unless such Indemnified Party shall have notified the Company in
writing within a reasonable time after the summons or other first legal
process giving information of the nature of the claim shall have been
served upon such Indemnified Party (or after such Indemnified Party
shall have received notice of such service on any designated agent),
but failure to
12
<PAGE>
notify the Company of any such claim shall not relieve the Company
from any liability which it may have to the Indemnified Party against
whom such action is brought otherwise than on account of this
indemnification provision. In case any such action is brought
against the Indemnified Parties, the Company shall be entitled to
participate, at its own expense, in the defense of such action. The
Company also shall be entitled to assume the defense thereof, with
counsel satisfactory to the party named in the action. After notice
from the Company to such party of the Company's election to assume the
defense thereof, the Indemnified Party shall bear the fees and expenses
of any additional counsel retained by it, and the Company will not be
liable to such party under this Agreement for any legal or other
expenses subsequently incurred by such party independently in
connection with the defense thereof other than reasonable costs of
investigation.
8.1(d). The Indemnified Parties will promptly notify the Company of
the commencement of any litigation or proceedings against them in
connection with the issuance or sale of the Fund Shares or the
Contracts or the operation of the Fund.
8.2. INDEMNIFICATION BY THE UNDERWRITER
8.2(a). The Underwriter agrees to indemnify and hold harmless the
Company and each of its directors and officers and each person, if any, who
controls the Company within the meaning of Section 15 of the 1933 Act
(collectively, the "Indemnified Parties" for purposes of this Section 8.2)
against any and all losses, claims, damages, liabilities (including amounts paid
in settlement with the written consent of the Underwriter) or litigation
(including 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 expenses (or actions in respect thereof) or
settlements are related to the sale or acquisition of the Fund's shares or the
Contracts and:
(i) arise out of or are based upon any untrue statement or
alleged untrue statement of any material fact contained in
the Registration Statement or prospectus or sales
literature of the Fund (or any amendment or supplement to
any of the foregoing), or arise out of or are based upon
the omission or the alleged omission to state therein a
material fact required to be stated therein or necessary to
make the statements therein not misleading, provided that
this agreement to indemnify shall not apply as to any
Indemnified Party if such statement or omission or such
alleged statement or omission was made in reliance upon and
in conformity with information furnished to the Underwriter
or Fund by or on behalf of the Company for use in the
Registration Statement or prospectus for the Fund or in
sales literature (or any amendment or supplement) or
otherwise for use in connection with the sale of the
Contracts or Fund shares; or
(ii) arise out of or as a result of statements or
representations (other than statements or representations
contained in the Registration Statement,
13
<PAGE>
prospectus or sales literature for the Contracts not
supplied by the Underwriter or persons under its control)
or wrongful conduct of the Fund, Adviser or Underwriter or
persons under their control, with respect to the sale or
distribution of the Contracts or Fund shares; or
(iii) arise out of any untrue statement or alleged untrue
statement of a material fact contained in a Registration
Statement, prospectus, or sales literature covering the
Contracts, or any amendment thereof or supplement thereto,
or the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to
make the statement or statements therein not misleading, if
such statement or omission was made in reliance upon
information furnished to the Company by or on behalf of the
Fund; or
(iv) arise as a result of any failure by the Fund to provide the
services and furnish the materials under the terms of this
Agreement (including a failure, whether unintentional or in
good faith or otherwise, to comply with the diversification
requirements specified in Article VI of this Agreement); or
(v) arise out of or result from any material breach of any
representation and/or warranty made by the Underwriter in
this Agreement or arise out of or result from any other
material breach of this Agreement by the Underwriter; as
limited by and in accordance with the provisions of
Sections 8.2(b) and 8.2(c) hereof.
8.2(b). The Underwriter shall not be liable under this indemnification
provision with respect to any losses, claims, damages, liabilities or litigation
to which an Indemnified Party would otherwise be subject by reason of such
Indemnified Party's willful misfeasance, bad faith, or gross negligence in the
performance of such Indemnified Party's duties or by reason of such Indemnified
Party's reckless disregard of obligations and duties under this Agreement or to
each Company or the Account, whichever is applicable.
8.2(c). The Underwriter shall not be liable under this indemnification
provision with respect to any claim made against an Indemnified Party unless
such Indemnified Party shall have notified the Underwriter in writing within a
reasonable time after the summons or other first legal process giving
information of the nature of the claim shall have been served upon such
Indemnified Party (or after such Indemnified Party shall have received notice of
such service on any designated agent), but failure to notify the Underwriter of
any such claim shall not relieve the Underwriter from any liability which it may
have to the Indemnified Party against whom such action is brought otherwise than
on account of this indemnification provision. In case any such action is
brought against the Indemnified Parties, the Underwriter will be entitled to
participate, at its own expense, in the defense thereof. The Underwriter also
shall be entitled to assume the defense thereof, with counsel satisfactory to
the party named in the action. After notice from the Underwriter to such party
of the Underwriter's election to assume the defense thereof, the Indemnified
Party shall bear the fees and expenses of any additional counsel retained by it,
and the Underwriter will not be liable to such party under this Agreement for
any legal or other expenses
14
<PAGE>
subsequently incurred by such party independently in connection with the
defense thereof other than reasonable costs of investigation.
8.2(d). The Company agrees promptly to notify the Underwriter of the
commencement of any litigation or proceedings against it or any of its officers
or directors in connection with the issuance or sale of the Contracts or the
operation of each Account.
8.3. INDEMNIFICATION BY THE FUND
8.3(a). The Fund agrees to indemnify and hold harmless the Company,
and each of its directors and officers and each person, if any, who controls the
Company within the meaning of Section 15 of the 1933 Act (collectively, the
"Indemnified Parties" for purposes of this Section 8.3) against any and all
losses, claims, damages, liabilities (including amounts paid in settlement with
the written consent of the Fund) or litigation (including legal and other
expenses) to which the Indemnified Parties may become subject under any statute,
at common law or otherwise, insofar as such losses, claims, damages, liabilities
or expenses (or actions in respect thereof) or settlements result from the gross
negligence, bad faith or willful misconduct of the Board or any member thereof,
are related to the operations of the Fund and:
(i) arise as a result of any failure by the Fund to provide the
services and furnish the materials under the terms of this
Agreement (including a failure to comply with the
diversification requirements specified in Article VI of
this Agreement);or
(ii) arise out of or result from any material breach of any
representation and/or warranty made by the Fund in this
Agreement or arise out of or result from any other material
breach of this Agreement by the Fund;
as limited by and in accordance with the provisions of Sections 8.3(b) and
8.3(c) hereof.
8.3(b). The Fund shall not be liable under this indemnification
provision with respect to any losses, claims, damages, liabilities or litigation
incurred or assessed against an Indemnified Party as such may arise from such
Indemnified Party's willful misfeasance, bad faith, or gross negligence in the
performance of such Indemnified Party's duties or by reason of such Indemnified
Party's reckless disregard of obligations and duties under this Agreement or to
the Company, the Fund, the Underwriter or each Account, whichever is applicable.
8.3(c). The Fund shall not be liable under this indemnification
provision with respect to any claim made against an Indemnified Party unless
such Indemnified Party shall have notified the Fund in writing within a
reasonable time after the summons or other first legal process giving
information of the nature of the claim shall have been served upon such
Indemnified Party (or after such Indemnified Party shall have received notice of
such service on any designated agent), but failure to notify the Fund of any
such claim shall not relieve the Fund from any liability which it may have to
the Indemnified Party against whom such action is brought otherwise than on
account of this indemnification provision. In case any such action is brought
against the
15
<PAGE>
Indemnified Parties, the Fund will be entitled to participate, at its own
expense, in the defense thereof. The Fund also shall be entitled to assume
the defense thereof, with counsel satisfactory to the party named in the
action. After notice from the Fund to such party of the Fund's election to
assume the defense thereof, the Indemnified Party shall bear the fees and
expenses of any additional counsel retained by it, and the Fund will not be
liable to such party under this Agreement for any legal or other expenses
subsequently incurred by such party independently in connection with the
defense thereof other than reasonable costs of investigation.
8.3(d). The Company and the Underwriter agree promptly to notify the
Fund of the commencement of any litigation or proceedings against it or any of
its respective officers or directors in connection with this Agreement, the
issuance or sale of the Contracts, with respect to the operation of either
Account, or the sale or acquisition of shares of the Fund.
ARTICLE IX. APPLICABLE LAW
9.1. This Agreement shall be construed and the provisions hereof
interpreted under and in accordance with the laws of the Commonwealth of
Massachusetts.
9.2. This Agreement shall be subject to the provisions of the 1933,
1934 and 1940 acts, and the rules and regulations and rulings thereunder,
including such exemptions from those statutes, rules and regulations as the
Securities and Exchange Commission may grant (including, but not limited to, the
Shared Funding Exemptive Order) and the terms hereof shall be interpreted and
construed in accordance therewith.
ARTICLE X. TERMINATION
10.1. This Agreement shall continue in full force and effect until
the first to occur of:
(a) termination by any party for any reason by 180 (six months) days
advance written notice delivered to the other parties; or
(b) termination by the Company by written notice to the Fund and the
Underwriter with respect to any Portfolio based upon the Company's
determination that shares of such Portfolio are not reasonably
available to meet the requirements of the Contracts; or
(c) termination by the Company by written notice to the Fund and the
Underwriter with respect to any Portfolio in the event any of the
Portfolio's shares are not registered, issued or sold in accordance
with applicable state and/or federal law or such law precludes the
use of such shares as the underlying investment media of the
Contracts issued or to be issued by the Company; or
16
<PAGE>
(d) termination by the Company by written notice to the Fund and the
Underwriter with respect to any Portfolio in the event that such
Portfolio ceases to qualify as a Regulated Investment Company under
Subchapter M of the Code or under any successor or similar
provision, or if the Company reasonably believes that the Fund may
fail to so qualify; or
(e) termination by the Company by written notice to the Fund and the
Underwriter with respect to any Portfolio in the event that such
Portfolio fails to meet the diversification requirements specified
in Article VI hereof; or
(f) termination by either the Fund or the Underwriter by written notice
to the Company, if either one or both of the Fund or the Underwriter
respectively, shall determine, in their sole judgment exercised in
good faith, that the Company and/or its affiliated companies has
suffered a material adverse change in its business, operations,
financial condition or prospects since the date of this Agreement or
is the subject of material adverse publicity; or
(g) termination by the Company by written notice to the Fund and the
Underwriter, if the Company shall determine, in its sole judgment
exercised in good faith, that either the Fund or the Underwriter has
suffered a material adverse change in its business, operations,
financial condition or prospects since the date of this Agreement or
is the subject of material adverse publicity; or
(h) termination by the Fund or the Underwriter by written notice to the
Company, if the Company gives the Fund and the Underwriter the
written notice specified in Section 1.6(b) hereof and at the time
such notice was given there was no notice of termination outstanding
under any other provision of this Agreement; provided, however any
termination under this Section 10.1(h) shall be effective forty five
(45) days after the notice specified in Section 1.6(b) was given.
10.2. EFFECT OF TERMINATION. Notwithstanding any termination of this
Agreement, the Fund and the Underwriter shall at the option of the Company,
continue to make available additional shares of the Fund pursuant to the terms
and conditions of this Agreement, for all Contracts in effect on the effective
date of termination of this Agreement (hereinafter referred to as "Existing
Contracts"). Specifically, without limitation, the owners of the Existing
Contracts shall be permitted to reallocate investments in the Fund, redeem
investments in the Fund and/or invest in the Fund upon the making of additional
purchase payments under the Existing Contracts. The parties agree that this
Section 10.2 shall not apply to any terminations under Article VII and the
effect of such Article VII terminations shall be governed by Article VII of this
Agreement.
10.3 The Company shall not redeem Fund shares attributable to the
Contracts (as opposed to Fund shares attributable to the Company's assets held
in the Account) except (i) as necessary to implement Contract Owner initiated or
approved transactions, or (ii) as required by state and/or federal laws or
regulations or judicial or other legal precedent of general application
(hereinafter referred to as a "Legally Required Redemption"). Upon request, the
Company will promptly furnish to the Fund and the
17
<PAGE>
Underwriter the opinion of counsel for the Company (which counsel shall be
reasonably satisfactory to the Fund and the Underwriter) to the effect that any
redemption pursuant to clause (ii) above is a Legally Required Redemption.
Furthermore, except in cases where permitted under the terms of the Contracts,
the Company shall not prevent Contract Owners from allocating payments to a
Portfolio that was otherwise available under the Contracts without first giving
the Fund or the Underwriter 90 days notice of its intention to do so.
ARTICLE XI. NOTICES
Any notice shall be sufficiently given when sent by registered or
certified mail to the other party at the address of such party set forth below
or at such other address as such party may from time to time specify in writing
to the other party.
If to the Fund:
82 Devonshire Street
Boston, Massachusetts 02109
Attention: Treasurer
If to the Company:
State Mutual Life Assurance Company of America
440 Lincoln Street
Worcester, MA 01653
Attention: Rod Vessels
If to the Underwriter:
82 Devonshire Street
Boston, Massachusetts 02109
Attention: Treasurer
ARTICLE XII. MISCELLANEOUS
12.1 All persons dealing with the Fund must look solely to the
property of the Fund for the enforcement of any claims against the Fund as
neither the Board, officers, agents or shareholders assume any personal
liability for obligations entered into on behalf of the Fund.
12.2 Subject to the requirements of legal process and regulatory
authority, each party hereto shall treat as confidential the names and addresses
of the owners of the Contracts and all information reasonably identified as
confidential in writing by any other party hereto and, except as permitted by
this Agreement, shall not disclose, disseminate or utilize such names and
addresses and other confidential information until such time as it may come into
the public domain without the express written consent of the affected party.
18
<PAGE>
12.3 The captions in this Agreement are included for convenience of
reference only and in no way define or delineate any of the provisions hereof or
otherwise affect their construction or effect.
12.4 This Agreement may be executed simultaneously in two or more
counterparts, each of which taken together shall constitute one and the same
instrument.
12.5 If any provision of this Agreement shall be held or made invalid
by a court decision, statute, rule or otherwise, the remainder of the Agreement
shall not be affected thereby.
12.6 Each party hereto shall cooperate with each other party and all
appropriate governmental authorities (including without limitation the SEC, the
NASD and state insurance regulators) and shall permit such authorities
reasonable access to its books and records in connection with any investigation
or inquiry relating to this Agreement or the transactions contemplated hereby.
Notwithstanding the generality of the foregoing, each party hereto further
agrees to furnish the California Insurance Commissioner with any information or
reports in connection with services provided under this Agreement which such
Commissioner may request in order to ascertain whether the insurance operations
of the Company are being conducted in a manner consistent with the California
Insurance Regulations and any other applicable law or regulations.
12.7 The rights, remedies and obligations contained in this Agreement
are cumulative and are in addition to any and all rights, remedies and
obligations, at law or in equity, which the parties hereto are entitled to under
state and federal laws.
12.8. This Agreement or any of the rights and obligations hereunder
may not be assigned by any party without the prior written consent of all
parties hereto; provided, however, that the Underwriter may assign this
Agreement or any rights or obligations hereunder to any affiliate of or company
under common control with the Underwriter, if such assignee is duly licensed and
registered to perform the obligations of the Underwriter under this Agreement.
12.9. The Company shall furnish, or shall cause to be furnished, to
the Fund or its designee copies of the following reports:
(a) the Company's annual statement prepared under statutory
accounting principles) and annual report (prepared under
generally accepted accounting principles ("GAAP")), as soon as
practical and in any event within 90 days after the end of each
fiscal year;
(b) the Company's quarterly statements (statutory and GAAP), as
soon as practical and in any event within 45 days after the end
of each quarterly period:
19
<PAGE>
(c) any financial statement, proxy statement, notice or report of
the Company sent to stockholders and/or policyholders, as soon
as practical after the delivery thereof to stockholders;
(d) any registration statement (without exhibits) and financial
reports of the Company filed with the Securities and Exchange
Commission or any state insurance regulator, as soon as
practical after the filing thereof;
(e) any other report submitted to the Company by independent
accountants in connection with any annual, interim or special
audit made by them of the books of the Company, as soon as
practical after the receipt thereof.
IN WITNESS WHEREOF, each of the parties hereto has caused this
Agreement to be executed in its name and on its behalf by its duly authorized
representative and its seal to be hereunder affixed hereto as of the date
specified below.
STATE MUTUAL LIFE ASSURANCE COMPANY OF AMERICA
By its authorized officer,
By: /s/ Richard M. Reilly
------------------------------
Title: Vice President
------------------------------
Date: 3/14/94
------------------------------
VARIABLE INSURANCE PRODUCTS FUND II
By its authorized officer,
By: /s/ J. Gary Burkhead
------------------------------
Title: Senior Vice President
------------------------------
Date: 3/18/94
------------------------------
FIDELITY DISTRIBUTORS CORPORATION
By its authorized officer,
By: /s/ Kurt A. Lange
------------------------------
Title: President
------------------------------
Date: 3/24/94
------------------------------
20
<PAGE>
SCHEDULE A
SEPARATE ACCOUNTS AND ASSOCIATED CONTRACTS
<TABLE>
<S> <C>
Name of Separate Account and Contracts Funded
DATE ESTABLISHED BY BOARD OF DIRECTORS BY SEPARATE ACCOUNT
Inheiritage Account, August 20, 1991 Variable Inheiritage Form Number 1026.1-94
VEL II - August 20, 1991 VEL '94 - Form Number 1018.1-94
VA-K - August 20, 1991 Exec-Annuity Plus - Form Number A3018.44-94
</TABLE>
21
<PAGE>
SCHEDULE B
PROXY VOTING PROCEDURE
The following is a list of procedures and corresponding responsibilities for the
handling of proxies relating to the Fund by the Underwriter, the Fund and the
Company. The defined terms herein shall have the meanings assigned in the
Participation Agreement except that the term "Company" shall also include the
department or third party assigned by the Insurance Company to perform the steps
delineated below.
1. The number of proxy proposals is given to the Company by the Underwriter as
early as possible before the date set by the Fund for the shareholder
meeting to facilitate the establishment of tabulation procedures. At this
time the Underwriter will inform the Company of the Record, Mailing and
Meeting dates. This will be done verbally approximately two months before
meeting.
2. Promptly after the Record Date, the Company will perform a "tape run", or
other activity, which will generate the names, addresses and number of units
which are attributed to each contractowner/policyholder (the "Customer") as
of the Record Date. Allowance should be made for account adjustments made
after this date that could affect the status of the Customers' accounts as
of the Record Date.
Note: The number of proxy statements is determined by the activities
described in Step #2. The Company will use its best efforts to call in the
number of Customers to Fidelity, as soon as possible, but no later than two
weeks after the Record Date.
3. The Fund's Annual Report must be sent to each Customer by the Company either
before or together with the Customers' receipt of a proxy statement.
Underwriter will provide at least one copy of the last Annual Report to the
Company.
4. The text and format for the Voting Instruction Cards ("Cards" or "Card") is
provided to the Company by the Fund. The Company, at its expense, shall
produce and personalize the Voting Instruction Cards. The Legal Department
of the Underwriter or its affiliate ("Fidelity Legal") must approve the Card
before it is printed. Allow approximately 2-4 business days for printing
information on the Cards. Information commonly found on the Cards includes:
a. name (legal name as found on account registration)
b. address
c. Fund or account number
d. coding to state number of units
e. individual Card number for use in tracking and verification of votes
(already on Cards as printed by the Fund)
(This and related steps may occur later in the chronological process due to
possible uncertainties relating to the proposals.)
22
<PAGE>
5. During this time, Fidelity Legal will develop, produce, and the Fund
will pay for the Notice of Proxy and the Proxy Statement (one document).
Printed and folded notices and statements will be sent to Company for
insertion into envelopes (envelopes and return envelopes are provided
and paid for by the Insurance Company). Contents of envelope sent to
Customers by Company will include:
a. Voting Instruction Card(s)
b. One proxy notice and statement (one document)
c. return envelope (postage pre-paid by Company) addressed to the
Company or its tabulation agent
d. "urge buckslip" - optional, but recommended. (This is a small,
single sheet of paper that requests Customers to vote as
quickly as possible and that their vote is important. One
copy will be supplied by the Fund.)
e. cover letter - optional, supplied by Company and reviewed and
approved in advance by Fidelity Legal.
6. The above contents should be received by the Company approximately 3-5
business days before mail date. Individual in charge at Company reviews
and approves the contents of the mailing package to ensure correctness
and completeness. Copy of this approval sent to Fidelity Legal.
7. Package mailed by the Company.
* The Fund MUST allow at least a 15-day solicitation time to the
Company as the shareowner. (A 5-week period is recommended.)
Solicitation time is calculated as calendar days from (but NOT
including) the meeting, counting backwards.
8. Collection and tabulation of Cards begins. Tabulation usually takes
place in another department or another vendor depending on process used.
An often used procedure is to sort Cards on arrival by proposal into
vote categories of all yes, no, or mixed replies, and to begin data
entry.
Note: Postmarks are not generally needed. A need for postmark
information would be due to an insurance company's internal procedure
and has not been required by Fidelity in the past.
9. Signatures on Card checked against legal name on account registration
which was printed on the Card.
Note: For Example, If the account registration is under "Bertram C.
Jones, Trustee," then that is the exact legal name to be printed on the
Card and is the signature needed on the Card.
23
<PAGE>
10. If Cards are mutilated, or for any reason are illegible or are not
signed properly, they are sent back to Customer with an explanatory
letter, a new Card and return envelope. The mutilated or illegible Card
is disregarded and considered to be NOT RECEIVED for purposes of vote
tabulation. Any Cards that have "kicked out" (e.g. mutilated,
illegible) of the procedure are "hand verified," i.e., examined as to
why they did not complete the system. Any questions on those Cards are
usually remedied individually.
11. There are various control procedures used to ensure proper tabulation of
votes and accuracy of that tabulation. The most prevalent is to sort
the Cards as they first arrive into categories depending upon their
vote; an estimate of how the vote is progressing may then be calculated.
If the initial estimates and the actual vote do not coincide, then an
internal audit of that vote should occur. This may entail a recount.
12. The actual tabulation of votes is done in units which is then converted
to shares. (It is very important that the Fund receives the tabulations
stated in terms of a percentage and the number of SHARES.) Fidelity
Legal must review and approve tabulation format.
13. Final tabulation in shares is verbally given by the Company to Fidelity
Legal on the morning of the meeting not later than 10:00 a.m. Boston
time. Fidelity Legal may request an earlier deadline if required to
calculate the vote in time for the meeting.
14. A Certification of Mailing and Authorization to Vote Shares will be
required from the Company as well as an original copy of the final vote.
Fidelity Legal will provide a standard form for each Certification.
15. The Company will be required to box and archive the Cards received from
the Customers. In the event that any vote is challenged or if otherwise
necessary for legal, regulatory, or accounting purposes, Fidelity Legal
will be permitted reasonable access to such Cards.
16. All approvals and "signing-off" may be done orally, but must always be
followed up in writing.
24
<PAGE>
SCHEDULE C
Other investment companies currently available under variable annuities or
variable life insurance issued by the Company:
Allmerica Investment Trust
Delaware Group Premium Fund, Inc.
25
<PAGE>
Amendment to Schedule A to Participation Agreement
among
Variable Insurance Products Fund II
Fidelity Distributors Corporation
and
First Allmerica Financial Life Insurance Company
Whereas, First Allmerica Financial Life Insurance Company (the "Company";
formerly State Mutual Life Assurance Insurance Company of America), Variable
Insurance Products Fund II, and Fidelity Distributors Corporation have
previously entered into a Participation Agreement dated March 1, 1994
("Participation Agreement"); and
Whereas, the Participation Agreement provides for the amendment of Schedule A
thereto by mutual written consent, the parties from time-to-time have so amended
Schedule A, and the parties now wish to consolidate said prior amendments to
Schedule A into a single document and to update Schedule A;
Now, therefore, the parties do hereby agree:
1. To amend and update Schedule A to the Participation Agreement by adopting the
attached Schedule A, dated July 15, 1997, and by substituting the attached
Schedule A for and any all prior amendments to Schedule A, as may have been
adopted from time-to-time.
In witness whereof, each of the parties has caused this agreement to be executed
in its name and on its behalf by its duly authorized representative as of the
date specified below.
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
By: /s/ Richard M. Reilly
-------------------------
Name: Richard M. Reilly
-------------------------
Title: President
-------------------------
Date: July 16, 1997
-------------------------
VARIABLE INSURANCE PRODUCTS FUND II FIDELITY DISTRIBUTORS CORPORATION
By: /s/ By: /s/
------------------------- ------------------------
Name: Name:
------------------------- ------------------------
Title: Title:
------------------------- ------------------------
Date: Date:
------------------------- ------------------------
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
Schedule A, as amended, to Participation Agreement Dated March 1, 1994
(Dated 7/15/97)
Separate Account* Product Name Registration.
- ---------------- ------------ ------------
VEL II VEL '93 33-71056
(Variable Life) Policy Form 1018.1-94 811-8130
Inheiritage Inheiritage 33-74184
(Variable Life) Policy Form 1026.1-94 811-8304
Group VEL Group VEL 333-06383
(Variable Life) Policy Form 1029.1-94 811-7663
VA-K ExecAnnuity Plus 33-71052
(Annuity) Policy Form A3018-94 811-8814
* The establishment of the Separate Accounts was authorized by vote of the Board
of Directors dated August 21, 1991.
<PAGE>
Form of
PARTICIPATION AGREEMENT
Among
DELAWARE GROUP PREMIUM FUND, INC.
And
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
And
DELAWARE DISTRIBUTORS, INC.
THIS AGREEMENT, made and entered into this ____ day of ___________, 1996
by and among DELAWARE GROUP PREMIUM FUND, INC., a corporation organized under
the laws of Maryland (the "Fund"), FIRST ALLMERICA FINANCIAL LIFE INSURANCE
COMPANY, a Massachusetts corporation (the "Company"), on its own behalf and
on behalf of each separate account of the Company named in Schedule 1 to this
Agreement as in effect at the time this Agreement is executed and such other
separate accounts that may be added to Schedule 1 from time to time in
accordance with the provisions of Article XI of this Agreement (each such
account referred to as the "Account"), and DELAWARE DISTRIBUTORS, INC., a
Delaware corporation (the "Distributor").
WHEREAS, the Fund is engaged in business as an open-end management
investment company and was established for the purpose of serving as the
investment vehicle for separate accounts established for variable life
insurance policies and variable annuity contracts (collectively referred to
as "Variable Insurance Products," the owners of such products being referred
<PAGE>
to as "Product owners") to be offered by insurance companies which have
entered into participation agreements with the Fund ("Participating Insurance
Companies"); and
WHEREAS, the common stock of the Fund (the "Fund shares") consists of
separate series ("Series") issuing separate classes of shares ("Series
shares"), each such class representing an interest in a particular managed
portfolio of securities and other assets; and
WHEREAS, the Fund filed with the Securities and Exchange Commission (the
"SEC") and the SEC has declared effective a registration statement (referred
to herein as the "Fund Registration Statement" and the prospectus contained
therein, or filed pursuant to Rule 497 under the 1933 Act, referred to herein
as the "Fund Prospectus") on Form N-1A to register itself as an open-end
management investment company (File No. 811-5162) under the Investment
Company Act of 1940, as amended (the "1940 Act"), and the Fund shares
(File No. 33-14363) under the Securities Act of 1933, as amended (the "1933
Act"); and
WHEREAS, the Company has filed or will file a registration statement
with the SEC to register under the 1933 Act certain variable annuity
contracts described in Schedule 2 to this Agreement as in effect at the time
this Agreement is executed and such other variable annuity contracts and
variable life insurance policies which may be added to Schedule 2 from time
to time in accordance with Article XI of this Agreement
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(such policies and contracts shall be referred to herein collectively as the
"Contracts," each such registration statement for a class or classes of
contracts listed on Schedule 2 being referred to as the "Contracts
Registration Statement" and the prospectus for each such class or classes
being referred to herein as the "Contracts Prospectus," and the owners of the
such contracts, as distinguished from all Product Owners, being referred to
as "Contract Owners"); and
WHEREAS, the Account, a validly existing separate account, duly
authorized by resolution of the Board of Directors of the Company on the date
set forth on Schedule 1, sets aside and invests assets attributable to the
Contracts; and
WHEREAS, the Company has registered or will have registered the Account
with the SEC as a unit investment trust under the 1940 Act before any
Contracts are issued by the Account; and
WHEREAS, the Distributor is registered as a broker-dealer with the SEC
under the Securities Exchange Act of 1934, as amended (the "1934 Act"), and
is a member in good standing of the National Association of Securities
Dealers, Inc. (the "NASD"); and
WHEREAS, the Distributor and the Fund have entered into an agreement
(the "Fund Distribution Agreement") pursuant to which the Distributor will
distribute Fund shares; and
WHEREAS, Delaware Management Company, Inc. (the "Investment Manager") is
registered as an investment adviser
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under the 1940 Act and any applicable state securities laws and serves as an
investment manager to the Fund pursuant to an agreement; and
WHEREAS, to the extent permitted by applicable insurance laws and
regulations, the Company intends to purchase Series shares on behalf of the
Account to fund the Contracts and the Distributor is authorized to sell such
Series shares to unit investment trusts such as the Account at net asset
value;
NOW, THEREFORE, in consideration of their mutual promises, the Company,
the Fund and the Distributor agree as follows:
ARTICLE I. SALE OF FUND SHARES
1.1. The Distributor agrees to sell to the Company those Series shares
which the Company orders on behalf of the Account, executing such orders on a
daily basis in accordance with Section 1.4 of this Agreement.
1.2. The Fund agrees to make the shares of its Series available for
purchase by the Company on behalf of the Account at the then applicable net
asset value per share on Business Days as defined in Section 1.4 of this
Agreement, and the Fund shall use reasonable efforts to calculate such net
asset value on each such Business Day. Notwithstanding any other provision in
this Agreement to the contrary, the Board of Directors of the Fund (the "Fund
Board") may suspend or terminate the offering of Fund shares of any Series,
if such action is required by law or by
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regulatory authorities having jurisdiction or if, in the sole discretion of
the Fund Board acting in good faith and in light of its fiduciary duties
under Federal and any applicable state laws, suspension or termination is
necessary and in the best interests of the shareholders of any Series (it
being understood that "shareholders" for this purpose shall mean Product
owners).
1.3. The Fund agrees to redeem, at the Company's request, any full or
fractional shares of the Fund held by the Account or the Company, executing
such requests at the net asset value on a daily basis in accordance with
Section 1.4 of this Agreement, the applicable provisions of the 1940 Act and
the then currently effective Fund Prospectus. Notwithstanding the foregoing,
the Fund may delay redemption of Fund shares of any Series to the extent
permitted by the 1940 Act, any rules, regulations or orders thereunder, or
the then currently effective Fund Prospectus.
1.4.
(a) For purposes of Sections 1.1, 1.2 and 1.3, the Company shall
be the agent of the Fund for the limited purpose of receiving redemption and
purchase requests from the Account (but not from the general account of the
Company), and receipt on any Business Day by the Company as such limited
agent of the Fund prior to the time prescribed in the current Fund Prospectus
(which as of the date of execution of this Agreement is 4 p.m.) shall
constitute receipt by the Fund on that same Business Day, provided that the
Fund receives notice of such
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redemption or purchase request by 11:00 a.m. Eastern Time on the next
following Business Day. For purposes of this Agreement, "Business Day" shall
mean any day on which the New York Stock exchange is open for trading or as
otherwise provided in the Fund's then currently effective Fund Prospectus.
(b) The Company shall pay for shares of each Series on the same
day that it places an order with the Fund to purchase those Series shares.
Payment for Series shares will be made by the Account or the Company in
Federal Funds transmitted to the Fund by wire to be received by 11:00 a.m. on
the day the Fund is properly notified of the purchase order for Series shares
(unless sufficient proceeds are available from redemption of shares of other
Series). If Federal Funds are not received on time, such funds will be
invested, and Series shares purchased thereby will be issued, as soon as
practicable.
(c) Payment for Series shares redeemed by the Account or the
Company will be made in Federal Funds transmitted to the Company by wire on
the day the Fund is notified of the redemption order of Series shares (unless
redemption proceeds are applied to the purchase of shares of other Series),
except that the Fund reserves the right to delay payment of redemption
proceeds, but in no event may such payment be delayed longer than the period
permitted under Section 22(e) of the 1940 Act. Neither the Fund nor the
Distributor shall bear any responsibility whatsoever for the proper
disbursement or
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crediting of redemption proceeds; the Company alone shall be responsible for
such action.
1.5. Issuance and transfer of Fund shares will be by book entry only.
Stock certificates will not be issued to the Company or the Account. Purchase
and redemption orders for Fund shares will be recorded in an appropriate
ledger for the Account or the appropriate subaccount of the Account.
1.6. The Fund shall furnish notice as soon as reasonably practicable to
the Company of any income dividends or capital gain distributions payable on
any Series shares. The Company, on its behalf and on behalf of the Account,
hereby elects to receive all such dividends and distributions as are payable
on any Series shares in the form of additional shares of that Series. The
Company reserves the right, on its behalf and on behalf of the Account, to
revoke this election and to receive all such dividends in cash. The Fund
shall notify the Company of the number of Series shares so issued as payment
of such dividends and distributions.
1.7. The Fund shall use its best efforts to make the net asset value
per share for each Series available to the Company by 7 p.m. Eastern Time
each Business Day, and in any event, as soon as reasonably practicable after
the net asset value per share for such Series is calculated, and shall
calculate such net asset value in accordance with the then currently
effective Fund Prospectus. Neither the Fund, any Series, the Distributor, nor
the Investment Manager nor any of
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their affiliates shall be liable for any information provided to the Company
pursuant to this Agreement which information is based on incorrect
information supplied by the Company to the Fund, the Distributor or the
Investment Manager.
1.8. While this Agreement is in effect, the Company agrees that all
amounts available for investment under the Contracts (other than those listed
on Schedule 3) shall be invested only in the Fund and/or allocated to the
Company's general account, provided that such amounts may also be invested in
an investment company other than the Fund if: (a) such other investment
company is advised by the Fund's investment adviser; (b) the Fund and/or the
Distributor, in their sole discretion, consents to the use of such other
investment company; (c) there is a substitution of the Fund made in
accordance with Section 10.1(e) of this Agreement; or (d) this Agreement is
terminated pursuant to Article X of this Agreement. The Company also agrees
that it will not take any action to operate the Account as a management
investment company under the 1940 Act without the Fund's and Distributor's
prior written consent.
1.9. The Fund and the Distributor agree that Fund shares will be sold
only to Participating Insurance Companies and their separate accounts. The
Fund and the Distributor will not sell Fund shares to any insurance company
or separate account unless an agreement complying with Article VII of this
Agreement is in effect to govern such sales. No Fund shares of any Series
will be sold to the general public.
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<PAGE>
ARTICLE II. REPRESENTATIONS AND WARRANTIES
2.1. The Company represents and warrants (a) that the Contracts are
registered under the 1933 Act or will be so registered before the issuance
thereof, (b) that the Contracts will be issued in compliance in all material
respects with all applicable Federal and state laws and (c) that the Company
will require of every person distributing the Contracts (i) that the
Contracts be offered and sold in compliance in all material respects with all
applicable Federal and state laws and (ii) that at the time it is issued each
Contract is a suitable purchase for the applicant therefor under applicable
state insurance laws. The Company further represents and warrants that it is
an insurance company duly organized and in good standing under applicable law
and that it has legally and validly authorized the Account as a separate
account under Title 18, Section 2932 of the Massachusetts Insurance Code, and
has registered or, prior to the issuance of any Contracts, will register the
Account as a unit investment trust in accordance with the provisions of the
1940 Act to serve as a separate account for the Contracts, and that it will
maintain such registration for so long as any Contracts are outstanding.
2.2. The Fund represents and warrants that Fund shares sold pursuant to
this Agreement shall be registered under the 1933 Act and duly authorized for
issuance in accordance with applicable law and that the Fund is and shall
remain registered under the 1940 Act for so long as the Fund shares are sold.
The
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<PAGE>
Fund further represents and warrants that it is a corporation duly organized
and in good standing under the laws of Maryland.
2.3. The Fund represents that it currently qualifies and will make
every effort to continue to qualify as a Regulated Investment Company under
Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code") and
to maintain such qualification (under Subchapter M or any successor or
similar provision), and that it will notify the Company immediately upon
having a reasonable basis for believing that it has ceased to so qualify or
that it might not so qualify in the future.
2.4. The Fund represents that it will comply with Section 817(h) of the
Code, and all regulations issued thereunder.
2.5. The Company represents that the Contracts are currently and at the
time of issuance will be treated as annuity contracts or life insurance
policies, whichever is appropriate, under applicable provisions of the Code.
The Company shall make every effort to maintain such treatment and shall
notify the Fund and the Distributor immediately upon having a reasonable
basis for believing that the Contracts have ceased to be so treated or that
they might not be so treated in the future.
2.6. The Fund represents that the Fund's investment policies, fees and
expenses, and operations are and shall at all times remain in material
compliance with the laws of the state of Delaware, to the extent required to
perform this Agreement and with any investment restrictions set forth on
Schedule 4, as
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<PAGE>
amended from time to time by the Company in accordance with Section 6.6. The
Fund, however, makes no representation as to whether any aspect of its
operations (including, but not limited to, fees and expenses and investment
policies) otherwise complies with the insurance laws or regulations of any
state. The Company alone shall be responsible for informing the Fund of any
investment restrictions imposed by state insurance law and applicable to the
Fund.
2.7. The Distributor represents and warrants that the Distributor is
duly registered as a broker-dealer under the 1934 Act, a member in good
standing with the NASD, and duly registered as a broker-dealer under
applicable state securities laws; its operations are in compliance with
applicable law, and it will distribute the Fund shares according to
applicable law.
2.8. The Distributor, on behalf of the Investment Manager, represents
and warrants that the Investment Manager is registered as an investment
adviser under the Investment Advisers Act of 1940 and is in compliance with
applicable federal and state securities laws.
2.9. The Fund represents and warrants that it has and maintains a
fidelity bond in accordance with Rule 17g-1 under the 1940 Act.
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<PAGE>
ARTICLE III. PROSPECTUSES AND PROXY STATEMENTS; SALES MATERIAL AND OTHER
INFORMATION
3.1. The Distributor shall provide the Company (at its expense) with as
many copies of the current Fund Prospectus as the Company may reasonably
request. If requested by the Company in lieu thereof, the Fund shall provide
the Fund Prospectus (including a final copy of the new prospectus as set in
type at the Distributor's expense) and other assistance as is reasonably
necessary in order for the Company to have a new Contracts Prospectus printed
together with the Fund Prospectus in one document (the cost of such printing
to be shared equally by the Company and the Distributor).
3.2. The Fund Prospectus shall state that the Statement of Additional
Information for the Fund is available from the Distributor (or, in the Fund's
discretion, the Fund Prospectus shall state that such Statement is available
from the Fund), and the Distributor (or the Fund) shall provide such
Statement free of charge to the Company and to any outstanding or prospective
Contract owner who requests such Statement.
3.3. The Fund (at its cost) shall provide the Company with copies of
its proxy material, shareholder reports and other communications to the
Company.
3.4. The Company shall not, without the prior written consent of the
Distributor (unless otherwise required by applicable law), solicit, induce or
encourage Contract owners to (a) charge the Fund's investment adviser or
contract with any
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<PAGE>
sub-investment adviser, or (b) change, modify, substitute, add or delete the
Fund or other investment media.
3.5. The Company shall furnish each piece of sales literature or other
promotional material in which the Fund or the Investment Manager or the
Distributor is named to the Fund or the Distributor prior to its use. No such
material shall be used, except with the prior written permission of the Fund
or the Distributor. The Fund and the Distributor agree to respond to any
request for approval on a prompt and timely basis. Failure to respond shall
not relieve the Company of the obligation to obtain the prior written
permission of the Fund or the Distributor.
3.6. The Company shall not give any information or make any
representations or statements on behalf of the Fund or concerning the Fund
other than the information or representations contained in the Fund
Registration Statement or Fund Prospectus, as such Registration Statement and
Prospectus may be amended or supplemented from time to time, or in reports or
proxy statements for the Fund, or in sales literature or other promotional
material approved by the Fund or by the Distributor, except with the prior
written permission of the Fund or the Distributor. The Fund and the
Distributor agree to respond to any request for permission on a prompt and
timely basis. Failure to respond shall not relieve the Company of the
obligation to obtain the prior written permission of the Fund or the
Distributor.
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<PAGE>
3.7. The Fund and the Distributor shall not give any information or
make any representations on behalf of the Company or concerning the Company,
the Account or the Contracts other than the information or representations
contained in the Contracts Registration Statement or Contracts Prospectus, as
such Registration Statement and Prospectus may be amended or supplemented
from time to time, or in published reports of the Account which are in the
public domain or approved in writing by the Company for distribution to
Contract owners, or in sales literature or other promotional material
approved in writing by the Company, except with the prior written permission
of the Company. The Company agrees to respond to any request for permission
on a prompt and timely basis. Failure to respond shall not relieve the Fund
or the Distributor of the obligation to obtain the prior written permission
of the Company.
3.8. The Fund will provide to the Company at least one complete copy of
all Fund Registration Statements, Fund Prospectuses, Statements of Additional
Information, annual and semi-annual reports and other reports, proxy
statements, sales literature and other promotional materials, applications
for exemptions, requests for no-action letters, and all amendments or
supplements to any of the above, that relate to the Fund or Fund shares,
promptly after the filing of such document with the SEC or other regulatory
authorities.
3.9. The Company will provide to the Fund at least one complete copy of
all Contracts Registration Statements, Contracts
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<PAGE>
Prospectuses, Statements of Additional Information, reports, solicitations
for voting instructions, sales literature and other promotional materials,
applications for exemptions, requests for no-action letters, and all
amendments or supplements to any of the above, that relate to the Contracts
or those Sub-Accounts of the Account to which Contract purchase payments and
value are allocable, promptly after the filing of such document with the SEC
or other regulatory authorities.
3.10. Each party will provide to the other party copies of draft
versions of any registration statements, prospectuses, statements of
additional information, reports, proxy statements, solicitations for voting
instructions, sales literature and other promotional materials, applications
for exemptions, requests for no-action letters, and all amendments or
supplements to any of the above, to the extent that the other party
reasonably needs such information for purposes of preparing a report or other
filing to be filed with or submitted to a regulatory agency. If a party
requests any such information before it has been filed, the other party
will provide the requested information if then available and in the version
then available at the time of such request.
3.11. For purposes of this Article IV, the phrase "sales literature or
other promotional material" includes, but is not limited to, advertisements
(such as material published, or designed for use, in a newspaper, magazine or
other periodical, radio, television, telephone or tape recording, videotape dis-
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<PAGE>
play, signs or billboards, motion pictures or other public media), sales
literature (I.E., any written communication distributed or made generally
available to customers or the public, including brochures, circulars,
research reports, market letters, form letters, seminar texts, or reprints or
excerpts of any other advertisement, sales literature, or published article),
educational or training materials or other communications distributed or made
generally available to some or all agents or employees, registration
statements, prospectuses, Statements of Additional Information, shareholder
reports and proxy materials, and any other material constituting sales
literature or advertising under NASD rules, the 1940 Act or the 1933 Act.
ARTICLE IV. VOTING
Subject to applicable law, the Company shall:
(a) solicit voting instructions from Contract owners;
(b) vote Fund shares of each Series attributable to Contract
owners in accordance with instructions or proxies timely
received from such Contract owners;
(c) vote Fund shares of each Series attributable to Contract
owners for which no instructions have been received in the
same proportion as Fund shares of such Series for which
instructions have been timely received; and
(d) vote Fund shares of each Series held by the Company on its own
behalf or on behalf of the Account that are not attributable
to Contract owners in the same proportion as Fund shares of
such Series for which instructions have been timely received.
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<PAGE>
The Company shall be responsible for assuring that voting privileges for the
Account are calculated in a manner consistent with the provisions set forth
above and with other Participating Insurance Companies.
ARTICLE V. FEES AND EXPENSES
5.1. The Fund and Distributor shall pay no fee or other compensation to
the Company under this Agreement, except that if the Fund or any Series
adopts and implements a plan pursuant to Rule 12b-1 under the 1940 Act to
finance distribution expenses, then the Distributor may make payments to the
Company in amounts agreed to by the Company and the Distributor in writing.
Currently, no such payments are contemplated. The Fund currently does
not intend to make any payments to finance distribution expenses pursuant to
Rule 12b-1 under the 1940 Act or in contravention of such rule, although it
may make payments pursuant to Rule 12b-1 in the future.
5.2. All expenses incident to performance by the Fund under this
Agreement (including expenses expressly assumed by the Fund pursuant to this
Agreement) shall be paid by the Fund to the extent permitted by law. Except
as may otherwise be provided in Sections 1.4 and 3.1 of this Agreement (or
Article VII, as it may be amended), the Company shall not bear any of the
expenses for the cost of registration and qualification of the Fund shares
under Federal and any state securities law, preparation and filing of the
Fund Prospectus and Fund Registration Statement,
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Fund proxy materials and reports, setting the Prospectus in type, setting in
type and printing and distributing the Fund proxy materials and reports to
shareholders (including the costs of printing a prospectus that constitutes
an annual report), the preparation of all statements and notices required by
any Federal or state securities law, all taxes on the issuance or transfer of
Fund shares, and any expenses permitted to be paid or assumed by the Fund
pursuant to a plan, if any, under Rule 12b-1 under the 1940 Act.
ARTICLE VI. COMPLIANCE UNDERTAKINGS
6.1. The Fund undertakes to comply with Subchapter M and Section 817(h)
of the Code, and all regulations issued thereunder.
6.2. The Company shall amend the Contracts Registration Statement under
the 1933 Act and the Account's Registration Statement under the 1940 Act from
time to time as required in order to effect the continuous offering of the
Contracts or as may otherwise be required by applicable law. The Company
shall register and qualify the Contracts for sale to the extent required by
applicable securities laws of the various states.
6.3. The Fund shall amend the Fund Registration Statement under the
1933 Act and the 1940 Act from time to time as required in order to effect
for so long as Fund shares are sold the continuous offering of Fund shares as
described in the
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the currently effective Fund Prospectus. The Fund shall register and qualify
Fund shares for sale to the extent required by applicable securities laws of
the various states.
6.4. The Company shall be responsible for assuring that any prospectus
offering a Contract that is a life insurance contract where it is reasonably
probable that such Contract would be a "modified endowment contract," as that
term is defined in Section 7702A of the Code, will identify such Contract as
a modified endowment contract (or policy).
6.5. To the extent that it decides to finance distribution expenses
pursuant to Rule 12b-1, the Fund undertakes to have a Fund Board of
Directors, a majority of whom are not interested persons of the Fund,
formulate and approve any plan under Rule 12b-1 to finance distribution
expenses.
6.6. The Company shall amend Schedule 4 when appropriate in order to
inform the Fund of any applicable investment restrictions with which the Fund
must comply.
ARTICLE VII. POTENTIAL CONFLICTS
The parties to this Agreement acknowledge that the Fund intends to file
an application with the SEC to request an order granting relief from various
provisions of the 1940 Act and the rules thereunder to the extent necessary
to permit Fund shares to be sold to and held by variable annuity and variable
life insurance separate accounts of both affiliated and unaffiliated
Participating Insurance Companies. The parties to this Agreement
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<PAGE>
agree than any conditions or undertakings that may be imposed on the Company,
the Fund and/or the Distributor by virtue of such order shall be incorporated
herein by this reference, as of the date such order is granted, as though set
forth herein in full, and such parties agree to comply with such conditions
and undertakings to the extent applicable to each such party. The Fund and
the Distributor will not enter into a participation agreement with any other
Participating Insurance Company unless it imposes the same conditions and
undertakings incorporated by reference herein on the parties to such
agreement.
ARTICLE VIII. INDEMNIFICATION
8.1. Indemnification by the Company
The Company agrees to indemnify and hold harmless the Fund, the
Distributor and each person who controls or is associated with the Fund or
the Distributor within the meaning of such terms under the federal securities
laws and any officer, trustee, director, employee or agent of the foregoing,
against any and all losses, claims, damages or liabilities, joint or several
(including any investigative, legal and other expenses reasonably incurred in
connection with, and any amounts paid in settlement of, any action, suit or
proceeding or any claim asserted), to which they or any of them may become
subject under any statute or regulation, at common law or otherwise, insofar
as such losses, claims, damages or liabilities:
(a) arise out of or are based upon any untrue statement or
alleged untrue statement of any
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material fact contained in the Contracts Registration
Statement, Contracts Prospectus, sales literature
or other promotional material for the Contracts
or the Contracts themselves (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 in
light of the circumstances in which they were made; provided
that this obligation to indemnify shall not apply if such
statement or omission or such alleged statement or alleged
omission was made in reliance upon and in conformity with
information furnished in writing to the Company by the Fund
or the Distributor (or a person authorized in writing to do
so on behalf of the Fund or the Distributor) for use in the
Contracts Registration Statement, Contracts Prospectus or in
the Contracts or sales literature (or any amendment or
supplement) or otherwise for use in connection with the sale
of the Contracts or Fund shares; or
(b) arise out of or are based upon any untrue statement or
alleged untrue statement of a material fact by or on behalf
of the Company (other than statements or representations
contained in the Fund Registration Statement, Fund Prospectus
or sales literature or other promotional material of the Fund
not supplied by the Company or persons under its control) or
wrongful conduct of the Company or persons under its control
with respect to the sale or distribution of the Contracts or
Fund shares; or
(c) arise out of any untrue statement or alleged untrue statement
of a material fact contained in the Fund Registration
Statement, Fund Prospectus or sales literature or other
promotional material of the Fund or any amendment thereof or
supplement thereto, or the omission or alleged omission to
state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading in
light of the circumstances in which they were made, if such
statement or omission was made in reliance upon and in
conformity with information furnished to the Fund by or on
behalf of the Company; or
(d) arise as a result of any failure by the Company to provide
the services and furnish the materials or
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to make any payments under the terms of this Agreement; or
(e) arise out of any material breach by the Company of this
Agreement, including but not limited to any failure to
transmit a request for redemption or purchase of Fund shares
on a timely basis in accordance with the procedures set forth
in Article I.
This indemnification will be in addition to any liability which the Company
may otherwise have; provided, however, that no party shall be entitled to
indemnification if such loss, claim, damage or liability is due to the wilful
misfeasance, bad faith, gross negligence or reckless disregard of duty by the
party seeking indemnification.
8.2. Indemnification by the Distributor
The Distributor agrees to indemnify and hold harmless the Company and
each person who controls or is associated with the Company within the meaning
of such terms under the federal securities laws and any officer, director,
employee or agent of the foregoing, against any and all losses, claims,
damages or liabilities, joint or several (including any investigative, legal
and other expenses reasonably incurred in connection with, and any amounts
paid in settlement of, any action, suit or proceeding or any claim asserted),
to which they or any of them may become subject under any statute or
regulation, at common law or otherwise, insofar as such losses, claims,
damages or liabilities:
(a) arise out of or are based upon any untrue statement or
alleged untrue statement of any material fact contained in
the Fund Registration Statement, Fund Prospectus (or any
amendment or
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supplement thereto) or sales literature or other promotional
material of the Fund, 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 in
light of the circumstances in which they were made; provided
that this obligation to indemnify shall not apply if such
statement or omission or alleged statement or alleged
omission was made in reliance upon and in conformity with
information furnished in writing by the Company to the Fund
or the Distributor for use in the Fund Registration
Statement, Fund Prospectus (or any amendment or supplement
thereto) or sales literature for the Fund or otherwise for
use in connection with the sale of the Contracts or Fund
shares; or
(b) arise out of or are based upon any untrue statement or
alleged untrue statement of a material fact by the
Distributor or the Fund (other than statements or
representations contained in the Fund Registration Statement,
Fund Prospectus or sales literature or other promotional
material of the Fund not supplied by the Distributor or the
Fund or persons under their control) or wrongful conduct of
the Distributor or persons under its control with respect to
the sale or distribution of the Contracts or Fund shares; or
(c) arise out of any untrue statement or alleged untrue statement
of a material fact contained in the Contract's Registration
Statement, Contracts Prospectus or sales literature or other
promotional material for the Contracts (or any amendment or
supplement thereto), or the omission or alleged omission to
state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading in
light of the circumstances in which they were made, if such
statement or omission was made in reliance upon information
furnished in writing by the Distributor or the Fund to the
Company (or a person authorized in writing to do so on behalf
of the Fund or the Distributor); or
(d) arise as a result of any failure by the Fund to provide the
services and furnish the materials under the terms of this
Agreement (including a failure, whether unintentional or in
good faith or otherwise, to comply with the diversification
- 23 -
<PAGE>
requirements specified in Article VI of this Agreement); or
(e) arise out of any material breach by the Distributor or the
Fund of this Agreement.
This indemnification will be in addition to any liability which the
Distributor may otherwise have; provided, however, that no party shall be
entitled to indemnification if such loss, claim, damage or liability is due
to the wilful misfeasance, bad faith, gross negligence or reckless disregard
of duty by the party seeking indemnification.
8.3. Indemnification Procedures
After receipt by a party entitled to indemnification ("indemnified
party") under this Article VIII of notice of the commencement of any action,
if a claim in respect thereof is to be made by the indemnified party against
any person obligated to provide indemnification under this Article VIII
("indemnifying party"), such indemnified party will notify the indemnifying
party in writing of the commencement thereof as soon as practicable
thereafter, provided that the omission to so notify the indemnifying party
will not relieve it from any liability under this Article VIII, except to the
extent that the omission results in a failure of actual notice to the
indemnifying party and such indemnifying party is damaged solely as a result
of the failure to give such notice. The indemnifying party, upon the request
of the indemnified party, shall retain counsel reasonably satisfactory to the
indemnified party to represent the indemnified party and any others
the indemnifying party may
- 24 -
<PAGE>
designate in such proceeding and shall pay the fees and disbursements of such
counsel related to such proceeding. In any such proceeding, any indemnified
party shall have the right to retain its own counsel, but the fees and
expenses of such counsel shall be at the expense of such indemnified party
unless (i) the indemnifying party and the indemnified party shall have
mutually agreed to the retention of such counsel or (ii) the named parties to
any such proceeding (including any impleaded parties) include both the
indemnifying party and the indemnified party and representation of both
parties by the same counsel would be inappropriate due to actual or potential
differing interests between them. The indemnifying party shall not be liable
for any settlement of any proceeding effected without its written consent but
if settled with such consent or if there be a final judgment for the
plaintiff, the indemnifying party agrees to indemnify the indemnified party
from and against any loss or liability by reason of such settlement or
judgment.
A successor by law of the parties to this Agreement shall be entitled to
the benefits of the indemnification contained in this Article VIII. The
indemnification provisions contained in this Article VIII shall survive any
termination of this Agreement.
ARTICLE IX. APPLICABLE LAW
9.1. This Agreement shall be construed and the provisions hereof
interpreted under and in accordance with the laws of
- 25 -
<PAGE>
the state of Delaware, without giving effect to the principles of conflicts
of laws.
9.2. This Agreement shall be subject to the provisions of the 1933,
1934 and 1940 Acts, and the rules and regulations and rulings thereunder,
including such exemptions from those statutes, rules and regulations as the
SEC may grant, and the terms hereof shall be limited, interpreted and
construed in accordance therewith.
ARTICLE X. TERMINATION
10.1. This Agreement shall terminate:
(a) at the option of any party upon six months advance written
notice to the other parties, such termination to be effective no earlier than
one year following the date on which the first Contract is issued to the
public; or
(b) at the option of the Company if shares of any Series are not
reasonably available to meet the requirements of the Contracts as determined
by the Company. Prompt notice of the election to terminate for such cause
shall be furnished by the Company, said termination to be effective ten days
after receipt of notice unless the Fund makes available a sufficient number
of Fund shares to meet the requirements of the Contracts within said ten-day
period; or
(c) at the option of the Fund upon institution of formal
proceedings against the Company by the NASD, the SEC, the insurance
commission of any state or any other regulatory body
- 26 -
<PAGE>
regarding the Company's duties under this Agreement or related to the sale of
the Contracts, the operation of the Account, the administration of the
Contracts or the purchase of Fund shares, or an expected or anticipated
ruling, judgment or outcome which would, in the Fund's reasonable judgment,
materially impair the Company's ability to meet and perform the Company's
obligations and duties hereunder; or
(d) at the option of the Company upon institution of formal
proceedings against the Fund by the NASD, the SEC, or any state securities or
insurance commission or any other regulatory body; or
(e) upon requisite vote of the Contract owners having an interest
in the affected Series and the written approval of the Distributor (unless
otherwise required by applicable law), to substitute the shares of another
investment company for the corresponding Series shares of the Fund in
accordance with the terms of the Contracts; or
(f) at the option of the Fund in the event any of the Contracts
are not registered, issued or sold in accordance with applicable Federal
and/or state law; or
(g) by either the Company or the Fund upon a determination by a
majority of the Fund Board, or a majority of disinterested Fund Board
members, that an irreconcilable material conflict exists among the interests
of (i) all Product owners or (ii) the interests of the Participating
Insurance Companies investing in the Fund; or
- 27 -
<PAGE>
(h) at the option of the Company if the Fund ceases to qualify as
a Regulated Investment Company under Sub-chapter M of the Code, or under any
successor or similar provision, or if the Company reasonably believes based
on an opinion of counsel satisfactory to the Fund that the Fund may fail to
so qualify; or
(i) at the option of the Company if the Fund fails to meet the
diversification requirements specified in Section 817(h) of the Code and any
regulations thereunder; or
(j) at the option of the Fund if the Contracts cease to qualify as
annuity contracts or life insurance policies, as applicable, under the Code,
or if the Fund reasonably believes that the Contracts may fail to so qualify;
or
(k) at the option of either the Fund or the Distributor if the
Fund or the Distributor, respectively, shall determine, in their sole
judgment exercised in good faith, that either (1) the Company shall have
suffered a material adverse change, in its business or financial condition or
(2) the Company shall have been the subject of material adverse publicity
which is likely to have a material adverse impact upon the business and
operations or either the Fund or the Distributor; or
(l) at the option of the Company, if the Company shall determine,
in its sole judgment exercised in good faith, that the Fund or the
Distributor shall have been the subject of material adverse publicity which
is likely to have a material
- 28 -
<PAGE>
adverse impact upon the business and operations of the Company; or
(m) upon the assignment of this Agreement (including, without
limitation, any transfer of the Contracts or the Account to another insurance
company pursuant to an assumption reinsurance agreement) unless the
non-assigning party consents thereto or unless this Agreement is assigned to
an affiliate of the Distributor.
10.2. NOTICE REQUIREMENT. Except as otherwise provided in Section
10.1, no termination of this Agreement shall be effective unless and until
the party terminating this Agreement gives prior written notice to all other
parties to this Agreement of its intent to terminate which notice shall set
forth the basis for such termination. Furthermore:
(a) In the event that any termination is based upon the provisions
of Article VII or the provisions of Section 10.1(a) of this Agreement, such
prior written notice shall be given in advance of the effective date of
termination as required by such provisions; and
(b) in the event that any termination is based upon the
provisions of Section 10.1(c) or 10.1(d) of this Agreement, such prior
written notice shall be given at least ninety (90) days before the effective
date of termination.
(c) in the event that any termination is based upon the provisions
of Section 10.1(e) of this Agreement, such prior written notice shall be
given at least sixty (60) days
- 29 -
<PAGE>
before the date of any proposed vote to replace the Fund's shares.
10.3. Except as necessary to implement Contract owner initiated
transactions, or as required by state insurance laws or regulations, the
Company shall not redeem Fund shares attributable to the Contracts (as
opposed to Fund shares attributable to the Company's assets held in the
Account).
10.4. EFFECT OF TERMINATION
(a) Notwithstanding any termination of this Agreement pursuant to
Section 10.1 of this Agreement, the Fund and the Distributor may, at the
option of the Fund, continue to make available additional Fund shares for so
long after the termination of this Agreement as the Fund desires pursuant to
the terms and conditions of this Agreement as provided in paragraph (b)
below, for all Contracts in effect on the effective date of termination of
this Agreement (hereinafter referred to as "Existing Contracts").
Specifically, without limitation, if the Fund or Distributor so elects to
made additional Fund shares available, the owners of the Existing Contracts
or the Company, whichever shall have legal authority to do so, shall be
permitted to reallocate investments in the Fund, redeem investments in the
Fund and/or invest in the Fund upon the making of additional purchase
payments under the Existing Contracts.
(b) In the event of a termination of this Agreement pursuant to
Section 10.1 of this Agreement, the Fund and the Distributor shall promptly
notify the Company whether the
- 30 -
<PAGE>
Distributor and the Fund will continue to make Fund shares available after
such termination. If Fund shares continue to be made available after such
termination, the provisions of this Agreement shall remain in effect except
for Section 10.1(a) and thereafter either the Fund or the Company may
terminate the Agreement, as so continued pursuant to this Section 10.4, upon
prior written notice to the other party, such notice to be for a period that
is reasonable under the circumstances but, if given by the Fund, need not be
for more than six months.
(c) The parties agree that this Section 10.4 shall not apply to
any termination made pursuant to Article VII or any conditions or
undertakings incorporated by reference in Article VII, and the effect of such
Article VII termination shall be governed by the provisions set forth or
incorporated by reference therein.
ARTICLE XI. APPLICABILITY TO NEW ACCOUNTS AND NEW CONTRACTS
The parties to this Agreement may amend the schedules to this Agreement
from time to time to reflect changes in or relating to the Contracts and to
add new classes or variable annuity contracts and variable life insurance
policies to be issued by the Company through a Separate Account investing in
the Fund. The provisions of this Agreement shall be equally applicable to
each such class of contracts or policies, unless the context otherwise
requires.
- 31 -
<PAGE>
ARTICLE XII. NOTICES
Any notice shall be sufficiently given when sent by registered or
certified mail to the other party at the address of such party set forth
below or at such other address as such party may from time to time specify in
writing to the other party.
If to the Fund:
Delaware Group Premium Fund, Inc.
Ten Penn Center Plaza
Philadelphia, PA 19103
Attn: Daniel J. O'Brien
If to the Company:
Abigail M. Armstrong
Secretary and Counsel
First Allmerica Financial Life Insurance Company
440 Lincoln Street
Worcester, MA 01605
If to the Distributor:
Mr. Michael P. Drennan
Vice President
Delaware Distributors, Inc.
Ten Penn Center Plaza
Philadelphia, PA 19103
ARTICLE XIII. MISCELLANEOUS
13.1. The captions in this Agreement are included for convenience of
reference only and in no way define or delineate any of the provisions hereof
or otherwise affect their construction or effect.
13.2. This Agreement may be executed simultaneously in two or more
counterparts, each of which together shall constitute one and the same
instrument.
- 32 -
<PAGE>
13.3. If any provision of this Agreement shall be held or made invalid
by a court decision, statute, rule or otherwise, the remainder of the
Agreement shall not be affected thereby.
13.4. Each party hereto shall cooperate with each other party and all
appropriate governmental authorities (including without limitation the SEC,
the NASD and state insurance regulators) and shall permit such authorities
reasonable access to its books and records in connection with any
investigation or inquiry relating to this Agreement or the transactions
contemplated hereby.
13.5. Each party represents that the execution and delivery of this
Agreement and the consummation of the transactions contemplated herein have
been duly authorized by all necessary corporate or trust action, as
applicable, by such party, and when so executed and delivered this Agreement
will be the valid and binding obligation of such party enforceable in
accordance with its terms.
- 33 -
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement
to be executed in its name and behalf by its duly authorized officer on the
date specified below.
FIRST ALLMERICA FINANCIAL LIFE
INSURANCE COMPANY
(Company)
Date: , 1996 By:
------------ ----------------------------
Name:
Title:
DELAWARE GROUP PREMIUM FUND, INC.
(Fund)
Date: , 1996 By:
------------ ----------------------------
Name:
Title:
DELAWARE DISTRIBUTORS, INC.
(Distributor)
Date: , 1996 By:
------------ ----------------------------
Name:
Title:
<PAGE>
SCHEDULE 1
Separate Accounts of First Allmerica Financial Life Insurance Company
Investing in the Fund
As of December ___, 1996
NAME OF ACCOUNT DATE ESTABLISHED
- --------------- ----------------
Separate Account VA-K November 1, 1990
of First Allmerica Financial Life
Insurance Company
<PAGE>
SCHEDULE 2
Variable Annuity Contracts
and Variable Life Insurance Policies
Supported by Separate Accounts
Listed on Schedule 1
As of ____________, 1991
Individual Variable Annuity Policies
funded by sub-accounts of Separate Account VA-K
and investing in shares of
Delaware Group Premium Fund, Inc.
<PAGE>
SCHEDULE 3
Variable Contracts
Excluded from Section 1.8
As of December 23, 1991
Individual Variable Annuity Policies Marketed
under the name "ExecAnnuity Plus"
<PAGE>
SCHEDULE 4
Investment Restrictions
Applicable to the Fund
As of ___________, 1996
<PAGE>
FIRST AMENDMENT TO
PARTICIPATION AGREEMENT
THIS FIRST AMENDMENT (the "Amendment Agreement") to the Participation
Agreement dated December 23, 1991 (the "Participation Agreement") by and among
DELAWARE GROUP PREMIUM FUND, INC. (the "FUND"), SMA LIFE ASSURANCE COMPANY
("SMA"), on its own behalf and on behalf of each separate account of SMA, and
DELAWARE DISTRIBUTORS, INC. (the "DISTRIBUTOR") is made as of the first day of
April, 1994 by and among the FUND, the DISTRIBUTOR, SMA, on its own behalf and
on behalf of each separate account of SMA named in Schedule 1 to this Amendment
Agreement as in effect as of the time this Amendment Agreement is executed and
such other separate accounts of SMA that may be added to Schedule 1 from time to
time in accordance with the provisions of Article XI of the Participation
Agreement (each such account referred to as the "SMA Account"), and STATE MUTUAL
LIFE ASSURANCE COMPANY OF AMERICA ("STATE MUTUAL"), on its own behalf and on
behalf of each separate account of STATE MUTUAL named in Schedule 1 to this
Amendment Agreement as in effect as of the time this Amendment Agreement is
executed and such other separate accounts of STATE MUTUAL that may be added to
Schedule 1 from time to time in accordance with the provisions of Article XI of
the Participation Agreement (each such account referred to as the "STATE MUTUAL
Account").
WHEREAS, the FUND, SMA, and the DISTRIBUTOR previously entered into the
Participation Agreement; and
<PAGE>
WHEREAS, the FUND, SMA, and the DISTRIBUTOR wish to add STATE MUTUAL as a
party to the Participation Agreement to enable STATE MUTUAL to purchase shares
of common stock issued by the various series of the FUND on behalf of the STATE
MUTUAL Account;
NOW THEREFORE, for consideration, the receipt and sufficiency of which are
hereby acknowledged, and intending to be legally bound, the FUND, the
DISTRIBUTOR, SMA, and STATE MUTUAL agree as follows:
1. Effective as of the date hereof, STATE MUTUAL shall be a party to the
Participation Agreement and shall independently be entitled to the same rights
and subject to the same obligations, covenants, conditions, undertakings and
liabilities under the Participation Agreement as SMA.
2. Effective as of the date hereof, STATE MUTUAL hereby makes, on its own
behalf and in respect of the STATE MUTUAL Account and Contracts (as defined in
the Participation Agreement) issued by STATE MUTUAL and not on behalf of SMA nor
in respect of the SMA Account or Contracts issued by SMA, the representations
and warranties set forth in Sections 2.1 and 2.5 of the Participation Agreement.
3. Effective as of the date hereof, all references in the Participation
Agreement to "the Company" shall hereafter be references to "SMA and/or STATE
MUTUAL, as the case may be."
2
<PAGE>
4. Effective as of the date hereof, the term "the Account" in the
Participation Agreement shall hereafter be read to include the SMA Account
and/or the STATE MUTUAL Account, as the case may be.
5. Effective as of the date hereof, except as otherwise set forth herein,
the term "Contracts" in the Participation Agreement shall hereafter be read to
include Contracts issued by SMA and/or Contracts issued by STATE MUTUAL, as the
case may be.
6. Schedules 1, 2, and 3 to the Participation Agreement are hereby amended
and restated in their entirety as set forth on Schedules 1, 2, and 3,
respectively, to this Amendment Agreement.
7. All references in the Participation Agreement to the "Investment
Manager" shall hereafter be references to Delaware Management Company, Inc. or
Delaware International Advisers Ltd., as appropriate.
8. With respect to the termination provisions set forth in Article X of
the Participation Agreement, (i) any notice provided by or option exercised by
SMA shall be operative solely with respect to SMA, and (ii) any notice provided
by or option exercised by STATE MUTUAL shall be operative solely with respect to
STATE MUTUAL.
9. All notices to be provided to any party to the Participation Agreement,
as amended, shall be sent in accordance with Article XII of the Participation
Agreement at the address of such party set forth below or at such other address
as such party may from time to time specify in writing to the other parties:
3
<PAGE>
If to the FUND:
Delaware Group Premium Fund, Inc.
1818 Market Street
Philadelphia, PA 19103
Attn: Daniel J. O'Brien
If to SMA:
Lila M. Weihs
Director, Annuity Products
SMA Life Assurance Company
440 Lincoln Street
Worcester, MA 01653
If to the DISTRIBUTOR:
Delaware Distributors, Inc.
1818 Market Street
Philadelphia, PA 19103
Attn: Michael P. Drennan, Vice President
If to STATE MUTUAL:
Lila M. Weihs
Director, Annuity Products
State Mutual Life Assurance Company of the America
440 Lincoln Street
Worcester, MA 01653
10. All other provisions of the Participation Agreement not amended by
this Amendment Agreement shall remain in full force and effect as set forth in
the Participation Agreement.
4
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has caused this Amendment
Agreement to be executed in its name and on its behalf by its duly authorized
officer as of the date first set forth above.
STATE MUTUAL LIFE ASSURANCE SMA LIFE ASSURANCE COMPANY
COMPANY OF AMERICA
By: /s/ Richard M. Reilly By: /s/ Richard M. Reilly
--------------------------- ---------------------------
Name: Richard M. Reilly Name: Richard M. Reilly
Title: Vice President Title: Vice President
DELAWARE GROUP PREMIUM DELAWARE DISTRIBUTORS, INC.
FUND, INC.
By: /s/ By: /s/
--------------------------- ---------------------------
Name: Name:
Title: Title:
5
<PAGE>
SCHEDULE 1
Separate Accounts of SMA Life Assurance Company
and State Mutual Life Assurance Company of America
Investing in the Fund
As of April 1, 1994
Name of Account Date Established
- --------------- ----------------
Separate Account VA-K November 1, 1990
of SMA Life Assurance Company
Separate Account VEL June 3, 1987
of SMA Life Assurance Company
Separate Account VEL II January 21, 1993
of SMA Life Assurance Company
Separate Account Inheiritage* September 15, 1993
of SMA Life Assurance Company
Separate Account VA-K of August 20, 1991
State Mutual Life Assurance
Company of America
Separate Account VEL-II August 20, 1991
of State Mutual Life Assurance
Company of America
Separate Account Inheiritage* August 20, 1991
of State Mutual Life Assurance
Company of America
* Regulatory approvals are pending for the Inheiritage products.
<PAGE>
SCHEDULE 2
(continued)
Variable Annuity Contracts
and Variable Life Insurance Policies
Supported by Separate Accounts
Listed on Schedule 1
As of April 1, 1994
State Mutual Life Assurance Company of America
Individual Delaware Medallion Variable Annuity Contracts funded by sub-accounts
of Separate Account VA-K and investing in shares of Delaware Group Premium Fund,
Inc.
Individual ExecAnnuity Plus Variable Annuity Contracts funded by sub-accounts of
Separate Account VA-K and investing in shares of the International Equity Series
of Delaware Group Premium Fund, Inc.
Individual VEL II Variable Life Insurance Policies funded by sub-accounts of
Separate Account VEL II and investing in shares of the International Equity.
Series of Delaware Group Premium Fund, Inc.
Individual Inheiritage* Variable Life Insurance Policies funded by sub-accounts
of Separate Account Inheiritage and investing in shares of the International
Equity Series of Delaware Group Premium Fund, Inc.
* Regulatory approvals are currently pending for the Inheiritage product.
<PAGE>
SCHEDULE 3
Variable Contracts
Excluded from Section 1.8
As of April 1, 1994
SMA Life Assurance Company
Individual Variable Annuity Policies Marketed under the name "ExecAnnuity Plus"
Individual Variable Life Insurance Policies Marketed under the name "VEL"
Individual Variable Life Insurance Policies Marketed under the name "VEL Plus"
Individual Variable Life Insurance Policies Marketed under the name "VEL II"
Individual Variable Life Insurance Policies to be Marketed under the name
"Inheiritage" *
State Mutual Life Assurance Company of America
Individual Variable Annuity Policies Marketed under the name "ExecAnnuity Plus"
Individual Variable Life Insurance Policies Marketed under the name "VEL II"
Individual Variable Life Insurance Policies to be Marketed under the name
"Inheiritage"*
*Regulatory approvals are currently pending for the Inheiritage product.
<PAGE>
PARTICIPATION AGREEMENT
AMONG
T. ROWE PRICE INTERNATIONAL SERIES, INC.,
T. ROWE PRICE INVESTMENT SERVICES, INC.
AND
STATE MUTUAL LIFE ASSURANCE COMPANY OF AMERICA
THIS AGREEMENT, made and entered into as of this 1st day of May, 1995 by
and among STATE MUTUAL LIFE ASSURANCE COMPANY OF AMERICA (hereinafter, the
"Company"), a Massachusetts insurance company, on its own behalf and on behalf
of each segregated asset account of the Company set forth on Schedule A hereto
as may be amended from time to time (each account hereinafter referred to as
the "Account"), and T. ROWE PRICE INTERNATIONAL SERIES, INC., a corporation
organized under the laws of Maryland (hereinafter referred to as the "Fund")
and T. ROWE PRICE INVESTMENT SERVICES, INC. (hereinafter the "Underwriter"),
a Maryland corporation.
WHEREAS, the Fund engages in business as an open-end management
investment company and is or will be available to act as the investment
vehicle for separate accounts established for variable life insurance and
variable annuity contracts (the "Variable Insurance Products") to be offered
by insurance companies which have entered into participation agreements with
the Fund and Underwriter (hereinafter "Participating Insurance Companies");
and
WHEREAS, the beneficial interest in the Fund is divided into several
series of shares, each designated a "Portfolio" and representing the interest
in a particular managed portfolio of securities and other assets; and
WHEREAS, the Fund has filed an application to obtain an order from the
Securities and Exchange Commission ("SEC") granting Participating Insurance
Companies and variable annuity and variable life insurance separate accounts
exemptions from the provisions of sections 9(a), 13(a), 15(a), and 15(b) of
the Investment Company Act of 1940, as amended, (hereinafter the "1940 Act")
and Rules 6e-2(b)(15) and 6e-3(T) (b)(15) thereunder, if and to the extent
necessary to permit shares of the Fund to be sold to and held by variable
annuity and variable life insurance separate accounts of both affiliated and
unaffiliated life insurance companies (hereinafter the "Shared Funding
Exemptive Order"); and
WHEREAS, the Fund is registered as an open-end management investment
company under the 1940 Act and shares of the Portfolios are registered under
the Securities Act of 1933, as amended (hereinafter the "1933 Act"); and
<PAGE>
-2-
WHEREAS, Rowe Price-Fleming International, Inc. (hereinafter referred to
as the "Adviser") is duly registered as an investment adviser under the
federal Investment Advisers Act of 1940, as amended, and any applicable state
securities laws; and
WHEREAS, the Company has registered or will register certain variable
life insurance and variable annuity contracts supported wholly or partially
by the Account (the "Contracts") under the 1933 Act, and said Contracts are
listed in Schedule A hereto, as it may be amended from time to time by mutual
written agreement; and
WHEREAS, the Account is duly established and maintained as a segregated
asset account, established by resolution of the Board of Directors of the
Company, on the date shown for such Account on Schedule A hereto, to set
aside and invest assets attributable to the aforesaid Contracts; and
WHEREAS, the Company has registered or will register the Account as a
unit investment trust under the 1940 Act; and
WHEREAS, the Underwriter is registered as a broker dealer with the SEC
under the Securities Exchange Act of 1934, as amended (hereinafter the "1934
Act"), and is a member in good standing of the National Association of
Securities Dealers, Inc. (hereinafter "NASD"); and
WHEREAS, to the extent permitted by applicable insurance laws and
regulations, the Company intends to purchase shares in the Portfolios listed
in Schedule A hereto, as it may be amended from time to time by mutual
written agreement (the "Designated Portfolios") on behalf of the Account to
fund the aforesaid Contracts, and the Underwriter is authorized to sell such
shares to unit investment trusts such as the Account at net asset value;
NOW, THEREFORE, in consideration of their mutual promises, the Company,
the Fund and the Underwriter agree as follows:
ARTICLE I. SALE OF FUND SHARES
1.1 The Underwriter agrees to sell to the Company those shares of the
Designated Portfolios which the Account orders, executing such orders on a
daily basis at the net asset value next computed after receipt by the Fund or
its designee of the order for the shares of the Designated Portfolios.
1.2 The Fund agrees to make shares of the Designated Portfolios
available for purchase at the applicable net asset value per share by the
Company and the Account on those days on which the Fund calculates its net
asset value pursuant to rules of the SEC, and the Fund shall use reasonable
efforts to calculate such net asset value on each day which the New York
Stock Exchange is open for trading. Notwithstanding the foregoing, the Board
of Directors of the Fund (hereinafter the "Board") may refuse to sell shares
of any Designated Portfolio to any person, or suspend or terminate the
offering of shares of any Designated Portfolio if such action is required by
law or by regulatory authorities having jurisdiction, or is, in the sole
discretion of the Board acting in good faith and in light of their fiduciary
duties under federal and any applicable state laws, necessary in the best
interests of the shareholders of such Designated Portfolio.
1.3 The Fund and the Underwriter agree that shares of the Fund will be
sold only to Participating Insurance Companies and their separate accounts.
No shares of any Designated
<PAGE>
-3-
Portfolios will be sold to the general public. The Fund and the Underwriter
will not sell Fund shares to any insurance company or separate account unless
an agreement containing provisions substantially the same as Articles I and
VII of this Agreement is in effect to govern such sales.
1.4 The Fund agrees to redeem, on the Company's request, any full or
fractional shares of the Designated Portfolios held by the Company, executing
such requests on a daily basis at the net asset value next computed after
receipt by the Fund or its designee of the request for redemption, except
that the Fund reserves the right to suspend the right of redemption or
postpone the date of payment or satisfaction upon redemption consistent with
Section 22(e) of the 1940 Act and any sales thereunder, and in accordance
with the procedures and policies of the Fund as described in the then current
prospectus.
1.5 For purposes of Sections 1.1 and 1.4, the Company shall be the
designee of the Fund for receipt of purchase and redemption orders from the
Account, and receipt by such designee shall constitute receipt by the Fund;
provided that the Company receives the order by 4:00 p.m. Baltimore time and
the Fund receives notice of such order by 9:30 a.m. Baltimore time on the
next following Business Day. "Business Day" shall mean any day on which the
New York Stock Exchange is open for trading and on which the Fund calculates
its net asset value pursuant to the rules of the SEC.
1.6 The Company agrees to purchase and redeem the shares of each
Designated Portfolio offered by the then current prospectus of the Fund and
in accordance with the provisions of such prospectus.
1.7 The Company shall pay for Fund shares on the next Business Day
after receipt of an order to purchase Fund shares. Payment shall be in
federal funds transmitted by wire by 3:00 p.m. Baltimore time. If payment in
Federal Funds for any purchase is not received or is received by the Fund
after 3:00 p.m. Baltimore time on such Business Day, the Company shall
promptly, upon the Fund's request, reimburse the Fund for any charges, costs,
fees, interest or other expenses incurred by the Fund in connection with any
advances to, or borrowings or overdrafts by, the Fund, or any similar
expenses incurred by the Fund, as a result of portfolio transactions effected
by the Fund based upon such purchase request. For purposes of Section 2.8 and
2.9 hereof, upon receipt by the Fund of the federal funds so wired, such
funds shall cease to be the responsibility of the Company and shall become
the responsibility of the Fund.
1.8 Issuance and transfer of the Fund's shares will be by book entry
only. Stock certificates will not be issued to the Company or any Account.
Shares ordered from the Fund will be recorded in an appropriate title for
each Account or the appropriate subaccount of each Account.
1.9 The Fund shall furnish same day notice (by wire or telephone,
followed by written confirmation) to the Company of any income, dividends or
capital gain distributions payable on the Designated Portfolio's shares. The
Company hereby elects to receive all such income, dividends, and capital gain
distributions as are payable on Designated Portfolio shares in additional
shares of that Portfolio. The Company reserves the right to revoke this
election and to receive all such income dividends and capital gain
distributions in cash. The Fund shall notify the Company of the number of
shares so issued as payment of such dividends and distributions. The Fund
shall use its best efforts to furnish advance notice of the day such
dividends and distributions are expected to be paid.
<PAGE>
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1.10 The Fund shall make the net asset value per share for each
Designated Portfolio available to the Company on a daily basis as soon as
reasonably practical after the net asset value per share is calculated
(normally by 6:30 p.m. Baltimore time) and shall use its best efforts to make
such net asset value per share available by 7 p.m. Baltimore time.
1.11 The Parties hereto acknowledge that the arrangement contemplated
by this Agreement is not exclusive; the Fund's shares may be sold to other
insurance companies (subject to Section 1.3 and Article VI hereof) and the
cash value of the Contracts may be invested in other investment companies,
provided, however, that (a) such other investment company, or series thereof,
has investment objectives or policies that are substantially different from
the investment objectives and policies of the Fund; or (b) the Company gives
the Fund and the Underwriter 45 days written notice of its intention to make
such other investment company available as a funding vehicle for the
Contracts; or (c) such other investment company was available as a funding
vehicle for the Contracts prior to the date of this Agreement and the Company
so informs the Fund and Underwriter prior to their signing this Agreement; or
(d) the Fund or Underwriter consents to the use of such other investment
company, such consent not to be unreasonably withheld.
ARTICLE II. REPRESENTATIONS AND WARRANTIES
2.1 The Company represents and warrants that the Contracts are or will
be registered under the 1933 Act; that the Contracts will be issued and sold
in compliance in all material respects with all applicable federal and state
laws and that the sale of the Contracts shall comply in all material respects
with state insurance suitability requirements. The Company further represents
and warrants that it is an insurance company duly organized and in good
standing under applicable law and that it has legally and validly established
the Account prior to any issuance or sale thereof as a segregated asset
account under the Massachusetts insurance laws and has registered or, prior
to any issuance or sale of the Contracts, will register the Account as a unit
investment trust in accordance with the provisions of the 1940 Act to serve
as a segregated investment account for the Contracts.
2.2 The Fund represents and warrants that Fund shares sold pursuant
to this Agreement shall be registered under the 1933 Act, duly authorized for
issuance and sold in compliance with the laws of the Commonwealth of
Massachusetts and all applicable federal and state securities laws and that
the Fund is and shall remain registered under the 1940 Act. The Fund shall
amend the Registration Statement for its shares under the 1933 Act and the
1940 Act from time to time as required in order to effect the continuous
offering of its shares. The Fund shall register and qualify the shares for
sale in accordance with the laws of the various states only if and to the
extent deemed advisable by the Fund or the Underwriter.
2.3 The Fund currently does not intend to make any payments to finance
distribution expenses pursuant to Rule 12b-1 under the 1940 Act, although it
may make such payments in the future. To the extent that it decides to
finance distribution expenses pursuant to Rule 12b-1, the Fund will undertake
to have a Board, a majority of whom are not interested persons of the Fund,
formulate and approve any plan pursuant to Rule 12b-1 under the 1940 Act to
finance distribution expenses.
2.4 The Fund makes no representations as to whether any aspect of its
operations, including but not limited to, investment policies, fees and
expenses, complies with the insurance and other applicable laws of the
various states, except that the Fund represents that the Fund's investment
policies, fees and expenses are and shall at all times remain in compliance
with the laws of the Commonwealth of Massachusetts to the extent required to
perform this Agreement.
<PAGE>
-5-
2.5 The Fund represents that it is lawfully organized and validly
existing under the laws of the State of Maryland and that it does and will
comply in all material respects with the 1940 Act.
2.6 The Underwriter represents and warrants that it is a member in
good standing of the NASD and is registered as a broker-dealer with the SEC.
The Underwriter further represents that it will sell and distribute the Fund
shares in accordance with the laws of the Commonwealth of Massachusetts and
any applicable state and federal securities laws.
2.7 The Underwriter represents and warrants that the Adviser is and
shall remain duly registered under all applicable federal and state
securities laws and that the Adviser shall perform its obligations for the
Fund in compliance in all material respects with the laws of the Commonwealth
of Massachusetts and any applicable state and federal securities laws.
2.8 The Fund and the Underwriter represent and warrant that all of
their directors, officers, employees, investment advisers, and other
individuals or entities dealing with the money and/or securities of the Fund
are and shall continue to be at all times covered by a blanket fidelity bond
or similar coverage for the benefit of the Fund in an amount not less than
the minimum coverage as required currently by Rule 17g-1 of the 1940 Act
or related provisions as may be promulgated from time to time. The aforesaid
bond shall include coverage for larceny and embezzlement and shall be issued
by a reputable bonding company.
2.9 The Company represents and warrants that all of its directors,
officers, employees, investment advisers, and other individuals/entities
employed or controlled by the Company dealing with the money and/or
securities of the Fund are covered by a blanket fidelity bond or similar
coverage for the benefit of the Fund, in an amount not less than $5 million.
The aforesaid bond includes coverage for larceny and embezzlement and is
issued by a reputable bonding company. The Company agrees to make all
reasonable efforts to see that this bond or another bond containing these
provisions is always in effect, and agrees to notify the Fund and the
Underwriter in the event that such coverage no longer applies.
ARTICLE III. PROSPECTUSES, STATEMENTS OF ADDITIONAL INFORMATION, AND PROXY
STATEMENTS; VOTING
3.1 The Underwriter shall provide the Company with as many copies of
the Fund's current prospectus as the Company may reasonably request. If
requested by the Company in lieu thereof, the Fund shall provide such
documentation (including a final copy of the new prospectus as set in type at
the Fund's expense) and other assistance as is reasonably necessary in order
for the Company once each year (or more frequently if the prospectus for the
Fund is amended) to have the prospectus for the Contracts and the Fund's
prospectus printed together in one document.
The Underwriter shall bear the expense of printing copies of its
current prospectus that will be distributed to existing Contract owners and
the Company shall bear the expense of printing copies of the Fund's
prospectus that are used in connection with offering the Contracts issued by
the Company.
3.2 The Fund's prospectus shall state that the current Statement of
Additional Information ("SAI") for the Fund is available from the Company
(or, in the Fund's discretion, from the Fund), and the Underwriter (or the
Fund), at its expense, shall print, or otherwise reproduce, and provide a
copy of such SAI free of charge to the Company for itself and for any owner
of a Contract who requests such SAI.
<PAGE>
-6-
3.3 The Fund, at its expense, shall provide the Company with copies of
its proxy material, reports to shareholders, and other communications to
shareholders in such quantity as the Company shall reasonably require for
distributing to Contract owners. The Underwriter, at the Company's expense,
shall provide the Company with copies of the Fund's annual and semi-annual
reports to shareholders in such quantity as the Company shall reasonably
request for use in connection with offering the Variable Contracts issued by
the Company. If requested by the Company in lieu thereof, the Underwriter
shall provide such documentation (which may include a final copy of the
Fund's annual and semi-annual reports as set in type or in camera-ready copy)
and other assistance as is reasonably necessary in order for the Company (at
the Company's expense) to print such shareholder communications for
distribution to Contract Owners.
3.4 The Company shall:
(i) solicit voting instructions from Contract owners;
(ii) vote the Fund shares in accordance with instructions
received from Contract owners; and
(iii) vote Fund shares for which no instructions have been
received in the same proportion as Fund shares of such
Designated Portfolio for which instructions have been
received.
so long as and to the extent that the SEC continues to interpret the 1940 Act
to require pass-through voting privileges for variable contract owners or to
the extent otherwise required by law. The Company reserves the right to vote
Fund shares held in any segregated asset account in its own right, to the
extent permitted by law.
3.5 Participating Insurance Companies shall be responsible for assuring
that each of their separate accounts participating in a Designated Portfolio
calculates voting privileges as required by the Shared Funding Exemptive
Order and consistent with any reasonable standards that the Fund may adopt.
3.6 The Fund will comply with all provisions of the 1940 Act requiring
voting by shareholders, and in particular the Fund will either provide for
annual meetings or comply with Section 16(c) of the 1940 Act (although the
Fund is not one of the trusts described in Section 16(c) of that Act) as well
as with Sections 16(a) and, if and when applicable, 16(b). Further, the Fund
will act in accordance with the SEC's interpretation of the requirements of
Section 16(a) with respect to periodic elections of directors or trustees and
with whatever rules the SEC may promulgate with respect thereto.
ARTICLE IV. SALES MATERIAL AND INFORMATION
4.1 The Company shall furnish, or shall cause to be furnished, to the
Fund or its designee, each piece of sales literature or other promotional
material that the Company develops or uses and in which the Fund (or a
Portfolio thereof) or the Adviser or the Underwriter is named, at least
fifteen calendar days prior to its use. No such material shall be used if the
Fund or its designee reasonably object to such use within fifteen calendar
days after receipt of such material. The Fund or its designee reserves the
right to reasonably object to the continued use of such material, and no such
material shall be used if the Fund or its designee so object.
<PAGE>
-7-
4.2 The Company shall not give any information or make any
representations or statements on behalf of the Fund or concerning the Fund in
connection with the sale of the Contracts other than the information or
representations contained in the registration statement or prospectus or SAI
for the Fund shares, as such registration statement and prospectus or SAI may
be amended or supplemented from time to time, or in reports or proxy
statements for the Fund, or in sales literature or other promotional material
approved by the Fund or its designee or by the Underwriter, except with the
permission of the Fund or the Underwriter or the designee of either.
4.3 The Fund, Underwriter, or its designee shall furnish, or shall
cause to be furnished, to the Company, each piece of sales literature or
other promotional material in which the Company, and/or its Account, is named
at least fifteen calendar days prior to its use. No such material shall be
used if the Company reasonably objects to such use within fifteen calendar
days after receipt of such material. The Company reserves the right to
reasonably object to the continued use of such material and no such material
shall be used if the Company so objects.
4.4 The Fund and the Underwriter shall not give any information or
make any representations on behalf of the Company or concerning the Company,
the Account, or the Contracts other than the information or representations
contained in a registration statement, prospectus, or SAI for the Contracts,
as such registration statement, prospectus or SAI may be amended or
supplemented from time to time, or in published reports for the Account which
are in the public domain or approved by the Company for distribution to
Contract owners, or in sales literature or other promotional material
approved by the Company or its designee, except with the permission of the
Company.
4.5 The Fund will provide to the Company at least one complete copy of
all registration statements, prospectuses, SAIs, reports, proxy statements,
sales literature and other promotional materials, applications for
exemptions, requests for no-action letters, and all amendments to any of the
above, that relate to the Fund or its shares, contemporaneously with the
filing of such document(s) with the SEC or other regulatory authorities.
4.6 The Company will provide to the Fund at least one complete copy of
all registration statements, prospectuses, SAIs, reports, solicitations for
voting instructions, sales literature and other promotional materials,
applications for exemptions, requests for no-action letters, and all
amendments to any of the above, that relate to the Contracts or the Account,
contemporaneously with the filling of such document(s) with the SEC or other
regulatory authorities.
4.7 For purposes of this Article IV, the phrase "sales literature and
other promotional materials" includes, but is not limited to, any of the
following that refer to the Fund or any affiliate of the Fund: advertisements
(such as material published, or designed for use in, a newspaper, magazine,
or other periodical, radio, television, telephone or tape recording,
videotape display, signs or billboards, motion pictures, or other public
media), sales literature (I.E., any written communication distributed or made
generally available to customers or the public, including brochures,
circulars, reports, market letters, form letters, seminar texts, reprints or
excerpts of any other advertisement, sales literature, or published article),
educational or training materials or other communications distributed or made
generally available to some or all agents or employees, and registration
statements, prospectuses, SAIs, shareholder reports, proxy materials, and any
other communications distributed or made generally available with regard to
the Funds.
<PAGE>
-8-
ARTICLE V. FEES AND EXPENSES
5.1 The Fund and the Underwriter shall pay no fee or other
compensation to the Company under this Agreement, except that if the Fund or
any Portfolio adopts and implements a plan pursuant to Rule 12b-1 to finance
distribution expenses, then the Underwriter may make payments to the Company
or to the underwriter for the Contracts if and in amounts agreed to by the
Underwriter in writing, and such payments will be made out of existing fees
otherwise payable to the Underwriter, past profits of the Underwriter, or
other resources available to the Underwriter. No such payments shall be made
directly by the Fund. Currently, no such payments are contemplated.
5.2 All expenses incident to performance by the Fund under this
Agreement shall be paid by the Fund, except as otherwise provided herein. The
Fund shall see to it that all its shares are registered and authorized for
issuance in accordance with applicable federal law and, if and to the extent
deemed advisable by the Fund, in accordance with applicable state laws prior
to their sale. The Fund shall bear the expenses for the cost of registration
and qualification of the Fund's shares, preparation and filing of the Fund's
prospectus and registration statement, proxy materials and reports, setting
the prospectus in type, setting in type and printing the proxy materials and
reports to shareholders (including the costs of printing a prospectus that
constitutes an annual report), the preparation of all statements and notices
required by any federal or state law, and all taxes on the issuance or
transfer of the Fund's shares.
5.3 The Company shall bear the expenses of printing (in accordance
with Section 3.1) and distributing the Fund's prospectus to owners of
Contracts issued by the Company and of distributing the Fund's proxy
materials and reports to such Contract owners.
ARTICLE VI. DIVERSIFICATION AND QUALIFICATION.
6.1 The Fund will invest its assets in such a manner as to ensure that
the Contracts will be treated as annuity or life insurance contracts,
whichever is appropriate, under the Internal Revenue Code of 1986, as amended
(the "Code") and the regulations issued thereunder (or any successor
provisions). Without limiting the scope of the foregoing, the Fund will
comply with Section 817(h) of the Code and Treasury Regulation Section
1.817-5, and any Treasury interpretations thereof, relating to the
diversification requirements for variable annuity, endowment, or life
insurance contracts, and any amendments or other modifications or successor
provisions to such Section or Regulations. In the event of a breach of this
Article VI by the Fund, it will take all reasonable steps (a) to notify the
Company of such breach and (b) to adequately diversify the Fund so as to
achieve compliance within the grace period afforded by Regulation 817.5.
6.2 The Fund represents that it is or will be qualified as a Regulated
Investment Company under Subchapter M of the Code, and that it will make
every effort to maintain such qualification (under Subchapter M or any
successor or similar provisions) and that it will notify the Company
immediately upon having a reasonable basis for believing that it has ceased
to so qualify or that it might not so qualify in the future.
6.3 The Company represents that the Contracts are currently, and at
the time of issuance shall be, treated as life insurance or annuity insurance
contracts, under applicable provisions of the Code, and that it will make
every effort to maintain such treatment, and that it will notify the Fund and
the Underwriter immediately upon having a reasonable basis for believing the
Contracts have ceased to be so treated or that they might not be so treated in
the future. The Company agrees
<PAGE>
-9-
that any prospectus offering a contract that is a "modified endowment
contract" as that term is defined in Section 7702A of the Code (or any
successor or similar provision), shall identify such contract as a modified
endowment contract.
ARTICLE VII. POTENTIAL CONFLICTS. The following provisions apply effective
upon (a) the issuance of the Shared Funding Exemptive Order, and (b)
investment in the Fund by a separate account of a Participating Insurance
Company supporting variable life insurance contracts.
7.1 The Board will monitor the Fund for the existence of any material
irreconcilable conflict between the interests of the contract owners of all
separate accounts investing in the Fund. An irreconcilable material conflict
may arise for a variety of reasons, including: (a) an action by any state
insurance regulatory authority; (b) a change in applicable federal or state
insurance, tax, or securities laws or regulations, or a public ruling,
private letter ruling, no-action or interpretative letter, or any similar
action by insurance, tax, or securities regulatory authorities; (c) an
administrative or judicial decision in any relevant proceeding; (d) the
manner in which the investments of any Portfolio are being managed; (e) a
difference in voting instructions given by variable annuity contract and
variable life insurance contract owners; or (f) a decision by an insurer to
disregard the voting instructions of contract owners. The Board shall
promptly inform the Company if it determines that an irreconcilable material
conflict exists and the implications thereof.
7.2 The Company will report any potential or existing conflicts of
which it is aware to the Board. The Company will assist the Board in carrying
out its responsibilities under the Shared Funding Exemptive Order, by
providing the Board with all information reasonably necessary for the Board
to consider any issues raised. This includes, but is not limited to, an
obligation by the Company to inform the Board whenever Contract owner voting
instructions are disregarded.
7.3 If it is determined by a majority of the Board, or a majority of
its disinterested members, that a material irreconcilable conflict exists,
the Company and other Participating Insurance Companies shall, at their
expense and to the extent reasonably practicable (as determined by a majority
of the disinterested Board members), take whatever steps are necessary to
remedy or eliminate the irreconcilable material conflict, up to and
including: (1), withdrawing the assets allocable to some or all of the
separate accounts from the Fund or any Portfolio and reinvesting such assets
in a different investment medium, including (but not limited to) another
Portfolio of the Fund, or submitting the question whether such segregation
should be implemented to a vote of all affected contract owners and, as
appropriate, segregating the assets of any appropriate group (I.E., annuity
contract owners, life insurance contract owners, or variable contract owners
of one or more Participating Insurance Companies) that votes in favor of such
segregation, or offering to the affected contract owners the option of making
such a change; and (2), establishing a new registered management investment
company or managed separate account.
7.4 If a material irreconcilable conflict arises because of a decision
by the Company to disregard contract owner voting instructions and that
decision represents a minority position or would preclude a majority vote,
the Company may be required, at the Fund's election, to withdraw the affected
Account's investment in the Fund and terminate this Agreement with respect to
such Account provided, however, that such withdrawal and termination shall be
limited to the extent required by the foregoing material irreconcilable
conflict as determined by a majority of the disinterested members of the
Board. Any such withdrawal and termination must take place within six (6)
months after the Fund gives written notice that this provision is being
implemented, and until the end of that six month period the Fund shall
continue to accept and implement orders by the Company for the purchase (and
redemption) of shares of the Fund.
<PAGE>
-10-
7.5 If a material irreconcilable conflict arises because a particular
state insurance regulator's decision applicable to the Company conflicts
with the majority of other state regulators, then the Company will withdraw
the affected Account's investment in the Fund and terminate this Agreement
with respect to such Account within six months after the Board informs the
Company in writing that it has determined that such decision has created an
irreconcilable material conflict; provided, however, that such withdrawal and
termination shall be limited to the extent required by the foregoing material
irreconcilable conflict as determined by a majority of the disinterested
members of the Board. Until the end of the foregoing six month period, the
Fund shall continue to accept and implement orders by the company for the
purchase (and redemption) of shares of the Fund.
7.6 For purposes of Section 7.3 through 7.6 of this Agreement, a
majority of the disinterested members of the Board shall determine whether
any proposed action adequately remedies any irreconcilable material conflict,
but in no event will the Fund be required to establish a new funding medium
for the Contracts. The Company shall not be required by Section 7.3 to
establish a new funding medium for the Contract if an offer to do so has been
declined by vote of a majority of Contract owners materially adversely
affected by the irreconcilable material conflict. In the event that the Board
determines that any proposed action does not adequately remedy any
irreconcilable material conflict, then the Company will withdraw the
Account's investment in the Fund and terminate this Agreement within six (6)
months after the Board informs the Company in writing of the foregoing
determination; provided, however, that such withdrawal and termination shall
be limited to the extent required by any such material irreconcilable
conflict as determined by a majority of the disinterested members of the
Board.
7.7 If and to the extent the Shared Funding Order contains terms and
conditions different from Sections 3.4, 3.5, 3.6, 7.1, 7.2, 7.3, 7.4 and 7.5
of this Agreement, then the Fund and/or the Participating Insurance
Companies, as appropriate, shall take such steps as may be necessary to
comply with the Shared Funding Exemptive Order, and Sections 3.4, 3.5, 3.6,
7.1, 7.2, 7.3, 7.4 and 7.5 of the Agreement shall continue in effect only to
the extent that terms and conditions substantially identical to such Sections
are contained in the Shared Funding Exemptive Order or any amendment thereto.
If and to the extent that Rule 6e-2 and Rule 6e-3(T) are amended, or Rule
6e-3 is adopted, to provide exemptive relief from any provision of the 1940
Act or the rules promulgated thereunder with respect to mixed or shared
funding (as defined in the Shared Funding Exemptive Order) on terms and
conditions materially different from those contained in the Shared Funding
Exemptive Order, then (a) the Fund and/or the Participating Insurance
Companies, as appropriate, shall take such steps as may be necessary to
comply with Rules 6e-2 and 6e-3(T), as amended, and Rule 6e-3, as adopted, to
the extent such rules are applicable; and (b) Sections 3.4, 3.5, 3.6, 7.1.,
7.2, 7.3, 7.4, and 7.5 of this Agreement shall continue in effect only to the
extent that terms and conditions substantially identical to such Sections are
contained in such Rule(s) as so amended or adopted.
ARTICLE VIII. INDEMNIFICATION
8.1 INDEMNIFICATION BY THE COMPANY
8.1(a). The Company agrees to indemnify and hold harmless the
Fund and the Underwriter and each of their officers and directors and each
person, if any, who controls the Fund or the Underwriter within the meaning
of Section 15 of the 1933 Act (collectively, the "Indemnified Parties" for
purposes of this Section 8.1) against any and all losses, claims, damages,
liabilities (including amounts paid in settlement with the written consent of
the Company) or litigation
<PAGE>
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(including legal and other expenses), to which the Indemnified Parties may
become subject under any statute or regulation, at common law or otherwise,
insofar as such losses, claims, damages, liabilities or expenses (or actions
in respect thereof) or settlements are related to the sale or acquisition of
the Fund's shares or the Contracts and:
(i) arise out of or are based upon any untrue statements or
alleged untrue statements of any material fact contained
in the Registration Statement, prospectus, or statement
of additional information for the Contracts or contained
in the Contracts or sales literature 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 the
Company by or on behalf of the Fund for use in the
Registration Statement, prospectus or statement of
additional information for the Contracts or in the
Contracts or sales literature (or any amendment or
supplement) or otherwise for use in connection with the
sale of the Contracts or Fund shares; or
(ii) arise out of or as a result of statements or
representations (other than statements or representations
contained in the Registration Statement, prospectus or
sales literature of the Fund not supplied by the Company
or persons under its control) or wrongful conduct of the
Company or persons under its authorization or control,
with respect to the sale or distribution of the Contracts
or Fund Shares; or
(iii) arise out of any untrue statement or alleged untrue
statement of a material fact contained in a Registration
Statement, prospectus, or sales literature of the Fund or
any amendment thereof or supplement thereto or the
omission or alleged omission to state therein a material
fact required to be stated therein or necessary to make
the statements therein not misleading if such a statement
or omission was made in reliance upon information
furnished to the Fund by or on behalf of the Company; or
(iv) arise as a result of any material failure by the Company
to provide the services and furnish the materials under
the terms of this Agreement (including a failure, whether
unintentional or in good faith or otherwise, to comply
with the qualification requirements specified in Article
VI of this Agreement); or
(v) arise out of or result from any material breach of any
representation and/or warranty made by the Company in
this Agreement or arise out of or result from any other
material breach of this Agreement by the Company,
as limited by and in accordance with the provisions of Sections 8.1(b) and
8.1(c) hereof.
8.1(b). The Company shall not be liable under this
indemnification provision with respect to any losses, claims, damages,
liabilities or litigation to which an Indemnified Party would
<PAGE>
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otherwise be subject by reason of such Indemnified Party's willful
misfeasance, bad faith, or gross negligence in the performance of such
Indemnified Party's duties or by reason of such Indemnified Party's reckless
disregard of its obligations or duties under this Agreement.
8.1(c). The Company shall not be liable under this
indemnification provision with respect to any claim made against an
Indemnified Party unless such Indemnified Party shall have notified the
Company in writing within a reasonable time after the summons or other first
legal process giving information of the nature of the claim shall have been
served upon such Indemnified Party (or after such Indemnified Party shall
have received notice of such service on any designated agent), but failure to
notify the Company of any such claim shall not relieve the Company from any
liability which it may have to the Indemnified Party against whom such action
is brought otherwise than on account of this indemnification provision. In
case any such action is brought against an Indemnified Party, the Company
shall be entitled to participate, at its own expense, in the defense of such
action. The Company also shall be entitled to assume the defense thereof,
with counsel satisfactory to the party named in the action and to settle the
claim at its own expense; provided, however, that no such settlement shall,
without the Indemnified Parties' written consent, include any factual
stipulation referring to the Indemnified Parties or their conduct. After
notice from the Company to such party of the Company's election to assume the
defense thereof, the Indemnified Party shall bear the fees and expenses of
any additional counsel retained by it, and the Company will not be liable to
such party under this Agreement for any legal or other expenses subsequently
incurred by such party independently in connection with the defense thereof
other than reasonable costs of investigation.
8.1(d). The Indemnified Parties will promptly notify the Company
of the commencement of any litigation or proceedings against them in
connection with the issuance or sale of the Fund Shares or the Contracts or
the operation of the Fund.
8.2 INDEMNIFICATION BY THE UNDERWRITER
8.2(a). The Underwriter agrees to indemnify and hold harmless the
Company and each of it directors and officers and each person, if any, who
controls the Company within the meaning of Section 15 of the 1933 Act
(collectively, the "Indemnified Parties" for purposes of this Section 8.2)
against any and all losses, claims, damages, liabilities (including amounts
paid in settlement with the written consent of the Underwriter) or litigation
(including legal and other expenses) to which the Indemnified Parties may
become subject under any statute or regulation, at common law or otherwise,
insofar as such losses, claims, damages, liabilities or expenses (or actions
in respect thereof) or settlements are related to the sale or acquisition of
the Fund's shares or the Contracts; and
(i) arise out of or are based upon any untrue statement or
alleged untrue statement or any material fact contained
in the Registration Statement or prospectus or SAI or
sales literature of the Fund (or any amendment or
supplement to any of the foregoing), or arise out of or
are based upon the omission or the alleged omission to
state therein a material fact required to be stated
therein or necessary to make the statements therein not
misleading, provided that this agreement to indemnify
shall not apply as to any Indemnified Party if such
statement or omission or such alleged statement or
omission was made in reliance upon and in conformity with
information furnished to the Underwriter or Fund by or on
behalf of the
<PAGE>
-13-
Company for use in the Registration Statement or
prospectus for the Fund or in sales literature (or any
amendment or supplement) or otherwise for use in
connection with the sale of the Contracts or Fund shares; or
(ii) arise out of or as a result of statements or
representations (other than statements or representations
contained in the Registration Statement, prospectus or
sales literature for the Contracts not supplied by the
Underwriter or persons under its control) or wrongful
conduct of the Fund or Underwriter or persons under their
control, with respect to the sale or distribution of the
Contracts or Fund shares; or
(iii) arise out of any untrue statement or alleged untrue
statement of a material fact contained in a Registration
Statement, prospectus or sales literature covering the
Contracts, or any amendment thereof or supplement thereto,
or the omission or alleged omission to state therein a
material fact required to be stated therein or necessary
to make the statement or statements therein not
misleading, if such statement or omission was made in
reliance upon information furnished to the Company by or
on behalf of the Fund; or
(iv) arise as a result of any failure by the Fund to provide
the services and furnish the materials under the terms of
this Agreement (including a failure whether unintentional
or in good faith or otherwise, to comply with the
diversification and other qualification requirements
specified in Article VI of this Agreement); or
(v) arise out of or result from any material breach of any
representation and/or warranty made by the Underwriter in
this Agreement or arise out of or result from any other
material breach of this Agreement by the Underwriter;
as limited by and in accordance with the provisions of
Sections 8.2(b) and 8.2(c) hereof.
8.2(b). The Underwriter shall not be liable under this
indemnification provision with respect to any losses, claims, damages,
liabilities or litigation to which an Indemnified Party would otherwise be
subject by reason of such Indemnified Party's willful misfeasance, bad faith,
or gross negligence in the performance or such Indemnified Party's duties or
by reason of such Indemnified Party's reckless disregard of obligations and
duties under this Agreement or to the Company or the Account, whichever is
applicable.
8.2(c). The Underwriter shall not be liable under this
indemnification provision with respect to any claim made against an
Indemnified Party unless such Indemnified Party shall have notified the
Underwriter in writing within a reasonable time after the summons or other
first legal process giving information of the nature of the claim shall have
been served upon such Indemnified Party (or after such Indemnified Party
shall have received notice of such service on any designated agent), but
failure to notify the Underwriter of any such claim shall not relieve the
Underwriter from any liability which it may have to the Indemnified Party
against whom such action is brought otherwise than on account of this
indemnification provision. In case any such action is brought
<PAGE>
-14-
against the Indemnified Party, the Underwriter will be entitled to
participate, at its own expense, in the defense thereof. The Underwriter also
shall be entitled to assume the defense thereof, with counsel satisfactory to
the party named in the action and to settle the claim at its own expense;
provided, however, that no such settlement shall, without the Indemnified
Parties' written consent, include any factual stipulation referring to the
Indemnified Parties or their conduct. After notice from the Underwriter to
such party of the Underwriter's election to assume the defense thereof, the
Indemnified Party shall bear the fees and expenses of any additional counsel
retained by it, and the Underwriter will not be liable to such party under
this Agreement for any legal or other expenses subsequently incurred by such
party independently in connection with the defense thereof other than
reasonable costs of investigation.
8.2(d). The Company agrees promptly to notify the Underwriter of
the commencement of any litigation or proceedings against it or any of its
officer or directors in connection with the issuance or sale of the Contracts
or the operation of the Account.
8.3 INDEMNIFICATION BY THE FUND
8.3(a). The Fund agrees to indemnify and hold harmless the
Company and each of its directors and officers and each person, if any, who
controls the Company within the meaning of Section 15 of the 1933 Act
(collectively, the "Indemnified Parties" for purposes of this Section 8.3)
against any and all losses, claims, expenses, damages, liabilities (including
amounts paid in settlement with the written consent of the Fund) or
litigation (including legal and other expenses) to which the Indemnified
Parties may be required to pay or may become subject under any statute or
regulation, at common law or otherwise, insofar as such losses, claims,
expenses, damages, liabilities or expenses (or actions in respect thereof) or
settlements, are related to the operations of the Fund and:
(v) arise as a result of any failure by the Fund to provide
the services and furnish the materials under the terms of
this Agreement (including a failure, whether unintentional
or in good faith or otherwise, to comply with the
diversification and other qualification requirements
specified in Article VI of this Agreement); or
(ii) arise out of or result from any material breach of any
representation and/or warranty made by the Fund in this
Agreement or arise out of or result from any other material
breach of this Agreement by the Fund;
as limited by and in accordance with the provisions of Sections 8.3(b) and
8.3(c) hereof.
8.3(b). The Fund shall not be liable under this indemnification
provision with respect to any losses, claims, damages, liabilities or
litigation to which an Indemnified Party would otherwise be subject by reason
of such Indemnified Party's willful misfeasance, bad faith, or gross
negligence in the performance of such Indemnified Party's duties or by reason
of such Indemnified Party's reckless disregard of obligations and duties
under this Agreement or to the Company, the Fund, the Underwriter or the
Account, whichever is applicable.
8.3(c). The Fund shall not be liable under this indemnification
provision with respect to any claim made against an Indemnified Party unless
such Indemnified Party shall have notified the Fund in writing within a
reasonable time after the summons or other first legal process giving
<PAGE>
-15-
information of the nature of the claim shall have been served upon such
Indemnified Party (or after such indemnified Party shall have received notice
of such service on any designated agent), but failure to notify the Fund of
any such claim shall not relieve the Fund from any liability which it may
have to the Indemnified Party against whom such action is brought otherwise
than on account of this indemnification provision. In case any such action is
brought against the Indemnified Parties, the Fund will be entitled to
participate, at its own expense, in the defense thereof. The Fund also shall
be entitled to assume the expense thereof, with counsel satisfactory to the
party named in the action and to settle the claim at its own expense;
provided, however, that no such settlement shall, without the Indemnified
Parties' written consent, include any factual stipulation referring to the
Indemnified Parties or their conduct. After notice from the Fund to such
party of the Fund's election to assume the defense thereof, the Indemnified
Party shall bear the fees and expenses of any additional counsel retained by
it, and the Fund will not be liable to such party under this Agreement for
any legal or other expenses subsequently involved by such party independently
in connection with the defense thereof other than reasonable costs of
investigation.
8.3(d). The Company and the Underwriter agree promptly to notify the
Fund of the commencement of any litigation or proceeding against it or any of
its respective officers or directors in connection with the Agreement, the
issuance or sale of the Contracts, the operation of the Account, or the sale
or acquisition of shares of the Fund.
ARTICLE IX. APPLICABLE LAW
9.1 This Agreement shall be construed and the provisions hereof
interpreted under and in accordance with the laws of the State of Maryland.
9.2 This Agreement shall be subject to the provisions of the 1933,
1934 and 1940 Acts, and the rules and regulations and rulings thereunder,
including such exemptions from those statutes, rules and regulations as the
SEC may grant (including, but not limited to, any Shared Funding Exemptive
Order) and the terms hereof shall be interpreted and construed in accordance
therewith.
ARTICLE X. TERMINATION
10.1 This Agreement shall continue in full force and effect until the
first to occur of:
(a) termination by any party, for any reason with respect to
some or all Designated Portfolios, by six (6) months' advance
written notice delivered to the other parties; or
(b) termination by the Company by written notice to the Fund
and the Underwriter with respect to any Designated Portfolio
based upon the Company's determination that shares of the
Fund are not reasonably available to meet the requirements
of the Contracts; provided that such termination shall apply
only to the Designated Portfolio not reasonably available; or
(c) termination by the Company by written notice to the Fund
and the Underwriter in the event any of the Designated
Portfolio's shares are not registered, issued or sold in
accordance with applicable state and/or federal law or such
law precludes the use of such shares as the underlying
<PAGE>
-16-
investment media of the Contracts issued or to be issued
by the Company; or
(d) termination by the Fund or Underwriter in the event that
formal administrative proceedings are instituted against the
Company by the NASD, the SEC, the Insurance Commissioner or
like official of any state or any other regulatory body
regarding the Company's duties under this Agreement or
related to the sale of the Contracts, the operation of any
Account, or the purchase of the Fund shares, provided,
however, that the Fund or Underwriter determines in its sole
judgment exercised in good faith, that any such
administrative proceedings will have a material adverse
effect upon the ability of the Company to perform its
obligations under this Agreement; or
(e) termination by the Company in the event that formal
administrative proceedings are instituted against the Fund
or Underwriter by the NASD, the SEC, or any state
securities or insurance department or any other regulatory
body, provided, however, that the Company determines in
its sole judgment exercised in good faith, that any such
administrative proceedings will have a material adverse
effect upon the ability of the Fund or Underwriter to
perform its obligations under this Agreement; or
(f) termination by the Company by written notice to the Fund
and the Underwriter with respect to any Designated
Portfolio in the event that such Designated Portfolio
ceases to qualify as a Regulated Investment Company under
Subchapter M or fails to comply with the Section 817(h)
diversification requirements specified in Article VI
hereof, or if the Company reasonably believes that such
Designated Portfolio may fail to so qualify or comply; or
(g) termination by the Fund or Underwriter by written notice
to the Company in the event that the Contracts fail to
meet the qualifications specified in Article VI hereof; or
(h) termination by either the Fund or the Underwriter by
written notice to the Company, if either one or both of
the Fund or the Underwriter respectively, shall determine,
in their sole judgement exercised in good faith, that the
Company has suffered a material adverse change in its
business, operations, financial condition, or prospects
since the date of this Agreement or is the subject of
material adverse publicity; or
(i) termination by the Company by written notice to the Fund
and the Underwriter, if the Company shall determine, in
its sole judgment exercised in good faith, that the Fund
or the Underwriter has suffered a material adverse change
in its business, operations, financial condition or
prospects since the date of this Agreement or is the
subject of material adverse publicity; or
(j) termination by the Fund or the Underwriter by written
notice to the Company, if the Company gives the Fund and
the Underwriter the written notice specified in Section
1.11 hereof and at the time such notice was given
<PAGE>
-17-
there was no notice of termination outstanding under any
other provision of this Agreement; provided, however, any
termination under this Section 10.1(j) shall be effective
forty-five days after the notice specified in Section 1.11
was given.
10.2 EFFECT OF TERMINATION. Notwithstanding any termination of this
Agreement, the Fund and the Underwriter shall, at the option of the Company,
continue to make available additional shares of the Fund pursuant to the
terms and conditions of this Agreement, for all Contracts in effect on the
effective date of termination of this Agreement (hereinafter referred to as
"Existing Contracts"). Specifically, the owners of the Existing Contracts may
be permitted to reallocate investments in the Fund, redeem investments in the
Fund and/or invest in the Fund upon the making of additional purchase
payments under the Existing Contracts. The parties agree that this Section
10.2 shall not apply to any termination under Article VII and the effect of
such Article VII termination shall be governed by Article VII of this
Agreement. The parties further agree that this Section 10.2 shall not apply
to any termination under Section 10.1(g) of this Agreement.
10.3 The Company shall not redeem Fund shares attributable to the
Contracts (as opposed to Fund shares attributable to the Company's assets
held in the Account) except (i) as necessary to implement Contract Owner
initiated or approved transactions, (ii) as required by state and/or federal
laws or regulations or judicial or other legal precedent of general
application (hereinafter referred to as a "Legally Required Redemption"), or
(iii) as permitted by an order of the SEC pursuant to Section 26(b) of the
1940 Act. Upon request, the Company will promptly furnish to the Fund and the
Underwriter the opinion of counsel for the Company (which counsel shall be
reasonably satisfactory to the Fund and the Underwriter) to the effect that
any redemption pursuant to clause (ii) above is a Legally Required
Redemption. Furthermore, except in cases where permitted under the terms of
the Contracts, the Company shall not prevent Contract Owners from allocating
payments to a Portfolio that was otherwise available under the Contracts
without first giving the Fund or the Underwriter 90 days notice of its
intention to do so.
10.4 Notwithstanding any termination of this Agreement, each party's
obligation under Article VIII to indemnify the other parties shall survive.
ARTICLE XI. NOTICES
Any notice shall be sufficiently given when sent by registered or
certified mail to the other party at the address of such party set forth
below or at such other address as such party may from time to time specify in
writing to the other party.
If to the Fund:
T. Rowe Price International Series, Inc.
100 East Pratt Street
Baltimore, Maryland 21202
Attention: Henry H. Hopkins, Esq.
If to the Company:
State Mutual Life Assurance Company of America
440 Lincoln Street
Worcester, Massachusetts 01653
Attention: Eric S. Levy
<PAGE>
-18-
If to Underwriter:
T. Rowe Price Investment Services
100 East Pratt Street
Baltimore, Maryland 21202
Attention: Terrie Westren
Copy to: Henry H. Hopkins, Esq.
ARTICLE XII. MISCELLANEOUS
12.1 All persons dealing with the Fund must look solely to the property
of such Fund, and in the case of a series company, the respective Designated
Portfolio listed on Schedule A hereto as though such Designated Portfolio had
separately contracted with the Company and the Underwriter for the
enforcement of any claims against the Fund. The parties agree that neither
the Board, officers, agents or shareholders assume any personal liability or
responsibility for obligations entered into by or on behalf of the Fund.
12.2 Subject to the requirements of legal process and regulatory
authority, each party hereto shall treat as confidential the names and
addresses of the owners of the Contracts and all information reasonably
identified as confidential in writing by any other party hereto and, except
as permitted by this Agreement, shall not disclose, disseminate or utilize
such names and addresses and other confidential information without the
express written consent of the affected party until such time as such
information may come into the public domain.
12.3 The captions in this Agreement are included for convenience of
reference only and in no way define or delineate any of the provisions hereof
or otherwise affect their construction or effect.
12.4 This Agreement may be executed simultaneously in two or more
counterparts, each of which taken together shall constitute one and the same
instrument.
12.5 If any provisions of this Agreement shall be held or made invalid
by a court decision, statute, rule or otherwise, the remainder of the
Agreement shall not be affected thereby.
12.6 Each party hereto shall cooperate with each other party and all
appropriate governmental authorities (including without limitation the SEC,
the NASD, and state insurance regulators) and shall permit such authorities
reasonable access to its books and records in connection with any
investigation or inquiry relating to this Agreement or the transactions
contemplated hereby. Notwithstanding the generality of the foregoing, each
party hereto further agrees to furnish the Massachusetts Insurance
Commissioner with any information or reports in connection with services
provided under this Agreement which such Commissioner may request in order to
ascertain whether the variable annuity operations of the Company are being
conducted in a manner consistent with the Massachusetts variable annuity laws
and regulations and any other applicable law or regulations.
12.7 The rights, remedies and obligations contained in this Agreement
are cumulative and are in addition to any and all rights, remedies, and
obligations, at law or in equity, which the parties hereto are entitled to
under state and federal laws.
<PAGE>
12.8 This Agreement or any of the rights and obligations hereunder may
not be assigned by any party without the prior written consent of all parties
hereto.
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement
to be executed in its name and on its behalf by its duly authorized
representative and its seal to be hereunder affixed hereto as of the date
specified below.
COMPANY: STATE MUTUAL LIFE ASSURANCE COMPANY OF
AMERICA
By its authorized officer
By: /s/ Ruben P. Moreno
-----------------------------------
Title: Vice President
--------------------------------
Date: 5/2/95
---------------------------------
FUND: T. ROWE PRICE INTERNATIONAL SERIES, INC.
By its authorized officer
By: /s/
-----------------------------------
Title: Vice President
--------------------------------
Date: April 26, 1995
---------------------------------
UNDERWRITER: T. ROWE PRICE INVESTMENT SERVICES, INC.
By its authorized officer
By: /s/
-----------------------------------
Title: Vice President
--------------------------------
Date: April 26, 1995
---------------------------------
<PAGE>
SCHEDULE A
Pending issuance of the Shared Funding Order, the Underwriter shall not
sell to the Company, and the Fund shall not make available for purchase to
the Company, shares of the Designated Portfolio for variable life insurance
Contracts supported wholly or partially by the Accounts.
<TABLE>
<CAPTION>
Name of Separate Account and Contracts Funded by
Date Established by Board of Directors Separate Account Designated Portfolios
- -------------------------------------- ------------------- -------------------------
<S> <C> <C>
Separate Account VA-K of State Mutual ExecAnnuity Plus T. Rowe Price International Series, Inc.
Life Assurance Company of America, 33-71052 ----------------------------------------
August 20, 1991 811-8814 - T. Rowe Price International
Stock Portfolio
Allmerica Select Separate Account of Allmerica Select T. Rowe Price International Series, Inc.
State Mutual Life Assurance Company 33-71058 ----------------------------------------
of America, August 20, 1991 811-8116 - T. Rowe Price International
Stock Portfolio
VEL II Account of State Mutual Life VEL '93 T. Rowe Price International Seres, Inc.
Assurance Company of America, 33-71056 ----------------------------------------
August 20, 1991 811-8130 - T. Rowe Price International
Stock Portfolio
Inheiritage Account of State Mutual Variable Inheiritage T. Rowe Price International Series, Inc.
Life Assurance Company of America, 33-74184 ------------------------------------------
August 20, 1991 811-8304 - T. Rowe Price International
Stock Portfolio
CONTRACTS TO BE ADDED LATER THIS MONTH
(INITIAL REGISTRATIONS HAVE NOT BEEN FILED YET):
Group VEL Account of State Mutual Group VEL T. Rowe Price International Series, Inc.
Life Assurance ------------------------------------------
- T. Rowe Price International
Stock Portfolio
Allmerica Select Separate Account II of Select VEL T. Rowe Price International Series, Inc.
State Mutual Life Assurance Company ------------------------------------------
of America - T. Rowe Price International
Stock Portfolio
</TABLE>
